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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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Aleardo G. Buzzi, President and Chief Executive Officer, Philip Morris International Inc. Marlboro continued its growth as the best-selling brand in West Germany (far left), Europe's largest and most profitable tobacco market. Superlights (above) is an important part of the Philip Morris brand family in Australia. Benson & Hedges (left) maintained its U.S. leadership in the i00mm segment, and Chesterfield (below) gained volume and share in Spain. began limited distribution of premium-priced Cartier Vendome; and in the dis- count segment introduced Bristol and successfully completed the national roll- out of Alpine. Overseas, we had several new product successes. Merit performed particularly well in Japan, selling nearly 2.1 billion units. In Korea, Virginia Slims became a leading import, while in Australia, Longbeach became the leader in its segment. Chesterfield was a success in the Netherlands, and in Venezuela, Fortuna became a leading brand in its first year on the market. Throughout the year, we increased the visibility and availability of our brands at retail. We placed added emphasis on incentive pro- grams for wholesalers and retailers, and stepped up our other promotional activities. A major initiative during the year was the expansion of our sales or- ganizations in the United States and a number of important foreign markets. We continue to modernize our plants to enhance efficiency and expand capacity to meet increased demand for our products. Over the next five years, we plan capital expenditures of over $2 billion to support our worldwide tobacco operations. The tobacco industry continues to face a number of social and political chal- lenges both in the United States and abroad. Some of these stem from the agendas of anti-smoking activists; others, from the view that tobacco taxes are a simple solution to government budget deficits. In the United States, we support legislation protect- ing those who choose to smoke from discrimination in employment. We have also launched programs stressing accommodation of both smokers and non- smokers in public areas. And we have joined with a number of coalitions - rang- ing from grass roots groups to organizations of leaders in the public and private sectors - to fight unfair and regressive consumer excise tax increases. In addition, we have developed an array of com- munications vehicles in the United States, including Philip Morris Magazine and the Smokers'Advocate national newsletter, to pro- vide information to con- World Cigarette Industry Unit Sales (Excluding U.S.A,)  World Cigarette Industry Unit Sales 0 Philip Morris Share of the World Market (%) Billion Units 5000 204816" J~> , 8 11

Philip Morris U.S. Cigarette Export Volume 85 86 87 88 89 sumers and to present our side of the issues. This helps us marshall support for our stances against unfair tax proposals, advertising bans, and similar constraints on our consumers' rights to enjoy our products and on our rights to market them. We are countering anti- smoking activity abroad with consumer information and politeness and accom- modation programs. These campaigns have gained public support and have successfully introduced the important elements of com- mon sense, courtesy, and civility into public policy debates on smoking. Our large and growing volume base and efficient production facilities have positioned us well for the opportunities and chal- lenges of the future. We have the brands, technologies, and marketing skills to strengthen our leadership and profitability in a highly competitive business. We also have the resources and the will to protect- and to build on-our achievements. Food In 1989, Kraft and General Foods operations merged to form the largest food com- pany in the United States and Canada, and the second largest in the world. In addition, most of our operating units more than met the financial and mar- keting targets set in the beginning of the year. On a pro forma basis, including a full year of Kraft results for 1988, Kraft General Foods, Inc. operating revenues grew by 1.9%, and operating companies income increased 26.2%, leading to operating margin improve- ments of 1.8 percentage points. At General Foods USA, improved product mix and operations led to revenue and income gains. Maxwell House volume increased, and share grew to reach more than 34%. Buoyed by the national expansion of Jell-O pudding snacks, our Jell-O and other desserts volume grew by nearly 3%. Kool-Aid and our other pow- dered beverages maintained our leadership position with a share of nearly 81%. We also continued to build our bakery operations, and pur- chased the Bouyea-Fassetts Baking Co., a regional baker in the Northeast. Post cere- als had an unsatisfactory year as share declined in spite of the success of our new oat-based cereals. Strong results at Kraft USA were led by continued vol- LL'",~ Ihe combination of Kraft and General Foods created more than the second-largest food company in the world. It created an organization determined to be the leader in its industry. To lead the industry we must rank first in quality, with products and services that con- sistently meet all our customers' and con- sumers' needs and ex- pectations, setting the standards for taste, nu- trition, convenience, variety, and value. We intend to lead in productivity as well as quality. In 1989, Kraft General Foods people achieved more than $425 million in savings by operating more effi- ciently. These are per- manent cost reductions, providing ongoing bene- fits for our company. The real opportunity now is synergy-work- ing together so that the Kraft General Foods of the future adds up to more than the sum of its parts in the past. With our family of brands, and the support of Philip Morris, we have immense strengths and even more potential. We are going to use them to grow still more, " Kraft General Foods introduced more new products in 1989 than any other U.S. food company. Among them: Kool-Aid Kool-Pops (above), and m crowave-reaay Cheez Whiz Zap-A-Pack (right). Michael A. Miles, Vice Chairman, Philip Morris Companies Inc.. and Chairman and Chief Executive Officer, Kraft General Foods, Inc. Operating Revenues (Percent ot Total Operabng Revenues) Food 51 % 12

The 'Great American Breakfast" promotion (left) now covers orange drink. bacon, bread, bagels, coffee- and more. Managing international product lines (right): John M. Keenan, Fresident. Kraft General Foods Inter- atronal; and Robert S. Morrison. r-res,dent, Kraft General Foods Canada. Research in oils, oilsubsti- tutes, and fat free technology (above) takes place at the new Kraft Foods Ingredients Center. Geoffrey C. Bible, President and Chief Administrative Officer, Kraft General Foods, Inc. 1W ume gains in the process cheese category. Among our grocery products, Miracle Whip increased its share of the spoonable salad dress- ing category to almost 89%, and Kraft increased its share of the mayonnaise market to over 21%. A sizable volume increase in our Kraft side dishes and dinners was largely driven by new Versa- tile Side Dish products such as noodles & sauce, sea- soned/sauced rice, and pasta salads. Kraft General Foods Inter- national is now the largest U.S.-based food multina- tional in both Europe and Asia. We also have a consid- erable presence in Latin America, as well as in a number of export markets. Philadelphia Brand cream cheese and Kraft mayon- naise and cheese slices showed strong global gains. Our European coffee busi- ness increased share in most markets, led by Gevalia in Sweden, Kenco in the United Kingdom, and Max- well in France and Germany, as well as by HAG in West Germany and HAG exports to other countries. Kraft General Foods Canada is now Canada's largest packaged food com- pany, with four of the coun- try's top ten food products, and seven of the top 25. In 1989, volume for Post cere- als gained 5%, lifting market share to a 20-year record of over 12%. Miracle Whip, Tang, and Maxwell House also increased their market shares. Total Oscar Mayer Foods volume rose by 6%, driven by gains in the core Louis Rich and Oscar Mayer fran- chises as well as by the suc- cessful introduction of new Lunchables lunch combina- tions, Louis Kemp surimi seafood products, and Zappetites microwaveable snacks. Oscar Mayer brand's number one market posi- tion, together with Louis Rich's leadership of the growing turkey segment, brought combined market shares to nearly 35% for luncheon meats and 19% for hot dogs. Oscar Mayer bacon also held its leader- ship, accounting for one- eighth of its category. Kraft General Foods Frozen Products is the larg- est frozen foods manufac- turer in the world. Breyers, the leading ice cream in the United States, increased its volume by 3%, and volumes for Light N' Lively, Knudsen, and Breakstone's products grew by the same amount. Jell-O novelties held vol- ume, while Cool Whip top- pings continued to lead the market with over a 60% share. Volume for Lender's, the clear leader in frozen Kraft General Foods, Inc. Volume Billions of Pounds 16 12 8 1111 4 0 85 2048163939 86 87 88 89 15

Total U.S. Cheese Consumption Md!ions of Pounos 24 bagels, grew by more than 5%. Birds Eye maintained share, and remains the mar- ket leader in frozen vegeta- bles. Our Budget Gourmet and Tombstone brands built both volume and market share during the year. Kraft General Foods Com- mercial Products is a major force in the expanding com- mercial food industry. Kraft Foodservice, which distrib- utes Kraft General Foods and other products to the foodservice industry, is the second-largest foodservice distributor in the country. With volume up 7.5%, oper- ating income improved still further, aided by increased efficiencies, tactical acquisi- tions, and a marketing and distribution alliance with Baxter Healthcare Corpora- tion. Kraft Food Ingredients is the country's largest pro- cessor of edible vegetable oils, and is expanding its product line of value-added specialty ingredients for food manufacturers, such as dehydrated cheese pow- ders, process and natural cheese, and confectionery products. Volume at Kraft 16 Food Ingredients was flat, but operating income rose, largely due to productivity and product mix improve- ments in the Oil Products Group. New product develop- ment is crucial to meet the demands of the consumer of the 1990's: food must be healthful; it must be conven- ient; it must deliver all the quality variety, and richness imaginable... and it must taste good. We are actively pursuing opportunities to satisfy these consumer needs with new products. One of the fastest-growing segments of the food indus- try is made up of products featuring reduced calories, and cholesterol and fat reduction. In 1989, we suc- cessfully introduced a large number of line extensions, such as Philadelphia Brand neufchatel cheese (a lighter style of cream cheese) in various markets; Cholesterol Free Miracle Whip, Kraft Cholesterol Free Mayon- naise, and Breyers Light ice milk in the United States; light Cracker Barrel cheese in Canada; and sugar-free Hollywood gum in France. We are also attracting health-conscious consumers with oat products, such as Post Honey Bunches of Oats, Lender's Oat Bran bagels, and Oroweat Oat Nut bread, as well as entire brands, such as Freihofer's Hearthstone bread, Louis Kemp surimi seafood, and Light N' Lively products. In light of growing interest in health and nutrition, we expect fat replacement tech- j 20481G:~:;40 James W McVey, President, Oscar Mayer Foods, and James M. Kilts, Presldent. Kraft USA, watch as meats from Oscar Mayer and cheeses from Kraft become Oscar Mayer Lunch- ables lunch combinations. Responding to consumer interest in health and variety: Entenmanns fat free and cholesterol free bakery line (above), Maxwell House Colombian Supreme coffee (also above), and Miracoli pasta dinners (right) in Germany. There `s always room for a key product in his test kitchens (left): Richard P Mayer, President, General Foods USA.

George F Goebeer. President. .~® Kraft Gerera!Foods Comrrercial ~~ Products ,~ooressrng healtn concerns vdhHe "ov=dfng full flavor Kraft Free fat .no'esterot free Ranch style ; oress~ng (far!eft). Finr iresh -- and oasias (aoovel reacto iooo stores throt ghout +ta!~ _ar Maver hot docs ta!so above ='e a stalJ!e Of the American C, ?;- - ~emas Herskov,ts_ Presdent- Kraft Ger,era! Foods Frozen Products nght~ nologies to present a major growth opportunity In 1989, we successfully adapted a variety of proprietary fat replacement technologies to a host of products, from Sealtest Free non fat ice cream in the freezer to Kraft pourable salad dressing and Entenmann's reduced calorie, fat free, and cho- lesterol free cakes on the grocery shelves. Convenient meal prepara- tion has become essential. In 1989, for the 720ro of the homes in the United States with microwave ovens, we began the introduction of our microwave Kraft entrees, Oscar Mayer Zap- petites snacks, Minute microwave meals, and Jell-O microwave pudding. Growing sales of ready-to- eat desserts led us to acquire the Catelli Magic Moments and Light Touch mini-dessert lines, giving us a 65% share of the market in Canada. In addition, Oscar Maver bolstered its U.S. convenience-store presence through contracts with Cir- cle K and Emro Marketing Co., and continued to expand Oscar Mayer Lunch- ables lunch combinations nationally. We now supply Boboli breads for on-site supermarket pizza prepara- tion. and increased capacit' v in our foodservice opera- tions is helping us grow with the expanding restaurant food market. Consumers also insist on taste, quality. and variety in their foods. In the growing hiaher-quaiit' v ground coffee segment. we introduced Maxwell House Rich French Roast coffee, Filter Packs, and Colombian Supreme in the United States, and Max- well House Sierra in Can- ada; we are also testing chilled, canned cappuccino. We acquired the DiGiorno brand fresh pasta business, broadening our position in a profitable, high-growth cate- gory Increased consumer interest in variety led us to introduce three flavors of Philadephia Brand cream cheese in Spain, and a new form - Mousse - to great success in Italy: Our 1989 capital invest- ments will help us keep up this pace. We are refocusing our coffee processing plants on specific products and processes, for instance, and expanding our capacity to meet rapidly increasing demand for Oscar Mayer Lunchables lunch combina- tions, Louis Rich turkey, and Louis Kemp surimi seafood. In our complex foodservice business, a substantial investment in error-free overnight service should give us a competitive advan- tage in a growing field. These investments fre- quently stretch across Kraft General Foods operating units. Our fat replacement technology wil I benefit many of our food compa- nies; California's new Kraft cheese facilitv will also ~ house Boboli bread opera ~ tions: and our purchase of Fini fresh foods in Italv V will take advantage of our Invernizzi distribution ~~ svstem there. - .:.. w }~a

I Merging Kraft and General Foods has led to thousands of specifically identifiable synergies offering concrete long-term benefits. Our syn- ergy projects range from the large-scale combination of our international operations and joint media purchases, to smaller but still signifi- cant savings from shared manufacturing facilities and other cooperative ventures. There are additional oppor- tunities in such constructive actions as bringing Oscar Mayer Zip-Pak packaging technology to Kraft cheese, and the joint marketing of Kraft General Foods prod- ucts through both "The Great American Breakfast" promotion and the sponsor- ship of Women's Interna- tional Professional Tennis. As 1992 approaches, the European Community is developing shared environ- U.S. Beer Industry Barrei Shipments (Federal Tax Paid Withdrawals)  U.S. Beer Industry Barrel Shipments  Miller Share of U.S. Industry ( % ) 85 86 87 88 89 20 30 25 20 15 10 5 0 mental and labeling rules to facilitate trade. We are ener- getically pressing for uni- form federal labeling statutes in the United States. Our solid 1989 results position us to satisfy chang- ing consumer needs more rapidly than ever before. Through close attention to detail, and by aggressively building and defending each brand, we will earn still greater acceptance in stores and homes around the world. Beer Miller Brewing Company posted a 1989 volume increase of 3.7%, perform- ing better than industry averages for the fourth consecutive year. The com- pany's share of the U.S. beer market rose to 23.1%, up by 0.6 share points over 1988. Despite increases in market- ing expenditures and prices for brewing materials, oper- ating margins improved as a result of continued cost containment efforts. Miller's share of the full- calorie premium segment increased for the second year in a row, bolstered by the continued rapid growth of Miller Genuine Draft- now counted among the nation's top ten beer brands. Miller Lite, the second- best-selling beer in the United States, increased volume in 1989, and repre- sents approximately 50% of the premium low-calorie segment. Milwaukee's Best, our leading below-premium entry, increased both vol- Leonard J. Goldstein, President and Chief Executive Officer, Miller Brewing Company. Operating Revenues tPe2ent ot Total OperaMg Revenues) Only the finest ingredients are used ir Miller's Milwaukee brew house (right). helping Miller Lite (above) to maintain its market leadership, We supported Miller High Life (left) with new pack- aging, graphics. and advertising.

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M Iler Genu,_ne Draft (far leff) is how amono the top ten beers in the United States New Sharo s nor-acoholrc- brew (left) helps consumers "keep=- their edae while enjoying a"f-uY6eet_ - flavor. Our rigorous quality control ' program includes taste testing _ (below) at the Miller Technlcafi Cenier t .'W-- PF d 9 - ~ C ' C r ~., t iO 0rns al7rfa +J S o _Orabon - r; orovrces tuaanc:no toostc~outors and . -_ , i , i ers o our t s a o ` =_ r ~~ u p o ooa acco, raDO2i. ano Cieer (reltl business s_ ume and share, and now ranks seventh in the industry We are responding to our changing customer and consumer base with major marketing initiatives. Local- ized marketing programs boosted our volume and share in key markets, such as Texas, while new product tests and introductions expanded our presence in growing segments. We launched two national brands: Lowenbrau Light, and Sharp's, a non-alcoholic beverage benefiting from an innovative, low-temperature brewing process. We also tested a light version of Gen- uine Draft, and increased Leinenkugel's strength in its traditional markets while expanding it geographically. To improve our focus on segments with greater profit potential, we discontinued Matilda Bay wine coolers. To provide a strong base for our gro«'th, we contin- ued our program of produc- tion improvements and capacity expansions, including a new hops pro- cessing facilitv in Wiscon- sin: expansion of packaged draft capability in lrwindale, California, and Fulton. New yi?rk: and the beginning of construction for packaged draft production in Fort Worth. Texas. Federal legislation now- requires warning labels on all beer sold in the United States. GVe redesigned and changed all our labels well ahead of the mandated deadline. 196y sawRliller'y larpest revenue. income. and vol- ume percentage gains in the past three years. We intend to build on this momentum. Financial Services and Real Estate Our consolidated operating companies income from financial services and real estate rose by 6.10b, despite a 16.2% decline in operating revenues as Mission Viejo Company continued its planned withdrawal from homebuilding. The financing activities of Philip Morris Capital Corpo- ration (previously named Philip Morris Credit Corpo- ration) led to operating reve- nues of $193 million, up 11.6%, and operating com- panies income of $82 mil- lion, up 32.3%. Increasing its ties to Philip Morris oper- ating companies, PMCC introduced several financing programs tailored to the needs of Philip Morris cus- tomers and suppliers. The company also continued its active role in leasing trans- actions, and is now one of the major equipment lessors in the United States. Mission Viejo operating revenues and operating companies income declined to S334 million and S91 mil- lion. respectivel}, as a result of the compan' v's focus on land planning. develop- ment. and sales..a.s wE,stel) up our selling activities. .,t}i in th<, continued strenp California market isyieldin<.; strong gains frunl ~3p1~rc~ci- ated real est<itU ValuCt. ~~() 4S I ():i~I-t !- ~_ni*

Managemen#'s Discussion and Analysis of Financial Condition and Resul#s of Operations V Operating Results 1988 Compared with 1987 Operating revenues for 1988 increased $3.6 billion (12.6%) and Effective September 15, 1989, outstanding shares of common operating profit increased $438 million (10.5%). All business * stock were split four-for-one. All references to per share amounts segments had increased operating revenues and all business have been restated to reflect the split. segments except food had increased operating profit. On December 7, 1988, Kraft, Inc. became a wholly-owned sub- The company's 1988 results included restructuring costs at sidiary of the company. The purchase of outstanding Kraft shares, General Foods. As a result of this restructuring, certain facilities retirement of employee stock options and other related payments were combined and overhead costs were reduced to achieve totaled $12.9 billion. The acquisition has been accounted for as a operating efficiencies. This restructuring reduced earnings before purchase and, accordingly, operating results of Kraft have been income taxes, net earnings and earnings per share by $348 mil- included in the consolidated operating results of the company lion, $212 milliort'and $.23, respectively. since acquisition. The purchase price exceeded the fair value of In 1987, the company recorded a pretax charge of $117 million ' the net assets acquired by $12.2 billion and such excess is being related to a restructuring of General Foods into three separate amortized over 40 years by the straight-line method. operating companies, partially offset by a pretax gain of $46 mil- lion from the sale of the Open Pit barbecue sauce retail business. I 1989 Compared with 1988 These items reduced 1987 earnings before income taxes, net eam- Operating revenues for 1989 increased $13.0 billion (41.0%) and ings and earnings per share by $71 million, $22 million and $.02, operating profit, as defined for segment reporting purposes (oper- respectively. ating income before unallocated corporate expenses), increased Interest and other debt expense net increased $24 million in , , $2.5 billion (53.4%). The inclusion of Kraft for the full year of 1989 1988 compared with 1987. The increase was due primarily to inter- resulted in $11.7 billion (90.0%) of the increase in operating reve- est (approximately $68 million) on debt associated with the pur- nues and $904 million (36.9%) of the increase in operating profit. chase of Kraft, partially offset by lower interest expense l f b The remainder of the increases resu ted primarily rom to acco =throughout the year prior to the Kraft acquisition, as well as higher I~ _operations. -= interest income Pamerl (R27 millinnl nn c-ach halannac intaract I~ In 1989, General Foods Corporation was combined with Kraft to expense prior to the acquisition of Kraft was lower by approxi- i` form Kraft General Foods, Inc. ("KGF'~, and the company charged mately $10 million in 1988 due primarily to lower average amounts $179 million against pretax income, primarily for costs associated of outstanding debt partially offset by higher interest rates , . I' with this merger. In addition, the company sold its equity invest As of January 1, 1988, the company adopted the method of " ~ " ment in Rothmans International p.l.c. ( Rothmans ) for 8610 mil accounting for income taxes prescribed by SFAS 96. Accordingly, ~ g lion 10 /a% notes maturing in 1994, generating a pretax gain of $455 the company changed its method of computing income taxes million. The notes were subsequently sold with recourse for from the-deferred method used in prior years to the method pre- approximately $850 million. The net impact of these items was an scribed by SFAS 96. SFAS 96 increased 1988 net earnings and earn- increase in eamings before income taxes, net eamings and eam- - ings per share by $213 million and $.23, respectively. Prior years' ings per share of $276 million, $152 million and $.16, respectively. data were not restated. (See Note 10 of the notes to the 1989 Amortization of goodwill increased to $385 million in 1989 due consolidated financial statements for further details.) primarily to goodwill arising from the acquisition of Kraft. Interest The company's effective tax rate in 1988 was 44.6%, compared and other debt expense, net, increased $ 1.1 billion in 1989 com _ With 44.9% in 1987. The rate did not decrease in line with the pared with 1988, due primarily to higher amounts of outstanding reduction in the U.S. corporate income tax rate, due to the rever- debt resulting from the acquisition of Kraft. sal during 1988 of excess deferred tax benefits recorded as of The company's ratio of earnings to fixed charges declined to 3.5 January 1, 1988 in accordance with SFAS 96 and higher provisions from 5.2 in 1988 and 5.0 in 1987, primarily as a result of higher for the repatriation of foreign earnings. - interest expense associated with the acquisition of Kraft. Earnings before cumulative effect of accounting change The company's effective tax rate in 1989 was 41.8%, compared increased in 1988 by $222 million (12.1%), due principally to with 44.6% in 1988. The decrease was due primarily to excess increased operating profit ($438 million), partially offset by higher deferred tax benefits related to Statement of Financial Accounting _- interest and other debt expense, net ($24 million) and a higher Standards No. ("SFAS") 96 and lower provisions for the repatria- income tax provision ($161 million). In addition to higher earn- tion of foreign earnings, partially offset by higher nondeductible ings, the 14.4% increase in earnings per share before cumulative goodwill amortization. effect of accounting change reflects a lower average number of Earnin s before cumulative effect of accountin chan e g g g outstanding shares of common stock in 1988._ increased in 1989 by$882 million (42.7%), due to increased operating profit ($2.5 billion), partially offset by higher interest -- expense ($1.1 billion) and a higher income tax provision ($449,- _- ,__ - - - - million). =----- I

uperaung Resurts dy Business Segment_ _ Philip Morris Intemational increased operating revenues by $290 million (3.696) due primarily to increased unit volume ($694 Operatmg revenues and operating profit increased 41.0% and 53.4%, respectively-over 1988. Operating revenues of tobacco operations were 40% and 52% of consolidated operating revenues in 1989 and 1988, respectively. Operating profit of tobacco opera- tions was 72% of total operating profit in 1989 compared with 84% in 1988, of which Philip Morris U.S.A. and Philip Morris Intema- tional contributed 51% and 21%, respectively, in 1989 and 67% and 17%, respectively, in 1988. Food operating revenues were 51% and 35% of consolidated operating revenues in 1989 and 1988, respec- tively. Operating profit of food operations was 22% of total operat- ing profit in 1989 compared with 9% in 1988. Percentages for tobacco and food operating profit reflect the 1989 gain on sale of investment in Rothmans, the inclusion of Kraft for the full year 1989, and food restructuring charges of $179 million and $348 million in 1989 and 1988,-respectively, Tobacco 1989 Compared with 1988 ' Operating revenues and operating profit in 1989 increased $1.3 billion (7.796) and $1.2 billion (31.6%), respectively, over 1988. The increase in operating revenues was due primarily to price increases ($1.5 billion) and volume growth ($696 million), partial- ly offset by currency translation ($480 million) and the deconsoli- dation of a subsidiary, the operations of which were merged into a joint venture. The increase in tobacco operating profit was due principally to higher gross profit ($1.1 billion), approximately 94% of which related to price increases, and to the $455 million gain on sale of investment in Rothmans. Partially offsetting these items were higher marketing, administration and research costs ($290 million), which were due primarily to higher marketing expenses. The following discussion of results by tobacco operating unit excludes the gain on sale of investment in Rothmans and amorti- zalion of goodwill. In 1989, Philip Morris U.S.A's operating revenues increased $988 million (11.6%), substantially all of which was due to price increases. Philip Morris U.S.A. increased its domestic unit volume to 219.5 billion units for a market share (based on shipments) of 41.9% in 1989 compared with 39.3% in 1988. Marlboro's share of the U.S. market was approximately 26% in 1989. The domestic cigarette industry's unit volume decreased approximately 6%. The industry decline in 1989 reflects lower consumer demand, as well as a decision by Philip Morris U.S.A's largest competitor to reduce trade inventories below year-end 1988 levels by limiting shipments. Philip Morris U.S.A.'s market share increase is attribut- able in part to this reduction of trade inventories and may be inflated by as much as one share point. In 1989, Philip Morris U.S.A.'s operating profit increased $519 million (16.8%). This- increase reflects higher gross profit ($753 million), substantially all of which was related to price increases, partially offset by higher marketing expenses. million) and price increases ($561 million), partially offset by currency translation ($480 million) and the deconsolidation of a subsidiary, the operations of which were merged into a joint ven- ture. Total unit volume of Philip Morris International for 1989 increased 7.7% over 1988. Philip Morris International's operating profit increased $233 million (30.2%), due primarily to higher gross profit ($318 million), partially offset by higher marketing, administration and research costs ($85 million). The increase in _ gross profit was due to price increases ($254 million) and volume increases ($199 million), partially offset by currency translation ($92 million) and the deconsolidation of a subsidiary, the opera- tions of which were merged into a joint venture. 1988 Compared with 1987 In 1988, operating revenues and operating profit from tobacco operations increased $1.9 billion (13.3%) and $556 million (16.9%) over 1987, respectively. The increase in operating reve- nues was due primarily to price increases ($962 million), volume growth ($639 million) and currency translation ($379 million). The increase in operating profit of tobacco operations was due principally to higher gross profit ($1.2 billion), approximately 70% of which related to price increases, with the remainder attribut- able to volume increases. Partially offsetting the increase in gross profit were higher marketing, administration and research costs ($674 million), which were due primarily to higher marketing expenses. In 1988, Philip Morris U.SA's operating revenues increased $861 million (11.3%), approximately 86% of which was due to price increases, with the remainder primarily attributable to a 1.7% increase in domestic unit volume. Philip Morris U.S.A's unit vol- ume outperformed the domestic cigarette industry, which declined by2.195 during 1988. In 1988, Philip Morris U.S.A's oper- ating profit increased $372 million (13.7%). The increase reflects higher gross profit ($736 million, approximately 92% of which related to price increases), partially offset by higher marketing, administration and research costs ($364 million, approximately 83% of which related to higher marketing expenses). Philip Morris International increased its operating revenues by $ 1.1 billion (15.4%) due primarily to increased unit volume ($522 million) and currency translation ($379 million). In 1988, Philip Morris International's operating profit increased $192 million (33.0%). The increase was due primarily to higher gross profit ($489 million), partially offset by higher marketing, administration and research costs ($297 million), primarily related to higher marketing expenses. The increase in gross profit was due primar- ily to volume ($193 million) and price ($169 million) increases, as well as currency translation. 20016"4a 25

Food 1989 Compared with 1988 Compared with 1988, food operating revenues and operating profit increased to $22.9 billion and $1.6 billion, respectively. These increases were due primarily to the inclusion of Kraft for the full year in 1989. Excluding Kraft, food operating revenues would have remained flat, reflecting the exclusion in 1989 of revenues from a subsidiary which was merged into a joint venture; and food operating profit would have increased approximately 85%. The increase in operating profit reflects the impact of a lower restruc- turing provision of $179 million in 1989 versus $348 million in 1988. Excluding the restructuring charges and the impact of Kraft, food operating profit would have increased approximately 17%. Operating results of the food segment reflect the inclusion of Kraft for the full year 1989 and the period after acquisition in 1988. To facilitate a year-to-year analysis of food operations, the follow- ing discussion addresses changes in the results of KGF for 1989 compared with the combined results of Kraft and General Foods for 1988. KGF's operating revenues increased $422 million (1.9%) in __ 1989. The increase was due primarily to price ($833 million) and yolume increases ($322 million), partially offset by the impact ($206 million) of conforming the fiscal year-end dates of KGF's international subsidiaries, currency translation ($202 million), disposals of businesses net of acquisitions ($170 million) and the deconsolidation of certain subsidiaries in countries with currency restrictions. KGF's operating profit increased 32.9%. Excluding restructuring charges in both 1989 and 1988, operating profit increased 14.4% due to higher gross profit ($475 million) arising principally from price increases, partially offset by higher good- will amortization ($222 million). The following discussion of results by KGF operating unit excludes KGF Headquarters items, restructuring charges and --- Eye and frozen desserts. KGF Frozen Products' operating profit `- amortization of goodwill. In 1989, General Foods USA's revenues increased $141 million (2.9%) due primarily to price increases ($157 million). Volume decreases in cereals, beverages and baked goods offset volume increases in coffee and desserts. General Foods USAs operating profit increased $110 million (33.9%) in 1989 due primarily to higher gross profit ($198 million) driven by price increases, partial- ly offset by higher marketing expenses ($89 million). Kraft USA's revenues increased $346 million (8.4%) due primar- ily to price increases ($342 million) and volume increases ($53 million), partially offset by the disposal of a business. Volume increases were due primarily to process cheese products. In 1989, Kraft USAs operating profit increased $241 million (43.7%), due primarily to higher gross profit ($262 million) resulting from price increases ($180 million), volume increases ($40 million) and cost savings _ : Operating revenues for KGFlnternational in 1989 decreased by $191 million (4.6%) due primarily to currency translation of $243 million, the change in Kraft International's year-end ($206 million) and the deconsolidation of certain subsidiaries, partially offset by price increases of $231 million, unit volume increases of $78 mil- lion and acquisitions of $41 million. KGF International's operating profit increased $46 million (13.9%) in 1989. The increase was due to higher gross profit ($104 million), due primarily to pricing, partially offset by higher marketing, administration and research costs ($10 million) and the impact ($48 million) of the deconsoli- dations and change in Kraft International's year-end. After excluding the 1988 revenues ($180 million) and the operating profit impact ($30 million) of a business which was exchanged for an interest in a joint venture, KGFCanada's operat- ing revenues and operating profit increased from 1988. Operating revenues increased $70 million (5.7%), due primarily to price increases ($37 million), currency translation ($41 million) and acquisitions ($18 million), partially offset by decreased volume ($26 million). Operating profit increased $45 million (32.5%), due primarily to higher gross profit, driven by a $49 million increase due to pricing and lower costs. _ Oscar Mayer Foods'operating revenues increased $100 million (4.6%) in 1989 due to volume increases ($57-million) in Louis Rich brands and from new product introductions and price increases ($43 million). In 1989, Oscar Mayer Foods' operating profit increased $5 million (2.9%), due primarily to higher gross profit ($13 million), partially offset by higher marketing, adminis- tration and research costs ($8 million). The increase in gross profit reflects volume increases of $28 million, partially offset by higher costs. _ Operating revenues of KGFFrozen Products increased by $91 million (4.5%) due primarily to price increases ($83 million) with the remainder attributable to increased volume. KGF Frozen Prod- ucts had volume increases in frozen dinners, Lender's bagels and Tombstone pizza, partially offset by volume decreases in Birds increased $39 million (28.9%) in 1989. The-increase reflects higher gross profit ($53 million), approximately 88% of which related to price increases, partially offset by higher marketing expenses ($15 million). KGFCommercialProducts Increased_operating revenues by $145 million (4.0%) due primarily to volume increases in foodser- vice operations ($147 million) and net acquisitions ($58 million), partially offset by price decreases _($60 million)In 1989, KGF __ Commercial Products' operating profit increased $50 million (47.0%). The increase reflects higher gross profit ($71 million, approximately 64% of which related to lower costs with the remainder principally attributable to volume increases), partially offset by higher marketing, administration and research costs. __ _

1988 Compared with 1987 Operating results in 1988 include Kraft's operating revenues of _ $821 million and operating profit of $58 million since acquisition.' Food operating revenues increased $1.3 billion (13.3%) in 1988. The increase was due primarily to the inclusion of Kraft since acquisition (62%), higher unit volume at General Foods and cur- rency translation ($165 million). General Foods had unit volume increases in its bakery business (due primarily to the acquisition of'I'he Charles Freihofer Baking Company in November 1987) and beverage and frozen food operations, while unit volume decreased in dry grocery products (due primarily to the sale in September 1987 of the Open Pit barbecue sauce retail business). Domestic coffee operations had both price and volume decreases. Oscar Mayer Foods had increased unit volume in all brands. Internationally, operating revenues increased due to cur- rency translation and higher unit volume (related primarily to acquisitions made in 1987). Food operating profit decreased $213 million (35.1%) due pri- marily to higher restructuring charges ($277 million). Higher gross profit of $455 million was partially offset by increases in market- ing, administration and research costs of $378 million, the largest portion of which was incremental marketing costs associated with Maxwell House's successful effort to recapture market share. Excluding the restructuring items in 1988 and in 1987, food operat- ing profit would have increased approximately 9.5%. Beer 1989 Compared with 1988 Operating revenues in 1989 increased $173 million (5.3%) due to increases in unit volume ($121 million) and prices ($52 million). Market share rose to approximately 23.1% from 22.5% in 1988. Operating profit in 1989 increased $36 million (18.9%) from higher gross profit ($72 million) due in equal amounts to volume and pricing, partially offset by higher marketing, administration and research costs ($36 million). 1988 Compared with 1987 Operating revenues in 1988 increased $157 million (5.1%). Approximately 69% of the increase resulted from unit volume increases, and the remainder from price increases. Market share rose to approximately 22.5% from 21.9% in 1987. Operating profit in 1988 increased $20 million (11.6%) due to higher gross profit ($39 million), partially offset by higher marketing, administration and research costs ($19 million). Financial Services and Real Estate 1989 Compared with 1988 Operating revenues from financial services and real estate in 1989 decreased by $102 million (16.2%) while operating profit increased $10 million (6.2%) from 1988. Operating revenues from financial services in 1989 increased $20 million (11.6%) over 1988, and operating profit increased $20 million (32.3%) due primarily to increased investments in finance assets and interest savings from debt refinancings undertaken during 1988. Operating reve- nues from real estate in 1989 decreased $122 million (26.8%) and operating profit decreased $10 million (10.1%) from 1988 levels, reflecting the impact of a 1988 change in business strategy in Cali- fomia from residential home building to land planning, develop- ment and sales. 1988 Compared with 1987 Operating revenues and operating profit from financial services and real estate in 1988 increased by $141 million (29.1%) and $94 million (over 100%), respectively. Operating revenues from finan- cial services increased 10.4% and operating profit more than dou- bled. Financial services operating profit increased relatively faster than operating revenues in 1988 due primarily to interest savings from debt refinancings undertaken during the year. Operating revenues from real estate increased 38.0% and operating profit more than doubled due primarily to strong market demand and the above-mentioned change in business strategy, both in South- ern California. Financial Review Cash Provided and Used Net Cash Provided by Operating Activities Cash provided by operating activities decreased from 1988 by $1.4 billion (27.3%). The decrease is related to the large amount of cash provided by working capital items in 1988, which was gener- ated principally by a designed reduction of accounts receivable and increase in accounts payable, as well as an increase in accrued liabilities. This increased cash flow was used to fund part of the Kraft acquisition. Net cash used for working capital in 1989 was principally due to the reversal of the amount provided in 1988. Partially offsetting the change in cash attributable to working capi- tal items was an increase of $978 million (28.5%) in other operat- ing cash flows, attributable primarily to higher earnings. In 1988, cash provided by operating activities increased from 1987 by $2.1 billion (73.5%) due primarily to the increased cash provided by working capital items in 1988 and to an increase of $398 million in other operating cash flows, attributable primarily to higher earnings. ' The company expects that cash from operations and available credit facilities will continue to be sufficient to meet the future needs of the business. Net Cash Used in Investing Activities In 1989, cash provided by investing activities included $992' million received from the divestiture of the company's equity investment in Rothmans and several food operations. 2U4816 1't.)':j 5 1

J Capital expenditures were $1.2 billion in 1989, approximately 59% of which related primarily to expansion and modernization of manufacturing and processing facilities of food operations. The $222 million (21.7%) increase in capital expenditures over 1988 was due primarily to the inclusion of Kraft for a full year in 1989. In 1988, capital expenditures increased $306 million over 1987 due primarily to expansion of manufacturing facilities related to new product lines. Capital expenditures are estimated to be $1.4 bil- lion in 1990 and a total of $5.0 billion for the four-year period 1991-1994, of which approximately $800 million and $3.0 billion, respectively, are projected for food operations. ==.In 1989, the company invested $484 million in finance assets as compared with $481 million in 1988 and $624 million in 1987. :Leasing investments accounted for 65%, 38% and 46% of these amounts, respectively. -- In 1988, the company paid $11.4 billion for the purchase of Kraft, net of $866 million of acquired cash. In 1989, the company paid an additional $388 million for previously untendered shares of Kraft common stock. Net Cash Provided by (Used in) Financing Activities -- J %- Consurner Products Debt _ During 1989, total consumer products debt decreased by $1.6 ~~,~ billion. The decrease represented $4.0 billion of debt repayments ~~'l~- and currency translation of $62 million, partially offset by $2.5 ' billion of domestic debt issued to refinance commercial paper and bank borrowings arising from the acquisition of Kraft. At December 31, 1989, consumer products commercial paper #gt~ borrowings were $6.1 billion, and interest rate swaps with a, 4' weighfed average maturity of 1.6 years provided a weighted aver- age fixed interest rate of 9.29% on $2.0 billion of these borrow- ranging from 9.25% to 9.50% on $1.0 billion of such borrowings. 1.72, down from 2.34 at December 31, 1988. Total debt was $16.4 weighted average maturity of 1.5 years provided protection levels - At December 31, 1989, the company's total debt-to-equity ratio was of the consumer products debt was fixed rate debt, approximately 36% was fully sensitive to interest rate fluctuations and approxi- mately 16% was sensitive to interest rate fluctuations up to protec- tion levels provided by interest rate protection agreements. The average interest rate on total consumer products debt was approximately 9.5% during 1988 and approximately 9.4% at year- end 1988. During 1988, total consumer products debt increased by $10.1 billion, which represented $10.0 billion of debt issuances and $.9 billion of Kraft debossumed at acquisition, partially offset by $.9 billion of debt repayments, as well as foreign currency translation. During 1987, total consumer products debt decreased by $534 million, which represented $1.4 billion of debt repayments, partial- ly offset by $484 million of debt issuances. Foreign currency translation increased total consumer products debt by $335 million. Financial Services and Real Estate Debt _ During 1989, financial services and real estate total debt increased by $34 million, which represented commercial paper issuances of $60 million, partially offset by debt repayments of $20 million and currency translation. uDuring 1988, financial services and real estate total debt increased by $126 million, which represented debt issuances of the equivalent of $201 million of foreign currency denominated debt, partially offset by debt repayments of $52 million. In 1987, financial services and real estate total_debt increased by $238 million, which represented $547 million of debt issuances, partially offset by debt repayments of $482 million. Foreign cur- rency translation increased financial services and real estate total debt by $160 million in 1987. ings. In addition, interest rate protection agreements with a Total Debt _ .: The company expects to continue to refinance long-term and ta~short-term debt from time to time. The nature and amount of the company's long-term and short-term debt and the proportionate amount of each can be expected to vary from time to time as a result of business requirements, market conditions and other factors. ucts debt to total equity was 1.56, down from 2.14 at December 31, to approximately $14.2 billion, of which approximately $13.8 bil- billion at December 31, 1989, compared with $17.9 billion at December 31, 1988. _ _ The company's percentages of interest sensitive debt and aver- age interest rates for 1989 and 1988 relative to total debt were approximately the same as those previously discussed for con- sumer products debt. At December 31, 1989, the company's ratio of consumer prod- - At December 31, 1989, the company's credit facilities amounted __ - 1988. At December 31, 1989, approximately 59% of the consumer lion were unused. These facilities were used to support the com- products debt was fixed rate debt, approximately 34% was fully pany's commercial paper borrowings. The company's credit sensitive to interest rate fluctuations and approximately 7% was facilities include a $12.0 billion revolving bank credit facility expiring in 1993. z~ sensitive to interest rate fluctuations up to protection levels pro- vided vided by interest rate protection agreements. The average interest _ The company maintains "A-1/P-2" credit ratings in the commer- rate ontotal,consumer products debt was approximately 9.5% -cial paper market and "A/A3" credit ratings for long-term obliga- during 1989 and approximately 8.5%aEyear end 1989. The differ- tions-; as compared with ratings of "A 1/P-2" and "A/Baa 1." ~. ence reflects the decrease in commercial paper rates during the ° respectively, at December 31, 1988. f rt f f989 At D h b 31 988 ourt qua er o ecem er 1 , approximately 4890 I 481b3 b 5 2 20

Jv- The company continually monitors its foreign currency expo- ~ sure. It acts to.manage_such exposure, when deemed prudent, through various hedging transactions. Foreign currency denomi- nated debt for which the company has not entered into currency- swap agreements is maintained primarily to hedge the currency exposure of its net investments in foreign operations. Equity and Dividends On November 29, 1989, the company announced its intention to expend up to $1.5 billion to repurchase common stock from time to time during the next two years. Purchases will be made in open market transactions at prevailing prices. Reacquired shares will become treasury shares to be reissued under employee benefit plans or used for other corporate purposes. In January 1990, the company commenced the program and repurchased 1.8 million shares at an aggregate cost of $69 million. Dividends paid in 1989 increased 23.0% over 1988, reflecting the increase in dividends declared to $1.25 per share in 1989 from $1.01 per share in 1988. The quarterly dividend rate established in August 1989 was at an annual rate of $1.375 per share, an increase of 22.2% over the annual rate of $1.125 established in August 1988. Return on average stockholders' equity was 34.2% in 1989 and 32.2% in 1988. Ratio of Earnings  Tbtal Debt (Year-End) to Fixed Charges  Consumer Products Debt (Year-End) 3 Ratio Billions of Dollars 7 6 5 4 3 2 1 0 85 86 87. 88 89 85 86 87 88 89  Ratio of Total Debt to  Stockholders' Equity Stockholders' Equity (Year-End) (Year-End) M Return on Average  Ratio of Consumer Stockholders' Equity (%) Products Debt to Stockholders' Equity (Year-End) Ratio Billions of Dollars 2.5 10 50 2.0 8 1.5 6 30 1.0 11 11 4 2C 11 .5 1 0 2 0 10 C 1 85 86 87 88 89 85 86 87 204816lt"'J 88 89

Selected Financial Data Fiffeen-Year Review (in millions of dollars, except per share data) ---- 38,528 36,960 Summary of Operations: Operating revenues ~ 44,759 $ 31,742 United States export sales 2,288 1,863 Costofsales 21,829 13,538 Federal excise taxes on products sold 2,140 2,127 Foreign excise taxes on products sold 3,608 3,755 Operating income 6,789 4,397 Interest and other debt expense, net (consumer products) 1,731 670 Earnings before income taxes and cumulative effect of accounting change 5,058 3,727 Pretax profit margin 11.3% 11.7% Provision for income taxes $ 2,112 $ 1,663 Earnings before cumulative effect of accounting change 2,946 2,064 ' Cumulative effect of accounting change 273 Net earnings 2,946 2,337 Earnings per share before cumulative effect of accounting change 3.18 2.22 Per share cumulative effect of accounting change " .29 Net earnings per share 3.18 2.51 ' Dividends declared per share 1.25 1.01 Weighted average shares = 14,861 17,122 Capital expenditures (consumer products) $ 1,246 $ 1,024 Annual depreciation (consumer products) 755 __ 608 Property, plant and equipment, net (consumer products) 8,457 8,648 Inventories (consumer products) 5,751 5,384 Total assets Total long-term debt Total debt-consumer products -financial services and real estate Total deferred income taxes Stockholders' equity Common dividends declared as a % of net earnings Book value per common share Market price of common share-high/low Closing price of common share at year-end Price/earnings ratio at year-end Vumber of common shares o.utstanding atyear-end yumber of employees = = ~ _ Operating income is income before interest and other debt_expense, net. 14,887 -: 16,442 _ __ _-- 1,538 - 1,504 -=.= 1,732 •- 1,559 1989 1988 927 932 9,571 -- 7,679 - 39.396 _ 40.3% $ 10.31 $ 8.31 451/z-25 251fr20'/s 415/s 25th __---- 13 10 = 929 ~ ` 924 _ 1987 1986 1985 $ 28,183 $ 25,883 $ 16,267 1,592 1,193 923 12,183 ' 11,901 6,709 2,085 2,075 2,049 3,331 2,653 1,766 3,990 3,537 2,664 646 772 311 3,344 2,765 2,353 11.9% 10.7% 14.5% $ 1,502 $ 1,287 $ 1,098 1,842 1,478 1,255 1,842 1,478 1,255 1.94 1.55 1.31 1.94 1.55 1.31 .79 .62 .50 951 954 959 $ 718 $ 678 $ 347 564 514 367 6,582 6,237 5,684 4,154 3,836 3,827 - 21,437 19,482 18,712 6,293 6,887 8,035 - 6,355 6,889 7,887 -I 378 1 141 , , 944 2,044 1,519 1,233 6,823 5,655 4,737 40.6% 39.9% 38.1% $__ _ 7.21 $ 5.94 $ 4.96 311/s-18t/s 191h-11 117ls-9 21% 18 11 11 11 8 - 947 951 955 _-.-113,000 °. 111,000 = I 14,000 v 157,000 155,000 sirce the dates of thetr acquisihon Share data have'been adjusted to reflect the 1989 four-for-one slock split. _ --L See Note 3 of the-notes to consolidated financial statements regarding 1989, 1988 . ears' amounts have been reclassified to conform with the current and 1987 restructuring charges of food operations and the 1989 sale of the compa- rior Certain p y ---- - ny's investment in Rothmans International p.l.c. --- -- ear's presentation. ; .. . . -. ~ _" . . Kraft, Inc. became a wholly owned subsidiary on December 7, 1988. General See Note 10 of the notes to consolidated financial statements regarding the com- 'oods Corporation was acquired in November 1985. Accordingly, consolidated PanY s 1988 adoption of the method of accounting for income taxes prescribed by anies Statement of,Financial Accounting Standards No. 96. - eratin results of these com a lude th o lt f th i g p p esu s o e comp ny nc e 0 ~2 0 481

11 6°Io~ 12 196 „_, ,. % 706 $ 521.,, _ 25tiy . _ :. . yU4 182 782 .78- .78 .30- 1,005 ,. 298----_-$,' , 566 ,- $ - 918 34 1- 250 ~ 4,014' 4,381 ^ T~ ~ 2,653 -- -~- 2,599 - - 9,880 ` 9,908 2,239 - `= 2,549 2,566 `- 3,054 436 141 907__ 825 4,093 4,034 _ 46.8% 40.59'0=- $ 4.21 4.03 4,178 2,834 --- - 9,756 3,776 3,728 83 627 3,663 38.6% $ 3.64 103/8-73/4 9-63/4v 81/2-51/2 10i/s. 9 71/z 11_ 10 9 971 1,000: 1,007 68,000 68,000 72,000 660 .66_ .66 .25 999 $ 1,019 211 3,583 2,922 9,180 3,499 3,804 3 455 3,234 37.9% 3 3.22 67/s-5 1/4 61/s 9 1,003 72,000 939 9.6% 390 549 549 .55 .55 .20 997 $ 751 178 2,806 2,499 7,362 2,598 2,800 1 327 2,837 36.3% $ 2.84 61/a-35/s 53/8 9 998 72,000 3,857 3,134 2,455 2,018 1,69• 1,037 961 862 778 68f 1,122 703 490 381 39: 1,096 883 721 569 451 190 137 95 97 9.' 906 746 626 472 36 10.9% 11.2% 12.0% 11.0% 9.99 $ 398 $ 337 $ 291 $ 206 $ 14, 508 409 335 266 21: 508 409 335 266 21: .51 .42 .35 .28 .2 .51 .42 .35 .28 .2 .16 .13 .10 .07 .0 996 966 957 951 93 $ 629 $ 566 $ 280 $ 220 $ 24 133 105 78 64 5 2,214 1,723 1,188 981 84 2,235 2,077 1,728 1,594 1,41 6,379 5,608 4,048 3,582 3,13 2,448 2,147 1,427 1,248 91 2,507 2,365 1,547 1,514 1,41 9 7 17 12 2 234 150 104 78 7 2,471 2,115 1,690 1,430 1,22 30.6% 30.6% 27.9% 25.7% 25.71 $ 2.48 $ 2.13 $ 1.76 $ 1.50 $ 1.2 47/8-37/s 43/4-31/2 4-31/4 4-21/s 33/4-2 41h 43/8 31/8 3 3 8 10 11 13 1 996 994 959 952 9; 65,000 60,000 53,000 51,000 48,0( 204816'"1 5 -~ 1 632 . __1,610_ _ 1,303_ _

Consolidated Balance Sheets (in millions of dollars) at December 31, 1989 Assets Consumer products Cash and cash equivalents $ 118 Receivables, net 2,956 Inventories: Leaf tobacco 2,202 Other raw materials F 1,521 Finished product 2,028 5,751 Other current assets Total current assets _ _ 555 -9,380 Property, plant and equipment, at cost: Land and land improvements 611 Buildings and building equipment 3,554 Machinery and equipment 7,305 Construction in progress - 887 12,357 Less accumulated depreciation 3,900 8,457 Goodwill and other intangible assets (less accumulated amortization of $745 and $361) 15,682 Other assets v= ~.e__ _ 9 Total consumer products assets _ __ 35,088~ .. ._.. . :. •. ._$ . . ~ - - . . „ ... . Financial services and real estate -- 1988 $ 168 2,222 1,873 1,540 1,971 5,384 377 8,151 612 3,422 7,137 761 11,932 3,284 8,648 15,071 1,921 33,791 --_ Finance assets, net 2,845 2,578 Real estate held for sale and investment Other assets Total financial services and real estate assets 32 383 379

_ . .~- _. _ , Payable for untendered Kraft shares Accrued liabilities: ~ `~ Taxes, except income taxes Employinenk costs ~~ ~n =Other Inccme taxes Dividends pavable - - P ~s Ttaii ol current labilites„ T Deferred income taxes _ Other liabilities ~~_.----~ ` Total consumer products liabilities Financial services and real estate Short-term borrowings _ Long-temi debt Deferred income taxes Other liabilities = TotalBnancial services and real estate liabilities ----- - Totalliabilities Contingencies Stockholders' Equity Common stock, par value $1.00 per share (935,320,439 and 239,618,948 shares issued) Additional paid-in capital Earnings reinvested in the business Currency translation adjustments, Less cost of treasury stock (6,790,848 and 8,588,003 shares) Total stockholders' equity TOTAL LIABILITIES AND STOCK-iOLDERS' EQUITY 47 596 805 2,829 2, 1,190 1, 318_, . 8,943 7, 15, 897 2,622 26,108 26. 323 1,215 1 1,111 200 2,849 28,957 2 29. 935 9,079 i 143 10,157 ~ 586 9,571 $38,528 7 $3E; 20481633057

Consolidated Statements of Earnings (in millions of dollars, except per share data) for the years ended December 31, 1989 1988 1987 Operating revenues $44,759 $31,742 $28,183 Cost of sales 21,829 13,538 12,183 Excise taxes on products sold ., ~f 5,748 5,882 _~. -~ 5,416 Gross profit 17,182 12,322 10,584 Marketing, administration and research costs 10,008 7,800 6,489 Amortization of goodwill Operating income F 385 6,789 125 4,397 105 3,990 Interest and other debt expense, net Earnings before income taxes and cumulative 1,731 670 646 effect of accounting change 5,058 3,727 3,344 Provision for income taxes 2,112 ~ 1,663 1,502 Earnings before cumulative effect of accounting change 2,946 2,064 1,842 Cumulative effect of change in method of Per share data: Earnings before cumulative effect of accounting change Cumulative effect of accounting change Net earnings 34

Consolidated Statements of stockholders' EqMiiY (in millions of dollars, except per share data) ~. ~ _.. ~ ",',~-~Earn'tngs Currency To ~-~ _. Additional_Reinvested___,t Translation__ ._ Costof- . Sto( C:ommon_Paid-in~~_. inthe~--,R_- z Adjust- - Treasury holde ` Stock Capital Business ments Stock Equ I Balances, January 1, 1987 Net earnings Exercise of stock options/units Cash dividends declared $ 240 $ 303 $5,344 $(103) $(129) $5,E 1,842 1,f (31) 57 (including related income tax benefits of $94) 249 2 Stock purchased __ (200) (2 -- Balances, December 31, 1987 240 272 6,437 146 -- ~ (272) 6,E Net earnings 2,337 2,~ Exercise of stock options/units (20) 48 Cash dividends declared $1.01 per share (941) (! Currency translation adjustments (including related income tax provisions of $26) (29) ~ 'Stock purchased ------- - - --- --- - - -- (539) (5 Balances, December 31, 1988 240 252 -- -- 7,833 --=- 117 - - (763) 7,6 Net earnings 2,946 2,9 Exercise of stock options/units and issuance of other stock awards prior to stock split (35) 87 Cash dividends declared $1.25 per share (1,159) (1,1 Four-for-one stock split 695 (217) (478) Exercise of stock options/units - - - - and issuance of other stock awards after stock split (63) 90 Currency translation adjustments (including related income tax provisions of $4) Balances, Decerriber 31, 1989 $935 ~ - $9,079 26 $ 143 $(586) $9,5 See notes to consolidated financial statements. 204816a "0Jy

Consolidated Statements of Cash Flows (in millions of dollars) for the years ended December 31, 1989 1988 1987 Cash Provided By (Used In) Operating Activities Net eamings-Consumer products $ 2,817 $ 2,173 $ 1,770 -Financial services and real estate 129 164 72 Net earnings 2,946 2,337 1,842 Adjustments to reconcile net earnings to operating cash flows: Consumer products Depreciation and amortization *- 1,194 779 704 Deferred income tax provision 154 (43) 338 Restructuring charges 179 348 71 Gain on sale of investment in Rothmans International p.l.c. Cumulative effect of change in method of accounting for income taxes Cash effects of changes in: (232) Receivables, net (718) 601 (117) Inventories (431) 2 (52) Accounts payable 171 408 (101) Other working capital items (455) 203 556 118 Other - 201 (7) (66) Financial services and real estate Deferred income tax provision 217 178 . 231 Cumulative effect of change in method of accounting for income taxes Increase in real estate receivables Decrease (increase) in real estate held for sale Other Net cash provided by operating activities Cash Provided By (Used In) Investing Activiiies Consumer products (41) 3,634 (81) (92) 108 (14) _ 85 19 4,998 2,881 Purchase of Kraft, Inc., net of acquired cash ($866 in 1988) (388) -(11,363) Purchase of other businesses, net of acquired cash (400) (235) Proceeds from sales of investments and businesses ~, 992 44 73 Capital expenditures - ---- - (1,246) (1,024) (718) Other . 82 52 117 Financial services and real estate Investments in finance assets : Finance assets proceeds ~ Other ~ (484) _- = 225 (481) (624) 147 ~=-~Net cash used m investing actlvlties See notes to consolidated financial statements. 36 --".-~---- °-.°. ~-- ~~2048

r~..,~~-'.;; ., aV ish Provided By (Used In) Financing Activifies onsumer producta _ Net issuance (repayment) of short-term borrowings Long-term debt proceeds Long-term debt repaid Purchase of treasury stock Dividends paid Issuance of shares Other Net issuance (repayment) of short-term borrowings Long-term debt proceeds Long-term debt repaid Other _Net cash provided by (used in) financing activities __ Effect of exchange rate changes on cash and_cash equivalents Increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year - _ Cash and cash equivalents at end of year _ Cash pai d: Interest - Consumer products -Financial services and real estate - -" - - ___' __ _-- --- _ _-----.. _ Income taxes $(2,990) $ 8,761 2,534 1,212 (1,014) (881) (539) (1,101) (895) 79 28 (85) 60 (20) 201 (20) (32) 6 12 (2,446) 7,762 (19) (44) $ (: ( (1" $ 1,711 589 $ 90 $ 88 $ $ 1,303 $ 1,088 $ 204~If;~~~1 I

Notes to Consolidated Financial Statements Note 1. Summary of Significant Accounting Policies: • ~Basrs of presentation: The consolidated financial statements include all significant subsidiaries. Balance sheet accounts are segregated by two broad types of businesses. Consumer products assets and liabilities are clas- sified as either current or non-current, whereas the accounts of financial services and real estate are unclassified, in accor- dance with respective industry practices. Certain prior years' amounts have been reclassified to con- form with the current year's presentation. Cash and cash equivalents: Cash equivalents include demand deposits with banks and all highly liquid investments with original maturities of three months or less. Note 2. Acquisition: On December 7, 1988, Kraft, Inc. became a wholly-owned subsid- iary of the company. The purchase of outstanding shares, retire- ment of employee stock options and other related payments totaled approximately $12.9 billion. The acquisition has been accounted for as a purchase and, accordingly, operating results of Kraft have been included in the consolidated operating results of the company since acquisition. The purchase price exceeded the fair value of the net assets acquired by $12.2 bil- lion and such excess is being amortized over 40 years by the straight-line method. The fair value of tangible assets acquired totaled $5.5 billion and long-term debt and other liabilities assumed totaled $4.8 billion. 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 deter- mined by the average cost or first-in, first-out methods. It is a generally recognized industry practice to classify the total amount of leaf tobacco inventory as a current asset although part of such inven~ory, because of the duration of the aging process, ordinarily would not be utilized within one year. Income taxes: Effective January 1, 1988, the company adopted the method of accounting for income taxes prescribed by Statement of Financial Accounting Standards No. ("SFAS") 96, "Accounting for Income Taxes." Prior years' data were not restated. See Note 10. Depreciation and amortization: Depreciation is recorded by the straight-line method. Substan- tially tially all goodwill and other intangible assets are amortized by the straight-line method, principally over 40 years. Had the acquisition of Kraft occurred at the beginning of 1988 and 1987, pro forma operating revenues, net earnings and earnings per share would have been approximately $43.0 billion, $1.5 billion and $1.63, respectively, for the year ended Decem- ber 31, 1988 and $38.9 billion, $1.1 billion and $1.21, respec- tively, for the year ended December 31, 1987. The pro forma results are not necessarily indicative of what actually would have occurred if the acquisition had been consummated at the beginning of each year, nor are they necessarily indicative of future consolidated results. Note 3. Restructurings and Divestitures: In 1989 General Foods Corporation was combined with Kraft to In 1988 the company provided for restructuring costs at form Kraft General Foods, Inc. The company charged $179 mil- General Foods. As a result of this restructuring, certain facilities lion against pretax income which was primarily for costs of this were combined and overhead costs were reduced to achieve merger. In addition, the company sold its equity investment in -- operating efficiencies. This restructuring reduced earnings Rothmans International p.l.c. for £610 million 101/4% notes matur- before income taxes, net earnings and earnings per share by ing in 1994, generating a pretax gain of $455 million. These - -- $348 million, $212 million and $.23, respectively. notes were subsequently sold with recourse for approximately - In 1987 the company recorded a pretax charge of $117 million ,$850 rriill.ion The net impact of these items was an increase in = related to a restructuring of General Foods into three separate earnings before income taxes, net earimings• and eamings - -- operating companies, partially offset by a pretax gain of $46 _ -- per share of $276 million, $152 million and $.16, respectively. million from the sale of the Open Pit barbecue sauce retail busi- ; ~• ness. These items reduced earnings before income taxes, 38 net earnings and earnings per share by $71 million, $22 million and $.02, respectively.

The cost_of approximately 60% of inventories wasdetermined the current cost of inventories at December 31, 1989 and 1M ~ using`the LIFOmethod. The stated i.IFOyvalues of i~~~ntories Y` - respectively :-`.-.P;= u~orc'~nnrnvimntclv C77(1 millinn nnA t7(Vl millinn lnuror thnn - Note 5. Short Term Borrowings and Borrowing_Arrangements: At December 31, the company's short-term borrowings and related average interest rates consisted of the following: - (in millions) Consumer products: Bankloans' Commercial paper 1989 Amount _ Average Outstanding Year-End Rate 435 11.6% 1988 Amount Outstanding Averag Year-End Rat $ 5,443 9.81, 4,118 9.4' (9,128) $ 433 $ 574 9.5 Y (310) - « _ . $ . 264 6,106 8.6% Amount reclassified as long-term debt ____ (6,052) Financial services and real estate: Commercial paper Amount reclassified as long-term debt $ 489 633 8.5 % #-. 323 =-_ _ _ - ---- The company maintains credit facilities with a number of lending institutions, amounting to approximately $14.2 billion at Decem- ber 31, 1989. Approximately $13.8 billion of these facilities were unused at December 31, 1989. These facilities were used for the acquisition of Kraft, to support the company's commercial paper borrowings and for other corporate purposes. Commitment fees, generally. .l %, are paid to the lending institutions as compensa- tion for availability of the facilities. The company's credit facilities include a revolving bank credit agreement expiring in 1993 for $12.0 billion which enables the company to refinance short- debt on a long-term basis. Accordingly, short-term borrowin intended to be refinanced have been reclassified as long-ten debt. Certain of the revolving credit agreements limit payment c dividends and the purchase, redemption or retirement of cal shares and/or require maintenance of a fixed charges cover~ ratio. At December 31, 1989, approximately $1.5 billion of ez, ings reinvested in the business was free of such restrictions. 204816~;j(,63

1-O6es (continued) Note 6. Long-Term De6t: . At December 31, the company's long-term debt consisted of the following: (in millions) Consumer products: Other Swiss franc, 41/436 to 51/z36, due through 1993 Deutsche mark, 43/4% to 6%, due through 1996 Japanese yen, 61h96 and 53/s%, due 1991 and 1992 Canadian dollar, 91/4%, due 1990 Other reclassified as long-term debt in 1989 and 1988, respectively Financial services and real estate• Other The company has entered into interest rate and currency swaps that affect its exposure to interest rate and currency move- ments on long-term debt. The effective interest rates may differ from the rates set forth in this note as a result of such swap arrangements. Foreign currency denominated debt for which the company has not entered into currency swap agreements is maintained primarily to hedge currency exposure of its net invest- 1989 --- 1988 $ 6,052 $ 9,128 5,497 3,652 1,211 1,199 - --491 580 - 304 296 - 239 261 86 84 186 443 332 _~_ _ 14,398 366 16,009 (752) 513,646 (127) $15,882 _ =_~ _ -° $ 310 $ 310 - 188 ~ 217 115 101 -~-- - - - - - _ 241 - 136 133 _ :- -- - - __- 106 Aggregate maturities of long-term debt, excluding short-term borrowings and current portion of long-term debt reclassified as long-term debt, are as follows: _-_ _ Consumer ', Financial services (in millions) __ products and real estate = ments tn toretgn operations. Short-term borrowings, reclassified Notes, 7% to 13.8% (average effective rate 9.38%), due through 1998 Debentures, 43/a9'o to 101h% (average effective rate 10.34%), $1.6 billion face amount, due through 2017 Foreign currency obligations: Less current portion of long-term debt, net of $1.0 billion and $834 million Notes, 8.06% to 12.25% (average effective rate 10.09%), due through 1993 Zero coupon bonds, 13.3% effective rate, $200 million face amount, due 1994 Foreign currency obligations: Short-term borrowings, reclassified _A+ne;..,.,,},,,..Qt 1a4A ..«.~...~....... .:~t..., ..L._~ _----.=-tyyl e ra e maturtty of 1.6 years provided a weighted average fixed =-1992 - ~ 648 -~ _-_ --~;~ -- 77, - tnterest rate of 9 299~0 on.$2. .0 billion of consumer products - 1993 ~366 296 ~~ ~ sh t t b l ifi d. d or - erm orrowtngs, rec ass e In ad ition, interest rate _= 1994 :- protection agreements wttn a weightect average maturity of 1.5 years provided protection levels ranging from 9.25% to 9.509'0 on $1.0 billion of such borrowings. 40 Swiss franc, 41/436 and 43/a%, due 1993 and 1996 Sterling, 11 1/a9U, due 1995 _ Canadian dollar, 101/8%, due 1990 2 200 1995-1999 -3,467 222 2000-2004 - - ~ :~ ~=r~ ~.~~t- The revolving credit facility under which the short-term debt wa: reclassified as long-term debt expires in 1993 and any amounts then outstanding mature. ~~ 752.~ b 176

Effective September 15, 1989, outstanding_shares of common stock amounts and stock plan data have been restated to reflect the split ~"' were splrt four-for-one All references in the financial statements to Shares of authorized common stock are 4 billion; issued, treasury weighted average numbers of shares and related prices, per share and outstanding were as follows: . . . ._ r~~~ . ,'#'-z x.y~:~. - . .x . . r . .. . . . . . ILL Issued Iteasury Outstanding Balances, January 1, 1987 239,618,948 (1,761,409) 237,857,539 Exercise of stock options/units 768,946 768,946 Purchased (2,000,000) (2,000,000) Balances, December 31, 1987 239,618,948 (2,992,463) 236,626,485 Exercise of stock options/units 661,760 661,760 Purchased - ~~-- - (6,257,300) (6,257,300) ~ _ Balances, December 31, 1988 239,618,948 (8,588,003) 231,030,945 Exercise of stock options/units and issuance of other stock awards 869,552 869,552 Four-for-one stock split 695,701,491 695,701,491 Exercise of stock options/units and issuance of other stock awards = 927,603 927,603 Balances, December 31, 1989 935,320,439 (6,790,848) 928,529,591 At December 31, 1989, 35,027,772 shares of common stock were reserved for stock options, stock units and other stock awards and 10,000,000 shares of Serial Preferred Stock, $1.00 par value, were authorized, none of which have been issued. In 1989 the company distributed as a dividend one common share purchase right ("Right") for each outstanding share of the company's common stock. The Rights are exercisable (and auto- matically trade with the common stock) only if a person or group acquires or announces an offer to acquire 10% or more of the com- pany's common stock. If such acquisition occurs, each Right will entitle the holder (other than such person or group) to purchase a number of common shares of the company or, if the company is acquired in a merger or other business combination, of the acquir- ing company having a market value of twice the exercise price (currently $150). Following the acquisition by any person or group of more than 10% but less than 50% of the company's common stock, the company may exchange, on a one-for-one basis, part or all of the Rights (other than Rights held by the acquiring person or group) for common shares. The company may redeem the Rights at $.01 per Right prior to the accumulation of 10% of the company': common stock by any person or group. The Rights expire on Octo ber 25, 1999. At December 31, 1989, 963,401,420 shares of commor stock were reserved for issuance upon exercise of the Rights. Note 8. Stock Plans: Under the 1987 Philip Morris Long Term Incentive Plan, the com- pany can grant to eligible employees stock options, stock apprecia- tion rights, restricted stock, deferred stock, stock purchase rights and long-term performance awards. Such grants may be for cash and up to 32 million shares of common stock. Under previous option plans, eligible employees were granted options to purchase common stock of the company at market prices on dates of grant. Under one such plan, units were granted which permit the holder 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, 1989 and 1988, options and units were exercis- able for 12,560,164 shares and 11,286,496 shares, respectively. Shares available to be granted at December 31, 1989 and 1988 were 15,085,712 and 22,728,576, respectively. 204S 1f~:,(;6 5

~ ~ abroad. If these amounts were not considered permanently reir; =° At nPr hP qR9_ anDlicable United es federal ~me ~ vested, additional deferred taxes of approximately $75 million taxes an~forei~n withholdmg taxes hae not ben provtded on ~ _ __ --- ,. approximate y-_$975 miC on of accumulated eamings of frorn would have been provided. subsidiaries that are expected to be permanently ieinvested ... _ ,.. ,. c&c The effective tncome tax rate on pretax earnings differed from . ,. ~°~ the U.S. federal statutory rate for the following reasons: ~ 1989 1988 1987 (in millions) Amount % - Amount % Amount % Provision computed at U.S. federal statutory rate $1,720 34.0% $1,267 34.0% $1,338 40.0% Increases (decreases) resulting from: State and local income taxes, net of federal tax benefit 191 3.8 126 3.4 92 2.8 Repatriation of foreign earnings 54 1.1 77 2.1 61 1.8 Excess deferred tax benefits - (7) (0.1) 74 2.0 - % Goodwill amortization 128 2.5 43 1.1 42 1.3 Other- 26 0.5 76 2.0 (31) (1.0) Provision for income taxes $2,112 41.8% $1,663 44.6% $1,502 44.9°ro The deferred income tax assets and liabilities included in the consolidated balance sheets were as follows: Consumer products Financial services and real est, December 31, December 31, (in millions) 1989 1988 1989 1988 Other current assets $ 287 $ 160 $ - $ - Income taxes (11) Deferred income taxes (897) (825) (1,111) (894) -- - $(621) $(665) $(1,111) $(894) The major types of temporary differences that give rise to de- ferred income tax assets and liabilities are differences between the book and tax bases of property, plant and equipment, inver ments in finance leases, and accrued liabilities. 204810~9 6 '7

NO`eS (continued) Note 11. Segment Reporting: Tobacco, food, beer and financial services and real estate are e the major segments of the company's operations. The com- pany's consolidated operations outside the United States, which are principally in the tobacco and food businesses, are organ- ized into geographic regions by segment, with Europe the most significant. Intersegment transactions are not reported sepa- -- rately since they are not material. For purposes of segment reporting, operating profit is operat- Data by Segment for the years ended December 31, (in millions) Operating revenues: Tobacco Food Beer Financial services and real estate Total operating revenues Operating profit: ing income exclusive of certain unallocated corporate expenses. See Note 2 regarding the acquisition of Kraft and Note 3 regarding food restructurings and the sale by the company's tobacco business of its investment in Rothmans. Substantially all goodwill amortization is attributable to the food segment. Identifiable assets are those assets applicable to the respec- tive industry segments. Reportable segment data reconciled to the consolidated financial statements were as follows: Tobacco Food Beer Financial services and real estate Other Total operating profit Unallocated corporate expenses Operating income = Identifiable assets: - Tobacco = - - Food Beer -_ Financial services and real estate Corporate assets - ~ ~ - - - Total assets _ Depreciation expense: Tobacco .- Food Beer im _° Finanial_services and real estate f=-. ~ °~ Capital additions: ~- -~-- -~Tobacco :; Food Beer „ _ Financial services and real estate 44 1989 1988 1987 $17,864 $16,586 $14,644 22,933 11,265 9,946 3,435 3,262 3,105 527 _ 629 488 $44,759 $31,742 - $28,183 $ 5,063 $ 3,846 $ 3,290 1,580 392 605 226 190 170 172 162 68 7,041 4,590 19 4,152 __252 _ 193 162 ~$ 6,789 _-= - _ $ 4,397 221 $ 6,780 $ 6,001 $ 6,467 : 25,983 24,870 9,125 ==1,556 1,623 1,680 . 0 37,759 35,663 20,162 ~~v769 -1,297 1,275 ~ = - t38,528 $36,960 ~ $21,437 $ 246 $ 237 $ 214 356 $ 3,990 201 137 136 137 ~ ~ . 2 - ~ ~_- 4 ~ -422 $ 467 $ 246 466 402 80 86 57 2 '2~4816~~;~;g

_-- ~ Data by Geographic Region for the years ended December 31, (in millions) -> s... = Operating revenues _~•E~, _ " ~ ~-~-.~-~ United States-domestic .~=export Europe Other . Total operating revenues Operating profit: United States Europe Other Total operating profit Unallocated corporate expenses- Operating income Identifiable assets: ~ United States Europe Other Corporate assets' Total assets Note 12. Pension Plans: The company adopted SFAS 87 for its U.S. pension plans in 1986 and for its non-U.S. plans effective January 1, 1989. Pension cost and related disclosures for non-U.S. plans in 1988 and 1987 were determined under the provisions of the previous account- ing principles. .4 1989 1988 1987 = _ 831,233 $20,866 Y $18,715 2,288` 1,863 1,592 8,424 7,251 6,314 2,814 1,762 -_ 1,562 $44,759 $31,742 $28,183 $ 6,061 $ 3,975 $ 3,698 692 449 373 288 166 81 7,041 4,590 4,152 252 193 162 ~ 6,789 $ 4,397 $ 3,990 $32,045 $30,638 $16,387 4,210 3,604 3,033 1,504 1,421 - - - 742 37,759 35,663 20,162 - 769 - _ 1,297 1,275 $38,528 $36,960 ~ $21,437 U.S. Plans The company and its subsidiaries sponsor noncontributory d. fined benefit pension plans covering substantially all employf The plans generally provide retirement benefits for salaried employees based on years of service and compensation durii the last years of employment. Retirement benefits for hourly employees generally are a flat dollar amount for each year of service. The company funds these plans in amounts consistee with the funding requirements of federal law and regulations. Net pension cost included the following components: (in millions) 1989 1988 1987 Service cost-benefits eamed during the year ~ 128 $ 102 $ 95 Interest cost on projected benefit obligation 303 216 191 Return on assets-actual (788) (372) (148 -deferred gain (loss) 408 108 (95 Amortization of net gain upon adoption of SFAS 87 Net pension cost (28) $ 23 (28) $ 26 (28 $ 1S 204816;bfiJ

J-ofes (continued) yote 12. Pension Plans (continued): 'he funded status of U.S. plans at December 31 was as follows: in millions) ,ctuarial present value of accumulated benefit obligation-vested -nonvested _ . ;enefits attributable to projected salaries 'rojected benefit obligation 'fan assets at fair value - :xcess of assets over projected benefit obligation lnamortized net gain upon adoption of SFAS 87 lnrecognized prior service cost 'nrecognized net gain from experience differences Prepaid pension cost ' he projected benefit obligation at December 31, 1989, 1988 1989 1988 $2,828 $2,555. 198 154 ---- 3,026 2,709 840 798 3,866 3,507 5,110 4,353 1,244 846 (317) (345) 49 72 (437) (135) $ 539 $ 438 The company and certain of its subsidiaries sponsor deferred nd 1987 was determined using assumed discount rates of 8%, - profit-sharing plans covering certain salaried, nonunion and 1/2% and 81/2%, respectively, and assumed compensation union employees. Contributions and costs generally are deter- ncreases of 6% to 7%, 6% to 71/z% and 71h9'o, respectively. The mined as a percentage of consolidated pretax earnings, as tssumed long-term rate of return on plan assets was 9% at defined by the plans. Certain other subsidiaries of the company )ecember 31, 1989, 1988 and 1987. Plan assets consist principally also maintain defined contribution plans. Amounts charged to ~f common stock and fixed income securities. expense for defined contribution plans totaled $180 million, $136 million and $118 million in 1989, 1988 and 1987, respectively. 'on-U.S. Plans 'ension coverage for employees of the company's non-U.S. sub- idiaries is provided, to the extent deemed appropriate, through eparate plans, many of which are governed by local statutory equirements. The plans generally provide pension benefits that ,re based primarily on years of service and employees' salaries :ear retirement. The company provides for obligations under uch plans by depositing funds with trustees, purchasing insur- nce policies or establishing book reserves. - Net pension cost in 1989 included the following components (in millions): - Service cost-benefits earned during the year --- $33 Interest cost on projected benefit obligation 63 Return on assets-actual (92) . . - -deferred gain 31 Amortization of net gain upon adoption of SFAS_ 87 (2) Net pension cost $33 ~ _ _ ~ The adoption of SFAS 87 for non-U.S. plans decreased 1989 pension cost by approximately $3 million. Pension cost for f -1988 and 1987 was $35 million and $30 million, respectively. :~-

at December 31 and January 1, 1989 was as Benefits attributable fo projected salaries _ , Proj cted benefit obligat'ion Plan assens n excess of (less than) projected benefit obligation Unamortized net (gain) loss upon adoption of SFAS 87 Unrecognized net gam from experience_differences .-. Prepaid (accrued) pension cost ~~ ~Aisets I;xceed~ Accumulated Benefits ccumulat Benefits ~ Exceed Assets-- Dec. 31 Jan.1 Dec. 31 Jan. 1 $ 330 35 111 137 129 ~=- 429 525 494 610 553 252 247 --~~-- ~ 1 72 1 24 (273) (247 (54) (63) 26 29 (49) (6) $ 69 $ 61 $(253) $(218 ~~----- ~~ The projected benefit obligation at December 31 and January 1, 1989 was determined using assumed rates in the following ranges: Discount rate Long-term-rate of ietum4on plan assets Plan assets consist primarilyof common stock and fixed income securities. Note 13. Litigatione Note 14. Additional Information: There is litigation pending against the leading United States cigarette manufacturers seeking compensatory and, in some cases, punitive damages for cancer and other health effects alleged to have resulted from cigarette smoking. Philip Morris Incorporated, a wholly-owned subsidiary of the company, is a defendant in some of these actions. It is not possible to pre- dict the outcome of this litigation. Litigation is subject to many 5.0% to 11.046 uncertainties and it is possible that some of these actions co, be decided unfavorably to PM Inc. An adverse development i pending litigation could encourage the commencement of ac tional similar litigation. All such actions are and will be vigot ously defended. However, management does not believe that this litigation will have a material adverse effect upon thE financial condition of the company. (in millions) 1989 1988 198 -1 Depreciation expense Rent expense Research and development expense~ Interest and other debt expense, net: ~ •- Interestexpense- Other debt expense Interest income - - , _---->-~ Interest expense of financial services and real estate operations included in cost of sales 4.5% to 10.0% 3.0% to 9.5% $ 757 $ 209 - $ 318 $612 $120 $245 $1,789 $734 $67: 5 1; (58) (69) (4: $1,731 = $670 $64, $ 93 $ 98 204810.~071

NOfes (continued) Note 15. Financial Services and Real Estate Operations: Philip Morris Capital Corporation (formerly Philip Morris Credit Corporation) is a wholly-owned subsidiary of the company. PMCC invests in third-party leveraged and direct finance leases and securities of third parties and engages in various financing activities for customers and suppliers of the company's subsidia- ries. Additionally, PMCC is engaged through its wholly-owned subsidiary, Mission V'iejo Company (formerly Mission Viejo Realty Condensed balance sheet data at December 31 follows: Group) in land planning, development and sales. Pursuant to a support agreement, the company has agreed to retain ownership of 100% of the voting stock of PMCC and make periodic payments to PMCC to the extent necessary to ensure that earnings available for fixed charges equal at least 1.25 times its fixed charges. (in millions) Assets Finance leases - - Other investments Less unearned income and allowances Finance assets, net - Real estate held for sale and investment Goodwill, net of accumulated amortization Other assets Total assets Liabilities and stockholder's equity Short-term borrowings - Long-term debt Deferred income taxes Other liabilities Stockholder's equity Total liabilities and stockholder's equity 1989 1988 $2,723 $2,163 1,166 3,889 1,166 3,329 ---1,000 2,889 728 2,601 -- 383 379 39 40 220 252 $3,531 $3,272 -- $ 323 $ 264 1,215 1,240 _--1,111 894 -- 200 221 682 653 $3,531 $3,272 Finance assets, net included intercompany balances of $44 mil- - intercompany balances of $80 million and $2 million, respec- lion and $23 million, respectively, at December 31, 1989 and 1988. tively, at December 31, 1988. These items were eliminated in the Other assets included intercompany balances of $47 million at company's consolidated balance sheets. December 31, 1989. Other assets and other liabilities included 48

~.,. ~~-.- ~'.~'1 Finance leases consist of 1nveS tmentsin trarispoCtation, telecom- Other investments consist primarily of preferred stock and , . __ ~ ~ muntions, commercial equipment and facilities with initial real estate and commercial receivables and are recorded at .~ ~e..__ ~ lease.terms. of_ 5_to 33 cost, which approximates market. years Rentals_recewable for leveraged ---- ----- ~. leases represent unpaid rentals less principal and interest on third-party nonrecourse debt. _ ~ Condensed income statement data follows for the years ended December 31, (in millions) Revenues: -- - Financial services Real estate~ ;. ~ Total revenues Expenses: Financial services = ` Real estate Totalexpenses ~ 4-_~ - _ -- Earnings before income taxes and cumulative effect of accounting change Provision for income taxes_ Earnings before cumulative effect of accounting change Cumulative effect of change in method of accounting for income taxes Net earnings Note 16. Quarterly Financial Data (Unaudited): (in millions, except per share data) Operating revenues Gross profit Net earnings Per share data: Net earnings Dividends declared Market price-high -low 1989 _ 1988 1987 $197 $175 $158 333 456 330 530 631 488 111 114 130 244 357 - ,_ 290 - -- - - 355 471 420 ~ -{ 175 160 68 46_ _ 37 _ (4) 129 123 72 41 $129 - $164 $ 72 1989 Quarters lst 2nd 3rd 4th $10,770 $11,595 $11,247 $11,147 $ 4,025 $ 4,540 $ 4,356 $ 4,261 $ 590 $ 745 a 748 $ 863 $ .64 $ .80 .93 $ .281 $ .281 $ .344 $ .344 $ 301/4 ; 36 ; ~ 42 T $ 45'fz $ 25 $ 291k $ 34'h $ 391fz 204b~E~~~7~

Note 16. Quarterly Financial Data (Unaudited) (continued): (in millions, except per share data) lst Operating revenues _$7,421 - Gross profit -` $2,748 Earnings before cumulative effect of accounting change = _~ : _._ - $ 490 Cumulative effect of change in method of accounting for income taxes Net earnings Per share data: Earnings before cumulative effect of accounting change Cumulative effect of change in method of accounting for income taxes--__-_ Netearnings Dividends declared Market price-high -low _--- -273'' $ 763 ~_ .52 __===~_.=-$ 201/~ 1988 Quarters 2nd $7,944 $3,115 $ 611 $ 611 $ .65 65 .23 $ 233/a $201/s 3rd 4th $7,737 $8,640 $3,701 $2,758 ----- - -------- - $ 621 $ 342 $ 621 $ 342 $ .67 $ .37 ' ~ $ .67 $ .37 $ .28 $ .28 $ 2451a $ 251h - $203/4 $ 225/s ;.. The sum of certain quarterly per share amounts do not equal the yearly amounts due to changes in shares outstanding during the year. See Note 3 regarding restructuring charges primarily in the fourth quarter of 1989 and in the fourth quarter of 1988 and the sale of the company's investment in Rothmans in the fourth quarter of 1989. _ . ,. . _ ,. r .. See Note 2 regarding the acquisition of Kraft in the fourth quarter of 1988. 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, 1990 there were approximately 74,200 holders of record.of the company's common stock.

Company Report on ~ . £ ~ ccountan#s_ FinanciaiS#atemen#s To the Board of Directors and Stockholders of Philip Morris _ mnanies Inc.. _ The consolidated financial statements and all related financial information here~n_are~the responsibility of _the company. ~~ ~".The financial statements which mcIude amounts based on jud g , :I -- _ -1 ~ I -- - - e accompanying consolidated balance sheets ments, have been preparedin accordance with generally- of Philip Moms ComDanies Inc. and subsidiaries as of Decem= - accented accounting principles Other financial information in _--Y . - - ,- _ _ ~- ---- --- _ _~ -- ber 31, 1989 and 1988, and the related consolidated statements of the annual report is consistent with that in the financial ~_ ~ _ _ . _ ~__ _._ _ earnings, stocktioiders' equity and cash fiows for each of the statements. , -, cial staternents are„_the responsibility of the company's man- believes provides reasonable assurance that transactions are -~ 4-~- - --~- ------~T agement Our responsibility is to express an opinion on these executed in accordance with management's authorization and three years,in the period ended December 31, 1989. These finan- The company maintains a system of internal controls which it : financial statements based on our audits ,- - °~ We conductedour audits in accordance with generally accepted auditing standards. Those standards require that we plan andiperform the'audit to obtain reasonable assurance = about whether the financial statements are free of material mis- ~ - statement An audit includes examining, on a test basis, evi dence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting a principles used and significant estimates made by management, as well as evaluating the overall financial statement presenta- tion. We befieve that our audits provide a reasonable basis for our opinion. ._ ~~. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Philip Morris Companies Inc. and subsidiaries at December 31,1989 and 1988, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1989, in conformity with generally accepted accounting principles. ` As discussed in Notes 1 and 10 to the consolidated financial statements, the company adopted in 1988 the method of accounting for income taxes prescribed by Statement of Finan- cial Accounting Standards No. 96. COOPERS & LYBRAND New York, New York January 29, 1990 properly recorded, that assets are safeguarded, and that accouni ability for assets is maintained. The system of internal controls is characterized by a control-oriented environment within the company which includes written policies and procedures,carefi selection and training of personnel, and audits by a professiona staff of internal auditors. e} -- _ Coopers & Lybrand, independent accountants, have audited and reported on the company's consolidated financial state- ments. Their audits were performed in accordance with gener- ally accepted auditing standards. LL The Audit Committee of the Board of Directors, composed of seven non-management directors, meets periodically with Coopers & Lybrand, the company's internal auditors and management representatives to review internal accounting con- trol, auditing and financial reporting matters. Both Coopers & Lybrand and the internal auditors have unrestricted access to th. Audit Committee and may meet with it without management representatives being present. 4

Board of Directors Murray H. Bring KA Alfred Brittain III Dr. Harold Brown Howard L. Clark Dr. Jose Antonio Cordido-Freytes William H. Donaldson Paul W. Douglas Jane Evans Robert E. R. Huntley Hamish Maxwell Dr. Elizabeth J. McCormack Michael A. Miles T. Justin Moore, Jr. Rupert Murdoch John A. Murphy s9

William Murray John S. Reed John M. Richman Hans G. Storr William P. Tavoulareas Margaret B. Young ., Dr. Elizabeth E. Bailey'.' Dean of the Graduate School of Industrial Administration Carnegie-Mellon University, Pittsburgh, PA Murray H. Bring' Senior Vice President and General Counsel Alfred Brittain lII3,6•' Former Chairman of the Board of Bankers Trust New York Corporation and Bankers Trust Company, New York, NY Dr. Harold Brown2.O•fi,r Chairman of the Foreign Policy Institute, School of Advanced International Studies, The Johns Hopkins University, Washington, DC Howard L. Clarkb.' Former Chairman and Chief Executive Officer of American Express Company, New York, NY Dr. Jose Antonio Cordido- Frevtes' S Member of Betancourt, Cordido and Associates, Caracas, Venezuela, Attorneys, and President of C.A. Tabacalera Nacional William H. Donaldson'•235•' Chairman and Chief Executive Officer of Donaldson Enterprises Incorporated, New York, NY Paul W. Douglas'•6 Chairman and Chief Executive Officer of The Pittston Company, Greenwich, CT Jane Evans/5 President and Chief Executive Officer Interpacific Retail Group, San Francisco, CA Robert E. R. Huntlev-'' Counsel, Hunton & Williams, Richmond, VA Hamish Maxwell'' Chairman of the Board and Chief Executive Officer Dr. Elizabeth J. McCormack's1 Adviser to members of the Rockefeller Famil}; New York, NY 20 ~8 16 'RJJ J77 Michael A. Miles Vice Chairman of the Board and Chairman and Chief Executive Officer of Kraft General Foods, Inc. T. Justin Moore, Jr.z•'s Counsel, Hunton & Williams, Richmond, VA Rupert Murdoch Chief Executive of The News Corporation Limited, New York, NY John A. Murphy'•2.'•' President William Munay24 Vice Chairman of the Board John S. Reed Chairman of Citicorp and Citibank, N.A., New York, NY John M. Richman'•' Counsel, Wachtell, Lipton, Rosen & Katz, Chicago, Illinois Hans G. Storr3J Senior Vice President and Chief Financial Officer William P. Tavoulareas" Former President of Mobil Corporation, New York, NY Margaret B. Young''•5 Chairman of the Whitney M. Young, Jr. Memorial Foundation, New York, NY Joseph F Cullman 3rd Chairman Emeritus George Weissman Director Emeritus Committees 'Member of Executive Committee Hamish Maxwell, Chairman -Member of Finance Committee John A. Murphy, Chairman 'Member of Audit Committee Robert E. R. Huntley, Chairman 'Member of Committee on Public Affairs and Social Responsibility John A. Murphy, Chairman 'Member of Nominating Committee T. Justin Moore, Jr., Chairman 6Member of Compensation Committee John S. Reed. Chairman 'Member vf Corporate Emplo.yee Plans lnvestment Committee bkilliam H. Donaldson. Chairman

.Officers Philip Morris F. Robert Kurimsky Philip Morris Corporate Staff: Companies Inc. D. Eric Pogue International Inc. William C. Smiy Calvin J. Collier Hamish Maxwell David Zelkowitz Aleardo G. Buzzi Senior Vice President, Chairman of the Board and President and General Counsel, and Secretary Chief Executive Officer Philip Morris U.S.A. Chief Executive Officer Gary P. Coughlan Senior Vice President John A. Murphy Carlos E. Salguero , President Frank E. Resnik Executive Vice President Finance Chairman Daniel M Dressel Michael A. Miles Richard L. Snyder . Vice Chairman of the Board Ehud Houminer Executive Vice President Senior Vice President, President and Human Resources William Murray Chief Executive Officer Walter Thoma Vice Chairman of the Board Executive Vice President Joseph P. Durrett Mark A. Serrano Senior Vice President, Murray H. Bring Executive Vice President, William H. Webb Sales Senior Vice President and Operations Executive Vice President J Bruce Harreld General Counsel . R. Nelson Beane Dinyar Devitre Senior Vice President and William I. Campbell Senior Vice President, Senior Vice President Chief Information Officer Senior Vice President Scientific Issues , Corporate Planning Thomas M. Kearns Alan J. Lacy Vincent J. Buccellato Senior Vice President Senior Vice President, Hans G. Storr Senior Vice President, Strategy and Development Senior Vice President and Sales Chief Financial Officer Vice Presidents: Robert G. McVicker David E.R. Dangoor Senior Vice President, John J. Tucker Senior Vice President, Bernard Beaurpere Technology, Quality Assurance, Senior Vice President, Marketing Martin D.J. Buss and Scientific Issues Human Resources and John Dollisson Administration Fred J. Laux Andreas Gembler Thomas D. Ricke Senior Vice President, Marc Goldberg Senior Vice President, Donald Fried Personnel Donal P. O'Brien Corporate Affairs Vice President, Associate General Counsel James J. Morgan Lee Pollak Edward W. Smeds , and Secretary Senior Vice President, Senior Vice President, Planning Operations and Logistics George R. Lewis Philip Morris Products Inc. Vice President and Harry G. Steele Eric C. Strobel Treasurer Senior Vice President, W John Campbell Senior Vice President, Finance and Administration President Corporate Marketing B. Jack Miller Vice President and Andrew Whist Officers: Controller Senior Vice President, Tobacco Technology Group John P Amboian External Affairs . Robert H Bradish Guy L. Smith IV Vice Presidents: . Richard B Burgess Vice President . , Donald W Carlin Corporate Affairs Vice Presidents: George Karandjoulis . William B. Chiasson Louis R Turano Breedlove James T Ste hen J Bloom . Gary Conte . p . John van Ham Assistant Secretary Elizabeth Butson Philip J. Davis Barry J. Case Raymond J. Herrmann Patricia A. Malzacher Dr. James L. Charles Kraft General Foods, Inc. John L. Hogan Assistant Secretary Stephen C. Darrah John E. Kelly Corporate Staff: O. Witcher Dudley Michael A. Miles John F. Mowrer III Dr. Kenneth S. Houghton Chairman and Robert B. Nagel Vice Presidents: Ellen Merlo Chief Executive Officer Robert V Richards John R Nelson Timothy A. Sompolski Bruce S. Brown . Douglas H Nelson Geoffrey C. Bible Bryan G. Stockton David I. Greenberg . Fredric S Newman President and Chief Robert A. Wait David M. Kirby . Dr. Thomas S. Osdene Administrative Officer J. Douglas Wert George L. Knox III William P Taylor Lawrence S. Wexler ^.r 2 0 4 816

General Foods USA Kraft General Foods Canada Kraft General Foods Philip Morris Capital Richard P. Mayer Robert S. Morrison Commercial Products Corporation President President George F. Goebeler Officers: Officers: President Hans G. Storr Chairman and Officers: John D. Bowlin Daniel S. Antonelli Chief Executive Officer Enrique J. Guardia Richard A. Bailey Frederick F. Avery Sylvester T. Hinkes George W. Beal William E. Beedie Norman J. Treisman Thomas J. Hoeppner Alan M. Cox Daryl D. Boddicker President Randy D. Kautto J. Robert Hall John M. Cabot Vice Presidents: Gregory B. Murphy Mark M. Leckie Ed Dudley John E. Nevins Gerald S. Lord Robert L. Herst Dennis J. Floam William A. Paterson J. Bernard Sabourin Jack A. Peterson Michael J. Kinney Alan R. Plassche Christine E. Thompson Leroy E Radtke Stephen I. Sadove Ronald A. Tomlinson . Harry B. Smith Mission Viejo Company Douglas A. Smith Jeremy D. Young Bi1lyJ. Strong James G. Gilleran Raymond G. Viault Thomas L. Thomas President and Oscar Mayer Foods Richard E. Thompson Chief Executive Officer Kraft USA James W McVey Ron Vautour James M. Kilts President Craig McCallum President Officers: Miller Brewing President-Colorado Division Officers: Company Jack G Raub Alan G. Be cker . Richard E. Bailey . Thomas F. Duesler Leonard J. Goldstein Executive Vice President Lani L. Beach Joel W. Johnson President and James L. Huesman Robert A. Eckert Ronald S. Kelly Chief Executive Officer Executive Vice President Seth Eisner Patrick J. Luby and Treasurer Ronald D. Harris Paul G. Roehrig Warren H. Dunn Charles E Martin 3rd Thomas J. Ryan Senior Vice President, Van Stevens William Morris Gene G. Suess Administration Executive Vice President David Rickard Bjorn J Thompson Mitchell Wienick . Paul J. Tiller Allen A. Schumer Vice Presidents: Senior Vice President Richard J. Waldrop , Danette S Fenstermacher Kraft General Foods Operations . Raymond G. Winburn William K Smith International . John M. Keenan Kraft General Foods Charles W Schmid Robert P. Swank President Frozen Products Senior Vice President, Marketing Thomas Herskovits Officers: President Vice Presidents: Charles A. Adamo Officers: Billy R Apple Bernard D. Balas . Eugene E. Jarrel John S. Craig RodneyJ. Blucher Virgis W Colbert Dr. Nicolaas EM. Kuijpers William J. Dowd Brian A. Mciver LarryJ. Gundrum Frank L. Donnelly Edward J. Moy Roger K. Hove Leonard H. Jacob Thomas A Koehler Charles A. Phillips Adrienne M. Johns . John G. Plackett Charles F. Marcy Paul R. Mollomo Luc E. Vandevelde Harold E. Reinhart ArthurJ. Rehberger George D Riemer Ellis Reynolds . Kathleen D Ryan Kathleen K. Spear . William A Saupe Danny L. Strickland . William G Schmus Ernest W Townsend . Robert L. Smith Ronald R. Strain .0 , 5

3rporate Responsibility )orate responsibility ns with the ordinary rities of the company. At -nost basic level, we ,ide our employees with fe workplace and an ronment of equal oppor- ty. We also insist on the iest standards of behav- imong our personnel. 'e have articulated our itions on such issues of lic concern as product ility, targeted excise ~s, product labeling, and rictions on advertising product use. For more rmation on these posi- s, please write to the porate Affairs Depart- it identified on the fac- ._ page.- Je all prosper when our imunities prosper. Our ?orate citizenship pro- ns help us reach out to headquarters and plant irriunities, and to larger :stituencies of con- 'iers around the world. )verlhalf our corporate itributions are devoted to ication. Early in 1990, we / "The freedom to say and think what we believe. To express our individuality and diversity. That's our birthright, and it's ensured by this document. Join Philip Morris in supporting the National Archives' celebration of the 200th Anniversary of the Bill of Rights." - -from the Philip Morris Companies Inc. television campaign commemorating the United States Bill of Rights Modem Art, and we co-pro- duced a widely distributed educational video on the exhibit. Our tobacco, food, and beer operations together supplied food, water, and other emergency aid to victims of Hurricane Hugo in the Caribbean and the United States. And we continued our strong sup- port of many minority orga- nizations in the United States such as the NAACP, the National Political Wom- en's Caucus, and the United States Hispanic Chamber of Commerce. We are celebrating our identity as a company pro- ducing goods found in almost all American homes by commemorating the bicentennial of the Bill of Rights. - Through a grant to the National Archives in Wash- ington, D.C., together with extensive television and print advertising, we are helping to promote a funda- mental understanding of the Bill of Rights. As of February iounced a major initiative 1990, we have sent a parch- :~ educe_adult illiteracy in ment copy of the Bill of ladelphia and to develop Rights to more than one and ational model for urban a half million Americans. racy programs; through a The stunning success of this it e fowith The Pew campaign is the result of the ; ~nta le Trusts arid the _ .° Nat ional Archives' dedica -'- - -;: I _._ ~~ ~1- s ommission on ~ and the ' tion to education , _ yo ri he A f - me t ~racy warm support o . ~,~ arts su~pport_.:--- -_can: _~'~ .people n 989, r ~ )ught_the critically aa'imed "Picasso and ~~ ~ione--- ~que: Pering Cubism" Vew York's Museum of

Headquarters Addresses: - _ _ Philip Morris Comp nies I ~ a nc.- . -~ 7r-w 120 Park Aver~ue _ 100 - New York, New York 1'~ ~ (212) 880 5000 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 Inc. 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 120 Park Avenue New York, New York 10017 Philip Morris Asia, Inc. 25th Floor, United Centre 95 Queensway, Central Hong Kong Philip Morris (Australia) Ltd. 252 Chesterville Road Moorabbin, Victoria 3189 Australia . Kraft General Foods Canada 95 Moatfield Drive Don Mills, Ontario M3B 3L6 Oscar Mayer Foods 910 Mayer Avenue Madison, Wisconsin 53704 Kraft General Foods Frozen Products Kraft Court Glenview, Illinois 60025 Kraft General Foods Commercial Products I Parkway North Deerfield, Illinois 60015 Miller Brewing Company 3939 West Highland Boulevard Milwaukee, Wisconsin 53201 Philip Morris Capital Corporation 120 Park Avenue New York,,New York 10017 Mission Viejo Company 26137 La Paz Road Mission Viejo, California 92691 request to: Donald Fried, Secretary Philip Morris Companies Inc. 120 Park Avenue New York, New York 10017 Transfer Agents and Registrars: First Chicago Trust Company of New York 30 West Broadway New York, New York 10007-2192 1-800-446-2617 Crestar Bank Box 26665 Richmond, Virginia 23261 Dividend Reinvestment Agent: First Chicago Trust Company of New York Dividend Reinvestment Plan P.O. Box 3506 Church Street Station New York, New York 10008-3506 Frankfurt Geneva Lausanne London Luxembourg Paris Tokyo Zurich NY Stock Exchange Symbol: MO Independent Accountants: Coopers & Lybrand 1251 Avenue of the Americas New York, New York 10020 Public Policy Issues: Inquiries regarding our positions on public policy issues involving the company and its products should be directed to: Corporate Affairs Department Philip Morris Companies Inc. 120 Park Avenue New York, New York 10017 Shareholder Publications: Written requests should be directed to: Financial Communications Dept. Philip Morris Companies Inc. 120 Park Avenue New York, New York 10017 or you may call: (212) 878-2505 Desgn; Eisenman & Enock Iha. Photography: Vickers & Beechbr, Chris Co1Nns, Paul Fusco, Burt Glinn, Peter Karw, Rkchard Alcorn, Bik Kelly, Abn MacWeeney JtvC'~~ Typograpny: Grid Typograph(c Services, Inc. 20 4 b16 Printed in U.S.A. by Laaky Company . Annual Meeting: Stock Exchange Kraff General Foods, ln c. Kraft Court The annual meeting of : Listings: Glenvierv, Illinois_6002 _ stoc olders of Philip Moms NewYork- = Companies Inc. will be held =_ Amsterdam Operating Unit Headquarters°. = on Apri126; 1990, at the Philip Antwerp Morris Manufacturing Center, - - Ba`sel General Focids USA- 3601 C R d Brussels , ommerce oa 250 North Street Richmond, Vrginia. White Plains, New York 10625 Kraft USA Kraft Court Glenview, Illinois 60025. Kraft General Foods International 250 North Street Form 10-K: The company's annual report on Form 10-K, which will be filed with the Securities and Exchange Commission, will be available to stockholders -- -- ` in April upon written White Plains, New York 10625

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