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P H I L I P M 0 R R I S INCORPORATED ~ l96~ A N N U A L R E P O R T Executivc Offices: One Ilundred Park Avenue, HIGHLIGHTS 1981 (($000) Net Sales .................. S 526,7; Net Income ................ 21,5 Per Share of Common Stock: Net Iiicome .............. $ 5.1 Dividends Declared ....... 3•( Net Income Reinvested For Expansion ............. 2•' Taxes Federal Excise Taxes ...... $ 184,1 Federal and State Income Taxes .................. 24, ") CONTENTS President's Message 2 Other: Social Security and Local Taxes ............ 4,5 Manufacturing and Leaf 4 Total Taxes ........ $ 213,3 Research and Development 4 Marketing 5 Number of Stockholders (At Dec. 31) Preferred ................ 2,2 Philip Morris International 8 Common ................ 33,4 Subsidiaries 8-9 Executive Personnel 10 Total Assets ................ $ 351,0 Total Assets Per Share ....... 95. Industry Affiliations 10 Financial 10 Common Stockholders' Equity Per Share ................ 47• Audited Financial Statements 12-17 Charts and Summary 18-19 The notes to consolidated financial statements should be read in conjunction with the above data. t 2048014426

Philip Morris Incorporated OFFICERS Joseph F. Cullman, 3rd President Chandler H. Kibbee Executive Vice President-Finance Robert P. Roper Executive Vice President-Operations George Weissman Executive Vice President-International Andrew C. Britton Vice President, Chief of Manufacture Hugh Cullman Vice President, Assistant Chief of Operations John E. Cookman Vice President, Diversi fication and Treasurer George C. Dawson Vice President, International Clifford H. Goldsmith Vice President, Subsidiary Relations Roger M. Greene Vice President, Advertising Justus Heymans Vice President, International Ray Jones Vice President, Sales George W. Macon, Jr. Vice President, Leaf Ross R. Millhiser Vice President, Director of Marketing Jack R. O'Connor Vice President, National Sales Manager Paul D. Smith Vice President, General Counsel Dr. Helmut R. R. Wakeham Vice President, Research and Development Thomas F. Ahrensfeld Associate General Counsel and Secretary Henry R. Blum Controller John A. Hampson Assistant Treasurer L. C. Metzger Assistant Treasurer Walter F. Sperber Assistant Controller Cornelia Craig Assistant Secretary Mary E. Russell Assistant Secretary I a DiRECTORS Joseph F. Cullman, 3rd President Howard S. Cullman President, Cullman Bros., Inc. Richard W. Dammann Dammann, Blank, Hirsch & Heming Attorneys-at-Law Dr. Jess H. Davis President, Stevens Institute of Technology Dr. Robert N. DuPuis Vice President, General Foods Corporation Wirt H. Hatcher Consultant, Retired Senior Vice President Chandler H. Kibbee Executive Vice President-Finance Edward Lasker Hastings and Lasker Attorneys-at-Law T. Newman Lawler Lawler & Rockwood Attorneys-at-Law Robert P. Roper Executive Vice President-Operations Arthur Snapper Chairman, Milprint, Inc. Sidney Weil Chairman, Executive Committee A•S•R Products Company George Weissman Executive Vice President-International j Harvie Wilkinson, Jr. President, State-Planters Bank of Commerce and Trusts, Richmond, Virginia Alfred E. Lyon, Honorary Chairman Leonard G. Hanson, Director Emeritus Herman E. Riddell, Director Emeritus Kenneth H. Rockey, Director Emeritus TRANSFER AGENT Morgan Guaranty Trust Company of New York 30 West Broadway, New York, New York REGISTRARS The First National City Bank of New York 55 Wall Street, New York, New York Chemical Bank New York Trust Company 100 Broadway, New York, New York COUNSEL Conboy, Hewitt, O'Brien & Boardman 39 Broadway, New York, New York AUDITORS Lybrand, Ross Bros. & Montgomery 2 Broadway, New York, New York .p Co p[ 41 ' P F A R HIG Net Net Per 1\ I r ( Nu ( I ( Toi To, Co I The be r

PHILIP MORRIS iNTERNATIONAL 100 Park Avenue, New York 17, New York George Weissman, Chairman, Chief Executive Officer George C. Dawson, President and Chief Operating Officer Justus Heymans, Senior Vice President Sidney Bach, Vice President William F. Fielden, Vice President Robert J. Leahy, Vice President James E. Turner, Vice President and Secretary George P. Washburne, Vice President BENSON & HEDGES (CANADA ) LTD. Brampton, Ontario Robert J. Leahy, President M. J. Adler, Vice President & Chie f o f Operations John Hughes, Vice President, Cigar Sales Antonio Toledo, Vice President, Marketing Joseph Secter, Secretary-Treasurer PHILIP MORRIS & CO., LTD. London, England Earle R. Adler, Managing Director M1LPR1lOdT, INC. Milwaukee, Wisconsin Arthur Snapper, Chairman o f the Board Fred hL Stefan, President and Chief Executive Officer Robert C. Roderick, Vice President, Manu facturing . Wagner Van Vlack, Vice President, Marketing C. K. Billeb, Vice President, Engineering Donald L. Faulkner, Vice President, Merchandise Manager S. Lyle Graham, Vice President, Personnel Walter J. Hullinger, Vice President, Manager, Field Operations Paul B. Hultkrans, Vice President, Manager, Industry Sales Adolph Miller, Vice President, Director o f Research Jack R. Jewell, Secretary NICOLET PAPER CORPORATION West DePere, Wisconsin Henry Fowler, President S Robert Etter, Executive Vice President Robert J. Hadraba, Vice President-Director of Sales Frank X. Kreiling, Vice President & General Mill Manager Herbert Wenberg, Vice President-Technical Services A•S•R PRODUCTS COMPANY New York, New York Robert G. Urban, President George Bratt, Jr., Vice President Joseph A. Dammann, Vice President and Treasurer Richard W. Dammann, Secretary AMERICAN SAFETY RAZOR COMPANY New York, New York Richard D. Robertson, Vice President-Staunton Operations Jay S. Salamon, Vice President, Marketing EVER-READY RAZOR PRODUCTS LTD. London, England Earle R. Adler, Chairman o f the Board SUPREME PRODUCTS CORPORATION Chicago, Illinois David Spatz, President TME LIGHTFOOT COMPANY Hoboken, New Jersey B. L. Marks, President PAL BLADE CORP., LTD. (CANADA ) Montreal, Quebec Jack Hendler, President & General Manager POLYMER INDUSTRIES, iNC. Springdale, Connecticut Dr. Frank C. Campins, President Richardson Thurston, Vice President and General Manager Raymond T. Clarke, Vice President John W. Foster, Jr., Vice President Dr. Howard L. Kane, Vice President J. W. Ogletree, Vice President Ralph C. White, Secretary-Treasurer Horace W_ Pierpoint, Controller I I I

P H I L I P M 0 R R 1 S ~- - INCORPORATED 1961 A N N U A L R E P O R T Executii;e Oflices: One Hundred Park AUCntte, New York 17, New York I I HIGHLIGHTS $ 351,018 95.85 Net Sales .................. S 526,732 $ 506,412 Net Income ................ 21,511 20,98-} Per Share of Common Stock: Net Income .............. S 5.61 $ 5.44 Dividends Declared ....... 3.60 3.60 Net Income Reinvested For Expansion ............. 2.01 1.84 Taxes Federal Excise Taxes ...... Federal and State Income Taxes .................. Other: Social Security and Local Taxes ............ Total Taxes ........ Number of Stockholders (At Dec. 31) Preferred ................ Common ................ S 18-1,1-16 $ 175,947 24,36•1 23,370 4,839 3,939 S 213,3-19 $ 203,256 2,200 33,474 Total Assets ................ Total Assets Per Share ....... Common Stockholders' Equity Per Share ................ 1960 ($000) 2,238 34,451 $ 321,717 87.62 47.93 46.46 The notes to consolidated financial statements should be read in confunction with the above data. 2048014429

PRESIDENT'S MESSAGE Philip Morris maintained its forward , momentum ir 1961. Net sales amounted to $526,752,000, an increase o 4 per cent over last year's total of $506,412,000. Net income of $21,511,000 was 2.5 per cent greater than the $20,984,000 for 1960. Unit cigarette sales were at a new high, and both net sales and net earnings increased for the eighth consecutive year. On a per common share basis, earnings were $5.61 in 1961, up 3.1 per cent over $5.44 for 1960. Dividends of $3.60 were paid on the common shares, the 34th consecutive year of common stock payments. Dividends of $4.00 were paid on the 47o Cumulative Preferred Stock and $3.90 on the 3.90% Cumulative Preferred Stock. CIGARETTE SALES INCREASED AGAIN: Cigarette sales were again the most important factor in the improved results for 1961. Shipments of our American- made cigarettes both for the domestic and world market were significantly ahead of the previous year. A marked profit improvement resulted from increased cigarette production in the United States. This profit improvement was offset by heavy introductory expenses in Canada and England, important additions to our non-tobacco research, development and new product programs, and by adjustments occasioned by the decline in the value of the Venezuelan bolivar. Marlboro had an excellent year with important gains both domestically and overseas. Marlboro is the largest selling American-made filter cigarette in the flip-top box in the world. It is also becoming increasingly popular in the king size soft pack. Parliament has been on an accelerating sales curve all through 1961. It is far and away the world's largest selling recessed filter cigarette. More and more smokers are recognizing the advanta es of Parliament's recessed filter and distinctive mild blend. Philip Morris brand has had a healthy year marked by a trend away from the long decline this brand had been experiencing, and for the first time in a decade, its production increased. The heartening public response to our new Philip Morris King Size Commander was responsible for the improved Philip Morris brand sales performance. The noticeably better tasting, better made cigarette produced by the new Mark VIII making machine attracted many new smokers to Philip Morris Commander. Our Alpine brand continued to share an important segment of the menthol filter field, and Benson & Hedges in its distinguished new packet had a fine sales increase to strengthen further its position as America's largest selling premium priced premium quality cigarette. Philip Morris International expanded its operations on a number of important fronts. ` 0 2 204801443t3

INTERNaTIONAL OPERATIONS EXPANDED: In Canada, our wholly owned company, Benson & ed~,~,es ( C;:nnada ) Ltd. opened a fine new factory iu rampton, near Toronto, and introduced in selected iarkets our Alpine and Parliament brands. Reaction by Canadian smokers to these products which are niade from Canadian grown leaf, using Canadian produced packaging materials and employing Canadian personnel, has been encouraging so far. Distribution is being widened to all important areas of Canada early in 1962. In Venezuela, our affiliate Catana strengthened its position when it amalgamated with Cavet, another large cigarette manufacturer in this important South American country. Profits to Philip \torris from Venezuela were reduced in 1961 by the devaluation of the bolivar, but «•e believe Catana has measurably enhanced its position in the Venezuelan market during the vear and the future should show a favorable profit trend. Philip \forris is receiving dollars from Venezuela on a satisfactory basis. Philip \torris (Australia) Ltd. enjoyed a year of sustained sales progress with profits at a satisfactory level, but not keeping pace with the sales increase, due to the expense of introducing Alpine and Philip \Iorris King Size. Both the new brands were successfully launched and are going, established brands in Australia. Philip hlorris Regular and Marlboro also howed good increases. The organization and roductiou facilities of Philip '1lorris & Co., Ltd. England )%c,cre strengthened and enlarged, but our osition still remains very small in this market. Philip Aiorris International was active in Europe. In Switzerland, Marlboro, made under license by Fabriques de Tabac Reunies SA, improved its leading position. In West Germany, \larlboro made under license by the Brinkmann Company showed consistent sales gains and enjoys a fine volume. NEW LICENSING AGREEMENTS SIGNED: In France, Parliament was successfully introduced under a manufacturing license arrangement with the French Government Regie. In Benelux, Philip NIorris is being manufactured under a licensing arrangement made late in 1961 with Ed. Laurens "Le Khedive." Marlboro will be introduced in Finland in 1962, to be made there by Amer-Tupakka Oy, under license from Philip D4orris. In South America, Philip Morris brands have a wide acceptance and our sales in this important market increased in 1961. In the Far East we enlarged our position, especially in Hong Kong where Philip Morris, locally made to our quality standards, were successfully introduced. In the Philippines, sales of our locally made Philip Morris and Marlboro brands were sharply curtailed at year's end by restrictions on the importation W f American grown tobaccos. Philip Morris brands have historically enjoyed a wide cceptance in world markets. We are aggressively trying o strengthen and enlarge our position in this rapidly growing segment of the cigarette industry. Our principal brands have a unique international character which we feel represents a most promising opportunity for Philip \[orris growth in the future all over the world. PAL, GEM PREMIUM BLADES INTRODUCED: In 1961 we reactivated the name American Safety Razor Company to indicate our emphasis on this important blade and razor division of A•S•R Products Company, our principal non-tobacco consumer products activity. During 1961 we continued our intensive program of product development and product improvement at American Safety Razor. The first result of this program reached the shaving public early in the year when the new Pal Premium injector blade was introduced nationally. Later in the year we introduced the new Gem Premium Edge single edge blade to strengthen our dominant position in this segment of the blade market. Philip Morris sales energies and advertising properties are being used to promote both these new products and results have been encouragirig so far. Both of these new products are superior to anything we have produced in the past, but they represent only our first steps in a much larger program which we believe will give consumers here and abroad a new standard of excellence and shaving comfort. Profits of A•S•R have been affected by our new product development and research program as well as our expanded promotional effort, but familiarity with the razor and blade business has reinforced our confidence in its future. Wet shaving is becoming more popular throughout our enlarged world population. 1961 was not a satisfactory year for our flexible packaging subsidiary, Milprint, Inc. of Milwaukee. Profit margins continued to narrow in the face of increased costs of production and -naterials without compensating increase in prices to o,..r customers. The industry continues to be plagued by excess capacity. We are making determined efforts to increase efficiency and develop more profitable lines. NICOLET OPERATION IMPROVED: Nicolet Paper Corporation, makers of glassine and sulphite papers in DePere, Wisconsin, a Milprint subsidiary, improved its operation. We continue to strengthen our Milprint organization against the day when more normal conditions in the packaging industry will permit Milprint to produce satisfactory profits on its volume. The future for Philip Morris appears promising in both domestic and international operations. The world-wide demand for quality American type cigarettes in general, and brands made by Philip Morris in particular, should expand with the increase in the world's population and the economic growth of many underdeveloped countries. Our emphasis on quality as a foundation for growth is firmly planted in all the people o f Philip Morris all over the world whose efforts have resulted in Philip Morris' present position o f unique strength. Thanks go to them especially for the progress made in 1961. New York, N. Y., February 28, 1982 .!• JOSEPfi F. GULLMAN, 3rd President 3

1]OME r3TtiC TOgACCO Philip Morris plants at Richmond and Louisville (upper right) added evening shifts to meet increasing demands for the Company's cigarette brands. MANUFAG't[3R3NG AND LER.F i In 1961, the Jtanufacturing Department at its plants in Richrnond' and Louisville continued its program of introducing new and improved machinery and manufacturing techniques designed further to enhance the quality of our products and the efficiency of manufacture. Production of Philip Morris Regular cigarettes was transferred during the year to Mark VIII making machines. This is the revolutionary equipment, first successfully employed on Philip Morris Commander, which produces cigarettes that are noticeably better made, better tasting and more uniform. During 1961, new three-year contracts were signed with the major unions which represent the Company's hourly employees. The Company continues to enjoy a history of fine relationships with its skilled men and women. Leaf purchases in 1961 were increased to provide for growing sales in the United States and abroad. The 1961 Burley and Bright crops were appreciably larger than 1960. Their average prices again were higher than those of the previous year, and prices paid by Philip Morris were also higher. Turkish-type leaf was of satisfactory quality and was purchased at about the same price as last year. RESEARCH AND DEVELOPMENT During 1961, the Research Center staff at Richmond was further augmented to meet the growing demands on its skills. Facilities for flavor studies were expanded, and the staff continued its searcr for improved methods of evaluating and testing leaf, other cigarettE` , components and packaging materials. 2048014432

Subsidiaries, as wejl, maintain product development operations, and use tlie Philip Morris corporate research center facilities to supplement their o«;n activities. These specialized units work for the continued improvement of product quality and the development pf new products to meet consumer interests and demands. MARKETING The C:oiuhauv's major brands-Marlboro, Philip Morris, Parliameut, Alpine and Benson & Iledges - strengthened their positions in the inclustrv. It is «•orthv of note that Philip Morris is the only cigarette manufacturer with established brands covering all segments of the cigarette market: full Havor filter, high filtration, regular, king size, menthol and premium priced. Advertising again played a key role. For the 1961-62 television season. the Company's brands are supported by the successful diversified lineup of network programs - Professional Football (National Football League ), Perrv Mason, The Dobie Gillis Show, Douglas Edwards witli the News, Rawhide and Route 66 - carefully selected the previous year. This is an unusual and desirable achievement, particularly for 1961, a vear noted for the high fatality rate of new as well as established shows. Moreover, the Companv's television properties were top rated in their time periods. Such performance means the Company reaches its audiences at a cost significantly lower than the industry average. Color newspaper advertising again in 1961 was used where the added imhact and visibility of color justified the premium cost. Black and white newspaper advertising continued its major role because of its relative efficiency and universal availability. Magazines reaching national audiences -such as Life, Look, The New Yorker, TV Guide, Sports Illustrated, Newsweek and Time - provided their _special function of portraying product advantages with high quality reproduction not available in other print media. I Network radio supplemented national television throughout the country in hundreds of markets. Local television and radio spots delivered additional penetration in major selected inarkets. _ Revelation and Bond Street smoking tobaccos were advertised chiefly through national magazines and were supported by strong point-of-sale merchandising. The total marketing efforts behind the brands' successes were demonstrably effective. Sales, Sales Promotion, Public Relations and Marketing Research each supplied special merchandising and promotion to make up the Company's total marketing effort. Enhancing basic distribution through all types of outlets were special programs to assist in the merchandising of cigarettes in the nation's super markets, vending machines and other specialized sales areas; e.g., the fourth in a series of volume outlet merchandising films, "The Consumer Wins Or Else," was completed in 1961 and demonstrated to super market management mutually advantageous methods in which to stock, display, merchandise and sell cigarettes. In addition, special programs were directed toward the college market. Chief of these is the popular "On Campus" column by humorist Max Shulman, which appears in the campus newspapers. Marketing Research guided the Company's marketing efforts into the most productive and efficient areas. This Department conducts continuing surveys among the smoking public to detect and evaluate changes or new trends in tastes and types of cigarette preference. Dwayne Hickman, star of the Dobie Gillis Show (CBS-TV) discusses future plans for the comedy series with Roger M. Greene, Advertising Vice President, left, and Ross R. Millhiser, Vice President and Director of Marketing. 5

DIVISIONS AND SUBSIDIARIES George Weissman, Chairman of Philip dforris International, left, and 11f. Girard of French Regie, following New York press conference to announce his- toric cross-licensing a;reement. PHILIP Mt3RA$S 1111TERIUA7if3NAL Throughout the year, the Companv's international activities wer again increased and expanded. To reflect more accurately th~ scope and nature of the Company's worldwide operations, thi; division's name was changed in Scptember from Philip Morris Overseas to Philip 'Morris International. The importance of this division's activities is growing. Sales potential internationally is impressive. As standards of living rise in the rest of the free world, per capita consumption of cigarettes increases strongly. Philip Morris is in a position to capitalize on this potential: the reputation of the Company's domestic products assists their acceptance around the world; the Company has historically Joseph F. Ctdlman, 3rd, left, President of Philip Morris, and M. Grinumelli, head of the French Gocernment Tobacco Administration, at Ei$el Tower reception to announce unique international Gauloises- Parliament agreement. Officials of Amer-Tupakka Oy and representatives of Philip Morris International f ollowing signing of agreement under which Marlboro cigarettes will be made and marketed by that firm in Finland. From left, Martti Santala, Director of Sales, and Reino Sarvanne, Director of Production, both of Amer-Tupakka Oy, with George Weissman, Chairman of the Board, Sidney Bach and Justus Heymans, all of Philip Morris International. engaged in foreign trade; trained personnel knowledgeable in world trade are equipped to further the Company's interests; and well founded licensees and subsidiaries are able to take advantage of expanding markets. In 1961, Philip Morris International again operated effectively in three ways: • it exported American-made cigarettes to more than 104 countries and territories, • its affiliated companies manufactured and sold Philip Morris cigarettes in 4 countries, and • the number of licensees, who make and market the Company's cigarettes, grew to 8. In all cases, quality standards of the parent Company are closely supervised and implemented by Philip Morris personnel. During the year, progress was made in all three areas: Export: Despite import restrictions imposed by many countries which have been key markets for Philip Morris brands, 1961 was one of the best years for the sale abroad of cigarettes made in the United States. To strengthen the sales effort, Philip Morris International stationed men in the field in Europe, the Far East, and South America. Affiliated Companies: A modern cigarette factory was completed near Toronto by Benson & Hedges ( Canada ) Ltd. and the production and sale of Parliament and Alpine cigarettes began in the early Fall. Consumer response has been encouraging. An amalgamation involving C. A. Tabacalera Nacional ( CATANA ), an affiliate of Philip Morris, and C. A. Venezolana de Tabaco ( CAVET ), was announced in December. Philip Morris : 2048014434 6

Through export to more than 100 countries, 8 licensing arrangevients, and 4 affiliates, Company brands are growing as international favorites. Philip Aforris personnel and research facilitias insure trniform high q«ality around the world. etaiucd its important position in the amalgamated company, ne of tlie major commercial enterprises in Venezuela with a artnership of local and U.S. capital. Philip \lorris (Australia) Ltd. made further progress, introducing Alpine and Philip \lorris King Size with gratifying results. Philip Morris & Co., Ltd., England, completed its first full vear of operations in a new factory in London, and launched Alpine cigarettes in the United Kingdom market. In all four companies, local nationals comprise the majority of personnel: more than 95 per cent of Benson & Iledges ( Canada ) Ltd. employees are Canadian; in England, operations are staffed 100 per cent by English; and 100 per cent Australian in that country; less than one per cent in Venezuela are non-Venezuelan. Licensees: Licensing agreements are desirable where local import duties, currency restrictions or price discrimination makes export from the United States impractical. Philip \iorris International has eight such agreements. In the Fall; international attention was drawn to a cross-licensing agreement between Philip Morris International and the French Tobacco Administration. Philip Morris was pleased that the Regie, one of the oldest and greatest tobacco organizations in the world, honored the company, not only by selecting Parliament to be the first U.S. brand to be made 'and marketed in France, but bv choosing Philip Morris to manufacture and sell the famous Gauloises, Western Europe's largest selling cigarette, in the U.S. Sales of both brands have been successful. Other licensing agreements concluded during the year provide I for the manufacture and sale of Marlboro in Finland, and Philip Morris in Ilong Kong and The Netherlands. Earlier licensing agreements are in effect in Panama, the Philippines, West Germany and Switzerland. On each of its three fronts, Philip Morris International will be confronted by such problems as the growth of regional economic blocs, additional import restrictions, imbalances of currency and a continued surge of nationalism around the world. However, the potential is large and Philip Morris International is welll positioned to operate within the framework of the situations as thev exist from one countrv to another. The Honorable Alvin Hamilton, Canadian Minister of Agriculture, right, watches first production of Alpine and Parliament cigarettes during dedication ceremonies for new Benson & Hedges (Canada) Ltd. plant near Toronto. From left, Robert J. Leahy, President, M. J. Adler, Production Vice President, both o f Benson & Hedges, and Mr. Hamilton. 2t?48t? 14$35

\Idpnnt bufldx /Icsihle p.akntra tn the ,ixv:h, mquirrmrnt, uf yuur prv~du. t- t.o latvri ur n d•uen d nr.d lc. .lt NIr -,Awr••n> tu ;,.- knkr pr.•tdenw arr ne.er arr.,n¢ed tn tacor a pnrtrculer marered nr;v:ntin6 Prme•x.'Phr•rr+nu nca•d tu hr.- .Vtlpnnt ulfrra inu fRe ardrat ee-:.-t a:u.:eBJe ontuArro. G•ur ne<t pm kage .an heoefit (rum thu "uprn rnmd" .q•proar h by tha• {uourwr in Ik•.~hle pn- kaRmF Your ruaom combination p.u knae wdI he produaA hr a nat:unwde ¢.h. drergn and pruductinn org:uuennon wnh Gt vrara vt;n•nrrnr Che rmult' \tare pn,tecuon. mnre:wka sazle for vnur produa at eaun..nu.xl ..mt. Now ur a grnd .... c to dtncu. er ... MILPRINT PACKAGING A MARKETING POWER ~ MILPR13di'!', It14C. The flexible packaging industry remained intensely competitive during 1961, and Milprint took further steps to position itself to take advantage of changing competitive situations - and new packaging materials. Substantial reductions were made in factory and administrative costs, and a number of Milprint's actions during the year were directed to the improvement of customer service and the development of new products. - the field sales force was realigned to provide more efficient handling of customer needs. - a field technical service force was created to offer on-the-spot assistance in solving packaging problems for Milprint customers. - merchandising efforts were enlarged, and research and development activities were expanded to develop new packaging techniques and to explore new materials. - new printing equipment was installed at the Downingtown, Pennsylvania, and San Francisco, California, plants, resulting in better service for Milprint customers in those areas. Two new packaging materials, long in development, were among the many new materials and packaging concepts introduced in 1961. Each has received favorable acceptance in preliminary market applications: Forlan, a versatile new type plastic food and non-food wrapper, provides marketing, functional and economic advantages; Nealam is an improved plastic coated film for vacuum packaged meat and other food products. Nicolet Paper Corporation, a subsidiary of Milprint, began to produce and market aluminized glassine, a product that provides a superior glassine by incorporating many of the characteristics of foil. In addition, Nicolet has been equipped to furnish wax coatings on certain products sold to major accounts. ~ ~ .~r m 0 ~ .r+ .p, 8

I I i A-S-R PRODUCTS COMPANY Robert G. Urban was appointed President of this Division in November. He has had broad experience in marketing with several lar,cre consumer product firms. In September, Sidney Weil retired as President of A-S-R Products; he"has agreed to continue as Chairman of the Executive Committee and will serve the company in an advisory and consulting capacity. Also during 1961, A-S-R Products re-established American Safety Razor Company as a division. Two important developments marked American Safety Razor's year: 1. Pal Premium blades were introduced and Pal's share of the injector razor market improved. 2. New Gem Premium blades were marketed nationally late in the Fall. Supreme Products Corporation, a subsidiary of A-S-R Products, continued as a major factor in the manufacture of drill chucks. In addition, Supreme has been awarded a defense contract to produce bomb fuses. n Out of Space-Age Technology comes a blade that takes friction out of shaving New Pale Premium Injector Blade rides on Liquid Ball Bearings to give shaves that feel friction-free! ' e...-.!c:.at •iaim c+Mr {svw da.pny, .r v:ae*[. Y+sn pc . .. . ... wa.a x.-r. r.. x w. r...v.e..,:...,... w.~ +n M*1 uM. fMM.b.a:.nr M au6.e POLYMER {N®US'Y'R9ifiS, INC. The new polymerization plant completed late in 1960 has made it possible for Polymer to move farther from its historic role as a custom formulator to that of maker and marketer of a proprietary line of polymers. For example, Polymer 65 - a textile finish developed by this subsidiary's chemists -was successfully introduced in 1961 and plans call for other Polymer-developed specialty products to follow. Polymerization plant production is being increased, since the new facility is currently operating at 100 per cent of capacity. . New from GEM I New GEM Premium Edge- now Micro-Misted to end blade tug! .,`ru+,•P.emum[6g.wa[q.w,waae,asf u«ro.4suea-ew.yswaqdarrnanyenm4 . vm.e xw e+pt"MCey bekm ftw ,o- aakapc as.ec Tntts «"v Ge~* ermwm 4Ms -v..~nstmsMus.weHul•eurs+•x+{Mt~ bSdo1+9""''*e~s~r.eha+sbettxM6Wt"e rr..ryouwor.t.rc.e,a,tiewxcrf~~ Y~M'7s~.w,w.edwer,- xaut~ •.!'nmmrf .-. '. naeMtbsnw.bYa: rocianP.eu,wm -,.ca+uTVwmewri,a4•.a..nrY.w. EJSeiKta,na~anaa.:.r~Yreeaw~.yet „y t tA y bpan,.a4p 4 is/Yf i*mth sietl: w.k up rtw erw yent~taxa ~n hsh~unBu x +ey4aAnrbYaa..nNH'l.eLbMt4nbMY itimOMnaOOO.nMMBCaPnmwmE.~p' •b~e+trasMacd3e.riw~GamMr*wnEdpa;a &atle4nvrMase.astawaeuwddbr' . 9

Hatcher Heymans Wakeham Riddell O'Connor ="` €d. 1961 one Share of Ph€ti Morris common stocl ~` represented t~`+ ~ ~` w ~143.84 _Safes of•= ~ ~ ~ ~ : ~ -. 01-st 6f goodsd sold ru, . , 109.53 ~ fo~viihich ~5a:28 wa~xc~sP tazesr " ' L,,=sqli nq,generaiana,~, a inIstrat[ve_ hxusfitsemre, - ~ na~eratin~neo~ne of ~ _ $12.95 .~ _ ~ ~' ' x p#of3erating InCome a ini s , ritmoperat€ng deduct ons had r __ ~iet eQst of: ,60 '~ n vtn~ p , w some o f `Le e l ~ a so e cantribafig ated f u " ~ d t ~ g t ~ n ~ ~ : ~ ds was. .18 .. M su6sldtai preferred stocR divrtlenqs were• - .16 ~ `~_ ;~ =_f eaving elrnittgs available for ~ _ - ome 41121, - : . $5.61 *'' _ ,~s.n ~ __ ~ Ot,this #WStoekho€der was paid . 60 p~iwdend of: ~ ~~ 3 lIIp,NJOrt'fs reTain[ grpVtttt ,~ : S EXEOL7TIVE PERSONNEL . Wirt H. Hatcher, Senior Vice President of Philip Morris, retired at the end of the year. He will continue to make available to the Company the benefits of his 47 years of tobacco experience by serving as a consultant and as a member of the Board of Directors. In April, the Board of Directors elected Dr. Helmut R. R. Wakeham Vice President-Research and Development. The Board in October elected Jack R. O'Connor Vice President- National Sales Manager and Justus Heymans Vice President- International. In accordance with Company practice, Leonard G. Hanson and Herman E. Riddell, having reached the age of 70, became Directors Emeritus. Mr. Riddell had served on the Board for twentv-five vears, and Mr. Hanson for twentv-seven. Edward Lasker was elected a Director in November. Mr. Lasker, partner in the California law firm of Hastings and Lasker, brings to the Board wide experience in advertising as well as law. The Company was saddened by the death in January, 1962, of Milton Dammann, Chairman of the Board of A•S•R Products. He had served that company for more than fifty years. INDUSTRY AFFILIATIONS The Tobacco Industry Research Committee, which Philip Morris has supported since its inception, has now contributed $5,450,000 to impartial investigation of the relationship, if any, between tobacco and human health. Some of the nation's most respected scientists and medical institutions have conducted research under TIRC grants. The annual report of Dr. Clarence Cook Little, Chairman of the Scientific Advisory Board of the TIRC, is available on request. The Company is a member of the Tobacco Institute, an organization composed of cigarette and tobacco manufacturers. The Institute and its president, former career Ambassador and U. S. Information Agency Director, George V. Allen, increasingly is recognized as a spokesman for the tobacco industry. In May the Institute will cooperate with the Jamestown Foundation in the celebration of the 350th Anniversary of John Rolfe's first successful tobacco crop which signaled the beginning of the tobacco industry and the start of international trade on the North American continent. FINANCIAL As reported elsewhere in this report to stockholders, consolidated net sales were up 4 Jo in 1961 over 1960. Due to the gratifying increase in cigarette sales and the substantial profit increase in domestic tobacco operations your Company was able to carry out programs of expansion abroad and to absorb certain financial adjustments and still report an increase of 2.5% in consolidated net income for 1961 over 1960. Among factors adversely affecting the rate of increase in I I dw,

Dtu•ing their national cout;etition in Riclunond in the Spring, mernbers of the Financial Analysts Federation totu•ed ~ Philip Jforris' Research Center facilities and heard Company officials discciss Philip 1lorris and its sTlbsidiaries. ~ ~ r t ~p„pe ~a I consolidated net income were adjustments to the decline in the exchange rate of the Venezuelan bolivar, heavy introductory costs undertaken in the production, marketing and distribution of Parliament and Alpine cigarettes by Benson & Hedges of Canada and lower sales and margins in our non-tobacco operations. Earnings retained in the business of $7,329,000, coupled with depreciation charges of 85,638,000, more than covered capital outlavs of $8,733,000 and long-term debt retirement of $2,000,000. In 1961, the Compan,v acquired 11,905 shares of preferred stock and 44,600 shares of common stock. All purchases were made in the open market and at year end the Company held 32,758 shares of 3.90% preferred, 9,637 shares of 4% preferred and 53,332 shares of common stock in its treasury. Substantial increases in leaf inventories necessitated by growing cigarette sales were financed by an increase in short-term borrowings which at year end stood at $45,214,000. This trend will probably continue in 1962, accompanied by increased interest charges. } CUlVSOLIDATED ySTATEMENTIlOF'S a!lRCE AND USE O~~UNDS . Yeer ended ISecernber 31, 1961 ~ ~- ~ ~ O S S --------' _,_ -_,_ q RGE OF _FUnD Net Earit~~s 511 - X5.~Y ;~ 638 Capifial lm rovernents I 1141 ~tetiremeno~" ~.ang="Cern, Debt.. ,pommon ahtt Preferred ~ t..2. ; ' 3.^f ' 6.:..:.. .! ...1., tzauRA,(_uiiuci _ gPt on +w' - ~ i 7$Z ~ : t1i5`posai- of Fixed Assr ts _ ~-- Other. Net 3d7 ~Itased for Sf- ock Pur „ TCeasurv 5 382 < , , ~ ` : ~nividends P6 ~or ~ ' . ~7e~lare ; - 14,182 ~' `' ,lncrease in Working - C*pitQE i : 436 ~~ ~_- .ti _.t- r . .. ... .

PHILIP MORRIS (INCORPORATED IN VIRGINIA) AND ITS CONSOLIDATED SUBSIDIARIES INCORPORATED 1 CONSOLIDATED BALANCE SHEETS for the years ended December 31, 1961 and 1960 (NOTE 1) ASS ETS : 1961 1960 Current: Cash .................................... S 15,881,939 $ 11,795,531 Accounts and notes receivable, less allowances for discounts and doubtful accounts .... 27,901,727 27,380,535 Inventories (Note 2 ) ...................... 232,541,105 209,325,774 Prepaid expenses .......................... 1,025,679 1,316,736 Total current assets .................. 277,350,450 249,818,576 Equity in net assets of unconsolidated foreign subsidiaries .............................. 7,282,258 7,558,077 I Land, buildings, machinery and equipment, at cost ... 99,065,689 93,641,243 Less, Allowance for depreciation ............ 37,506,097 33,680,910 61,559,592 59,960,333 Deferred charges and other assets .................. 3,232,965 2,746,400 Brands, trade-marks, patents and good will, less amortization ............................. 1 593 079 1 634 109 , , , , ~ $351 018 344 $321 717 495 4. , , , , 00 a ~ The accompanying notes are an integral part of the financial statements. .m 4k -A 12

I LIABILITIES: 1961 1960 Current: N otes payable ....... . .................... 5 4,5.•21-l.cu){) $ 20,966,000 . Long-term liabilities due within one year...... .' {)Ut).O00 2,000,000 Dividends pat•able . . . . . . ........ .. .......... >.5~3Ei.O~;(i 3,558,701 Accounts payable and accrued liabilities ...... '0,3 25,376 19,043,827 Federal and other taxes on income ........... 15,415.578 13,827,357 I Total current liabilities ............... 56,-19L050 59,395,885 Deferred federal taxes on income ................. . i.-1•12.(z5 7 965,804 Lon~-term liabilities (Note 3 ) .................... 6.3.-100.000 65,400,000 Total liabilities ..................... 1 .5 1.333, 7 3 7 125,761,659 Stockholders' equity (Note 4 ) : Cumulative preferred stocks, par value $100 per share ...................... .28,-101).600 28,740,200 Common stock, par value $5 per share (Note 5). 18,577,455 18,401,820 Capital surplus ........................... 47 ? 73:319 45,613,512 Earnings retained in the business (Note 6)... 11-1.073.--117 106,744,669 _'05,3 2-) , 791 199,500,201 Less, Cost of preferred and common stocks held in treasury .......... 8,649,184 3,544,395 199,684,607 195,955,806 ~ ~ $351,018,344 $321,717,495 I 13

PHILIP MORRIS (INCORPORATED IN VIRGINIA) AND ITS CONSOLIDATED SUBSIDIARIES INCORPORATED CONSOLIDATED STATEMENTS OF EARNINGS for the years ended December 31, 1961 and 1960 (NOTE 1) 1961 1960 Net sales ....................................... $526,752,3-1-1 $506,412,297 Cost of goods sold ............................... Cost of shipping goods, selling, advertising and general administration ......................... Operating income ......................... Other income ................................... 401,098,656 18,225,7712 479,32-1,-i28 47,427,916 3,013,700 50,441,616 384,340,057 75,494,329 459,834,386 46,577,911 3,227,740 49,805,651 Interest ....................................... 3,079,599 3,465,285 Provision under deferred profit-sharing plan ........ 1,316,652 1,225,183 Other deductions ............................... 831,057 1,397,743 5,227,338 Earnings before provision for taxes on income and before equity in net earnings of unconsolidated foreign subsidiaries ............................. Provision for federal and other taxes on income ...... 45,214,278 24,364,000 6,088,211 43,717,440 23,370,292 20,850,278 20,347,148 Equity in net earnings of unconsolidated foreign subsidiaries .................................. 660,995 637,266 Net earnings ............................. $ 21,511,273 $ 20,984,414 The accompanying notes are an integral part of the financial statements. Y I I 14

` ~ CONSOLIDATED STATEMENTS OF SURPLUS 4 ~ for the years ended December 31, 1961 and 1960 (NOTE 1) 1961 1960 I CAYITAL SURPLUS: Balance at beginning of year ............... $ 45,613,512 $ 44,605,434 Excess of proceeds over par value of common stock issued under stock options ........ 1,606,284 908,616 Adjustments for retirement of preferred stocks through sinking fund . ................. 53,523 56,962 Adjustments for common stock issued under A•S•R emplovees' stock option plan assumed by the Company ...................... - 42,500 Balance at end of year ........... $ 47,273,319 $ 45,613,512 EARNINGS RETAINED IN TIiE BUSINESS: Balance at beginning of year ............... $106,744,669 $100,364,650 Net earnings per accompanying statement .... 21,511,273 20,984,414 128,255,942 121,349,064 Deduct: Cash dividends declared: On cumulative preferred stocks: I o series ..................... 638,139 658,944 3.90 o series ............... 332,060 351,571 On common stock, including, in 1960, $196,380 on stock of A•S•R Products Corporation .. 13,212,326 13,085,707 14,182,525 14,096,222 Expenses incident to the combination of Philip Morris and A•S•R .......... - 508,173 14,182,525 14,604,395 Balance at end of year (Note 6). $114,073,417 $106,744,669 The accompanying notes are an inte~ral part of the financial statements. 15

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of all whollv owned active subsidiaries and the equity of the Company in net earnings of unconsolidated subsidiaries less than wholly owned. Accounts in foreign cur- rencies have been translated at appropriate exchange rates. 2. INVENTORIES: December 31 1961 1960 Tobacco and tobacco products at average cost: i Leaf tobacco .................... ... .. ' $192,778,361 $170,926,863 Manufactured stock and operating supplies .. 23,322,800 21,705,610 Other inventories, at the lower of cost (first-in, first- out) or market ... . ...................... 16,439,944 16,693,301 $232,541,105 $209.325,774 3. LONG-TERM LIABILITIES, less amount included in current liabilities: Sinking Fund Debentures: 25/8%, payable $1,600,000 annually and $16,000,000 on April 1, 1966 ............ $ 20,800,000 $ 22,400,000 4%$%, payable $2,000,000 annually from 1965 to 1978 and $12,000,000 on June 1, 1979 .. 40,000,000 40,000,000 41/4 % Notes, payable $400,000 annually and $1,000,000 in 1967 ..................... 2,600,000 3,000,000 4. CAPITAL SHARES: $ 63,400,000 $ 65,400,000 December 31 1961 1960 Authorized: Preferred .............................. 284,096 287,402 Common .............................. 5,000,000 5,000,000 Issued: Preferred: 4% Series ........................... 167,863 169,862 3.90% Series ........................ 116,233 117,540 Common .............................. 3,715,491 3,680,364 In treasury: Preferred: 4% Series ........................... 9,637 6,401 3.90% Series ........................ 32,758 27,395 Common .............................. 53,332 8,732 The Company is required to set aside annually in sinking funds, amounts sufficient to' redeem 1,999 shares of preferred stock, 4% Series, at $105.50 per share, and 1,307 shares of 3.90``/c Series at $100.75. Shares held in treasury at December 31, 1961 are sufficient to fulfill sinking fund requirements for the ensuing year. The preferred stock is redeemable at any time, otherwise than through sinking funds, at $105.50 per share plus accrued dividends for 4% Series and at $100.75 per share plus accrued dividends for 3.90% Series. s 1 1 I 16

I I 5. STOCK OPTIONS: Pursuant to stock option plans approved by shareholders, common stock of the Company has been made available for option to officers and other key employees at closing market prices on the dates granted. 1961 1960 Shares under option, beginning of year ......... . .......... 79,131 81,135 Options granted . . __. . . __ .. . _ -. . ..-_ .. . . . . ... . . ..... . . . . . . . . . . 69,850 23,750 Options exercised . ....................... ............... (35,127) (24,083) Options canceled . . . . .............. . .................. (3,023) (1,671) Shares under option, end of year .................... ... . 110,831* 79,131 Shares available for option, end of year .................... 59,638 3,319 *At prices ranging from $43.125 to $117.50 6. DIVIDEND RESTRICTIONS: The agreements covering long-term liabilities and preferred stock contain restrictions with respect to the payment of dividends (other than stock dividends ) on the common stock and to the purchase, redemption or retirement of capital shares. At December 31, 1961, approximately $55,600,000 of the consolidated earnings retained in the business was free of such restrictions. 7. DEPRECIATION: Depreciation charged to costs and expenses aggregated $5,637,846 in 1961 and $5,361,975 in 1960. OPINION OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of Philip Morris Incorporated: We have examined the consolidated balance sheets of PHILIP MORRIS INCORPORATED and its Consolidated Subsidiaries as of December 31, 1961 and 1960 and the related consolidated statements of earnings and surplus for the years then ended. Our examinations were made in accordance with generally accepted auditing standards, and accordingly included such tests of the accounting records of the companies and such other auditing procedures as we considered necessary in the circumstances. In our opinion, the accompanying balance sheets and related statements of earnings and surplus present fairly the financial position of Philip Morris Incorporated and its consolidated subsidiaries at December 31, 1961 and 1960 and the consolidated results of their operations for the years then ended, in conformity with generally accepted accounting principles applied on a consistent basis. LYBRAND, ROSS BROS. & MONTGOMERY New York, January 31, 1962. I.- .a. 4 .1b I 17

SALES • EARNINGS & DIVIDENDS PER SHARE SALES • OPERATING ASSETS WORKING CAPITAL • DEBT 1954 '55 '56 '57 .58 59 '60 '61 1954 '55 '56 '57 '58 '59 '60 '61 1954 '55 '56 '57 '58 '59 '60 '61 °Operating assets are the sum of "total current assets" and "plant and equipment" at cost, as shown on the Company's consolidated balance sheets. . . EIGHT YEAR FINANCIAL REVIEW(1) (In thousands, except last fice columns) Earnings Shipping Before Selling Federal Net Earnings Net Sales 1954 352,674 129,438 280,086 41,736 27,103 13,020 3.7% 9,604 1,185 2,231 17.1% 3,245 319 NOTES: (1) These statistics combine information for all consolidated subsidiaries. A•S•R Division acquired In 1960 on a pooling of Interests basis has be included for all periods shown. Wholly owned foreign subsidiaries consolidated for the first time in 1960 are reflected from the dates of acquisition. (2) Excludes equities In net earnings of unconsolidated foreign subsidiaries more than 50% owned, less related federal taxes on Income; such s Excise Taxes Cost of Goods Sold Advt'g & and Other Gen'i Taxes Admin. on Income (2) Amount Profit Net Earnings Retained Dividends Declared - Sinking % of Net Annual Fund Common Preferred Amount Earnings Depreciation Payments Margin 1961 $526,752 $184,146 $401,099 $78,226 $45,214 $21,511 I 4.1% II I $13,212 $ 970 $7,329 34.1% $5,638 $2,277 1960 506,412 175,947 384,340 75,494 43,717 20,984 4.1% 13,085 1,011 6,888 32.8% 5,362 2,274 1959 498,456 168,608 379,061 73,932 40,756 19,590 3.9% 11,140 1,024 7,426 37.9% 4,932 2,287 1958 473,022 163,023 360,763 67,855 39,743 18,705 4.0% 10,467 1,037 7,201 38.5% 4,981 2,291 1957 439,596 151,646 336,718 62,529 35,451 17,441 4.0% 10,017 1,039 6,385 36.6% 4,472 2,287 1956 409,934 144,165 320,010 53,809 31,682 15,544 3.8% 9,516 1,041 4,987 32.1% 3,872 1,895 1955 358,789 126,254 282,844 44,135 28,275 13,212 3.7% 9,074 1,043 3,095 23.4% 3,564 304 ~ 18 2048014446

RETURN ON COMMON STOCKHOLDERS' CAPITAL EXPENDITURES • STOCKHOLDERS' INVESTMENT • TOTAL DEBT INVESTMENT RETAINED EARNINGS • DEPRECIATION MILLIONS STIS -_ - a S TOCKROL I DERS'INVESTMEN T ~ ~. " T cta pEl lr *0 4 }At-m I ~ t. F iO - Plant & Plant & Capital Equipment Equipment Current Expenditures (Gross) (Net) Inventories Assets Working Long Capital Term Short Term Total MILLIONS 16r- CAPITAL EXPENDITURES FOR EXPANSION & REPLACEMENT Per Common Share No. of Tangible Common Net Dividend Working Net Worth Shares (3) Earnings Declared Capital Book Value $ 8,733 $99,066 $61,560 $232,541 $277,350 $190,859 $65,400 $45,214 $110,614 $198,092 3,662,159 $5.61 $ 3.60 $52.12 $47.93 7,300 93,641 59,960 209,326 249,819 190,423 67,400 21,000 88,400 194,322 3,671,632 5.44 3.60 51.86 4 6.46 12,380 90,050 59,655 210,967 252,239 187,404 69,100 30,000 99,100 187,419 3,656,281 5.08 3.15 51.26 44.79 8,580 80,906 53,444 219,744 271,658 150,103 30,600 89,400 120,000 179,602 3,629,109 4.87 3.00 41.36 42.79 8,337 74,009 51,024 213,209 263,210 149,063 33,700 84,200 117,900 173,466 3,621,345 4.53 3.00 41.16 42.30 13,830 68,464 48,717 215,188 263,152 148,144 36,500 85,200 121,700 167,514 3,621,345 4.01 3.00 40.91 40.64 6,307 59,574 41,688 203,511 249,195 155,412 39,300 67,700 107,000 162,716 3,621,137 3.36 3.00 42.92 39.38 7,492 57,185 40,531 191,794 223,508 156,740 37,600 43,100 80,700 162,542 3,621,137 3.27 3.00 43.28 3 8.40 uities are included in net earnings for all periods since dates of acquisition. 3) Outstanding shares include in all periods the equivalent of Philip Morris shares issued in exchange for companies acquired on a pooling of Interests basis. 19

The Perry Mason Show and its star, Raymond Burr, won TV Guide Silver Bowls as best television series and best actor in 1961. Burr received an "Emmy" thetyear before. Show is sponsored by Parliament. Broad Audience Appeal of Major Network TV Programming Supports Sales Left: Parliament sponsors Douglas Edwards, award-winning news commentator. Right: Roger 3f. Greene, Advertising Vice President, at rigkt, accepts Alfred P. Sloan Award for Company-sponsored public service television program on highway safety. Producer of the CBS-TV show is at left. The DobieGillis Show and Route 66 rate consistently high in their time periods. The National Cowboy Hall of Fame honored Rawhide for accurate portrayal of the American West. Popular show is sponsored by Marlboro. I (0 20 Paul Hornung, left, 1961 winner of Marlboro Player of the Year Award, and Mike Ditka, Rookie of the Year. Marlboro sponsors National Football League games across the country. <

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