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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