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I financial higher rate than earnings of companies whose business volume compared to the base period had been reduced, remained un- changed, or increased at normal rates. We are concerned with the unequal hardship worked by Excess Profits Taxes on our employees and shareholders, all of whom helped to make possible the Company's past growth and recent position. However, we hope a continued uptrend will, in a measure, offset this disadvantage. The added common and a new issue of preferred stock of last year's financing improved our capital structure. Their issuance reduced the proportion of funded debt, raised the preferred stock portion and increased the common stockholders' equity. With the addition of $8,441,466 of net earnings retained in the business, the common stockholders' equity at the end of the fiscal year amounted to 58% of our capitalization, with funded debt and preferred stock accounting for 21% each. By replacing a substantial portion of our then outstanding bank loans with permanent capital, the financing improved our borrowing facility and provided an ample and sound founda- tion for future financing in case of need. In the normal course of business, bank loans which had been made to carry the financial peak load were repaid in full in early August. Our larger needs, however, made it advisable to increase our investment in leaf tobacco and new purchases were financed with new bank loans in accordance with our customary practice. The funds derived during the year from financing, from bank loans and from operating profits were applied to increasing our investment in leaf, expansion of production and storage facil- ities, to payment of the regular cash dividends on the Com- pany's capital stock, and to take care of increasing costs of labor and materials. The table on Page 10 shows in more detail the sources from which funds were secured and the purposes to which they were applied. Had taxes continued at the old rate, our pre-tax income of $35,087,145 would have made ample provision for increased cash dividends, bonus distribution to employees and substantial addition to the capital investment required by our business. Under the new tax law, however, our earnings were taxed at a

the uses made of added cash f unds and their source (fiscal year ended March 31) taxes The amount received by Government from the sales of the Philip Morris Company is larger by far than that received by any group benefiting from or making tangible contribution to the Company's operation, whether as stockholder, employee, farmer, supplier or distributor. The taxes charged against our last year's sales totaled $169,718,000, or 55% of sales. This amounted to $44,828 for every employee, about $10,000 for every stockholder, or about $130 for every retail establishment that sold Philip Morris cigarettes. N 0 .~, uses of funds sources of funds Toward Completion of Expansion Program. $ 1,531,000 Profit from Operations . . . . . . . . $37,370,000 Other Expenditures for Operating Depreciation, Provided . . . . . . . . 909,000 Facilities . . . . . . . . . . . 767,000 Sale of Additional Capital Stock .... 28,493,000 To Increase Leaf Tobacco and Other Supplies 61,228,000 Increased Bank Loans . . . . . . . . 19,500,000 To Increase Cash and Receivables ... 1,588,000 Increase in Other Current Liabilities ... 8,573,000 To Increase Other Assets.. ...... 286,000 Other Sources . . . . . . . . . . . 92,000 To Pay Interest on Borrowed Capital ... 1,948,000 Repurchase of Preferred Stock Subject to Sinking Fund . . . . . . . . . . 516,000 For Prior Service Payment under Retirement Plan . . . . . . . . . . . . . 116,000 For Incentive Bonus Plan . . . . . . . 311,000 To Pay Taxes on Income Federal Normal Tax and Surtax ... 15,064,000 Excess Profits Tax . . . . . . . . 2,686,000 State Income Tax . . . . . . . . 648,000 To Pay Cash Dividends. . . . . . . . 8,248,000 rate one-third higher than in the preceding year. This reduced our cash funds derived from net earnings. To conserve cash we therefore decided to distribute to the stockholders a share in the additional Company earnings in the form of a stock dividend after the end of the fiscal year. This gave to the stockholder an opportunity either to hold his increased share in the Company's equity for its future earning power or to receive in cash his share in the business increase by selling his stock dividend. On our books a transfer of $5,828,850 was made from earned surplus to capital and capital surplus, representing the value of the stock distributed as a dividend. 10

I I excise taxes on cigarettes To the cigarette consumer the ex- cise, or revenue stamp tax, is a special sales tax of about 98% added to the sales value from which the manufacturer provides for the cost of his raw materials and all other requirements of his business. Last year cigarette smokers paid $1,263,000,000 in excise taxes on the cigarettes they consumed. This is a third more than the total amount of money received by the tobacco farmers of the nation for the tobacco crop. This stamp tax is described as a tax upon the domestic con- sumption of cigarettes, but it must be paid by the manufacturer prior to the making of the cigarettes which are to be taxed. The manufacturer is reimbursed through his sale of the cigarettes. Losses which may occur between manufacture and collection of the sales price are borne by the manufacturer. Excise taxes paid by Philip Morris alone last year were $150,000,000. The financing of these stamp taxes required a continuous investment on the part of Philip Morris of about $12,000,000, a substantial portion of working capital. The investment of the industry, as a whole, required to finance this tax levied upon the domestic consumption of cigarettes, amounted last year to about $120,000,000. cigarette taxes at retail In addition to the $1,263,000,000 of taxes paid at the manufacturer's level last year by the domestic consumers of cigarettes, States and Municipalities collected spe- cial sales taxes from the same consumers totaling about $450,- 000,000. The retail price paid by the majority of consumers for a package of cigarettes is about 201/2 cents. This covers a reve- nue stamp of 7 cents, about 31/2 cents on the average in state and city sales taxes, 4 cents to the farmers who grow the tobacco and to other suppliers, and only about 3 cents each to distribu- tors and manufacturers. These special sales taxes are now imposed at the retail level on cigarettes in 42 States and a number of Municipalities. Most of these taxes have come within the last decade. They range from 1 cent to 8 cents per package and are included in the retail price of cigarettes. These special taxes accounted for the greater part of the increased retail price of cigarettes over the past ten years. taxes on income There must also be deducted from our sales dollar the increased Federal taxes on income. The normal tax 11

I how we used our sales revenue 11111M FEDERAL EXCESS PROFITS TAX ~ OTHER FEDERAL TAXES I ~ STATE TAXES `: r PREFERRED W= COMMON i TO~PROVIDE FOR BUSINESS NEEDS ;140 '' 120 100 , p 80 _' 60 ' 40 " 20 0° 0 20 , 40_ 60 801 100, 120 __= 140 ~_~-"~1A(Ctl Of~DO~LLAR~S O and surtax are assessed equally against all taxpayers according to the amount of their income. The Excess Profits Tax, however, is not. This tax disproportionately takes away gains which result from success, growth, and increased efficiency accomplished in the period before July 1, 1950. During the fiscal year just ended, it reduced the share accruing to our stockholders and employees from our business success to a larger degree than in the average company. As a consequence, net earnings from which our Com- pany's dividend distributions and bonus payments can be made are a smaller proportion of our pre-tax earnings. excess profits tax credit Based upon our average earnings in the fiscal years of the base period when we were growing, and allowances for capital invested in Philip Morris during and since that base period, our Exess Profits Tax credit was about EMPLOYEES I INTEREST FARMERS AND OTHERS^ I I TOBACCO AND OTHER MFG.. AND DISTRIBUTION COSTS. AND OTHER FINANCIAL COSTS b i i i GOVERNMENT FOR STATE AND FEDERAL I 1 TAXES ON INCOME ; STOCKHOLDERS ` CAI H DIVIDEND FIUTURE `

~~ NET SELLING PRICE PER 1000 PHILIP MORRIS BRAND CIGARETTES (left scale) ~ PRICE OF FLUE•CURED TOBACLO* (nehtstalet 70 RE VENUE STA MPS PER 1000 CIGA RETTES (left swle) 60 50 /0000 40 30 2C 1C 1940 1941 1942 1943 1944 1945 1946 1947 1948 1949 1950 7. 6. 5. °3. 2. 1 prices VSeuttt 11 S eCVt a1 AS~iCUltuitf $22,600,000. After applying normal taxes and surtaxes, this equals $4.96 per common share and is the amount we were permitted to earn after payment of Federal normal tax and surtax on income. All income in excess of this amount was taxed at the rate of about 65% during the past fiscal year. Our Excess Profits Tax credit will be subject to certain adjustments for the next year under the now-existing tax law and earnings in excess of this credit will be taxed at 77% for the year ending March 1952. investment in tobacco Our continuing rate of growth during the past four years has increased our share of the domestic cigarette les by 70% a d: consequently our tobacco requirementsyhave risen Last year-we again increased our investment in leaf tobaccohfor future use ~ h~` On account of the uncertainties of the world sitnation we ~oug an additional amount., During t igherFtha.n ~ 1-1 voIume 19 51 0 re u eaf _ starage ~ave- als~ -Ieased iive ourr~leaf depa ~ oper car ~ ~~ ~>n a 0 he ~past season leaf pr e s~ avraged about 15%a iri the re; ceding yer: This factor :; an ,- d our larg~r ~ ,, ~°` urchases is ~ reflected in the increase of our tobacc9 ~ " ,~~~~ investment -to 00,000,000, 33% higher,than last ear. ~ Y. ~. To accomrnodate ou arger reirements~ :e. ~~aY~ ~ng~~ uses ~ri ichmond and _2I `in Louis (ditiona ware ous pace in both cities± ~ments adequate and suitable room for t] , eaf stores while iging.~~~r~£~ ~ run ®

With his forklift truck, the operator can stack half- ton hogsheads of tobacco with ease and precision. These prize tobacco plants will each produce hundreds of tobacco seeds for a future crop. Twenty, men in Richmond discuss rates and plans for the coming year. Counterclockwise around table from wall left are: C. P. Jones; A. C. Britton, Factories Manager, Richmond; C. T. Ames, Jr., V.P., Production; L. C. Crump; G. P. Brauburger and B. Sobol, Attorneys; E. 1L1. Powers; R. !V. Norris, Personnel Manager, Richmond; R. P. Roper, Director of Personnel; J. E. Lentie, V.P., T.IV.I.U.; John T. Duke; J. E. Harris; Dwight M. Hash, 0. C. Davis; Edward t11. Dunnavant, V.P., Local 203; Mathew H. Williams, Pres., Local 203; S. E. Blaine, 1st V.P., T.IV.I.U.; George Benjamin, V.P., T.1G'.I.U.; James T. Singleton; Clarence G. Marley, V.P., Local 209. 14

Union President Mathew Williams speaking on TV said, "Philip Morris has just about the best working con- ditions in American in.dustry today." 11'. C. Bowles receives his share of the prize won for efj'iciency by the production team of which he is part. this section may be removed for reference On a field trip President McComas takes a moment to chat with a truckman delivering Philip Morris at a jobber's place o/ business in Chicago. 15

MEDITERRANEAN AREA (INSET) TYPES BY DISTRICT TYPES BY DISTRICT CAVALLA - LATAKIA ® XANTHI - LECCE ~ CATERINI ~ PRILEP ® IZMIR (SMYRNA) - DJEBEL - SAMSUN CYPRUS BAFRA  PACKING AND SHIPPING CENTERS TYPE U.S.TYPES CLASSIFICATION TYPE U.S.TYPES CLASSIFICATION TYPE U.S.TYPES CLASSIFICATION GEORGIA o - CLARKSVILLE r MARYLAND W ~- SO. CAROLINA W ~~ PADUCAH ca t W `, -• BURLEY ~ EASTERN CAROLINA ~ 24 HENDERSON GREEN RIVER ~ - MIDDLE BELT DARK VIRGINIA ~ ® ONE SUCKER ~ OLD BELT L - SUN CURED - PERIQUE 7 ® 05M ~ 0 m A64111111101, MEDITERRANEAN SEA 1~t BLACK SEA ® ® W r :l U 0 - SALT LAKE CITY ,FATERn/ DIEB BDURGAS tH B m a LEAF STORAGE POINTS LEAF MARKETS •Not shown: Warehouse distribution points in Honolulu, Hawaii, and in Butte, Montana. FT. WORTOH Q SAN ANTONIO MAIN OFFICE 0 ti OFFICES AND FACTORY LOCATIONS • 0 WAREHOUSE DISTRIBUTION POINTS's

Philip Morris balance sheet statistics I assets Cash & Marketable Securities -1951 1950 1948 1947 I (000's untitted) 1946 $ 9,115 $ 8,652 $ 5,264 $ 4,857 $ 4,024 $ 2,486 $ 2,320 $ 2,455 $ 3,175 $ 3,158 Receivables 11,935 10,810 9,173 7,196 6,391 7,914 10,063 11,017 8,219 6,255 Inventories 220,839 159,611 132,444 93,913 98,812 112,745 87,280 69,948 70,570 53,143 Other Current Assets - ' - I - ~ - ~ - ~ 1,867 206 1 4,290 4 102 ~ - Total Current Assets 241,889 179,073 146,881 105,966 109,227 125,012 99,869 87,710 82,066 62,556 Net Property Account 10,360 8,971 8,301 6,828 6,468 4,989 5,110 3,471 3,723 3,729 Prepaid Items & Other Assets 1,337 1,051 1,117 937 : 1,049 1,391 1,929 3,304 3,286 2,534 Total Assets 253,586 189,095 156,299 113,731 116,744 131,392 106,908 94,485 89,075 63,819 liabilities Notes Payable 75,000 55,500 30,000 - 5,500 44,000 16,000 5,000 -8,000 Federal Taxes 17,760 9,415 7,811 3,431 3,440 2,681 6,992 ; 6,028 7,917 6,212 Accounts Payable 3,020 5,057 6,773 ' 5,753 : 3,866 2,574 5,047 • 6,952 ' 5,427 3,425 Other Current Liabilities 5,667 3,402 , 2,987 i 1,797 ~ 1,834 ~ 1,369 ~ 2,255 ~ 1,645 ~ 1,774 t 1,795 Total Current Liabilities 101,447 73,374 47,571 10,981 14,640 ; 50,624 30,294 19,625 ~ 15,118 19,432 termDebts,et2:0 g T300erves for Contingenciec. - ~ Net Worth 32,000 32,000 32,000 ' 32,000 ' 11,500 11,300 11,500 11,700 ' 1949 2371 237 ~ 500 j - 1 250 1 - I - I - _ 76,491 70,513 69,604 ; 69,268 65,064 63,360 62,257 t 49,387 120,139 83,721 ' Total Liabilities and Capital 253,586 Net Working Capital 189,095 156,299 ' 113,731 ' ' 116,744 131,392 106,908 94,485 89,075 " 68,819 balance sheets at March 31 1945 1944 1943 1942 - -~::~ -- - - 140,442 105,699 99,310 94,985 94,587 . 74,388 - 69,575 68,085 66,948 43,124 ' Net Asset Value of Common Stock 38.01(i) 32.40. 28.04 24.80. 23.95 23.68 22.56• 21.94* 21.29* 19.28* *-adjusted to present capitalization (1) Before 5% stock dividend. ~ ~ ~ ~ iffMated Not ure fna '"d'raisa H th. R.portedR_ " ,toX sate iad t.yt:d at 38% 16,689,145 1 6.62 ~ 8.50 'In January the tax rates which applied retroactively to the fiscal year just ended were adopted by the U. S. Government. Prior to that time and following the end of the preceding fiscal year different tax rates were believed to be applicable. Therefore, the estimated net earnings reported at quarterly periods are different from the results as determined under the rate finally applied by the U. S. Government. Figures for the year 1942 are on a consolidated basis with English subsidiary.

comparison of Philip Morris operations 1951 5 9 f with the aggregate figures of its four ma jor co'mpetit s 1950 1949 I Philip Morris Sales (1) $305,804 As '/o of Sales 100.00% Competitors $2,329,961 As % of Sales 100.00% Philip Morris $255,152 As % of Sales 100.00% Competitors $2,316,574 As % of Sales 100.00% Net Income Before Taxes 35,087 11.47 224,604 9.64 25,167 9.84 205,497 8.87 Taxes (2) 18,398 6.01 109,817 4.71 9,864 3.86 82,977 3.58 Net Income 16,689 5.46 114,787 4.93 15,303 5.98 122,510 5.29 Total Investment (Bank Loans, Funded Debt, Capital & Surplus) 227,139 74.28 1,600,353 68.68 170,721 66.75 1,569,072 i 67.73 Total Inventories 220,839 72.21 1,473,723 63.25 159,611 59.28 1,418,013 61.21 Net Income before Taxes plus interest . . . $ 37,035 as Per Cent of Total Investment . . . . 16.30% $ 243,450 15.21% $ 26,835 15.72% $ 224,946 14.34% Net Income before Taxes as Per Cent of Net Worth 29.21 24.42 30.06 22.11 Analysis of Capital Structure Long Term Loans $ 32,000 21.03% $ 493,448 34.91% $ 32,000 27.65% $ 522,657 37.39% Preferred Stockholders 31,510 20.71 158,374 11.21 18,969 16.39 158,374 11.33 Common Stockholders & Surplus 88,629 58.26 761,514 53.88 64,752 55.96 716,791 51.28 (1) Includes Revenue Stamp Taxes (2) Includes Federal and State Taxes on Income and Federal Excess Profits Taxes analysis of Philip Morris operations Net Sales $305,804,000 and ~ _- - financial ~ = position LE $255,7` analysis of operations Net Sales 100% 100 Cost of Sales: Revenue Stamps 48.17 48.8 Other 32.25 32.8 Gross Operating Profit 19.58 18.2 Shipping, Selling, General and Administrative Expense 7.36 7.6 Net Operating Profit 12.22 10.6 Other Income .03 •C Total Income 12.25 10.7e Income Deductions .78 .9t Net Income before Taxes 11.47 9.(/ Federal and State Taxes on Income 6.01 i 3.8r Net Income after Taxes 5.46 ~ 5.9p Net Income as Per Cent of Net Worth 13.89 ~ 18 s analysis o f financial position Net Property Account as Per Cent of Tangible Net Worth 8.62 Current Liabilities as Per Cent of Tangible Net Worth 84.44 Total Liabilities as Per Cent of Tangible Net Worth 111.08 Current Liabifities as Per Cent of Inventories 45.94 . 10.7' , 87.64 125.E6 45.97 Long Term Debt as Per Cent of Net Working Capital 22.79 i 30.~1 204BQ16?12 Figures for year 1942 are on consolidated basis with English subsidiary.