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Philip Morris Inc.,Annual Report 1956 Year ended December 31, 1956 FJ = CO 0 9-. -_=~

Philip Morris Inc. j Annuai Report 1956 Contents Officers and Directors 2-3 Highlights of the Year 4 The President's Report 5-15 Special Pictorial Plant Tour 11-14 Audited Financial Statements 16-21 Financial Information 22-23 Products of Philip Morris Inc. 24 COVER: THROUGH THE DAYS AND INTO THE NIGHTS OF 1956. BUSY PHILIP MORRIS PEOPLE HERE IN THE MAIN ST.. RICHMOND. VIRGINIA PLANT. AS IN OUR OTHERS. TURNED THEIR HANDS AND SKILLS TOWARD ONE OBJECTIVE: MAKING THE FINEST CIGARETTES IN THE WORLD. 1

Officers Directors O. PARKER McCOMAS President O. PARKER McCOMAS, President JOSEPH F. CULLMAN, 3rd, Executive Vice President C. T. AMES, JR., Vice President* J. E. COOKMAN, Vice President DR. R. N. DuPUIS, Vice President W. H. HATCHER, Vice President G. J. HENN, Vice President RAY JONES, Vice President C. H. KIBBEE, Secretary and Treasurer R. P. ROPER, Vice President G. WEISSMAN, Vice President and Ass't. to the President H. R. BLUM, Controller J. A. HAMPSON, Assistant Treasurer CORNELIA CRAIG, Assistant Secretary PAULINE WAGNER, Assistant Secretary "Retires March 1, 1957. ALFRED E. LYON Chairman of the Board JOSEPH F. CULLMAN, 3rd Executive Vice President A H. E. RIDDELL, Wickes, Riddell, Bloomer, Jacobi & McGuire, Attorneys-at-Law B K. H. ROCKEY, Retired C HOWARD S. CULLMAN, Honorary Chairman, Port of New York Authority D DR. JESS H. DAVIS, President, Stevens Institute of Technology * L. G. HANSON, Retired Philip Morris Vice President and Treasurer F C. T. AMES, JR., Vice President in Charge of Operations p W. H.•HATCHER, Vice President in Charge of Leaf I I 2 2048018545

I TRANSFER AGENTS: Guaranty Trust Co. of N. Y., 140 Broadway, New York REGISTRARS: The First National City Bank of New York, 55 Wall Street, New York cn -k* ~ Bankers Trust Company, 16 Wall Street, New York COUNSEL: Conboy, Hewitt, O'Brien & Boardman, 39 Broadway, New York AUDITORS: Lybrand, Ross Bros. & Montgomery, 90 Broad Street, New York 3

$326,814,554 26,016,261 13,253,000 12,763,261 4.06 8,661,699 3,061,207 235,079,375 104,349,354 130,730,021 I 4

To the Stockholders of Philip Morris Inc. For the twelve months ended December 31, 1956, con- solidated net sales were $326,814,554 which repre- sented a 15~'Jo increase over the $283,218,646 reported for the previous year. Net income of $12,763,261 equivalent, after allowance for dividends on the Pre- ferred Stocks, to $4.06 per share on the Common Stock showed an increase of approximately 127o over the 1955 results. In addition to the regular dividends on the Pre- ferred Stocks, four quarterly dividends of 750 per com- mon share were paid during 1956 which represented the 29th consecutive year in which Philip Morris Inc. has paid dividends on its Common Stock. The total of $3.00 per common share paid during 1956 was the same as in the previous six years. In achieving the above sales figures, which repre- sent a record in the history of this Company, your management undertook five major merchandising moves in 1956: First was the placing of Marlboro in true national distribution by bringing production and distribution up to the outstanding public demand for this popular priced filter cigarette in a flip-top box. When the brand was introduced in 1955, sales and distribution were seriously impeded by unavoidable delays in the delivery of machinery. This situation was entirely corrected as we entered 1956 and aggressive sales force efforts built distribution and inventory levels in all principal out- lets to a point consistent with the requirements of a national brand. The growth of the brand has fully justified the substantial amount of time, money and research which were expended on it. Today it is one of the top ten brands in America. In all major areas of the country it is one of the leading filter cigarettes. We have also been very gratified by its increasingly favorable acceptance in many foreign countries. Second was the conversion of the king size Philip Morris in a soft package to the long size Philip Morris Philip Morris Leaf Vice President T. H. Hatcher (left), President 0. Parker McComas, Esecutive Vice President Joseph F. Cuilman, 3rd, and Director Dr. Jess Davis discuss leaf market trends with Universal Leaf Tobacco Company Board Chairman, J. Pinkney Harrison. 5

in the flip-top box. This move was taken because of the enthusiastic consumer acceptance of the Marlboro flip-top box and was further reinforced by extensive market research and sales testing. Third was the introduction of a new Parliament in a handsome blue, gold and white flip-top box at only a slight premium, about 20 per pack at retail, above popular priced filters. We were able to market this new recessed white-tipped filter cigarette at a substantial reduction from the former price because of the pro- duction efficiency of new machinery which became available to us during the year. Fourth was the change in name of the former Parlia- ment to Benson & Hedges. These are exactly the same luxury filter mouthpiece cigarettes, in the custom flat box, as the former Parliament. Fi f th in our series of moves was the launching of new filter Spud, a popular priced filter cigarette whose flavor is freshened by a light touch of menthol. This is the first time in tobacco industry history that a cigarette company has launched and placed in na- tional distribution five major brands within a twelve month period. These marketing moves and packaging changes rep- resented a tremendous undertaking for your Company and its personnel. How well they met the challenge is evidenced by the fact that your Company's sales in- creased over 15oJo in 1956 against an estimated average industry dollar increase of 4%. The extensive costs of such moves are reflected in the fact that the per- centage increase in our profits was less than that in our sales. However, your management believes that this policy was necessary to maintain our progress in the cigarette industry's development and to seize an opportunity to build for the future. We believe we have demonstrated that through the continued use of modem marketing and packaging techniques, we can outpace and outgain the industry-given the courage, the will and the personnel. It is to the latter to whom I wish to pay particular tribute. Our sales force, small by comparison with our major competitors, is to be highly commended for having achieved such excellent distribution and dis- play of our brands. Stimulated by the new brands and with morale at a high peak, they not only accomplished a significant conversion of smokers to our brands, but in cooperation with our Distribution and Operations Departments, kept returns on discontinued styles to an absolute minimum. Once again, the essential co- Philip Morris National Sales Manager John R. O'Connor (left), Executive Vice President Joseph F. Cullman, 3rd, and Sales Vice Yre<ident Hay Jones plan sales force role in the Company's 193 7, multi•hrand marketing strategy. Pictured at the occasion of the announcement of the Philip Morris College Scholarship Plan are President 11cComas with Dr. Wilson Compton, President of the Council for Finan- cial Aid to Education, Inc. (left) and Wesley W. Walton, Director of Sponsored Scholar• ship Services of the Educational Testing Services of Princeton, New Jersey, adminis• trator of the Plan. Brand Managers meet to co-ordinate activities. (Standing) John R Latham, Philip Morris and Spud; (seated, left) Hugh Cullnian, Parliament and Benson & Hedges, and Ross Millhiser, Marlboro. I 6 2Q4$t} 1$ s49

Philip )furris f'resident O. 1'arkcr \lr•(:ornas i riAltt ) and ~Icnor l:;rrlu- A. racta. l'rr~i• .1,•nt of TaGaralora \acional. ~. A., (left) dcmonstrate Philip Nforris niudcrn rnrtlt- ods of n anufacturc to Scitor Ricardo M. Arias. then Prcsi- dent of thc licpublic of Pan- a na an l pre•scnt Panaenanian lmbassador to the U. S., at the formal opening of the inodcrn Tabacalcra Nacional Panamanian plant which will produce Philip NIorris and \larlboro in that ronntrv un- der a licensin_ arrangement. Philip Morris' famed living trademark, "Johnny," makes his fourth annual ap- pearance in the Veterans of Foreign Wars' Loyalty Day Parade in New York City. operation of all levels of the distributive and retail trades played a primary role in the success of these merchandising moves.  The product and packaging changes obviously made 1956 a busy and active year for the Operations De- partment. The proper scheduling of production, pur- chasing and the training of the necessary additional personnel to meet the shipping schedules for the in- troduction of five new brands was an achievement of great moment. In spite of higher leaf costs, higher wages, higher costs of material, increased employee benefits and a general rise in other costs coincident with the changeover of brands, the efficiency of this Department in controlling costs was outstanding. Despite imperative concentration on immediate tasks during the year, the Operations Department was able to continue its very productive program of basic engineering and machinery development, thereby creating a reservoir of product and production im- provements which we expect will have a beneficial effect on consumer acceptance, quality and costs of our products in the future. To make our marketing moves possible, we have expended $12,745,000 over the last two years on new fixed assets. We will continue to invest considerable capital funds in new modern equip- ment. The coordinated efforts of the Operations De- partment, Market Research and Packaging Depart- ments, the Leaf Department and the Research and Development Department are geared to a long range program of not only satisfying the consumer of 1957 but anticipating the desires of the consumer of 1962. The 1956-57 tobacco crop was of good quality, but the great demand for Burley of high flavor was a very unsettling factor on the prices for this important type of tobacco. As a result, a slight increase in the cost of leaf used in manufacture will be incurred next year.  The Company's aggressive research program was continued and expanded during the year and will be further increased during 1957. Our planned expendi- tures this year will be approximately three times as large as they were only three years ago. Because of our strong belief that research will continue to con- tribute importantly to the welfare and progress of your Company, we are planning to establish an en- larged modem research laboratory which should per- mit the Department to operate much more efficiently and effectively than in its present quarters. Once again the Research and Development De- 7

N EW FI LTER SPU D Freshens the smoke...something w n P ! This is how freeh your mouth will taste sfter you smoke NEW FILTER' SPUDS. These new and different filter cigarertes from Philip Morris have a light touch of meothol thst &eshen® the smoke-somethin¢ ¢nndrr/u1! It is happy for you that you possess the art o( pleasing with delicacy. )ar n- Impact upon the smoking public and individ- uality of product identity are achieved through advertisements such as these created and placed by our national advertising agencies: Philip Morris N, W. Ayer & Son, Inc., Phila. Parliament and Benson & Hedges Benton & Bowles, Inc., N. Y. Marlboro Leo Burnett Co., Inc., Chicago Spud OgiTvy, Benson & Mather Inc., N. Y. Strike up a friendship witti new PARLIAMENT Eepect to 6nd in Benson & Hedga mtain pleuims nc other C$atetfe offat. Lltttaiq6 6avor, CIuzC ul tafte. Co.tlier tabaccos, metlcvlwrly blended. dguctl~ bmc, aatcm-t.ibted. Rlter mouthpiece, reccsxd ro that aaly the Havcr toYCh. yma lipt. A& HENSON 8 HEDGES:..Retu6rndKtrg 5:a c.u~xe, Iln.YrYZwNf..a~«~vy...~y. *o..,. aa...r.w..aw..ow.r arsrnu~ 540..IV.!lrf.Yw..Y(.~.1~N..i It "I - ~ ~ ..,,.k...,...a_.,.....-., ...,a~.~....~......~>r~...,....ew

partment made important contributions to our basic scientific knowledge of the constituents of tobacco and smoke and of techniques for analyzing our products. More than twenty technical papers were presented by this group before scientific bodies. A number of patents ""ere issued here and abroad to the Company. Increas- ing application of research findings is being made in our factories, leaf and purchasing operations.  During 1956, your Company's advertising programs reflected steps taken during the prior two years to prepare for major marketing efforts on each of our brands. Important among these steps was the appoint- ment of separate agencies to handle each of our brands as individual and distinct marketing problems. These agencies have impressive records in marketing a variety of products. Another phase of our advertising program was the maintenance of flexibility in all media to give proper advertising support at the appropriate times to our new products as they were introduced locally, region- ally and, finally, nationally. In this connection your Company has developed one of the most valuable franchises in television for spot announcements. During the last quarter of 1956, the Marlboro brand co-sponsored the professional football network tele- casts, reaching nearly 200 markets, many of them not previously penetrated by our advertising for the brand. The reaction has encouraged us to plan continued use Packed houses at every performance attest to the success and popularity of The Philip Morris Country 3lusic Show. Traveling in a specially equipped bus, this troupe of welI-known musicians and singers is carrying the Philip Morris message of goodwill to lovers of country music all over the South ... another Philip Morris "first" t:o-.pon:or.,hip of professional football over 186 CB>-TV stations marked NTarlhoru's debut on network TV in thc• fall season of 1956. On January 3rd this succe~sful new filter-tipped cigarette b<•rame a ro-sponGor of the tirizc•-«inning (.R~-TN' dramatic serics, I'lrnhntrse 90. of network programming in the year ahead. In Janu- ary 1957, Marlboro began co-sponsorship of the dis- tinguished Playhouse 90 series, a major dramatic series, over 128 CBS-TV network stations each Thursday night. In April, we will co-sponsor the popular Baseball Game of the i4eek Saturday afternoons over the CBS- "I'V network in 170 marketing areas. The professional football telecasts will be resumed in the fall. We are sponsoring a new show, The Philip Morris Country Rlusic Show, which will tour through and perform daily in the South, broadcasting each Friday night over a Southern regional radio network. Advertising in 1957 will also include aggressive pro- grams in newspapers, Sunday supplements, outdoor billboards, magazines and spot radio, each campaign tailored to the needs of the individual brands. Along with other costs in the general economy, ad- vertising costs rose during 1956, and we anticipate further increases in 1957. However, paralleling these rising costs there has also been a significant increase in your Company's total impact upon the public. As we support five brands, instead of the one brand we supported just a few years ago, we are embarked on the strongest advertising program in our Company's history. 0 Our Overseas Division, which was set up late in 1955, had an active and successful year. Sales of our own products overseas were up some 10%, which was

I " M most gratifying, especially in view of the fact that industry-wide export sales were reported as substan- tially unchanged. We successfully concluded an arrangement with a local cigarette manufacturing company in Venezuela under which we have an opportunity to purchase con- trol of the company. Venezuela is one of the most important markets for American cigarettes outside of the United States. We are pleased to have a secure foothold in this country where the Philip Morris brand is the leading imported cigarette with approximately 10~/0 of the entire Venezuelan market. We are contin- uing to explore actively opportunities in many other countries. Some of these may require capital invest- ments on our part. However, in others we will provide only blended tobacco and technical skill, and receive royalties on sales. Our Australian subsidiary reported a loss for its fiscal year ended June 30. 1956 due entirely to certain non-recurring year end charge-offs. How- ever, we are encouraged by the steady progress that our Philip Morris brand is making in that country. We are confident that this progress will continue and we have every reason to believe that this subsidiary will operate at a profit in its present fiscal year. Our English subsidiary, which is more than 100 years old, had an excellent year. The new white, gold, and red Philip Morris label was introduced in that market in December of 1955. In 1956, the first full twelve months of selling the new label, sales of Philip Morris in England increased more than 607o. This operation is a small one but its outlook seems more promising than it has in many years. Expanded manu- facturing capacity and increased promotion are high on the 1957 order of priority for this company.  In several places we have paid tribute to our per- sonnel for the achievements of this year. Recognizing our, as well as the nation's, need for continued sources of well-educated, skilled personnel, we have expanded our program of aid to higher education. This program includes direct grants to institutions for research proj- ects in the health, scientific and tobacco agriculture fields; general grants to associations of independent colleges which are not supported by public funds; and a college scholarship program for the children of our employees. We feel strongly that unless private industry, such as ours, directly engages in such pro- grams, we would have to pay for them indirectly through taxation, thereby injecting governmental agencies deeper into this important field. This year we accrued the first contribution to the Deferred Profit Sharing Trust in accordance with the plan approved by the stockholders at the special meet- ing held in November, 1955. The $788,544 which was paid over to the Trustee on January 28, 1957 amounts to approximately 5% of the compensation paid to those eligible under the plan. Our increase in sales and our sales projections created the necessity of adding substantially to our tobacco inventories. This was financed through cur- rent borrowing and accounted for the major portion of the increase in notes payable. At the year end, total debt represented 565yo of current inventories. Your Company continues to be in a strong position with adequate borrowing capacity. Clark T. Ames, Jr., our Vice President in charge of Operations, reaches the statutory retirement age this month and retires as an officer of this Company. For almost half a century he has devoted his superior efforts and abilities to raising the standards of the production of quality tobacco products. His devotion and unstinting efforts are deeply appreciated. New executive promotions include the elevation of Vice President Robert P. Roper to the post of Chief of Operations; Andrew C. Britton to Chief of Manu- facture; Roger C. Pickhardt to Personnel Director; Robert W. Norris to Director of Community and Plant Relations; and Dr. R. C. Sproull to Director of Technical Services. Dr. Jess H. Davis, President of Stevens Institute of Technology and one of the nation's leading scientists and educators, joined our Board of Directors in June succeeding Walter B. Ryan, Jr. who retired. It is with a deep sense of sorrow that we report the passing, last spring, of Otway Hebron Chalkley, former Chairman of the Board. Mr. Chalkley, a native Virginian, was a pioneer in this Company. His wisdom and foresight guided it along the path of progress. During the year, your Board approved a policy of retirement of Directors who will have reached the age of seventy, effective with the election of Directors at the Annual Meeting of Stockholders to be held in 1958. They will become Directors Emeritus after reaching that age and will remain so until attaining the age of seventy-five. As Directors Emeritus they will be invited to all Board meetings but will not be entitled to cast a vote. Their years of accumulated experience should prove of great value to the Company. (Continued on Page 15) I I 10

Robert P. Roper, Philip Morris Vice President in charge of Operations, welcomes you to a special tour of the East Main Street plant of Philip Morris in Richmond, Virginia. Cigarette manufacturing at Philip Morris is a modern blending of skill, science, and tradition. We are proud to introduce you to our people and our methods. The small pictures show our main plants-the Stockton Street plant of Philip Morris in Richmond (left) and the modern production wing of our Louisville, Kentucky plant. 11

1,000 pounds of prepared leaf tobacco is prized in each hogshead for aging. The blended, flavorful leaf is fed into Sara- togas for short aging and more blending. Here are our department heads: (Left to right) Benjamin Soyars, Production; Christian Grosser, Engineering; Robert W. Norris, Personnel and Community Relations; Andrew C. Britton, Chief of Manufacture; and Loyal C. Davis, Quality Control. Years later, traditional hogsheads of leaf start the final journey to smokers. Making machine produces an endless rod and cuts it into uniform cigarettes. The Guardite process restores moisture and properly conditions tobacco for handling. Quality control tests at every step as- sure continuous perfection of product. New Parliament with recessed mouthpiece Consumer-tested designs make Parlia• now made four times faster than before. ment cartons a"stand-out" for shoppers. 12 2048018555

, Selected leaf arrives at the stemmery for initial blending and stemming processes. Skilled craftsmen blend over 150 kinds of leaf to meet exacting taste demands. 1,250 fresh, flavorful cigarettes are made by this machine every sixty seconds. Tobacco is re-dried after stemming to prop- erly condition vintage leaf for mellowing. Intricate machines cut uniform filler, in- suring smooth, even smoking quality. Golden leaf, dried, cleaned, blended, is now ready for time-honored expert maturing. Flavor processing contributes to unique taste and delicate bouquet of the blend. Inspected and approved, fresh cigarettes Trained eyes inspect the prize-winning are packed in PM's unique flip-top box. Philip Morris packages before cartoning. High-speed machinery combines tobacco Rigid quality control maintains Marl- Filter, Flavor, Flip-Top Box- Marlboro and filter to make modern Marlboro. boro standards at all production stages. is America's fastest growing cigarette. 2048018°sSb 13

Modern equipment produces the all-new, lightly mentholated, filter-tipped Spud. Benson & Hedges are custom blended and custom tailored for discriminating smokers. U. S. Revenue Stamps purchased by Philip Morris exceed $150,000,000 yearly. Complex operation forms the flip-top box around 20 refreshing Spud cigarettes. Quality of Benson & Hedges is guarded by unique inspection and control. Cartons are inserted in protective ship- ping cases by special packing machinery. Spud cigarettes are manufactured under ideal, "climate - controlled" conditions. The flat, slide-and-shell B & H package is a symbol of custom cigarette quality. AE11EUil01i ~W.'Y.'wr= The family of Philip Morris products is shipped to smokers all over the world. Endless conveyor belts move cigarettes Cigarettes are shipped speedily by A job well done. Making Philip Morris a go from plants direct to waiting transportation. truck, rail, ship and air for fresh delivery. place to work and a good company to work for 14 are basic objectives. People, not machines, make your cigarettes which we sincerely believe are the finest produced anywhere. 204$4i9S57

i Tlie 1'liilip Niorri• lirlrl c;tlr•c (nrro i, rlirrrt-1 I,N tl,<•<• Kt•- airut;rl ~1;rn.r_ •r _ st« ndirt„ I It to riclit,: t Llu~d- liin- n •atiulix: Ja} I)irlcrnan. t'.hi- ra _o: t;,•uree J. Karnul. 1ew l url.: '„•ntrr(, /rli to ric) t, /;iL i,v rt \1'. \\ inter, Jr., Los :1n- ;;r(r.: lirrr Juhnson- 1)allus: \(. }i. (i~•rk%.ith, f'ItilarieIpltia: John N1. 111on- W;tnta. In conclusion, we want to again point out that your Company's sales increase of 151;''o was substantially above that of the cigarette industry. The top chart shows our sales progress over the past three years. According to the figures presently available, Philip Morris Inc. accounted for 36 j°o of the total increase in industry cigarette sales in 1956 over 1955. This was due, in our opinion, to the fact that we produced products of a quality second to none in the industry, backed them up with aggressive merchandising, and packaged them in crush-proof flip-top boxes of appeal- ing designs and colors. These three factors can make 1957 another fine year for your Company. Our competition, however, is not unaware of the consumer appeal of the flip-top box and we expect several other brands will be marketed in 1957 in this type of packing. Accordingly, in order to exploit fully our advantage, we plan to increase our merchandising programs this year. The expanded effort also seems desirable to give us the opportunity to increase further our share of the total cigarette industry. Your Company is not alone in experiencing in- creased costs. The adjacent chart clearly portrays what has happened to marketing and distribution costs in the industry in the past five years. Our industry has lagged far behind others in keeping prices in line with costs. We believe that your Company's stature has im- proved this year and we feel that this position can be further strengthened. We are pleased with our sales growth and positive steps are being pursued which should have an important effect in bringing net income to higher levels. dLL 7w~....,~ President I ~ February 25, 1957 , 2C?48018558 15

LYBRAND, Ross BROS. C, MONTGOMERY The Board of Directors and Stockholders of Philip Morris Incorporated: We have examined the consolidated balance sheet of PHILIP MORRIS INCORPORATED and its Subsidiary, BENSON and HEDGES, as of December 31, 1956 and 1955 and the related consolidated statements of earnings and surplus for the years then ended. Our examination was made in accordance with generally accepted auditing standards, and accordingly included such tests of the accounting records and such other auditing procedures as we con- sidered necessary in the circumstances. In our opinion, the accompanying balance sheet and related statements of earnings and surplus present fairly the consolidated financial position of Philip Morris Incorporated and its subsidiary, Benson and Hedges, at December 31, 1956 and 1955 and the consolidated results of their operations for the years then ended, in conformity with generally accepted accounting principles applied on a consistent basis. Al" 9..a. New York, January 23, 1957. A 16

Philip Morris INCORPORATED (Incorporated in Virginia) AND ITS SUBSIDIARY, BENSON AND HEDGES CONSOLIDATED STATEMENT OF EARNINGS for the yearr ended December31, 1956 and 1955 1956 0 1955 Net sales $326,814,554 / $283,218,646 Cost of goods sold ............ 258,849,952 0 225,540,480 Cost of shipping goods, selling, advertising and general administration 37,679,498 0 30,273,911 296,529,450 E 255,814,391 1 Operating income ................ _ 30,285,104 E 27,404,255 Nonoperating income ... .......... ...____ .................. __.._....................... 94,835 0 77,557 30,379,939 0 27,481,812 Interest . .............. ................... .............. .........::............:.......:. 3,350,304 2,143,418 Prior service contribution under company's retirement plan...... ......... 144,102 144,102 Provision under deferred profit-sharing plan .......... 788,544 Plant closing expenses .. ..... .... .............. ..........._...... .-_................... - 80,728 838,031 4,363,678 / 3,125,551 I Earnings for year before provision for federal and state taxes on income....._.......... .......___ ...............:. ................... 26,016,261 24,356,261 ~ 0 Provision for federal and state taxes on income .................................. 13,253,000 12,830,000 ~' ~ b Net earnings for year ..... ............................ ........ <:.,.................. $ 12,763,261 $ 11,526,261 u M ~ Q The accompanying notes are an integral part of the financial statements. 17

Ii CONSOLIDATED BALANCE SHEET December 31,1956 and 1955 ASSETS Current : 196€ 1955 Cash.. $ 19,223,119 / $ 15,930,048 Notes and accounts receivable, less allowances for discounts and doubtful accounts ........................................................................ 15,626,570 E 14,646,342 Inventories, at average cost: Leaf tobacco ................................................................................ 185,131,189 176,058,047 Manufactured stock ... ...... ..... ...................................................... 5,972,121 8,380,729 Stock in process, revenue stamps and operating supplies ................ 9,126,376 7,537,010 Total inventories ....... ................................................... 200,229,686 191,975,786 Total current assets ....................................................... 235,079,375 0 222,552,176 Property, plant and equipment, at cost: Land, buildings, machinery and equipment........ .................................. 42,689,082 36,316,442 Less, Allowances for depreciation ................................................ 11,483,407 10,536,789 31,205,675 E 25,779,653 Other assets: Notes receivable, due after one year ...................................................... 1,634,934 - r.~ ~ Investments in and advances to unconsolidated subsidiaries, at cost 3,165,328 3,148,379 A ~ 0 Prepaid expenses and deferred charges.................................................. Brands, trade-marks and good will, at cost (results from acquisition of 1,505,893 1,533,902 w ra tIt ~ Benson and Hedges ) ....................................................................... 8,578,974 E 8,578,559 F-~ 14,885,129 E 13,260,840 $281,170,179 / $261,592,669 The accompanying notes are an integral part of the financial statements. I 18

Philip Morris INCORPORATED (Incorporated in Virginia) AND ITS SUBSIDIARY, BENSON AND HEDGES I LIABILITIES Current : 1955 0 1955 Notes payable . . ... ........... .......... .............. ,............ ........................ $ 81,100,000 $ 64,700,000 25/s % Sinking Fund Debentures due within one year ............................ 1,600,000 1,600,000 Dividends payable .. ...................:.............:.............. 2,425,462 2,425,551 Accounts payable and accrued liabilities ............................................ 8,269,807 5,742,356 Federal and state taxes on income .. .... ............................................. 10,954,085 11,756,467 Total current liabilities _ .. .......................................... 104,349,354 E 86,224,374 25/s % Sinking Fund Debentures, payable $1,600,000 annually to maturity on April 1, 1966, less amount due within one year shown above ... ............ ........................ ......... ..z_........... ................. 28,800,000 30,400,000 Minority interest in Benson and Hedges.......... ...................................... 12,510 ~ 12,293 Total liabilities ............................................................... 133,161,864 E 116,636,667 1 CAPITAL Stockholders' equity (Note 1), represented by: Cumulative preferred stocks, par value $100 per share ....................... 30,062,600 30,393,200 Common stock, par value $5 per share (Note 2) ............................... 14,436,165 14,436,165 Paid-in capital in excess of par value of capital stocks ........................ 46,786,107 46,751,136 Earnings retained in the business (Note 3) ........................................ -. 60,046,760 56,985,553 151,331,632 148,566,054 r' c'3 Less, Cost of preferred stocks held in treasu .... 3,323,317 3,610,052 ~ ry ....................... 0 148,008,315 144,956,002 '''' co $281,170,179 $261,592,669 ~ KI The accompanying notes are an integral part of the financial statements. 19

I CONSOLIDATED STATEMENTS OF SURPLUS for the years ended Derember 31, 1956 and 1955 195f = 1955 Paid-in capital in excess of par value of capital stocks: Balance at beginning of year .......................................................................... $46,751,136 $46,724,217 Adjustments due to retirement of preferred stocks through sinking fund .,.. 34,971 26,919 Balance at end of year ........................................................................ $46,786,107 $46,751,136 Earnings retained in the business: Balance at beginning of year .......................................................................... $56,985,553 $55,164,093 I Net earnings for year, per accompanying statement...................................... 12,763,261 ® 11,526,261 69,748,814 / 66,690,354 Deduct, Cash dividends declared: On cumulative preferred stocks: 4% Series ................................................................................... ~ 688,784 , 691,284 3.90% Series ................ .................................. ........ ................... 351,571 0 351,863 h,'O .t+ m On common stock .............................................................................. 8,661,699 / 8,661,654 a w ca Ln ~ 9,702,054 9,704,801 w Balance at end of year (Note 3) ................................................ $60,046,760 E $56,985,553 The accompanying notes are an integral part of the financial statements. I 20

I I NOTES TO FINANCIAL STATEMENTS 1 Information concerning Philip Morris capital shares: Authorized at December 31, 1956: Preferred, 300,626 shares Common, 5,000,000 shares Outstanding (including treasury stock): 1956 1955 Preferred: 4% Series 177,858 179,857 3.90% Series 122,768 124,075 Common 2,887,233 2,887,233 In treasury ( preferred ) : 4% Series 5,712 7,611 3.90% Series 32,623 33,930 I 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% Series at $100.75. Shares held in treasury at De- cember 31, 1956 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 $102.75 per share for 3.90% Series to May 1, 1958 and at diminishing amounts there- after, but not less than $100.75 plus accrued divi- dends. Preferred stockholders are entitled to such amounts upon voluntary liquidation or to $100 Philip Morris INCORPORATED (Incorporated in Virginia) AND ITS SUBSIDIARY, BENSON AND HEDGES per share, plus accrued dividends, upon involun- tary liquidation. 2 At December 31, 1956 and 1955 there were outstanding options held by officers and other key employees to purchase, subject to certain limita- tions, 68,050 and 66,000 shares, respectively, of the common stock of the Company at the closing market prices ($43.125 per share in 1956 and $45.50 in 1955) on the dates of issuance of the options, which expire on varying dates up to November 1, 1966. During 1956 additional op- tions for 3,000 shares were issued and options for 950 shares were canceled. No options were exer- cised during 1956. At December 31, 1956 and 1955 the number of unoptioned shares available for the granting of options amounted to 31,950 and 34,000, respectively. 3 The terms of issue of the 2s/s % sinking fund debentures include certain restrictions with respect to dividends (other than stock dividends) on the common stock of the Company, and to the pur- chase, redemption or retirement of its capital shares. At December 31, 1956, approximately $36,860,000 of the earnings retained was free of such restriction. Under similar restrictions in the terms of issue of the cumulative preferred stocks, the amount of earnings retained free of such restrictions was in excess of the afore-mentioned $36,860,000. ~ 4 Provision for depreciation of plant and equip- ~ 4z- ment charged to costs and expenses aggregated $2,130,542 in 1956 and $2,033,997 in 1955. 21

PHILIP MORRIS BALANCE SHEET STATISTICS (000's omitted) BALANCE SHEETS AT MARCH 31 1956 * 1955* 1954* 1954* 1953 1952 1951 1950 1949 ASSETS Cash $ 19,223 $ 15,930 $ 9,410 $ 11,292 $ 10,355 $ 11,136 $ 9,115 $ 8,652 $ 5,264 Receivables 15,626 14,646 13,613 13,113 12,750 11,015 11,935 10,810 9,173 Inventories 200,230 191,976 180,832 194,294 193,747 221,453 220,839 159,611 132,444 Total Current Assets 235,079 222,552 203,855 218,699 216,852 243,604 241,889 179,073 146,881 Net Property Account 31,206 25,780 25,942 25,913 21,692 19,916 10,360 8,971 8,301 Brands, Trademarks & Goodwill 8,579 8,579 8,496 8,282 - - - - - Prepaid Items & Other Assets 6,306 4,682 2,795 2,237 1,761 1,536 1,337 1,051 1,117 Total Assets 281,170 261,593 241,088 255,131 240,305 265,056 253,586 189,095 156,299 Number of Employees 5,000 4,700 3,800 4,365 3,841 3,707 3,786 3,420 3,554 LIAB[L[TIES Notes Payable $ 81,100 $ 64,700 $ 42,400 $ 54,000 $ 60,000 $ 85,000 $ 75,000 $ 55,500 $ 30,000 Federal Taxes 10,434 11,344 11,330 15,279 11,520 15,414 17,760 9,415 7,811 Accounts Payable and Other Current Liabilities 12,815 10,181 9,119 8,969 10,336 8,591 8,687 8,459 9,760 Total Current Liabilities 104,349 86,225 62,849 78,248 81,856 109,005 101,447 73,374 47,571 Long-Term Debt 28,800 30,400 32,000 32,000 32,000 32,000 32,000 32,000 32,000 Other Liabilities 13 12 79 260 - - - - 237 Net Worth 148,008 144,956 146,160 144,623 126,449 124,051 120,139 83,721 76,491 Total Liabilities and Capital 281,170 261,593 241,088 255,131 240,305 265,056 253,586 189,095 156,299 Net Working Capital 130,730 136,327 141,006 140,451 134,996 134,599 140,442 105,699 99,310 Net Tangible Asset Value Applicable to Common Stock -Per Share (1) 39.21 38.15 37.38 36.84 38.99 37.85 38.01 32.40 28.04 'Philip ivforris Incorporated and Benson and Hedges, consolidated. (1) Per share values 1949 through 1951 not adjusted for 5% stock dividend in 1951. BALANCE SHEETS AT DECEMBER 31 I 22

f I PHILIP MORRIS OPERATING STATISTICS (000's omitted) STATEMENTS OF INCOME FOR THE CALENDAR YEARS ENDED DECEMBER 31 A FOR THE FISCAL YEARS ENDED MARCH 31 I I 1956t 1955# 1954t 1954* 1953 1952 1951 1950 1949 Net Sales $326,815 $283,219 $282,775 $294,902 $314,895 $306,698 $305,804 $255,752 $228,372 Cost of Sales 258,850 225,541 226,466 236,019 259,733 248,977 245,937 208,985 188,656 Gross Operating Profit 67,965 57,678 56,309 58,883 55,162 57,721 59,867 46,767 39,716 Shipping, Selling, General & Administrative Expenses 37,680 30,274 28,257 29,167 29,989 25,320 22,497 19,470 17,499 Operating Profit 30,285 27,404 28,052 29,716 25,173 32,401 37,370 27,297 22,217 Net Income Deductions 4,269 3,048 3,621 3,261 2,945 4,054 2,283 2,130 1,557 Net Income (Before Taxes) 26,016 24,356 24,431 26,455 22,228 28,347 35,087 25,167 20,660 Federal and State Taxes on Income 13,253 12,830 13,056 14,033 10,883 15,720 18,398 9,864 8,162 Net Income 12,763 11,526 11,375 12,422 11,345 12,627 16,689 15,303 12,498 Cash Dividends Declared (Common) (Preferred) 8,662 1,040 8,662 1,043 8,651 1,185 7,666 1,209 7,342 1,232 7,341 1,244 6,995 1,253 5,996 789 5,246 818 Net Income Retained in the Business 3,061 1,821 1,539 3,547 2,771 4,042 8,441 8,518 6,434 Per Share Earned on Common Shares Outstanding (1) 4.06 3.63 3.53 3.90 4.13 4.65 6.62 7.26 5.84 Common Shares 2,887,233 2,887,233 2,887,233 2,876,171 2,448,121 2,448,121 2,331,544 1,998,467 1,998,467 $Philip Morris Incorporated and Benson and Hedges, consolidated. i'Philip Morris Incorporated for 12 months and Benson and Hedges subsequent to January 31, 1954. +Philip Morris Incorporated for 12 months and Benson and Hedges for February and March of 1954. (1) Per share values 1949 through 1951 not adjusted for 5~Ja stock dividend in 1951. s+'G4$f?18566 23

Philip Jlorris-"A natural smoke. Natural-tasting, good-tasting tobacco clear through." Long size in the flip-top box and regular in the familiar soft package ... Marlboro-Old fashioned flavor in the new way to smoke. A lot to like-filter, flavor, flip-top box. Fast growing, popular priced . . . Parliament-All new, modern recessed filter cigarette. Bright new flavor ... new flip-top box ... new low price ... Spud-A new, popular priced, filter cigarette with a bright new taste. Lightly mentholated ... Benson & Hedges-Here are certain pleasures no other cigarette offers. Luxurious flavor- costlier tobaccos-cigarette-case box- recessed filter mouthpiece. King and regular size ... English Ovals-Artfully blended, top quality tobacco- a premium priced cigarette in a crush-proof box ... Products of Philip Morris Inc. Player's Navy Cut-Top grade mild Virginia tobaccos. Premium quality and price ... crush-proof box ... Bond Street-Our most popular smoking tobacco- an aromatic blend . . . Revelation-Five distinctive tobaccos combined for the pleasure of the most demanding pipe smoker ... Country Doctor, Wakefield Mixture, Handsome Dan and Barking Dog-Special mixtures of rich tobaccos designed to appeal to the varying tastes of pipe smokers ... Lyon's Own-Unsurpassed quality smoking tobacco ... Benson & Hedges Cigars-A premium line of excellent CLEAR FiAVANA, LA YERBA, and EXCLUSIVE IMPORT SELECTION cigars. I I 24 DESIGNED ®Y DESIGNERS ]-PHOTOGRAPHY 9Y MYRON EHREN9E0.G-LEiTERPRESS EY DAY15. DELANEY. INC.. NEW YORK

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