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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