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I I I FOREWORD On the following pages you will read the story of an American company. You will follow, chapter by chapter, the story of Philip Morris presented in sales figures, manufacturing methods, advertising techniques and financial reports. But there is an important part of that story that can- not be tabulated in a financial statement. There is a community of interest in the success of Philip Morris that extends beyond the interest of stockholders, beyond the framework of factories, offices or warehouses. The farmer, bringing his tobacco crop to market, is part of that community. The truck driver, the freight handler, the store clerk are part of that community. Col- lege students, beneficiaries of trusts, housewives with small investments - all these multiplied by thousands - are part of that community. In a real sense they all depend on the well being of our Company; they all participate in its success. And so, in presenting this report of our stewardship, we address ourselves to the ever-widening community of interest, moving outward from the circle of our Company to the people of America. We are confident that each reader will find a signifi- cant picture of progress that reflects his own security, his own welfare. -6 CONTENTS . Highlights of the Year .................. 4 Summary ................ . .. .. . ............. .. 7 Sales .............................. ..._.......... 8 Purchasing and Distribuiion.......... .. 9 Leaf ................. ...... ........... _............. 10 Export .............................. ..... -.. -. ...11 Research .............. ......................... 11 Phi(ip Morris Team ..... .-~ rt ......_..12 Board of Directors .......... ............ ....._.... ___14 Manufacturing ................................14 Advertising ................. .nz...:.............. 19 Financial ......... ...............s .. e ......... 22 Products ............................. ,-. .... _..29 CHARTS Use of Sales fncome...... ................ 6 Management and Promotion............... - 8 Index, Production . of Cigarettes ... .......... ..:. :......... . 9 (nventories and Sales .......... _. . - 10 Personnel ........ .......... _-._-...------ .._.....-..... ._.-12 - Length of Service Investment per Job TABLES Highlights ......_ ......... ____ .a.......... 5 =-_ Statistics ........:..: ...........................15 - - 6a(ance Sheet Statistics .--Record of Operations 10-Year Analysis ~-,~ _--- ---- ~ - .~~. - =lnvestment Used ......_._._ 4 ... .:.22. r~z "'-MThis report does not constitute a reprtsento ~ ~ ~..4- ;~ion, prospectus or circular'[,n, res„p` ect of any ~n " ' ' 27` = ~ a .A co cstenk f1r fRftit~+ll nf tlae r'nrnsrnf:n n 'nr..t ir ~ nht fransmitfed in onnection witi s al ~ F <t ny s e _ ~r offer to sell or solicitation ai an offer to..._ _ "a or any negotiation for A:L_`sals iif any ° _iuch stock or security.

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2 From the growing of tobacco seed until a smoker enjoys a Philip Morris, many business processes occur. We received for our part $255,752,488 last year. Out of this we paid $134,910,203 to Government for revenue stamps and income taxes. From the remainder we made pay- ments to people in all walks of life f~or their contribution to the stream of commerce high spotted in these pictures. 1. From flowering plant comes seed. 2. Tobacco goes into the drying shed on the farm. 3. Farmers mingle with tobacco buyers on the auction floor. 4. Two Kentucky girls inspect a stream ol tobacco strips in our Louisville factory. 5. He is packaging cigarettes which flow through the hopper at 2400 per minute. 6. She makes the final package inspec- tion as she places 10 packs in a carton. 7. Shipping cases on their way to truck and freight car. 8. Philip Morris cigarettes are delivered to an independent distributor.

/ Cigarette sales of the Company advanced during the period. ' We were able to reduce certain of those costs which are within our control, partly offsetting higher prices of many things which we must buy. / Our leaf inventories are at a new peak in line with the sales trend. ~ Earnings on the total capital used in the business, including bank loans, were at the rate of 8.94%-appreciably better than the average for the industry. e The average earnings of Company employees were the highest in our history. 0 Total dividend payments to the common stockholders were higher than ever before. ~ The value of what the common stockholders own was increased by 15.56 °/, . / We simplified our capital structure and prepared to seek added permanent capital.

Computed per Share of Common Stock Previous Years for Comparison Fiscalyears 1950 1949 *1936 I SALES of . ....... ................................................................ $127.97 $1 14.27 $ 21.56 Provided for- Tobacco and other costs of manufacturing and distributing Philip Morris products ..... ....................... 46.27 41.51 6.87 Revenue taxes and income taxes for support of U. S. Government . ._,,,, 67.27 60.35 11.42 Income taxes for support of State Governments....,,..,, .23 .20 .04 Interest on borrowed money and other financial costs .................. ........... ._......... ......... ____ ..._............ , -.79 .59 .10 Payments to employees and insurance, hospi- talization, pensions and other benefits ........... ........ ...- 5.76 5.37 1.20 Payments of dividends to shareholders Preferred ............. ....... ----......... ------------ . ... .39 .41 None Common .. ...... ....... ....... ......... ........... ....._,.-........ 3.00 2.62 .33 Future operation and risk .... .... ........................ 4.26 3.22 1.60 I Investment in Philip Morris of....... ........ ............................ $ 85.67 $ 69.30 $ 6.20 Was supplied by- People who loaned us money .......... ........_...... ............. 43.78 31.03 None Owners of Preferred stock ..... ............................ 9.49 10.23 None Owners of Common stock ......... ...._............. ............... 32.40 28.04 6.20 *(adjusted to present capitalization) Total investment used in the operation of Philip Morris was ............ ......... .................................. . $171,221,000 $138,491,000 $7,726,000 For each job in the Company this amounted to . ... 50,065 38,968 4,105 ~ Insurance of Personnel, Pensions, Hospitalization o and other benefits provided by Philip Morris.......... 692,418 560,126 1,075 e~o C? ha CT ua

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SUMMARY I Our unit sales of cigarettes increased ap- proximately 10% during the period covered by this report when cigarette production of the industry as a whole, influenced by a general decline in exports, was little changed. Total sales exceeded those in any previous period. The dollar value of sales in the domestic market was $249,125,000 compared to $221,664,000 in the 1949 fiscal year, and in- cluded for the full year the price increase made in July 1948. Export sales at $6,627,000 showed but little change from 1949, and total sales of $255,752,000 were approximately 12% higher than $228,372,000 sales last year. We made further improvements in oper- ating efficiency, especially in handling and preparing leaf tobacco. These improvements, plus the increase in sales, made possible a partial offset to higher leaf costs. Net earnings after all taxes were $15,303,184 compared'with $12,498,058 for the previous year-a return of 8.94% on the total investment employed. $6,784,657 of the net earnings were declared as dividends to the stockholders. In March the regular quar- terly dividend on the Common Stock was in- creased to 750 and an extra dividend of 750 was declared. From the net earnings $8,518,527 were reinvested to help provide for additional needs arising from our continued growth. Inventories of leaf tobacco were on a greater scale than ever before to provide adequate stocks of tobacco of Philip Morris quality to protect the upward sales trend. These added leaf inventory requirements were financed by bank borrowings, resulting in an increase from $30,000,000 to $55,500,000 in that part of our capital which we borrow from banks. Under these circumstances, we deemed it advisable to prepare for additional perma- nent capital to reduce current bank borrowings. In February we moved our administrative offices to 100 Park Avenue. A long-term lease was taken on office space suited to our increased business: The people who coordinate the activ- ities of our Company now have most efficient office facilities. In the following pages we include detailed information about the processes of our business which contributed to the results summarized here.

SALES PROMOTION AND MERCHANDISING Under Ray Jones, Vice President in charge of Sales, our 500 trained salesmen served over a million wholesalers and retailers last year. The Sales Promotion and Merchandising staff develop sales aids and instruct our salesmen as to their best use in display and consumer serv- ice. Thus, our salesmen are often able to help both wholesalers and retailers to increase sales not only of our products but also of other items which they carry. :', DisplaY material is prepared to aid public campaigns of various sorts. For example, last year we developed a campaign and supplied material for use in hotel rooms, on merchandise vending machines and in other appropriate places in connection with "Make Every Week Fire Prevention Week." The campaign was endorsed- by the National Fire Protection Association and the National Board of Fire Underwriters. Salesmen make periodic visits to our fac- tories and meet with other parts of our oper- ating team, thus broadening their knowledge of our products. This knowledge makes their train- ing most effective in their daily contacts with distributors and the consuming public. The sales force is kept up to date on our advertising and promotion programs and about coming events which provide opportunity to stimulate sales. Each field representative systematically reports his observations to headquarters. This two-way flow of information keeps the entire sales division constantly alert to changing conditions. I

I I ~ .. ~'~` u _ ' 1933 - 1934_<.T935 1936 1937 __1938 1939 1940 1941 1942.- 1943 1944 1945 1946 . 1947 1948 1949 1950 PURCHASING AND DISTRIBUTION Vice President W. C. Foley supervises the purchasing of all supplies and the distribution of products. He also acts in an advisory capacity to the Sales and Advertising Departments. The records of his department help in the planning of production schedules, and close control of purchases is facilitated by his daily contact with the Production and Sales Departments. Cigarettes in our warehouses and enroute are held to about two weeks' sales requirements, thereby insuring delivery of fresh merchandise. 9-

LEAF The first responsibility of the Leaf Buying Departments is to provide a sufficient quantity of selected cigarette tobacco of proper age to meet sales needs. Maintenance of our blends requires that we have on hand an adequate sup- ply of the quality types of tobacco we use from at least three crop years. To be certain of this, our trend of growth is taken into account in leaf buying. The dollar value of our leaf inventories, E a l 1940 I 1941 I 1942 I 1943 I 1944 based on average cost, has risen, reflecting the higher costs in more recent years. In view of official parity prices and govern- ment controls over tobacco acreage, we see little prospect of appreciably lower prices for domes- tic leaf tobacco in the immediate future. In the imported tobaccos, prices in dollars have in- creased less than in the domestic market. IMW~lm ~ 1948 1 1949 I 1950 ~.A +r"a.V; 1W ® z F ~ I Choice orientaf leaf is being selected for •removat from the Archbetl_warehouse in the presence of the Customs Inspector.

I E EXPORT Demand for our brands abroad continued high, but the scarcity of dollars in foreign mar- kets affected by exchange controls put a positive limitation on our sales. Sales of $6,627,000 compared to $6,708,000 in fiscal 1949. RESEARCH Our success, built upon Philip Morris quality, results not only from use of the finest tobaccos but also from our method of making the cigarettes. In the process, the highly devel- oped art of tobacco blending is of great impor- tance, but our graduate chemists are also constantly engaged in further research. Cigarettes purchased periodically by our salesmen throughout the country are returned to one of our Control Laboratories for tests. This gives us a continuous check on our distribution controls, in- _. suringg factory freshness of products as they reach the consumer. TT

33.36°/° 1-3 YEARS Investment Per Job at March 31 M Our organization is made up of about 3,500 Philip Morris employees drawn from the ranks of the American people. Employees and their families benefit through group life in- surance, placed with the Aetna Life Insurance Company, and hospital-surgical-medical insur- ance, underwritten by the Blue Cross Plan or similar John Hancock Plan, as location dic- tates. Salaries and wages last year totaled $10,804,388. All participate in the Retirement Plan. The Fund on this date totals approxi- mately $3,250,000, under the trusteeship of J. P. Morgan & Company, Inc. The personnel of Philip Morris perform their daily tasks under a management policy which has a respect for human dignity and which commits itself to clean, sanitary and safe working conditions. Medical dispensaries and non-profit cafeterias are run for the con- 3,420 venience and health of all production personnel. Employees are kept informed of the Company's activities. They have pride in their association with it, pride in their products, and pride in the contribution which they are making to the Company's progress. Each has a personal interest in delivering to the public, day after day, year after year, a product as fine and uniform in quality as human care and scientific skill can make it. The American people have recognized this achievement and endorsed it with their patronage. As a result our Company has prospered. Its prosperity has been shared in by our employees and stock- holders through whom it is channeled back into the stream of the national economy. We are all proud of our team and of the team-work which has brought our Company to its present position. Length of Service of Our Employees TOTAL EMPLOYEES MARCH 31, 1950

ALFRED E. LYON Chairman of the Board __ CHIEF EXECUTIVE OFFICER 0. PARKER McCOMAS President CHIEF ADMINISTRATIVE OFFICER I E W. E. LIEBETRAU Vice President W. F. GREENWALD Director of Research R. P. ROPER Director of Personnel L. G. HANSON Vice President-Treasurer CHIEF FINANCIAL OFFICER Under the Financial De- partment are the offices of the Controller, H. R. Blum, and the Secretary & Assistant Treasurer, C. H. Kibbee. W. H. HATCHER Vice President MANAGER OF DOMESTIC LEAF Buying and storage of Domestic Tobacco is under this Department. R. H. KUHN MANAGER OF IMPORTED LEAF The buying, importing and warehousing of for- eign grown tobaccos are under this Department. W. C. FOLEY Vice President PURCHASING-DISTRIBUTION This Department han- dles the distribution of finished goods and the purchases of materials and supplies other than tobacco. C. T. AMES, JR. Vice President IN CHARGE OF PRODUCTION RAY JONES G. J. HENN Vice President Vice President IN CHARGE OF SALES SALES ADMINISTRATION The sales force, the Sales Promotion Department and the Merchandising Director are under this Department. E. W. DINWIDDIE Vice President MASTER BLENDER The manufacture of cigarettes and smoking tobaccos is under this Department. P. H. GORMAN Manager ADVERTISING Radio, Televinion and Publications advertising. G: C. DAWSON Manager EXPORT SALES

MANUFACTURING EFFICIENCY The manufacture of Philip Morris prod- ucts is under the supervision of C. T. Ames, Jr., Vice President in charge of Production. Mod- ernization programs have been completed in all our plants. Additional productive capacity is available by extra shift operations. New machines, balanced operation and improved methods, especially in the handling of leaf, helped the production teams to increase output while maintaining our high standards. Our factories ran on a full five-day week throughout the year except for holidays and vacation periods. Periodic meetings between employee rep- resentatives and the Vice President in charge maintain harmonious labor relations and help the over-all operation. The net investment in land, equipment and buildings, with approximately a million square feet, now stands at $8,971,018. The balance in the reserve, representing deductions from in- come made over the years to provide for re- placement of existing facilities, amounted to $4,719,987 at the end of our fiscal year. We own property adjacent to existing plants which could be utilized for construction of a new plant if advisable. In the meantime, our existing'facilities could take care of in- creased need with extra shift operation. Management and Board of Directors W. H. Hatcher, Vice President since 1939 and head of the Domestic Leaf Buying Depart- ment, was elected a Director to succeed J. E. Archbell, who retired last November. Mr. Arch- bell, in charge of our imported leaf buying since 1931, was succeeded by Russell H. Kuhn. Mr. Kuhn's many years of experience in the oriental tobacco markets and close association with Mr. Archbell fit him well to manage this department. Chandler H. Kibbee joined the Company in December as Secretary and Assistant Treas- urer, and L. C. Metzger is now able to devote himself solely to tax problems. Last December we announced our deep regret at the passing of Sterling Grigg after an illness of nearly a year. Mr. Grigg had ably assisted Vice President C. T. Ames, Jr. His fine character and warm friendliness are missed throughout our organization. ~ 0 t,sts r,~t hour cor,trol tf- ~- hloisture contcnt o` the 4 u f ~ igpr f` ~i~Et xm- It

9 `: Wan.President, E.,F..Hutchins (rightj, ans_wers ;_ q.visitor's questioi in _our Couisvi(te, p[ant. Cahn'e~:r:'+rrn--rrrt Fnr~' trrcichine c ® ® ® ® 9 gJCbh'.:_ ~i O L; a er~ r~fi#vi-P241 vkC1~~,icl C tt~ E. 0. McGhee explains a device for qvaf}ty''controf on our ~.~~.,.. making machmes to the President and the Chairman of_fihe .Boq'ird. + STATISTICS

~ I "T Q ® ~" Q Itleetttlg.~~o~ #h4} i Jf_:mll r.,ork Guilc_l at ~ F"- Cn r,i Par'Lsh~~F . . .~ HOuSG -~" o ~~_@. ~OuS-~"o~ #}1 FiRST U':IT,-klA`1 CCI-tGREGA1'IONA1,WClEfY I J E:ODKIYU ---------- ~-------- - - 4r , Ts = Corporation dividends . . are good providers This young lady is performing research in ~jfiamms in r the laboratory of the WISCONSIN ALUMNI FOUNDATION. tts work has made. many contributions to _ the welfare of the Americart p "e'op(e. M QMHM6 1~1 pare :sus~fairied i i'me cr_isrs by:fis`su ~ .- ~~... ... . . . r iFLE XMERICALt tRSUttArfG9 ~_,P60F these~i~t~;eesa.~e'xepr~:3cntafiwe .:` - ~bsr~a- s ~~-.: of more than 2~0 Compan~es, S choo .. cn.~sion . F'Einds,` . .... . . . . . . . ~ .r.~,_. . , F oundation~ an~id 3 ~ Y~ ._~...'~`^a5~ t~hons wno are,stockholders ~ i3iT" ulip,Moiris. k 7, -ilk,'- ~ R a M 13 11

PHILIP MORRIS BALANCE SH.EET STATISTICS Balance Sheets at March 31, (000's omitt'ed) ASSETS Cash & Marketable Securities $ 8,652 $ 5,264 $ 4,857 $ 4,024 '$ 2,486 $ 2,320 $ 9,509 $ 2,393 Receivables 10,810 9,173 7,196 6,391 7,914 10,063 5,098 1,665 Inventories - 159,611 132,444 93,913 98,812 112,745 87,280 34,781 8,231 Other Current Assets 1,867 206 Total Current Assets 179,073 146,881 105,966 109,227 125,012 99,869 49,388 12,289 Net Property Account 8,971 8,301 6,828 6,468 4,989 5,110 3,017 1,250 Prepaid Items & Other Assets 1,051 1,117 937 1,049 1,391 1,929 2,262 122 Total Assets 189,095 156,299 113,731 116,744 131,392 106,908 54,667 13,661 LIABILITIES Notes Payable 55,500 30,000 - 5,500 44,000 16,000 - 3,800 Federal Taxes - 9,415 7,811 3,431 3,440 2,681 6,992 2,706 395 Accounts Payable 5,057 6,773 5,753 3,866 2,574 5,047 3,699 1,149 Other Current Liabilities 3,402 2,987 1,797 1,834 1,369 2,255 1,545 591 Total Current Liabilities 73,374 47,571 10,981 14,640 50,624 30,294 7,950 5,935 Long Term Debt 32,000 32,000 32,000 32,000 11,500 11,300 Reserves for Contingencies, etc. - 237 237 500 - 250 Net Worth 83,721 76,491 70,513 69,604 69,268 65,064 46,717 7,726 Total Liabilities and Capital 189,095 156,299 113,731 116,744 131,392 106,908 54,667 13,661 Net Working Capital 105,699 99,310 94,985 94,587 74,388 69,575 41,438 6,354 Net Asset Value of Common Stock 32.40 28.04 24.80 23.95 23.68 * 22.56 * 17.80 * 6.20 '-adjusted to present capitalization Figures for the year 1936 are on a consolidated basis (with American subsidiary).

10 YEAR ANALYSIS 0 The fiscal year of Philip Morris NET SALES (including Revenue Stamps) $255,752,000 $228,372,000 $171,258,000 NET SALES (including Revenue Stamps) , per $1,000,000 of net property 28,509,000 27,510,000 25,081,000 ANALYSIS OF OPERATIONS Net Sales (excluding Revenue Stamps) 100.00% 100.00% 100.00% Cost of Sales (excluding Revenue Stamps) 64.22 65.62 71.13 Gross Operating Profit 35.78 34.38 _ 28.87 Shipping, Selling, General & Administrative Expenses 14.90 15.15 _ 17.21 Net Operating Profit 20.88 19.23 11.66 Other Income .13 .09 .69 Total Income 21.01 19.32 12.3 Income Deductions 1.76 1.44 1.1 Net Income before Taxes 19.25 17.88 11.1 Federal and State Taxes on Income 7.54 7.06 4.10 Net Income 11.71 10.82 7.09 Net Income as % of Net Worth 18.28 16.34 8.56 Earnings per share of Common Stock 7.26 5.84 2.60 CAPITAL STRUCTURE % Long term debt 27.65 29.50 31.22 % Preferred Stock 16.39 18.85 20.43 % Common Stock and Surplus 55.96 51.65 48.35 ANALYSIS OF FINANCIAL POSITION Net Prop. Acct. as % of tang. net worth 10.72 10.85 9.68 Current Liabil. as % of tang. net worth 87.64 62.19 15.57 Total Liabilities as % of tang. net worth 125.86 104.34 61.29 Inventories as % of net working capital 151.01 133.36 98.87 Current Liabilities as % of inventories 45.97 35.92 11.69. Long Term Debt as % of net working capital 30.27 32.22 33.69 (1) After exchange of 2 shares of $5 pc

I MORRIS OPERATIONS Ltd., Incorporated ends March 31 $170,906,000 $178,686,000 $185,299,000 $177,901,000 $141,047,000 $112,310,000 $87,116,000 26,423,000 35,815,000 36,262,000 51,253,000 37,885,000 30,764,000 28,875,000 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 73.70 77.43 72.52 68.54 58.65 50.83 51.46 26.30 ~' 22.57 27.48 31.46 41.35 49.17 48.54 14.95 13.09 12.65 15.36 18.77 21.05 22.48 11.35 9.48 14.83 16.10 22.58 28.12 26.06 .80 .19 .28 .18 .28 .37 .35 2.15 9.67 15.11 16.28 22.86 28.49 26.41 .54 1.76 .98 .83 .78 .86 1.46 9.61 - 7.91 _.. 14.13 -. 15.45 -:: 22.08 27.63 24.95 3.83 .56 7.00 7.28 11.61 12.52 6.83 5.78 7.35 7.13 8.17 10.47 15.11 18.12 7.12 8.88 10.45 10.50 11.13 ----~-- _ 15.76 15.71 2.04 2.671>> 5.94 5.82 6.10 8.00 8.11 31.49 14.24 14.79 15.36 15.82 21.40 27.16 26.17 26.07 26.66 30.16 31.89 47.11 58.60 59.04 58.57 57.52 69.84 68.11 9.29 7.21 7.86 5.48 5.98 7.40 6.46 21.03 73.14 46.60 31.00 24.30 39.34 17.04 67.73 89.75 64.36 49.16 43.11 39.34 17.04 104.47 151.56 125.45 102.74 105.41 123.45 83.94 14.82 44.90 34.71 28.06 21.42 36.57 22.86 33.83 15.46 16.24 16.89 17.48 alue for each share of $10 par value stock.

RECORD OF PHILIP MORRIS OPERATIONS I Statements of Income for the fiscal years ended March 31, (000's omitted) Net Sales (inc(uding Revenue Stamps) $255,752 $228,372 $171,258 $170,906 $178,686 $185,299 $87,116 $26,876 Cost of Sales (Including Revenue Stamps) 208,985 188,656 146,694 148,412 159,799 159,051 67,456 20,171 Gross Operating Profit 46,767 39,716 24,564 22,494 18,887 26,248 19,660 6,705 Shipping, Selling, General & Administrative Expenses 19,470 17,499 14,641 12,752 10,953 12,080 9,106 3,498 Operating Profit 27,297 22,217 9,923 9,742 7,934 14,168 10,554 3,207 Other Income 172 101 5880) 683(2) 156 267 142 16 Total Income 27,469 22,318 10,511 10,425 8,090 14,435 10,696 3,223 Income Deductions 2,302 1,658 985 2,174(3) 1,476(4) 940(7) 592 421 Net Income (Before Taxes) 25,167 20,660 9,526 8,251 6,614 13,495 10,104 2,802 Federal and State Taxes on Income 9,864 8,162 3,491 3,293 4660) 6,692 2,766 394 Net Income 15,303 12,498 6,035 4,958 6,148(s) 6,803 7,338 2,408 Cash Dividends Declared (Common) 5,996 5,246 3,497 3,498 2,998 4,497 4,464 415 (Preferred) 789 818 836 863 817 866 85 - Net Income Retained in the Business(e) 8,518 6,434 1,702 597 2,333 1,440 2,789 1,993 Earned per common share adjusted to present common shares outstanding 7.26 5.84 2.60 2.05 2.67 2.97 4.06 1.93 Per share earned on common shares outstanding 7.26 5.84 2.60 2.05 2.67(6) 5.94 8.11 5.80 Common Shares 1,998,467 1,998,467 1,998,467 1,998,468 1,998,470 999,235 894,010 415,465 (1) Includes $409,890 profit on sales of securities after deduction of $137,000 of Federal income taxes thereon. (2) Including renegotiation recovery of $310,000 in connection with government contracts and net premium of $133,865 received on sale of 2s/8% Debentures. (3) Including premium of $472,000 paid on retirement of 3% Debentures, and provision of $500,000 for contingencies. (4) Includes $242,000 war-time packaging changeover loss (after deduction of $250,000 charged to reserve for post-war and other contingencies) ; also includes $275,000 for settlement of claims in connection with rescission of subscriptions to Cumulative Preferred Stock, 3.60% Series. (5) Reflects a refund of Federal Excess Profits Taxes of prior years under carry-back provisions of the Internal Revenue Code amounting to $1,867,528 and a credit of $300,000 representing excessive provisions of prior years' taxes. (6) After stock split 2 for 1. (7) Including provision of $250,000 for post-war and other contingencies. (8) Subject to minor surplus adjustments. Figures for the year 1936 are on a consolidated basis (with American subsidiary).

They benefit not only individual stockholders but thousands of others as well-people who are helped by the companies and institutions which depend upon investment . . . Here are some of those who benefited from Philip Morris dividends paid to institutional stockholders. ® IP, ® 0 ~-=__r~ ' Relu`rris 'on its investment hefp cover _~ the cost of maintaining the B[ood Bank~ at the BEVERLY HOSPITAL, BEVERLY, MASS~ ?a 3 TFH t 'W; c = Last yea4500 " retired clergymen `recetveC~,:[qcomefrfhe CHURCH PENsaoN, p FUND RRe~v. irkby earned throug~h 43 yeors.i_n-the ministry. ~ Admini5t[atlory;at,.EMORY UNfYERS}Tl( learn the faC~S behind the a ~- ~~ r> >(~ s, trustees that na Enstitutior~~can possibiy Irye unto itself afone 1 CQ p t ~a~~-__, - .,, ~... a 500-7 THE LEGAL AID SOCIETY MANTOR V fAG1AGY ATJOR11tY The LEGAL AID SOCfETY advises and repre- sen~s;in,court peopte who have no means ~ to empioy• counsel. Last year the Society a('sg, ~relped many 6roken horries to rec -onciEiation and a fresh start ~ , ~_3e-..... . . IOrT1DlOfl C,O~'.IO(~ i

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ADVERTISING Our Advertising Department, under P. H. Gorman, during the past year continued the presentation of "No CIGARETTE HANGOVER" to the consuming public and developed the demonstration of the Philip Morris nose test. Effective display of our sales messages through advertising is vital to our growth. We use publications as well as night and day radio and television. The advertising agencies which have served us well in the past continued to work with our Sales and Advertising Depart- ments in carrying out our programs. Entertain- ment value remains of first importance in attracting audiences but we endeavor, in addi- tion, to select programs which afford oppor- tunities for the public. We believe that the service resulting from this policy, while bene- fiting the Company, at the same time fulfills an obligation of good citizenship. The Horace Heidt Original Youth Oppor- tunity Show, in which hundreds of people par- ticipate, travels the length and breadth of the country in its search for talent. It is broadcast on Sundays over the network of the Columbia Broadcasting System at 9:30 P.M., Eastern time. Each prospective entertainer has an audi- tion; those selected are paid for a local theater appearance. Everyone who qualifies is given a radio debut with pay. From there on, the con- testants' progress depends upon the approval of the studio audiences measured by an electric applause meter.

June, 1949 - Rev. Geene (seated) gets his wish for further treatments. In his letter to Mr. Lyon last January, Rev. Geene said: "As you can see the treatments given to me by Philip Morris were the difference between the ability to work and not to work. I am very grateful, therefore, to Philip Morris for this gift of a new life and I wish to thank you for all you and Philip Morris have done to fulfill the needs of people. It is a wonderful work and greatly appre- ciated by vast numbers of Ameri- cans." 20 "THIS IS YOUR LIFE" AND THE PHILIP MORRIS FUTURE The Ralph Edwards "This Is Your Life" program, now on C.B.S. Tuesdays, 9:30 P.M., Eastern time, selects individuals from the broad cross section of America and presents the high spots of their lives. The outstanding wish'of each individual is stated on the pro- gram and brought closer to realization by action of Philip Morris. Other programs are "Crime Photographer," Thursdays, Columbia Broad- casting System, 9:30 P.M., Eastern time, and daytime radio shows "Ladies Be Seated," Mon- day through Friday, American Broadcasting Company, 12 to 12:25 P. M., Eastern time, and "One Man's Opinion," daily, American Broad- casting Co., 3:25 to 3:30 P.M., Eastern time. Mary Bethune hears Edwards broadcast plea for aid to The Bethune-Cookman College in Florida. I I

The use of television has been expanded. We present, in addition to spots, "Candid Cam- era," with Allen Funt on the Columbia Network on Mondays at 9 P. M., Eastern time.

FINANCIAL Under the supervision of Vice President L. G. Hanson, members of the financial and accounting staff reach into every department of the Company in their daily work. By anticipat- ing and providing for the day-to-day financial requirements of the Leaf, Manufacturing, Sales and Advertising Departments, they effect the close control of our financial resources required for successful operation. Our sales revenue of $255,752,488 was at an all-time peak. The use we made of this is illustrated by the chart on Page 6. $550,301 was set aside for distribution among employees eligible to participate in the bonus, with no individual receiving more than 5%. Our earnings before payment of taxes on income were $25,167,184, an increase of $4,507,126 over the year before. $9,864,000 was set aside to pay Federal and State taxes on income. For dividends to the stockholders $6,784,657 was provided, and $8,518,527 was retained to help toward the greatly increased needs for future operation. Working capital increased to $105,698,609 and the value of stockholders' investment was $7,230,373 higher. Since there was no further need for the unused portion of the contingency reserve estab- lished in 1947, it was transferred to earned surplus. We further simplified our capital struc- President I C ture by redeeming, during the year, the 19,151 shares of 3.60% Preferred Stock which had been outstanding at March 31, 1949. The trend of our increasing sales shown by the chart on Page 8 dictated that we should prepare for higher future sales by increasing inventory. This required the use of an addi- tional $25,500,000 in bank borrowings. NEW FINANCING The Company has undertaken a financing program, consisting of an offering to its Com- mon stockholders of 130,610 shares of a New Series of Cumulative Preferred Stock and 333,077 shares of Common Stock, with an underwriting commitment, subject to certain conditions, to purchase unsubscribed shares. The Company expects to apply net proceeds of the financing to reduction of its outstanding bank loans. May 19,1950 Many People Supply the Large Amounts of Capital Invested in Philip Morris YEARS ENDED MARCH 31, (000's OMITTED) 1950 1949 1948 1947 1946 1945 1936 People Coaned Us Capital.......... ..............$ 87,500 $ 62,000 $ 32,000 $ 37,500 $ 55,500 $ 27,300 $ 3,800 Preferred Shareholders Invested ................. 18,965 20,451 20,942 21,739 21,939 19,985 - Common Shareholders' Equity ................ 64,756 56,040 49,569 47,864 47,328 45,078 7,725 r•s Total Capital Invested ......................$171,221 $138,491 $102,511 $107,103 $124,767 $ 92,363 $11,525 C9 ,ta CIO ~ Net Sales ............................ ..... $255 752 .... $228 372 $171 258 $170 906 686 $178 $185 299 $26 876 ~ .. , . .. , , , , , , v Total Capital as percent of Sales ....... ......... 66.95 60.64 59.86 62.67 69.82 49.85 42.88 ~ v 4* Net Earnings as percent of Total Capital........ 8.94 9.02 5.87 4.63 4.93 7.37 20.89 Chairman of the Board 22

i AUDITED FINANCIAL STATEMENTS Auditors' Certificate LYBRAND, ROSS BROS. & MONTGOMERY CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors of Philip Morris & Co. Ltd., Incorporated: We have examined the balance sheet of PHILIP MORRIS & CO. LTD., INCORPORATED as of March 31, 1950, and the related statements of earnings and surplus for the fiscal year 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 considered necessary in the circumstances. We made a similar examination for the fiscal year ended March 31, 1949. In our opinion, the accompanying balance sheets and related statements of earnings and surplus present fairly the financial position of Philip Morris & Co. Ltd., Incorporated at March 31, 1950 and 1949 and the results of its operations for the fiscal years then ended, in conformity with generally accepted accounting principles applied on a consistent basis. ® ido11110 u; ~ ZRtr 1 01 'T` ~.~^v~A ~ ` riazt<a ii-FS ~ ,[ ~ r'RA(3IL£ P~LR/5H/HLC F~RWt,wL '~ ![e15HtHE[ S?: , w,umrarns:: R m ,~h_ .~ ~ Three men irr #he S~~pp ng Department 1oad~280,09p~pounds of produet,daily nto fru'cks and freight cars. The special conveyor equipment whic~t they use ts Plexibie"in applieation. C tv_ vl

24 Assets CURRENT: Demand deposits in banks and cash on hand ................................. Accounts receivable from customers, less allowance for discounts and doubtful accounts, 1950: $765,681; 1949: $732,538 ... ..... Accounts receivable from others ....................................................... Inventories, at average cost: Leaf tobacco (including imported leaf in bond subject to duty).... Manufactured stock ........... ....................................................... Stock in process, revenue stamps and operating supplies............ Total inventories .............. .............................................. . Total current assets ........................................................ PROPERTY, PLANT AND EQUIPMENT: Land, buildings, machinery and equipment, at cost ........... ................ Less, Allowance for depreciation .. ............................................. OTHER ASSETS: Investment, at cost, in Philip Morris & Co. Ltd. (England) (Note 1) ..... Prepaid expenses and deferred charges .......................................... A VIRGINIA A 1950 A N ( E March 31, 1949 $ 8,651,921 $ 5,264,092 10,427,690 8,734,378 382,314 438,885 145,362,079 117,992,814 10,265,517 9,956,827 3,983,250 4,494,234 159, 610,846 132,443,875 179,072,771 146,881, 230 13,691,005 12,332,969 4,719,987 4,031,712 8,971,018 8,301,257 235,965 235,965 815,309 880,362 1,051,274 1,116,327 $189,095,063 $156,298,814 II The accompanying notes are an k,

S H EE T S 1950 and 1949 I CURRENT: Notes payable to banks Liabilitie5 Dividends declared, payable after March 31 .. .................... ........... Accounts payable ......... ......... Accrued liabilities, interest, taxes (other than federal income taxes), incentive bonus, advertising, etc. . . .... . ......................... . ... Provision for federal income taxes ............ ......,............. ............... ... Total current liabilities.................-..-...__............................:. FUNDED DEBT: 25/8% Sinking Fund Debentures, maturing April 1, 1966 (sinking fund payments commence March 31, 1956) ..................................... RESERVE FOR CONTINGENCIES CaPital STOCKHOLDERS' INVESTMENT, REPRESENTED BY: Cumulative preferred stock, par value $100 per share; authorized 350,000 shares issuable in series: 4% Series, authorized and originally issued 199,847 shares; out- standing, 1950: 191,851 shares; 1949: 193,850 shares (Note 2) . . .......... .......... ........ ......... .............................. ........ 3.60% Series, authorized 149,883 shares, originally issued 19,543 shares; outstanding, 1950: (Note 3); 1949: 19,151 shares ..... ....... ... .. ........................ __._...._._............ Common stock, par value $5 per share; authorized 3,000,000 shares; issued 1,998,467 shares (Note 4)... .......... ......................-......... Surplus: Paid in by stockholders (in excess of par value of capital stocks, less financing expenses).............................,_._.....___................. Earnings reinvested or retained in the business (Note 5)............ Less, Cost of cumulative preferred stock held in treasury: 1950 1949 4% Series 2,199 shs. 2,912 shs. 3.60% Series 5,573 shs. integral part of the financial statements. 1950 1949 $ 55,500,000 $ 30,000,000 3,187,353 3,200,859 1,869,912 3,572,182 3,401,999 2,987,452 9,414,898 7,810,793 73,374,162 47,571,286 32,000,000 32,000,000 237,000 19,185,100 19,385,000 1,915,100 9,992,335 9,992,335 14,288,392 14,277,516 40, 471,181 31,715,654 83,937,008 77,285,605 216,107 795,077 83,720,901 76,490,528 $189,095,063 $156,298,814 V •.! 25 ..~_~

S T A T E M E N T S OF EARNINGS for the fiscal years ended March 31, 1950 and 1949 NET SALES Cost of goods sold ...... .......... •............. .._y._ ...........:,.:........................... Cost of shipping goods, selling, advertising and general administration.. Operating income ...................................................................... Nonoperating income ............................................................................. Interest on debentures ......... .............._.................................................... Other interest charges ............. ........ ........... ............ .............. :.............. .:.. Provision under incentive bonus plan ...............................,,...,...,,..,,,,,,,,. Prior service contribution under company's retirement plan.................... Miscellaneous charges .......................................................................... Provision for federal and state income taxes .......................................... Net earnings ............................................................................. 1950 1949 $255,752,488 $228,372,099 208,985,530 188,655,871 19,470,228 17,499,145 228,455,758 206,155,016 27,296,730 22,217,083 172,691 100,816 27,469,421 22,317,899 840,000 840,000 827,913 259,523 550,301 468,818 79,424 79,424 4,599 10,076 2,302,237 1,657,841 25,167,184 20,660,058 9,864,000 8,162,000 $ 15,303,184 $ 12,498,058 I The accompanying notes are 26 i`°

CORPORATION STATEMENTS OF SURPLUS for the fiscal years ended March 31, 1950 and 1949 I PA I D I N 8 Y S T 0 C K H O L D E R S(in excess of par value of capital stocks, less financing expenses): Balance at beginning of year ........ .......................... .................... Excess of par value over cost of cumulative preferred stock redeemed during year, 19,151 shares of 3.60% Series and 1,999 shares of 4% Series (Note 3)... ................................. Deduct: Transfer to common stock capital (Note 4) .............. ......... Premium on cumulative preferred stock redeemed during year, 1,999 shares of 4% Series and 196 shares of 3.60% Series .......... ...... .............v.............. ...,.......... . Balance at end of year ............................................ EARNINGS REINVESTED OR RETAINED IN THE BUSINESS: Balance at beginning of year ....................... .._........,.................. Net earnings for year ............ .............. ....... ........... ---- ....... .. Transfer of balance of reserve for contingencies ........................ Deduct: Dividends declared: On cumulative preferred stock: 4 % Series ........... .......... ......................................... 3.60 % Series ................. ....................................... On common stock ............. ......... ....._.............................. U Balance at end of year (Note 5). ............................... integral part of the financial statements. 1950 1949 $14,277,516 10,876 $15,941,480 14,288,392 15,941,480 1,656,000 7,964 1,663,964 $14,288,392 $14,277,516 $31,715,654 15,303,184 237,000 $25,281,282 12,498,058 47,255,838 37,779,340 758,908 30,348 5,995,401 766,482 51,198 5,246,006 6,784,657 6,063,686 $40,471,181 $31,715,654 27

I NOTES TO FINANCIAL STATEMENTS 1. Audited statements at March 31, 1949 of the Eng- lish subsidiary (on the basis of translation into U.S. currency at applicable official rates of exchange, after giving effect retroactively to the subsequent devaluation of the pound in September, 1949) showed net assets of $298,925 and net income of $40,419 for the fiscal year then ended. Correspond- ing information as of March 31, 1950 and for the fiscal year then ended is not presently available. No dividends were received from the subsidiary dur- ing the period. 2. The cumulative preferred stock, 4~/o Series, is re- deemable, at any time, otherwise than through the sinking fund, at $107.50 per share if redeemed on or before February 1, 1953 and thereafter at di- minishing amounts (not less than $105.50 per share), plus accrued dividends. Holders of this series of stock are entitled to like payments upon voluntary liquidation of the company and to $100 per share plus accrued dividends upon involuntary liquidation. The company is required to set aside annually in a sinking fund an amount which is sufficient to redeem, at $105.50 per share, one per cent (lofo) of the maximum number of cumulative preferred stock, 4% Series, that have been issued. Preferred stock in treasury may be used in connection with such sinking fund requirement. The company holds a sufficient number of shares of preferred stock in treasury for use in lieu of sinking fund payments aggregating $210,895 to be made within one year f rom March 31, 1950. 3. On December 15, 1949 the company called for redemption and cancellation the remaining out- standing shares of the cumulative preferred stock, 3.60% Series. The foregoing shares, together with those previously redeemed constitute the entire 19,543 shares originally issued. Under the terms of the Certificate of Incorporation as amended, such shares can not be reissued. 4. Transfer of $1,656,000 to common stock capital during the fiscal year ended March 31, 1949 repre- sents $3 per share for 552,000 shares of common stock of $5 par value per share heretofore included in capital stock account at equivalent of $2 per share. No additional shares of common stock were issued. 5. The terms of issue of the 25/g% Sinking Fund Debentures include certain restrictions with respect to the declaration or payment of dividends (other than dividends payable in stock of the company) on any shares of common stock of the company, and to payments on account of the purchase, re- demption or other retirement of its capital shares. At March 31, 1950, approximately $18,716,000 of the earnings retained was free of such restrictions. The terms of issue of the cumulative preferred stock include certain restrictions with respect to the declaration or payment of dividends (other than dividends payable in stock of the company) on the common stock. The amount of earnings re- tained free of such restrictions was in excess of the $18,716,000 mentioned above. Provision for depreciation of plant and equipment charged to costs and expenses aggregated $900,598 for the fiscal year 1950 and $742,042 for the fiscal year 1949. 28

N w ® 6 AN ~SVs ® wo ~.a ® 9NO ~ ® a © ~ e a a s g ® e PRODUCTS OF THE PHILIP MORRIS COMPANY Philip Morris quality, a standard feature of all our products, is the result of carefully- developed tobacco know-how which is backed by a hundred 'years of experience. We start with the finest tobaccos grown, domestic as well as imparted. Next comes aging-without proper aging of tobaccos, no cigarette can reach perfection. Then the art of the master blender is applied. All our experience is preserved in carefully-guarded secret formulas which bring out the flavor and aroma of these fine tobaccos. Also of great importance in producing the standard of excellence reached by Philip Morris is ultra modern machinery for making and packing cigarettes. Popular-priced Philip Morris cigarettes have become our principal product. The growing sales volume demonstrates the superiority of this brand for day-in, day-out smoking pleasure. It wears well. Spuds are an evenly mentholated blend of high quality domestic and imported tobaccos. They are manufactured in two styles: Tipped and Plain Ends. Marlboro cigarettes are enlivened by the rich aroma of selected oriental leaf. They are designed for extreme mildness and are produced in three styles: Ivory Tipped and Plain Ends which appeal to men and women; and Beauty Tipped (red) created especially for women. Fleetwoods are 20% longer than the standard cigarette. They come in Plain Ends or IvoryTips and have a special trade and consumer acceptance in the popular price class. Other cigarettes we produce are: the well-known Dunhill Majors, made in a long size, having a definite appeal to a select market; English Ovals, since 1918 a blend of best quality Turkish and domestic tobaccos, packed in crush-proof boxes and sold in the premium price class; and Player's Navy Cut "Medium" cigarettes, made prin- cipally of select bright Virginia tobacco and packed in slide, crush-proof boxes. They sell in the premium class. Bond Street, an aromatic blend of selected tobaccos comparable in every way to the most expensive mixtures, is our largest selling item for the pipe smoker. Revelation is a particularly mild blend of five of the world's finest quality tobaccos, skillfully combined. This tobacco is designed to appeal to the most discriminating pipe smoker. Country Doctor, Handsome Dan, Barking Dog and Wakefield English Mixture are pipe mixtures, each varying slightly, to appeal to the special taste of a wide range of smokers. Lyon's Own is a very superior mixture in the premium price class. $ © ® ~ ® ~ im ~ ~ ~°~~ _ r ~;,:•a4_ ~w ® ® ® ~ M , ._v ,

L. G. HANSON, Chief Financial Offzcer Last year our annual report was singled out by the independent Board of Judges for triple honors in the Annual Report Survey conducted by the FINANCIAL WORLD. The reports of management to the owners of 4,500 com- panies were examined. Our report for the third time was judged the Best in the Tobacco Industry. It was judged the Best in all Consumer Goods for the year and the Second Best in All Industry groups throughout the world. We appreciate these honors which we share with our stockholder relations consultants, Henry B. Dalby and associates. j02 - - . a ~~

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