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VENEZUELA: C. A. Tabacalera Nacional, in which Philip Morris has a controlling interest, makes Marlboro, Alpine. Parliament and Philip Morris, in addition to local brands, in this modern plant. Executive Vice President George Weissman, right, Chairman of the Board and Chief Executive Officer of Philip Morris Overseas, with George C. Dawson, President of the Company's Overseas Division. I'IIII,II' .l/Uh'h'IA'~; OI"l;li'Sl;'_(S The complexities of the world situation, the emer;~int,• of common economic associations and the rise of nationalism throughout the world created new problems -and new opportunities-for the Overseas Division in 1960. Combining all phases of its operation including export sales and sales by subsidiaries and licensees, the Overseas Division in 1960 enjoyed its best year to date. The total net income produced topped all previous records. The gains in the past y ear are due to the continued expansion in overseas markets. In 1960, foreign subsidiary financial results were consolidated with those of the parent company as described in the financial section of this Annual Report. Among Philip Morris Overseas world-wide activities : In Venezuela, when the ;overnment restricted the import of U. S. made cigarettes, C. A. Tabacalera Nacional, a company in which Philip Morris has a controllin- interest, was able rapidly to expand manufacture locally of Philip lIorris brands. Thus, the loss of substantially well-established export sales formerly shipped from the United States was offset. In addition, C. A. Tabacalera -Nacional also manufactures and markets local brands. In Germany, where because of high import duties export sales were negligible, Philip lIorris Overseas licensed Brinkmann, G.m.b.H. to manufacture and sell 11larlboro. This has proceeded most encouragingly. In Canada, construction is well alono, on a new, modern cijarette plant near Toronto. From this plant, TIMN 440300 8

jor thc y(ars ertrlcd DecemLer J1, 1,060 and 1;)j3 (Note 1) Capital surplus : Balance at beginning of year, as previously reported ................... Add: Excess of par value of common stock of A-S-R Products Corporation over par value of common stock of Philip Morris Incorporated issued in exchange theref or Capital surplus of A-S-R Products Corpora- tion at December 31, 1958 .............. Balance at beginning of year, as adjusted: .. ... Excess of proceeds over par value of cammon stock issued under stock options. .:. ... . Adjustments for retirement of preferred stocks through sinking fund ................... Adjustments for common stock issued under A-S-R employees' stock option plan as- sumed by the Compan.. ... . .. . ..:... ... Balance at end of year..... :..... EARNINGS RETAINED IN THE BUSINESS: Balance at beginning of year, as previously reported ................... Add, Earnings retained in the business of A-S-R Products Corporation and its sub- sidiaries at December 31, 1958 (Note 1) .. Add, Equity in undistributed net earnings of foreign subsidiaries not previously in- cluded in consolidation, less related fed- eral taxes on income ................... Balance at beginning of year, as adjusted ...... Net earnings per accompanying statement ..... Deduct : Cash dividends declared : Philip Morris : = On cumulative preferred Stocks : 4% Series ............ : . . . . . 3.90% Series ........ ..... On common stock ............... A•S-R, on common stock.... `...... Expenses incident to the combination of Philip Morris and A-S-R ........... Balance at end of year (Note 6) ... The accompanying notes are an integral part of the financial statements. 16 1'l),n 19-59 $ 3r,-136,056 6,001,700 241,656 $ 44,605,434 43,679,412 908,616 882,551 56,962 43,471 42,500 - $ 45,613,512 $ 44,605,434 $ 84, 789,801 7,325,102 92,114,903 824,518 $100,364,650 92,939,421 20,984,41-1 19,589,804 121,349,064 112,529,225 658,944 672,414 351,571 351,571 12,889,327 10,368,564 13,899,842 11,392,549 196,380 772,026 14,096,222 12,164,575 508,173 - 14,604,395 12,164,575 $106,744,669 $100,364,650 TIMN 440308

© President Joseph F. Cullman, 3rd, discusses the purchase and blend of quality tobaccos used in the Company's new Philip Morris Commander during his Fall tour of Kentucky auction markets. From left to right, Edwin W. Humphreys, President of Southwestern Tobacco; Mr. Cullman; J. Pinckney Harrison, Chairman of the Board of Universal Leaf Tobacco Co.; and Wirt H. Hatcher, Senior Vice President of Philip Morris. By direetin, major mana~e- ment attention to the continuation of basic engineering and machinery development programs, "cost of prod- uct" Naas held at previous year's levels relative to sales. Increased efficiency offset the higher costs of leaf tobacco, materials, labor costs per hour, and related improvements in frin;•e benefits. The _1Ianufacturing Department was charged with developinlp- a king size, non-filter cigarette, to be so en,ineered as to set a new high quality standard in cigarette manufacturing. The cigarette was destined to become Philip Morris Commander. To accomplish this, a radical departure in cigarette manufacturing technolo~,•y Nvas employed. In cooperation with the 1Iolins Machine Company, the delivery of DIolins Mark VIII Makers was expedited. These new and unique machines are the most revolutionary development in cigarette manufacture in t«-enty-five years. In the past, the industry's making machines depended upon gravity to drop the tobacco onto a movin, belt. The continuous vacuum action of the Mark VIII holds the tobacco in shape. This air jet delivery is continuously controlled electronically with utmost precision. The end result is a cigarette with uniform texture, firm, well-packed ends, and a solid feel. Independent tests prove Commander the most evenly packed cigarette of its type on the market. Successful meeting of the good sales demand for Philip Morris Commander attests to the skill of the operating personnel in adapting themselves quickly to the most modern manufacturing methods, thus rontinuin~_- to ;•ive the CompanY a competitive edge iu 1>rodnct quality. !, f', . 1F Despite a larger 1960 crop of Bright flue cured leaf, an active demand existed durin,r the entire buying season and the average price of the crop was somewhat higher than in 1959 due chiefly to the higher prices paid for certain grades. The market was also affected by unusually active forei;n buying. Overall quality was slightly better; there were fewer undesirable hybrid types produced. The Company purchased considerably more Bright leaf than in 1959, replenishing inventories to normal. A summary of daily analyses of each grade made by our Research Center confirmed the judgment of the Company's buyers that the Bright leaf we purchased was unusually ripe, mild and flavorful, and will assure a continuance of the high standards established for the Company's eigarettes. While Burley leaf encountered bad weather at planting time, growing conditions improved during later critical periods and acceptable quality for the most part was produced, with slightly fewer pounds than in 1959. The average market price was higher. The Company's increasing requirements necessitated appreciably larger purchases to bring leaf inventory to the proper level to insure the use of only fully aged tobacco. Very satisfactory purchases of Turkish-type leaf were made in 1960, in terms of both quality and price. TIMN 440297 5

position in this larye market. Reco(ynizinc, the -rowin; importance of our wholly owned and majority owned foreign subsidiaries, we adopted a policy in 1960 of consolidatin~ the results of these subsidiaries into our overall financial results. Sales and profits of wholly owned subsidiaries and our equity in profits of our majority owned foreign subsidiaries are included in the Consolidated Financial Statements. In April, the stockholders approved the acquisition of the assets of A-S-R Products Corporation for about 363,000 shares of Philip Morris Common Stock. We referred to this acquisition as a possibility in last year's Annual Report and later described the affairs of this corporation in a detailed proxy statement sent to all stockholders. A•S•R is a major producer of razors and blades in the United States and England under the trademarks Gem, Pal, Personna and Fver-Ready. We have been coneentratinn, first on improving the A-S-R line of products with major emphasis on research, product development and new products. During the year, we disposed of two small California operations of A•S•R, Com Air and L".S. Relay, which did not fit our objectives for A-S•R. We are optimistic about the future for A-S-R and the opportunities for enlarging the A-S-R business, especially in the razor and blade fields. 1960 was not a good year for Milprint, Inc., our flexible packagin,- subsidiary with headquarters in Milwaukee, Wisconsin. Although sales volume was down only moderately, profit margins continued to reflect the hi~--hly competitive nature of the packaging industry ~,enerally, in which production capacity presently eteeecls demand. During the year, we placed in full operatin_g commission our new ;•lassine and sulphite paper mill at Nicolet, a llilprint subsidiary. This new mill will add importantly to the Nicolet output and is already contributing to Nicolet's profits. _lIajor organizational chan~es at lIilprint were effected during the year. Plant facilities on the East Coast were consolidated at Downingtown, Pa., and on the West Coast at South San Francisco, when a major addition to our plant there was completed. Since its acquisition in 1957, we have effected important changes in the organization, method of operation and facilities of Milprint. Under more favorable conditions in the national economy and the packaging industry, these changes should produce improved sales and profits for Milprint. Polymer Industries, Inc., our small chemical and adhesives subsidiary, completed the construction of new polymerization and solvent plants. Sales and profit trends at Polymer were favorable as our new facilities reached expected levels of productivity and efficiency. We were particularly pleased by the contribution made by our expanded research activities now housed in our new Research Center at Richmond, Va. This fine facility is attracting a high caliber of personnel interested in scientific research and is providing them with the most modern equipment available. Important contributions to our complete product line, including those of A•S-R, are being made by our Research Department. As for the future, we are optimistic for reasons we believe to be sound : the ~reater than averaae increase in the growth of the world's population in the 21 to 35 age group, which smokes more cigarettes than any other a;e category; the continuing rise in the number of women smokers; and the strong overseas demand for American-type ciaarettes, coupled with the fact that in less mature economies abroad, consumption of cigarettes is browin; at a far faster rate than in the United States. Philip Morris has emerged from the industry's period of change in a strong position, competitively represented in every smoking eategory by a well designed and well packaged cigarette. The quality traditionally associated with your Company has never been hi~her. I would like to extend mana;ement's appreciation to the men and women of Philip Morris. Their eneraies, their talents and loyalty have made your Company's year a successful one. JOSEPH F. CULLMAN, 3RD New York, New York President March 3, 1961 TIMN 440295 3

The year 1960 was one of continued pro,•ress for Philip Morris. Net sales of $506,412,000 were 1.6 per cent greater than the $498,456,000 for 1959. Net income of $20,984,000 compared with $19,590,000 for 1959, an increase of 7.1 per cent. On a per common share basis, net income was $5.44, up from $5.08 last y ear. Unit cigurette volume and dollar sales set a new Company record, and sales and earnings increased for the seventh consecutive year. Dividends of $3.60 per share were paid on the Common Stock, $4.00 on the 4% Cumulative Preferred and $3.90 on the 3.90% Cumulative Preferred Stock. Payment on the common shares-up from $3.00 in 1959-represented the 33rd consecutive year of payment on Philip Morris Common Stock. Ci,,urette sales continued to improve. They were the most important factor in the successful year experienced in 1960. In the late summer of 1960, this Company introduced Philip Morris Commander in the S5mm full kin(,r size field. Commander was the first ci:;arette to offer the American smoker the hioh standard of uniformity, firm ends, fullness of packing and "vacuum cleanino," of tobacco supplied by the new Mark VIII ci-arette makino, machine. This revolutionary new machine makes a noticeably better ci~l-arette and is the first major advance in cigarette making technique in many years. The public's response to the new Philip _lIorris Commander has been most (Yratifying. Sales of this product were up sharply over Philip Morris Longs, and by year-end the long decline in the Philip Morris brand had been reversed and an upward trend was developing. All our filter brands showed strength, especially Marlboro, now popular in both the flip-top box and the king size soft paek, which was running about 10 fo ahead of the 1959 sales rate throughout the last quarter of 1960. Recessed filter Parliament continued to show strength, especially in the king size soft pack. Our Alpine brand, combining fresh filtration, li,rht menthol and fine tobaccos further established itself in this ~rowin; cateaory. A dignified new desian was developed for our Benson & Hedges packet and introduced in the summer of 1960. Sales of this hi;h quality product, which is America's laraest selling premium priced, premium quality ci;arette, reacted well to our promotion and to the new packet as volume increased over the previous year. Philip 1lorris Overseas enjoyed another year of sales growth, market development and expansion. During the year, the exportation of American made ci-arettes to Venezuela came to a halt due to that ~overnment's policy and, accordin~ to plan, we began manufacture there of Philip Morris, Marlboro, Alpine and Parliament cigarettes in our subsidiary, C. A. Tabacalera Nacional. The reception of these brands manufactured in Venezuela has been favorable, and we have been successful in maintaining our important position in this market. We also make and sell in Venezuela brands employing only tobacco ~rown in Venezuela. At the year's end exchange controls were in effect in Venezuela, but dollars were being received by us for tobacco and materials shipped from the United States. A conservative accounting approach to profits accruing to the parent company has been adopted until the exchange situation in Venezuela becomes clearer. During the year, Philip Morris Overseas improved its position on the European continent, especially in West Germany, where 11Iarlboro was successfully introduced under a manufacturin- ayreement with the Brinkmann Company. Our Overseas Division also improved its position in France, Italy, Spain and Sweden where Philip Morris and Marlboro are leading American made brands, and in Switzerland, where Marlboro has aa leading position. In Canada we broke ground in Brampton, outside of Toronto, for a new ultra-modern cigarette factory for our wholly owned subsidiary, Benson & Hedges (Canada) Ltd. In England, we moved into new and enlarged facilities. Philip Morris (Australia) Ltd. had a good year notwithstanding competition for the first time from American made cigarettes imported into Australia. Profits were about $500,000 with sales of both Philip Morris and Marlboro showina encoura~inb trends at the year's end. In the Philippines, Philip Morris made important progress, and the 1l'Iarlboro brand was successfully introduced. In Latin America, Philip 11lorris brands have been traditionally strong and, during 1960, enjoyed fine sales in a number of good neighbor nations to the south. We hope and plan to expand our TIMN 440294 2

AUSTRALIA: Sales and profits increased again during 1950 for Philip Morris (Australia) Ltd. Marlboro and Philip Morris are made by this subsidiary, as well as Revelation, a local filter brand. completely equipped with the world's latest cigarette manufaeturing equipment, Benson & Hedges (Canada) Ltd. will enter thc Canadian cigarette market. This subsidiary's ei<,ar operations, located in Montreal, showed moderate pro~-gress in 1960. In England, Philip Morris & Co., Ltd. moved into new, larger facilities and reinforced its management with avie«- to expanding their efforts in that area. Philip Morris (Australia) Ltd., has made encouraging penetration of the Australian market. The Swiss licensee, Fabriques de Tabac Reunies, S. A., reports that Marlboro is the leading seller in its cate(yory. The P1lilippines licensee has enjoyed sales so favorable that production has been restricted to meet the limited availability of American-grown leaf. In man' v areas of the world-Europe, Middle East, Africa, the Far East- and South America-demand for Philip Morris products often exceeds the ability to meet requirements because of local import or currency restrictions. Many of the above and similar activities reflect the Company's approach to expansion overseas. Through investment, licensing or similar arrangements on export sales, Philip Morris has flexibility to secure true international development of business. To further the Company's world-wide marketing operations, Executive Vice President George Weissman, formerlv in charge of marketing, has been appointed Chairman of the Board and Chief Executive Officer of Philip Morris Overseas. ENGLAND: Philip Morris & Co., Ltd. moved into a new plant in London during the year and also reinforced its management. Marlboro, Alpine, Philip Morris are made by the English subsidiary. CANADA: Top, architect's rendering of the new plant near Toronto for Benson & Hedges (Canada) Ltd. Bottom, by the end of the year, construction was well under way on the modern Canadian facility. Subsidiary expects to enter the Canadian cigarette market in 1961. TIMN 440301 9

('o.VSOhwATA'D S7'<>,z'r_1IrXT OF SOL-hCE AND I;SE OF I'L'VDS Year endecl December 31,1960 (000 omitted) SOURCE OF FUNDS Net Earnings .......................................... . $20,984 Depreciation ........................... ................ 5,362 Shares Issued under Stock Option ..... ..... 1,071 Disposal of Fixed Assets ..... ................. 3,709 Reduction in Current Assets ................... 2,420 Other, Net ................................................ 1,024 $34,570 USE OF FUNDS Capital Improvements ............................ $ 7,300 Additional Investment in C. A. Tabacalera Nacional (Venezuela) .................. ..... 1,530 Payment of Short Term Loans ................ 8,594 Payment of Long Term Debt ...................... 2,068 Common and Preferred Stock Purchased for Treasury ................................ ....... 813 Expenses in respect to A•S•R Acquisition 508 Dividends Paid to Stockholders ............ 13,757 $34,570 For the seventh consecutive year llie Comhany r(,ported increases in both sales and eai"n- im,•s. Consolidated net sales in 1960 were up 1.6cl'(, over t959 to a record high of $506,412,000 and consolidated net earnin,>•s were $20,984,000, or 7.11/~o over 1959. It was pleasing to note the improved profit marain repre- ,ented by this percentage gain in net earnings in spite of the relatively unfavorable sho«-in~ of non-tobacco subsidiaries and divisions. Consolidated net earnings, after provision for dividends on the preferred stock, amounted to $5.44 per share compared to $5.08 in 1959, as restated to include the A•S-R Products division and forei~,n subsidiaries. Thus the Company comfortably covered its dividend of $3.60 per common share, an annual level to which it was raised by the Board of I)irectors beainnina with the January 1960 quarterl,r payment. The Company retained $6,888,000 of net earnim,•5, «-hieh with depreciation of $5,362,000 more than paid for 1960 capital outlays of $7,300,000. For the first time, Philip JIorris has this year included fore ign tobacco subsidiary figures in the financial statements. The Principles of Consolidation are set forth in the notes to the audited statements; broadly speaking, the Company has consolidated in full all its n-holly owned foreign subsidiaries, and has included in the financial statements the net earnings of forei(,n subsidiaries not wholly owned only to the extent of its interest in them, and after related income taxes. In accordance Nrith the public announcement of October 26, 1960, the Company has been acquiring its ('ommon Stock in the open marl:et, and at year-end held a modest amount as reflected in notes to the financial statements in this Annual Report. As was announced, this stock, and additional shares which may be thus acquired, are to be available for possible use in connection with future acquisitions, stock option p1ans and other corporate purposes. DISTRIBUTION OF THE SALES DOLLAR year ended December 31, 1960 Manufacturing & Distribution Costs ............ 44.03G Excise Tax .................................................... 34.74~ Employee Salaries & Fringe Benefits ... .... . 12.27G Federal & Other Taxes on Income ............ 4.62~ Interest & Net Non-operating Costs ........... .20~ Stockholders' Dividends .............................. 2.78G Reta i ned Earn i ngs .............................. .... ...... 1.36~ TIMN 440296 4

With two members of A•S•R management on the Philip Morris Board of Directors, and with A•S•R management unchanged, conditions are appropriate for fullest exploitation of the opportunities foreseen in the acquisition. .IIILPRIN1', INC. In August, former President Arthur Snapper became Chairman of the Board and Chief Executive Officer of Milprint, the Company's flexible packaging subsidiary. Fred M. Stefan was elected President. His background and experience are ideally suited to the planned progress and expansion of this subsidiary. AIilprint's South San Francisco plant added more than 57,000 square feet to its existing plant and all West Coast operations were consolidated at that site. At DePere, Wisconsin, Milprint subsidiary -Nicolet Paper Corporation completed a plant expansion to accommodate a new paper making machine. The added producing capacity, coupled with the finest available tinishing equipment, makes it possible for Nicolet to market many additional types of specialty papers. Throughout the year, Alilprint gained greater flexibility in its operations. The industry of which it is a part is fast changing; favored packaging materials and their combinations change as quickly as new processes and new products are developed. Jlilprint is committed to no one packaging material. Its versatility and ability to offer combinations of packaging best suited to the customer's needs is an advantage to Milprint's customers and a sound basis for this subsidiary's operations. POLYMER INDUSTRIES, INC. Polymer completed new solvent adhesives and polymerization plants at Springdale, Connecticut, in September. The latter facility now produces a substantial share of Polymer's own requirements for standard polymers at costs which should favorably affect profits. As a further result of adding polymer capacity, this subsidiary in 1961 will broaden its market base through the sale of synthetic resins, and will expand its sales as a formulating chemical company. Sales of chemical additives for textiles-a vital part of Polymer's business-were ahead of the previous year. The world's largest supercalender for making glassine complements new paper machine in Nicolet Paper Corporation's expanded plant in DePere, Wisconsin. All equipment is the most modern available. I'll/1Jf' )l0l,hlS Philip Morris' research program was further strengthened during the year. The Research Center staff was expanded to include additional senior personnel with important skills in various fields. Two new laboratories-for radio chemistry and biochemistry research-were fully equipped and staffed in 1960. The Research Center is carrying forward a basic program aimed at the technical problems in all aspects of the Company's business as well as product development work in the tobacco area. In addition, each of the subsidiaries has product development (Yroups active in its specialized field. Contributions by Research to Purchasing, .lIanufacturina and Marketing were significant. Research on leaf, cigarette components and packaging materials is reflected in standards of highest quality maintained in the Company's products with no increase in costs. Flavor evaluation and improvement were important areas of activity aimed at meeting the public's demand for full-flavored tobacco products. Utilization techniques were developed to improve efficiency of leaf usage and product quality. The Research Department performs scientific and technical services for all units and subsidiaries of the Company. The continuing growth of this, activity indicates the importance of the Research Center to the Company's diversified business. TIMIN 440303 11

PHILIP MORRIS 100 PARK AVE. NEW YORK 17, N. Y. INCORPORATED TIMN 440314

Cooperating with Molins Machine Company, Philip Morris personnel made Marlboro cigarettes on the Molins Mark VIII maker at the British Trade Fair in New York. Philip Morris' Janice Taylor greets distinguished visitor, the Duke of Edinburgh. : l i:( , 1 l l. f: . In October 1960, the following executive changes were announced: Georo-e Weissman, formerly Executive Vice President, Marketing, was named Chairman of the Board and Chief Executive Officer of Philip llorris Overseas. Mr. Weissman will continue as an Executive Vice President of the parent company. Clifford H. Goldsmith was elected Vice President, Subsidiary Relations; and Hu,(Xh Cullman, formerly Treasurer, was elected Vice President, Assistant Chief of Operations. John E. Cookman, Vice President, Diversification, was also elected Treasurer. Ross R. \Iillhiser was appointed Vice President, Director of .llarketing. He had previously been Vice President and Assistant Chief of Operations. George J. Henn, Vice President, Distribution and Customer Service, retired at the end of the year. He had been Nvith the Company for thirty-seven years and had been a Vice President for the past seventeen years. ll:l: Mutually satisfactory labor ne<,otiations were completed during 1960 with the unions which represent most of the Company's employees. The successful completion of these ne`•otiations reflected the continued history of sound, understandin;• relations between Philip Morris and its men and women, both union and non-union. A comprehensive major medical insurance plan, formulated especially for Philip Morris, was put into effect for all salaried employees late in the year. 71: ( 171i:1,: ,Vsllll' In December, former Career Ambassador and Lnited States Information Agency Director George V. Allen was elected President of The Tobacco Institute. He succeeds The Honorable The Philip Morris Derby Festival Show, during Louisville's famous Kentucky Derby Week, identifies Company with community. From left: Spencer T. Jones, plant manager; Parade Grand Marshal Raymond Burr, star of TV's Perry Mason; Lillian Campbell, Derby Festival Queen; and famous Johnny. Free show, which features top talent, attracts more than 20,000 Louisvillians and Derby visitors each year. James P. Richards, Special Presidential Ambassador and former Conl-ressman from South Carolina, who has retired. Mr. Richards' valuable counsel will still be available to the organization. Philip Morris has actively supported the work and the aims of the Institute since its inception three years ago. The Tobacco Industry Research Committee-now in its seventh year-has contributed $4 million to research designed to determine the relationship, if any, between tobacco and health. Philip Morris, along with other tobacco manufactttrin- and leaf companies, contributes to the TIRC. Their research is organized and grants are allocated throu~h a scientific advisory board composed of some of the nation's most distinguished scientific leaders. Those interested in the reports of the TIRC may write to Executive Director, 150 East 42nd Street, New York 17, N. Y. The Tobacco Tax Council, Richmond, Virginia, researches and reports information pertaining to taxes on tobacco products. Today, 47 states and 324 municipalities collect cigarette taxes in addition to the eight cents per pack imposed by the Federal Government. The inequitable tax burden imposed on smokers is a matter of increasing concern. The Council has just published a booklet on this subject which is available on request to The Tobacco Tax Council, 1000 N. Thompson Street, Richmond, Virginia. The role of the corporation in the community and the industry continues to expand. Your Company's management is keenly aware of the responsibilities and benefits of good corporate citizenship. Just as Philip l'Iorris is known as a leader and innovator in research, production and marketing, the Company conducts its operations in a responsible manner that will continue to enhance its relationships with investors, employees, customers, and communities. TIMN 440304 12