Tobacco Documents Online

TIMN 440458

(Top row, left to right) O. Parker McComas Alfred E. Lyon Joseph F. Cullman, Jr. L. G. Hanson (Center row., left to right) W. H. Hatcher C. T. Ames, Jr. Joseph F. Cullman II[ (Bottom row, left to right) K. H. Rockey H. E. Riddell W. B. Ryan, Jr.

PRODUCTION AND DISTRIBUTION On July 15, 1954, production started on the new cardboard box for Marlboro filter cigarettes in our Richmond plant. This was an historic occasion in the American cigarette industry for it represented the first major packaging change since the soft cup paper package was introduced in 1908. The efficiency of the new machines enables us to compete in the popular price filter field with a superior package. The modern and attractive Marlboro box, com- parable in size and shape to the conventional paper package so that it can be used in vending machines and other ci=arette outlets, is formed in an intricate one-step packing operation around the cigarettes. Another major problem faced and solved by Pro- duction in the past year was the transfer of Parliament manufacturin, operations to our Louisville and Rich- mond plants.yConsiderable personnel retraining was necessary to adapt to the production techniques -in- volved in custom-making this quality brand. Our work in the packaging field which led last year to the introduction of the Philip Morris Snap- Open Pack and this year to the Marlboro box is continuing. We are constantlv re-examinins our production TIMN 440470

THE PHILIP MORRI S TEAM Complex personnel problems in- clttdin- those arising from the integration of Benson and Hedees into Philip Morris & Co. Ltd.. Inc.. were capably handled bv. left to right. New York Office ARanager Rohert A. Hartwick. Field Person- nel & Communitv Relations Direc- tor Robert Nj. Norris. Vice President Robert P. Roper and StafT Assistant Roger C. Pickhardt. The events of the past year strengthen our belief in the corporate policy of providing the Philip Morris team with workin- conditions and benefit programs that are the best in the tobacco industry and compare favorably with all industry. In 1954, the Philip Morris team faced the industry's difficult problems with skill, energy, enthusiasm and confidence. For the seventh consecutive year, Philip Morris labor and employee relations received the hi Thest industry ratings in Forbes Magazine's Annual Report on American Industry. With the transfer of Parliament manufacturinL, to Louisville and Richmond plants, it was necessary to dispense with the services of about 600 people in the New York area, all of whom, unfortunately, it was not feasible to relocate in our plant cities. In recognition of their services and in keeping with our sense of responsibility to all employees, we gave them sever- ance allowances and helped many find gainful employ- ment elsewhere. The assimilation of other Benson and Hedges personnel into the Philip Morris organization was successfully arranged. At the year end, 3,800 people were on our payrolls, approximately 1,600 of whom have been with the company for ten years or more. Approximately one hundred people are now receiving benefits under our Retirement Plan.

4 THE PRESIDENT'S LETTER During the nine months ended December 31, 1954, our new fiscal year end, your company's business was adversely affected by three major factors. These were, first, the decline in national cigarette consumption, second, the unusual costs attendant upon the consoli- dation of the Benson and Hedges operation with our own, and third, the delays inherent in developing and launching a popular priced filter cigarette with the first new type of packaging in over a generation. How- ever. despite these and other problems,~he earnings per ,hare were quite satisfactory. ` The nine months ended December 31, 1954 re- corded consolidated net sales of $217,008,564 and net income after taxes of $9,098,982, equivalent, after allowance for dividends on the preferred stock, to S2.85 per share. For purposes of comparing the year with future years, we have included operating figures for the twelve months ended December 31, 1954. During the calendar year we earned $3.53 p~r share, r compared with $3.90 per share for the fiscal year ended March 31, 1954. Four quarterly dividends of $.75 per common share were paid during 1954, rep- resenting 27 consecutive years in which your Company has paid dividends on its common stock. As stated above, 1954 was not a particularly good year for the industry. According to the best available estimates, cigarette consumption declined about 5%, and the decline in non-filtered cigarettes was much (71 greater. We believe that the sales performance of our Philip Morris brand was not out of line with that of competing brands. The consolidation and integration of the Benson and Hedges operations with our own, which involved transferring Parliament manufacturing operations from their New York City and Yonkers factories to our Richmond and Louisville plants, was consummated early in the Fall. This move obviously involved many major problems affecting both personnel and produc- TIMN 440462

C. T. Ames, Jr. Vice President in Charge of Production Joseph F. Cullman. Jr. Chairman of the Executive Committee Joseph F. Cullman I1I cxecntive Vice Preeiderrt L. G. Hanson Senior Vice President W. H. Hatcher Vice President in Charge of Leaf Tohacco Alfred E. Lyon Chairman of the Board of Directors O. Parker McComas President H. E. Riddell Wickes•. Riclclell, Bloonler. Jacobi & McGuire, Attorneys-at-Lcrw K. H. Rockey Retired W. B. Ryan, Jr. Retired O. Parker McComas President Joseph F. Cullman III Executive Vice President L. G. Hanson Senior Vice President C. T. Ames. Jr. Vice President H. W. Chesley. Jr. Vice President J. E. Cookman. Vice President Dr. R. N. DuPuis Vice President W. H. Hatcher Vice President G. J. Henn Vice President Ray Jones Vice President C. H. Kibbee Secretary and Treasurer R. P. Roper Vice President George Weissman Vice President H. R. Blum Controller Cornelia Craig A.rsistant.Secretary J. A. Hampson A.c.cistant Secretary Guaranty Trust Co. of N. Y., 140 Broaclway, New York The National City Bank of New York. 55 Wall Street, New York Bankers Trust Company, /6 Wall Street, Ne w York Conboy. Hewitt. O'Brien & Boardman. 39 Broadway, New York Lybrand. Ross Bros. & Montgomery, 90 Broad Street, New York °Y°IMINT 440461 3

I)turing, the year we further adapted our multiple-brand selling-structure to the current market conditions. (Top left) Sales I'roniotion trio. Michael Keith. Manager. R. S. Larkin. Director, Jack Gaynor, Field Manager. plan for correlation of point- ot-sale material with advertising themes. (Center left) Brand Advertising Managers. C. V. Schuchard, Parliament. J. R. Latham. Philip Morris. R. R. Millhiser. Marlboro. outline current advertising campaigns to Advertising Director R. \1. Greene. (Bottom left) J. R. O'Connor, Assistant to Sales Vice President, and Charles Sanders. Parliament Sales Man- a<,er. diacuss the application in the field of advertising and sales promotion plans. Pictured to the right are the stars of our three principal television and radio shows: Lucy and Desi Arnaz. stars of CBS-TV's "I Love Lucy." Gale Storm and Charles Farrell of"Mv l.ittle Mar<.[ie." CBS-Radio and Reed Hadley with guest star Barbara Whitin, on CBS-TV'.ti"Pnhlic Defender." TIMN 414®`ff69D 8 Vice Presidents Ray Jones. Joseph F. Cullman [[[, Harry W. Chesley. Jr. and George J. Henn formulate sales, advertising and promotion strategy for all brands. _~

NINE MONTHS ENDED TWELVE MONTHS ENDED DECEMBER 31, 1954 DECEMBER 31, 1954 MARCH 31, 1954 Sales $217,008,564 $282,774,523 $294,902,434 Income before Federal Taxes 19,248,982 24,045,276 26,014,638 Federal Taxes on Income 10,150,000 12,670,000 13,593,000 Net Income 9,098,982 11,375,276 12,421,638 Earnings per Common Share 2.85 3.53 3.90 Common Stock Dividends Paid 6,494,002 8,651,526 7,665,763 Earnings Retained for Future Operation and Risk 1,720,919 1,538,885 3,546,690 Current Assets 203,855,458 203,855,458 218,698,699 Current Liabilities 62,849,341 62,849,341 78,247,517 Working Capital 141,006,117 141,006,117 140,451,182 tion with resultant heavy extraordinary costs. The decision to take this step was made after careful studies ~ hich indicated sizable operating economies. Produc- tion costs on Parliament in both Richmond and Louis- vil(e are now most gratifying and indicate that the move will prove of considerable benefit. The new Marlboro lilter cigarette with its dramat- icallv new pack,i,,ing is now in process of being dis- tributed nationally and its initial reception by the public has hcen cncotu aging. The decision to delay the comp~iny's cntrv into the popular price filter field \\au occasioned hy yotnr management's belief that the .<<Ics potential of a fine (ilter cigarette in a new type C.ffdhoard hox would he -reater than in a conventional paper package. The obvious advantages of Marlboro's wliClue packaging should justify the delays which were causQd by the complexity of the new machinery and its resultant slow delivery. Our industry is still faced with problems. The changing pattern of consumer tastes, to which we referred in previous reports, was accentuated in 1954; the trend to king-size and filter cigarettes, at the expense of the regular size, continued; the health con- troversy reached new levels of public attention; the burden of excessive taxation continued. Your man- agement has been well aware of these problems, and with full confidence in the future has undertaken the followina steps: The introduction of the popular price Marl- boro filter cigarette. Additional emphasis on research, develop- ment, and engineering to bring to our products and processes the maximum possible scientific benefits and improvements. New aggressive advertising and promotional approaches specifically conceived for today's marketing conditions. A continuing program for the improvement TIMN 440463 5

EN processes with a view to applyin`, the newest techno- lo,ical developments to our plants. Our activities in the fields of Engineerinu. Machine Development and Oualitv Control were expanded during the year. The handling of manufactured stocks from the factories to the retail counters. a matter of inereasin,Ycomplexity because of the growing nuniber of brands. was expedited this year throu =h use of all modern modes of transportation and warehousing. Air freight, rail and truck facilities served our fiftv distribution points to insure rapid delivery of fresh goods to consumers. •_ i ® More than 50 patents cover the manufacture of the new filter- tipped Marlboro in its unique box. Production, Engineering, Research, and actually all de- partments of the organization worked together to speed the de- velopment of the new brand be- ing manufactured in Richmond. All Parliament manufacturing operations have been transferred to our Richmond and Louisville plants, thereby utilizing avail- able plant space. Certain econ- omies were effected by locating closer to sources of supply. When the demand for Marlboros exceeded the supply in Dal- las. air freight enabled us to quickly replenish dealers' stocks. J. E. Cookman. Vice President. works out production and distribution details involved in the shift of Parliament produc- tion to our Richmond and Louisville;plants with Director of Distribution Ray Nolan. General Traffic Manager Otto Olsen and J. T. Clemence. Assistant to the Production Vice President. TIMN 440471 13

SALES AND ADVERTISING 1 he changes in the cigarette industry and the transition of our Company from primarily a one-brand company to a multi-brand company was reflected in changes we made this year in our sales and advertising strategy. Organizationally, we have adapted our selling struc- ture to current market conditions. Brand advertisina managers have been placed in positions of authority and responsibility on Philip Morris, Parliament and the new Marlboro. Each brand's advertising is created and handled by a separate leading agency. The over- all coordination of the selling effort is achieved at the executive level. The popular price filter cigarette market grew sub- stantially in 1954, achieving 10% of the industry total. Currently, we are initiating national distribution on long size Marlboro filter cigarettes. In its unique box package and with its fine filter and blend, your man- agement is confident Marlboro will be a strong entry in this field. This confidence in the brand is based on the fact that it is the first ci(yarette, to our knowledge, to have been subjected to extensive consumer research before launching on a national basis. Our advertising strategy was also marked by a shift at the year end. Faced with increasing television costs occasioned by rising expenditures for shows and the ,rowin- number of stations, we sought co-sponsorship of the "I Love 1.ucy" and "The Public Defender" CBS-TV programs. Thus, on January 3rd, Procter & Gamble joined us in the sponsorship of "I Love Lucy" and beginning March 10th, the Revlon Company will share "The Public Defender." On radio we are follow- ing a similar pattern with co-sponsorship of "My Little Margie" on CBS-Radio network Sunday nights and participation in the new "Tennessee Ernie" show Wednesday. Thursday and Friday nights over CBS- Radio. These moves, similar to ones taken by other large advertisers, will 7ive us greater flexibility in our over-all advertisiny and better balance amonz news- papers, magazines, television and radio. Our 1955 program with increased emphasis available in printed advertisina should ;ive us many additional impressions for our advertisinr dollar. An estimated 6,730,800,000 Philip Morris and Par- liament advertising messages were delivered to Amer- ica during 1954 by our radio and television programs. and extensive newspaper and magazine coverage. During the year our sales force accomplished the distribution of kina size Parliament and extended the distribution of regular size Parliament. Forceful sell- ing and promotion behind the Snap-Open Pack on Philip Morris aided us in maintaining the brand's position in the fiercely competitive non-filter cigarette market. Our sales of smoking tobaccos, a small but healthy segment of our over-all business, increased as against a general decline in this industry classifi- cation. We are continuing to expand our efforts in the export market. These have been particularly fruitful in the Central and South American markets where Philip Morris is the leading brand in several countries. More a-gressive advertising and selling effort is being placed behind the expanded output of our English subsidiary. [n Europe, our competitive sales position is improving, but local governmental restrictions still inhibit our capitalizing on this market to the fullest extent. As the year closed our Australian subsidiary was preparing its sales campaign in that country, and in addition already had booked orders for export to India, Ceylon and New Guinea. 9

.Scienti/ic reseurch nrrd clereluprrrerrt, srrpplenrentin, e.cherrirnc e crrrd trcrditiwr, fornrsu.ss•nrhul of tlre tohucco hicltrstt.v tnciuy, Oa the ccn'er is JnJtn Alcrsat of r ttr Richtttoncl Luborutories, u nrembc-r o f the 1'hiCrp .Worris reseurclt teurrr tlrut rorttribtttes to onr scientilic l,rau1rlerl,"e. APplicuticut of knuwlecl,e guirtecl irt tlte lcrburutore tesults !rt hellrr pruclucts for utcr curtsrrmers, nncl a nrore eJJicien t crnd profitable operation. CONTENTS Directors and Officers . ... 2 Highlights of the Year .. .... ..... ...... 4 The President's Letter. ... .... ...... . ... 4 ~ The Philip Morris Team ....... ..... .. ...... 7 Sales and Advertising 8 , Research . .... ....... ..... . ........10 Production and Distribution ... 12 ~ Company Installations . .._. __ , ..14 Leaf ......... .. .... . ..... .. ...... . ...... 15 Financial Information ... ........ ..... ...... 16 Fin.,.nce .... ... ..... ._.. ...... . ....... _ 18 Audiccd Financial Statements 19-23 Philip Morris Products... . ...... ..... 24 TININ 440459

PHILIP MORRIS BALANCE SHEET STATISTICS (000's omitted) BALANCE SHEET AT BALANCE SHEETS AT MARCH 31 DEC. 31 1954* 1954* 1953 1952 1951 1950 1949 1948 ASSETS Cash $ 9,410 $ 11,292 $ 10,355 $ 11,136 $ 9,115 $ 8,652 $ 5,264 $ 4,857 Receivables 13,613 13,113 12,050 11,015 11,935 10,810 9,173 7,196 Inventories 180,832 194,294 193,747 221,453 220,839 159,611 132,444 93,913 Other Current Assets - - 700 Total Current Assets 203,855 218,699 216,852 243,604 241,889 179,073 146,881 105,966 Net Property Account 25,942 25,913 21,692 19,916 10,360 8,971 8,301 6,828 Brands, Trademarks & Goodwill 8,496 8,282 Prepaid Items & Other Assets 2,795 2,237 1,761 1,535 1,337 1,051 1,117 937 Total Assets 241,088 255,131 240,305 265,056 253,586 189,095 156,299 113,731 Number of Employees 3,800 4,365 3,841 3,707 3,786 3,420 3,554 3,285 LIABILITIES Notes Payable $ 42,400 $ 54,000 $ 60,000 $ 85,000 $ 75,000 $ 55,500 $ 30,000 $ Federal Taxes 11,330 15,279 11,520 15,414 17,760 9,415 7,811 3,431 Accounts Payable 4,072 2.807 5,382 2,773 3,020 5,057 6,773 5,753 Other Current Liabilities 5,047 6,162 4,954 5,818 5,667 3,402 2,987 1,797 Total Current Liabilities 62,849 78.248 81,856 109,005 101,447 73,374 47,571 10,981 Long-Term Debt 32,000 32,000 32,000 32,000 32,000 32,000 32,000 32,000 Reserves for Contingencies, etc. 79 260 - - - - 237 237 Net Worth 146.160 144.623 126,449 124,051 120,139 83,721 76,491 70,513 Total Liabilities and Capital 241,088 255,131 240,305 265,056 253,586 189,095 156.299 113,731 Net Working Capital 141.006 140,451 134,996 134,599 140,442 105,699 99,310 94,985 Net Tangible Asset Value Applicable to Common Stock-Per Share (1) 37.38 36.84 38.99 37.85 38.01 32.40 28.04 24.80 •Philip Morris & Co. Ltd., Inc. and Benson and Hedges, consolidated. (1) Per share values 1948 through 1951 not adjusted for 5% stock dividend in 1951. y + TIMIN 440474

IiH:CONI) OF Pt(ILIY MORRIS OPERATIONS (000's omitted) statements of Income for the STATEMENTS OF INCOME FOR THE FISCAL YEARS ENOED MARCH 31 oec°.3ie iesa Dec.31, i°9°5a t 1954* 1953 1952 1951 1950 1949 1948 Net Sales $217,009 $282,775 $294,902 $314,895 $306,698 $305,804 $255,752 $228,372 $171,258 Cost of Sales 173,569 226,466 236,019 259,733 248,977 245,937 208,985 188,656 146,694 Gross Operating Profit 43,440 56,309 58,883 55,162 57,721 59,867 46,767 39,716 24,564 Shipping, Selling, General & Administrative Expense 21,162 28,257 29,167 29,989 25,320 22,497 19,470 17,499 14,641 Operating Profit 22,278 28,052 29,716 25,173 32,401 37,370 27,297 22,217 9,923 Other Income 64 98 232 237 151 99 172 101 588 Total Income 22,342 28,150 29,948 25,410 32,552 37,469 27,469 22,318 10,511 Income Deductions 3,093 4,105 3,493 3,182 4,205 2,382 2,302 1,658 985 Net Income (Before Taxes) 19,249 24,045 26,455 22,228 28,347 35,087 25,167 20,660 9,526 Federal and State Taxes on Income 10,150 12,670 14.033 10,883 15,720 18,398 9,864 8,162 3,491 Net Income 9,099 11,375 12,422 11,345 12,627 16,689 15,303 12,498 6,035 Cash Dividends Declared (Common) (Preferred) 6,494 884 8,651 1,185 7,666 1,209 7,342 1,232 7,341 1,244 6,995 1,253 5,996 789 5,246 818 3,497 836 Net Income Retained in the Business 1,721 1,539 3,547 2,771 4,042 8,441 8,518 6,434 1,702 Per Share Earned on Common Shares Outstanding (1) 2.85 3.53 3.90 4.13 4.65 6.62 7.26 5.84 2.60 Common Shares 2,887,233 2,887,233 2,876,171 2,448,121 2,448,121 2,331,544 1,998,467 1,998,467 1,998,467 tReflects earnings of Philip Morris & Co. Ltd., Inc. for 12 months and Benson and Hedges earnings subsequent to January 31, 1954. +'Reflects earnings of Philip Morris & Co. Ltd., Inc. for 12 months and Benson and Hedges earnings for February and March of 1954. (1) Per share values 1948 through 1951 not adjusted for 5% stock dividend in 1951. TIMN 440475 -A

& CO. LTD., INCORPORATED Incorporated in Virginia AND ITS SUBSIDIARY, BENSON AND HEDGES 9 MONTHS ENDED DECEMBER 31, 1954 Net safles $217,008,564 Cost of goods sold 173,568,571 Cost of shipping goods, selling, advertising and general administration .......... ................ ..... 21,161,968 194,730,539 Operating income ... .. ........ .. ............ 22,278,025 Nonoperating income ........ 64,170 22,342,195 Interest.. .. .. . .. ......... ... .... . . .......... .... 1,670,852 Prior service contribution under company's retirement plan ...... .... ........... ...... .. . ... .. 108,077 State income taxes ...................... ................ ....... 308,000 Provision under incentive bonus plan .... _... ........ 392,836 Net loss on disposal of fixed assets ..... .......... ... .... 63,556 Plant closing expenses.. .......... 549,892 Premium on redemption of Benson and Hedges bonds .... ..... .... 3,093,213 Earnings for period before provision for federal taxes on income . .... ..... ....... 19,248,982 Provision for federal taxes on income.. .... .... ....... 10,150,000 Net earnings for period . . ... . ... . ... ...... $ 9,098,982 "Denotes red figure. The acconrpanyinl- notes are an integrnl part of the financial statentents. 12 MONTHS ENDED DECEMBER 31, 1954 FISCAL YEAR ENDED MARCH 31,1954 $282,774,523 $294,902,434 226,466,205 236,019,238 28,256,529 29,167,277 254,722,734 265,186,515 28,051,789 29,715,919 98,202 158,946 28,149,991 29,874,865 2,368,575 2,708,161 144,102 144,102 386,000 440,000 488,513 528,704 55,633 72,7=I0 549,892 112,000 112,000 4,104,715 3,860,227 24,045,276 26,014,638 12,670,000 13,593,000 $ 11,375,276 $ 12,421,638 20 TIMN 440478

The careful selection and blending of our choice vintage leaf is essential to the qual- ity tobacco products of Philip Morris. Philip Morris Imported Leaf Department. long considered one of the finest in the industry, inspects a shipment ef the delicate flavorful tobaccos from the Middle East. From left to right. Warren B. Mooney, Department Manager Russell H. Kuhn, Frank D. Lillaston, Matthew J. Rusak, Irving E. Finold. Our Richmond stemmery, the most modern in the world, was placed in operation in July of 1954, supple- menting the facilities afforded by our Louisville stem- mery. Our stemmeries gave us better control of the tobaccos we process, resulting in an improved product and yield. Prices paid for the 1954 crop of flue-cured tobaccos were somewhat lower than those paid for the 1953 crop. In the Middle and Old Belts, inferior and drought-stricken in 1953, we were able to replenish our stock with higher quality leaf at averages lower than those for the several past crops. With more than 50% of our requirements completed, our purchases of 1954 crop Burley grades have been averaging less than last year's costs, and the quality has been higher in most grades. On December 31, 1954, with more than 50% of our Burley crop invoiced, our leaf inventory stood at $169,1 13,214 compared to $178,077,323 on March 31, 1954, when our Burley purchases were completed. From our warehouses, we were able to ship suffi- cient Philip Morris blend leaf for several months' pro- duction in Australia and England. Other leaf pur- chases for our overseas subsidiaries were made in Australia, Canada, Rhodesia and the Middle East. The analytical and technical services of the Re- search Department were utilized to the fullest in guiding our purchases of those crops that were par- ticularly mild and flavorful. Working with our research scientists, we were able to determine the desirability of irrigated tobacco, particularly from those areas affected by bad weather conditions. Our heavy purchases of irrigated tobaccos further built up our stores of vintage tobacco, a fact which our Advertising Department was able to bring out effectively to the public. TIMN 440473 15

PRODUCTS OF THE PHILIP MORRIS COMPANY The manufacture of highest quality tobacco products has been synonymous with the Philip Morris name for more than 100 years. Skilled technicians and re- searchers combine modern scientific procedures with the rich experience and deep traditions of our leaf and manufacturing artisans to produce cigarettes and smoking tobaccos that give pleasure, enjoyment and satisfaction to consumers around the world. It is, therefore, with great pride that we welcome the addition of the new MARLBORO filter-tip ciga- rettes to our line. In its unique crush-proof flip-top box, MARLBORO offers smokers a long size filter cigarette that delivers the goods on flavor. Easy draw- ing, it is sold at the popular filter price. America's Most Modern Cigarette, MARLBORO. PHILIP MORRIS, America's Finest Cigarette, King- Size and Regular. A superb smoke at popular prices in the new, exclusive Snap-Open Pack. PARLIAMENT, distinctive and smart, premium filter mouthpiece cigarettes. In a unique "cigarette case in itself" container. Kinb Size and Regular. DUNHILL, King-Size at popular prices, available in both plain and cork tip. SPUD, recommended for those who want the best in cool, mentholated smoking. Plain and cork tip. ENGLISH OVALS, rich and flavorful, a premium-priced blend of highest quality in a crush-proof box. VIRGINIA ROUNDS, 100% blend of the finest bright tobaccos. Corn-tipped. PLAYER'S NAVY CUT, "Medium" cigarette, blended for mildness from Virginia's top grades of tobacco, crush-proof box, premium quality and price. BOND STREET, aromatic and even burning, our largest selling pipe tobacco. REVELATION, five types of fine tobacco, masterfully blended to appeal to the discerning pipe smoker. COUNTRY DOCTOR, WAKEFIELD MIXTURE, HAND- SOME DAN and BARKING DOG are superb mixtures designed to satisfy the most discriminating and vary- ing tastes of pipe smokers. LYON'S OWN, the premier of smoking tobaccos. BENSON AND HEDGES CIGARS, an excellent line of quality CLEAR HAVANA, LA YERBA, and EXCLUSIVE IMPORT SELECTION cigars. TIlMIN 440482 24 PFINTED BY DAVIS. DELNNEY, INC„ NEW YORK

/ 6 CO. LTD., INCORPORATED Incorporated in Virginia AND ITS SUBSIDIARY, BENSON AND HEDGES 9 MONTHS ENDED DECEMBER 31, 1954 Paid-in capital in excess of par value of capital stock: Balance at beginning of period .... .... ... ........ ........ $46,363,077 Excess of fair market value (as determined by Board of Directors ) over par value of shares of Philip Morris common stock issued to stockholders of Benson and Hedges, less applicable expenses..... 342,922 Adjustments due to redemption of preferred stock .._ 18,218 Balance at end of period .. .. ... ... ..... $46,724,217 I4;arnings reinvested or retained in the business: Balance at be~inning of period $53,443,174 Net earnings for period .. 9,098,982 62,542,156 Deduct, Cash dividends declared: On cumulative preferred stock: 4% Series ... .... .. 527,538 3.90% Series ................ 356,523 On common stock . . .. ... .. .. ....... .... 6,494,002 7,378,063 Balance at end of period (Note 5) .. $55,164,093 The accontt>unvin„, notes are an integral part of !he financial statements. 12 MONTHS ENDED DECEMBER 31, 1954 FISCAL YEAR ENDED MARCH 31, 1954 $33,305,848 $33,300,490 13,400, ( 5 1 13,057,229 18,218 5,358 $46,724,217 $46,363,077 $53,625,208 $49,896,484 11,375,276 12,421,638 65,000,484 62,318,122 707,372 725,111 477,493 484,074 8,651,526 7,665,763 9,836,391 8,874,94S $55,164,093 $53,443,174 TIMN 440480 22

We arc ,w'e that in the scientitic pre,c:nt un intini,ile Lnowletige of Otnr products and continuuus improve- ntent in processes are essential to our Company's future progress. Thus, in the past year we expanded activities in all fields of research-laboratory, produc- tion and consumer. In addition to our own efforts, we enlisted the services of many expert consultants. The new Marlboro is an example of how our in- tegrated research program worked in the development and marketing of a new product. While the Production Department, under the able supervision of Vice Presi- dent C. T. Ames, Jr., and its Engineering Department, headed by Christian E. Grosser, worked on perfecting the mechanics of the new machinery necessary to han- dle this product, the Research Department, directed by Dr. R. N. DuPuis, Vice President, conducted a thorough investigation of the filtration field to secure for Marlboro the exclusive filter that would provide easy draw, good taste and effective filtration. Simul- taneously, Leaf Vice President Wirt H. Hatcher, Chairman of the Filter Tip Coordinating Committee, formulated the quality Marlboro blend that would conie through the filter with flavor and mildness. Color specialists and packaging experts tested our every aspect of the package design. Our Market Research group, under Vice President George Weissman, sub- jected Marlboro to exhaustive consumer tests. Thus, at every turn research has been applied to this product to reduce the business risks normally attendant to a major venture such as this. Coordinated research will continue on this product as well as all others in our line. One of the most important projects of our labora- tories at this time is the analysis of smoke constituents. We feel this is basic to our fundamental objectives of giving smokers uniform high quality products. As a result of our efforts and with the utilization of modern instrumentation, such as our mass spectrometer, new and faster methods of identifying some of the known smoke constituents and also new techniques, which have already identified previously unknown smoke components, have been developed. The results of this work as it progresses will have wide application in our manufacturing processes, our leaf activities, our prod- uct structure and in the work of the Tobacco Industry Research Committee, whose Industry Technical Com- mittee Dr. DuPuis will head in 1955 TIMN 440469 (Upper le f t) Top executives of the Research and Development team: Robert J. Leahy; Dr. Carvitle V. Mace; A. E. O'Keeffe; Dr. R. N. DuPuis, Vice President; and Dr. Loyal H. Davis, Quality Control Director. (Lower left) Engineering Staff Chiefs, Matthew J. Slovic and A. E. Roop, Chief Engineer Christian E. Grosser, Garland H. Branch, E. E. Wagner. (Upper right) Smoking machines in our Richmond laboratories simulate human smoking for test purposes. (Lower riglit) A counter-current distribution unit 1 separates the components of smoke for analysis.

oz & CO. LTD., INCORPORATED /ncorporated in Virginia AND ITS SUBSIDIARY, BENSON AND HEDGES DECEMBER 31, 1954 MARCH 31, 1954 (:urrent assets: Demand deposits in banks and cash on hand ... $ 9,410,186 $ 11,291,918 Accounts receivable, less allowance for discounts and doubtful accounts 13,612,556 13,112,549 Inventories, at average cost (Note 2).. ... .... . 180,832,7 16 194,294,232 Total current assets.. 203,855,458 218,698,699 Current liabilities: Notes payable to banks . . .... .................. . . .. ....... .......... ...... 42,400,000 54,000,000 Cash dividends payable ... . ... . .... ............. .... ... ... ... ..... .... ... 2,459,668 2,458,326 Accounts payable and accrued liabilities .... .................... ... .. ....... 6,660,007 6,509,983 Federal taxes on income . .... 11,329,666 15,279,208 Total current liabilities ... .......... ..... ........ ...... ... ... .... 62,849,341 78,247,517 Net current assets. .. ........... .... ... .... ..... 141,006,1 17 140,451,182 Property, plant and equipment, at cost (less allowance for depreciation, December 31, $9,608,210; March 31, $8,550,663)...... .. 25,942,336 25,913,260 Investments in and advances to unconsolidated subsidiaries, at cost (Note 3) .. ................. .......... ........... .... ................... ........ . ... 1,470,308 408,044 Prepaid expenses and deferred charges ........ ........................ ..... 1,324,565 1,829,174 Brands, trade-marks and good will, at cost (results from acquisition of Benson and Hedges)... ..... 8,495,847 8,281,799 178,239,173 176,883,459 Vlr% Sinking Fund Debentures, maturing April 1, 1966 (sinking fund payments commence in 1956)... 32,000,000 32,000,000 I'Iinority interest in Benson and Hedges . .. ... . . ...... . ... ... ......... ...... 79,302 260,560 32,079,302 32,260,560 Net assets .... . ..... ... ...... ... ........ ..... . .. . .... .. ... $146,159,871 $144,622,899 Share n-,. ners' investment (Notes 4 and 5), represented by: Cumulative preferred stock, par value $100 per share ... ...... .... .... $ 30,723,800 $ 31,054,400 Common stock, par value $5 per share .... ................... .......... .. ...... 14,436,165 14,380,855 Paid-in capital in excess of par value of capital stock .... ......... 46,724,217 46,363,077 Earnings reinvested or retained in the business...:. ... .... 55,164,093 53,443,174 147,048,275 145,241,506 Less, Cost of preferred stock held in treasury ........ ......... 888,404 618,607 $146,159,871 $144,622,899 The ucconnpanyin;> notes are an inte.-ral part of the financial statements. TIMN 440479 21

P H 1 L I P M O R R 1 S & C O. LT D. I N C O R P O R AT E D ,fIM-S 440484

Treasury Department heads are, left to right: Alex F. Shennan, Manaser, Accoun ting Department; H. R.- Blum, Controller; W. F. Sperber, Mana,er, Budget Depart- ment; Earl J. Lee, General Super- visor - Machine Methods; W. H. Kittleman, Credit Manager. Committee meets to discuss Com- pany pension fund operations. From left to right: J. A. Hampson, Assistant Secretary; Cornelia Craig, Assistant Secretary; Henry Weimer, Manager, Insurance De- partment; L. C. Metzger, Tax Manager. FINANCE There were no events of unusual interest in the finan- cial affairs of the Company during the fiscal period. With the exception of the purchase of the necessary makinQ and packaging machines for the new Marlboro filter cigarette, there were no important additions to fixed assets. Bank loans at the year end totaled S42.400,000, a reduction of $11,600,000 from March 3(, 1954. This reduction was due almost entirely to the smaller size of the leaf inventory. At the year end, the Company held 439,224 shares of Benson and Hedges common stock which repre- sents slightly in excess of 99% of the total number of shares outstanding. The exchange offer under which your Company agreed to exchange one share of its stock for each share of Benson and Hedges' was term- inated on October 1, 1954. During the year, the ad- ministrative and accounting sections of Benson and Hedges were consolidated with the Company's, result- ing in operating economies and efficiency. Our new Australian subsidiary, in which we hold a 65% interest with the balance owned principally in Australia, will ultimately represent an investment on our part of approximately $2,500,000. Only a por- tion of this investment, which is included on the bal- ance sheet in "Investments and Advances to Subsidi- aries," had been made at the year end. 18 TIMN 440476

THE PERFECT PIPE TOBACCO I r tg:Vildand.Vello~' %ftiow„TmT!!!J'" Facroa~es PN MAoe4~NN ~V.LS ua M 5. A. QRR ' SEl 5 4 CO. EtTEp Mr`C B~ENO ~NC. ~ TIMN 440483

The Executive Committee meets to evaluate plans for the national distribution of Marlboro. and the sales and promotion proerams for the Philip Morris and Parliament brands. From left to right. O. Par},er htcComa,. President: Joseph F. Cullman. Jr._ Chairman of the Committee: and Alfred F. Lyon. Chairman of the Board. and modernization of our packaging. The Snap- Open Pack and the new Marlboro box are two initial successful examples. The formation of our Australian manufactur- ing subsidiary which will soon begin distribution of ci`zarettes in that area of the world. This is one result of our continuing search for additional business opportunities abroad. Full cooperation with the Tobacco Industry Research Committee, which is supported by the tobacco industry for the purpose of conducting impartial investigations of the relationship of tobacco usage and human health. In this latter connection, I would feel remiss if I did not once aoain state our position on this matter: "There is no conclusive laboratory proof of any kind. anywhere. linking the use of cigarettes with pulmonary diseases. There are certain purely statisti- cal associations which are not only the subject of much doubt in scientific circles, but also ci>uld apply with eyual, or perhaps even more, validity to other environ- mental factors in our present-day society. 'We, at Philip Morris, have full faith in the yuality of our product. wi1ich. for more th,tn 100 vear~. have L'Ome forth fr0m our factorie~ to bring plearsw-e, enjoyment and rVlaxation to millions of ,ntokers. \'`e have thmt ~;rn r(;rith th.rt thC intClli2enCe ,tnd lairurincfcdncs~ of our consumers will prevail in an atmosphere he- clouded by propaganda." It is with deep regret that we report the d:.ath of Mr. Geor-e P. Brauburger, former Director ar.d Coun- sel, who resigned from the Board early in 1954. He served the Corporation lovally and faithfu11v in hot`l capacities for many years. Mr. O. H. Chalkley. former President and C'hair- man of the Board. also resigned from the Board oiDirectors early in 1954. His experience in the tobacco business and sage advice durin:, his lon(, as;ociation with Philip Morris contributed substantially to the -rowt!i and success of the Corporation. On behalf of myself and the Board of Dinctor". I wish to take this opportunity to thank all the men and women of Philip Morris for their splendid co- operation and loyalty. The 5ubstantial contrihution they make to yotur Company's welfare and pruLlres~, is iaratefullv acknowlcd,-,ed. I'~~ , i,!cn r I cl' ru;ir~ l~" . ly;; TIMN 440464

AUDITED FINANCIAL .~iG_l.•Y/CllCG, <~l.Fh'JJJ/%'fX.f.fTc~l /py/.lILO?Ylp/Isty ..J CERTIFIED PUBLIC AccoUNT°aNT ~,5 ...~wK w~~»s ~.oav~,. `-esa+e ~,vo ~ousrcH ~ s or Aoc Foaa sw•~ •R..wc~aca~ -' .~e wHac~es~. .. ' ' 9i ~~OUe3 SfPiT~G . a~ SB~ac.. ®- .HO..nM 9w ' _~'+COn V` The Board of Directors and Share Owners of Philip Morris & Co. Ltd., Incorporated. STATEMENTS We have examined the consolidated balance sheet of PHILIP MORRIS & CO. LTD., INCORPORATED and its Subsidiary, BENSON and HEDGES, as of December 31, 1954 and March 31, 1954 and the related consolidated statements of earnings and surplus for the nine months' and twelve months' periods ended December 31, 1954 and for the fiscal year ended March 31, 1954. Our examination was made in accordance with generally aecepted auditing standards, an.i accordingly included Such tests of the accounting records and such other auditing procedures as.we %onsidered 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 & Co. Ltd., Incorparated and its subsidiary, Benson and tiedges, at December 31, 1>:;4 and Maroh 31, 1954 and the consolidated results of their operations for the nine months' and twelve mo~nths' periods ended Jecembzr 31, 1954 and for the fiscal year ended.March 31, 1954, in conformity with generally accepted accounting principles applied on a consistent basis. ~Z2 ~Gt.r.~o(•~0 .4 Yo^::, January 21, 1955. TIMN 440477 19

NOTES TO FINANCIAL STATEMENTS In 195-1 the Company changed its fiscal period from a year ending March 31 to a calendar year. The results of operations since the close of the last fiscal year ended 1,1arch 31. 1954. together with corresponding comparative ,tatemcnts for the years ended December 31 and March 31. 1954. are presented in the accompanyin, statements of earnin,s and surplus. The accompanying consolidated financial statements in- clude the financial statements of Benson and Hed_aes and its subsidiaries Subsequent to January 31, 1954. Inventories comprise: December 31. 1954 March 3 I. 1954 [.eaftobacco S169.113.214 `'s178.077,323 \lanufactttred stock 5?99.51 i 9.-124,489 Stock in process. revenue stamps and operating sup- plies 6.419.987 6,792.-120 S 180,832.716 $194.294,232 InveStments in and advances to unconsolidated sub- ,idiaries at December 31 include S1.037.628 advanced to Philip Morri, ( Australia ) Ltd., a newly-formed subsidiary. The Company tubticribed to approximately 65% of the capital stock of the Au~tralian company and is committed to an agure,ate investment of approximately $2,500,000. includin, the antounts advanced to December 31, 1954. Shares of the :australian company stock were issued in January. 19s~. Information concerning Philip Morris capital shares: Authoriied: Preferred. 3 17.1 56 shares ( in- cl udi n e 9.9 18 redeemed shares which may not be reissued ) Common. 3.000.000 shares & CO. LTD., INCORPORATED IncorporQted in Virginia AND ITS SUBSIDIARY, BENSON AND HEDGES Outstanding (includine treasury stock) : December 31, 1954 March 31, 1954 Preferred: 4% Series 181.856 183.855 3.90% Series .. 125,382 126,689 Common 2,887,233 2,876,171 [n treasury ( preferred ) : 4% Series .. 6.010 4,021 3.90% Series 3.937 2.619 The Company is required to set aside annually, in sinking funds, amounts sufficient to redeem 1,999 shares of pre- ferred .stock, 4% Series, at $105.50 per share, and 1.307 shares of 3.90rk Series at $100.75. Shares held in treasury at December 31. 1954 are suti'icient to fulfill sinking fund requirements for the ensuing year. hhe preferred stock is redeemable at any time, otherwise than through sinking funds, at $106.50 per share for 4% Series to Februar,v I, 1955 and S102.75 per share for 3.90°lc Series to May 1. 1958 and at diminishing amounts thereafter, but not less than $105.50 for 4% Series and S 100.75 for 3.90% Series, plus accrued dividends. Pre- ferred share owners are entitled to such amounts upon voluntary liquidation or to $100. per share plus accrued dividends upon involuntary liquidation. The terms of issue of the 25ie% sinking fund deben- tures include certain restrictions with respect to dividends (other than stock dividends ) on the common stock of the Company. and to the purchase, redemption or retirement of its capital shares. At December 31, 1954, approximately $36.240.000 of the earnings retained was free of such restriction. Under similar restrictions in the terms of issue of the cumulative preferred stock, the amount of earnings retained free of such restrictions was in excess of the afore-mentioned $36,240.000. Provision for depreciation of plant and equipment charged to costs and expenses aggregated $1.397,744 and $1.844,306, respectively, for the nine months' and twelve months' periods ended December 31, 1954, and $1.594,325 for the fiscal vear ended March 31. 1954. TIMN 440481 23

® ) .~---~_ N~Z F _ ~-.-~~ ~- ~ ~~ aa~~~ M~r'r ..C...~_....., ~ ...~ ~ WZA ® ® ~ t y r s i A R x x u w CE EF( ;r"1sii~ete 1€ t f iftttf~,C[.[[{ ~~ lit(tj[[[~LL I~ ~i0 We cordially invite our Share Owners and-the general public to visit these facilities and in- spect the modern pro- duction and processing equipment sp?cially de- signed for the manufac- ture of Philip Morris' fine quality products. l. 20th & Cary Street Factory-Richmond 2. Stockton Street Fac- tory-Richmond Richmond Green Leaf Stemmery 4. London Factory 5. Louisville Factory 6. Louisville Green Leaf Stemmery Executive Offices in 100 Park Avenue, New York City 8. Australian Factory 3. 7. .

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