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.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