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EARNINGS RETAINED_F FUTURE OPERATION &-RlSK . Per Cent of Total Tax-Paid Cigarette Production" EARNINGS RETAINED FOR FUTURE OPERATION & RISK PROFIT SHARlW- EMPLOYEES {BI 1948 1952 Five Largest Standard Size 90.4% ' 74.6% Total King Size 5.7% 18.6% All Other 3.9% ;I 6.8% Total 100.0% i 100.0% *Figtu•e s f rom Printers' lak, issues of Jurunny 7, 1949 cmcl Jannury 9, 1953. Satisfied that a new trend was established in the industry, we prepared orQanizationally and promo- .y tionally to meet the challenge. Last year our new Vice President, Harry W. Chesley. Jr. coordinated sales, advertising and sales promotion campaigns. The management of the sales force, supervising of sales promotion and the direction of advertising continue under the direct supervision of department heads, and the sales field force was reorganized on the basis of seven regional sales manaqers who were Qiven greater responsi- bilities. ~ ~ During, the year we completed the introduction of DUmhill as a king size brand to compete in all national markets. Experience gained when we ap- plied Dunhill promotion to market after market helped set the pattern to introduce Philip Morris Kin~ Size overni~ht in all national markets last January 21. Sales of Dunhill are directed by a sepa- rate organization within our Sales Department. CASkl: DIVIDENDS TO SHARE OWNERS TAM ON INCOME*40- ,;(fEOERAL & STATE).

Like hosts of other happy couples, Mr. and Mrs. Desi Arnaz share Philip Morris in their moments of companionable relaxation. 10 TIMN 440496

We have increased our sales promotion and ad- vertising efforts. Our TV show "I Love Lucy" has had a particularly remarkable public acceptance. When Lucy had her television baby on January 19, approximately 44 million people watched Lucy go to the hospital. And the following week an even larger audience watched our commercials introduc- ing Philip Morris King Size. Recognizing that almost everyone knows about Lucy and loves her, we signed a contract which insured our sole spon- sorship of "I Love Lucy" for two and one-half years. Our advertising messages through magazines, Sunday comics, daily newspapers, radio and televi- sion reach almost all of the.forty-five million homes in America each week, totaling in fiscal 1953 more than three billion selling messages for Philip Morris, Dunhill and Marlboro cigarettes. Our sponsored programs are: Radio-My Little Margie, Sunday, CBS, 8:30 PM; Philip Morris Playhouse, Wednesday, CBS, 9:00 PM; TV - I Love Lucy, Monday, CBS-TV, 9:00 PM; My Little Margie, Thursday, CBS-TV, 10:00 PM; My Hero, Saturday, NBC-TV, 8:00 PM. This schedule indicates original broadcast times for the Eastern time zone. I LOVE LUCY-Lucy and Ricky Ricardo entertain their landlords, Ethel and Fred Mertz (Vivian Vance and William Frawley). MY LITTLE MARGIE-Margie (Gale Storm) saves her boyfriend (Don Hayden) from her irate dad (Charles Farrell). MY HERO-Bob Beanblossont (Robert Cummings), Julie Marshal (Julie Bishop) and the boss, Mr. Thackery (John Litel) are in trouble. (Sponsored by Dunhill King Size cigarettes.) PHILIP MORRIS PLAYHOUSE ON BROADWAY - Stars Louis Calhern, Dorothy McGuire and Richard Carlson accept Philip Morris cartons from Johnny, while announcer Joe King and producer- director Charles Martin wait for the radio drama to go on the air. TIMN 440497

T~r~T~~~T~'ACTTTB T~TCr AZ`TD BI~Z'R IBTiT ~ TOl~T We completed our building program which added substantially to our production facilities. The increase in our overall productive capacity and the maintenance of efficiency in our plants made possible the prompt national distribution of Philip Morris King Size in addition to Dunhill and the Philip Morris standard size. Without the expanded facilities it would hardly have been possible for us to convert a sufficiently large portion of our plant to the manufacture of king size cigarettes so that the factories could keep up with the achievement of the Sales Department in securing almost over- nic,ht national distribution for our new brand. LThis achievement was also aided by our 50 strategically located warehouses from which rapid distribution of fresh cigarettes was made to the jobbers and distributors who serve the 1,300,000 retail sales outlets. In January a curious passer-by wonders about Dunhill X. After the secret conversion of entire manufacturing floors to produce Philip Morris King Size, secret distribution to our strategically located warehouses was accomplished by coding the cases in this wav. From ou- ,+arehouses it was onlv a niatter of hours to supply the market. TIMN 440498 12

The initial conversion of manufactur- ing machines from production of standard-size cigarettes to king size cigarettes was a major accomplishment in a short period of time in Richmond and Louisville. Here Spencer T. Jones, Louisville Factory Manager, reviews the changeover with Harry Gibbs, Lead Making Machine Adjuster. Instructing operator Alta Shain in the operation of one of the packaging machines converted to king size. This packaging assembly for the Philip Morris King Size wraps a red tear tape with the cellophane for easy package opening. Spencer Jones and Charles Hunter, Lead Pack- ing Machine Adjuster, discuss the best means of converting the packaging machine to king size. 'I'IMAN 440499

BENEFITS TO SHARE OWNERS AND GOVERNMENT FROM PHILIP MORRIS SALES MILLIONS OF DOLLARS 45 60 75 90 105 120 135 150 SHAREOWNER BENEFftS' I ~m 165 CASH DlVIDEI/I)S EARNINGS RETAtNEp . GOVERNMENT BENEFITS _TATAL TAXES E(CISE TRXES ON INCOME (FEDERAL & STATE) *AFtE& TAX GARiGY-BACK OF $700,000 . TIMN 440500 BORROWED FUNDS, LEAF INVENTORY AND ADVANCE PAYMENT OF EXCISE TAXES 200 LEAF INVENTOR J FUNDED DEBT AND BANK LOANS ~ ~ ADVANCE PAYMENT OF EXGlSE TAXES F-7-- R 1947 1948 1949 1950 FISCAL YEARS ENDED MARCH 31st 1951

PHILIP MORRIS BALANCE SHEET STATISTICS (000's omitted) Bc,lancc s,1 c-cr.s ca ,y1arrh 31. 1953 1952 l 1951 1950 1949 I 1948 1947 1946 1945 ASSETS Cash & Marketable Securities $ 10,355 $ 11,136 $ 9,115 $ 8,652 I i $ 5,264 $ 4,857 J $ 4, 072 $ 2,486 $ 2.320 Receivables 12,050 11,015 I 11,935 10,810 9,173 7,196 6,391 7,914 10,063 Inventories 193,747 i 221,453 220,839 159,611 132,444 93,913 1 98,812 i 112.745 87,280 Other Current Assets 700 - - - - - ~ - ', 1,867 206 Total Current Assets 216,852 j 243,604 241,889 179,073 146,881 105,966 ' 109,227 125,012 99.869 Net Property Account 21,692 19,916 10,360 8,971 8,301 j i 6,828 , 6,468 4,989 5,110 Prepaid Items & Other Assets 1,761 ~ 1,535 1,337 1,051 1,117 ~ 1 937 1,049 1,391 1,929 - Total Assets 240,305 ; I 265,056 , 253,586 189,095 156,299 ~ I 113,731 116,744 131,392 106,908 Number of Employees 3,841 3,707 3,786 3,420 3,554 3,285 3,405 3,904 4,753 LIABILITIES Notes Payable $ 60,000 $ 85,000 $ 75,000 $ 55,500 1 $ 30,000 ~$ - ;$ 5,500 ~ I$ 44,000 $ 16,000 Federal Taxes - 11,520 ---- 15,414 ~ ~ 17,760 9,415 1 7,811 i 3,431 ; 3,440 I 2,681 I 6,992 Accounts Payable 7,525 2,773 3,020 ' 5,057 6,773 5,753 3,866 i 2,574 5,047 Other Current Liabilities 2,811 5,818 ~ 5,667 I 3,402 2,987 1,797 ~ 1,834 1,369 i 2,255 Total Current Liabilities 81,856 ~ 109,005 j 101,447 73,374 47,571 ; 10,981 1 14,640 ~ 50,624 30•294 Long Term Debt 32,000 ~ 32,000 32,000 32,000 32,000 32,000 32,000 ' 11,500 11,300 - - ~ Reserves for Contingencies, etc. - 237 237 500 - 250 1 Net Worth 126,449 124,051 120,139 83,721 76,491 ! 70,513 69,604 ' 69,268 65.064 Total Liabilities and Capital 240,305 265,056 253,586 189,095 ; 156,299 i 113,731 116,744 131,392 106.908 Net Working Capital 134,996 134,599 140,442 ; 105,699 99,310 94,985 94,587 74,388 69,575 Net Asset Value Applicable to Common Stock-Per Share 38.99 37.85 38.01 32.40 28.04 24.80 23.95 23.68 22.55' *Adjusted--stock split 2 for 1, Julp 10, 1945. + TIMN 440501

COMPARISON OF PHILIP MORRIS OPERATIONS WITH THE AGGREGATE FIGURES OF ITS FOUR MAJOR COMPETITORS (000's omitted) i 1945 i 1944 2,320 1 $ 2,455 10,063 11,017 87,280 206 99,869 li 87,710 -- -r 51I0 1 , 3,471 1,929 '; 3,304 L06,908 , 94,485 4,753 3,881 16,000 $ 5,000 6,992 6,028 5,047 6,952 2,255 1,645 30,294 19,625 11,300 11,500 250 65,064 63,360 106,908 69,575 94,485 68,085 22.56* 21.94* 1952 1951 Philip Morris As % of Sales Competitors As % of Sales Philip Morris As % of Sales Competitors (1) Sales 100% $2,764,751 100% $306,698 100% $2,485,163 fore Taxes Net Income Before 22,228 7.06 231,802 8.38 28,347 9.24 233,202 (2) Taxes 10,883 ,883 3.46 138,634 5.01 ~ 15,720 5.12 141,096 Net Income 11,345 3.60 168 93,168 3.37 I 12,627 4.12 92,106 Total Investment (Bank Loans, Funded Debt, Capital & Surplus) 218,449 69.37 1,832,123 66.27 241,051 78.60 1,751,265 Inventories Total 193,747 6L53 1,693,506 61.25 221,453 72.21 1,614,16C Net Income Before Taxes plus Interest .... as Per Cent of Total Investment ..... $ 25,294 11.58% $ 253,746 13.85% $ 32,102 13.32% $ 252,577 Net Income as Per Cent of Net Worth 8.97 9.18 10.18 Analysis of Total Investment Debentures and Bank Loans $ 92,000 42.12% $ 816,670 44.58% $117,000 48.54% $ 808,053 Preferred Share Owners 31,005 14.19 158,374 8.64 31,385 13.02 158,374 Common Share Owners & Surplus 95,444 43.69 857,079 46.78 92,666 38.44 784,838 (1) Includes Revenue Stamp Taxes (2) Includes Federal and State Taxes on Income and Federal Excess Profits Taxes 1953 ANALYSIS OF PHILIP MORRIS OPERATIONS POSITION AND FINANCIAL for the fisca: yeci: ended March 31 Net Sales $314,895,000 ANALYSIS OF OPERATIONS Net Sales 100% Cost of Sales: Revenue Stamps 49.94 Other 32.54 Gross Operating Profit 17.52 Shipping, Selling, General and Administrative Expense 9.53 Net Operating Profit 7.99 Other Income .08 Total Income 8.07 Income Deductions 1.01 Net Income Before Taxes 7.06 Federal and State Taxes on Income 3.46 Net Income After Taxes 3.60 Net Income as Per Cent of Net Worth 8.97 ANALYSIS OF FINANCIAL POSITION Current Liabilities as Per Cent of Tangible Net Worth 64.73 Total Liabilities as Per Cent of Tangible Net Worth 90.04 Total Debt to Total Investment (including Bank Loans) 42.12 Total Debt to Inventories 47.48 Tangible Net Worth to Total A~,et, 52,62 Long Term Debt as Per Cent of Net AVorl in '2 ( apit;i ) 23-%0 TIMN 440502

Slatt'n~rnt~ ~,t in, RECORD OF PHILIP MORRIS OPERATIONS (000's omitted) ti,<<il ~~tur, t-i, 1953 1952 1951 1950 1949 1948 1947 1946 1945 1944 Net Sales (including Revenue Stamps) $314,895 , $306,698 ; $305,804 $255,752 $228,372 $171,258 $170,906 $178,686 $185,299 $177,901 Cost of Sales (including Revenue Stamps) 259,733 I ; 248,977 i 245,937 208,985 188,656 146,694 148,412 159,799 159,051 152,290 Gross Operating Profit 55,162 i 57,721 59,867 46,767 39,716 24,564 22,494 18,887 26,248 25,611 Shipping, Selling, General & Administrative Expense 29,989 ' 25,320 22,497 19,470 17,499 14,641 12,752 10,953 12,080 12,507 Operating Profit 25,173 ', 32,401 37,370 27,297 22,217 9,923 9,742 7,934 14,168 13,104 Other Income 237 151 99 172 101 : 588' 683(2) 156 267 149 Total Income 25,410 i 32,552 37,469 27,469 22,318 10,511 . 10,425 8,090 14,435 13,253 Income Deductions 3,182 :1 4,205 2,382 2,302 1,658 985 2,174"' 1,476'' 940"' 672 Net Income (Before Taxes) 22,228 ', 28,347 35,087 25,167 , 20,660 9,526 8,251 6,614 13,495 12,581 Federal and State Taxes on Income 10,883`9' 15,720 18,398 9,864 8,162 3,491 3,293 466") 6,692 5,930 Net Income 11,345`e' 12,627 16,689 15,303 12,498 6,035 4,958 6,148"' 6,803 6,651 Cash Dividends Declared (Common) (Preferred) 7,342 1,232 7,341 1,244 6,995 1,253 5,996 789 5,246 818 3,497 836 3,498 863 2,998 817 4,497 866 4,496 844 Net Income Retained in the Businessfe' 2,771 4,042 8,441 8,518 6,434 1,702 597 2,333 1,440 1,311 Per Share Earned on Common Shares Outstanding 4.13 4.65 6.62 7.26 5.84 2.60 2.05 2.67 5.94 5.82 Common Shares 2,448,121 2,448,121 2,331,544 1,998,467 1,998,467 1,998,467 1,998,468 1,998,470 999,235 999,2 35 1 2 3 4 5 Includes $409,890 profit on sales of securities after deduction of $137,000 of Federal income taxes thereon. Including renegotiation recovery of $310,000 in connection with government contracts and net premium of $133,865 received on sale of 25/s9o Debentures. Including prentium of $472,000 paid on retirement of 3% Debentures, and provision of $500,000 for contingencies. 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"1( - Series. Reflects a refund of Federal Excess Profits Taxes of prior years under carn-back provisials of the Inten:al Revenue Code amounting to $1,867,528 and a credit of $300,000 representin, excessive provisions of prior years' taxes. Subject to minor surplus adjustments (except in 1951 when 5~/~ stock diiidend na.i declared). After stock split 2 for 1. Including provision of $250,000 for post-war and other contingencies. Reflects a refiuid of Federal Excess Profrts Tax of prior rear tunder can.r-bacl; prolisions of th(, Imernal Rerenue Code amounting ta 5700,000. TIMN 440503

';)'iKING CAPITAL The sources from which we got our working funds and the uses made of them. Fiscal Year Ending March 31, 1953 Fiscal Year Ending March 31, 1952 Fiscal Year Ending March 31, 1951 Workin`~ Capital at Beginning of Year ............................ $134,599,804 $140,442,262 $105,698,609 /~ i)DITIUNS: Net earninLs for year ............................................ $11,345,200 $12,627,140 $16,689,144 Depreciation of plant and equipment .................... 1,646,989 763,630 414,150 Sale of Capital Stock ............................................ 28,492,956 Total Additions .................................... $12,992,189 $13,390,770 $45,596,250 I)F;I)UCTIONS: C'ash dividends declared ...................................... $ 8,574,029 $ 8,585,624 $ 8,247,679 M-i Cost of Preferred Stock acquired .......................... 373,087 129,254 516,026 Additions to property, plant and equipmcnt.......... ~ 3,495,004 320 238 10 1 802,666 , , , ~ Misccllancous ...................................................... 153,435 198,112 286,226 .P .P C Total DeductlonS .................................. $12 595 555 $19 233 228 852 597 $10 C!1 , , , , , , O Net Rertirctrmn or Addition to Working Capital.... $ 396 634 458 842 $ 5 $ 34 743 653 .P , , , , , U'orkin,_, Capital at ]vlarch 31 .......................................... $134,996,438 $134,599,804 $140,442,262 15