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PHILIP MORRIS & CO., LTD., INC. 119 Fifth Avenue • New York, N. Y. OWNED BY 16,456 STOCKHOLDERS OPERATED BY 3,405 EMPLOYEES ml 'GXP.C~a~.1 O. H. CHALKLEY, Chairman J. E. ARCHBELL O. PARKER MCCOMAS GEO. P. BRAUBURGER H. E. RIDDELL L. G. HANSON K. H. ROCKEY A. E. LYON W. B. RYAN, JR. J. J. SWITZER ' ~GCEX.1 A. E. LYON, President O. PARKER MCCOMAS, Vice-President G. J. HENN, Vice-President L. G. HANSON, Vice-President & Treasurer RAY JONES, Vice-President W. C. FOLEY, Vice-President C. T. AMES, Vice-President T. F. GANNON, Vice-President E. W. DINWIDDIE, Vice-President W. H. HATCHER, Vice-President L. C. METZGER, Secretary W. E. LIESETRAU, Vice-President W. S. RouLHAc, Assistant Treasurer H. R. BLUM, Assistant Secretary - [ *nz . • • . . . . . . . Guaranty Trust Co., 140 Broadway, New York, N. Y. • • . . • . . . . . . Commercial National Bank & Trust Co. of New York . Conboy, Hewitt, O'Brien & Boardman, 39 Broadway, New York Lybrand, Ross Bros. & Montgomery, 90 Broad Street, N. Y. I - -~.~

uring the fiscal year 1947 your company's sales were $170,905,550, less than the peak year 1945 when large quantities were being shipped to the Armed Forces, but nearly twice the $87 million sales of pre-war 1941. Export of Philip Morris products, other than those delivered to the armed forces overseas, amounted to 14% of the total goods sold in fiscal 1947 as compared to 4.3% in fiscal 1946 and 2.9% in fiscal 1945. At\'farch 31st our current assets were $109,227,074 and current liabilities were $14,640,322, indicating net working capital of $94,586,752. Included in current assets is a leaf inventory notable for its high quality and moderate cost. Net profits per common share were considerably lower than in the preceding year and amounted to $2.04 per share of common stobk. Believing that the conditions which affected our net in the past year were unusual, and that eventualities had been amply provided for in a contingency reserve, the directors distributed during the year 85% of these net profits in the form of the regular $1.50 dividend and a 25¢ extra dividend, The past year has been one of great importance as a period of consolidation in the life of your company. We have overcome difficulties which accumulated during the time of our greatest expansion and have completed changes, planned in the war years, leading to greater efficiency. A period of change is always a period of high cost and last year's profits were unfavorably affected by external conditions, including a lack of materials for packing and a narrow profit margin resulting from price controls. Relief from these condi- tions did not come until mid-year and although the second half year showed improvement, it could not entirely offset the adverse influences of the first half. In order to view more clearly the results of the year's operations and the outlook for the years ahead, I would like to establish a perspective by reviewing the past. NET INCOME BEFORE FEDERAL INCOME TAXES PROVISION FOR THE FUTURE O FEDERAL TAXES ~ PREFERRED DIVIDENDS ~ COMMON DIVIDENDS ~

he growth of your company since 1937 has been unprecedented. Sales have risen from $55.6 million in the 1938 fiscal year to the present level of $171 million. This increase of about 208% coincided with a 120% increase in the industry as a whole. The normal difficulties attendant upon such growth were magnified in our case during the war years. Leaf purchases were limited by allocations based on consumption in a prior period, while our stocks were drained by larger sales. The demands of a country at war, increasing daily, made our need of tobacco for aging greater than ever before. Finished goods prices were fixed but costs were steadily mounting. Heavy financial requirements of expanding production were accentuated by a narrowing margin of profit on sales. Manpower demands of war production and the fighting forces caused upsetting changes in our personnel and reduced our sales force. While war conditions were troublesome, other serious problems have appeared more recently. Within the past eighteen months industry has been shaken by sudden changes in the shift of the nation from war to peace-time tempo. In the fall of 1945 the end of the enormous requirements of the. armed forces converted cigarette shortages to surpluses almost overnight and brought do- mestic stocks out of hoarding. In 1946 the end of controls in the raw tobacco inarkets brought wide advances of leaf prices. The price rise was apparently arrested in November and more normal markets are anticipated by 1948. You will be interested to know how we met these problems and our operations will be dis- cussed later in this report. To summarize the results: 1. We have retained our gains in domestic sales and delivered to our customers in the past year 29 billion cigarettes, not far below our wartime volume when cigarettes sent to the fighting fronts were added to our domestic deliveries. 2. Our financial condition is sound and compares favorably with the industry as shown in the table on pages 16 and 17. 3. Our inventory of leaf tobacco in quality and age we believe is second to none. In cost it is below the current market. In quantity and quality it is sufficient to take care of increased con- sumption. I

400 I 375 350 325 300 275 250 225 200 175 125 100 75 50 25. ,~/J~l'~k~~%lC:LLC3yG C~ Ci!!y.(2~'~E:LLE/y (9K&z 1937- 900 ) 0( 1932 1 1933 ~ 1934 1 1935 1 1936 ~ 1937 ~ 1938 ~ 1939 1940 / 1941 ~ 1942 ~ 1943 4. Operating efficiency is on a high level and our margin of operating profit has increased 25% as compared to last year. 5. Our earnings amply cover our regular dividend of $1.50 per share. ~ 6. Our sales organization, consisting of Philip Morris employees serving the distributors and 0 .~ ~ retailers who handle our products, has been expanded and is now well equipped to meet the t.~ ~ keener competition of the post-war market. 0 ~ 5

Some Philip Morris tobaccos are aged for eight years. 6

I MR. W. H. HATCHER, VICE-PRESIDENT and chief of the leaf de- partment, is known throughout the plantation areas and the auction markets for his incisive knowledge of bright and burley quality. A discriminating buyer, during the market season from June to March he seldom relaxes except for occasional outings with dog and gun over the fields of his farm or in the duck marshes of Virginia. MR. J. E. ARCHBELL came from a farm in eastern Carolina forty-four years ago to work in a tobacco company in New York and rapidly advanced to be super- intendent of its Brooklyn plant. He went to the Middle East in 1912 and in the Twenties became head of the largest American concern buying oriental to- bacco there. He returned' in 1928 to retire, a young man. Inactivity didn't suit him and he joined our company in 1931 to work with Mr. Hatcher in Rich- mond. The selection and purchase of our Turkish and Latakia tobaccos is under his direction. His wide experience in all phases of the production of fine ciga- rettes and smoking tobaccos is often drawn upon by his fellow directors in setting the policies of the company. His office is in our main plant and almost every evening finds him in his Virginia country home when he is not travelling on company business. he quality of our blends is our greatest indirect sales'appeal. Achieved even during the war, we see clear sailing ahead in this respect today. There are signs that in cigarettes, as in everything the con- suming public buys, a return to pre-war habits of discriminating on the basis of quality has begun and our advertising continues to feature Philip Morris quality.

our company's financial policy has always been affected by the necessity to build stocks of leaf tobacco and increase productive capacity in line with the tremendous growth in sales. Where pos- sible it has been our policy to meet expansion requirements out of income. For this reason our divi- dend payments have been a moderate proportion of net income. In recognition of the stockholders' undistributed equity in our net earnings, we issued a stock dividend during the late Thirties, thus retaining in the business the funds which a cash dividend would have withdrawn. Our continuing rapid growth, however, was such that stockholders were given the opportunity to subscribe addi- tional funds through preferred stock four times during the past ten years. The first three of these issues have either been converted into common stock or refunded by the presently outstanding 4% preferred. The $3.60 preferred outstanding was issued last year. At the peak of the war demand when tobacco prices were making new highs every year, your directors found that additional funds could be used again to the interest of the stockholders. An issue of preferred stock was planned principally to provide the increased capital funds necessary to finance the higher price of tobacco, the increased volume of revenue stamps and the larger in- ventory requirements of the company occasioned by growing sales. The opportunity to purchase needed tobacco on favorable terms came in advance of the stock issue and funds were borrowed from banks on short term. Conditions in the tobacco industry were undergoing marked change during the long period of preparation and registration of the new preferred stock issue which was made necessary by the laws and practices governing financial markets. As it happened, the offer- ing of the preferred stock coincided with the end of purchases for the armed forces as described earlier in this letter. The income and production figures covering the period immediately preceding the offering of this stock included the effect of military orders. With the sudden ending of this de- mand, sales of the entire industry dropped sharply, much more than could have been expected be- cause of the season of the year. Your management believed that the stockholders should be apprised of this situation and concurrently gave them the option to cancel their subscriptions. All but 19,543 shares were cancelled. This event led your company to make its first substantial long term loan. I 8

j The management might well have continued to make short term loans inasmuch as the lenders of funds to be replaced by the capital subscription were quite happy to have the loans remain. But first, because the growth of the company had made its inventory requirements permanently higher, and second, because the nature of its inventory holding is long term due to the aging period, it was believed wisest to substitute a long term debt for short term notes payable to banks. A $32 million issue of debentures was placed with the Equitable Life Assurance Society of the United States, as described in the annual report last year. It was taken on the most favorable terms and lowest interest cost ever advanced by a large finan- cial institution to a member of the tobacco business community up to that time. MR. L. G. HANSON, the chief financial officer of the company, has been with us for twenty-three years. Treasurer and Director since 1934, he became Vice- President during the latter weeks of the war. His fellow directors rely upon the soundness of his judg- ment in matters affecting the financial policy of your company. We entered the 1947 fiscal year in a sound condition. During that year we added over $1.4 million to the company's productive equipment and at the same time improved its working capital position. This improvement in liquid condition was accomplished through a reduction of manu- factured stocks and accounts receivable and the application of the $32 million bond issue to the reduction of bank loans and outstanding long term debt. Current assets on March 31st, 1947 were more than seven times current liabilities and our net working capital was at an all time high of $94,586,752. CONTINGENCY RESERVES Your directors have deemed it provident to set aside the sum of $500,000 out of the net earnings FJ 0 44 co ~ rs 0 0 cr- a. 9