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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

Provided for taxes on income 2,550,000 3,200,000 Available from usual operations for dividends and provision for future needs of the business 4,497,694 5,409,085 But in each year there were charges of an unusual nature which were paid or set aside out of income: Losses from termination of war and reim- bursement of stockholder costs arising from subscription cancellations on 3.60 pfd $517,222 Premium paid on retirement of 3% debentures $472,000 And in each year there were credits or sums received not in the ordinary course of business: Refund of excess profits taxes 1,867,528 Excess income tax provision prior years 300,000 And the balance set aside for future business needs was 2,333,340 597,064 t,~ of the year just ended in order to create a reserve to take care of eventualities and leave future earn- ings free of contingent charges. Among the possible charges provided for are the expenses to the company which may be incurred in the settling of claims described in some detail in the pros- pectuss of Jan. 16, 1946 under "pending litigation." 10

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ii outstanding part itt the success of Philip Morris during the last ten years has been played by the men of the leaf and blencling department. \Ir. Ifatcher, a vice-hresident, and \Ir. Archhell, a direc- tor of the company, have worked together in close cooperation since thev, with Mr. Dinwiddie, our tobacco blending exhert, origiuated the 1'hilih Morris English Blend in 1932. Much of our success has been duf° to their ability to maintain our standard of quality over the years. Because of the variability of weather, tobacco from the same seed grown in the same ground by the same fanner will differ sufficiently from year to year to affect its taste. Therefore at the time of the making of a cigarette there must be on haind not only the proper amount of well aged tobacco of maiiv types but also a duplication of these types from at least three crop years. This is necessary to iitstu'e uuiforinitv of blend. To anticipate in the auction markets requirements for manufacturing for years ahead and to buy with unerring accuracy quantities of aged tobacco of proper grade and quality is always difFi- cult. It is even more difficult with the added hroblem of a large increase in sales from year to year. It is to the credit of this branch of our business that the quality of Philip Morris English Blend ciga- rettes is just as high today as at the time of the origination of the blend. Tlie uncii of our leaf c1ehairtuleiit have a knowledge of tobacco which extends over more thaii two generations and covers the entire world. Owing to wide experience with tobacco markets our leaf purchasing problems did not become acute until the,complications caused by government allocations and the rising prices of raw tobacco brought by the war years were upsetting the entire industry. During 1945 we bought a substantial portion of the tobacco which had been owned by the Axton Fisher Tobacco Company. We were able to select from it large quantities of high quality and 12

These machines, by means of alternate application of high vacuum and steam, restore moisture to the tobacco which has previously been dried and aged, thus giving the best texture for machine handling. The machines accomplish in a few hours what formerly required weeks. The vacuum is so perfect that when a machine is closed and the vacuum applied, to use the words of our foreman, "all the men in Richmond couldn't get the hogshead out." well aged leaf to use in the immediate production of the additional cigarettes necessitated by the growth of the company's sales. Without it, inventory of aged leaf would have been dangerously reduced. Its use in the critical period just passed has made it possible for your company to achieve today an aged tobacco inventory outstanding in the industry in terms of the company's quality and production requirements. Thanks to this fortunate acquisition we came into the year 1946 with enough tobacco of Philip Morris quality to enable us to be selective in our purchases of raw tobacco in the crop season just concluded when prices reached an all time peak. Our inventory costs are well below those price levels and the company's inventory position will permit us to take advantage of any price recessions in making further purchases. 13

he manufacturing department of your company is under Mr. C. T. Ames, Jr., Vice-President in charge of produc- tion. In 1937 this department was lo- cated in our main plant in Richmond which had 213,000 square feet of floor space. By purchase and building, (some of the building in the difficult war years ) we have expanded to our present size with two complete pro- duction units in Richmond and one each in Louisville and London, Eng- land. MR. C. T. AMES, JR., VICE-PRESIDENT in charge of manu- facturing, came with us in 1935. Beginning forty years of experience in cigarette making as a factory worker in a large tobacco company, he started up the management ladder when he was made packing foreman in 1910. By 1919 he was plant superintendent and continued in a managerial capacity thenceforth. The investment in land, machinery, and buildings with 962,000 square feet of floor space now operated, stands at $6,468,421, after deduction of reserves. This compares to $1,513,914 of net prop- erty investment in 1937. Annual deductions, now aggregating $3,370,020, are made to provide for replacement of equipment when it wears out or when better, more efficient machines may be de- veloped. Finished Philip Morris products might be compared to the dishes prepared by a fine chef. Assembling the best ingredients is the starting point. Skill and imagination are combined in the blending, flavoring and making, to reach in the end the pleasurable taste giving the greatest satis- faction. When cigarettes were made by hand, excellent quality could be achieved but only at a cost prohibitive to the general public. Our application of the science of mass production and lab- oratory cleanliness to the art of cigarette making has added uniformity to the excellence of the cigarette maker's best work and has brought vintage tobacco within the range of all smokers. Although tobacco prices on the average have risen 78% and wages have more than doubled, manufacturing efficiency and an increase in volume have made up enough of the increase in the 14

A TEN YEAR RECORD OF PHILIP MORRIS OPERATIONS Statements of Income for the fiscal years ending March 31. (000 omitted) ~ OPERATING PROFIT (1) Disregarding a stock dividend of one-half share of Common Stock for each share of Common Stock. Earned Surplus charged $2,597,950.00 for shares of Common Stock issued with respect to this dividend. (2) Including provision of $250,000.00 for post-war and other contingencies. (3) Including claim in amount of $1,867,527.76 for refund of federal excess profits taxes of prior years, arising under the carry-back provisions of the Internal Revenue Code, and excess provision of $300,000 in prior years for federal income taxes. (4) Including charge of $492,221.95 for losses arising from termination of war, less amount thereof charged against provision of $250,000.00 for post-war and other contingencies. (See Note 2). Also including charge of $275,000.00 for reimbursement of withdrawing subscribers in the purchase of subscription rights to shares of Cumulative Preferred Stock, 3.6070 series. ,(5) Includes recovery of $310,000 in connection with government contracts, net premium of $133,865 received in sale of 2%J Debentures, 7) Subject to minor surplus adjustments. NET SALES (including Revenue Stamps) OST OF SALES (including Revenue Stamps) ROSS OPERATING PROFIT SHIPPING, SELLING, GENERAL & ADMINISTRATIVE EXPENSE OTHER INCOME TOTAL INCOME INCOME DEDUCTIONS NET INCOME (before Taxes) FEDERAL AND STATE TAXES NET INCOME TOTAL DIVIDEND PAYMENTS- CASH NET INCOME RETAINED IN ; THE BUSINESS (7) and profit of $77,200 on sale of real estate. ) Includes premium of $472,000 paid on retirement of 370 Debentures, and provision of $500,000 for claims, litigation and contingencies. 1938 1939 1940 1941 1942 1943 1944 1945 1946 1947 $55,613 $64,595 $73,344 $87,352 $112,565 $141,047 $177,901 $185,299 $178,686 $170,906 41,605 48,088 56,469 67,639 87,175 113,682 152,290 159,051 159,799 148,319 14,008 16,507 16,875 19,713 25,390 27,365 25,611 26,248 18,887 22,587 6,487 7,979 7,191 9,149 10,884 12,420 12,507 12,080 10,953 12,845 7,521 8,528 9,684 10,564 14,506 14,945 13,104 14,168 7,934 9,742 430 108 131 161 193 183 149 267 (3)2,323 (5)683 7,951 8,636 9,815 10,725 14,699 15,128 13,253 14,435 10,257 10,425 584 551 675 594 445 515 672 (2)940 (4)1,476 (6)2,174 7,367 8,085 9,140 10,131 14,254 14,613 12,581 13,495 8,781 8,251 1,704 1,534 1,704 2,771 6,462 7,682 5,930 6,692 2,633 3,293 5,663 6,551 7,436 7,360 7,792 6,931 6,651 6,803 6,148 4,958 3,115 (1)4,004 4,455 4,549 5,103 5,091 5,340 5,363 3,815 4,361 2,548 2,547 2,981 2,812 2,689 1,840 1,311 1,441 2,333 597 A TEN YEAR RECORD OF PHILIP MORRIS OPERATIONS Balance Sheets at March 31. (000 omitted) ``" ASSETS Cash and Marketable Securities $ 1,082 $ 1,501 $ 1,529 $ 9,524 $ 3,158 $ 3,175 $ 2,455 $ 2,320 $ 2,486 $ 4,024 Receivables 3,093 3,705 3,854 5,172 6,255 8,219 11,017 10,063 7,914 6,391 Inventories 20,915 27,295 32,038 34,876 53,143 70,570 69,948 87,280 112,745 98,812 Oth t A t C 102 290 4 206 1 867 er urren sse s - - - - - , , Total Current Assets 25,090 32,501 37,421 49,572 62,556 82,066 87,710 99,869 125,012 109,227 Net Property Account 2,438 2,885 2,783 3,099 3,729 3,723 3,471 5,110 4,989 6,468 Prepaid Items & Other Assets 1,713 1,757 2,051 2,044 2,534 3,286 3,304 1,929 1,391 1,049 Total Assets 29,241 37,143 42,255 54,715 68,819 89,075 94,485 106,908 131,392 116,744 LIABILITIES Notes Payable 8,850 7,000 9,000 52 8,000 - 5,000 16,000 44,000 5,500 Federal Taxes 1,602 1,426 1,700 2,706 6,212 7,917 6,028 6,992 2,681 3,440 Accounts Payable 1,121 877 665 3,708 3,425 5,427 6,952 5,447 2,574 3,866 Other Current Liabilities 1,134 1,206 1,298 1,552 1,795 1,774 1,645 1,855 1,369 1,834 Total Current Liabilities 12,707 10,509 12,663 8,018 19,432 15,118 19,625 30,294 50,624 14,640 Long Term Debt - - - - - 11,700 11,500 11,300 11,500 32,000 Reserves for Contingencies, etc. - - - - - - - 250 - 500 Net Worth 16,534 `26,634 29,592 46,697 49,387 62,257 63,360 65,064 69,268 69,604 Total Liabilities 29,241 37,143 42,255 54,715 68,819 89,075 94,485 106,908 131,392 116,744 Net Working Capital 12,383 21,992 24,758 41,554 43,124 66,948 68,085 69,575 74,388 94,587 1938 1939 1940 1941 1942 1943 1944 1945 1946 1947 2048020072

A COMPARISON OF PHILIP MORRIS OPERATIONS WI The fiscal year of Philip Morris & Co. Ltd., Inc. ends March 31. The figures of the four major competitors are on a calendar year b, '~ 1937 1938 1939 1940 P. M. Co. 4 Competing P. M. Co. 4 Competing P. M. Co. 4 Competing P. M. Co. 4 Compet Companies Companies ` Companies Compan, 000 omitted 000 omitted 000 omitted 000 omitted 000 omitted 000 omitted 0000 mitted 000 omit• NET SALES (including Revenue Stamps) $55,613 $864,056 $64,595 NET SALES (including Revenue Stamps) per $1,000,000 of net property ~22~,810 16,063 2390 , ANALYSIS OF OPERATIONS $87,352 $902,9 14,925 8,187 ~ 15,8 ~ 100.0070 100_00F -100.0070 ~'.JzOQyo100.0f Net Sales (Excluding Revenue Stamps) 100.00yo 100.0070 :.,'~100 007 Cost of Sales (Excluding Revenue Stamps) 48.36 23.91 16.65 25.10 16.29 20,22 16.60 Gross Operating Profit ~51.64- 38.80 193_ ~ 37.68 _X45 ' 39.35 ~ Shipping, Selling, General & Administrative Expense Net Operating Profit ~2773 _a 22.15 21.39 27.23- ; 22.75 Other Income ~L58 1.18 ~$4 - 1.15 63 Total Income Income Deductions Net Income before Taxes Federal and State Taxes Net Income as % of Net Sales (Excluding Revenue Stamps) Net Income as J of Net Worth CAPITAL STRUCTURE 7 Long term debt ASSET POSITION Net tangible assets per $1000 of debt (1) Partially estimated. -49.31 M_ 23.33 W215": (1)61.20 ~~4~ 62.32 52.5 _, 1.98 60.65 23.38 1.54 $847,009 $73,344 $851,838 1.43 71&90,~ 161`_ _ 59.71 8.39 _, 40.2E N2.46 ` 15.9 24.37 Q~ 42 24.79 716. 21.35 44 21.11 5.70~, 21.84 ~- -- - :~ ---, g7~. 17, _ ~ 22.54 U5 20.88 ..- ~ % - 17.38 ~ fi_1 17.03 320 9I - , 17.52 {l ~ : ~ 4 14.14 24.6_0 ; 13.43 25_.13 ~-~ - -£-.. - 13.75 2048020073 (2) after 50J stock dividend. (3) after exchange of 2 shares $5 par value for each share of $10 Par Value Stock. 4.08 _--ZC75-:j 4.32 ~~0' - 6.59 16.64 13.1C 10.46 9,023 16

THE AGGREGATE FIGURES OF ITS FOUR MAJOR COMPETITORS ~12,565 $1,045,506 $1.41,047 $1,206,242 $l~ 90I ~ $1,408,276 $185,299f $1,419,195 $178,686 ~ $1,514,167 0,186 17,459 885_~ 21,375 _"a~ 253' 27,199 62 29,542 35,815 32,771 . ,.. $170,906 $1,965,829 0 0070 100.00% 10 00~ 100.00% l66. ~ 100.00J ,-1~ 100.007 f0000%, 100.007 100.00To 97 59.77 ~§8 65~, ~ __ 62.15 54 68.16 2 52 _ 75.09 J77.43 78.76 3 70 . 77.73 ~~~a 5.77 ; 858 40.23 ~35 37.85 ~46 31.84 48 24.91 2 2 ~7 21.24 2630 ^ 22.27 15.19 ~1877~f 12.54 12.00 9,510 13.26 'W4 9.88 13.37 6 ,83_ :.: 76.75 W~ 10.72 10.72 4,582 ~ 2.01y. ~ 25.04 1 A! 8 ~ 25.31 614 ~ 57 .45 ~ 8 25.61 6 25.76 07 ~~ 1.58 TB~~ 1.58 :~ ~~ 24.03 ~~08 I 24.18 u ~d5~ 10.77 ~1 &I~ 13.46 G.;; 10.46 M65' .= 7.86 < 09 `, 5.77 i49~ _~ 6.18 ~ _. 21.38 ~ 83-' 1 17.05 A90-48:; 15.47 16.09 8 ` .32 - =_ .30 35 80~ 23 7 8.93 =A ~ 7.68 0, 10.15 5 9.34 = 88 `~~ 8.82 20.24 20.89 9~ 28.21 ~~ 28.97 1~9 11.53 ~6 O7 ~ 11.1 I 9.99 14.36 0 10.93 21.70 ~ 17.35 1~.82 16.32 1.40 20.30 ~}~ 15.91 0 50_ :A 13.88 ~ fi~~ 14.52 11.37 8.23 1,5 4,457 _j 3,328 3,259 26,423 _ 1.94 1.80 11.68 68.23 68.00 61.80 ~J 6s) i 56.67 Z I_~ 45.44 0 2,984 IMW03 6, :~ 1,774 33,908 100.00 J 1,939 17 ~xan the 1937 comparison is between the March 31, 1938 fiscal year of Philip Morris and the 1937 calendar year for the other companies. ~ 1941 1942 1943 1944 1945 1946 ~~ _ PrM. Co. 4 Competing P. M. Co. 4 Competing P. M. Co. 4 Competing P. M. Co. 4 Competing P. M. Co. 4 Competing P. M. Co.^ 4 Competing ~ Companies Companies - Companies Companies Companies Companies 000 omitted 000 omitted 000 omitted 000 omitted 000 omitted _ 000 omitted 000 omitted 000 omitted 000 omitted 000 omitted 000 omitted 000 omitted

To insure against the presence of particles of tobacco stem in the finished cigarettes, the soft part of the leaf is removed from the stem at an early stage of manufacture. These machines each do in one day the work which would require weeks of tedious application for a man. Philip Morris costs to permit us to sell the unvarying Philip Morris quality at present prices, only 18% higher than in 1937. Great progress has been made in improved control and reduction of costs. During the past eighteen months improvements in method and machinery developed in coping with the acute war- time difficulties have been applied with splendid results. Costs of making each thousand ciga- rettes have been reduced and the time required to get freshly packed cigarettes from the factory to the tobacco counter•in quantities to meet current demand has been further shortened. The changes planned by your company, under great strain in meeting huge demands, reached full application during the year just passed and lower operating costs are anticipated next year. 18

n the fall of 1946 Mr. O. Parker yfcComas joined us as Vice-President and Director. He brings to the organization experience and wisdom gained in a distinguished banking career. After taking a master's degree at Princeton University in 1917, he joined the army and won the Silver Star in action in France. He was demobilized in 1919 and began a business career in Wall Street in 1920. partment in addition to the Foreign Department. He resigned from this post and came to us and For many years he was a vice-president of the Bankers Trust Company of New York, repre- senting them both in this country and abroad. In 1937 he was placed in charge of the Banking De- his value to Philip Morris has already been demonstrated. Government $3,500 in revenue stamps. ages of Philip Morris cigarettes per day and each pays the Each of these packing machines automatically fills 50,000 pack- This is one of the machines which make. 600,000 cigarettes per day. The worker fills the cases with ciga- rettes to go to the packing machines on the overhead trolley. In the lower tray are cigarettes for one of the many tests of quality which feature PhilipMorris manufacturing processes.

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our money, invested as it is in this business, even with the finest tobacco and modern buildings and equipment, could not be productive without the skill, experience and interest of the men and women who make up the Philip Morris team. At the close of our fiscal year there were 3,405 people working in the main offices in New York and the three producing units in Richmond and Louisville. In each department each member of our organization performs an indispensable part in creating Philip Morris products and delivering them to our customers. Our plants ar& air-conditioned, equipped with the most efficient lighting, and kept spotlessly clean. Standards of safety are maintained on a high level consistent with the best national practise by a committee working with the representative of our insurance company. Monthly meetings of supervisors and foremen in the plants implement the safety education program in eliminating acci- dents through proper use of machines. Dining facilities are provided in our plants through non-profit, company run cafeterias where wholesome and attractive dishes are prepared under the direction of highly qualified restaura- teurs. iModern, comfortably furnished rest rooms are maintained and medical care is administered in scientific dispensaries by registered nurses under the direction of physicians. Hospitalization insurance has been arranged by the company and provides for cases necessi- tating hospital care, such as severe illness of employees, surgery or pregnancy. In addition to the usual workmen's compensation insurance maintained under the laws of the states in which the company operates, group life insurance is made available to all. By a participating arrangement, the cost of this insurance to the employee is kept at a low figure, with your company making up any difference in the billing by the life insurance company. The retirement fund which the com- pany maintains provides for life income to employees who have reached retirement age and under an optional retirement plan, provides for income to beneficiaries after the death of the employee. Union organizations of the A. F. of L. exist in each of our plants and through a committee arrangement representatives of the union workers have access to management representatives at all times. We have had no strikes and morale is high. 21

REVENUE STAMPS $85,007,308- R-FEDERAL INCOME TAXES $3,200,000 DIVIDENDS $4,361,085 RESERVES $500,000 RETAINED NET INCOME $597,065 WHAT HAPPENED TO THE $170,905,550 PAID YOUR COMPANY FOR ITS PRODUCTS e have specialists in many fields among our personnel. Their experience as individuals covers a wide range from tobacco farming to the chemists' laboratory. In the factory the production workers using machines are aided by maintenance crews of skilled mechanics whose work in continu- ous inspection and repair helps to prevent accidents and loss of time due to machinery failure. En- gaged in research and in the operation of our laboratories are scientists who guard the quality of our products by frequent checking and periodic tests. The people of our sales'and promotion depart- ment are constantly in touch with the smoking public and their observations are passed on to pro- duction personnel. Most of our supervisory positions have been filled from the ranks of those who have grown with us and spent their lives working with the company, and with each of the individuals in the key points of our organization are others acquiring by experience the knowledge necessary to step into those key positions when the present occupants step down.

® ® 0 ® ,.. ii.~i ! A ~.M © A-_ 0 W am ® U LY I z- Skilled mechanics maintain the watch-like precision of the many machines in our factories. This pack- ing machine inspects the cigarettes before the package is closed and automatically rejects any package containing a cigarette having the slight- est imperfection. The entire factory is moisture controlled. Every two minutes a reading is taken which shows'moisture content of tobacco to 1/10 of one percent. Varid- tion from the standard is corrected instantly throughout the entire plant. Graduate chemists establish scientific tests to maintain the high standards set for Philip Morris products. +:. 23

ur employees last year received $7,978,587 and the management appreciates their aid in meeting the final responsibility for smooth and effective teamwork during the year. May 28, 1947 24 A. E. Lyon President I I I I

hilip Morris products are backed by a hundred years of fine cigarette making. The best tobaccos obtainable are used in the blends and their flavor and aroma are brought out by carefully guarded secret formulas employed in the course of manufacture. The cigarettes and pipe tobaccos pro- duced are designed to meet the taste of the most discriminating smokers. Philip Morris English Blend, sold at the popular price, has become our principal product in point of sale and has demonstrated its superiority for day-in day-out smoking pleasure. It wears well. Marlboro cigarettes, enlivened by the rich aroma of selected oriental leaf, are created to suit the preference for extreme mildness in smoking. They are produced in three styles: Ivory Tipped and Plain End, appealing to both men and women, and Beauty Tipped (red ) created especially for women. Other cigarettes produced are the well-known DunhillMajors, now made in a long size, having a definite appeal to a select market; the English Ovals, manufactured in an oval shape since the early Twenties of a blend of best quality Turkish and domestic tobaccos and packed in crush-proof boxes, selling in the premium price class. Player's Navy Cut "Medium" cigarettes are constituted principally of select bright Virginia tobacco packed in slide and shell crush proof boxes and sold in the premium class. Fleetwood and Spud cigarettes are brands acquired in the purchase of certain assets of the Axton Fisher Tobacco Company. Fleetwoods, in the popular price class, are 20% longer than the standard cigarette and have a special trade and consumer acceptance. Spuds, made in cork tip and plain ends, are an evenly mentholated blend of high quality domestic and imported tobaccos. For the pipe smoker the largest selling item is Bond Street. It is an aromatic blend of selected tobaccos and is comparable in every way to the most expensive mixtures. Revelation is a particularly mild blend of five of the world's finest quality tobaccos, skillfully combined. This tobacco is designed to appeal to the most discriminating pipe smoker seeking per- fection. Country Doctor, Handsome Dan, Barking Dog and Wakefield English Mixture are pip~~ mixtures, each varying slightly, to appeal to the special tastes of a wide range of smokers. Lyon's Own is a very superior mixture in the premium price class. 25

To-the Board of Directors of Philip Morris & Co. Ltd., Incorporated: We have examined the balance sheet of PHILIP MORRIS & CO. LTD., INCOR- PORATED as of March 31, 1947, and the statements of income and surplus for ards applicable in the circumstances and included all procedures which we considered necessary. Our examination was made in accordance with generally accepted auditing stand- other supporting evidence, by methods and to the extent we deemed appropriate. the transactions, have examined or tested accounting records of the company and accounting procedures of the company and, without making a detailed audit of the fiscal year then ended, have reviewed the system of internal control and the consistent with that of the preceding year. in conformity with generally accepted accounting principles applied on a basis at March 31, 1947, and the results of its operations for the fiscal year then ended, In our opinion, the accompanying balance sheet and related statements of income and surplus present fairly the position of Philip Morris & Co. Ltd., Incorporated New York, May 12,1947. . ~ o fef~-_ 26

N ET SA LES....... ..................................................... $170,905,550 $178,686,032 COST OF GOODS SOLD ................................................. 148,411,919 159,882,242 SELLING GENERAL N ADMINI A D STRATIVE EXPENSES......... 12,844,765 10,953,363 --- -~-:~.. ~ _ _ .~a..-. . Gross profit .................................... $ 22,493,631 $ 18,803,790 SHIPPING Operating profit before federal income taxes .......................... $ 9,648,866 $ 7,850,427 OTHER IN CO M E .....................................................,.. 162,360 155,840 $ 9,811,226 $ 8,006,267 OTHER DEDUCTIONS: Interest on debentures .................................................. $ 830,725 $ 345,500 Other interest .....................-.................................. 219,669 452,161 Miscellaneous .............:.......................................... 151,747 160,912 $ 1,202,141 $ 958,573 $ 8,609,085 $ 7,047,694 PROVISION FOR FEDERAL INCOME TAXES ............................... 3,200,000 2,550,000 Income for year before special items set forth below .................. $ 5,409,085 $ 4,497,694 ADDITIONS: Recovery of federal excess profits taxes of prior years ..................... .......... 1,867,528 Recovery in connection with Govern m entcontracts ........................ 310,000 ....... Excess provision in prior years for federal income taxes ................... ........ .. 300,000 Premium received on sale of 2%J Sinking Fund Debentures, less expenses of issue ............................................ 133,865 ....... Profit on sale of,realestate ............................................ 77,200 ....... $ 5,930,150 $ 6,665,222 DEDUCTIONS: Losses arising from termination of war ($492,222), less $250,000 charged against reserve therefor ........................................... .......... 242,222 Premium paid on retirement of Twenty Year 3J Debentures .............. 472,000 ....... Settlement of claims in connection with canceled subscriptions to cumulative preferred stock,3.60J series ....................................... Provision for claims, litigation and contingencies ......................... Balance of income transferred to earned surplus ..................... .......... 275,000 500,000 ....... ~6 ra .~ -~ $ 972,000 $ 517,222 c4 U ~ ~ $ 4,958,150 $ 6,148,000 0 0 27

ASSETS 1947 1946 CURRENT: Demand deposits in banks and cash on hand. ......... .................. $ 3,999,636 $ 2,461,395 United States Government obligations, at cost. . . . . ....................... 24,414 24,414 Accounts receivable from customers, less allowance for discounts and doubtful accounts, $609,180 for 1947 and $625,684 for 1946............ 5,583,334 6,326,257 Accounts receivable from others ....................................... 807,236 1,588,204 Inventories, at average cost: Leaf tobacco (including imported leaf in bond subject to duty) ......... 85,217,504 92,177,814 Manufactured stock .............. ........._........._...,....r...:. 8,214,029 15,193,063 Stock in process, revenue stamps and operating supplies .............. 5,380,921 5,373,701 Total inventories ......................:....................... $ 98,812,454 $112,744,578 Refund receivable for federal excess profits taxes of prior years.......... .......... 1,867,528 Total current assets ........................................... $109,227,074 $125,012,376 PROPERTY, PLANT AND EQUIPMENT, AT COST: Land, buildings, machinery and equipment .............................. 9,838,441 8,006,041 Less, Allowance for depreciation . .................................. 3,370,020 3,016,891 $ 6,468,421 $ 4,989,150 OTHER ASSETS: Notes receivable from supplier ......................................... 93,750 156,250 Investment, at cost, in Philip Morris & Co., Ltd. (England) (Note 1). ....... 235,965 235,965 Other investments .................................................... 11,800 11,800 Prepaid expenses and deferred charg,es ................................. 707,400 731,016 Good will trade-marks and brands . . . . .. ... .......... 50 000 . , ... .................. ... .. . , r ~y ~ $ 1,048,915 $ 1,185,031 .r, c,o 410 $116 744 $131 186 557 a et~ 0 , , , , ~ ao cn i. 28

LIABILITIES 1941 1946 CURRENT: Notes payable to banks ............................................... $ 5,500,000 Dividends payable .................................................... 1,464,486 Accounts payable ..................................................... 2,401,822 Accrued liabilities-interest, taxes (other than federal income taxes), advertising, etc ................................................... 1,833,539 Provision for federal income taxes ...................................... 3,440,475 Total current liabilities.......................................... . $ 14,640,322 FUNDED DEBT: Twenty-year 370 Debentures, less $205,750 sinking fund cash held by trustee .......... 2%J Sinking Fund Debentures, due April 1, 1966 (sinking fund payments com mence M arch 31,1956) ........................................ 32,000,000 $ 44,000,000 966,863 1,607,781 1,369,158 2,680,587 $ 50,624,389 11,294,250 RESERVE FOR CLAIMS, LITIGATION AND CONTINGENCIES ............... 500,000 CAPITAL CAPITAL STOCK: Cumulative preferred, par value $100 per share, authorized 350,000 shares issuable in series: 470 Series, authorized 199,847 shares; at March 31, 1947 redeemed 1,999 shares and outstanding 197,848 shares (Note 2) ................... 19,784,800 19,984,700 3.60% Series, authorized 149,883 shares, outstanding 19,543 shares (Nnte 2) ...................................................... 1,954,300 1,954,300 Common, par value $5 per share, authorized 3,000,000 shares; outstanding at March 31, 1947, 1,998,468 shares (552,000 shares issued for equivalent of $2 per share) .................................................. 8,336,340 8,336,350 CAPITAL SURPLUS, statement annexed ................................... 15,949,390 15,960,374 EARNED SURPLUS, statement annexed (Note 3) ............................ 23,579,258 23,032,194 $ 69,604,088 $ 69,267,918 $116,744,410 $131,186,557 29

STATEMENTS -OF SURPLUS EARNED SURPLUS CAPITAL SURPLUS Balance of income transferred from statement of income .................... 4,958,150 Transfer of common stock heretofore reserved against scrip certificates which expired during year .............................................. $27,990,344 $15,960,384 Premium on 1,999 shares of cumulative preferred stock, 4% series, redeemed during year ....... .................................. .......... $ 10,994 On cumulative preferred stock, 4J series.......... $ 793,391 On cumulative preferred stock, 3.60% series ....... 70,355 $ 863,746 On common stock, $1.75 per share ................ 3,497,340 4,361,086 Write-off of cost of good will, trade-marks and brands .................... 50,000 $ 4,411,086 BALANCES, March 31, 1947 Note 3 ....................................... $23,579,258 for the ftscai year e;ndeo March 31,1947 ~,: ~;._A r'_ _ ~- $ 10,994 $15,949,390 30

STATEMENTS 1. Net assets of this wholly owned English subsidiary are approximately equal to the invest- ment atnount, on the basis of the official rate of exchange. 2. The Cumulative Preferred Stock is redeemable at any time, otherwise than through the sinking funds, at $108.50 per share for 4% Series (up to February 1, 1949) and $103.00 per share for 3.60% Series (up to February 1, 1950), and at diminishing per share amounts after those dates but not less than $105.50 for 4% Series and $100.00 for 3.60% Series; plus accrued dividends in each case. Holders of the shares of each series are entitled to such specified payments upon voluntary liquidation of the company and to $100.00 per share, plus accrued dividends, upon involuntary liquidation. The company is required to set aside, in sinking funds, amounts sufficient to redeem 1% of the maximum number of shares that have been issued of each series, at $105.50 per share for the 47), Series and $100.00 per share for the 3.60% Series. Preferred stock in treasury may be used in connection with such 'sinking fund requirements. The sinking fund payments to be made within one year from March 31, 1947 aggregate $230,494.50. 3. The terms of issue of the 25;% Sinking Fund Debentures include certain restrictions with respect to the declaration or payment of dividends (other than dividenus payable in stock of the company ) on any shares of capital stock of the company, and to payments on account of the purchase, redemption or other retirement of its capital shares. At March 31, 1947, approximately $4,836,000 of the earned surplus was free of such restrictions. The terms of issue of the Cumulative Preferred Stock include certain restrictions with respect to the declaration or payment of dividends (other than dividends payable in stock of the company ) on the common stock. The amount of earned surplus free of such restrictions was in excess of the $4,836,000 shown above. The company has submitted information to the Government concerning its renegotiable contracts for the fiscal year ended March 31, 1945 and for the nine months ended December 31, 1945. It is the opinion of the nanagement that any renegotiation refunds which may be required will not be material in relation to net income for the fiscal years ended March 31, 1945 and 1946. Provision for depreciation of plant and equipment charged to costs and expenses aggregated $475,112 for the fiscal year 1947 and $471,701 for the fiscal year 1946. c<a 31

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