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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.