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S O. Parker McComas was advanced to the post of Executive Vice President during the past year. ALL of us were saddened by the death of Mr. J. J. Switzer, for 17 years a director of our company. All who worked with hini over the years valued the warmth of his personality and the soundness of his judgment. During the year Mr. William C. Foley, a member of the Philip Morris team since 1919 and a Vice President since 1933 was elected to the Board, filling the vacancy created by the death of Mr. Switzer. 0 5irrCE the war we have improved our system of ware- housing and distribution with two major objects in view: (1) to have at all times an adequate supply of finished products stra- tegically placed throughout the country to meet the maximum demands of distributors and retailers in the shortest possible time and (2) to reduce our investment in finished goods to the most efficient level. In two years we have reduced our finished goods in- ventory from $15.2 million at the end of March, 1946, to $5.7 million at the end of March, 1948. Systematic checks made by our field men show that even in many outlying sections of the country our cigarettes are now sold at tobacco counters within 17 days of their manufacture in Richmond and Louisville. William C. Foley, our new Director.

'LE success of our company has been built upon the Philip Morris blend. Its quality comes not only from the fine tobaccos it contains but also from our method of making the cigarette. Our Philip Morris cigarette is the first truly modern cigarette, for in its making science has complemented and improved the product of the highly developed art of tobacco blending. Our research department, composed of graduate chemists, is continually search- ing for better methods for the control and improvement of our products and their labora- tory work is an important contribution to Philip Morris quality. Electronic Inspection - This device is designed to detect, by means of electrical impulses, the most minute particle of foreign matter present in the unending stream of tobacco now ready for cigarettes. A flake of rust or a tiny chip of metal automatically reverses the direction of the conveyor belt so that the tobacco containing this foreign matter is rejected. A

LEAF tobacco makes up a greater proportion of our total inventory than was the case a year ago. In pounds our supplies of high quality -leaf tobacco are larger, and in type and quality they are well balanced and suited to the strict production requirements of our blends. As noted in our report last year, the purchase of a substantial amount of aged tobacco in 1945 lessened our dependence upon purchases in the 1946 season of tobacco for aging. We were able to restrict our buying in 1946 to extending only our holdings of special types of top grade leaf. In the 1947-1948 tobacco buying season we were influenced by several factors. There are vintage years in tobacco just as there are in wines and 1947 was such a year for many types. British purchases of flue-cured bright tobacco, normally large, were smaller than usual and stopped entirely early in the season. With this buying withdrawn, there was a moderate decline in prices for flue-cured tobacco. This provided an economical op- portunity to purchase substantial quantities of 1947 tobacco at favorable costs. We do not anticipate any major change in tobacco costs in the immediate future. A restriction of acreage to be planted and the requirements of tobacco for export, together with the parity price floor established by the government, will probably prevent any siz- able drop in leaf prices. LEFT: A field of fine tobacco under cultivation. RIGHT: This is the Fourth Street Warehouse in Lexington, Kentucky. Some of our leaf is bought on this floor. Along the 29 aisles covering six acres, stocks of choicest quality tobacco await the arrival of buyers of the best burley. 2048020672

Irr THE past year we paid o$_$5,500,000 of bank loans so that we now have none and have added $764,056 to our production facilities in equipment and improved machinery. We bought 3,970 shares of 3.60°Jo and 4,000 shares of 4% preferred stocks. We bought large quantities of the year's vintage tobacco for aging to assure quality leaf in future years. We provided the funds to finance these developments in part from this year's undistributed earnings and in part through the reduction of inventories of finished goods. A summarv of the principal financial changes during the year is shown in the table on page 13. Federal revenue stamps affixed to products sold during the fiscal year, cost the Company $86 million. We must buy these stamps in advance and so the Treasury collects the money before the tax is paid by the taxpayer. We only get our money back when the buyers of our products pay us. During the past year our average daily advance to the Treasury of the United States was $6 million without interest. This sum, if advanced on loan at the prevailing bank rate, would earn approximately $120,000 a year. Net earnings included a net gain of.$409,890 after taxes, realized from the 12 sale of unlisted securities carried at a nominal value, thus making these funds available for use in our own business. A law suit which had been in litigation for many years was settled and is described in the proxy letter to be mailed about June 14, 1948. In this con- nection the contingency reserve estab- lished in the 1947 fiscal year was reduced in the amount of $263,000. GROWTH IN VALUE OF WHAT THE STOCKHOLDER OWNS ®O®®®EM/IE®/IEVIVI/~M/M/MM MMEME®EM®NEMEMIN ® ~~~ MOMM®~ ~~° /~~m MAIMME/®®M /N/NU/M/M ®MOMi®® M®®N®® . / M////i/ /AI//MUM/®/OM/E ~ ®/®//M®M/MM//M®/ ®=/Ri=M®®/®®/0 a ®/IR/i//®/®/®/i!//M /®//M//®/M/E/IB//N/IN ~ /,®///MMMMMM/®®®®M//® 'o ®U®N ®EM ®®®f®IM®!/1/®®®®®®® c °;

I Our current assets, including $84,049,803 of leaf inventory, were $105,966,- 002 as of llarch 31, 1948, compared with current liabilities of $10,981,246, giving us net working capital of $94.984,756. Current assets were nearly ten times current lia- bilities. We provided out of net earnings of the year $3,628,000 for Federal and State income taxes. After providing $835,901 for the dividend requirements of our preferred stocks, $3,497,353 was paid in dividends to holders of common stock. An additional amount for future needs was supplied by reinvesting in the business the $1,702,024 which was left when all obligations had been met. A SUMMARY OF PRINCIPAL CHANGES IN OUR FINANCIAL CONDITION During the last two fiscal years we used funds: 1948 1947 I To repay bank loans . . . . . . . . . . . . . . . . . . . . . . _ . . . . . - $5,500,000 $38,500,000 To redeem Twenty-year 3% Debentures, due in 1962 and 1963. . 11,294,250 To add to cash in banks. . . . . . . . . .. . . . . . . . . . . . . . . . . . 857,205 1,538,241 To add to plant facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 764,056 1,832,400 To increase accounts receivable . . . . . . . . . . . . . . . . . . . . . . .. . __. . . 805,112 To redeem shares of preferred stock, pursuant to sinking fund require- ments . . . . . . . . . . . . .. . . . . - . . . . . _ 227,415 210,894 To pay charges against the contingency reserve . . . . . . . . . . . 263,000 To purchase shares of preferred stock held in treasury ..... .. ... 566,167 To write off cost of goodwill, trademarks and brands. . . . . . . . . . . . . . 50,000 $8,982,955 $53,425,785 We secured the necessary funds: From sale of 25/a% Sinking Fund Debentures, due in 1966. ......... _ $32,000,000 From reduction in inventories of leaf tobacco, manufactured stock, and operating supplies . . . ... . . . . . . . . . . . ._. . . . . . . .. . . . . . . . $4,898,975 13,932,124 From reduction in accounts receivable. . . . . . . . . . . . . . . . . . . . 3,391,419 From reduction in notes receivable from supplier . . . . . . . . . . . . . . . . . . 62,500 62,500 From depreciation reserve. 404,164 353,129 From sales of securities . . . . . . . . . . . . . . . .. . . . . . . . . . . ... . . . . . 29,414 From increase in accounts payables, accrued liabilities and miscellaneous charges . . . . . . .. . . . . . . . _ . . . . . . . . . . . . . . . . . . . . . . . . . 1,885,878 , 3,089,549 From net earnings in excess of dividends . . . . . . .. . . . . . . . . . . . . .. . . . . . 1,702,024* 597,064 $8,982,955 $53,425,785 * Includes net gain of $409,890 after taxes from sale of unlisted securities. I 13

1939 1940 1941 1942 1943 1944 1945 1946 1947 1948 NET SALES (including Revenue Stamps) $64,595 $73,344 $87,352 $112,565 $141,047 $177,901 $185,299 $178,686 $170,906 $171,258 COST OF SALES (including Revenue Stamps) 48,205 56,579 67,639 87,175 113,682 152,290 159,051 159,799 148,412 146,694 GROSS OPERATING PROFIT 16,390 16,765 19,713 25,390 27,365 25,611 26,248 18,887 22,494 24,564 SHIPPING, SELLING, GENERAL & ADMINISTRATIVE EXPENSE 7,862 7,081 9,149 10,884 12,420 12,507 12,080 10,953 12,752 14,641 OPERATING PROFIT 8,528 9,684 10,564 14,506 14,945 13,104 14,168 7,934 9,742 9,923 OTHER INCOME 108 131 161 193 183 149 267 (3)2,323 (5)683 (7)725 TOTAL INCOME 8,636 9,815 10,725 14,699 15,128 13,253 14,435 10,257 10,425 10,648 INCOME DEDUCTIONS 551 675 594 445 515 672 (2)940 (4)1,476 (6)2,174 985 NET INCOME (before taxes) 8,085 9,140 10,131 14,254 14,613 12,581 13,495 8,781 8,251 9,663 FEDERAL AND STATE TAXES ON INCOME 1,534 1,704 2,771 6,462 7,682 5,930 6,692 2,633 3,293 3,628 NET INCOME 6,551 7,436 7,360 7,792 6,931 6,651 6,803 6,148 4,958 6,035 TOTAL DIVIDEND PAYMENTS - t ~:~ -CASH (1)4,004 4,455 4,549 5,103 5,091 5,340 5,363 3,815 4,361 4,333 NET INCOME RETAINED IN THE BUSINESS (8) 2,547 2,981 2,811 2,689 1,840 1,311 1,440 2,333 597 1,702 (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 $300,000.00 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 con- tingencies. (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, 3.60% series. (5) Including recovery of $310,000.00 in connection with government contracts, net pre- mium of $133,865.00 received in sale of 2%s% Debentures, and profit of $77,200.00 on sale of real estate. (6) Including premium of $472,000.00 paid on retirement of 3% Debentures, and pro- ~ vision of $500,000.00 for claims, litigation and contingencies. m (7) Including profit of $546,889.78 on sales of securities (before federal income tax of ~ $137,000.00 ) . o (8) Subject to minor surplus adjustments. ce Figures for the years 1939 to 1942 inclusive are on a consolidated basis (with English subsidiary). 14

1939 1940 1941 1942 1943 1944 1945 1946 1947 1948 NET SALES (including Revenue Stamps) $64,595 $73,344 $87,352 $112,565 $141,047 $177,901 $185,299 $178,686 $170,906 $171,258 COST OF SALES (including Revenue Stamps) 48,205 56,579 67,639 87,175 113,682 152,290 159,051 159,799 148,412 146,694 GROSS OPERATING PROFIT 16,390 16,765 19,713 25,390 27,365 25,611 - 26,248 18,887 22,494 24,564 SHIPPING, SELLING, GENERAL & ADMINISTRATIVE EXPENSE 7,862 7,081 9,149 10,884 12,420 12,507 12,080 10,953 12,752 14,641 OPERATING PROFIT 8,528 9,684 10,564 14,506 14,945 13,104 14,168 7,934 9,742 9,923 OTHER INCOME 108 131 161 193 183 149 267 (3)2,323 (5)683 (7)725 TOTAL INCOME 8,636 9,815 10,725 14,699 15,128 13,253 14,435 10,257 10,425 10,648 INCOME DEDUCTIONS 551 675 594 445 515 672 (2)940 (4)1,476 (6)2,174 985 NET INCOME (before taxes) 8,085 9,140 10,131 14,254 14,613 12,581 13,495 8,781 8,251 9,663 FEDERAL AND STATE TAXES ON INCOME 1,534 1,704 2,771 6,462 7,682 5,930 6,692 2,633 3,293 3,628 ' NET INCOME 6,551 7,436 7,360 7,792 6,931 6,651 6,803 6,148 4,958 6,035 ';; TOTAL DIVIDEND PAYMENTS - s~ -CASH (1)4,004 4,455 4,549 5,103 5,091 5,340 5,363 3,815 4,361 4,333 NET INCOME RETAINED IN THE BUSINESS (8) 2,547 2,981 2,811 2,689 1,840 1,311 1,440 2,333 597 1,702 (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 $300,000.00 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 con- tingencies. (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, 3.60% series. (5) Including recovery of $310,000.00 in connection with government contracts, net pre- mium of $133,865.00 received in sale of 2%s% Debentures, and profit of $77,200.00 on sale of real estate. (6) Including premium of $472,000.00 paid on retirement of 3% Debentures, and pro- vision of $500,000.00 for claims, litigation and contingencies. (7) Including profit of $546,889.78 on sales of securities (before federal income tax of $137,000.00 ) . (8) Subject to minor surplus adjustments. Figures for the years 1939 to 1942 inclusive are on a consolidated basis (with English subsidiary). 14

1939 1940 1941 1942 1943 1944 1945 1946 1947 1948 ASSETS Cash and Marketable Securities $ 1,501 $ 1,529 $ 9,524 $ 3,158 $ 3,175 $ 2,455 $ 2,320 $ 2,486 $ 4,024 $ 4,857 Receivables 3,705 3,854 5,172 6,255 8,219 11,017 10,063 7,914 6,391 7,196 Inventories 27,295 32,038 34,876 53,143 70,57~ 69,948 87,280 112,745 98,812 93,913 Other Current Assets 102 4,290 206 1,867 Total Current Assets 32,501 37,421 49,572 62,556 82,066 87,710 99,869 125,012 109,227 105,966 Net Property Account 2,885 2,783 3,099 3,729 3,723 3,471 5,110 4,989 6,468 6,828 Prepaid Items & Other Assets 1,757 2,051 2,044 2,534 3,286 3,304 1,929 1,391 1,049 937 Total Assets 37,143 42,255 54,715 68,819 89,075 94,485 106,908 131,392 116,744 113,731 LIABILITIES Notes Payable 7,000 9,000 52 8,000 5,000 16,000 44,000 5,500 Federal Taxes 1,426 1,700 2,706 6,212 7,917 6,028 6,992 2,681 3,440 3,431 Accounts Payable 877 665 3,708 3,425 5,127 6,552 5,047 2,574 3,866 5,753 Other Current Liabilities 1,206 1,298 1,552 1,795 2,074 2,045 2,255 1,369 1,834 1,797 Total Current Liabilities 10,509 12,663 8,018 19,432 15,118 19,625 30,294 50,624 14,640 10,981 I Long Term Debt 11,700 11,500 11,300 11,500 32,000 32,000 Reserves for Contingencies, etc. 250 500 237 Net Worth 26,634 29,592 46,697 49,387 62,257 63,360 65,064 69,268 69,604 70,513 Total Liabilities 37,143 42,255 54,715 68,819 89,075 94,485 106,908 131,392 116,744 113,731 Net Working Capital 21,992 24,758 41,554 43,124 66,948 68,085 69,575 74,388 94,587 94,985 Figures for the years 1939 to 1942 inclusive are on a consolidated basis (with English subsidiary).

i ~ - ~MPARISON 0 ILIP~_MORRIS~-O. ~- ~ figures of~~e four ~nalor 4om~etttors pre on a calendar 0 ERATIONS WITH ~ °~~~ :THE fISCAt. `YE ~ ear basis. For example, fhe 16 NET SALES (including Revenue Stamps) NET SALES (including Revenue Stamps) per $1,000,000 of net property ANALYSIS OF OPERATIONS Net Sales (Excluding Revenue Stamps) Shipping, Selling, General & Administrative Expense CAPITAL STRUCTURE % Long term debt P. M. Co. 4 Competing P. Ft. Co. 4 Competing Companies Companies 000 omitted 000 omitted 000 omitted 000 omitted $64,595£ $847,009 $73,344~ $851,838 -22,390 15,530 26,354 _ 14,925 25.10 1938 1939 16.29 ANALYSIS OF FINANCIAL POSITION Net Prop. Acct. as 0/6 of tang. net worth ,$5+~ 11.08 Current Liabil. as % of tang. net worth 14.45 Total Liabilities(3)as%oftang.networth 31.06 Inventories as % of net working capital ~' 98.19 Current Liabilities as % of inventories 3 0I.J. Long Term Debt as % of net working capitaf 20.22 16.60 P. M. Co.Y 000 omitted 22.46 1940 1941 P. M. Co.T 4 Competin -:~__A Companies 000Tomitted" 000 omitte $112,565 $1,045,5C 4 Competing Companies 000 omitted $87,352 $902,967 28,187 15,815 41~ .. 100 00% 100.00% 100.00 ° 100.00% 100.00% 100.00% 15.92 (1) After 50% stock dividend. (2) After exchange of 2 shares of $5 par value for each share of $10 par value stock. 1 0t= PHILI~ MQRf 138 comparison t ,30,186 ' 17,459 100.000_~ 100.000i Cost of Sales (Excluding Revenue Stamps) 48:07 62.32 52 55 .. 60.65 51.61 59.71 59.77 -.~ Gross Operating Profit 51~.93 , 37.68 ,4L45 = 39.35 48.39 40.29 .49.03 40.23 .21.02 Other Income Total Income Income Deductions 22.75 25.93 24.37 .63 .440. . .42 26.33 24.79 4p ;; 1.54 ;;.1.46 1.56 21.84 24.87 23.23 4.32 .6.80 6.59 =T60_~ 23.38 25.04 .57 25.61 1.58 Net Income before Taxes . Federal and State Taxes on Income Net Income as % of Net Sales (Excluding Revenue Stamps) 17.03 17.52 18.07 16.64 `I 5-04_ 13.26 - - -- ~`='--- - -- - - -- ~-- - - - -- Net Income as % of Net Worth ~4.60~ 13.43 13.75 15.76 13.70 12.00 Net Income per share of Common Stock (1j~50~ % Preferred Stock % Common Stock and Surplus 11.89 13.44 15.34 :86 . 74.67 } ~ 75.45 . ~68.09 ° 76.26 11.18 ___- 10.46 11.42 12.08 30.59 95.77 12.93 18.40 13.37 :31:91 13.28 30.17 13.37 L983_ . ~ . 76.75 11.79 33.09 48.41 114.55 ~: ~i~57 - -~ 30.38 15.24 IAG .~o ` : t7: 15.19 9.88

AGGREGATE`Ff: t" 7- °-~.. 0:' LTD , iNE ~ ENDS MAR H 31 ~ r:~ ~en the°March 31~,1939_`fiscal lrear of Phthp Morri s and GUR_ErS-__4T.-_ fTSFOURz MA10_R ear r1or the_other companies ~ e: r ~ e f,938 cal~en~ eG MP_ETITOR fl $ 1942 P. 6t. Co. 4 Competing { Companies 000 omitted 000 omitted $141,047 $1,206,242 1943 15.36 ~ 10.46 21.38 .32 21.70 €83?? 1.40 15.45 _ 20.30 `7.28' 11.37 All liabilities except Capital and Surplus. P. M.-Co. 000 omitted~ 1944 P. M. Co. 4 Competing Companies 000 omitted~ 000 omitted '3 $177,90 1 $1,408,276 $185,299 $1,419,195 4 Competing Companies 000 omitted P.YM. Co. 1945 4 Competing P. M. Co.- Companies 000 omitted 000 omitted 1946 1947 4 Competing P H. Co. 4 Competing Companies ~ Companies 000 omitted 000 omitted 000 omitted 000 omitte $178,686 $1,514,167 $170,906 $1,965,829 $171,258 $2,169,816 .®:~ ~ 100.00% 10 0.0 0%.,7 100.00% 100_.00% 100.00% 1_Qb 00%a 100.00% ~100 00%° 100.00% -100,00°~ 100.00% 58;65 62.15 ;68.54 J, 68.16 72.52 75.09 77 43, _~ 78.76 7~r70_ 77.73 7i.13~ 76.83 d.35 18.77 22.58 - 37.85 3T:46 31.84 27:48 ~ 24.91 22 7 21.24 26.30 " 22.27 28.87 23.17 22.86 12.54 25.31 .45 25.76 10.47 _ 10.72 11:13 10.72 6.10. 15.82 20.24 26.66 11.53 5732 68.23 2 1_ 10.80 33.57 61.89 112.49 25.40 16:28 .1,5,36 26.07 8. 7 ~ 68.00 W ~ 7;. 8.93 wM3 , ,. 7.68 QF_, 10.15 .T045~ 9.34 12.65 7.86 ..13.09 _14.83 _ 17.05 8 ~~ ~- ,~ 28 ~ .30 15.11 17.35 ,~7~26 14.13., . 7.00 - -_£._5.24_- 20.89 14~.79,'. 28.21 11.11 26 17__ 9.99 5~8 ~ 9.60 ~.7 $6~ ~ 8.81 3-1itQ ~ 36.99 66.60~ 42.86 66.48 568 112.48 12~4 107.84 25.91 33.98 8.82 ~ 7.! 2 L 11.68 ~8 ,56~ 13.28 (712.67 f ~ 2.04 5 ~,24 28.97 :2- 14.36 ~ 61.80 56.67 ~ 5.77 15.47 35 15.82 }2j5 ; 16.32 ~t „2 1~2 7.66 ~~.78 _: 8.60 Z-0,04 ; 8.75 6.18 17.21 16.09 .23 .29 16.65 1.80 :' 116 ~ 1.83 14.52 14.82 5.92 6.07 36.57 ~31;,22 q 35.18 ~~= 12.30 11.22 .~~, .~, 51.13 ~ 8 35`~ 53.60 6.81 16.36 7.69 9.22 11.09 ~ j 3 ] 4 45.26 48.10 54.06 90.13 111.08 112.75 118.25 1d4. 7 a 119.14 124.55 028.94 182 27.07 30.19 A- 33.61 41.99 _j3.64 ¢ 40.61 ® 17