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ADVERTISING Competition is keen in our industry. We have met the challenge of tremendous adver- tising power with a program developed after careful research and market analysis. Our advertising plans are concentrated on two important phases-the development of pro- ductive selling messages and techniques and the studied selection of media to be used on the most efficient basis. The advertising agencies which have serviced our Company in the past, have again in fiscal 1949 worked closely with the sales and advertising departments in the planning and carrying out of the advertising programs for our various products. In order to reach the greatest possible audience in the most efficient and productive way we use both nighttime and daytime radio programs. Entertainment value is of first im- portance in attracting audiences to hear our selling messages. At the same time, however, programs are planned to afford various op- portunities for the public. This gives an element of service to programs presented from coast to coast. We believe this is of value not only because it creates wide community interest but also because it helps build good will and pres- tige for our Company. We have used spot Television advertising for approximately one year and recently pre- sented a full time Television show. We believe that Television will develop into an important selling medium and are continuing our study to develop a full knowledge of its potentials. Johnny, our living trademark, is particularly well adapted to Television presentation. As in the past we spent more in propor- tion to our sales than some companies and we believe that "our investment in advertising is accelerating our long term growth. I I

TELEVISION. Jinx Falkenberg Demonstrates Philip Morris' Quality

® 0 ck~ i7lJJ7lll D 0 0 ® ® u INDIANA KENTUCKY TENNESSEE Q r 0 FLORIDA W EST V IRGINI M r NORTH CAROLINA ~ MISSISSIPPI ALABAMA GEORGIA SOUTH CAROLINA IIB s VIRGINIA . i BAL mond EW YORK ~ NI~/ JERSEY I SOtJRCES OF PHILIP MORRIS DOMESTIC LEAF 12 nFE FLUE CURED ~.,. mes . 11B CLASSIFICATION GEORGIA SOUTH CAROLINA EASTERN CAROLINA MIDDLE BELT OLD BELT TYFE CLASSIFICATION CLARKSVILLE PADUCAH HENDERSON DARC VIRGINIA OHIO TYFE AIR CURED MARYLAND BURLEY GREEN RIVER ONE SUCKER SUN CURED PERIQUE

I LEAF Our inventories of leaf tobacco are the largest in our history. Prior to the end of our 1948 fiscal year it became clear that our sales would demand increased quantities of leaf, both domestic and imported. Before the open- ing of the markets in 1948 substantial amounts of aged domestic leaf were purchased and placed in our warehouses for further aging. These stocks of leaf were increased by the extra amounts of high quality tobacco bought during the market seasons and placed in storage. Our supplies of choicest Oriental tobaccos are at our highest level. Our 1950 requirements can be met even at an increased level of sales. The staff of our Domestic Leaf Depart- ment under Mr. Wirt H. Hatcher, was strength- ened during the year through the addition of Mr. Edwin W. Tucker. Mr. Tucker is now gen- eral assistant to Mr. Hatcher. Mr. J. Raymond Kuhn continues the direct supervision of leaf stocks. The Oriental Leaf Department under Messrs. J. E. Archbell and Russell H. Kuhn has been fortified by the recruiting of Mr. John H. Lane. Mr. Tucker and Mr. Lane have long been considered in the industry as outstanding experts in their respective fields. Government controls reduc- ed the crop acreage and raised the support price. Because of these factors which artificially affect the price and limit the supply, no ma- terial reduction in the price of domestic leaf tobacco seems likely in the near future. Left: Mr. Edwin W. Tucker was born and grew up in the tobacco country in Virginia. Work in tobacco from growing fields to auction floors has been his career. In November of last year he resigned his post as Assistant Vice President of Universal Leaf Tobacco Company to join the Domestic Leaf Department of Philip Morris. Right: John H. Lane was born in Turkey of American parents and has maintained his contact with Oriental tobacco throughout his business life. For years he work- ed in a tobacco company in the Orient in both tech- nical and administrative positions. Last September he joined the Oriental Leaf Department of Philip Morris.

MANUFACTURING The cumulative effect of efficiency gained through our expanded program is in force to- day and in our plants we are turning out more cigarettes than ever before. The manufacturing division under Mr. C. T. Ames, Jr., Vice Presi- dent, profited materially during the year by the improved machines and methods described in greater detail in our last two reports. Additional improvements in equipment and production facilities were made during the year. As an example, in the stemming department thirty- four new machines now do the work formerly requiring fifty. Our net investment in land, machinery and buildings with over one mil- lion feet of floor space in use, now stands at $8,301,257. (continued on page 19) 14-

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RECORD OF PHILIP MORRIS OPERATIONS Balance Sheets at March 31, (000's omitted) 1949 1948 1947 1946 1945 1944 .ASSETS , Cash & Marketable Securities ~ 5,264 ~ 4,857 $ 4,024 ~ 2,486 " $ 2,320 S 2,455 $ Receivables 9,173 7,196 6,391 7,914 10,063 11,017 tnventories 132,444 93,913 98,812 112,745 87,280 69,948 Other Current Assets - - - 1,867 206 4,290 Total Current Assets 146,881 105,966 109,227 125,012 99,869 87,710 Net Property Account 8,301 6,828 6,468 4,989 5,110 3,471 Prepaid Items & Other Assets 1,117 937 1,049 1,391 ' 1,929 3,304 Total Assets 156,299 113,731 116,744 131,392 106,908 94,485 LIABILITIES Notes Payable 30,000 - 5,500 44,000 16,000 5,000 Federal Taxes 7,811 3,431 3,440 ` 2,681 6,992 6,028 Accounts Payable 6,773 5,753 3,866 2,574 5,047 6,552 Other Current Liabilities 2,987 1,797 1,834 1,369 2,255 2,045 Total Current Liabilities 47,571 10,981 14,640 50,624 30,294 19,625 Long Term Debt 32,000 32,000 32,000 11,500 11,300 11,500 Reserves for Contingencies, etc. 237 237 500 - 250 - Net Worth 76,491 70,513 69,604 69,268 65,064 63,360 Total Liabilities and Capital 156,299 113,731 116,744 131,392 106,908 94,485 Net Working Capital 99,310 94,985 94,587 74,388 69,575 68,085 Net Asset Value of Common Stock 28.04 24.80 23.95 23.68 *22.56 -*21.94 I 3 1939 1936 l 1,501 $ 2,393 ) 3,70.5 1,665 27,295 8,231 - 32,501 12,289 2,885 1,250 1,757 122 37,143 13,661 7,000 3,800. a 1,426 395 877 1,149 1,206 591 10,509 5,935 - - - - 26,634 7,726 37,143 13,661 21,992 6,354 * 14.01 *6.20 *-adjusted to present capitalization Figures for the year 1939 are on a consolidated basis (with English subsidiary). Figures for the year 1936 are on a consolidated basis (with American subsidiary).

RECORD OF PHILIP MORRIS OPERATIONS Statements of Income for the fiscal years ended March 31, (000 omitted) 1949 1948 1947 1946 1945 1944 1939 1936 Net Sales (Including Revenue Stamps) $228,372 $171,258 $170,906 $178,686 $185,299 $177,901 $64,595 $26,876 Cost of Sales (Including `Revenue Stamps) 188,656 146,694 148,412 159,799 159,051 152,290 48,205 20,171 Gross Operating Profit 39,716 24,564 22,494 18,887 26,248 25,611 16,390 6,705 Shipping, Selling, General - & Administrative Exp. 17,499 14,641 12,752 10,953 12,080 12,507 7;862 3,498 Operating Profit 22,217 9,923 9,742 7,934 14,168 13,104 8,528 3,207 Other Income 101 7251 6832 2,3234 267 149 108 16 Total Income 22,318 10,648 10,425 10,257 14,435 13,253 8,636 3,223 Income Deductions 1,658 985 2,1743 1,4765 9407 672 551 421 Net Income (Before Taxes) 20,660 9,663 8,251 8,781 13,495 12,581 8,085 2,802 Federal and State Taxes on Income 8,162 3,628 3,293 2,633 6,692 5,930 1,534 394 Net Income 12,498 6,035 4,958 6,148 6,803 6,651 6,551 2,408 Total Dividend Payments declared Cash (Common) 5,246 3,497 3,498 2,998 4,497 4,496 3,7278 415 (pfd.) 818 836 863 817 866 844 277 - I Net Income Retained in the Business 9 6,434 1,702 597 2,333 1,440 1,311 2,547 1,993 Earned per common share adjusted to present common shares outstanding 5.84 2.60 2.05 2.67 2.97 2.91 3.67 1.93 Per share earned on common shares outstanding 5.84 2.60 2.05 2.676 5.94 5.82 7.34 5.80 Common Shares 1,998,467 1,998,467 1,998,468 1,998,470 999,235 999,235 855,1951/2 415,465 (1) Including profit of $546,889.78 on sales of securities (before federal income tax of $137,000.00). (2) Including recovery of $310,000.00 in connection with government contracts, net premium of $133,865.00 received in sale of 2%°fo Debentures, and profit of $77,200.00 on sale of real estate. (3) Including premium of $472,000.00 paid on retirement of 3% Debentures, and provision of $500,000.00 for claims, litigation and contingencies. (4) 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. _.... -(5) 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 7). 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. (6) After stock split 2 for 1. (7) - - • • _, v. . .; .ncies. 000 -. nc ud~ng provnston of ~250,.00 for post-war snd otlier continge - - „_ _-~ -r- ,.- - - (8) Disregarding a stock dividend of one-half shar of Comm on Stock fo'r each share of Common . Stock. Earned surplus charged $2,597,950.00 for shares of Common Stock issued with respect to thisdtvidend. _ -:_ .---

A COMPARISON 0 f 0 t; The fiscal year of Philip Morris & Co. Ltd., Inc. ends March 3' 1948 1947 1 NET SALES (including Revenue Stamps) Philip Morris Company $228,372,000 4 Competing Companies $2,286,066,000 Philip Morris Company $171,258,000 4 Competing Companies $2,169,816,000 Philip Morris Company $170,906,000 NET SALES (including Revenue Stamps) per $1,000,000 of net property 27,510,000 22,536,000 25,081,000 27,523,000 26,423,000 ANALYSIS OF OPERATIONS Net Sales (Excluding Revenue Stamps) 100.00% 100.00% 100.00% 100.00% 100.00% Cost of Sales (Excluding Revenue Stamps) 65.62 74.52 71.13 76.83 73.70 Gross Operating Profit 34.38 25.48 28.87 23.17 26.30 Shipping, Selling, General & Adminitrative Expense 15.15 7.25 17.21 6.81 14.95 Net Operating Profit 19.23 18.23 11.66 16.36 11.35 Other Income .09 .13 .85 .29 .80 Total Income 19.32 18.36 12.51 16.65 12.15 Income Deductions 1.44 1.96 1.16 1.83 . 2.5 Net Income before Taxes 17.88 16.40 11.35 14.82 9. I Federal and State Taxes on Income 7.06 6.62 4.26 6.07 3. Net Income as % of Net Sales (Excluding Revenue Stamps) 10.82 9.78 7.09 8.75 5.78 Net Income as % of Net Worth 18.63 13.55 8.56 13.28 7.12 Earnings per share of Common Stock 5.84 2.60 2.04 CAPITAL STRUCTURE % Long term debt 29.50 39.13 31.22 35.18 31.49 0/6 Preferred Stock 18.85 11.52 20.43 11.22 21.40 % Common Stock and Surplus 51.65 49:35 48.35 53.60 47.11 ANALYSIS OF FiNANCIAL POSITION Net Prop. Acct. as 9'0 of tang. net worth 10.85 12.96 9.68 11.09 9.29 Current Liabil. as % of tang. net worth 62.19 46.10 15.57 54.06 21.03 Total Liabilities as % of tang. net worth 104.34 115.23 61.29 112.75 67.73 Inventories as % of net working capital . 133.36 118.79 98.87 124.55 104.47 Current Liabilities as % of inventories 35.92 25.48 11.69 30.19 • 14.82 Long Term Debt as % of networking capital 32:22 45.13 33.69 40.61 --- 33.83 (1) After exchange of 2 shares of $5 par value for each share of $10 p~ ~ .R ~ C3 ca . -ta 0o I

1E MORRIS OPERATIONS WITH THE AGGREGATE FIGURES OF ITS FOUR rhe figures of the four major competitors are on a calendar year basis. For example, the 1948 comparison is between the March 31, 1949 fiscal year 16 1945 1944 1943 1942 4 Competing Philip Morris 4 Competing Philip Morris 4 Competing Philip Morris 4 Competing Philip Morris 4 Competing Companies Company Companies Company Companies Company Companies Company Companies $1,965,829,000 $178,686,000 $1,514,167,000 $185,299,000 $1,419,195,000 $177,901,000 $1,408,276,000 $141,047,000 $1,206,242,000 33,908,000 35,815,000 32,771,000 36,262,000 29,542,000 51,253,000 27,199,000 37,885,000 21,375,000 100.00% 100.00qo 100.00%. 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%, 77.73 77.43 78.76 72.52 75.09 68.54 68.16 58.65 62.15 22.27 22.57 21.24 ' 27.48 24.91 31.46 31.84 41.35 37.85 6.18 13.09 5.77 12.65 7.86 15.36 10.46 18.77 12.54 16.09 9.48 15.47 14.83 17.05 16.10 21.38 22.58 25.31 .23 2.78 .35 .28 .30 .18 .32 .28 .45 16.32 12.26 15.82 15.11 17.35 16.28 21.70 22.86 25.76 1.80 1.7b 1.94 .98 1.44 83 1.40 78 1.58 ~ 4.52 10.50 13.88 14.13 15.91 15.45 20.30 22.08 24.18 5.92 3.15 6.22 7.00 8.23 7.28 11.37 11.61 13.46 8.60 7.35 7.66 7.13 7.68 8.17 8.93 10.47 10.72 11.68 8.88 8.82 10.45 9.34 10.50 10.15 11.13 10.72 2.671 5.94 5.82 6.10 36.57 14.24 28.97 14.79 28.21 15.36 20.89 15.82 20.24 12.30 27.16 14.36 26.17 9.99 26.07 11.11 26.66 11.53 51.13 58.60 56.67 59.04 61.80 58.57 68.00 57.52 68.23 9.22 7.21 7.69 7.86 8.81 5.48 9.60 5.98 10.80 48.10 73.14 45.26 46.60 42.86 31.00 36.99 24.30 33.57 111.08 89.75 - 90.13 64.36 86.58 _, 49.16 66.48 43.11 61.89 119.14 151.56 118.25 ._..125.45 107.84 - s.102.74 112.48 105.41 112.49 27.07 44.90 28.94 34.71 31.26 28.06 29.33 21.42 27.07 41.99 15.46 33.61 - 16.24 33.98 16.89 25.91 -17.48 25.40 es,,