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PHILIP MORRIS & CO. LTD., INCORPORATED Report upon Examination of Financial Statements March 31, 1947 LYBRAND, Ross BROS. & MONTGOMERY CERTIFIED PUBLIC ACCOUNTANTS NEW YORK OFFICE

CONTENTS Pages Comments: introduotion Statement of Income Net Sales Gross Gross Profit Shtpping, Selling, Qeneral and Administrative 1-3 4- 8-10 Expenses 10 Other Income and Other Deductions 10 Financial Position 10-13 Balance Sheet: Demand Deposits in Banks 13 United States Government Obligations 13 Accounts Receivable from Customers 14 Accounts Receivable from Others 14 Inventories 15 Property, 'lant and Equipment 15 Other Assets 15-16 Liabilities 16 Capital Stock 17 Statements: Comparative Balance Sheet, March 31, 1947 and 1946 18 Comparative Statement of Income for the fiscal years ended March 31, 1947 and 1946 19-21 Comparative Statement of Shipping, Selling, General and Administrative Expenses for the fiscal years ended March 31, 1947 and 1946 22 Statements of Surplus for the fiscal year ended March 31, 1947 23 Notes to Financial Statements 24 ~

LYBRAN-D, ROS S$RO S. &",\ I( )~'TGON, II:RY CERTIFIED PUBIIC ACCOUNTANTS RtlICtNT UARTNtM~ NtM TORR ST LOUIS WILLIAMM,LVORAND RNW.O[LPHIA LOU~W+LLA ROecRT, H. MONTOOM[RT 90 B R O A D ST R E ET c~•~CAOO ATLANTA PRI(9R SINCLAIR DOlrON b~LLA~ NEW Yo Rx4 •~L•~MDRt MOUStON. NORMAN JGEMHART NOilts WALTER L SCHAFFERPnTlEUROH LOls CO CONRAC B, TAYLOR OtfROlf ~CATtLt ALVIN R.JENNIN-0 8 CLEVLLANO HERMON F. DELL C'NCINNArI LONOONCHRISTORHER H,IINOL,L ROCRI0RDPAR18 MILTON R. CAMRBELL EOwARDO:CARSON June 9, 1947 , OEOROE W MeIVER:JR.WALTERR13TAL9H MAIIKI, 11 It;11AFiDtlON Mr. Alfred E. Lyon, President, Philip Morris & Co. Ltd., Incorporated, 119 Fifth Avenue, New York 3, New York. Dear Sirc Supplementary to our report upon examination of the balance sheet of PHILIP MORRIS & CO. LTD., INCORPORATED as of March 31, 1947, and the statements of income and surplus for the fiscal year then ended, submitted under date of May 12, 1947, we present herein comments and certain statistical data reLative to various items in such financial statements. STATEMENT of INCOME The accompanying statement of income shows a comparison of results for the fiscal years ended March 31, 1947 and 1946. The balances of income transferred to earned surplus, after application of special items of additions to and deductions from income for the respective years, were $4,958,150 for the fiscal year 1947 and $,6,14&,000 for the fiscal year 1946o The effect of the special items on the amounts reported for the two years is shown in the following comparison:

Income for year before special items Special items, net deduction for 1947 and net addition for 1946 Years Ended March 1 Increase L241 1946 Dacrcases* $5,409,085 $4,497-694 $ 911,391. 450,935 1,650,306 2-1101,241µ jj_L958L150 46214_8_,000 41~189,850* The nature of the various special items is indicatedby the descriptions of them on the comparative statement of income presented herein. There is no similarity between the special items applied in the two fiscal years. They are all of an unusual nature and may be described as nonrecurring in the ordinary course of the business. The special items applied with respect to the fiscal year ended March 31, 1946 were described in our report, dated June 24, 1946, relative to the examination for that year. The items for the fiscal year 1947 are discussed herein. The recovery of $310,000 in connection with government con- tracts is the amount claimed and received~by the company, under statutory provisions, in respect of higher costs incurredlin replace- ment of leaf tobacco used for completion of government contracts during the fiscal year ended March 31, 1943. The amount of recovery was limited to the reduction of billings on government contracts for that year, as provided by the renegotiation agreement concluded in November, 1943, The premium received on sale of the 2-5/8% Sinking,Fund Debentures amounted to $320,000. The expenses of the issue aggregated $,185,635, as follows: Selling commission $120,000 Counsel fees 20,074 Trustee 7,500 Printing 2,001 Documentary stamps 35,200 Sundries 860 4_185,635 2

For federal income tax purposes the premium and expenses will be amortized over the life of the debenture issue, with annual net ad- ditions of $6,718'to taxable income. The premium paid on retirement of the Twenty Year 3% Debentures is deductible for income tax pur- poses in the fiscal year ended Mai-ch 31, 1947 but the unamortized balance ($19,314) of premium which was received on sale of that issue must be included in taxable income for such yea:.r. The federa,l income tax applicable to the special items for the year ended March 31, 1947 is not of material amount and was not stated separately from the general provision of $3:,200,000 for such fiscal year. The balances ofincome for the two years, after deduction of dividends declared on the cumulative preferred stock ($863,746 for 1947 and $816,977 for 1946), were approximately equal to $2.05 per share of common stock for the fiscal year 1947 and $2.67 per share of common stock for the fiscal year 1946. The dividends declared on common stock were $1.75 per share for 1947 and $1.50 per share for 1946 (on basis of new $5.00 par value stock). A condensed comparison of the results of opera:tions for the fiscal years ended Marc431, 1947 and 1946, after provision for in- come taxes but before special items, is presented in the following summary: 1947 Amounts Pctges of Net Sales Net sales Cost of sales $170,905,550 148,411,919 100.00 86.84 Gross profit 22,493,631 13.16 Shipping, solling, generaL and administrative expenses 12,844,765 7.52 _ Operating profit 9,648,866 5.64 Other income 162,360 .09 9,811,226 5.73 Other deductions , 1,?02~14L ~70 Income before federal income taxes and special items _ 8,609,085 5.03 Provision~ for federal income taxes 3,200,000 10 87 Income before special items 1_ 5_,:4'09. t o85 _}«.16 1946 Pctges of Amounts Net Sales $178,686,032 100.00 159,882,242 89.48 18,803,790 10.52 10,953,363 6.13 7,850,427 4.39 155, 8 4 0 .09 8,-006, 267 4.48 958.573~ .54 1010;~333159 7,047,694 3.94 2,5501,000 1.43 4 ?~1 41497j69 3

Net Sales: As indicated by the foregoing comparison of operating results, the net sales for the year ended March 31, 1947 were $7,780,482 less than the preceding year. Such decrease is 4-35 per cent of the sales for fiscal year 1946., The decrease in the dollar volume of net sales is the composite result of two principal factors, namely: a,, Decrease of quantities of cigarettes and smoking tobacco sold. As shown on tabulation presented hereinafter, such decrease•wa:s 1,833 millions of cigarettes and 1,095,000 pounds of smoking tobaccos, b. Increases of net selling prices of cigarettes. Two in- creases of approximately $.25 each in the net selling prices per thousand of all brands of cigarettes were made on April 25 and October 7, 1946, respectively. Comparison~of net sales amounts by brands for the two fiscal years is set forth in the following tabulation~: Fiscal YearsEnded March31 Increases 1947 1946 Decreases* Cigarettes: Domestic sales: Philip Morris English Blend $147,269,996 $145,282,504 $ 1,987,492 Marlboro 3,431,132 11,630,951 8,199,819* Dunhill Major 989,560 1,409,505 419,945* Spud 962,917 2,742,936 1,780,019* Engl'ish Ovals 733~, 308 951, 792 218, 484 * Fleetwood Imperial 632,788 2,151,450 1,515,662* All others 106,323 208',483 102,160* Total domestic 154,126,024 164,377,621 10,251,597* Export sales: Philip Morris English Blend 11,887,529 9,466,966 2,41o,563 Fleetwood Imperial 484,629 1,263 483,366 Marlboro (note) 399,837 4,983 394,854 Barking Dog 185,140 185,140• Sp ud~ 160,137 122,283 37,854 All others 111,007 13,316 97,691 ~1~ 67,354r_303 117)±986.4752 L616J2,12* Smoking tobacco: 1UU~:333160 Domestic sales: Bond Street ~ 1,EE8,150 $ 1,968,586 ~ 300,436* Revelation 1,231,573 1,419,314 187,741* Private brands 285,533 376,872 91,339* Country Doctor 198,106 299,389 101,283* All others 47,964 188,911 140,947* Ex port sales 119,921 _ 446,528 3._6,6o7* '17, 6()a,6C0 ~~1114i8_',353* Total cigarettes and smoking tobacco ~17O._9.o5,550 $~178 6S6,o~~ ~v_Z78a,`8_'~ Note: These are special sales of Marlboro for export. In the ordinary course of business this brand of cigarette is not exported directly by the company. 4

From the foregoing tabulation and the one whic4follows, dealing with quantities, the relative importance of various elements of the sales totals is indicated by percentages, as follows: Percentages of all sales: Cigarettes: Domestic Export Total Smoking tobaccos Total Philip Morris cigarettes: Domestic Export Total Percentages of cigarette sales: Domestic Export Total Philip Morris: Domestic Expprt Total Marlboro, domestic All others, domestic and export Total Percentage of domestic cigarette sales: Philip Morris Marlboro All others To tal 90.18 91.99 7.74 5, 38 97.9? 97.37 2.08 2.63 100.00 100A0 86.17 81.31 6.96 5.30 g3.13 86.61 92.10 94.48 83.26 87.48 7.90 5•52 16.74 12.52 100.00 100~00 100.00 100 00 88.00 83.50 8o,o6 78.64 .10 5.44 14,61 12 ;~4 95.10 -88.94 94.67 90.98 2.05 6.691,51 5.04 2.8_~ 4.)l 3.82 3.98 100.00 100.00100.00 100.00 95,55 88.38p 96.16 89.89 .~..,,~J 7,08 1.81 5.77 2.22 4.54 2~03 4.34 100 . 00 100 00 100~. 00 100~. t10 The comparison of quantities of cigarettes and smoking tobacco sold during the two fiscal years is presented in the following tabula- tion: Dollar Sales Quantity Sales 1947 246 1947 194 . 1U02333161 t I ~ f!

Fiscal Years Ended March 31 Increases Decreases* 194'7 1246 Quantities Pctges Cigarettes: Domestic sales: Philip Morris English Blend 23,217,381,580 24,246,237,810 1,028,856,230* 4.2* Marlboro 437,362,470 1,555,079,880 1,117,717,410* 71.9* Dunhill Major 155,975,560 234,652,000 78,676,440* 33.5* Spud 151,426,980 456,568,700 305,141. 20* 66.8* Fleetwood Imperial 99,683,440 358,119,330 258'-435,~90* 72.2* English Ovals 71,180,700 95,639,250 24,458',550* 25.6* s All others 12,745,61o 26,025,8210 13,280,210* 51,0* 24,14_,7_56,.3410 26,97_?,322,790 2J826,566,450* 10.50 Export sales: Philip Morris English Blend Marlboro (note) 4,238,122,320 240,630,400 3,804,297,983 1,876,000 433,824,337 238',754,400 11.4 Fleetwood Imperial 178,112,200 503,200 177,609,000 Spud 78,505,200 49,014,600 29,490,600 60.2 Barking Dog 76,100,000 76,100,000 All others 42,330,600 4,646,600 37,684,000 S 4,853,800,720 3,860,.338,383 993,462',337 25.7 Total cigarettes 28'~99,557,060 832L661~17~3 104113 5,9+ I Smoking tobacco (pounds): Domestic sales: Bond 3treet ,478,146 ,787,087 08,941* 7.3* Revelation 900,647 1,035,999 135,352* 13.1* Private brands 220,595 299,398 78;803* 26.3* Country Doctor 128,4,53 189,573 61,120*, 32.2* All others 34,161 95,766 61,605*, 644 3* 2,762,002 3,407,823 645,821*~ 18.9* Export sales 97,779 547,838' 450,0591* 82.2* ; Total smoking tobacco 21859,781 3,955,661 1,095,8801* 27,7* Note: These are special sales of Marlboro for export. In the ordinary course of business this brand of cigarettes is not exported directly by the company. 1002333162 The foregoing tabulations of sales, expressed in dollar amounts and quantities, disclose that the decreases experienced in the fiscal year 1947 as compared with 1946 were greater in respect of quantities than of dollars, The price increases that were made effective during the fiscal year 1947 ,provided a partial offset, in~the sales totals, to

the decreases of quantities sold., The effects of the two factors can be expressed approximately, for the business of the full fiscal year 1947, as to the dollar amount by which sales increased as a consequence of higher prices and the dollar amount by which sales dacreased bocause of dEclina in quantities sold. A computation of such amount3 on the basis of annual average net selling, prices for the two fiscal years indicates that the net sales for the fiscal year 1947 reflect $9,64~0,000 of in- creases of selling prices on the quantities sold during the year and a decrease of $17,420,000 of sales volume because of reduction of quan- tities sold. The computation is summarized by brands in the following tabulation: Cigarettes: Domestic sales: Net Decrease of Sales Volume Decreases Due Increases Due to Decline in to higher Average Quantities Net Net Selling Prices Sold Decrease Philip Morris English Blend $8,154,000 6,167,000~ 1,987,000* Marlboro 16o,ooo 8,360,000 8,200,000 Dunhill Major 53,000 473,000 420,000 Spud 53,000 1,833,000 1,780,000 Fleetwood Imperial 34 , 000 1,553,000 1,519,000 English Ovals 25,000 243,000 218,0n0 All others 5,000 107,000 102,000 8,484,000 18,736,000 10,252,000 Export sales: Philip Morris English Blend 1,342,000 1,079',000* 2,421,000* Marlboro 239,000t 634,000* 395,000* Fleetwood Imperial 37,000 446,000* 483,00GR Spud 36,ooot 74,000* 38,000* Barking Dog 185,000* 185,000* All others 10,-000t 108,000* 98,000* , $8.9~78,000 16 210,000 LA632,_000 Smoking tobacco: Domestic sales: Bond Street 40,000 S 340,000 ~ 300,000 Revelation 2,000t 186,000 188,ooo Private brands 8,000 99,000 91,000 Country Doctor 5,000t 96,000 101,000 All others 19,000t 122,000 141,00U Export sales 40,000 367,000 327,000 ~ 62 Lo00 111 2_10 L000 11148,000 Total cigarettes and smoking tobacco 9640 000 ~17,420p000 t7j80,.000 an increase. *Inc3icates 1UUZ333163 a decreasa. tIndicates 7

N1144 OVh'I,Y The annual average net•selling prices used for the fore- going tabulation were influenced in some degree by variations in amounts of discounts and allowances, special allowances in respect of some of the export business, and variations in sales of the various sizes of containers of smoking tobacco on which varying prices per pound are realized. In the figures relative to variations in sales as so far presented, the domestic sales of Philip Morris cigarettes are included at the average net price or $6.3431 per thousand for the fisc-al year 1947. At the current net price of approximately $6.50 per thousand, or $.1569 per thousand more than the annual average, the sales proceeds for the 23,217 millions of such cigarettes sold during the fiscal year 1947 would have been greater by approximately 43,643,000. It is to be noted that the export business represents a greater proportion of quantity volume than it does of dollar volume. This is because tax stamps are not placed on products sold for export and consequently are noti.ncluded,in dollar volume for such shipments. Gross Profit: Percentage of net sales represented by gross ~,profit increased from 10.52 for the fiscal year ended March 31, 1946 to 13.16 for the fiscal year ended March 31, 1947. Some of the factors which contributed to this improvement of gross profit results are as ;I follows : 1. Increases in cigarette prices effective April 25, and October 7, 1946. 1946 2. Increases in volume of export sales of cigarettes. Revenue stamps export profit are not included in the selling price and cost of shipments and therefore the percentage of gross thereon is higher than on domestic sales for which revenue stamps are included in sales and costs. 3. Discontinuaneo of production of cigarettes at Stephano Bros. factory which had a higher cost than the company's own plants. Approximatoly 4 per cent of eigarettes produced during the fiscal year 1946 was manufactured at Stephano Bros., and none for the fiscal year 1947. 4. Decrease in average cost per unit of production (except leaf tobacco) at the Louisville factory at which new machinery was installed during the 1947 fLscal year, 1U02.333164