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, Approximately 23 per cent of the cigarette production during the fiscal year 1947 was manufactured at Louisville, as compared with approximately 361per cent in tho 1946 fiscal year. 5. A decrease in percentage of discounts and allowances on net sales of the fiscal year 1947 as compared with the fiscal year 1946. While the factors listed above had the effect of increasing the average percentage of gross profit on sales for the fiscal year 1947, there also were offsetting,factors which tended to reduce such percent- age result, namely: 1. The domestic sales of Marlboro cigarettes decreased ap- proximately 72 per cent in quantity. Such decrease has relatively greater effect upon percentage of gross profit because the average gross profit for the 1947 fiscal year was $1.85 per thousand for Marlboro cigarettes as compared with $ ,74 per thousand for Philip Morris English Blend cigarettes (domestic sales). 2. Increase in cost of bright leaf tobacco per unit produced~. 3. Increases in all direct costs and overhead per unit pro~- duced at each of the factories in Richmond. Approximately 77 per cent of the company's production of cigarettes during the fiscal year 1947 was manufactured at Richmond. The comparable percentage for the fiscal year 1946 was 80. I The aforesaid gross profit percentage results are composite averages for all business. For the principal product, Philip Morris Englisti Blendicigarettes, the comparison in respect of domestic sales as follows, expressed as amounts per thousand c1garettes : Average Net Selling Fiscal Year Ended March 31 Price Cost 1947 $6.34 $5.60 1946 5.99 5.50 Gross Percentage Cj Profit of Gross Profit;j $ . 74 11.67 .49 8.18 'v'i A better indication of the trend in percentage of gross profit for that brand is reflected by the following analysis of the results stated above for the fiscal year 1947 classifiod according to the poriods in which price increases became effective. n 9

e A Period verag Net Selling Price Cost Gross Percentage Praf i.h~~ of Gross Profit April 1, 1946 to April 24, 1946 $6>00 $5.59 $.41 6.83 April 25, 1946 to October 6, 1946 6,24 5.58 ,66 10.58 October 7, 1946 to March 31, 1947 6.50 5.62 .88 13.54 Shipping, Selling, General and Administrative Expenses: These expenses increased during the 1947 fiscal year, as compared with 1946, both in aggregate amount and in percentage of net sales. The increase in amount was $1,891,402 and the increase in percentage of net sales was 1.39, that is from'6.13 per cent for 1946 to'7.52 per cent for 1947. The increase is~principally in the selling, ex- penses, including advertising. A detailed statotnent of these expenses is presented with this report, showing amounts for each of the two fiscal years and the amounts of increases and decreases, Other Income and Other Deductions: Details of other income and other deductions, and also comparison of such items for the two fiscal years, are shown on the accompanying comparative atatement of income. The principal item of increase during the two years is in respect of interest expense which increased by $252,733 for the fiscal year 1947 over1946. The aggregate interest,expense for 1947 was $1,050,394. For the fiscal year ending March 31, 1948 the intorost on the 2-5/8% SinkingFund Debentures will be$840,000. FINANCIAL POSITION The accompanying comparative balance sheet discloses a marked improvement in net working capital position at March 31, 1947 as compared with March 31, 1946. The comparative amounts are $94,586,752 for 1947 and $74,387,987 for 1946,, The ratios of current assets to current ].iabilities for the two balance sheet dates are 7.46 to 1 for 1947 and 2.47 to 1 for 1946, 10

Summary of the items included in net working capital as of the two balance sheet dates is as follows: March 31 Increases CURRENT ASSETS: 1947 1946 D * ecreases Cash ~ 3,999,636 $ 2,461,395 $ 1,538,241 t U. S. (iovernment obligations 24,414 24,414 Accounts receivable 6,390,570 7,914,461 1,523,891* Inventories 98,812,454 112,744,578 U,932,124* Refund receivable for federal excess profits taxes of prior years: 1,867,528 1,867,528* Total $109,227,074 12 0~ 2,376 41 -02* CURRENT LIABILITIESr.- Notes payable to banks 5,500,000 $ 44,000,000 $38,500,000* Dividends payable 1,464,486 966,863 497,623 Accounts payable 2,401,822' 1,607,781 794,041 Accrued liabilities 1,833,539 1,369,158 464,381 Provision for federal income taxes 3,440,4'75 2,680,587 759,888 Total 14 640,322 $ 50,624,389 ~ 8'9 4,067* Working capital (net) 94,586,752 $ 74,~87198Z $20,198,765 The increase in working capital arises principally out of an addition to funded debt, and, to a lesser degree, from net income for the fiscal year 1947 not distributed as dividends or used to purchase new property, machinery and equipment. A concise summariza- tion~of the factors which contributed to the improved position is as follows: 11

• ,J~~n~ia,~~C Balance of net income for year, as per accompanying statement of income Provision for depreciation, deducted from income Provision for claims, litigation and contingencies, deducted from!inc;omo Docroaso of prepaid expenses and deferred charges to income Deduct: Dividends declared ~ 4,361,086 Payments for retirement of 4,958,150 475,112 500,000 23,616 5,956,87$ preferred stock 210,895 4,571,981 Available for additions to plant assets or working capital 1,384,897 Other funds provided during year: Increase of funded debt 20,705,750 Collection of notes receivable from supplier 62,500 Proceeds from sales of propertyI plant and equipment (less profit included in net income) 373,982 21,142,232 22,527,129 Amount of addition to property, plant and equipment 2,328,364 Amount of addition to net working capital $20,198,765 Net tangible assets per share of common stock amounted to $23095 at March 31, 1947 and $23.66 at March 31, 1946. These amounts are based upon the balance sheets for the respective dates and are be- fore provision for premi=on future redemptions of preferred stock through sinking fund operations or as a consequence of voluntary liqui- dation of the company. The computation~is based on the following amounts: March 31 1947 1 40 Common stock $ 8,336,340 $ 8,336,350 Capital surplus 15,949,390 15,960:,374 Earned surplus 23,579,258 23,032,194 * trade- Go d will marks and brands 50,000 , o $47,864,988 447,238,918 Number of shares of common stock 1,998,468 1,998',470 *Indicates red figure~ 12

Note 3 of notes to the financial statements refers to the restrictions, under the indenture for the 2-5j$% Sinking Fund Debentures, with respect to the payment of dividends (excepting stock dividends) and payments for the purchase, redemption or other retire- ment of capital shares. The amount of earned surplus not subject to such restrictions at March 31, 1947 was appr)ximatFTy $4,836,000. Such amount was computed a4 shown below: Balance of net income for fiscal year 1947, per accompanying statement of income $4,958,150 Deduct: nividend3 declared $4,361,086 Payments for redemption of preferred stock 210,895 Good will, trad©-marks and brands 50,000 4,621,981 Available for future dividends Amount of surplus as at March 31, 1946 available for dividends, as provided by indenture 336,i69 4,500,000 Total $4,836 169 BALANCE SHEET Brief comments on various items contained in the accompany- ing balance sheet as at March 31, 1947 are set forth in following paragraphs. Demand Deposits in Banks: The cash on deposit with banks, as shown by statements received from the depositaries of the company, was confirmed to us by such depositaries and reconciled with! the ie- lated balances appearing,on the books. United States Government 0bligations: The amount of $24,414 represents the cost of three United States Treasury bonds, 3%, 1951-55 (total par value,$25,000), which were counted by us in the safe deposit vault of The National City Safe Deposit Company at 42nd Street and Madison Avenue, New York, N.. Y. ..r r 13

Accounts Receivable from Customers: gtatements of approxi- mately 96 per cent of the dollar amount of customers' accounts at March 31, 1947 were mailed by us to the customers with requests that we be advised directly of any discrepancies. Minor differences in- dicated in certain of the replies received~were satisfactorily explained to us. The allowance for doubtful accounts ($500,000)' is the same as at March 31, 1946,. Bad debt loss for the fiscal year 1947 was negligible. The allowance for cash discounts ($109,180) is approxi- mately 2 per c©nt of the accounts receivable at March 31, 1947, ex- clusive of export and certain other accounts not subject to discount. Accounts Receivable from Others: The principal items of other accounts receivable, which; we tested by such! procedures as we deemed appropriate in each instance, are indicated in the following comparative summary: March, 31 1947 1946 Accounts with the United States Government: Refund receivable for taxes on income of prior years $241,631 $' 236,321 , Refunds receivable for canceled or returned federal revenue stamps 130,644 827,974 Surplus materials in connection with war contracts 17,341 153,806 Drawback claims (import duties)_ 118,691 13,939 508,307 1,232,040 Advances to salesmen 88,056 65,678 Ecusta Paper Corporation (notes due September 1 and'March 1, subsequent to balance sheet dates) 62,500 62,500 Tobacco Products Export Corporation 30,18'5 47,045 Claims against carriers and insurance companies 25,803 66 ,101 ~~. Account current, Philip Morris & Co. Ltd. (London) 20,134 1,668 Italian Regie 16,023 16,023 Stephano Bros. 14,538 39,463 Due from purchasers of supplies, scrap, etc. 10,577 8,090 Due from vendors 8,395 13,'771 Permanent contingent funds 6,513 5,158' Refund due from advertising agency 6,356 7,618 Due from employees 5, 84`2 5,964 4 007 17 085 Miscellaneous , 807,236 . $1L 88,,204 ;.l?M:333170 14

Inventories: A separate report upon our examination of the inventories was submitted under date of May 21, 1947. PropertY, Plant and Equioment: During the fiscal year 1947 an aggregate amount of $2,328,364 was added to the property, plant and equipment accounts. Classification of this total by general categories is as follows: Building improvements: Richmond ~ Louisville 6,714 15,564 ~ 22,278 Building equipment: Richmond 81& Louisville 154,753 155,571 Machinery and equipment: Richmond 226,906 Louisville 1,875,282 2,102,188 Leasehold improvements, New York 3,271 Office furniture and fixtures 10,033 Automobiles and trucks 35,023 $2,328,364 We examined vouchers in support of the principal items among the additions for the year. The various property, plant. and oquipment accounts were reduced by an aggregate amount of $495,965, representing the cost of items sold or otherwise retired during the fiscal year 1947. Accumulated depreciation on such items amounted to $121,983, and the net undepreciated balance of cost was $373,982. However, there was a realized gain of $85,773 credited to income in connection with retirements. Depreciation provision charged to costs or expenses was $475,112 for the fiscal year 1947 as compared with $471,701 for the fiscal year 1946. Other Assets: The notes receivable from- the Ecusta Paper Corporation, aggregating $156,250, were confirmed to us by that company. Of this total, $62,500 m$tures prior to March 31, 1948', and has been included with other current receivables as hereinbefore 15

listed. The balance of the notes receivabLe, amounting to S93,750, is set forth separately on the c.c-_cmpnnyin^ balance sheet among other assets. The totals for prepaid expenses and deferred charges as at the two balance sheet dates include items as follows: March 31 1947 ~26, State and local taxes $288,633 $297,694 Machine parts at factories 181,251 175,557 Advertising materials, office and sundry supplies 49,098 32,418 Insurance premiums 95,429 77,616 Magazine and other advertising 23,477 15,985 Freight and other expenses related to manufactured stock at depots 51,069 69,188 Interest on bank loans 14,062 57,420 Miscellaneous 44L381 5,138 Total $707,400 731 01u Liabilities: Notes payable to banks were confirmed to us by the respective loaning banks and a confirmation was obtained from J. P. Morgan~& Co., Incorporated, Trustee, with respect to the amount of 2-5/4Sinking Fund Debentures outstanding. Statements submitted to us by the principal suppliers were compared with the related ac- counts payable as shown by the books. Accrued liabilities for various expenses as of March-31st include the following items: State, local and miscellaneous taxes 6 Accrued interest on debentures Additional compensation to officers and employees (rQlativo to income of prior years) Accrued storagc charges Allowances to~customers for advertising, etc. Redemption ofpremium~certificates and coupons Salaries and wages Miscellaneous 16 1947 124 646,814 $~ 611,269 420,000 85,750 53,596 342 , 000 285,000 170,306 112,032 6a, 000 74 , 093 120~,143, 80,948 74,276: 66,470 N- CJ CJ 1 36 9j58 -

Capital Stock: Shares of capital stock issued and out- standing as of March 31, 1947 were confirmed to us by the registrar and transfer agent for each class of stock. In conclusion, we express our appreciation for the cordial cooperation accorded to us during the course of our examination. Very truly yours, 17

ASSETS: Current: Demand deposits in banks and cash on hand United.States Government obligationa, at cost Accounts receivable from customers, less allowance for discounts and doubtful accounts, $609,180 for: 1947 and $625,684 for 1946 Accounts receivable from others Inventories, at average cost; Leaf tobacco (including imported leaf in bond subject to duty) Manufactured stock I Stock in process, revenue stamps and operating supplies Total inventories C'Refund receivable for federal excess profits taxes of prior years Total current assets Property, plant and equipment, at cost: Land, buildings, machinery and equipment Less, Allowance for depreciation Other assets; Notes receivable from supplier Investment, at cost, in Philip Morris & Co., Ltd. (England) (Note 1) Other investments Prepaid expenses and deferred charges Good will, trade-marks and brands 18 PHILIP MORRIS & CO. LTD., INCORPORATED (Incorporated in Yirginia) i ~COMPARATiVE BALANCE SHEET, March 31, 1947 and 1946 1947 24,414 ~ 5, 583, 334 .8079236. 217,504 214,029 5,380,921 _98,8 12,454 .9,838,441 93,750 235,965 11,.800 707,400 1946 8,006,041 3,370,020 3,016,891 6,468,421 4,989,150 731,016 50,000 1,048,915 1,185,031 116744410 11186,5-51 CAPITAL: 344,0,475 2680~8 '14i640,322. 0 624 8 .._... " 32,000,000 500,000 112420 19,784,800 9,984,7001' 1,954,300 ;1,954,306 80336-340 :`. ~8,336,3501~ 15,949,390 .°'.15,960,374' ?39 Zqj258. 2 0 2 1 4 6 ,604,088 `'-6 2671918 11647 4_ 1 1 1$6~7 LIABILITIES:. Current: Notes payable to banka Dividends payable Accounts payable Accrued liabilities,- intereat, taxes (other than federal income taxes), advertising, etc. Provision for federal income taxes Total current liabilities Funded debt; $205,750 fiwenty-year 3% Debenturee, less sinking fund cash held by trustee 2-5/8,%Zinking Fund Debentures, due April 1, 1966 (sinking fund payments commence March 31, 1956) Reserve for claims,-litigation and contingencies Capital stock: Cumulative preferred, par value $100 per share; authorized 350,000 shares issuable in series: 4% Series, authorized 199,847 shares; at March 31, 1947 redeemed 1,999 ehares and outstanding 197,848 shares (Note 2) 3.60% 8eries,-authorized •149,883 shares, outstanding 19,543 shares (Note Common, par value 65 per share, authorized 3,000,000 shares outstand- ing at March 31, 1947, 1,99$,468 shares (552,000 shares issued for, equivalent of $2 per share) Capital surplus,.statement annexed Earned surpius, statement annexed;(Note, 1~4 1946 . 5,500,000 ~ 44,000,000 1,464,4g6 966,863 2,401;822 1,607,781 1,833,539 1,369,158. f