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I PHILIP MORRIS & CO. LTD,, INCORPORATED -- Report upon Examination of Financial Statements

CONTENTS Pa es Comments: Introduction 1 Statement of Income 1-3 Net Sales 4-8 Gross Profit 8-10 Shipping, Selling, General and Administrative Expenses 10 Other Income and Other Deductions 10 Financial Position 10-13 Balance Sheet: Demand Deposits in Banks 13 i United States Government Obligations 13 Accounts Receivable from Customers 14 Accounts Receivable from Others 14 Inventories 15 Property, Plant and Equipment 15 Other Assets 15-16 Liabilities 16 C apital 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 Comparative Statement of Shipping, Selling, General and Administrative Expenses for the fiscal years ended Marc,Xi 31, 1947 and 1946 19-21 22 Statements of Surplus for the fiscal year ended March 31, 1947 23 Notes to Financial Statements 24 N1 0 .t~ r~o a ns ~ 0 ~ j

LYBRA~TD, Ross BROS.E,i\rC)NTGO-NLERY CERTIFIED PUBLIC ACCOUNTANTS RESIDENT PARTNERS NEW YORK ST. LOUIS PHILADELPHIA LOUI$VILL£ WILLIAM M. LYBRAND 90 B R O A D S T R E ET CHICAGO ATLANTA ROBERT H. MONTGOMERY ®O9TON DALLAS PRIOR SINCLAIR 4 eALTIMORE HOUSTON NORMAN J. LENHART N EW YO R K "'F' WASHINGTON SAN PRANOISCO WALTER L.SCHAFFER PITTSGURGH LO°.y ANGELES CONRAD B.TAYLOR D€TROIT SEATTLE ALVIN R.JENNINGS CLEVELAND - HERMON F. SELL CINCINNATI LONDON ROCKFORD PARIS CHRISTOPHER H. KNOLL HILTON R.CAMPBELL June 9, 1947. EDWARD G.CARSON GEORGE W. McIVER,JR. WALTER R. STAUB MARK E.RICHARDSON Mr. Alfred E. Lyon, President, Philip Morris & Co. Ltd., Incorporated, 119 Fifth Avenue, New York 3, New York, Dear Sir: 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 $6,148,000 for the fiscal year 1946. The effect of the special items on the amounts reported for the two years is shown in the following comparison: ~ W 1

ROSS 13kto:;. ti Years Ended March 31 Increase 1947 194 Decreases* Income for year before special items $5,409,085 $4,497,694 $ 911,391 Special items, net deduction for 1947 and net addition for 1946 450,935 1,650,306 2,101,241* $4,958,150 $6,148,000 $1,189,850* The nature of the various special items is indicated by 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 yearo 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 incurred in 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 -~ -" 860 185 635 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 March 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 year. The federal 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 of income 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 $1075 per share for 1947 and $1,50 per share for 1946 (on basis of new 45000 par value stock). A condensed comparison of the results of operations for the fiscal years ended March 31, 1947 and 1946, after provision for in- come taxes but before special items, is presented in the following summary: 1947 1946 Pctges of Pctges of Amounts Net Sales Amounts Net Sales Net sales $17:0,905,550 100000 $178,686,032 100,00 Cost of sales .148,411,919 86.84 159,882,242 8,48 Gross profit 22,493,631 13016 18,803,790 10.52 Shipping, selling, general and administrative expenses 12,844,765 7.52 10,953,363 6.13 Operating profit 9,648,866 5.64 7,850,427 4a39 Other income 162,36o .09 1 55,840 °09 r..i 0 9,811,226 5,73 8,006,267 4.48 43. Other deductions 141 1 202 a70 958 573 54 co ~ Income before federal income taxes and ~ - , , , - . r.~ v v w ~ special items 8,609,085 5.03 7,047,694 3.94 Provision for federal income taxes 3,200,000 1087 --2,550,000 1.43 Income before special items $ 5,409,085` 3.16 ~ 4,497,694 2.51 __ , . ~

~aR-, ROSS HNO.S. 7 i y 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: ao Decrease of quantities of cigarettes and smoking tobacco sold. As shown on tabulation presented hereinafter, such decrease'was 1,833 millions of cigarettes and 1,095,000 pounds of smoking tobaccoso 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 Cigarettes: Domestic sales: Philip Morris Marlboro Dunhill Major Spud English Ovals in the following tabulation: Fiscal Years Ended March 31 Increases 1947 194 Decreases* English Blend Fleetwood Imperial All others Total Export sales: domestic Philip Morris English Blend Fleetwood Imperial Marlboro (note) Barking Dog Spud All others Smoking tobacco: 4 Domestic sales: Bond Street Revelation Private brands Country Doctor _ -All others Export sales Total cigarettes and 147,269,996 $145,282,504 $ 1,987,492 3,431,132 11,630,951 8,199,819* 989,560 1,409,505 419,945* 962,917 2,742,936 1,780,019* 733,308 951,792 218,484* 632,788 2,151,450 1,518,662* 106,323 208 483 102,160'E- 154,126,024 164,377,621 10,251,597* 11,887,529 9,466,966 2,420,563 484,629 1,263 483,366 399,837 4,983 394,854 185,140 185,140• 160,137 122,283 37,854 111,007 13,316 97,691 $167,354,303 $173,g86,432 $ 6,632,129* $ 1,668,150 $ 1,231,573 2g5~533 198,106 47:964 119,921 1,968,586 ~ 300,436* 1,419,314 187,741* 376,872 91,339* 299,389 101,283* ' 188,911 140,947* 446,528 326,607* $ 3,551,247 $ 4,699,600 $ 1,148,353* smoking tobacco $170,905,550 $178,686,032 $ 7,780,482~ ,-,-Note: These are special sales of Marlboro for exporto In the ordinary course of business this brand of cigarette is not exported directly by the company. 4 2048020034

From the foregoing tabulation and the one which follows, dealing with quantities, the relative importance of various elements of the sales totals is indicated by percentages, as follows: Dollar Sales uantit Sales 1947 194 1947 194 Percentages of all sales: _ _ Cigarettes: Domestic go.18 91.99. Export 7.74 5.38 Total 97.92 97.37 Smoking tobaccos 2.08 2,63 Total 100,00 100.00 Philip Morris cigarettes: Domestic 86.17 81.31 Export 6.96 5030 Total 93.13 86.61 Percentages of cigarette sales: Domestic 92,10 94,48 83,26 87.48 Export 7.90 5.52 16~74 12,52 Total 100,00 100.00 100,00 100.00 Philip Morris: Domestic 88.oo 83.5o 80006 78.64 Export 7.10 5.44 14,61 12,34 Tota1 95.10 .88.g4 g4a67 go.98 Marlboro, domestic 2.05 6.69 1.51 5.04 All others, domestic and export 2.85 4.37 3.82 3.98 Total 100.00 100.00 100.00 100,00 Percentage of domestic cigarette sales: Philip Morris 95a55 88.38 96,16 89.89 Marlboro _ _ 2.23 7.08 1.81 5.77 --All others -2e22 4:54 2;03 4,34 Total - 100.00 100.00 100000 100.00 The comparison of quantities ~ sold during the tion: -J of cigarettes and smoking tobaccc two fiscal years is-presented in the following tabula-

ROSSBKOS. S'Tppw`' Fiscal Years Ended March 1 Increases Decreases* 1947 1946 Quantities Pct es 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* 7109* Dunhill Major 155,975,560 234;652,000 78,676,440* 3305* Spud 151,426,980 456,568,700 305,141,720* 66.8* Fleetwood Imperial 99,683,440 358,119,330 258,435,890* 72.02* English Ovals 71,180,700 95,639,250 24,458,550* 25a6* All others 12,7459610 26,025,820 13,280,210* 51,0* 24,145,756,340 26,972,3229790 2,826,566,450* 10.5* Export sales: Philip Morris English Blend 4,238,122;320 3,804,297,983 433,824,337 11.4 Marlboro (note) 240,630,400 1,876,000 238,754,400 Fleetwood Imperial 178,112,200 503,200 177,609,000. Sp ud 78,505,200 49,014,600 29,490.,600 6oa2 Barking Dog 76,l00,000 76,l00,000 All others 42,3J0,600 4,646,600 37,684,000 4,853,800,720 3,860,338383 _ 993,462,337 25.7 Total cigarettes 28,999,557,060 30,832,661,173 1,833,104,113* 5.9} Smoking tobacco (pounds): Domestic sales: Bond Street ,478,146 .787,087 08,941* 703* Revelation 900,647 1,035,999 135,352* 1301* Private brands 220,595 299,398 78,803* 2603* Country Doctor 128,453 189,573 61,120* 32,2* All others 349161 95,766 61,6o5*, 64.3* 2,762,002 3,407,823 645,821*, 1809* Export sales 97,779 547,838 4 0 0 * 82.2* Total smoking : tobacco 2,859,781 3,955,661 1,095,880* .2707* 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, -_ The foregoing tabulations of-sales,= expressed in dollar amounts ° ._.-...__s F.-• _ ._ ... ..J - Y~ l r.~ Q and quantities, disclose that the decreases experienced c the fiscal ~ [o -- 4 ~ year 1947 as compared with 1946 were greater in respect of quantities~ ~ r. 0 ,than of dollars. The price increases that were made effective during ca .;the fiscal year 1947 provided~a .partial offset, in the sales totals, to

KOSSHROti, 10,000t $9,578,000 ~ 40,000 2,000t 8,000 5,000t 19,ooot 40,000 ~ 62,000 Total cigarettes and smoking tobacco 19,640,000 *Indicates an increaseo tIndicates a decrease. 7 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 decreased because of decline in quantities sold. A computation of such amounts 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 $9,640,000 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: Net Decrease of Sales Volume Increases Due to Higher Average Net Selling Prices Cigarettes: Domestic sales: Philip Morris English Blend 8,154,000 Marlboro 16o,o00 Dunhill Major 53,000 Spud 53,000 Fleetwood Imperial 34,000 English Ovals 25,000 All others 5,000 8,484,000 Export sales: Philip Morris English Blend 1,342,000 Marlboro 239,000t Fleetwood Imperial 37,000 Spud 36,o0ot Barking Dog All others Smoking tobacco: Domestic sales: Bond Street Revelation Private brands Country Doctor All others Export sale_s Decreases Due to Decline in Quantities Sold _ Net Decrease $ 6,167,000 $ 1, 987, 000* 8,360,000 8,200,000 473,000 420,000 1,833,000 1,780,000 1,553,000 1,519,000 243,000 218,000 107,000 102,000 18,736,000 10,252,000 1,079,000* '2,421,000* 634,000* 395,000* 446,000* 483,000* 74,000* 38,000* 185,000* 185,000* 108,000* 98,0oo* $16,210,000 $ 6,632,000 $ 340,000 $ 300,000 186, ooo ---188, o00 99,000 91,000 96,000 lol,ooo 122,000 141,000 367,000 n 327,000 ~ 0 ~ 1,210,000 $ 1,148,000 $17,4209000 fi- v $7,780,000 Ss-

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 of $6.3431 per thousand.for the fisc-al year 1947, At the current net price of approximately $6.50 per thousand, or $a1569 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 $3,643,0000 It is to be noted that the export business represents a greater proportion of quantity volume than it does of dollar volumea This is because tax stamps are not placed on products sold for export and consequently are not included 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 follows: 1. Increases in cigarette prices effective April 25, 1946 and October 7, 1g46o 2. Increases in volume of export sales of cigarettes. Revenue stamps are not included in the selling price and cost of export shipments and therefore the percentage of gross profit thereon is higher than on domestic sales for which revenue stamps are included in sales and costs. 3. Discontinuance of production of cigarettes at'Stephano Bros. factory which had a higher cost than the company's own plants. Approximately 4 per cent of cigarettes produced P•3 ~ -during the fiscal year 1946 was manufactured at Stephano 4, __Bros., and none for the fiscal year 1947. ~ cs aa 4. Decrease in average cost per unit of production (except 0 .leaf tobacco) at the Louisville factory at which new machinery was installed during the 1947 f1scal yeara ~ w rn 8

tiuss xHOS. •^ . r Approximately 23 per cent of the cigarette production during the fiscal year 1947 was manufactured at Louisville, as compared with approximately 16 per cent in the 1946 fiscal year. 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 $1085 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 inall 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. The aforesaid gross profit percentage results are composite averages for all business. For the principal product, Philip Morris EnglisYi Blend cigarettes, the comparison in respect of domestic sales is as follows, expressed as amounts per thousand cigarettes: iscal Year Ended March 31 Average Net Selling Price ost Gross Percentage Profit of Gross Profit 1947 $6,34 $5.60 $,74 11.67 1946 5.99 5.50 049 8.18 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 classified according to the periods in which price increases became effective.

Average Period Net Selling Price Cost Gross Percentage Profit of Gross Profit April 1, 1946 to April 24, 1946 $6,00 $5.59 $,41 6.83 April 25, 1946 to October 6, 1946 6024 5.58 066, 10a58 October 7, 1946 to March 31, 1947 6050 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 advertisingo A detailed statement 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 statement of incomea 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 over 1946, The aggregate interest expense for 1947 was $1,050,394, For the fiscal year ending March 31, 1948 the interest on the 2-5/8% Sinking Fund Debentures will be $840,000. FINANCIAL POSITION r.~ v 4:11 rc The accompanying comparative balance sheet discloses a 0 ~ marked improvement in net working capital position at March 31, 1947 ~ ~ .~ c5 as compared with March 31, 1946, The comparative amounts are .494,586,752 for 1947 and $74,387,987 for 1946. The ratios of current assets to current liabilities f or the two balance sheet dates are 7,46 .to 1 for 1947 and'2a47 to 1 for 1946.

Summary of the items included in net working capital as of the two balance sheet dates is as follows: CURRENT ASSETS: March 31 Increases 1947 19466 Decreases* Cash $ 3,999,636 $ 2,461,395 $ 1,538,241 U. S, Government obligations 24,414 24,414 Accounts receivable 6,390,570 7,914,461 1,523,891* Inventories 98,812,454 112,744,578 13,932,124* Refund receivable for federal excess profits taxes of prior years 1,867,528 1,867,528* Total $109,227,074 $125,012,-376 $15,785,302* 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 3,440,475 2,680,587 759,888 Total $ 14,640,322 $ 50,624,389 $35,984,067* Working capital (net) $ 94,586,752 $ 74,387,987 $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 f ollows : tl- 11

t$"W' O ROSSBROS 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 income ~ ,958,150 475,112 - -500, 000 Decrease of prepaid expenses and deferred charges to income 23,616 5,956,878 Deduct: Dividends declared $ 4,361,086 Payments for retirement of 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 f unded-debt 20,705,750 Collection of notes receivable from supplier 62,500 Proceeds f rom sales of property~plant and equipment (less profit included in net income) 373,982 21,142,232 22.9527,129 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 $23,95 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 premium on f uture redemptions of preferred stock through sinking f und operations or as a consequence of voluntary liqui- dation of the company. The computation is based on the following amounts: .Common stock Capital surplus --Earned surplus : Good will, trade-marks and_brands March 31 1947 1946 $ 8,336,340 $ 8,336,350 15,949,390 15,960,374 23,579,258 23,032,194 50,000* $47,864,988 $47,278L918 Number of,shares of common stock :z1,998,468 1,998,470 w *Indicates red figure o 12

Note 3 of notes to the financial statements refers to the restrictions, under the indenture for the 2-5/8% 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:)ximatFly $4,836,000. Such amount was computed as shown below: Balance of net income for fiscal year 1947, per accompanying statement of income $4,958,150 Deduct: Dividends declared $4,361,086 - Payments for redemption of preferred stock 210,895 Good will, trade-marks and brands 50,000 4,621,981 Available for future dividends 336,169 Amount of surplus as at March 31, 1946 available for dividends, as provided by indenture 4,500,000 Total 44,836,169 BALANCE SHEET Brief comments__on various items contained in the accompany- ing balance sheet as at March 31, 1947'are set forth in following paragraphsa NO Demand Deposits in Banks: The cash on deposit with banks, 0 .b. 0 NI as shown by statements received from the depositaries of the company, 0 a was confirmed to us by such depositaries and reconciled with the re- __._. lated balances appearing on the books. ~ United States Government Obligations: The amount of $24,414 represents the cost of three United States Treasury bonds, 3% , 1951-55 -(total par value,$25,000)9.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. 13

Accounts Receivable from Customers: Statements of approxi- rrmately 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 cent of the accounts receivable at March 31, 1947, ex- clusive of export and certain other accounts not subject to discounto 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: Ref und receivable for taxes on income of prior ears $241 631 $' 236 21 y , ,3 Ref unds 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) 1,18,691 13,939 508,307 -1,232,040 , Advances to salesmen Ecusta Paper Corporation (notes due September 1 ~e and March 1, subsequent to balance sheet.dates) ~Tobacco Products Export Corporation =~ ~"Claims against carriers and insurance companies ;;Account current, Philip Morris & Co. Ltd, (London) Italian Regie Stephano Bros. Due f rom purchasers of supplies, scrap, etco aw Miscellaneous- "- - - ~~ .. -__.~~ _........ ~, =~ 88,056 62,500 30,185 25,803 20,134 16,023 14,538 10,577 8,395 6,513 6,356 _5,842 °_4;007 65,678 62,500 47,045 66,101 1,668 16,023 39,463 8,090 13,771 5,158 7,618 5,964 17,085 807,236 $1,588,204 2048020044 14 Due from vendors 4FPermanent contingent funds f-Refund due from advertising agency i_-Due f rom employees-

i.qSS BROS. GyrCO`1tr Inventories: A separate report upon our examination of the inventories was submitted under date of May 21, 1947. Property, Plant and Equipment: 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 $ 6,714 Louisville 15,564 $ 22,278 Building equipment: Richmond 818 Louisville 154,753 155,571 -:j ~ Machinery and equipment: Richmond Louisville Leasehold improvements, New York Office furniture and fixtures Automobiles and trucks 226,906 1,875,282 2,102,188 3,271 10,033 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 equipment 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 4475,112 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 4156,250, were confirmed to us by that companyo Of this total, $62,500 matures prior to March 31, 1948, and has been included with other current receivables as hereinbefore 15

v ~~'t0 ROSS HxoS. t_ E _ listed. The balance of the notes receivable, amounting to $93,750, is set forth separately on the accompanying balance sheet a.mong other assetso The totals for at the two balance prepaid expenses and deferred charges sheet dates include items as follows: as March 31 1947 146 State and local taxes $288,633 4297,694 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 manuf actured stock at depots 51,o6g 69,188 Interest on bank loans 14,062 57,420 Miscellaneous 4,381 5,138 Total 707,400 $731,016 Liabilities: Notes payable to banks were confirmed to us by the respective loaning banks and a confirmation was obtained from "-'Jo Po Morgan-& Ooa, Incorporated, Trustee, with respect to the amount of 2-5/8% Sinking Fund Debentures outstanding. us by the principal suppliers were compared Statements submitted with the related ac- counts payable as shown by the bookso -to -1_~ Accrued liabilities for various expenses .-include the following items: - 1947 1946 State, local and miscellaneous taxes $ 646,814 $ 611,269 Accrued interest on debentures 420,000 85,750 Additional compensation to officers and employees (relative to income of prior years) 53,596 Accrued storage charges 342,000 285,000 ,a. Allowances to customers for ~ 0 advertising, etc. 170,306 112,032 Redemption of premium certificates 4 and coupons 6o,0oo ~ 74,093 ~ Salaries and wages 120,143 80,948 ~ Miscellaneous 74,276 66,470 $1,833,539 $1,369,158 as of March 31st

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

aossnao~ PHILIP MORRIS & CO. LTD., INCORPORATED (Incorporated in Virginia) COMPARATIVE BALANCE,SHEET, IMarch 31, 1947 and 1946 ASSETS: 1947 Current: Demand deposits in banks and cash on !ian l S 3,3)9,636 United States Government obligatiorrs, at cost 24,414 Accounts receivable from customers, less allowance for aiscounts and doubr.ful accounts, )b609,18:) for 1947 and $1625,684 for I)46, 5,5?33,?.34 Accounts receivablu_ frcm uCh-~rs 807,_36 Inv,.n'tnr•ies, at avr:c,age cost: Leaf' tobacco (incluiing imported leaf' In bonI subject to duty) R5,2.17,504 Manufactured stock 8,214,W9 Stock In process, re•.!~,nue stfa.mps and operating suppli~s 5, 3t'0,921 Total Lnvent,ori~,s q8,812, 154 Refund receivable for fer3erallexcess profits taxes of prior years , Total ~.urrenl assets 109,227,074 Property, plant and nq-i.lpnent, at Cost: Land, bui.llings, machinery ur.9 equipment 9,8:~3,4 41 Less, Allowance for depreciation 3,370,';z0 6,468,421 Other assets: Notes receivable from supplier! Investment, at cost, in Philip Morris & Co., Ltd. (England) (N-e 1) Other investments Prepaid expenses and ,9eferrr?9 charges Good will, trade-marks at:d bran,ls 18 1946 LIABILITIES: $ 2,461,395 24,414 Current: Notes payable to banks Dividends payable Accounts payable Accrued liabilities,- interest, taxes (other than federal income taxes), advertising, etc. 6,326,257 Provision for federal income taxes 1,588,204 Total current liabilities 92,177,814 15,193,063 5, 3'73,71 01 112, 744, 578 1,867,528 125,012,375 B,006,041 3,016,8)1 4,989,150 ;)3, -,'50 156,250 235,965 235,965 11,800 11,800 707,400 731,016 1,048,9'5 50,000 _-1 l, 85,031 ;I1?6,744,410 {b131,186~557 Funded debt: Twenty-year 3% Debentures, less $6205,750, sinking fund cash held by trustee 2-5/8% Sinking Fund Debentures, due April 1, 1966 (sinking fund payments commence March 31, 1956) ]jeser'~tne for claims, 11tYgal°l.otL~i,and contingencies I CAPITAL: II! Oapit,Eil ,stock: Cumulative preferred, par value $100 per share, atrthorized "3;0,000 shares issuable in series: 4% Series, authorized 199,847 shares; at March 31, 1947 redeemed 1,999 shares and outstan9ing 197,848 shares (Note 2) 3.60% Series, authorized 149,883 shares, outstanding 19,543 shares (Note 2) Common, par value $5 per share, authorized 3,000,0010 shares outstand- ing at March 31, 1947, 1,996,468 shares (552,000 shares issued for equivalent oi' $2 per share) Capital surplus, statement annexed Earned surplus, statement nanexed (Note 3) 1947 1946 ~G 5,500,000 ~ 44,000,000 1,464,486 966,863 2,401,822 1,607,781 1,833,539 1,369,158 3,440,475 2,680,587 14,640,322 50,624,389 11,294,250 32,000,000 500,000 19,784,800 19,984,700 1,954,300 1,954,300' 8,336,340 8,336,350 15,949,390 15,960,374, 23,579,2~8 23,032,194 69,604,088 , 69,267,918 4116,744,410 $~131,186,557 etit?0z08bqz

COMPARATIVE STATEMENT of INCOME for the fiscal years ended March 31, 1947 and 1946 1947 1946 Increases Decreases* Gross sales, less returns $174,438,725 $182,497,474 $ 8,058,749* Deduct: Discounts Allowances $ 3,210,066 323,109 $ 3,395,438 416,004 $ 185,372* 92,895* $ 3,533,175 $ 3,811,442 $ 278,267* Net sales $170,905,550 $178,686,032 $ 7,780,482* Cost of goods sold 148,411,919 159,882,242 11,470,323* ~ Gross profit $ 22,493,631 $ 18,803,790 $ 3,689,841 Shipping expenses ~ 2,645,659 $ 2,783,958 $ 138,299* .Selling expenses 9,408,180 7,497,206 1,910,974 1.General and administrative expenses 790,926 672,199 118,727 $ 12,844,765 $ 10,953,363 $ 1,891,402 Operating profit before federal income taxes $ 9,648,866 7,850,427 $ 1,798,439 9 !~Other income: Dividends ~ 11,290 $ 11,290 Commission on purchase of leaf tobacco for others 14,687 47,419 $ 32,732* Profit on sale of securities 59,677 59,677* Interest' 10,922 22,691 11,769* Net profit on disposal of machinery and equipment 8,573 8,573 Reversal of prior year provision for management bonus 49,796 49,796 Miscellaneous -- 67,092 14,763 -52,329 %r ~ 162,360 $ 155,840 ~ 6,520 Forward $ 9,811,226 $ 8,006,267 $ 1,804,959 19

COMPARATIVE STATEMENT of INCOME, Continued 1947 Increases 1946 Decreases* Brought forward $ g,811,226 ~ 8,006,267 $ 1,804,959 Other deductions: Interest on debentures Other interest Prior service contribution under company retirement plan Expenses in connection with withdrawn offering of debentures Net loss on disposal of machinery and equipment Costs resulting from cancella- ~ 830,725 219,669 79,424 ~ 345,500 $ 485,225 452,161 232,492* 79,424 42,565 42,565* 21,681 21,681* tion of contracts for additions to plant 36,386 17,242 19,144 Miscellaneous 35,937 35,937 $ 1,202,141 $ 958,573 $ 243,568 Income for and before provision federal income taxes special items set forth below $ 8,609,085 $ 7,047,694 $ 1,561,391 -,Provision fo taxes r federal income 3;200,000 2,550,000 650,000 Income for year before special items set forth below tAdditions: ! Recovery of federal excess ~ It profits taxes of prior years 0 1,867,528 § 1,867,528* Recovery in connection with government contracts $ 310,000 310,000 Excess provision in prior years for federal income taxes 300,000 300,000* Premium received on sale of 2-5/8% Sinking Fund Debentures, less expenses of issue 133,865 133,865 Profit on sale of real estate 77,200 77,200 $ 521,065 $ 2,167,528 $ 1,646,463* Forward $ 5,930,150 $ 6,665,222 $ 735`,072* ~ 4%A a7 0 ~ 0 v r.n %a

COMPARATIVE STATEMENT of INCOME, Continued Brought forward Deductions: Losses arising from termination of war ($492r222"), less $250,000 charged against reserve therefor Premium paid on retirement of Twenty Year 3% Debentures Settlement of claims in con- nection with canceled subscriptions to cumulative preferred stock, 3.60% series Prov'ision for claims, litiga- tion and contingencies Balance of income trans- ferred-to earned surplus 1947 1946 Increases Decreases* $ 5,930,150 ~ 6,665,222 $ 735,072* $ 242,222 $ 242,222* $ 472,000 472,000 275,000 275,000* 500,000 500,000 $ 972,000 $ 517,222 $ 454,778 $ 4,958,150 d 6,148,000 1,18g,850* I.- 21

COMPARATIVE STATEMENT of SHIPPING, SELLING, GENERAL and ADMINISTRATIVE EXPENSES for the fiscal years ended March 31, 1947 and 1946 Shipping expenses: Labor ,Gases, etc. Cartage -Freight ,Express Selling expenses: Advertising Salesmen's salaries and expenses Sales managers' salaries and expenses ~ Scheme expense ` Samples Sales administration Royalties Miscellaneous General and administrative expenseso Salaries, executive Salaries, office Office rent, electricity, etc. Postage Legal and auditing expense State and local taxes (includes federal capital stock tax in 1946) Stock transfer and registrar expense Doubtful accounts written off Miscellaneous . - . : _ . -.-.~e-. Less, Portion charged to manufacturing costs Combined totals 1947 1 46 Increases Decreases* $ 335,431 $ 372,827 ~ 37,396* 486,819 511,041 24,222* 80,828 95,943 15,115* 1,677,009 1,760,871 83,862* 65,572 43,276 22,296 $ 2,645,659 $ 2,783,958 $ 138,299* $ 6,988,043 $ 6,328,593 $ 659,450 1,260,191 507,948 752,243 204,194 135,941 68,253 230,085 63,684 166,401 284,544 108,617 175,927 105,793 84,475 21,318 28,914 34,561 5,647* 306 ,416 233,387 73,029 $ 9,408,180 $ 7,497,206 $1,910,974 ~ 192,500 ~ 148,333 $ 44,167 531,958 426,074 105,884 67,939 58,435 9,504 18,966 14,315 4,651 111,159 109,797 1,362 567,541 472,314 95,227 34,574 30,139 4,435 3,041 963 2,078 195,825 217,692 21 , 867 * 1,723,503 1,478,062 245,441 932,577 "805,863 I26,714 6 721,926 $ . 672,199 $- 118 , 727 rs 0 .~ $12 ,844 ,765 $10 ,953 ,363 11,891 ,402 0 22

k:OSS Hf:Uti, STATEMENTS of SURPLUS for the fiscal year ended March 31, 1947 Balances, March 31, 1946 Balance of income transferred from statement of income Transfer of common stock heretofore reserved against scrip certificates which expired during year AL Deduct: Premium on 1,999 shares of cumulative preferred stock, 4% series, redeemed during year Dividends declared: On cumulative preferred stock, 4% series On cumulative preferred stock, 3.60% series On common stock, $1.75 per share Write-off of cost of good -will, trade-marks and brands _ ». Balances, Marchf31, 1947 (Note 3) 2-3 Earned Surplus Capital Surplus $23,032,194 $15,960,374 4,958,150 10 27 ,990 ,344 15 ,960 ,384 10,994 793,391 70,355 ~ 746 863 5* , ~ 0 ~ 3,497,340 4 361 086 a , , 50,000 Cn W -=4,411,086 10,994 $23 ,579 ,258 $15,949,390

ti4l}111 `l zoss Hku~ : ~~rGO l`~~ NOTES to FINANCIAL STATEMENTS Net assets of this wholly owned English subsidiary are approxi- mately equal to the investment a,mount, on the basis of the official rate of exchange. The Cumulative Preferred Stock is redeemable at any time, other- wise than through the sinking funds, at $108.50 per share for 4% Series (up to February 1, 1949) and $103.00 per share for 3.60% Series (up to February 1, 1950), and at diminishing per share amounts after those dates but not less than $105.50 for 4% Series and $100.00 for 3.60% Series; plus accrued dividends in each case. Holders of the shares of each series are entitled to such specified payments upon voluntary liquidation of the company and to $100.00 per share, plus accrued dividends, upon involuntary liquidation. The company is required to set aside, in sinking funds, amounts sufficient to redeem 1% qf the maximum number of shares that have been issued of each series, at $105.50 per share for the 4% Series and $100.00 per share fbr the 3.60% Series. Pre- f erred stock in treasury may be used in connection with such sinking fund requirements. The sinking fund payments to be made within one year from March 31, 1947 aggregate $230,494.50. The terms of issue of the 2-5/8% Sinking Fund Debentures include certain restrictions with respect to the declaration or payment of dividends (other than dividends payable in stock of the company) on any shares of capital stock of the company, and to payments on account of the purchase, redemption or other retire- ment of its capital shares. At March 31, 1947, approximately $4,836,000 of the earned surplus was free of such restrictions. The terms of issue of the Cumulative Preferred Stock include certain restrictions with respect to the declaration or payment of dividends (other than dividends payable in stock of the company) on the common stock. The amount of earned surplus free of such restrictions was in excess of the $4,836,000 shown above: Provision f or depreciation of plant and equipment charged to costs The company has submitted information to the Government concern- ing its renegotiable contracts for the fiscal year ended March 31, 1945 and for the nine months ended°December 31, 1945. It is the opinion of the management that any renegotiation re- funds which may be required will,not be material in relation to net income for the fiscal years ended-March 31, 1945 and 1946. -$471,701 for the fiscal year 1946. and expenses aggregated 4475,112 f or the fiscal year 1947 and