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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