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I PHILIP MORRIS & CO. LTD., INCORPORATED Report upon Examination of Financial Statemente as of March 31, 1945 and for the fiscal year then ended LYBRAND, Ross BROS. & M0NTG0MERY CERTIFIED PUBLIC ACCOUNTANTS New YORK OFIIC[

` ,y1 CONTENTS Am, Pages. Text of Report: Introductory Comments 1 Assets Purchased from The Axton--Fisher Tobacco Company 1-2 Results of Operations 3-7 Financial Position 8-9 Balance Sheet Comments: Demand Deposits in Banks 10 Investments 10-11 Accounts Receivable, Customers 11-12 Accounts Receivable, Others 12 Inventories 12 Notes Receivable from Supplier 13 Estimated Post-War Refunds of Excess Profits Tax 13 Fixed Assets 13-15 Prepaid Expenses and Deferred Charges 15 Liabilities 15-16 Reserve for Post-War and Other Contingencies 16 Capital Stock 16-17 Statements: Balance Qheet, March 31, 1945 Statement of Surplus for the fiscal year ended March 31, 1945 Comparative Statement of Income for the fiscal years ended March 31, 1945 and 1944 Comparative Statement of Shipping, Selling, General and Administrative Expenses for the fiscal years ended March 31, 1945 and 1944 f 18-20 21 22-23 24 1

LN•mAXD, ROss 13r,o5.~'~ :~Ic~~~1•c-Tc~~~r~.tz~~ RESIDENT RARTNER6 CERTIFIED PUBLIC ACCOUNTANTS NEW ,ONN WILLIAM M. LY~RAND 90 B R O A D S T R E ET ~»~c;oo ~H~A RO9ERT~HMONTOOMCRt, WALTER,A9TAUb eOSTOM HHILTON OUMBRILIE , S-aTON NEw YOR-c 4 °'L""°p` THOMAS BOHENOERSON "ttpuAOM PRICIR 5 1 NCLAIR OETP0. 7 NOHMAN J LENHART CLEVEUNDWALTER L SCHAFFER C,Nr,NNATr CONRAOB TAYLOR noCRroNO HCRML'N F OCLL ALVINR.JENNINO9 CHRI9TOPHrRH KNOLL HILTON;H.CAMPFJCLL EDWARD 0 C^R11ON' June 27, 1945. OEONOEWMcIVER,JR., WALTCRR BTAUb Mr. 0. H. Chalkley, Chairman of the Board of Directors, Philip Morris & Co. Ltd., Incorporated, 119 Fifth Avenue, New York 3, N. Y. Dear Sir: We have examined the balance sheet of PHILIP MORRIS & CO. LTD., INCORPORATED sT LnuU1 wuieViLL[ ATLANTA OAL LA! HOWbTON 9AN TNANCISCO LO9 ANO[LES BEATTLt LONDON as of March 31, 1945, and the related statements of income and surplus for the fiscal year thon.ended. We reviewed'the systems of internal control and the accounting procedures of the company and, without making a detailed audit of the transactions, examined or tested accounting records of the company and other supporting evidence, by methods and to the extent we deemed appropriate for the purpose of enabling us to express our opinion with!respect to the aforesaid financial statements which were submitted to you under date of May 23, 1945. This report includes comments relativo to these statements and also further details pertaining to the scope of our examination. Assets Purchased from The Axton-Fisher Tobacco Company: Under aniagxeement dated June 20, 1944, the company purchased the following assets from The Axton-Fisher Tobacco Company ('a Kentucky corporation) for $8,925,000 in cash: 1

1. Approximately 9,475,000 pounds of loaf tobqcco. 2. All of that company's real estato ( including factory buildings and storage warehouses), manufacturing facilities, automobiles and trucks, furniture and fixturoe, supplius, brands, trade-marks and trade names. b -s4 3. As a result of subsequent adjustments with respect to leaf tobacco, the afore-mentioned purchase price was reduced to $8,912,359. This amount plus $29,003 for incidental legal expenses, etc., or $8,941,362, represents the total cost of the assets so acquired and such cost was allocated to various asset accounts on the books as follows: Inventory of leaf tobacco Fixed assets Wrapping and casing materials, etc. Machine shop and miscellaneous factory supplies Capital stock (100 shares) of The Axton-Fisher Tobacco Company (a Delaware corporation) Miscellaneous assets Leaf tobacco, $6,243,518 2,034,208 540,222 117,437 1,000 4,977 48,941,362 wrapping and casing materials, etc., and ~A machine shop and miscellaneous factory supplies were priced at current values as estimated by the management of the company. The basis used for allocating costs of fixed assets is described in W following paragraphs of this report. The cost of the capital stock of The Axton-Fisher Tobacco Company (a Delaware corporation) repre- the cash con9iders.tion for which the stock was iesued1by that sents company. Miscellaneous assets were valued at the amounts which worn subsoquently i-ualizod upon th«se:l'e of such~ ass,ots. Capital stock of The Axton-Fisher Tobacco Compairy (a Delaware corporation which is inactive), con- sisting of 100 sharc:s and represunting all of the outstanding capital stock of that company. 2

RESULTS of OPERATIONS a% b The operations of the company for the fiscal year onded March 31, 1945 resulted in not income of $6,803,625, after a provision of 0250,000 for post-war and other contingoncios. This comparos wilth net income of $6,650,664 for the fiscal year ended March 31, 1944, except that no corrosponding provision for post-war and other con- tingencies was made for that year. After deducting $ 866,633 for dividends declared on cumulative preferred stock, the earnings for the fiscal year ended March 31, 1945 were equivalent to $5.94 per share on the outstanding common stock (999,235 shares) as compared with $5.81 per share for the preceding fiscal year. The afore-stated earnings, per share, were computed with- out giving any effect to premiums paid on the redemption or exchange of Series, during the past two cumulative preferred stock, 4-,% and. 4-,1 fiscal years. The operating results for the past two fiscal years are pre- sented in condensed comparative form in the following summary: , Net sales Cost of sales Gross profit Shipping, sel].ing, general and administrative ex- penses Net profit from operations Other income Other deductions Net income before provisiorny for federal taxes on irlcocua, and post- war and other con- tingencies, forward 1945 1944 Amounts Pctges of Not Sslos Pctges of Amounts Not Sales 4185,299,150 100.00 $177,901,263 100.00 59Z183 416 85_91 152 ;L4 LO ~z1 LO 85,. 68 26,115,714 14.09 25,481,133 14.32 12 0Dd5~ 6.52 12,507,038 s .0 14,035,959 7.57 12',974,095 7.29 267,540 .14 149, Q 28 .08 14,303,499 ^ 7.71 13,123,121 7.37 689 8'74 37 678, ~~, .37 Iu©Z332s2Z 13,613,625 7.34 12,450.664 7.00

Net income before provisions for federal taxes on income, and post-war and other con- 4% 1945 ._1944 P'ctges of Pctges of Amounts Net Stiles Amounts Net Sa1e,3 6,803,625 _,3.67 on cumulative preferred stock 86_6_,633 Balance Shares of common stock out- standing at end of year 999,U5 Earnings per share of common stock 0_5.~4 An increase of S7,397,887 in net sales Provision for federal taxes on income Not income before provision for post-war and other contingencies Provision for post-war and other contingencies Net income transferred to earned surplus Dividends declared during year tingencies, brought forward $ 13,613,625 6,650,664 _ 3 _7~ 844,00Q g_._5_,806,655 999,~35 $5_081 during the fiscal year ended March 31, 1945 was equivalent to 4.16 per cent of net sales for the previous year. Increases and decreases in net sales of the principal brands are shown by the following comparison: Fiscal Years Ended March31 Increases 1~~1944 Decreases* i Cigarettes: Domestic sales: Philip Morris English Blend $130,930,079 $158,361,615 $27,431~536* Marlboro 17,763,769 3,433,610 14,330s159 Spud 2,961,294i 2',961,294 Fleetwood Imperial 1,955 ~58'0 1,955,580 Dunhill Major 1,508,134 1,539,051 3a~,917* English Ovals 848)930 4g0,Q0$ 9 8 Pfsul Jones 2, 705t 5 1,t502 ~ ;g07* All others 244,489 132,135 112,354 Export sales: Philip Morris English Blend 23,635,451 9,223,070 14,412,381 All others 1679567 74,780 9'~L787 $184, 012 , 5~8 4173 1.826 z071 $6,186 . 517 Smoking tobacco: Domestic sales: Bond Street Revelation Private brands Country Doctor All others Export 9ales t --------- ~~ ~~32623 2,072,008 ~ 1,684,~76 $ 387.6T2 1,407,0 3 1,10~~.i0 302,n~3 410 5~7 325,187 85 7~80 295:031 231,1%8 t3,903 208 .184 91, 325 1-_0 \ 859 89 i~699 638,566 1~3 Total cigarettes and smoking tobacco $185 P99 ,1')0 $177,901,.~13j~ 39 7, 88'7! tIndicates red figure for returned ;,alt.s with respoct to a broild discontinued in preceding f3scal year. 4

""1 Sales of Spud, Fleetwood and Mapleton (listed separately on the preceding page with the exception of the latter, which is included with "all others,")ara only for the period from June 20, 1944 to March 31, 1945, since these brands were included in the assets purchased from The Axton-F3sher Tobacco Company. The foregoing comparison does not show the full effect of increased sales during the past fiscal year because large quantities of the company's products (principally cigarettes) were diverted to the armed forces overseas. Inasmuch as the prices for export sales are exclusive of revenue stamps, the following com- pa.risonlof units sold is a better indication of the increased volume of sales: Fiscal Years Ended March 31 Increases Pecreases* a4 1~44 Quantities Pct es Cigarettes: Domestic sales: Philip Morris English Blend 1,904,408,200 6,512,662,560 ,608,254,360* 7.4* Marlboro 2,375,939,560 419;937,660~1,916,001,900 416.6 All others 6,01Q 1,189,6q 44? :436:870 747,259,200 168.9 _ 24 0 30 27~41~t0~7~r090 11~44,99J,260* 7.1* Export sales: Philip Morris English Blend 9,875,945,205 4,078,832,726 5,797,112,479 142.1 / Marlboro All others Total cigarettes Smoking tobacco (pounds): Domestic sales Export sales Tota1 smoking tobacco 1,697,800 1,771,000 73,200* 4.1* --_--55.333,850: 30~,429,000 24,904,850 81.8 s9Lq3?L9?6~85~ _4_L111,0~2~26 1,821j_944,129 141.6 ' `403,02011 5?6069,816 3876,g5oj8L 1 12.3 ~~~~~~2G24 3,619,995 2,931,595 688,400- 23.5 1 L217,351 813,141 404.210 49.7 4,87-346 3~7'~'4,73h 1^09:2_761 0 29.2 5

From the foregoing,comparison of operating results, it ~ will be observed that the percentage of gross profit de~clined from 14.32 f or the fiscal year ended March 31, 1944 to 14.09 for the fiscal year ended March 31, 1945. This small decline in th~e average percentage of gross profit would have been somewhat ~ Rreater (because of the continued rise in costs of leaf tobscco). if the same relationship bc;tween sales of the various brands had been maintained. During the past fiscal year, however, the u:~it sales of Marlboro cigarettes were increased over 400 per cent which compbres with~ a relatively siiiall ptrccr.tage incr~;ase in total unit sales of Philip ~?orris ~;nglish Blend~ ciRarettes. The effect of such a large increase in sales of ?'rlarlboro cigarettes is significant for the reason that the gross profit on Marlboro cigarettes was about ~1.81 per thousand as against approximately ~.66~ per thousand on Philip Morris E:~lish~ Plend ci~garettes (after -~ elim2nating estimated interest on leaf tobacco included in factory ~ cost of both brands) for the fi~scal yoar endod March 31' 19'~5 , , • Anot,her factor which dlso t~u3 til~~ c.i i'~ct of minimi~zing the percentage decl~ine in gross profit was a red'~uction of over ~400,000~ in cash~ discounts and allowances during the past fiscal year. The reduction in cash discounts is attributable to a sub- stantial increase in service sal'es on which no cash discounts are Rranted. A1lowances were reduced as a result of certain changes in the company's pol~icy with respect to service busi~ness. A comparison of g~oss profit percentages f or the past two fiscal years is somewhat distorted as a result of the sharp~ increase in the volume of export sales and also certain price increases in connection therewith during the past fiscal year. Such distortion is caused by the absence of the revenue tax from both the selling price and cost of export sales, thereby reflect- ing a hi~ther pc~rcentage of gxoss profit thyn is the case with~ re- ~ spect to dom~stic sales. The foll~wing compzarison is therefore . made which shows only the average gross profit, per thousan3, on .., ...~ domestic sales ef Philip Morris Englis2i i3lend cigarettes for the pa s t two f isca l years : 1~~F!~3~~ji:J ~

;11\r1;1,Y 11 f Average Net Averagu Averzige Periods Selling Price Net Cost Gross Profit Fiscal year ended M.3rch 31, 1944 $5.97 $5.21 $.76 Fiscal year ended March 31, 1945 5.98 5.32 .66 The average net selling price is after discounts and allowances and the average net cost is factory cost of cigarettes sold, less the estimated interest on leaf included therein. Increased cost of leaf tobacco is the major cause of the decline in average gross profit as shown by the preceding comparison. The percentage of the total of shipping, selling, and general and administrative expenses to net sales shows a decrease from the previous year. Such decrease may be ascribed principally to a reduction of about $1,107,600 in selling expenses, which amount includes $813,777 for advertising. On the other hand, an increase of approximately $672,806 in shipping expenses resulted largely from expanding export sales to the armed forces because shipments in con- nection with such sales requirt; a spe9ibl typo of packing not used on cigarettes sold in the domestic market. The cost of the Philip Morris retirement plan for the fiscal year ended March 31, 1945 amounted to $409,532, including a prior service contribution of $88',701. The rate used for current service contributions, as approved by the Board of Directors, was unchanged from the precedinR,yedr. These contributions under the plan were charged to the operating accounts in accordance with the basis adopted in the prior peri~od. Federal taxes on income absorbed 48 per cent of the net income, beforc provisions for such taxes and for post-war and other contingencies, as compared with 47 per cent for the fiscal year ended March 31, 1944. Because of an increase in the taxable net income, a larger amount of net income was sub,ject to the excess profits tax than in the preceding fiscal year. 1L~'!r :~2626 7

FINANCIAL POSITION 0% k 0 The changes which ha ve occurred in the position of the company during the past fiscal year are shown by the following condensed~ comparison: ASSETS: Ca sh Investments Receivables, net Inventories Total current assets Fixed essets, net Other assets Total assets March 31 D±~ 1944 $ 1,527,228 998,868 10,062,768 87,2b0,431 99,869,295 5,10y,493 1,929,245 ~106,908,033 LIABILITIESt Notes psyable, banks Dividends payable Accounts payable, trade Provision for federal taxes on income Other current liabilities Total current liabilities Twenty Year 3% Debentures Reserve for post-war and other contingencies CAPITAL: Capital stock and capital surplus Earned surplus Total liabili I,ics and capit3l ~ Increases Decreases* $ 2,660,629 $ 1,133,401* 1,47U,b09 451,741* 11,016,978 954,210* 69,248,087 17, 32,344 85,076,303 14,792-992 3,471,111 1,638,382 1,853,444 75,8oi 1'2a_40o858 A16,507_,175 16,000,000 $ 5,000,000 $11,000,000 2,448,083 2,458,703 10,620* 2,376, 7U2 3,781:968 1,405,176* 6,992,316 1,943,904t 5,048,412 2,476,999 2,3551792 - 121,206 30,294,189 15,540,367 14,753,822 11,300,000 11,500,000~ 200,000* $ 41, 844 ,189 250,000~ $ 44,364,990 206 8.8~4 A 65,063,844 $10b .9a9 033 250,000 $ 27,040,37 $14,803,822 1t,`623326~27 ~ 43~1595,496 $ 769,494 19',764,995_ ~ 53~360,491 ~ 1,703_,357 - tAf'tt.r t.rcciuct:o^ of ?~' of United StatES Trea9ury tax t:otc s anci accruei int~rest therEon,.