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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,.

ON 1 _N ) V The amounts of net a sse ts per sha re of common stock at March 31, 1945 and March 31, 1944 are indicated in the following, tabula tion : Total assets Total liabilities Less, Amount equalto per va lue of cumulative preferred stock out- standing Not asavts a1located to common stock Number of ghcro® of common stock outstanding Net assets per share of common stock 1245 1944 $106,908,033 $90,400,858 41,844,189 27.040.367 65,063,844 65,360,491 12z2~`~..700 520 1LLI-91 $ 45,079,144 . $43,840,991 999,235 9.99,235 $45-11 A.~3187 In the above amounts per share of common stock, no effect has been given to any premiums which may be paid~on preferred stock redeemed through sinking fund operation or through~any voluntary liquidation of the company. An increase of $1,703,353 in capital during the past fiscal year is accounted for in the following summary: NBt income (after provision of $250,000~for post-war and other conting(incies) for the fiscal year ended March 31, 1945 Less, Cash dividends declared during the period $6,803,625 5,363,098 $1,440,527 Net proceeds from the sale, exch~inku or redemption of cumuldtive preferred stock credited to capital accounts during the fiscal year ended March 31, 1945 262,826 Tncreast.: incbpita.l $1,703_,3'>3. 9

BALANCE SHEET COMMENTS h 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 related balances appearing on the books. Investments: Tho invostments in U. 5. Treasury Bonds and other securiti;es listed on stock excha,nges were as follows at March 31, 1945: Excess of Par Value Amounts of Bonds at Market or Number At Quotations of Shares Ledger Market Over Ledger Securities of Stock Amounts Quotations Amounts . United States 3 Per Cent Treasury Bonds, 1951-1955 $25,000 $ 24,414 United Stores Corporation: $6 preferred stock 9'~5$8~' 974,454 Class A stock 2,1~50 ~ Totals .98,868 ~ 27,953 ~ 3,539 987,259 12,805 ~1zo15,212 t1~O44 The total amount of the above securities at market quotations on March 31, 1945 was $171,854 more than the comparable amount at March 31, 1944, eliminating from consideration those securities which were sold during the past fiscal year. The above listed securities were counted by us in the safe deposit vault of The National City Safe Deposit Company at 42nd Street and Madison Avc;nuo, Now York, N. Y. Securities sold during the period under review and the profits derived from such sales are shown in the following summary; c._ . ~. rv~ ?U 10

Number Ledger Proceeds Profits Securities of Shares Amounts from Sales on Sales 11 r United Stores Corporation: $6 preferred stock 3 300 Class A stock , 700~ $333,132 $341,259 $ 8,127 Imperial Tobacco Company of Canada, ordinary shares 5,250 32,266 58.691 26,425 United Cigar-Whalen Stores Corporation, common stack 28,000 ~-68 5L10 b 212 4~1?O.r~6 ~1~;3,1;20 010,764 Accounts Receivable z Customers: Statements of approximately 99 per cent of the dollar amount of customers' accounts (exclusive of certain receivables from United States Government departments) at March 31, 1945 wore mfziled by us to the customers with requests that we be advised directly of any discrepancies. Minor differences indi- cated in certain of the replies received were satisfactorily accounted for by us. Confirmations of the aforesaid receivables from United States Government departments, amounting to approximately $4,000,000, were not obtained by us but, subsequent to March 31, 1945, we examined checks and/or United States Government public vouchers as evidenco withrespect to the collection of approximately 80 per cent of such accouilty. We also reviewed copies of bills of lading and purchase orders in support of a major portimof these balances. A summary of the changes in the allowance for doubtful counts during the past fiscal year is shown hereunder: Lnlance, Murch 31, 1944 Add: Amount provided from incomo for the fiscal year ended March 31, 1945 Recoveries on accounts previously written off Deduct: Poubtful accounts written off Mercantile agency cxpc:nse Balance, March 31,, 1945 ac-- N 4 4`l,R 760 ~ ZJ $31,781 ~ 4 . 2 97 36 ~078. V) 514,838 4 13.~18 1 . b20 1 4 83g~ $r,(10 , 000 11

,'N An allowance of $116,799 for cash discounts is approxi- mately 2 per cent of the domestic accounts receivable at March 31. 1945, exclusive of United States Government and other accounts not subject to cash discounts. Accounts ReceivabLQ, Others: The principal items of other current receivables, which we tested by such procedures as we deemed appropriate in each instance, are indicated in;the following summary: Stephano Bros. $, 86,036 Ecusta Paper Corporation (notes due September 1, 1945 and March 1, 1946) 62,500 Claims against carriers 58',27.4 Tobacco Products Export Corporation 49,156 Receivable from broker for sales of securities 30,940 Sales of scrap, etc. 17,832 Claims for refund on revenue stamps attached to damaged stock 16,558 Italian Regie 16,023 Advances to salesmen 13,331 Deposit with United States Government 8,000 Permanent contingent funds 4,527 Miscellaneous 57,533 $420,710 0 Inventories: The scope of our examination with respect to inventories is outlined in a separate report submitted to you under the date-of June 18, 1945. 12

\ Notes Receivable from Supplier s The notes receivable from the Ecusta Paper Corporation, aggregating $281,250, were conf3rmed to us by that company. Of this total, 462,500 matures prior to March 31, 1946, arld has therefore been included with other current receivables as hereinbefore listed. The balance of the notes receivable, amounting to $21&,750, has been excluded from current assets on the accompanyicg balance sh;:ut i.nxsmuch as they mature subsequent to March 31, 19-~~6. Estimated Post-War Refunds of Excess Profits Tax: The composition of the estimated post-war refunds of excess profits tax for the past three fiscal years is shown by the following summary: Fiscal year ended March 31, 1943 $370,000 Less, Adjustment with respect to renegotiation of billings on government contracts for that year 7,900 342,100 Fiscal year ended March 31, 1944 165,000 Fiscal year ended March 31, 1945 245,000 $752,100 14 Fixed Assets: Fixed assets increased $2,083,104 during the past fiscal year and reserves for depreciation increasud $444,722, so that the net book amount of fixed assets was $1,638,382 highcr at March 31, 1945 thun at March 31, 1944. Practically all of the additior.s to fixed assets during the year under review were purchased from The Axton-Fisher Tobacco Compu.ny. The cost of such additior.s. was determined Total cost of all assets acquired from The pxton-r'isher Tobacco Company, as hereinbefore stated~ Less, Aggregate of values a ss igned to other than fixed assets, as estilm+ited by the munagumtnt Balance applied to fixedassets as follows : $8,941,362 6,907,154 $2,034,208 13

Of the $2,034,208 applied to fixed assets, $68,227 was charged to automobiles and trucks and $5,251 was'charged to furnitura and fixtures based upon (a) estimtztod valuos by the management with respect to automobiles and trucks,and (b) sales amounts or esti- mated values by the management with respect to furniture and fixtures subsequently sold or transferred to other offices of the company. The remaining balance, or $1,960,?30, was charged to the various fixed asset accounts in accordance with the allocation made by an independent appraisal co;npany, which allocation was based upon the relative appraised values of the fixed assets so acquired, An independent appraisal by the same company in 1943 shows an appraised value substantially in excess of the aforestated $2,034,208 recorded on the books as the cost of the fixed assets acquired from The Axton-Fisher Tobacco Company. A summary of the fixed~assets acquired from The Axton- Fisher Tobacco Company, as allocated on the books, is shown here- under: Land Buildings Building equipment Machinery and equipment Railroad sidings Automobiles and trucks Furniture and fixtures 98,000 743,010 159 o135 924, 532 1,198 # 68, 227 40,106 t2, 034,_?08. Vouchers in support other charges to the fixed asset of accounts during the past fiscal year were submitted to us and it appears that such charges were prop3rly capitalized, $ 14

\ Allowances for depreciation for the fiscal year ended March 31, 1945 amounted to $470,790, as compared with $317,967 in the preceding fiscal year. The portion applicable to the fixed assets acquired from The Axton-Fisher Tobacco Company was established by the afore-mentioned independent appraisal company based upon an investigation and inspection of such assets which~took into con- sideration expired life, condition at the time of appraisal, utility, and normal obsolescence. Prepaid Expenses and Deferred Charges: Based upon our reviews and the tests applied by us, we are of the opinion that the following prepaid expenses and deferred items, as of March 31, 1945, represent proper charges to operations subsequent to that date: Federal capital stock, state and local taxes: -, , Prepaid at March 31, 1945 $ 6.49'7 Portion of tax liability at March 31, 1945 applicable to periods sub- sequent to that date 299.975, 306,472 Machine parts at factories 124,222 Advertising materials, office and sundry supplies 33,462 Insurance premium9. 79,749 Megazine and other advertising expense 31,49'7 Freight from factories and other expenses related to manufactured stock at depots at March 31, 1945 52,829 Interest 28', 504 Miscellaneous 3,, $q4 Total $660,629 Liabilities: All liabilities of the company at March 31, 1945, of which we have knowledge, are reflected in the accompanying balance sheet. Notes payable to banks were confirmed to us by the re spec tive loaning banks and a c onf irma tion was received from J. F. Morgan & Company, Trustee, with respect to the Twenty Year 3% DcbEntures outstanding. Stat:;rr,vnts submitted to .is by the prin,.ipal 15

~-\ 1k I ti.i -ti 141V .1 ~1 1 suppliers were compared with the related accounts payable as shown by the books. Our audit procedures for the substantiation of ac- counts payable also included a review of the transactions recorded on the books subsequent to March 31, 1945. From our examination of the various provisions for accrued liabilities, it appears that the total of such provisions, as re- flected imthe appended balance sheet, was adequate. A summary of these provisions is shown hereunder: Total t8,847,391 Reserve for Post-War and Other ContinAencies: During the past fiscal year a reserve of $250,000 was provided for post-war and other contingencies which was charged to income. No corresponding provision was made for the preceding fiscal year ended March 31, 1944. Federal taxes on income Other accruals: State, local and miscellaneous taxes, including 4299,975 to be charged against operations of the subsequent fiscal year Additional compensation to officers and employeos Accruod storage charges Allowances to customers for advertising, etc. Redemption of premium certifi- cates and coupons Salaries and wages Accrued interost on debentures Miscellaneous 876,421 210,835 220,000 141, 733 74,093 147,805 87,250 • 96,938 01,855~075 Capital Stock: Shares of capital stock issued and out- standing as of March 31, 1945 were confirmed to us by the registrar and transfer agent for each class of stock. A summary follows showing the changes which occurred in the cumulative preferred capital stock accounts during the fiscal year i ended March 31, 1945: IU644332G35 16

."1 PIS , 01 4 j% 3eries: Balances, March 31, 1944 Deduct: Redeemed through sinking fund in~1944 Exchanged for 4% Series during January, 1945 Redeemed or ce,ll~ed for redemption on March 5, 19415 Balances, March 31, 1945 40 Series: Balances, March 31, 1944 Deduct: Redeemod through sinking fund in 1944 Exchanged for 4% Series during January, 1945 Redeemed or called for redemption on March 5, 1945 Balances, March 31, 1945 4% Series: Issued during January, 1945 in exchange for 14 ~6 and 4?-% Scries, as follows: 4 ~ Series 42% Series Issued for cash during January, 1945; pursuant to subscriptions by holders of common stock Balances, March 31, 1945 Shares Outsts.nding 146,026 1,461 70,770 _7_3,795 14L426 49 492 25,189 23,488 49',.169 Total Par Value A_14,.602,600 146,100 7,077,000 7,379, 500 $14,642,600 $ _a.916,900 49,200 2,518,900 2,348,800 916,90,0 70,770 ~ 7,077,000 25,189 2,518,900 103,888 10,388',800 199r847 19,984,700 As stated in Note 2'to the balance sheet, the company had a balance of approximately $396,000 on deposit with a rcdemptien agent relative to certain shares of cumulative preferred stock, 44% and 4'3% Series, which had not yet been redeemed as of March 31, 1945. No changes occurred in the outstanding common stock during the past fiscal year. very truly yours, ~j ~--a.a..it nS._,-,r /a,-*-4 . 1tGZ3,32(;36 17

ARCHIVE LOCATION VARIANCE SHEET THE NUMBER (RANGE) IS LOG-TED: ( IN THE AUDIO G18INET IN THE VIDEO CABINET ON THE OVERSIZE SHELF IN THE MICROFORY-S CABINET AT THE WAREHOUSE IN THE TRANSLATION/TRANSCRIPTION FILES 0VERSi2E 2jcccJ,~FA'T IN CotLECTioq

NOTES to BALANCE~SHEET 1. Audited statements of the English subsidiary show net assets of $240,740 (on the basis of trar9lation into U. S. currency at the official rate of $4,025 per pound sterling, except that exchange rates prevailing in the years of acquisition were applied to fixed and intangiblq a:mnsta) at March 31, 19,1E1 and not income of $'(,536 for the fiscal year then ended. The corresponding informati=as of March 31, 1945 and for the year then ended is not yet available. 2. At March 31, 1945,the Company had a balance of approximately $396,000 on deposit with a redemption a~ent relative to cert^in shares of Cumulative Prc;forred Stock, 4.u96 and 40 Series (called for redemption on March 5, 1945),which had not been redeemod as of' March 31, 1945. Ncithor such deposit with the redemption agent nor the corresponding amount of' liability for unredeemed prefArred stoak i9 reflected In the accotnpaiiyLng balance sheet. 3. The Cumulative Preferred Stock, 4% Series, is redeemable at any time, oth:-rwise than~through the sinking fund~, at $108.50~per share if rodeomed on or before Febi,uar 1, 1949 and thereafter at diminishing amounts (not less than L05.50 per shzra), plias accruod dividcind9. Holdors of' this class of stock are entitled to like payments Upon voluntary liquidation of the company and to $100 per share, plus accrued dividends, upon~ir.voluntary liquidation, Beginning with the fiscal yeiir commencing April 1, 1945, the Com- pan is required to set nnida in a sinking fund, wit.hin eighty (80~ days after the end of each fiscal year, an amount which is sufficient to redeem, at $105.50 per share, one per cent (1%) of the maxim-im~ number of sharen of Cu.raulative Preferred Stock, 4% Series, theretofore issued, except that any preferred stock in treasury may be used, by resolution of the Board of Directors, in connection with such sinking fund requirement. The amount of the first sinking fund requirement in to be set a3ide on or prior to Juiie 19, 1946. 4, The tercns of issue of the Twenty Year 3% Debentures and the Cumulla- tive Preferred Stock, 4% Series, include certain restrictiorns with respect to, the declaration or payment of dividends (iother than dividends payable in stock of the company) on the Common Stock. At March 31, 1945,apl.roximately $101,000,000 of the earned surplus was free of auch restrictions. I U GZ:3326 38 C'ontinded 1G

NOTES to BALANCE SHEET', V"ontinued No provision has been made for any reductions in billings on~ overnment contracts for the fiscal years ended March 31, 1944 ~preliminary proceadings have been~commenced with respect to renegotiation for this year), and 1945 because the percentages of profits realized on government sales during those two years are believed to be somewhat lo3s than the porcentage whichl resulted from the concluded re::egotiation agreement for the fiscal year ended March 31, 1943. It is the opinion of the management that any renegotiation refunds which may be required for the fiscal years ended March 311, 1944 and1945 will not be material in relation to the net income for those years. 6. Contingent Liabi1ity: A suit instituted in a preceding year by certaiii minority stockholders against certainipresent and former officers and directors of the Comptiny as 9ti1l pcnding at March 31, 1945. Although this suit is for the benefit of the Company, it may be liab]_© to the offic9v9 and dircctora undor SoOtiol] E1-a of the Gencral Corporation Law of the State of New York and under Article V of the By-laws of the Compnny which p3~ovldofor the Itidcmiiificationof" officers and directors for their reasonable expense9Y incDzding attorney's fees, f ,0

STAfiEML,NT of S'tIRPLTIS for the fisc,A.a ye;.lr ond,2d htiz~rch 31, 1945 1^1 CAPITAL SURPLUS: Balance, March 31, 1944 $15,739,645•75 Add: Excess of aggregate amount received for 103,888 shares of. Cumulative Preferred Stock, 4% Series, issued at $105.50: per share, over total par value of such shares $ 571,384.00 Aggregate amount received~, at $1.50 per share, onexchange of 70,770 ahRrep of Giltuulati.vu Pref'orreci Stock, 4% Series, f'or a like number of shares of Cumula- tive Preferred Stock, 41% Series 106,155.00 617,539.00 16,417,184.75 1k Lase, Underwriting commission and other expenses in connection with issue of Cumulative PreferrQd Stock, 4% Series 9alance, March 3191945 3739245.22 EARNED SURP'LUS ; Balance, March 31, 1944 $19,764,995•35 Add, Net tnromo (aftcr proviaion of $250,000 for post•war and other contin- gencios) for the year endod~March 31, 1945, per statement annexed 6,803,624.62 26,568,619'•97 Deduct: Cash dividends declared: On Cumulative Preferred Stock $ 866>633.17 On Common S*.ock 4,496,465.25 5,363,098.42 Premium on shares of Cumula- tiva Pref'erred Stock, 4 9 .and 4?y~ Series. redeemed pur- suant to sinking fund requirements 9,288.00 Prernium~ on 73.7Q5 shares nf Cumula- tive Pref'erred Stock, AI,,% Series, redeemed at $104 per share 295,180~.00 Premium on '; ,188 sharos of Cumula- tive Preferred Stock, 4~% Series, redeemed~at $107 per share 164,416.00 Aggregate amount paid, at $1.50 per share, on exchange of 25,189 shares of CumniLa}i,e F r.~,f.rred Stock, 4$ 5eries,for a like nunriber of shares of hLl'dTl~11~tl ~~,, ~'n,~r nr rnt~ St,7C:k, •4 1>% 3-ari:~s 7,783.50 5.869',765.92 F~~slanc~. °:,,~~~k1 1~~'~~ ~~s~ee note)l $'2~0.L-98,8~4'05 53e No*.,e 4 to~ balance sheet. ~ 1~

4 Shipping expenses, as annexed Selling expenses, as annexed General and administrative expenses, as annexed 5 3,703,453.54 $ 3,030',e47.47 $ 672,806.07 7,513,060,.45 8,620,659.89 1,107,599.44* 863,240.90 855,730.84 7-.'~10.06~ ~ I2,Or.9~~)4.89 $ 12~1.)or03K M 42.' ,," Net profit from operations, forward $ 14,035,958.65 $ 12,974,094-53 $1,061,864_12 ' UUti332 641 COMPARATIVE STATLMENT of INCOMF.' for the fiscal years ended March 31, 194~5 and 1944 1945 Increases 1944 Decrea:ses* Qross sales $1891284,180.79 $182,292,386.89 $6,991,793-90 Deduct: Discounts Allowances $ 3,234,141.48 350L88 . 02 . $ 3,401,676.91 ~ 167,535.43~ 3831447 . 27 238,55. 2 1 ~ 3,9$5-o3a.5o --- - .__-- $_. 4j391124.18 $ _ 406,093.68* Net sales $185 1299,150.29 $177,901,262.71 $7,391,887.58 . Cost of sales, before adjustment $16~083 137.28 $156,248,455.01 $7,834,682.27 Deduct: Interest on leaf $ 4,670,006.37 $ 3,681,215.11 $ 988',791.26 Interest on real estate 143, 005.60 90,746.72 52,25&.88 Scrap sales and other adjustments 86,688.56 56,363.20 30,325.36 ~ 4,899,700.53 $ 3,828,325-03 $1,071,375,50 Cost of sales, as adjusted $159,183,436•75 $152,420,129.98 $6,763,306.77 Gross profit from operations ~ 20~,115,713.54 $ 25,481,132.73 $ 634,580.81 t -1 P. nc

COMPARATIVE STATEMENT of INCOME, Continued 1a4 1 44 Increases nec~rc~Aae~* Net prof i t from opCra- tions. brought fnrward $14,035,958.69 1,12,974,09j.~)3 1,061,86,1.12~ 4 Other income: Dividends received $ 102,209.07 ~ 81,723~.01 t ission on r m h s C f 20,186.06 pu c e o o m a leaf tobacco for others Profit on sales of securities Interest received Not profit on disposals of machinery and equipment Miscellaneous 79,011.30 40 , 764 . 06 29,737-16 2,971.55 12,847.14 30,066.64 48,914.66 10 , 76.1.. 06 30,223.73 486.57K 3,122.51 150.96x 3,890.50 81956.64 ?fi~)Q 0.28 ~ 149 ,026. 39~ l lt~', 513. t3y $14,303,498.93 $13,123,120.9•2 $1,180.378.01 ~ Other deductions: Provision for additional com- pensation to officers and employees 152,002.34 148,529.09 3,473.25 ~ Interest on debentures 351,500.00: 357,250.00 5,750.00~* Other interest expense 97,670.97 19,076.54 78,591.43 Prior service contribution under company retirement plan ci8,701.00 88,701.00 Net adjustment on renegotiation of prior year government contracts 58,900.00 58,900.00* ~ 689,874.31 ~ 672,4r,6.E3 ~ 17,-~17..h~3 Net income, before pro- visions for federal taxes on income, and post-war and other contingencies ~1'~,F13,F''~.62 $12,1!'0,661.29 $1,162,960.33 ~• , $ 4,355,000.00 $ 4,320,000.00 $ 35,000.00 1064332642 and $165,000 for 1944) 2,205.000.00 1,180,000.00 725.000.00 Provision for federal taxes on income: Income taxes Excess profits tax (after deducting 4245,000 post- war refund credit for 1945 Net income before pro- vision for post-war and~ other contingencies Provision~for post-war and other contingencies Not income transferred to e.9rneci sa:rplila 4 6,5F0,000.-00 $ 5,800.000.00 $ 760,000.00 t 7,053,624.h~ $ 6,6~0,664.'9 $ 1o'~,n~n~ 250 , 000 , 00 _ ~ Cl~~Q7i ~h~~ ~`~ ,~ f~' ~r(~~FF•~ .10 _-~-~---=--~-s-=-'---~ rt---~~=-a- - 2r~01000.00 n")O ~ .

COMPARATTVE STATEMENT of SHIPPING, SELLING, GENERAL and ADMINISTRATIVE EXPENSES for the fiscal years ended March 31, 1915 and 1944 Shipping expenses: Labor Cases, etc. Cartage Freight Express 1 4 $ 406,980.56 1,074,423.89 101,958.55 2,047,446.90 3.64 306,377.12 5'~0,115.86 ~4,663.34 2,003,838.91 F1a",2 4 1.._1 :ascs Decren3os* $ 100,603.44 504,308.03 17,295.21 431, Go7•99 Fi, 1.,10 ~3~.303a453'.:~4 ~3,03o,6a7 ,4:f' ~ 61t'~~~fi~o~ Selling expenses: Advertising $6,3'(2,2Z2.o6 $7,185,988.62 $ 813)776,56* Salesmen's salaries and expenses 442,611.84 582,676.18 140,-064.34* Sales managers' salaries and expenses 124,284.78 125,096.99 812.21* Scheme expense 97,613.26 132,406.39 34,793.13* • Sample s 79,063.35 136,646.62 57,583,27* Loss on goods destroyed 6,394.12 8',149.99 1,755,87* Sales administration 83,510.84 99,401.3'( 15,890,53* Gratis goods 459.61 12,935• 02 12,4'(5.41* Royalties 38,630.20 29,301.29 9,328,91 Miscellaneous 268,228o.3 08 05Y , 4_2 39,1't(.o~* ~13Zoho.45 ~8 6 0 "tA.- ~~ ~~ ~~5' General and aftinistrative expenses: Salaries, executive ~ 175,000.00 ~ 175,000.00 Salaries, office 384)459.32 346,765,56 $ 3Y,693.76 Office rent, electricity, etc, 53,644.53 52,255•35 1)389.18 Postage 1'(,'',9°( , 4 3 15,8-(0.66 1, '(26 .'r7 Legal and auditing expense 9a.q119.08 105,679.64 10,160.56* Federal capital stock, state and local taxes 715 , 8!00 .11 618.174.38 97,625-73 Stock transfer and registrar expense 11,854 , 2'( 13,365.99 1,511.'(2* Provision for doubtful accuutits 31, .0r 91,146,14 59,365.09* Miseellaneous' 4 40. 5Z 17 154 , 067 , 6u0 2017 1 72 . "Z . , 1,660,496.31 1,572,325.32 88,1"70.99 ~ Less, Portion charged to costs 797, 255.41 716,594.48 <30;bb0.93 863,240.90 $ 85c;.7-~0.84' ~ ~;10 06 24