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LN•mix,m), Izoss I31~os. F,.,MONT 1•cJo4t1 ;uY III CERTIFIED PUBLIC ACCOUNTANTB NtGID[MT PARTNtRG I L WILLiAM'M.LTERAkD ~ O B ROAD STREET N[W,TORN PNILAD(LPN/A •t LOUit LOUI.V4lt ROecRTH.MONTOOMiRM.7 C~~io.00 MLANTA, WALTtA A STAIY!! N. HILTON DUMt1RIL'LC N E M/ YO R 4 .~'TINONt NOU.TON. THOM AB 15 .O-HENDERSON K WAONIhOTON.AN rRANCl.CD , . / P aTRewRON LO. ANDCLt. R ORBINCLAIR D[tROii .[ATTLC NORMAN J. LENHART CL;vE4AND WALTER, L 9CHAFFER UNCIMMAH -' CONRAD E.TAYLOR ROCNrORD LONDON HERMON F BCLL ALVIN R.JENNIN09 CHRt9TOPHER H.KNOLL HILTON 9 CAMPBELL I:oW/:RD O CA1tOC1N W. MeiVEH.JR. ~ ebruary 2, 1946. ~ WALTERR 8TAUB MARK E.RICHARD9ON. Philip Morris & Co. Ltd., Incorporated and Me©srs, Lehman Brothers, Qlore, Forgan & Co, end Associated Underuriters Dear Sire: k Under date of February 2, 1946, Philip Morris & Co. Ltd., Incorporated addressed a letter to Subscribers and other Purchasers of Cumulative Preferred Stock, 3.60% Series, of Philip Morris & Co. Ltd., Incorporated, which letter is herein- after referred to as "the company's letter." The oompany's ].etter inoludes cortain statements and estimates relating to the following accounting information: (a ) Net sales and net income of the months of November and December 1945 (b) Estimates of net sales and net income of the months of January, February and loroh 1946, assuming no price relief from OPA during the period Statement of ad,justments, in respect of accruals for profit-sharing and Federal income and ex- cess profits taxes charged to income of the seven months ended October 31, 1945, which would be rrndQ if the nctual ndt income of the five months ending March 1946 is as estimated (d) Statement of estimated net incone, after texes, of the fiscal year ending March 31, 1946, pred- icated upon the assumption as to net income of the five months ending March 31, 1,a46 3tatement of estimated amount of refund which the comFany Would be entitled to receive 1n i F

2 0 respect of excess profits taxes of prior years, arising from the present carry-back provisions of the Tnternal Revenue Code, predicated upon the assur,.ption as to net income of the fiscal year ending March 31, 1946. In following paragraphs we eomment upon the aforesaid aecount- ing inforrnRtion. We made a general review but not an audit of the eompany's balance sheet as of December 31, 1945 and its state- trents of income of the months of November and December 1945, and obtained information and explanations from the management. The amounts of not income of those nionths as reported in the company's letter are in agreement with the books of the company. Our review did not disclose to us any information which would lead us to believe that the said net income amounts for the months of Novomber and December 1945 are not stated fairly and on a: basis of accounting consistent with that of the seven month period ended October 31. 1945. ~~ With respect to the management's estimate of net sales and net income of the months of January, February and March 1946, as set forth in the cptrpany's letter, we observed the manner in which such estirra.te was prepared, The estimate of net sales of the month of January'was based primarily upon information received from the'shipping depots up to a date late in January. Estimated net sales of the months of February and March were predicated upon the basis of some inorease of 'volune in those r;lonths over the month-of January, past experience of the company, in general, having indicated that it is reasonable to expect volume to increase from January to February and March. Forecasted gross profit on the eatitr,ated sales was predicated upon the exl;erience for the months of November and December 1945. E xpenses deductible from such gross profits were estinated by the management in line with the sales volume predictions and the actual experience of preceding months, with increases and decreases in respect of expense iter.,s affected by different factors within the three month period. Federal income tax on the estimated income amounts was computed at the rate of 391 per cent, which is the approximate effective rate of income tax f or a fiscal year ending t;arch 31, 1946 if Federal excess profits tax on the year's income were not involved, as would be the case if the management's estimate of net income for the last three months of the fiscal year proves to be reasorably accurate. During our observation of the procedures followed by tt~;P management in j--VeparAtion of the eatirrate of net income

3 of the months of January, Februar9 and March 1946, nothing came to our attention which would lead us to believe that the fore- cast was not prepared with care or that the managenent had not considered all pertinent factors. The company's letter states that, if the nanagen,ent's estimate of net income of the five nionths ending March 31, 1946 is realized, certain a mounts of accruals for profit-sharing and for Federal income and excess profits taxes charged against inoome of the seven months ended October 31, 1945 will be can- celed as being no longer required. Provision for profit-sharing in respect of income of the fiscal year ending March 31, 1946 will not be requirPd if the not income, aft,er Federal income taxes, of the f ive months ending March 31, 1946 proves to be $90,000, as estimated by the management. Accordingly, under such circumstance, the provision of $85,000 for profit-sharing, which was charged against income of the seven months ended October 31, 1945, would be reversed, thereby resulting in an equivalent increase of net income of the fiscal year, as stated in the company's letter. Furthermore, if the income of the five months ending March 31, 1946 becomes $150,000, before Fed- eral income tax, as estimated by the managernent, provision for Federal excess profits tax in respect of income of the year ending March 31, 1946 will not be required. Accordingly, under such circumstance, the provision of $44!0,000 for Federal excess profits tax, which was charged against income of the seven months ended October 31, 1945, would not be needed, but as a consequence of the elimination of provisions for profit-sharing and for excess profits tax, an additional amount of approxi„;ately 4185000 would be ndeded for Federal normal tax and surtax on the income of the seven months ended October 31, 1945, leaving a net reduction in taxes of $255,000 as stated in the company's letter. We have verified the computation of the estimated a mount of refund which the company would be entitled to receive ~A in respect of excess profits taxes of prior years, arising from C the present carry-back provisions of the Internal Revenue Code, O if the various assumptions hereinhefore referred to prove to ~ be correct and if the necessarily reLated Federal income tax ~ returns as filed ere accepted by the Bureau of Internal Revenue.~ A copy of the sunma ry of the mana en,ent's estimate of ~ net income of the year ending March 31, 1946 is ettached, N Very truly yours, ~ , fJ/n r//G~1/~ ~mGLt (}WK

FORECA3T of FARNIN09 year,ending March 31, 1946 Net salea ~ Gross profit % to sales 982,000 8,80 Advertising 8hipping Other expense Operating profit Interest and other deductions less other income ' Actual November 1 DM~6er 1 4 #11,164,000 ` Provision for Fleetvood and Spud advertising ' Management bonus Income before taxes Income tax Excess profits tax Net income 555,000 197,000 169,0o0(A) ..61,000 80,000• 74,000 932000 ~ 36, 000 57,000 $11,798, 000 984,000 8,34 589,oooJB) )C 167,000 118,000 110,000 72,000 1,000 37,000 ' ~ 15,000 22,000 s , ' Estimated for 1946 . ~ hxve Months Accrual ~N Adjuated seven 'Montha Total Ja,,, nua r , February ruary ,. rch ~ ' ~ otal ~ d uatments! _Total Totai_ for Yea : T , , r 410,800,000,$11,200,000 $12,000,000 56,962,000 962,000 #120,586,000 $177,548,000 907,400 -941,000 ;1,020,000 ;* 4,834,000 ';4~834,000 13,925,000 :18,759,000 8.4 8~4. 8,5 560,000 525,00o(D) 495,000(8) 2,724,000 2,724,000 3,653,000 5,377,000 150,000, 155,000 170,000 839,000 839,000 1,887,000 " 2,726,000 120,000 ,;120,000 120,000 647,000 647,000 942,000 1,589,000 77,000 141,000 235,04a 624,000 624,000 7, 443, 000 8, 067, bo0 , 90,000 90,000 50,000(F) r 382,.000 r .382,000 ': 339,000 721,000 ~ 75,000 75,000 75,000 ~ ~ 85,000-~A. 85, 000 85, 000 13,000 51,000 ?:,4 "..185,000 ,167,000 ;,85,000 252,000 ~7,019,000 7,271,000 5,000 20;000 73,000 67,000 ~185,000 ; 252,000 2,610,ooo ..` 2,862,000(0) ,. ~ 440,000 440,000 ~4~p,o0o r 8,000 31,00o 000 _~340,Of10 440,000 3,969,aoo 4,,409,000 A Includes Xmas trta ppiag `150H, ' .~.:. Inoludea.contributioU 201d, : ~ C Special items nonrecurring $l0ll* ` E 0 "#15K, and army camp bhowe #201I ($5ltper week One less broadoae Cancellation of gusine hde'#4011,`and'army,oamp ehowe i25K.4$5~ per'week After commission h4oae,' $40M, on leaf purohneea, Adjusted by &10l4 or loxer rate on capital'gaina and dividends.. ,. , N tes For the purpose of the letter to 4tockholders, dated Februery`2, 1946, the eetion ted prot'it, after taxee, was reported at the same amounts as were used in thl press release dated January 30, 1946, <°The.difference of $10,000 net profiE te . between this statement and the press r lease va„ applied to reduce'the net eatitaeted income oP the last three montha from 8135 OOO to $125,000,~It will be note~ that-the.#aQ OOO diffei~anoo arises trom`lowec Income tax on capital gains and dividenda as applied in`the column "Totalfox Year,",^In,reporting the eatimate-for the year it was preferable to ~Round" the amount to the even hundred thousanl, ,