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PHILIP MORRIS & CO. LTD. , INCORPORATED Report upon Examination of Inventories as of March 31, 1947 LYBRAND, Ross BROS. &MONTGOMERY CERTIFIED PUBLIC ACCOUN'TANTS NEW YORK OFFICE

LYBAN'll, R.OsS BROS. &>) t()NTGON, Il;12Y CERTIFIED PUBLIC ACCOUNTANTS 90 E3ROA0 STREET NEw YoRK 4 May 21, 1947. Mr. A. E. Lyon, President, Philip Morris Ra Co. Ltd., Incorporated, 119 Fifth Avenue, New York 3, N. Y. NcwTORS It tOwta PNIaABlrPMl~ 1 ~11Inv~L4l t'I~ICiUtI ATLANTK eo9TON DALLAs e.LTwMoA[ MOU.TOM wIeMINpTON •AN FRANC11C0 IilftaBUROM LObANDtLtI O[Tw01T' lEATTLC CL[V[LANO - CINCiNNATI LONDOM ROCA[(1FD PAR. O Dear Sirs Under date of May 12, 1947 we reported upon our examina- tion of the balance sheet of PHILIP MORRIS & CO* LTD., INCORPORATED RC.IOCNTPARTN£Ry WILLIAM M.LYaRANO~ ROD£RT H:MONTPOMCRTRI710R AINl.I41N N111MAN J LFNlIAt1f WALTEN L.9CHAFr£R CONRAO 15. TAYIORNFRM{)NI, BP.LL ALVIN 4.JENNINO9CHRI5TOPHER H. KNOLL HILTON N. CAMPRELL EOWARO OCAR$ON Of.L91711C, W M~~vER.JR. WALTER R.3T.~UB MAR1( E.RICHARO9ON as of March 31, 1947 and of the statements of income and surplus for the fiscal year then ended• In this supplementary report we present more detailed information with respect to our examination of the inventories included in such balance sheet. A condensed summary comparison of the inventories as of March 31, 1947 and 1946, is as followsi March ~~1~~ March 31. 1946 ~rwirri ~ ~ Domoetia 1Qaf tobacco $76,504,193 03,113,703 Imported leaf tobacco in bond,subjeet to duty, not recorded 02,980,000 in 1947 and $3,095,000 in 1946) 8,713, 31i 9064,11a. 85,217,504 92,177,814 Manufactured stock, including revenue stamps affixed 8,214,029 15,193,063 CiCarettes and $moking tobacco tn proceas 1,913,601 1,660,999 Ca Revenue stampa unaffixed 797 807 621,541 ~ Operating supplics , 2 6, 69,5U 3:091.,1Fi $92,454 M2, 744, 57~3 '0-4 Ca A detailed summary of the inventory accounts 1947 is shown on the following page. as of March 31, 1

SU7i0iARY of INVENTORY ACCOUNTS, March 31, 1947 Accounts Maintained At Total Richmond Lou svi e ew Yorx Domestic leaf tobacco: Stock in warehouses, and at Louisville plant $75,627,019 $75,584,409 $ 42,610 Freight, drayage, storage, inourance and buying expenses 877.174 877,174 6 04 1 76,461 5£33 -o~ 42630 Imported leaf tobacco: Stock in v.3rehouses $ 8,339,463 $ 8,339,463 Fraidit, drayara, storage, insurance and buying exp~=: s 6,802 96,£302 Advances a~i:zst purchases 1~9,961 Purchacos frcm Imparial Tobacco Cczpan,y, Ltd. in tran3it to factory 107,085 Manufactured stocks CiCarAttes Sr.okinz tobacco Cigarettes and smoking tobacco in process Revenue stamps unaffixed Operating supplies: Casing m.aterials Wrapping and saipping supplies Factory supplies Allo,.:ance for obsolete wrappin,;s Totals 9 8t,( 1 ~,~11 ~ 814364265 169,961 107, 085 2Z7,046 ~ 8,019,842 ~ 666,718 $1,186,723 $6,166,401 194,187 _ 93_143 101,044 8,214,022 -S~ 759i851 Ai~186,723 6267,445 ljM,601 L'~-15?tcn ~6~542 ---a Z 80 32,0 1!~ 26~ 1116 565,280 ~ 457,022 $ 108,258 2,230,497 1,730,357 458g,280 ~ 40,860 35,445 26,564 ,881 1~1.70.. ~ 161,7og 2 669s51 $ -2_, 943 -576,41.9 9' ~ 812 4' .75~~ ~2 6~10 t6,423,642 BASIS of PRICING folloxs: The inventory was priced generally at average eost, as Domeatic and imported leaf tobacco in wa.rehouses, at averace cast, subject to reallocation of cost between grade classifications to maintain Crade "d'_fferentials." 2

Manufactured stock, at average cost of leaf tobacco plus leaf expense, casing material, direct labor, cost of stemmery operation and factory overhead, computed separately for each brand of ciLlrettes and smokin~ tobacco. Cigarette and smol:ing tobacco in process, at average cost of leaf plus leaf expense, casin,-,, material, direct labor and cost of stemmery operation, if applicable, but exclusive of factoiy overhead. Manufacturin" supplies, at averaCe cost. Revenue stamps, at cost. The averaGe costs of Crades of domestic leaf tobacco are determined by averaoing the costs of three elements, as follows: 1. The averaLe grade costs of stock on hand.of old crops; 2. The averaGe 6rade costs of current purchases of re-dried tobacco (dealer purchases)j and 3. The avera~e grade costs of green leaf purchases of the new crop. The avera~es for stock on hand and purchases of re-dried tobacco are determined as the latter are received and the invoices are entered in the accounts. The averages inclusive of the purchases of the new crop of gr3en leaf are determined as of the beginning of the buying seasons (August 1 for bricht and December 1 for burley), as though all the new green leaf had been bought on those dates, un- less there is indication that the averaQe cost of the new green leaf will not exceed the average cost•(on comparable basis) of leaf then on hand. If, for such reason, the average is not so determined as of the beginning of the buying season it is done after all of the new leaf has been received, which is usually at the end of February. For the fiscal year ended March 31, 1947 the burley leaf in inventory was priced at the avera6e cost computed as of February 28, 1947, for the reason above stated. The bright leaf in inventory was priced at the averaGe cost computed as of August 1, 1946. For such computation the actual cost of the green leaf purchases of the 1946 crop was applied. For convenience in accounting, the averaLe cost of bricht leaf as of August 1, 1946, inclusive of new c,reen leaf, was I I 3

eetimted in August for the purp e of computing the charges to manufacturing cost for such leaf used in production from Auguat 1, 1946 to March 31, 1947. The estimate was somewhat higher than the averaGe cost as finally determined, and adjustment was made in rTarch, 1947, in the amount of ~~170,000, rQducin~ manufacturing costa and increasin, inventory. EXAMINATION of PRICING We mm~tde extensive review and tests of the basis of pricing as outlined in preceding paragraphs. For loose leaf tobacco purchased during the year ended March 31, 1947, we examined invoices for the larger amqunta purchased. Green purchase bills were reviewed and by application of the percentage of yield the approximate pounds of re-dried tobacco obtained was checked. Extensive tests were made of the re-dried bills as a further check of the pricing and grading of the leaf purche,sed * The cost of cigarettes and smoking tobacco In process includes freight, drayage, storage, insurance and buying department expenses. These charges, for convenience in accnunting, are seg- reCated in "loaf expense" accounts until the leaf tobacco is placed in process, at which time the amount considered applicable thereto is transferred to the process account, The balances in the leaf expense accounts not transferred to work in process at March 31, 1947, including accrued storage charges of $342,000, are added to leaf inventory. The amounts were examined by us and do not appear to be in excess of the aggretate amount of charges applicable to the domestic and imported leaf tobacco in warehouses at that date. We also made substantial testa of the arithmetical com- putations of the inventories, including the leaf tobacco, manufactured stock and the other perpetual inventory records. EXAMINATION of PHYSICAL STOCK Domestic Leaf Tobacco in Warehouses: We examined warehouse receipts with respect to domestic lsaf tobacco stored in public

warehouses as at March 31, 1947, and, in addition, secured confirma- tion from the warehouses that the tobacco called for by such receipts was stored in the respective warehouses for the account of the company at that date. The examination of warehouse receipts was cor,vnenced on March 24, 1947, and from that time until April 17, 1947, such receipts were under our control. During the period from April 9 to April 16, 1947, we visited certain warehousea in the states of Virginia, Kentucky, North Carolina and Tennessee and made test counts of selected lots of the domestic leaf tobacco called for by the afore-mentioned warehouse receipts. Such teat counts consisted of examination of the taos attached to the selected ho-sh:ads, indicating the hogshead numbers and net weio~its. Various hogsheads, selected at random by us, were partly opened to ascertain that they contained leaf tobacco, At Louisville we counted all of the leaf at the factory on March 31, 1947. The hogBheade of domestic leaf tobacco counted by us repre- sented approximately 26 per cent of the total weight of all domestic leaf tobacco recorded in the accounts. The followinZ tabulation in- dicates the locations visited and the extent of Warehouses and Locations Pounds ; tored RicYriond, Virginia: Alleghany Warehouse Co., Inc. 16,358,979 Blair Tobacco Storage Co., Ine. 5,817,555 CarrinCton & Michaux, Inc. 622,867 Che3apoak® ;toraCa Corporation 15,198,036 Fireproof Storage Co. 1,990,292 J. P. Taylor Co., Inc. 3,637,375 The VauC,hn Storage Co. 10,306,438 E. K. Vietor & Co. Inc. (Star Warehousesj 15,418,808 69,35o,35Q Blackstone, VirZinia: Joseph E. Beach & Co. 1,025,182 Danville, Virginia: Reliance StoraBQ do Inspection Co., Inc. 9,932 VirGinia Tobacco Co., Inc. 1,433,748 our tests: Pounds Test- Percentages .checleed of Test Checks 5, 644, 752 . 34.5 2,297,O54 39.5 3,658,666 24.0 450,479 22.6 9010943 24.8 2,442,740 23.7 3,772,553 24.4 19,168,137 27.6 528,528 36.8 5

Warehouses and Locations Newport News, Virginia: Hiden Storage & Forwarding Co. Petersburg, Virginia: W. B. Beach & Co., Inc. South Boston, Viroinia: J. P. Taylor Co., Inc. Walters Tobacco Storage Co. Carrollton, Kentucky: R. U. II.zrker Tobacco Co. Hopkinsville, Kent.ucky: Southwestern Tobacco Co., Inc. Lexington, Kentucky: Southwvstern Tobacco Co., Inc. Louisville, Kcntucky: k^estern District Warehousing Corp. Warehouses operated by company Maysvillo, Kentucky: Kirk & Key 0w::n3boro, Kentuc:tys Southc:astern Tobacco Co., Inc. Selbyville, Kentucky: Southwestern Tobacco Co., Inc. Durham, North Carolina: Central L; af Tobacco Co. W. L. Robinson Co., Inc. Fairmont, North Carolina: Person-Garrett Co., Inc. Fuguay Sprin,(,-s, North Carolina: North State Tobacco Co. Qoldsboro, North Carolina: J. P. Taylor Co., Inc. dreenville, North Carolina: E. B. Ficklen Tobacco Co., Inc* Person-Garrett Co., Inc, Henderson, North Carolinat J. P. Taylor Co., Inc. Kinston, North Carolina= L. B. Jenkins Tobacco Co., Inc. Kinston StoraLE Co. Pounds Pounds Test- Percentages Stored chocked of Test Checks 6,016,735 1,596,624 26.5 289,686 1,858,702 618,836 33.2 199,610 967,735 446,080 46.1 733,889 4,125,072 692,697 11,228,659 2,410,751 865,372 833,393 134,057 430,040 415,294 374,586 1,283,210 42,106 866,648 1,866,584 1,055,Q52 179,166 6 1,112,040 26.9 265,2~ 38.3 3,552,775 31•7 739,765 30.6 568,496 65.7 363,392 43.6 541,782 42.2 0 , 779,358 41.7 Cj W - Gb

Wnrehoueoe nnd Locntlons Roxboro, North Carolina: Reidsville Tobacco Co. Kinston-Sa1em, North Carolina: Winston Leaf Tobacco & St;orap,v Co., Inc. Piedmont Loaf Tobacco Co. Rocky Mount, North Carolina: Pounds Pounds Test- Percentages Rtornft, 1inrka o,£,.Tnn t Che ek:i 20460 426,918 452,132 W. B. Lea Tobacco Storage Co. 808 206 0. R. Garrett Co., Inc. 83,129 ZThorpe & Ricks, Inc. 1,329,051 Sni thf i e ld, North Carol ina t Bright Leaf & Burley Tulacco Co., Inc. Wilson, North Carolinat 10E3, 454 R. P. Watson Co., Inc. 2,047,596 Wilson Tobacco Co., Inc. 192,934 James I. Miller Tobacco Co., Inc. 48, 09f Lake City, South CarolinAt Jamas I. Miller Tobacco Co. Guaranty Storage Co. Oxford, North Carolinas W. A. Aclams Co. Greenville, Tonnessee: L. B. Jonkins Rodrying Co., Inc. The Austin Co., Inc. Total, Rictumond aocounts Louisville Plant 143,371 25,328 981,878 408,378 41.5 3,360,454 1~.360 2.8 r,a 55 ~S= ~ 603 ~~,~60~ 100~ Imported Leaf Tobac~co in 1~rehousess The quantities (bales) of imported leaf tobacco in bonded varehouses were confirmed direct to us by the United States Customs Service. During the period from April 1 to 16, 1947 we visitdd varehousea in RicYimond, Nowport N~owa and Peteraburq, Virginia, and Louisville, Kentucky, and made test counts of selected items of imported leaf tobacco. The bales of imported leaf tobacco counted by us represented approximately 46 psr cent of the total wsight of imported tobacco in varehouses as recorded in the accounts. The folloxing tabulation indicatas the locations visited and the extent of our testst ; 7

; ~ Pounds Location = Pounds Stored Test- Percentagee chocked of Tent C1:ockn Richmond, Va. 6,0470634 3,150,8`9 52. lo Peterauure, Va. 2,007,756 1,(,r~~,Gr~ ,3.63 Newport News, Va. 1,~329 ,UU l ~?£3~,~£i 1~ .'(5 Louisville, Ky. 43,IIu6 43,8u6 100.00 New York, N. Y. 639 42 4.,.r-'r' .. A - ,.. Manufactured Stock: At the factories the physical i:nvon- toriea of ranufactured stock were taken by company employees on March 31, 1947. We checked such inventories completely at Louisville and approximately 95 per cont of the dollar amount at ltichmond. In respect of manufactured stock in warehouses, as con- trolled by the books at New York, our counts of the stock at the warehouses Boston Houston Ca.-..den Indianapolis Chicago Jack3onville Cleveland Jersey City Dallas Kan^as City Denver Los AnLelee Detroit Minneapolis representatives made physical in the following cities: New York (Torrer'a Warehouse) Portland (Pxcept Sea ;torc~e) Providence .an Francisco (except sea Stores) 5t. LouSA St. Paul Syracuse The stock at Jersey City and 611.~an Francisco is in the custody of company employees but stock at the othor locations listed above is in the cuatody of public rrarehousea. With respect to stocks of ciLarettes and smoking tobacco at varioua locations tt:rouj;hout the country, other than as listed above, we received direct from the in- depeadent rrarehouEes confirmation of stocks on hand (with exception of a few insiigiificant items). ~hipnents in transit at Xarch 31, 1947 from the Richmond and Louisville factories to the various warehouses were accounted for by examirlation of such records as railroad bills of ladinZ, warehouze advices of receipts, inventory and shipping records at Gichmond and Louisville, and inventory and receivinZ records at new York and Ean Francisco. Tezts were aade at a nu.-,her of locatioas, to determ'_ne that aercf~.:dise reported by the warenouees as ahip;.ed to c::stc mer s had actw311y left the p:^e:aieee prior to our countc. i P,

I The approximate proportions of the quantities of warehouse stocks of cigarettes and smoking tobacco counted by us, confirmed by correspondence, and in transit from the factories, were as follows t Per Cent of Total Quentity Counted 62 Confirned 11 In transit from Richmond and Louisville factories to varohouses 27 Total 100 Cigarettos and Snokin% Tobacco in ProcessA Revonue 8tmps and Uperattng Suppliost Physical counts were made by compaay employeea at the factories, on March 31, 1947, of these inventories except for wrapping and shippina supplies and factory supplies at Ric.,imond, and factory supplios at Louisville. The excepted items are under per- petual inventory controls and selected items are counted during the year, when conditions parmit, with the objective of count.tng each item several tiraes within the year. At Richmond, selected quantities of cigarette and smoking tobacco in process were test-checked by us by inspection and estimates of such quantities. The dollar amount of the quantities so tested aggregated approximately 93 per cvat of the total dollar amount of all cigarette and smoking tobacco in process at that plant. At Louisville we made a complete check of all of the cigarette tobacco in process, by actual counts or estimates. Test counts were made by us of other mnterials and supplies on hand and we secured a confirmation from a vendor for various casing materials held in its warehouse. Such materials and supplies accounted for through test counts and confirmation represented approximately 78 per cent in dol?.ar amount of all materials and supplies at Richmond CJ and 64 per cent at Louisville. 9