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4 PHILIP MORRIS & CO. LTD., INCORPORATED 119 Fifth Avenue New York, N. Y. February 2, 1946 I To Subscribers and other Purchasers of Cumulative Pre f erred Stock, 3.60% Series, o f Philip Morris & Co. Ltd., Incorporated: On January 15, 1946, this Company issued subscription Warrants to its Common Stock- holders entitling them, or their assigns, to subscribe to 3/40ths of a share of Cumulative Pre- ferred Stock, 3.60% Series (herein called the "Preferred Stock") for each share of Common Stock held. The Warrants expired at 3 P.M. (local time) Monday, January 28. Of the 149,000 shares of Preferred Stock offered, 142,563 shares, or 95.6%, were subscribed for by Common Stockholders or their assigns. Late in December, 1945, the Management ascertained that profits for the month of November had declined substantially, but believed that such decline was the result of the abnormally large sales in October following the late cigarette shortage. However, within the last few days, the Company has been able to compute its profits for December, 1945, and while they show an im- provement over November, they are materially below what had been anticipated. Accordingly, the Company believes that this information should be made available to the subscribers to, and purchasers of, its new Preferred Stock. On the basis of unaudited reports for the months of November and December, 1945, and estimated figures for the last •three months of the fiscal year, which ends March 31, 1946, the Management estimates the earnings of the Company will be as follows : November (actual) ................. December (actual) .................. January, February and March (estimated) ... .... ........ Income before : Federal Income Taxes Federal Income Taxes Net Income $ 93,000(loss) $36,000(1) $ 57,000(loss) 37,000 15,000 22,000 206,000 81,a00 125,000 $150,000 $60,000 $ 90,000 (1) Credit. Should the foregoing estimate of profits for the five months ending March 31, 1946, be real- ized, certain accruals of expenses •made during the first seven months of the fiscal year and charged against income reported for that period will be cancelled as being no longer required. Such accruals aggregate $340,000: $85,000 for profit sharing; and $255,000 for Federal income and • excess profits taxes. On the basis of the foregoing figures, the Management believes that net

earnings, after taxes, for the current fiscal year will be $4,400,000. In addition, the Company will be entitled to receive $1,625,000 representing the estimated amount of refund due with respect to excess profits taxes of prior years, arising from the present carry-back provisions of the Internal Revenue Code, making an aggregate of $6,025,000 to be credited to Earned Surplus for the year. These figures assume no price relief from the O. P. A. during the period. The foregoing figures are predicated upon net sales of $11,164,000 and $11,798,000 for the months of November and December, 1945, respectively, and on estimated net sales of $10,800,000, $11,200,000 and $12,000,000 for the months of January, February and March, 1946. Traditionally cigarette sales for the entire industry are lower in the months of January and February than they are in any other months of the year. As stated in the Company's Prospectus, dated January 15, 1946, the Company's net sales for the seven months ending October 31, 1945 were $120,600,000. The decline in net profits which has occurred for November and December is due primarily to the virtual discontinuance of sales to the armed forces and the abnormally large domestic sales in October, which the Company believes resulted in over-stocking. Increased tobacco costs were a factor in the Company's costs for the first seven months of the current fiscal year, but prior to• November such increased costs were partially offset by increased sales. However, the full impact of such increased tobacco costs and of the increased costs of the 1945 tobacco crop was not fully reflected in profits until November and December. The decrease in net profits was due in a lesser degree to a sharp decrease in sales of Marlboro Cigarettes during November and December, as compared with monthly average sales for the preceding seven months. This brand sells at a higher price than Philip Morris and carries a higher margin of profit. The Company believes that its domestic sales volume is on a satisfactory basis. With the exception of January, 1944, domestic sales of Philip Morris Cigarettes during January were larger than in any previous January in the Company's history. However, if the limitation placed by the O. P. A. on the sales price of the Company's products continues unchanged, and if manufacturing and other costs remain at present levels, the Management estimates that net earnings for the fiscal year ending March 31, 1947, will be substantially less than those for the current fiscal year. The Management can make no forecast as to future leaf tobacco costs but it does believe that no important increase in the cost of production due to labor costs is likely, since labor cost is one of the smaller factors in the total cost of the Company's products. Application for relief has been made to the O. P. A., but no action has as yet been taken thereon by that body. The Company has been informed that the O. P. A. is making a study of the cigarette industry and that if it be found that the industry is not making a rate of profit on current net worth equal to that earned during the 1936-1939 base period, relief from the present ceiling price will be granted promptly. In view of the fact that during the last fiscal year the Company sold over 30,000,000,000 Philip Morris Cigarettes, it is obvious that a moderate increase in ceiling price would materially improve the Company's earnings' prospects. i If in the light of the information above set forth, you desire to withdraw your subscription to the new Preferred Stock, in whole or in part, you may do so by writing or wiring to this Company to that effect, c/o Guaranty Trust Company of New York, Agent, Corporate Trust Division, 140 Broadway, New York 15, New York, specifying the number of shares withdrawn. Subscribers who may elect to withdraw their subscriptions will receive a refund at the subscrip- ` tion price of $100 per share as soon as practicable after receipt of such withdrawal. ~ --- , _- -~~ , - _ - - ~ - - --- If you have already received your certificates for the Preferred Stock and desire a refund, ~ such certificates will have to be returned before such refund can be made. If refunds are to be ~

i I made to a person other than the person in whose name the stock is registered, the certificate will have to be duly endorsed and the signature duly guaranteed, with transfer tax stamps in an appropriate amount affixed. The right to withdraw subscriptions and to tender stock will expire at 3 P. M., Eastern Standard Time, on February 18, 1946. No shares of Preferred Stock, other than those which have already been issued, will be issued prior to that date, unless a written request to that effect is received by the Company, c/o Guaranty Trust Company, acknowledging receipt of this letter and requesting delivery of the stock. In the event that the Company shall have received no advice from you with relation to your subscription before 3 P. M., Eastern Standard Time, on February 18, 1946, certificates for the new Preferred Stock will then be issued and delivered to you. The Underwriters of the Preferred Stock, headed by Lehman Brothers and Glore, Forgan & Co., have executed an amendment to the Underwriting Agreement with the Company wherein such Underwriters agree that if 119,200 shares or more of the Preferred Stock remain subscribed for on February 18, 1946, said Underwriters will purchase the balance of shares offered on the terms and conditions of the original Underwriting Agreement; otherwise the Underwriters will have the option to terminate their obligations to purchase such shares. Whether or not any shares are taken up by the Underwriters, shares subscribed for with respect to which no application for refund shall have been made on or before February 18, 1946, shall remain issued and outstanding. The sale of the proposed issue of $15,000,000 principal amount of new Debentures has been postponed for further consideration until after February 18, 1946. Very truly yours, PHILIP MORRIS & CO. LTD., INCORPORATED By A. E. LYON, President