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LYBRA_,TD, ROSS BROS.&MMONTTGOMERY L RESIDENT PARTNERS CERTIFIED PUBLIC ACCOUNTANTS WILLIAM M. LYBRAND 90 B R O A D S T R E ET NEW YORK PHILADELPHIA ST LOUIS LOUISVILLE ROBERT H. MONTGOM ERY CHICA00 ATLANTA WALTER A.STAUB BOSTON DALLAS H. HILTON DUMBRILLE THOMAS B G HENDERSON N E W YO R K "t 4 WASH NOTON SAN FRANCISCO . . PRIOR SINCLAIR PITTSeURDH LOSANDEL€S NORMAN N DETROIT SEATTLE J. LE HART CL€VELAND WALTER L.SCHAFFER CINCINNATI - CONRAD B.TAYLOR HERMON F. BELL ROCKFORD LONDON ' ALVIN R.JENNINGS _ CHRISTOPHER H. KNOLL HILTON R.CAMPBELL n EDWARD G. CARSON - •-= Fr.+brua ry C, 1946. GEORGE W. McIVER.JR. WALTER R.STAUB MARK E. RICHARDSON Philip Morris & Co. Ltd., Incorporated and Messrs, Lehrmn Brothers, Glore, Forgan & Co. and Associated Underwriters Dear Sirs: 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 company's letter includes certain 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 March 1946, assuming no price relief from OPA during the period (c) Statement of adjustments, 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 made if the actual net income of the five months ending March 1946 is as estimated (d) Statement of estimated net income, after taxes, of the fisca 1 year ending March 31, 1946, pred- icated upon the assumption as to net income of the five months ending March 31, 1946 (e) Statement of estimated amount of refund which the company would be entitled to receive in

2 respect of excess profits taxes of prior years, arising from the present carry-back provisions of the Internal Revenue Code, predicated upon the assumption as to net income of the fiscal year ending March 31, 1946. In following paragraphs we comment upon the aforesaid account- ing information. We made a general review but not an audit of the company's balance sheet as of December 31, 1945 and its state- ments of income of the months of November and December 1945, and obtained information and explanations from the management. The a mounts of net income of those months as reported in the compan9ls letter are in agreement with the books of the company. Our review did not disclose to us any inform8 tion which would lead us to believe that the said net income a mounts for the months of November 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 company's letter, we observed the m.anner in which such estimate 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 increase of volume in those months 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 estimated sales was predicated upon the experience for the months of November and December 1945. Expenses deductible from such gross profits were estimated 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 items affected by different factors within the three month period. Federal income tax on the estimated income amounts was computed at the rate of 39f per cent, which is the approximate effective rate of income tax for a fiscal year ending March 31, 1946 if Federal excess profits tax on the yearts income were not involved, as would be the cas6 if the management's estimate of net income for the last three months of the fiscal year proves to be reasonably accurate. During our observation of the procedures followed by the management in preparation of the estimate of net income o- ~-

1 3 of the months of January, February and March 1946, nothing ca me to our attention which would lead us to believe that the f ore- cast was not prepared with care or that the management had not considered all pertinent factors. The company's letter states that, if the management's estimate of net income of the five months ending March 31, 1946 is realized, certain amounts of accruals for profit-sharing and for Federal income and excess profits taxes charged against income 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 required if the net income, after 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 f isca l 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 management, provision for Federal excess profits tax in respect of income of the year ending March 31, 1946 will not be required. Accordingly, under auch circumstance, the provision of $440,000 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 approximately $185,000 would be needed 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 verif ied the computation of the estimated amount of refund which the company would be entitled to receive in respect of excess profits taxes of prior years, arising from the present carry-back provisions of the Internal Revenue Code, if the various assumptions hereinbefore referred to prove to be correct and if the necessarily related Federal income tax returns as filed are accepted by the Bureau of Internal Revenue. A copy of the summary of the mana gement's estimate of net income of the year ending March 31, 1946 is attached. -- Very truly youra,