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Lenox Hill Hospital 100 -Llif 77... 51•Kf Ntw -x• Nav. " 1Q('i2/ November 3, 1978 t,r Dr. Nilliam U. Gardner Scientific Director Council for Tobacco 8siearch 110 East 59th Street Nev York, N.Y. 10022 Dear Bill: SF0800031 I have been thiakin= about the recent activities of couasel, C'PB, over the nast tan days. If antitrust lav caanot be ezolained to sK tben I camnot understand it, a typical Catch 22 situation. In regard to the iuza appl4cation there is no possible relevance to antitrust that I can sae. Sencs advice of couaael is out of bounda, and sisply adds another level.of authority on relevance. I think GTR should be renamed Council for Legally Yer- ffitted Tobacco Research, CLIPT for short. When fay personal counsel sives advice that I cannot follow it is ignored. My advice as SAb Chairnan is that on the Fuxa applica- tion the counsel is in error, and usual considerations should Qovern. Remember when condensate fract.ton research vas proscribed, we lost Dr. Craiebead. My considered opinion is that the time for as to sever connectioas with CTR is near. I would be pleased to tell Mr. Joseph Cullman the problesu if be is interested. With all othera involved w have bad aore than complete discussions. Best wishes. Sheldon C. Sotaars, M.D. Director of Laboratories SCS:cm cc: Mr. Addison Yeaaan J ~.r t f"`.. i i~ j ti..~* -'T ~~ .~ L.• ~

Confidential - Subject to Minnesota Protective Order and Addendum \ Category I STATE OF MINNESOTA AND BLUE CROSS AND BLUE SHIELD VS. PHILIP MORRIS INCORPORATED, ET AL AMMENDED EXPERT ANALYSIS OF ADVERTISING, R&D AND YOUTH PREVENTION EXPENSE BY PAUL J. MUCH JULY 1997 HOULIHAN LOKEY HOWARD & ZUKIN A SPECIALTY INVESTM ENT BANKING FIRM Chicago Los Angeles New York San Francisco Minneapolis Washington D.C. loronto Dallas Atlanta

Confidential - Subject to Minnesota Protective Order and Addendum \ Category I The attached bound volume constitutes the expert report of Paul J. Much. This report and Mr. Much's opinions and testimony will be based on his academic training and experience and his ongoing review of publicly available corporate financial data and internal tobacco industry documents and discovery. A listing of the documents relied upon by Mr. Much is attached. Defendants have yet to fully answer discovery upon which portions of this report are based. Mr. Much may review additional documents and discovery produced or to be produced by defendants and may rely on other experts in this case. Mr. Much reserves the right to supplement and revise this report, in accordance with the court's orders of March 13, 1997, and May 16, 1997. ~ ~ Senior Managing Director 7-;~- r'7

Confidential - Subject to Minnesota Protective Order and Addendum \ Category 1 Table of Contents Tab Philip Morris & R.J. Reynolds 1 Statistical Analysis Philip Morris Charts R.J. Reynolds Charts Brown & Williamson and American Tobacco A B C 2 Statistical Analysis Brown & Williamson Charts American Tobacco Charts Liggett and Lorillard A B C 3 Statistical Analysis Liggett Charts Lorillard Charts Footnotes A B C 4

CTR HN 043290

CTR NN 043291

ADVERTISING, R&D AND YOUTH PREVENTION (S Actual) I 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 Philip Morris Rneuch & Development Expeaditum (a) $2.483.259 $2,943,747 $3,180,591 Ceat.l..Nee+ to CTR Coaolarion: to Graenl Food (b) 5147,450 580,000 $98,750 $112,500 591,305 $75,372 592,968 $109,250 f115250 $139,531 $150,000 Coombutionz to Special Projects (b) 0 0 0 0 0 0 0 0 0 0 0 Toul Coatnb.tlo.u to C7R $147 450 S80 000 S98 750 5112 500 S91 105 $75,372 $92 968 5109 250 5115 250 SU9 531 5150 000 Rewreh & Developmeet Eapenditurn aad Coalribntbu to CTR 5147,450 580,000 598,750 5112,500 $91,305 $75,372 $92,969 $109,250 $2.598.309 53,083,278 $3,3)0,591 Adverti.l.g. Martett.g & Promotioa Expeaditum (c) peRditnrro Youth P.ermtinn F± , Youth Prerention Expenditures (d) Yoath Prevrntion Expenditures Wough TI (e) 0 0 0 0 0 0 0 0 0 0 0 Total Youth Prrveetioa Expeaditum R.J. Reynolds Rnear[Y & Developme.t Eape.dlt.rn (t) CwatAal.... te CTR Contobutions to ceneril Fund (b) Cootributions to Special Projeets (b) Total Coatribotiou to CTR Reuar(b & De.elopmeat Expeedieorn aad Coatr>'b.t(oas to CfR Advert4ia8, Marluting & Pronotba Expeaditum u Stated Ia Answer to Interrogatory No. 21. (g) Eetimated Advertteieg, Marketing & Proawtloo Expeeditarn Reported to FTC (b) YnrL Preveattwe R.neadtrure. Yowb Ptevmtion Expeoditurex (i) Youth Preveotion Expendiuues through TI (e) Total Youth Preveatlo. Eapeedll.rn 'i go -- $387,000 $236,000 5310,938 $339.750 $28.,571 5234,748 s306,250 3396,250 S4t7,500 5514,000 5546,876 0 0 0 0 0 0 0 0 0 0 0 5387,000 5236,000 $310,938 $338,750 5284,57t $234,748 $306,250 5386,250 5417,500 $514,000 5546,876 5387,000 5236,000 5310,938 $338,750 1284,571 $234.748 5306,250 5386,250 5417,500 $514,000 5546,876 529,079,690 530,459,0M 539,403,534 541,216,816 $43,569,031 $50,316.407 553,141,763 557,296,984 $60r0 6,874 559,860,879 570,874,729 529,079,690 530,459,044 $39,403,534 $41,216,816 $43,569,031 $50,316,407 $53.141,763 557,296,984 $60, 206,874 559,860,879 $70,874,729 0 0 0 0 0 0 0 0 0 0 0 07q7/97 CONFIDENTIAL-SUBIECT TO MINNESOTA PROTECTIVE ORDER AND ADDENDUM 3 CATEGORY I

ADVERTISING, R&D AND YOUTH PREVENTION (S Actual) Philip Morris 19651 19661 19671 19681 1969 19701 19711 19721 19731 19741-- 1975 Reuareh & Devebpmeae Erpeedleura (a) 53,612,807 53,921,318 $4.679,382 $5,361,677 55,986,753 $6,978,913 58,653,668 $10,418,624 511,796 ,991 515,084,2.14 517,156,613 Cn.tiA.lie.s tn CtR Coaubutions to General Fund (b) $180,000 5198,750 $217,500 5288,750 5515,625 5481,125 $712,160 1648,333 5837,692 51,140,755 SIa73,110 Coo6n'butions to Special Projects (b) 0 21,200 22,200 39,600 15,000 30.800 53,400 61,200 41,193 76,652 63,022 Tota) Ce.trRut{ou to CTR 5180,000 _ __ 5219,950 _ __ _ _ $239,700 _ _ 5328 350 . _ _ 5530,625 5511 925 _ 5765,560 _ $709 533 _ _ 5878,885 SI 217 407 SI 436 3, 32 ReseareY & Devebptne.e Eapeedituret and Coatrib.tfo.. to CTR 53,792,807 $4,141,268 54,919,082 $5,6'J0,027 56,517,378 $7,490,838 59,419,228 $11,128,157 512,675,876 516,301,651 518,592,945 Adverthie8, Marketin8 & Promotioe E.pendit.rea (c) 549,525,967 $58.104,621 560,264,038 562,733,980 So1,1J6,929 573,026,503 $I11,069,995 Youth Preve.ti... ..pcwdYur Yooth Preventioe Exprndituref (d) Youth Preven0oa Eapeaditures throu8h T1(e) 0 0 0 0 0 0 0 0 0 0 0 Total Youth Preveatio. Eape.diteres R.J. Reynolds Raeard & Development Eape.dit.re, (Q Ce.ri1..LM- Iw CTR Coetu3rtioos a Oeru;ral Fund (b) Comributions to Special Projects (b) Total Co.tribrtlo.s to CTR Rasarai & Devebpmeet Eapenditures aed Co.trib.tbu to CTR AdvertW.B, Marketin8 & Prometioa Eapendit.ra e. Stated 1. A..wer to Isterro8atory No. 21. (8) E.810ated AdverWieB, MarkNi.B & Promotba Eap..dYerse Repurted (o FTC (b) Ywr.. Prevealw. r....wdu.... YouA Preventio.. E:peedituref (i) Youth Nersuoe Ecpeadiores duou8h TI (e) Total Yo.th P.eveatle. Eape.dhrrn 115 000 000 , , $618,752 $633,752 5637,500 5743,752 51,155.000 51,025,000 $1,372,462 $1.100.405 $1,335,334 $1,562,6 98 51,967,995 0 5618 752 67,600 $701 352 67,800 $705 300 102,000 $845 752 33,600 $1188600 65,600 $1090600 101,400 SI477862 104,400 $1 204805 64,386 $1 399 722 110,677 51 7 7 87,913 ' , , , , , , , ,6 3,3 5 ,055,908 S_ 5618,752 S701,352 $703.300 $845,752 51,188,600 SI,090,600 $1.473.862 SIr04,805 116,399,722 51,673,3 75 52,055,908 $67,367,680 $73.520.251 $78,672,816 $79,015,550 $79.226.236 589,635,729 162,y22,220 572,790,761 573 ,854,317 $95,4:7,5N 5121,419,4C4 567,367,680 573,520,251 578,672,816 $79.01 5,S50 579,226,236 $89,635,729 562,522,220 572,790,767 573,884,317 $95,427,SM SI30,132,BSV 0 0 0 0 0 0 0 0 0 0 0 07/02/97 CONFIDENTIAL • SUBIF.CT TO MINNESOTA PRO7ECTIVE O1(DER AND ADDIiNDUM \('ATEGORY 1

ADVERTISING, R&D AND YOUTH PREVENTION (S Actual) ph111pM4II1Y Roearcl & S><.ebpmeat Eapeaditaree (a) frtJ.aln.. to CTR Coan'butions to Csennal Fund (b) C6em'b9tions to Special Projects (b) T6ul Coatrib.tiou to CCR Roewrcl & De.etopmeat Expenditures ead C6atriDaioae to CfR AdvertlsLp BtarYetlaB & Promotba Eapeaditares (c) Yo. I. Prere. In. -. ctarn Youwb Preveafion Expenditures (d) YootL Prerestioo E.penditurestbro98b TI(e) Tolel Yo.tl Prwe.tba E.peadll.rer R.J. Revnolds Rerearch & Devebpeuat Ecpendlt.rer. (f) Cnau.t6.. r jIg Coatibutionr blieoael Fond (b) CoMribWioro oo Special Projeet. (b) Total Co.lrWrtloar to CTR Rneant. & Devolopmeat Eape.dkora ead Coavlb.tle.r to CTR Adverti.iop MarYellq & lrormtba Eapeadkarer ar Stned Ia A.ewer to Ioterroptory No. 21. (8) Estimated AdvertBlaB, M.rketla8 & trnmotb. Eapeadit.ra Reported to FTC (b) Ya.tb Prevea Lr F.ne.dit.ree Yowh Prevoeon Expmdiova (i) Yoatb Prermtioa Expenditures through T1(c) Total Yoatb fre.eatba E=pe.dkoree [ 1976 -1977 1978[ _ 1979[~ - -19801 19811- 1982 1983 19941 1985 19-9-61 f20,674,798 $1,737,960 89,%7 $27,276,N82 $1.902.922 188,190 $29,391,501 $1,830,439 190,677 $34,477,606 $1,992,659 245,903 516,8LI,N2N 52,126,879 310,574 f45,738,312 $2.238,943 300,025 $SJ,54N,792 52,657,230 440,644 $57.419,876 53,008,258 347.794 S60,120174 53,909,019 317,774 563,889,16-1 $4,390,133 379.082 $73.711.797 55,308,278 839,902 SI,827,927 52,091,112 52,021,115 $2,238,562 52,437,453 52,538,868 $3,097,874 53,356,052 54,226,793 f4,769,215 56,148,180 f22,502,725 SI64,689,339 0 529,367,994 $164.026,498 0 511,412,616 5226,662,781 0 $36,716,168 5249,825,725 0 S39a11,281 SJ32,049,120 0 $48,277,180 $394,910,811 0 556,646,666 5467,940,119 0 560,775,928 $502,760,151 24,444 $64,547,167 $546,304,954 561,497 568,658,378 5695,628,132 789,678 S84,859,977 5738,037,891 353,439 -• - •• -- •• -- •• $24,444 5561497 5789,678 $353,439 $21.336.000 $24.134.000 f36,499,000 538,874,000 546,269,000 555,034,000 568,809,000 52,401,861 f2,204,142 52,45t,852 $2,262,025 $2,415,625 $2,328,985 $2,695,691 Sl,736,628 $3.503.884 5 3,84t,3V3 54,705,793 I22,569 _244,536 216_tl52 _ 2'IOp28 117,160 459,054 354,715 _ 291,193 -- 140,V22_ 741,8-W __ 12,524,430 52,448,678 _ f2,688,704 $2„552,63J 12,765,953 _ _12,646,IJ3 {.1,591,34) I,7V3,077 ~-f4,8vt115 53,447,623 $2.524.430 52,448,678 52,688,704 $2.552.653 524,101,955 526,7N0,U5 $39,633,745 f42,465,J43 S.w,064,0 77 A9.223,3t5 $74,25wo23 5149,021,007 5192,685,525 S2I4,385,981 $298,435,251 $363.761,764 f433,172,002 5530,116,117 5588,184, 168 $612,613,628 $603.973.000 5600,440,000 5178,154,911 5274,096,902 5272,157,950 $333,753,395 f407,131,883 5517,372,525 5663,720,590 $683,262, 478 $965.584.811 $1.030.051.262 51,014,720,146 0 0 0 0 0 0 0 26,583 518,255 707,754 319,153 $26,583 5518,255 5707,754 5319,IS3 07/02197 CONFIDENTIAL - SUBJECT TO MINNESOTA PROTECf I V E ORDER AND ADDENDUM \ CATEGORY I

ADVERTISING, R&D AND YOUTH PREVENTION (S Actua)) Philip Morris I 1987 1988 1989 1990 1991 1992 1993 1994 1954-9 Ruearch & Derebpmeat Eape.dit.re. (a) S80a34,564 $56,064,368 S57,633,513 S53,951,610 S61,072,778 $61.450.896 $72,890,963 589,253,153 5 1,143,213,361 to LTR Coe6buu6ns to Geeeal Fand (b) $5,754,937 56,752,365 57,245,257 58,162,873 $9,307,060 $10,945,500 $11,070,876 S11,196,1% SI09,3 44,059 Cmmbucortf to Special Projects (b) 641,763 517.770 428,618 174,973 0 0 0 0 5,937,923 Total C4+trm.tlos to CTR 56,3% 700 S7,270,135 S7,673,875 $8,337 846 S9 307 060 $10,945,500 $11,070,876 $I 1 1% 1% S 1 I S 181 981 Reaeard & Derebpmetl Etpeedlt.rra and Cu.triD.tbaa to CTR 586,131.264 563,334,501 565.307,388 $62,289,456 570,379,838 $72,3%,3% 583,%1,8J9 $100,449,349 51,258,415,342 Adrertitie8, Marketi.8 & Proawtio. Eapeadit.rv (c) 5857,058,060 S1,1J9,610,449 $1,290,880,892 $1,540,812,544 $1,687,684,672 $1,825,558,753 $2,847,3 82,978 $2,242,617,367 S18,J90,J1J,271 Youth Prcreetbw F. dp,~ltrrr Youth Preveutioe Eapenditures (d) • - -• 514,000,000 514,000,000 Youth Prcvention Eapeadi6rten duou8h TI (e) 7,9_2J 186,657 157 i 22 2 _51J,606 1,850729 y4J5,676 891,801 29,869 6,818,740 Total Youth Pre.ntb. Etpeedtt.rea _ _ _ 729fl45676 f21923 SSIJ606 SI,SS 0 5186,657 5157,Q2 ftl918, 01 _ $14029869 69 $ 20_,JIb 7•10 _._____ _ __ ._____. __ ._ ___._ ________ _ RJ. Reynolds RewrcY 6 Derebpme.t Eape.dNrres (0 Cee tt..t th.. te CTR Conubr6oes to CCeneral Fued (b) Contnbutions to Special Projects (b) Total Ca.trib.tbes to CTR Researcb & Derebpme.t Eapeedlt.rn a.d Ce.trib.tbu to CTR ' Ad.ertW.B. Marketie8?a Proreetb. Espe.dltarrn au Stated 1. Aeswer to l.terrvptery No. 21. (8) Est(mated Adrerthl.4 Marketi.8 & PromoUe. Eape.ditara Reperted to FTC (it) Ye. i7..PeneadNrrre Youth Prere.tios E:perdieves (I) YaA Prewtio. Expeedi6ses dvoa8h TI (e) Total Youth Preve.tlo. Eape.dit.res $69,610,000 192,697,000 5105,125,000 $115.619.000 $105.291.000 SI03,211,000 591,915,000 55,112,586 25,954,450 $5,588,403 $5,672,304 S6a68,672 $7,016,192. 57,933,688 556,067 445,017 346.922 126,083 0 0 0 $5,668,653 16,399,467 $5,935,325 55,798,387 56,368,672 57,016,192 $7,933,688 $75.278.653 599,0%,467 5111,060,325 1121,417,387 5111,639,672 SI10,227,192 199,848,688 5469,964,000 $436.853,000 1527,019,000 $573,241,000 14%,898,000 $462,034,1100 1435,540,000 $982,594.217 $1,151,648,213 S1,2I7,875,4I1 $1,398,850,320 51,721,184,872 $1,952,607,072 SI,631,176, 099 - - 167-029 7 9 139.2" 246 SI39 18,173 $19 173 _362,432 $362 432 1,268,681 269 691 $1 919,252 $919 252 634,747 S6J4747 516 02 , , , , , , f53,000,000 $85.063.000 11,127,486,000 17,867,212 $99,683,917 0 6.029.255 $7,867,212 $105,713,172 $145,930,212 S1,2J3,199,172 1326,151,000 $9,733.'96,7_'8 SI,436,469,797 119,170,024,594 S 14,000,000 $14.000.000 18,311 55,099,617 $11018311 519,099,617 > 07/02/97 CONFIDENTIAL - SUBJECT TO MINNESOTA PROTECTI V E ORDER AND ADDENDUM \ CATEGORY I