Industry Summary

Anne Landman's Collection

Industry Summary

Date: 1992 (est.)
Length: 195 pages
2051363425-2051363618
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Abstract

Buried inside this mostly-dull 195-page Philip Morris (PM) marketing report is some important information that should be noted by public health groups and authorities:

In noting the decline of smoking rates in the U.S., PM lists the major factors that have proven particularly effective at decreasing the demand for cigarettes: "the declining social acceptability of smoking, increased smoking restrictions, particularly in the workplace [and] rising excise taxes and prices..." Confirming that higher cigarette prices effectively decrease smoking rates, the report also says that lower-priced (discount) cigarettes help "keep some consumers in the marketplace" who otherwise would have quit.

The document also describes PM's opposition to fire-safe cigarettes:

"Anti-smoking groups endorse the 'self-extinguishing', or 'Fire Safe', cigarette as a way to...cause all cigarettes to look and taste the same. Such mandates could cripple the competitive advantage of leading brands and intensify the erosion of the overall cigarette market."

PM describes its strategy to fight fire-safe cigarette legislation on Page 150, Bates No. 2051363574:

"ISSUE: Efforts by anti-smoking groups to mandate a 'fire safe' cigarette could destroy the competitiveness of leading brands and increase the cost of manufacturing cigarettes. STRATEGY: ...PM-USA will expand coalitions among the fire prevention community and public policy makers to diffuse support for 'fire-safe' legislation at the state and federal level..."

PM also considered nicotine-replacement therapy aids (like the patch and gum) to be direct competitors. To fight the incursion of these products into the nicotine market, PM planned to develop a "proprietary alternative smoking product" called "Beta," which would "be marketed in direct response to such products as nicotine-releasing skin patches and chewing gum." [Page 37, Bates No. 2051363461]

The report also reveals the extreme importance of smoker databases to cigarette companies' continued ability to promote smoking--something public health authorities have largely ignored. As legal restrictions tighten on advertising and promotions, cigarette companies increasingly turn to huge databases of information that they gather on smokers to continue actively marketing cigarettes to large numbers of people:

"The marketing environment is likely to become more restrictive during the plan period, including additional restrictions on outdoor and event sponsorship. This necessitates creating alternative avenues of reaching the consumer. Developing a smoker name database will enable us to effectively reach a large number of smokers..."

Smoker databases are of such importance as promotional tools that PM girded itself to deflect any legislation that might restrict the company's ability to gather personal information on smokers:

"As the database becomes more critical to our marketing plans, it becomes essential that we protect it from legislated restrictions..." [Page 107, Bates No. 2051363531]

The document also makes it clear that PM fights restrictions on event sponsorship at least in part because these events provide the company with venues in whcih they can gather personal data on smokers (the company refers to gathering smoker information as "name generation.") The says PM should "Increase [the company's] presence at major events and use as source for name generation."

Also of interest to health authorities should be the information on Page 145 (Bates No. 2051363569) that describes PM's strategy to divert health department funds away from tobacco control and towards "support[ing] other health programs (pre-natal care, half-way houses, etc.)" (areas which don't threaten cigarette sales):

"Long Term Goals

• Counter ASSIST Program in 17 states: - Work with grass roots organizations to divert state health department funds, equivalent to the amount of ASSIST funding, to support other health programs (pre-natal care, half-way houses, etc.).

(Note: ASSIST was a widespread public health effort in the early to mid 1990's in the U.S. to reduce smoking rates in 19 states)

PM's plans also included efforts to eliminate public health restrictions on tobacco that were already in place:

"Rollback Program:

- Particularly in localities, introduce legislation to reinstate marketing activities, such as sampling and couponing, that have been banned or restricted.

- Pass state preemption."

The report also refers to African Americans as an "important volume opportunity" while simultaneously describing how to fight the idea that the industry targets minorities in their promotions,

This and much more information within this document shows that far beyond simply making and selling cigarettes, Philip Morris actively worked on a number of fronts to fight efforts to reduce the many public health threats the company poses.

Fields

Quotes

Industry volume of 509.2 billion in 1991 was down 12.6 billion versus 1990, continuing a declining trend which began in 1982. Over the past five years, U.S. cigarette volume has declined at a compounded annual rate of 2.6%. Factors which continue to negatively influence volume include the health controversy, the declining social acceptability of smoking, increased smoking restrictions, particularly in the work place, rising excise taxes and prices, and the decline in the number of new people reaching smoking age.

During the upcoming five years, we anticipate cigarette volume to continue to decline based on an additional excise tax increase in 1993 and the continued hostile smoking environment. Sales of cigarettes in the U.S. are projected to decrease an average of 2.7% per year between 1991 and 1996, reaching 443.5 billion in 1996...

[From page 6]:

These sociodemographic trends highlight the importance to PM-USA of maintaining its historic strength among entering smokers, retaining smokers as they age, and gaining share among older age groups so that we can continue to increase our market share to reach 49.7% in 1996.

Race/Ethnicity

...While smoking incidence varies considerably among these groups (ranging from 16% among Asians to 29.7% among Blacks), it is evident that they represent an important volume opportunity. During the plan period PM-USA will hold its near 50% share of Hispanics, and will increase its 19.8% share among Blacks primarily via the launch of B&H King Size. In addition, we will build upon our 61.3% share among Asians through intensified marketing programs.

[From Page 7]: INDUSTRY VOLUME DECLINES BY NIELSEN COUNTY SIZE

This industry erosion in major metros is being driven by smoking incidence declines and broader smoking restrictions, acting to offset population shifts which have favored cities and suburbs...

[From Page 9]: Smoking continues to be skewed more heavily toward the less educated. Approximately 38% of smokers (age 25-54) have attained some college education, whereas approximately 55% of non-smokers in that same age group have some college education. Similarly, 20.9%, of smokers (age 25-54) did not graduate from high school compared to 10.7% of non-smokers.

[From Page 24]:

SOCIETY SUMMARY

Cigarette smoking has evolved from a majority adult habit to a minority act, enjoyed by a weakened social constituency. Consequently, the political and social base of the smoker has eroded and opinion leaders have begun turning against the industry, supporting legislation, litigation, and non-profit anti-smoking groups that seek to restrict smoking. During the plan period, the cigarette industry will be required to defend and protect its rights as a result of:

• States increasing state excise taxes to compensate for weak local economies and fiscal budgets.

• Employers adopting employment practices that discriminate against individuals based on legal lifestyle decisions pursued off premises during non-working hours.

• Anti-smoking forces continuing using the environmental tobacco smoke controversy to restrict people's right to smoke.

• States and local governments legislating restrictions and bans on the sales and marketing activities for tobacco products.

• Legislations requiring that cigarettes be self-extinguishing.

• Environmentalists mandating product specifications on the marketplace.

• Attitudes towards smoking.

[From Page 27]: SMOKING RESTRICTIONS

The environmental tobacco smoke (ETS) controversy continues to be used by anti-smoking forces to restrict the opportunity to smoke. In recent years, despite success in defeating state-wide bans, the number and scope of these restrictions have increased significantly in the private sector and they are expected to continue to grow. Because of this success at halting or modifying state legislation restricting smoking, anti-smoking activists have turned to federal agencies and localities to push for additional restrictions.

[From Page 30]: MARKETING RESTRICTIONS

During the plan period, attacks on the tobacco industry's marketing practices will focus on the allegations that industry marketing activities are aimed at encouraging youth to smoke, as well as women and minorities. Also, federal funds will be used to force local communities to restrict tobacco marketing practices. U.S. Health and Human Services Secretary Louis Sullivan's American Stop Smoking Intervention Study program (ASSIST) will provide $135 million over seven years to seventeen state health departments "...to change attitudes about smoking and counter the sinister marketing strategies of the tobacco industry. "ASSIST will be augmented by the American Cancer Society which will provide $25-$30 million in additional funds for lobbying and smoking cessation campaigns.

[From Page 144]: Marketing and Sales Restrictions

The organized anti-smoking movement is attempting to restrict or ban our ability to reach existing smokers with marketing and sales vehicles considered legitimate tools for virtually all other products. Restrictions on advertising, sponsorship, sampling, couponing and sales practices limit our efforts to increase market-share. By restricting the industry's ability to use widely accepted marketing and sales techniques, the anti-smoking forces are attempting to reduce public acceptability of cigarettes.

PM-USA's goal is to defeat proposed marketing and sales restrictions or bans. PM-USA is proactively supporting state legislation to preempt local restrictions, as well as to establish tobacco industry marketing and sales guidelines as state law...

ISSUe:

The anti-smoking movement is using false charges about the targetting of youth, women and minorities to advance legislation restricting or banning the marketing and sale of cigarettes.

Strategy:

| !

PM-USA will use two strategies to combat marketing restrictions. First, we will advance our position that smoking is an adult custom, that PM-USA does not want minors to smoke and is working in cooperation with retailers to prevent minors from purchasing cigarettes. Second, we will demonstrate to elected officials, public policy decision makers, the media and consumers that advertising, sampling and sponsorship are forms of free speech protected by the First Amendment. To increase awareness of company/industry initiatives we will use advertisements on the Youth Initiative in selected publications..

1992-1994

Marketing Freedoms

Develop state legal fellowship programs with the American Civil Liberties Union and

• Washington Legal Foundation to oppose bans or restrictions (Freedom of Speech).

Develop Sports Sponsorship Coalition to promote/defend corporate right of sponsorship.

• Coordinate with minority interest groups to counter anti-smoker's claims on "targeting".

Long Term Goals

Rollback Program: - Particularly in localities, introduce legisla- tion to reinstate marketing activities, such as sampling and couponing, that have been banned or restricted. - Pass state preemption.

Company

Philip Morris

Author

Presumed corporate author, Philip Morris

Recipient

Presumed corporate recipient, Philip Morris

Region

United States

Named Organization

Abco Markets

Alza

Amcon Dist

Amer, American Tobacco

American Cancer Society

American Lung Assn

Assist, Assist

Bakery Confectionery + Tobacco Workers I

Bat, British American Tobacco

Big D Drug

Brooke Group

Brooke Partners

Business Week

Bw, Brown & Williamson

Carolina Cigarette

Chicago Tribune

Church Dwight

Ciba Geigy

Circle K

Citicorp Consumer Banking

Clark Oil

Coalition for Solid Waste Solutions

Colonial Heights Packaging

Conference of North East Governors

Core Mark

Cygnus

Dmk Holding

Dominicks Finer Foods

Eagle Star

Eby Brown

Elan

Eli Witt

Emro Marketing

Epa, Environmental Protection Agency

Executive Steering Comm

Fareway Stores

Fays Drugs

FDA, Food and Drug Administration

Fleming Companies

Ftc, Federal Trade Commission

Gallaher

General Foods

Globe

Grand Union

Grocery Mfg

Hhs, Dept of Health and Human Services

House

Impel Marketing

Japan Tobacco

Kmart

Kohlberg Kravis

Kroger

Lederle

Liggett Ducat

Lm, Liggett & Myers

Loews

Lor, Lorillard

M Sosnick

Ma Legislature

Mai Basic Four

Managed Care Networks

Management Steering Comm

Marion Merrill Dow

Maverick Markets

Mays Druag Stores

Mclane

Medic Discount Drug Stores

Mitsubishi

Mobil

Mobilizations

Moodys

Msa

Natl Assn Mfg

Natl Conference of State Legislatures

Natl Consumer League

Natl Waste Management Assn

New Valley

Nielsen

Niosh, Natl Inst for Occupational Safety & Health

Ny Times

Old Dominion

OSHA, Occupational Safety & Health Administration

Pace Membership Clubss

Pharmarcia

Piggly Wiggly

Pillsbury

PM Customer Advisory Council

PM Magazine

PM-Eec, PM-Eec

Price Chopper

Public Interest Research Group

Quaker Oats

Quick Trip

Rh Macy

Richmond Blue Cross Blue Shield

RJR Nabisco

RJR Nabisco Holdings

RJR, R.J.Reynolds

Roper, Roper Org

Samelson Leon

Sams

Save Mart

Scientific Advisory Board

Sheetz

Simon Schuster

Smokers Advocate

Smokers Caucus

Solid Waste Task Force

Southland

Spectrum Stores

Standard Poors

Steering Comm

TI, Tobacco Inst

Time

Trade Council

Tripfoods

Tropicana Products

Tsg, Technical Study Group

US Census

US Congress

US Senate

Volk Group

Walmart Stores

Warner Lambert

Western Union

Wetterau

White House Competitiveness Council

York Engineering

Litigation

Stmn/Produced

Named Person

Allen, R.J.

Anderson, D.

Buno, T.

Campbell, W.I.

Dangoor, D.

Dimarco, R.

Fitzmaurice, R.A.

Ford, Y., J.R.

Gorden, R.

Griscom, T.

Gunzenhauser, G.R.

Halset, W.G.

Hendrix, R.S.

Higgens, H.E.

Iauco, D.

Isbister, D.

Jarett, J.

Johnson, C.

Johnston, J.W.

Juchatz, W.

Kauffeld, R.W.

Laux, F.

Lebow, B.S.

Mau, T.

Merlo, E.

Moore, W.

Nelson, J.

Newlin, L.

Ockers, J.M.

Oglesby, M.

Orlowsky, M.

Ridgeway, S.

Robinson, R.W.

Schindler, A.

Schindler, A.J.

Schroer, J.

Spears, A.W.

Steele, H.

Stewart, M.

Surgeon General

Szymanczyk, M.

Tedder, D.R.

Tisch, L.

Turner, J.C.

Volk, S.J.

Welsh, D.M.

Wexler, L.

Type

REPT, REPORT, OTHER

CHAR, CHART, GRAPH, TABLE, MAPS

DRAW, DRAWING

Subject

Fire Safe Cigarettes (Products)

promotions

marketing restrictions

advertising

Youth Smoking Prevention Programs (Industry-sponsored youth smoking prevention programs)

Designed to stave off further legislated marketing restrictions

Document Images

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INDUSTRY SUMMARY The tobacco industry is characterized as mature and declining, yet with high margins for a low cost consumer product. During the plan period, the industry will be affected by changes in volume, demographic, product category, trade channels, marketing mix, and pricing. Industry Volume Trends Volume trends will continue to be impacted by the health controversy, the declining social acceptability of smoking, increased smoking restrictions, particularly in the workplace, rising excise taxes and prices, and demographic changes. Population Trends By 1996, only 12% adults under the age of 25 and over two-thirds will be 35+, as compared to 1986 which had 16% adults under the age of 25, and slightly over half the age of 35+. This sociodemographic trend highlights the importance of PM-USA's ability to maintain its histcric strength among entcring s.mcker.t, ;eiain srr:oicers as they age and gain share among oiG'ar c~e rr::Â°`- ; ~~ : _st Â°d?e can Â°.i;Â¢inY!a !J 1rGrvsae our r; ar:{Gt share. ~itiler socioderriographic trends that will impact PM-USA over the plan period are: Â• Changing racial/ethnic mix of the U.S. population. Â• Decline in smoking incidence in urban environments. Â• Decline in smoking among white collar workers. Product Category Trends The discount category will continue to be a dynamic segment in the tobacco industry, supported by growing legitimacy, advertising support, brand/packing proliferation and/or repositioning, and couponing. In addition, reduced tar cigarettes will continue to grow. Product concepts and research that may lead to new products include: low tar/high flavor, reduced nicotine, low smoke, sc:rrated smoke aroma, flavored cigarette and new devices. Tr,qrfe- CharTneis Competitive pressures, rising costs and thin profit margins will continue to affect wholesalers resulting in consolidations, mergers and liquidations. In addition, retail environments will continue to be affected by consumer's buying patterns which are in response to their lifestyles and economic circumstances. f>rlarketing Mix Non-media expenditures for merchandising and couponing have steadily risen over the last five years. During the plan period, this increase is expected to continue as competition reinvests a substantial portion of price increase revenue into retail promotional programs to stabilize premium brands and to gain share in the growing and intensely price competitive discount category. Retail Pricing Over the plan period, premium retail prices (cartons) are forecasted to increase 9.1 % annually. The average retail price of 85mm premium products (without coupons) is projected to approach the $20.00 per carton mark in 1992-93 and the $3.00 per pack mark in 1995- 1996. . 2

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INDUSTRY VOLUME TRENDS Industry volume of 509.2 billion in 1991 was down 12.6 billion versus 1990, continuing a declining trend which began in 1982. Over the past five years, U.S. cigarette volume has declined at a compounded annual rate of 2.6%. Factors which continue to negatively influence volume Include the health controversy, the declining social acceptability of smoking, Increased smoking restrictions, particularly in the work place, rising excise taxes and prices, and the decline in the number of new people reaching smoking age. During the upcoming five years, we anticipate cigarette volume to continue to decline based on an additional excise tax increase in 1993 and the continued hostile smoking environment. Sales of cigarettes in the U.S. are projected to decrease an average of 2.7% per year between 1991 and 1996, reaching 443.5 billion in 1996. While premium brands will continue to fuel the decline, decreasing an estimated 5.8% per year, discount brands will continue to grow, albeit more slowly, presumably keeping some consumers in the marketplace. INDUSTRY VOLUME TRENDS Total m=~~~--=Prerniurn ~ ~ ~ `~ D;SCOL'nt 600 400,' 200-; 626.5 0 '81 '83 '86 '87 '89 '91 '93 '95 '96 ~nÂ•ce; PM-USA Marks'ing Research . COMPOUNDED ANNUAL VOLUME GROWTH (9/0) 1986-1991 1991-1 ~ 1a Total Industry (2.6) (2.7) Premium Brands (6.3) (5.8) Discount Brands 19.7 4.7 3 L

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Notwithstanding the forecasted industry decline, PM-USA will continue to address the challenge this forecast provides in order to lessen the effect on our volume and share. Corporate Affairs will continue to provide information and support issues concerning social and work place restrictions which have been placed on smokers. They will also continue to lobby for minimal state and federal excise tax increases, so as to lessen retail price increases. From a product development perspective, PM-USA will develop new products to meet the continued demands of our changing market, e.g. more flavorful, ultra low tar products. We will also continue to develop new and innovative products to address the perceived health and social issues surrounding the cigarette industry. Finally, PM-USA will continue to moderate price increases of our premium brands in order to make smoking less cost prohibitive. Assumptions This industry forecast is based on the following assumptions: Â• During the plan period there will not be any major socio-political or technological upheaval affecting the industry. Â• The federal excise tax will rise $2.00/M in January 1993 to $12.00/M per the budget accÂ°'~rd r^?chcd in f.overnsJvr 1990. There are no further increases in fcueral yxcise taxes expec;vd duririg siyp 1992-1996 eian penod. ~ Wtzte excise taxes will rise approximately 7-10% per year. The 1991 weighted average state excise tax was 25.4 cents per pack, a 6.9% increase over 1990. Assuming a growth rate of 10% per year, state excise taxes are forecasted to increase to approximately 40.9 cents per pack by the end of the plan period. Â• The industry continues to remain relatively price inelastic due partially to the availability of lower priced alternatives, such as Bristol, which had an average retail carton price (85mm) of $13.18 in 1991, compared to $17.48 for a premium brand. Elasticity is assumed to be -.37. This means that for every 10% increase in price, industry volume will decline 3.7%. 4

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POPULATION TRENDS Age An important trend continues to be the aging of the U.S. population. By 1996, only 12% of adults will be under the age of 25 and over two-thirds will be 35+. 18-24 Source: U.S. Census Bureau 25-34 ADULT POPULATION AGE PROFILES 1981-1998 35-44 45-54 55+ Although there will be 6.3 million more smoking age adults in 1996 relative to 1991, the gains will occur among adults in older (over 35) age groups. ADULT POPULATION GROWTH BY AGE GROUP 1991-1996 of People 6.5 3.7 -4.4 25-? A 35-44 5 45-54 VVT

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Incidence Historically smoking incidence has been lower among the older age groups, and smoking incidence overall is expected to continue declining due to health, social and price pressures. As a result, there will be 47.2 million smokers in 1996 compared to 52.6 million in 1991. I Smoking incidence By Age Group Incidence % 1991 1 g9g Difference Under 25 30.9 30.0 (0.9) 25-34 33.5 29.3 (4.2) 35-44 31.3 26.8 (4.5) 45-54 30.0 25.6 (4.4) 55-64 24.2 20.6 (3.6) 65+ 13.6 11.5 (2.1) Source: Roper (1991 Incidence) and PM-USA Business Planning Estimates (1996) A demographic model, built up with data from the U.S. Census, Roper and Consumer Tracking sources, indicates industry losses due to sociodamocraphic effects such as aging iquating. ;'very five jp:Â°:r v;~riod s;ncs 1981, the irdustry has ;ast over ':C0 bialion units 41 tZlei4 (e.g., 3,23.7 biiiiocl "t,:llits ii1 1981 519.0 bill'ion units in 1986). Cigarette volume from new adults (18-22 years of age) entering the market has not compensated for these losses, and the volume contribution from this group is declining. In 1981, smokers in this age group contributed 73.6 billion units to the industry; however, in 1996 this group of new smokers will only contribute 41.7 billion units. SOCIO/DEMOGRAPHIC INFLUENCES ON INDUSTRY VOLUME 13 Existing Smoker Volume Â® New Smoker Volume 1981 Existing Volume CAG% Source: Business Planning Estimates 1986 (3.70) 1991 (4.61) 1996 (4.63) The :;qe composition of inc'r,try vOitIrrle will by ?.fferted by these chairfgvs in the po;^.Â°'Â°.`.ion so that by 1996, 62.8% of volume will come from smokers over the age of 34 vs. 56.3% in 1986. 6

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Industry Volume By Age Group (%) 1 S91 j 99g Diff r~ence Under 25 13.9 13.4 (0.5) 25-34 26.9 23.8 (3.1) 35-44 24.6 25.9 1.3 45-54 16.6 18.9 2.3 55-64 10.5 10.2 (0.3) 65+ 7.5 7.8 0.3 ISource: PM-USA Business Planning Demoqraphic Model (1996) These sociodemographic trends highlight the importance to PM-USA of maintaining its historic strength among entering smokers, retaining smokers as they age, and gaining share among older age groups so that we can continue to increase our market share to reach 49.7% in 1996. Race/Ethnicity r~iother trend ~vh`rlh will Increase in importence over the plan period is the changing mix r i-he U.S, population. By 19U'3, v;e estimate ahere will be 2 tni;iio;7 ;.D ac Bia~,~, Asian or i ~is; ar ic. The Asian Adult population will increase 48.~% compared to 1981; the number of Hispanics will grow 34.4% and the number of Blacks will increase 22.5%. ADULT POPULATION INCREASE 1981 vs 1996 White Black Source: U.S. Census Bureau and PfN-USA Business Planning Estimates Hispanic Asian While smoking incidence varies considerably among these groups (ranging from 16% among A.3ia^s to 29.7% amorig Blacks), it is evident that they represent an important volume uppcrtuntty. During the plan period PM-USA will hold its reLr 6G;o sihara of H,spanius, and will increase its 19.3% share among Blacks primarily via the launch of B&H King Size. In addition, we will build upon our 61.3% share among Asians through intensified marketing programs. 7

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I I I I I I I I I I I I I I SMOKING INCIDENCE BY RACEJETHNICITY (1991) White Black Hispanic Source: Roper, Hispanic Tracking and PM-USA Business Planning Estimates 28.1% 29.7% Asian Nielsen County Type Population density, characterized by Nielsen A,B, C and D counties, is a strong determinant of industry performance. Industry volume has been declining in urban environments at a rate several times that of non-urban counties. INDUSTRY VOLUME DECLINES BY NIELSEN COUNTY SIZE Source: SPACE: 3 Month Average Nielsen A Nielsen B Nielsen CJD This industry erosion in major metros is being driven by smoking incidence declines and broader smoking restrictions, acting to, offset population shifts which have favored cities and suburbs. 8

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CHANGE IN SMOKING INCIDENCE BY NIELSEN COUNTY SIZE 1986 vs 1991 %Char aej 1.5 -6.0 Nielsen A Source: Roper I I I I -3.0 Nielsen B Nielsen C Nielsen D During the plan period it is anticipated that the pressures and restrictions in urban areas will continue to mount, potentially affecting PM-USA's business since 68% of our smokers reside in Nielsen A & B counties. Occupation Since 1981, smoking prevalence has decreased among all occupations (white collar and blue collar) for males. Among females, decreases were generally smaller, with the smallest decline occurring among the blue collar workers. SMOKING INCIDENCE BY OCCUPATION (%) Males Females 1>3$1 1m SiJ1S. 1$$1 1m t'i119i* White Collar: Professional, Top 29.3 21.6 (7.7) 28.1 21.8 (6.3) Management Small Business 40.6 29.9 (10.7) 38.6 28.0 (10.6) Owners Clerical and 35.0 28.5 (6.5) 33.9 23.7 (10.2) Sales Blue Collar: Skiiied/Unskilled 44.6 37.7 (6.9) 37.1 34.8 (2.3) Laborers Service Workers 41.1 36.2 (4.9) 35.4 31.0 (4.4) Source: Roper I I I I I I i I I I I I 9 I

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Education Smoking continues to be skewed more heavily toward the less educated. Approximately 38% of smokers (age 25-54) have attained some college education, whereas approximately 55% of non-smokers in that same age group have some college education. Similarly, 20.9% of smokers (age 25-54) did not graduate from high school compared to 10.7% of non- smokers. Smokers (25-54) 13.9% 24.5% 40.7% Source: Roper ~ Non H.S. Grad H.S. Grad ~ ~ Some Cc!lera El College Grad 10.7% in general, since 1981 Incidence has declined more among men than women: Â• Smoking among males has declined -at all education levels. Â• Among women who did not graduate from high school incidence has remained flat. Â• Among female college graduates smoking incidence has declined less than among men, possibly due to a lower base incidence in 1981. 'OK:~a ATT,t;:NÂ°rEnaÂ•t' W ~. - ... . . . . ~....-. ~ (%) Males Females 1$81 j.i3$1 S'ch44 1i38j j.$$1 SrhQl. Non-High School 42.3 37.4 (4.9) 32.0 32.6 +0.6 Gr.;duate High School 40.1 33.1 (7.0) 33.9 28.0 (5.9) Graduate Some College 34.4 29.0 (5.4) 30.2 24.1 (6.1) College Graduate 26.8 19.7 (7.1) 20.8 17.0 (3.8) Source: Ro er These changing profiles, coupled with an aging population, may have particular irnpact on PM-USA, whoGe cÂ°<<noqraphic riroi:le is skewed to younger, better educated and hi^:ier income smokers. 10 EDUCATIONAL PROFILE 1991- Non-Smokers (25-54)

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PRODUCT CATEGORY TRENDS Discount Category Demographics The discount category will continue to be a dynamic segment in the tobacco industry, supported by growing legitimacy, increased advertising support, brand/packing proliferation and/or repositioning, and aggressive couponing. During the upcoming five years, discount brands' share of the industry is expected to increase approximately 11.1 points over the plan period, to 36.1% in 1996. During the past five years, the discount category has grown 16.1 share points to 25.0% in 1991. This market category has grown in every demographic segment, even among groups that historically have been less price conscious, for example, smokers under 35 and those living in Nielsen A counties. Discount Penetration By Demographic Group 1986 vs. 1991 Men 3.8% 13.2% Vlo m e n 4.6 16.5 ' i r:" Under 25 1.5 5.3 25-34 3.3 12.2 Over 35 U 1$-4 35-44 5.3 16.2 45-54 4.9 19.5 55+ 5.7 20.9 No College 4.7 16.9 Some College 3.9 13.0 Nielsen A 2.5 8.7 8 4.5 14.6 t~ 5.2 20.0 D 6.3 23.1 Source: PM-USA Consumer Tracking Read: In 1986, 3.8% of all male smokers smoked a discount brand. 11

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Discount brands have also begun to grow among Blacks, and future growth is expected to resemble the trend among Whites. DISCOUNT BRAND EVOLUTION White Discount - Black Discount 9-6 of Discount Brand Smokers in the Market 14 12 10 I . s . 0 1980 1982 1984 1986 1988 1990 1992 Source: PM-USA Consumer Tracking and Consumer Research projections Segment Development The increased availability of discount brands in convenience outlets, in particular, has fueled the growth in this category. In 1988, 31% of discount sales were in convenience stores, and this percentage grew to 40.9% in 1991. This growth in convenience stores particularly affected PM-USA, since in 1991 47% of our total sales were in convenience stores. T RADE CLASS SHARE OF DISCOUNT aALES Â€1 Convenience Â® Supermarkets Â® Grocery Stores 13 Drug Store 40.9 Projected Black Discount 12

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Discount brands' share is anticipated to grow 11.1 points over the plan period to 36.1% in 1996. This growth will be realized primarily in the sub-generic and black & white/private label subsegments of the discount category. MARKET SHARE OF DISCOUNT SUBSEGMENTS Difference 1991-96 Branded Generics 2.7 10.7 11.0 0.3 Price-off - 0.5 0.2 (0.3) Value 25's/30's 1.9 0.5 0.3 (0.2) Sub-Generics - 6.8 12.5 5.7 B&W/PL La 8.5 12-1 5.6 Total 8.9 25.0 36.1 Source: MSA and Market Research Estimates Historically, PM-USA's premium brands were relatively insulated from the growing discount segment due arimariiy to their younger smoker base and urban skew. In 1986, PM's JFO-'{_. 1 y,jl<':' :3y?itc~'1G~t~ Â±(i:"71 i reilC! n d`J t. ~~`,'i ,~'i:`r~tr'`~f~~`~ ..,.t~;.} f' dX,; -o Ci`izcourt. In '359t, however, PM r,rernium I%,iÂ•arrGs !j`i`otributed 93% cf thG'r fa;r share of switchers and an estimated 101 % of their fair share of alternate purchases of discount brands. PM's SHARE OF PREMIUM TO DISCOUNT SWITCHING 1986 PM Share of Premium Smokers 39.6% PM % of Fair Share 84% EI Madboro O Other Prentium 1987 39.7% 85% 1988 42.0% 94% 1989 44.6% 87% 1990 46.6% 94% 1991 48.9% 93% ~ Source: PM-USA Corsumer Tracking Batween switching and P.iternate purchasing, it is estimated that PPr9's premium brands are ;,urreni:y contftuting 4o thcir fr:ir share of vl;ilj,ne to the discount category. Du>.`no the plan p~lltiUU, aciions wiii ~:=; taken to in;;ulaie ihe srns,ictirs of yiariboro and our other ;:EÂ•~~rnium brands from the allure of price incentives sur:h that h.4a~r[bc: o and our rth er premium trands are !d>re;asted to contribute 57"-:Â•'o and 43%, o` fair share to discount gro~-.vth over the 1991- 1 S.:r3 period, respectively. 13

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Low/Ultra Low Tar Category The tar delivery of filter cigarettes has been an important product attribute affecting smokers' brand/packing choices since the mid-70's. The low/ultra low tar category has grown steadily and as of year-end 1991 comprised 54.1 % of the total market. 0 Non-Filter Percentage 100 80 60 40 20 1 ~ ,__.... ._. .. ._. ,.~,......~___ 19 31 r Source: MSA and Market Fiesearch Estimates INDUSTRY COMPOSITION BY TAR LEVEL 1981-1996 Â® Full Flavor Low Tar 1986 1991 13 Uftra Low Tar Low/ultra low tar cigarettes have steadily increased in popularity among adult smokers under 25 and in 1991 commanded a 47.7 share among adult smokers under 25. Among all other age groups low/ultra low tar packings are preferred by the majority. TAR PREFERENCE BY AGE GROUP % Prefering Low T^r4.lrtra Low Tar 60 ., 1 1 Under 25 25-34 Source: PM-USA Consumer Tracking 01981 01986 rÂ•1991 35-44 45-54 55+ During tne next five years, the low tar category will continue to grow fueled primarily by the incrt,ase in the cL-,,-cent of older smokers, ln addition, as smokers who enter the market snlu-iing a low u i i7jr'czi:d iiiature, some will G:;C:lGv io switch farther down 'ale tar spectrum stimulating growth in 'he ultra !ow tar segment to 16.7% by 1998. iPM-USA will capitalize on this trend during the plan period by launching line extensions of Marlboro and Merit into the ultra low/ super ultra low tar segments and develop new filter and filler technologies which will deliver more flavor at lower tar levels. 14

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Menthol Category The menthol category will continue to decline, primarily due to two factors: its lack of appeal among White young adult smokers and the rapid decline in smoking incidence among Blacks (36.9% in 1986 vs 29.7% in 1991), over 70% of whom smoke a menthol. WHITE SMOKERS M1981 Â®1986 1991 % Who Smoke Menthol MENTHOL CHOICE BY RACE BLACK SMOKERS Â®1981 Â®1986 1991 % Who Smoke Menthol 100.0 .. 32.1 89.0 88.1 836824 84.7 78.6 Under 25 25-34 35-44 75.1 The menthol category is projected to decline 2.1 share points to 23.8 in 1996. This loss of 26.4 billion units of menthol volume over the plan period is expected to cause competition among B&W, RJR and Lorillard to intensify since these three companies have an 72.1 share of the menthol category. Since PM-USA has only 21.6 share of menthol, our sales overall will be less affected. However, because B&H and Virginia Slims sales are 32.2% menthol, this trend will impact their sales performance. To offset the effect on B&H, we are scheduled fin 'atanch B&H ,fl-~? Size in 1992. Product Cf~tcgcri w~s In support of our strategy to extend the equity of our premium trademarks, PM-USA will be developing innovative products that provide tangible added value for consumers. This will help deliver insulation from the discount category for our premium brands by offering unique attributes that lower price products can't match. In 1991, there were no major new product developments tested by industry firms. Discount and reduced tar cigarettes continue to dominate the new product segment with 71% of the new packings introduced in 1991 being low tar or ultra low tar, Out of the 31 new packings introduced, 23 packings or 74% were discount brands. Product concepts and research that may lead to new products include: Â•Low T;?r,/-b.jghFlav_o_r_: PM-USA's objective is to develop efficient 4-6 mg products with aouiv3lent consumer taste perception to flavor low tar products. Products that have y r "A from r:-,dn.xc1,h ir7 this area are 'V;e;it #Jltima, Cambridge n.nd Br~Aol LowV:>t, and frlu7;horo Ultra Lights. Â• Redummd NicQ ineÂ• PM-USA has been testing de-nicotinized cigarettes in several markets since 1990 under the brand name Next and as line extensions of Merit and B&H. Currently, we are test marketing B&H De-Nic only in Arizona, where results have been disappointing. in general, tests have revealed that consumers are interested in the 15

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I I I I I I I I I I I I concept of a de-nicotinized cigarette, but are frequently dissatisfied with the product's taste. To address the taste issue, PM-USA is currently investigating the potential of a reduced nicotine cigarette or "Haif-Nic", rather than de-nicotinized. Â• Low Smoke: The product is designed to produce less visible smoke from the lit end than a standard cigarette. Products tested by RJR and PM-USA have relied on paper technology and reductions in tobacco content to achieve the desired results. PM-USA is using the concept in Virginia Slims' Super Slims, which offers two unusual product characteristics: reduced side stream smoke and a smaller cigarette circumference. RJR test marketed Vantage Excel 100's (a low side stream smoke product) in 1989, but the cigarette was withdrawn after lack of consumer interest. The future viability of this concept is dependent on its ability to deliver satisfying taste and the successful communication of the product's benefits to smokers. Â• Scented Smoke Aroma: The concept of a scented cigarette is to minimize or eliminate the discomfort of smoking to others, which could lead to it becoming more socially acceptable. RJR has been test marketing since 1990, a brand named Horizon, a vanilla scented product with advertising claiming it to be "The First Cigarette That Smells Good". Horizon has reported a shipment share in its test markets of 0.1% to 0.2%. In 1991, RJR discontinued the testing of another scented brand, Chelsea, a smaller circumference cigarette similar to VS Super Slims. PM-USA is investigating the potential of scented cigarettes through project Ambrosia. Â• Flavored Cigarettes: Menthol's appeal among young adult smokers has been declining in recent years. Flavored cigarettes may present an opportunity to gain trial and conversion from smokers that may want additional flavor but find Menthol too harsh. Lorillard has resurrected a lemon flavored cigarette, Spring Lemon Lights, which began testing as a non-menthol in 1989 and was discontinued in late 1990. The brand is currently being test marketed as a menthol mixed with lemon flavorings. Â• New Devices: Since the introduction and subsequent withdrawal of RJR's Premier, no new smoking articles have been introduced. Development activity on these type of products continues by PM-USA, RJR and BAT. It is anticipated that pharmaceutical and biotechnology companies will continue developing products that are designed to aid a smoker in quitting. Currently, Marion Merril Dow markets Nicorette, a prescription nicotine chewing gum and Alza Corp., Ciba-Geigy and Cygnus/Warner Lambert have gained FDA approval for a nicotine delivery skin patch. The market for skin patches has been estimated by pharmaceutical industry analysts to reach approximately $1 billion dollars by 1995. Packaging As premium cigarette prices continue to increase and competition from discount brands intensifies, some companies will consider new packaging concepts to make premium brands more affordable or to add value to justify the premium price. Examples of these two concepts were evident in 1991 as, Lorillard tested the Newport half pack (sold at half the price of a 20 pack) in two southern states and RJR unveiled "The Wrap" for Winston and Salem. RJR is actively using new packaging concepts to create "product news" in an attempt to enhance brand equity and build smoker loyalty for their premium brands which have been suffering double digit volume and share declines in recent years. In July 1991, RJR introduced Winston in a new aluminized foil wrap packaging and claimed that it maintained freshness longer than traditional cellophane packaging. In November, Salem was also introduced with "The Wrap". It is too early to tell if these packaging innovations have had an impact on Winston and Salem's performance. 16

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I RJR is also testing a sliding box package for Dakota and is test marketing a new dual use packaging on Vantage Ultra Lights. The dual use package is similar to a conventional box packaging, but will also convert to a soft pack type access by tearing off part of the pack's top. PM-USA tested a similar packaging concept on B&H in the early 1980's that generated little consumer interest. As part of our strategy to create economies of scale, we plan to use SKU's to our strategic advantage. New packaging, like the 5 pack carton and B&H Kings rounded corner box, provide consumer value and help put pressure on our competitors slow moving packings. Marlboro will be launching in August 1992, a 5 pack carton that provides the consumer with an alternative to the large cash outlay of a traditional pack carton. Another potential packaging concepts is the twin pack configuration. In addition, PM-USA is exploring new pack material textures and graphics to update brand packaging. Environmental concerns and possible future ecological legislation may require manufacturers and suppliers to develop packaging and cigarette filters that are biodegradable and include a specified percentage of recycled material. Any packaging changes will be evaluated meticulously for consumer acceptability and quality assurance. I I I I I I I I I I I I

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TRADE CHANNELS Wholesale Community Competitive pressures, rising costs and thin profit margins have brought about an increasing number of consolidations, mergers and liquidations of tobacco wholesalers. In many cases, a tobacco distributor's profitability does not generate enough working capital to make necessary investments in warehousing, technology, processing equipment and delivery vehicles to remain competitive with larger food wholesalers. The consolidation trend is evident in a review of PM-USA's top 100 customers over the last ten years. Comparing 1981 with today, 60% of the accounts remain in the top 100 (includes corporate structural changes and the military), 25% have been acquired or been involved in a merger and 15% are no longer in the top 100 or have gone out of business. Â• Since 1985, the number of wholesale tobacco distributors has decreased 17% to 1,257. If this trend continues, by 1996 there will be approximately 1,000 tobacco wholesalers remaining. Wholesale grocers have also declined 18% to 540. Combined, these channels represented about 78Â°'0 of direct sales. Â• Direct retailers, representing 22% of direct sales, have increased steadily since 1985 and now total about 500 accounts. Helping to expand this category is the increased popularity c ' -iholesale price ciubs such as Sam's and Price Chopper, which snrÂ»ioA many small ~ ~~ur-ts and --etailers. We expect this trend to continue since smaller tobacco distributors are under increasing economic strain. Brand proliferation, manufacturers price increases and growing receivables have diluted wholesaler working capital. This problem is compounded by a 13% decline in inventory turns since 1985. Those that remain in the business will need to focus on improving their financial position and capital structure, increase technological applications, increase efficiency to reduce overhead, diversify into more profitable product lines, expand into new markets and increase value added services. Another factor working against the financial health of tobacco wholesalers is the current US banking crisis. Wholesalers have traditionally been dependent on bank financing to respond to cigarette manufacturers' trade programs. There is a possibility that some distributors may t;~~d ;t d:fficult to obtain credit ^s bankers become increasingly conservative in their lending ~,w:t:c; s. This cou'd accelerate consolidation vf the industry in tt3e near future. Coe of ihe most notauie consolidations in the d;stribut'ron carraifiunity was the acquisition :r' the McLane Company, PM's largest customer, by Wal-Mart Stores, Inc. This increased McLane's average weekly volume by 23% to approximately 265 million units or 6.3% of PM's average weekly volume and assured McLane retail distribution to approximately 1,600 Wal- Mart and 150 Sam's Wholesale Club retail locations. 18

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THE RETAIL UNIVERSE IN THE 1990's Trade Class Management: During the 1980's, consumers began to alter their cigarette purchase patterns in response to their lifestyle and economic circumstances. This has contributed to the growth of cigarette volume in trade classes such as convenience and gas stores, which have aggressively promoted the cigarette category and as a result have increased their share of industry sales from 26% in 1984 to 34% in 1991. There has been a corresponding decline in the grocery and drug categories. INDUSTRY RETAIL SALES BY TRADE CLASS (%) 12 34 3ource: PM-USA SPACE 1984 1991 Associated with the growth in the convenience store trade class has been the shift in consumer purchase patterns toward packs. Since 1984, pack purchases have increased to 59; of ;.' o'. ~~. Civ iding trade ciasses into pack ari ^arton `;y .,.~ ~~ ,. :s ~j s ~ ~d ~'ir;g: Carton Qutlets E&GIS Carton Pack gutlets i gnd= Supermarkets 30% 70% Convenience 85% 15% Mass Merch. 15% 85% Grocery 60% 40% Drua Stores 60% 40% T he proliferation of cigarette packings, along with the general increase in new consumer products and line extensions, has created intense competition for limited retail space in all trade classes. PM-USA is competing not only with other cigarette manufacturers for retail space and visibility but with all consumer product companies. In tha current business :,erironment, PM-USA will focus efforts on stores with similar merci^??n.ndising cheracteristics, operating policies and customer bases because each provides ,in opportunity to tailor marketing prograrr,s that provide our brands a competitive advantage. in ctrdr:r `v fccus r: taiier`s :L:nntion on pr ,muting P,%4-tJSA's brands, we are implementing 'Retaii be.6-,,-j rnwt'chart0a.isg t:ir.;n iiia.t r::wards rotaile.s for t;'.-.'!.1ing r2 s,;- USA volume thr.avr:h total st:1';: ~ pv rticipaticn. The pian features financial inci-intives for retailers to emont<size PM's Premium brands, captu, e prirne real estate, reduce out-of- stocks, support r1ew items and develop private label partnerships. In supermarkets and mass merchandisers, PM will continue to pursue improvements in retail v.3ibility and inventory levels, through carton merchandising programs and fixture placement. In addition, there will be increased emphasis on improving premium brand pack sales in 19 I ij

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I I I I I I I I ~ I I I I I I carton outlets through a number of marketing and merchandising fixture initiatives. In pack outlets, PM is working to become the first tier supplier with large convenience, gas and drug store chains. We are increasing our premium brand retail presence through the development of account specific promotional and merchandising programs for high volume chain stores. Although PM will attempt to maintain our fair share of discount brand volume, we will work to position all low price brands in a secondary retail position to our premium brands. Carton Outlets Supermarkets: Current trends in the supermarket trade class include: Â• Although many large supermarket chains continue to expand the size of their stores, this trend among intermediate size supermarkets appears to have slowed. Â• Generic products are regaining strength due to economic conditions. Â• Margins on key categories, some of which have historically subsidized other categories (health and beauty care), are being reduced by competition from non-supermarkets. Â• Labor and related costs are increasing at significant rates and are reducing profitability faster than margins. Cigarettes continue to be considered one of the best performing products in supermarkets and are consistently ranked each year in the top 10 largest selling product groups. Cigarette inventory turns of 22X outperform the supermarket average of 15X. In 1991 Marlboro continues to be the leading brand in the trade class with a share of 19.5%, up 0.3 points versus 1990. Highlighting the strong performance of discount brands in supermarkets is Doral, which is the 4th largest selling brand in the trade class with a share of 5.8%, an increase of 0.5 points versus year-ago. Cambridge is also doing well in the trade class with a share of 3.6%. The discount category has grown rapidly in this trade class in 1991, increasing 4.6 points over year-ago to a current market share of 26.5%. Supermarket shopper demographics are similar to discount smokers, with both skewing older (35+) and female. Supermarkets, which has a high number of deal oriented consumers, provide manufacturers a perfect environment for implementing aggressive coupon and retail price promotion programs. % Share 1991 PM-USA B,Zg B&W Lorillard Amer Ltggett Chain 38.3% 32.3% 8.2% 6.9% 8.1% 6.2% Change vs. 1990 1.1 (0.8) (0.2) (0.2) (0.3) 0.4 Independent 36.4% 29.5% 9.5% 6.3% 10.5% 7.8% Change vs. 1990 1.4 (1.9) (0.3) (0.4) 0.6 0.6 Supermarket cigarette sales are predominantly cartons (68%). However, in recent years the emphasis has switched to the front-end of the store as pack sales comprise a growing portion of volume (32% in 1991 versus 24% in 1985). Presence at the front end offers an advantage in terms of impulse buying, new product introductions, availability of packings, and strong point of sale visibility. For the retailer, pack sales are more profitable on a per unit basis than carton sales with an average margin of 24% compared to 14% for cartons. 20

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Total merchandising spending for the industry in supermarkets has increased 17% annually since 1984. Pack spending has taken on greater significance in this trade class and now represents 21% of total payments. Merchandising Spending Estimates Supermarket Trade Ciass $ in Millions im PIVI-USA BstB B$c1~C 1~4111hLS! 9mÂ€i: Ltqqett IstW Carton $63.9 $51.1 $29.1 $17.3 $16.4 $11.0 $188.0 Pack 28.5 J3,2 1Â¢ DA Q,g Q,Q 49.1 Total $92.4 $71.0 $29.5 $17.4 $16.6 $11.0 $237.9 1984 Carton $21.7 $22.2 $15.3 $9.2 $7.0 $3.4 $78.8 Pack Total $21.7 $22.2 $15.3 $9.2 $7.0 $3.4 $78.8 Pack Outlets Convenience and Gas Stores: Convenience and gas stores combined represent the largest trade class for industry cigarette volume. With total sales in 1991 of $8.1 billion, cigarettes were the number one ranked in- store category. Cigarette sales in the trade class increased by 9.5% over 1990. Pack sales continue to gain share in convenience stores, accounting for 85% of sales in 1991 vs 70% in 1986. In addition, discount brands are increasing their share of convenience stores' business, increasing 6.4 points versus 1990 to 24% in 1991. In general, changing consumer lifestyles will continue to favor the growth of this trade class. The convenience store's average shopper demographic profile is very similar to cigarette purchasers. Cigarette Purchasers Daily C-Store ShoRpers In C-Stores Sex 2-to-1 male 61% male Age 60% adults under 34 62% adults under 34 Education 75% no college 60% no college Over the last five years, the total number of stores in the trade class has grown 11% to 84,500. This is comprised of a 30% increase in gas stores to 32,500 outlets and relatively no growth among traditional convenience stores, which have been flat at about 52,000. As the number of stores and customers have grown, the percent of industry cigarette volume sold in convenience outlets has increased from 23% in 1985 to 38% in 1990. PM-USA is substantially ahead of the competition in this trade class with a 1991 share of 47%. % Share 1991 PM-USA g,jg B&W Lorillard gp1g~ Ligaett Total Convenience 46.9% 28.2% 8.5% 6.3% 6.1 % 4.0% Change vs. 1990 0.6 (1.3) (0.4) (0.6)_ __ 0.9 0.6 Recently, several major convenience store chains have reported financial difficulties that could further reduce the number of stores. Circle K, which is currently operating under Chapter 11 bankruptcy proceedings, has announced plans to shut or sell 1,500 of its 3,700 stores over the next 12 to 18 months. Southland Corporation (7-11) emerged from Chapter 11 in March 1991 and is now largely controlled by its Japanese affiliates. . Total merchandising spending for the industry in the convenience and gas trade class has increased 20% annually since 1984. Pack spending in 1991 represents 74% of total payments versus 60% in 1984. PM-USA accounts for 44% of total merchandising spending in this trade class. 21 I I I I I I ~ I I I I I I I I I

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Merchandising Spending Estimates Convenience and Gas Trade Class $ in Millions 1991 PM-USA RJR P&'_V Lor;ltargi Amer Liogett j:ota~ Carton $25.1 $16.0 $9.8 $2.7 $6.0 $2.3 1, 31.9 i; a ui,; Y~ ELE 1717 Total . $102.3 $69.6 $32.8 $15.0 $12.6 ~ :~.3 $234.6 198" Carton $9.0 $7 6 $5.8 $1.3 $1.7 $0.4 $25.8 Pack 12.7 . 12.2 M 5-1- 1.7 DA am Total $21.7 $19.8 $12.4 $6.4 $3.4 $0.5 $64.2 MARKETING MIX Industry marketing spending increased an average of 13.2% per year between 1986 and 1991, reaching approximately $5,622.2 million in 1991. It is estimated that in 1991, PM-USA Â•had the highest marketing expenditures in absolute dollars, but ranked fifth in regards to spending on a per thousand basis. INDUSTRY ".:A's~~KE17li4G 8'A"PENCJtIUe. '" Â° ..~~. _~Â• Â€~ ~ ._ aAUCL r-ivi-USA ' $2,101.1 $212.0 $4.25 18.2a, RJR 1,986.4 14.02 1,185.0 6.29 10.9 B&W 567.0 10.02 347.0 5.10 10.3 Loriliard 408.3 11.05 277.0 5.88 8.1 Amer 438.7 12.25 202.0 4.83 16.8 Liggett 120.7 fim 107.0 1.$.4 2.4 Total $5,622.2 $11.04 $3,030.0 $5.21 13.2% Within total marketing spending, there has been a shift to retail price promotion at the expense of traditional advertising. Industry media spending has fluctuated over the last five years, r;sing from $732 million in 1986 to a high of $790 million in 1989, and then falling to $637 million in 1991. In 1986, media represented 24% of total marketing spending, while and ,r-nonina 1Â°:pc P7%., ir ('Â•,.,nir.^P' nf3n-meC``'q "e.rs for r:iÂ°,..~r:~~Sinyiand c0;lw'';ling si?s s'te~tG~tEy risrn t5y:.'~ :~te i~srt f:.~o year; ~Si~,oi'E= s. i~,~'.3 <'ttllion in 1986 to $2.1 billion i,,s 1991. These non-media expendiiures now cot:.pEis: 37-:r;; OlÂ¢ tra'aI industry marketing spending versus 11% for media. This is anticipated to continue in the future, as competitors reinvest a substantial portion of price increase revenue into retail promotional programs to stabilize premium brands and to gain share in the growing and intensely price competitive discount category. 22

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MEDIA vs COUPONING/MERCHANDISING SPENDING w ty ;llions ~ 0 Media 1-3 Couponing r] Merchandising 1986 1991 Fuel~nq the discount category's growth is the consistcnt increase of coupon incid,:r:~;e and vaEraes in both the branded generic and sUb-geneVic segments. In addition, 1-sveral competitors are attempting to mitigate or stabilize premium brands' decline rates through the use of coupons. RJR has been very aggressive in couponing both their premium and discount brands in 1991. Per our strategy, PM-USA has maintained one of the lowest premium couponing rates in the industry. In addition, PM pursued a strategy of remaining competitive in the discount category and continued to match competitive coupon levels in both the branded generic and sub-generic segments. 1991 Average Coupon Incidence and Values Premium D1smaIIt g[a fi_~d on Deal Ava. Valu_e % Soid on 1ea! AV-9. Ya(Ue PM-USA 9.8% $2.58 60.0% $2.38 Rd' R .~..- . 37.2 7.4 1.64 1.4J 65.2 E 2.4 e.6:. Lariifard 26.7 1.93 0.0 0:0 Amer 4.6 1.67 48.9 1.76 iLiggett im 16-5 L22 lndustrY Avg. 21.5% $1.81 45.7% $2.23 Estimated media expenditures indicate that discount brands are increasing as a percent of total spending. Within the premium category, RJR has decreased spending by 43% to $144 million and American has declined by 46% to $22 million, since 1986. Although PM-USA premium brand spending appears relatively flat, a tradeoff has occurred over the last five years between Marlboro and other premium brands. Marlboro spending in 1991 (influenced by Medium) was $143 million, an increase of 32% over 1986, while other premium brands declined 38% to $81 million. For discount brands, American led all competitors with spending of $43 million on their sub-generic products: Misty, Montclair and Bull Durham. 23

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ESTIMATED MEDIA EXPENDITURES I r I I I I I I I i$.$j. Premium JQfsg4StOf L4f81 198g Premium )Dj,scounf TQ181 Total 5 (.tSt9Sa PM-USA $224.0 $32.3 $256.3 $246.0 $56.0 $302.0 (3.2)% RJR 144.1 14.0 158.1 254.0 10.0 264.0 (9.7) B&W 44.9 16.2 61.1 28.0 19.0 47.0 5.4 Lorillard 86.7 0.2 86.9 75.0 0.0 75.0 3.0 Amer 22.4 43.4 65.8 41.0 0.0 41.0 9.9 Liggett 5.6 q..5 9.1 2.3 0.7 3.0 24.8 Total $527.7 $109.6 $637.3 $646.3 $85.7 $732.0 (2.7)% Manufacturers appear to be realizing that merely emphasizing price on discount brands Increases the danger of cigarettes becoming little more than a commodity in the mind of the consumer. This would make product differentiation extremely difficult and discourage brand loyalty. In response, we anticipate that manufacturers will continue to increase the amount of advertising in an attempt to build brand equity for discount products. Retail Pricing Over the plan period, premium retail prices (cartons) are forecasted to increase 9.1 % annually. The average retail price of 85mm premium products (without coupons) is projected to approach the $20.00 per carton mark in 1992-93 and the $3.00 per pack mark in 1995- 1996. ESTIMATED AVERAGE PREMIUM RETAIL PRICE (85 mm) (1991-1996) Source: PM-USA Merket Research As premium brands near the $20.00 per carton threshold, smokers will be driven to purchase packs rather than cartons or switch to discount brands. In an effort to retain Marlboro carton buyers, PM-USA will develop and launch half-cartons in 1992. in addition, Marlboro Express will be developed and tested in 1993 for value sensitive pack buyers. 24

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SOCIETY SUMMARY Cigarette smoking has evolved from a majority adult habit to a minority act, enjoyed by a weakened social constituency. Consequently, the political and social base of the smoker has eroded and opinion leaders have begun turning against the industry, supporting legislation, litigation, and non-profit anti-smoking groups that seek to restrict smoking. During the plan period, the cigarette industry will be required to defend and protect its rights as a result of: Â• States increasing state excise taxes to compensate for weak local economies and fiscal budgets. Â• Employers adopting employment practices that discriminate against individuals based on ., legal lifestyle decisions pursued off premises during non-working hours. Anti-smoking forces continuing using the environmental tobacco smoke controversy to restrict people's right to smoke. Â• States and local governments legislating restrictions and bans on the sales and marketing activities for tobacco products. Â• Legislations requiring that cigarettes be self-extinguishing. Â• Environmentalists mandating product specifications on the marketplace. Â• Attitudes towards smoking. M 1 r I I I I I I ~ 0 i i I 25 ~

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Taxation The current federai cigarette excise tax is 20 cents per pack. A 6:..ur cent increase took effec; on January 1, 1991, and another increase of 4 cents per pack is scheduled to take ef+ect on .~ ~;nuary 1, 1 ~ry3. In 1;~g i, five bills were proi:::. ~~u to fu;ther increa, : the fedc aE s,:;;` L,-; tc-_;: rate, but none of these proposals was passed out of corr:r.-i;ttee. We estimate weighted average annual state excise tax increase= will be in the 7% to 10% range during the plan period. Two forces will drive these increases: Â• The primary force is the weak economy and consequent fiscal deficits. If the national recession persists, state revenue growth will lag behind costs for essential services. The National Conference of State Legislatures has predicted major budget problems in '133 Ltates. STATES WITH BUDGET PROBLEMS SourcÂ•s Netlonal Conference Of StatÂ• LÂ•plelatunÂ• And Other Sources Â• The other force is the anti-smoking movement. It argues that smokers should pay for the alleged "social costs" of smoking imposed on the economy and bear a larger burden of spiraling health care costs through increased excise taxes. Cigarette smoking has been inappropriately linked to productivity losses, job absenteeism, rising health care costs and Increases in various types of Insurance. Anti-smoking forces also believe that rising retail prices will infiuence smokers to quit. In 1991, excise tax increases were proposed in 36 states. The 1991 weighted average state excise tax rose to 25.4 cents per pack, a 1.6 cent or 6.9% increase over 1990. 26

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Pro'wr:ted Wsighted Avsrak~r~ Tax i~SatGs At D.f,erent Annual Pe,,;w-::'5ge i: ;rcas~s ~'~,varage i :n!`#adia irPr`tts pEC ~ a.~-~~ 7.0 27.2 29.1 31.1 33.3 35.6 8.5 27.6 29.9 32.4 35.2 38.2 10.0 27.9 30.7 33.8 37.2 40.9 AVERAGE STATE EXCISE TAX PER PACK ~ WEIGHTED AVERAGE TAX WEIGHTED AVERAGE TAX (6 10% ORoINTH) EMPLOYMENT DISCRIMINATION There is a growing trend among employers to adopt employment practices that discriminate against Individuals based on legal activities, such as smoking, pursued off premises during non-working hours. The trend has emerged largely as a result of: Â• The growing social unacceptability of smoking. Â• The supposed link of smoking to the increase in health care and insurance costs borne by employers. Â• The efforts by employers to create a "smoke-free" environment by not hiring smokers. During the last three years, 21 states discrimination and protect employee discrimination/privacy bills: have enacted legislation to proh privacy. In 1991, 14 state ibit employment s passed anti N Â© Year Bills Introduced Bills Enacted C~1 1989 24 2 N 1990 21 5 W 1991 36 14 n 27 iw7 kLis O

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SMOKING RESTRICTIONS The environmental tobacco smoke (ETS) controversy continues to be used by anti-smoking forces to restrict the opportunity to smoke. In recent years, despite success in defeating state-wide bans, the number and scope of these restrictions have increased significantly in the private sector and they are expected to continue to grow. Because of this success at halting or modifying state legislation restricting smoking, anti-smoking activists have turned to federal agencies and localities to push for additional restrictions. Number of States SMOKING RESTRICTIONS STATE LEGISLATION 1985 -1991 N INTRODUCED E] APPROVED 44 i During 1991 the National Institute for Occupational Safety and Health (NIOSH) issued a report urging that smoking be banned in all workplaces. The major impetus behind this was the findings of the Environmental Protection Agency's Scientific Advisory Board which stated in a preliminary report that ETS should be considered a class A carcinogen. Â• In 1991, 227 localities introduced and 131 adopted legislation to restrict smoking or tighten existing restrictions on smoking. 44 states introduced legislation to restrict smoking. Of the 4 states which passed laws, none was overly restrictive. Â• 52.1% of the Fortune 50 companies surveyed had policies that either banned or limited smoking to designated areas. An additional 35.4% had some smoking restrictions that varied at different levels and sÂ„noking may have been permitted in private offices. rnr ..~;~ i:,=: r 1~;=;3 1 eG9 I S-Sfl 1991 Â• Twelve states proposed legislation preempting local smoking restrictions. One state, Nevada, passed such legislation. A bill remains pending in :,;assfachusetts. Â• Seventeen states introduced legislation to require smoking areas be provided. Bills have been passed in three states (MT, NV, VA). Bills are pending in New York and Massachusetts. 29

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States representing 42% of the U.S. market now have legislation protecting smokers from employment discrimination. ENACTED PRIVACY LEGISLATION TO PROHIBIT DISCRIMINATION AGAINST SMOKERS 1989-1991 Discriminatory hiring practices are opposed by an overwhelming majority of Americans. According to a national poll released in 1990 by the National Consumer's League, three out of four registered voters surveyed felt employers had no right to ask about the private lives of job applicants, base hiring or firing decisions on what employees do on their own time, or force a change in an employee's lifestyle. Â• 74% said an employer has no right to ask employees if they smoke off the job. 4 'e:, f':;v -;r;.picyer iÂ•s_s no r:jitt'o r---fuse to hire a smoker. Â• i.4% felt the employer has no right to require an emp3cayb,~ or applicGI dl .o tirnok;rEg. Similarly, many of the nation's leading newspapers, including the New York Times and the Chicago Tribune, have recently run editorials opposing such invasions of privacy. Time, Business Week, and other major news and business publications have run feature stories on employee privacy. Over the plan period, states will continue to pass legislation prohibiting employers from making employment decisions based on lifestyle decisions. Popular support for privacy legislation will also broaden. By the end of the plan period, we believe nearly all states will enact laws which ban employment discrimination against smokers. 28

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I I 0 I I I I ~ I I ~ I ~ I I I I The current trend toward more restrictive measures will continue through the plan period. It is anticipated that proposals will become increasingly restrictive, applying to all areas where smokers and non-smokers interact. ENVIRONMENTAL TOBACCO SMOKE.(ETS) The alleged risk posed to nonsmokers by environmental tobacco smoke (ETS) is being reviewed by the Environmental Protection Agency. The EPA has three draft documents that address ETS: the ETS compendium, the ETS risk assessment, and the ETS workplace policy guide. A. - a 'summary of technical information prepared for the EPA by scientific consultants, including several well known anti-tobacco advocates. One chapter reported that ETS causes an estimated 37,000 nonsmoker cardiovascular disease deaths each year. In June, 1991 EPA made it clear that the compendium is not intended as "an official EPA document" or to reflect official EPA policy. B. ETS Risk Assessment- EPA's risk assessment of ETS is an evaluation of the data available on lung cancer in nonsmoking adults and respiratory effects in children. Based on 24 epidemiological studies, the EPA draft concluded that ETS is a Category A carcinogen and a cause of lung cancer in nonsmokers, attributing approximately 3,700 lung cancer deaths per year to ETS. Of the 24 studies listed in the draft report only five reported a statistically significant association between ETS and lung cancer in nonsmokers. Following a period of public comment, the Agency's Scientific Advisory Board essentially concurred with the results of the findings. However, SAB instructed EPA to undertake extensive revision of the risk assessment. The draft is currently being revised to incorporate the SAB comments as well as newly published studies. The EPA is expected to release a final document during the first quarter of 1992. C. ETS Workplace Policy Guide - the draft guide, based on the conclusions of risk assessment and other unsubstantiated health claims, recommends banning smoking altogether or confining smoking to separately ventilated areas. The Occupational Safety and Health Administration (OSHA) has issued a Request for Information (RFI) on the overall issue of indoor air quality, which includes ETS. The RFI would help OSHA determine whether it should proceed with regulatory action regarding exposure levels to all indoor airborne substances, or possibly selected substances including ETS. Following an initial period of public comment, OSHA may publish a proposed standard. The proposed standard would then be subject to public hearings and possible revisions, after which a final standard could be issued. This process could take as long as 3-5 years. All 50 states must comply with OSHA regulations. In addition, 24 states, including some of our largest markets, have their own OSHAs which can issue rulings that may exceed federal standards. In June, 1991 the National Institute for Occupational Safety and Health (NIOSH) issued an official bulletin which concluded that ETS is "a potential occupational carcinogen" and suggested "exposure to ETS is most efficiently controlled by simply eliminating tobacco use from the workplace. "Short of a total smoking ban, NIOSH follows the EPA guide of recommending smoking be limited to separately ventilated areas. Some type of ruling will be made during the plan period affecting the legal ability of smokers to smoke in public places, workplaces, and other areas open to both smokers and nonsmokers. Depending upon the outcome, the number of smoking opportunities in an average day could be severely reduced. 30

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I MARKETING RESTRICTIONS During the plan period, attacks on the tobacco industry's marketing practices will focus on the allegations that industry marketing activities are aimed at encouraging youth to smoke, as well as women and minorities. Also, federal funds will be used to force local communities to restrict tobacco marketing practices. U.S. Health and Human Services Secretary Louis Sullivan's American Stop Smoking Intervention Study program (ASSIST) will provide $135 million over seven years to seventeen state health departments "...to change attitudes about smoking and counter the sinister marketing strategies of the tobacco industry. "ASSIST will be augmented by the American Cancer Society which will provide $25-$30 million in additional funds for lobbying and smoking cessation campaigns. TRENDS IN MARKETING RESTRICTIONS Â• 1950s: Â• 1960s: Federal Trade Commission bans health claims in cigarette advertising; First Surgeon General's Report on the alleged health effects of smoking; FTC requires warning labels on cigarette packs; Anti-smoking groups obtain FCC approval for counter advertising on television; Â• 1970s: Television advertising ban goes in effect; Health warnings required on all cigarette advertising; Minimum age requirements for the sale of cigarettes expanded; Â• 1980s: Anti-smoking groups claim tobacco industry targets youth, women and minorities; Sampling banned in most public places; Efforts to ban tobacco sports sponsorship -- efforts subsequently defeated; Efforts to ban all cigarette advertising -- efforts subsequently defeated; First sales restrictions and bans on vending machines; Â• 1990s Anti-smoking groups pass first free-standing display bans; " Increase in the number of tobacco health warnings required at point-of- purchase; Increase in the number of vending and sampling bans and restrictions; First stadium tobacco advertising bans go into effect; Anti-smoking groups focus on the passage of advertising restrictions on public property and mass transit; Anti-smoking groups renew counter advertising on television and in print (California Prop. 99 programs). The period from 1985 through 1991 highlighted a shift by the anti-smoking movement away from encouraging adults to quit smoking to preventing minors, women and minorities from starting to smoke. All forms of tobacco sales and marketing practices are under attack. Anti- smoking organizations are also working with medical groups to pressure elected officials. However, the tobacco industry has been successful in defeating most sales and marketing restrictions at the state and federal level. In response, our opponents have shifted their efforts to localities and federal regulatory agencies. The increased introduction of all forms of restrictions demonstrates a systematic effort by the anti-smoking organizations to constrict marketing venues available to tobacco products. This is exemplified by the increasing number of vending, sampling and outdoor advertising restrictions and bans. In 1991, anti- smoking forces passed the first bans on free standing displays on the grounds that they encouraged "shoplifting" of cigarettes by minors (a claim that has never been substantiated). 31 Q I I I I ~ I ~ I I I I ~ I I I

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STATE AD/MARKETING RESTRICTION LEGISLATION (YEAR TO DATE 1985-1991) MARKETING RESTRICTIONS INCLUDE:VENDING, ADVERTISING, AND SAMPLING. LOCAL AD(f,;ARKETING RESTRICTiONS Year To Date (1985 - 1991) '87 T 84 219 MARKETING RESTRICTIONS INCLUDE ADVERTSING, VENDING AND SAMPLING 32 Â® INTRODUCED #p APPROVED

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FIRE PREVENTION Anti-smoking forces continue to pursue legislation requiring that all cigarettes be "self- extinguishing". The issue was first raised in 1974 when research conducted by national fire service organizations indicated that cigarettes were the leading cause of fire-related deaths. Anti-smoking groups endorse the self-extinguishing, or "Fire Safe", cigarette as a way to mandate uniform product specifications that could cause all cigarettes to look and taste the same. Such mandates could cripple the competitive advantage of leading brands and intensify erosion of the overall cigarette market. Â• 1974: Fire prevention groups claim that cigarettes are the leading cause of death in residential fires. Â• 1980: First "self-extinguishing" cigarette legislation is introduced at the state level (MD), and reaches a peak of 19 states considering such legislation by 1983. Â• 1984: Congress establishes the Technical Study Group (TSG) to examine the feasibility of testing ignition propensity of cigarettes in order to mandate the creation of a "Fire Safe" cigarette. Â• 1987: TSG releases report stating that further research needed on ignition propensity standards for cigarettes, as well as on technical and rommerJal feasibility of "Fire Safe" ^i,+~rptfiQ. Â• 1990: TSG is re-authorized to develop tests for ignition propensity as well as the technical and commercial feasibility of manufacturing a "fire safe cigarette". The TSG's report is due in 1993. 1993 will be a critical year for this issue. If the TSG establishes ignition propensity standards for cigarettes and determines that "fire safe" cigarettes are technically and commercially feasible, Congress may mandate product specifications. If the TSG does not recommend guidelines in 1993, it is possible that the level of state activity on this issue will increase significantly as anti-tobacco forces lobby for "fire-safe cigarette" regulations on a state by state basis. IVIRON"MENY:1L ISSUES As much as 85% of the nation's 190 million tons of municipal solid waste created annually is buried in landfills. Many of the 5,000 landfills in existence have either reached capacity, or are deemed too expensive to operate as a result of more stringent EPA regulations. Public concern over landfill safety may also force many remaining landfills to be closed prematurely. During the plan period, it is estimated that as many as 50% of existing landfills will be closed. The lack of available and affordable landfill space, coupled with pressure by environmentalists to find new solutions to waste management, have culminated in the introduction of legislation which would mandate recycling levels and provide revenues for the creation of new public oversight agencies. Many of these proposals target specific industries, either for continuing to rely on packaging that is not "environmentally friendly", or because their products yield high tax revenues that could be used for waste management programs. The tobacco industry is vulnerable in both areas. History N 1:711 Â• 1989: EPA releases "The Solid Waste Dilemma: An Agenda for Action "which identifies the composition of the solid waste stream and establishes a recommended solid waste i~ management hierarchy: source reduction, recycling, waste combustion, landfiiling. ~ Â• 1990: Over 800 state and local solid waste bills are introduced. Highlights:

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Conference of North East Governors (CONEG) issues model legislation phasing out the use of heavy metals (lead, mercury, zinc cadmium, hexavalent chromium)in inks, dyes and stabilizers used in packaging. This legislation is subsequently adopted by 8 states. Public Interest Research Group (PIRG) introduces legislation mandating 30% recycled content by 1993. Bills and initiatives are introduced in FL, HI, MA, NY, and OR and VT. The Oregon initiative is defeated, the Massachusetts initiative is withdrawn from the ballot by the state Supreme Court because of invalid signatures. Advanced Disposal Fee legislation is adopted in Wisconsin and Florida (1Â¢/package tax effective 10/92). Maine bans aseptic packaging. Â• 1991: Oregon adopts PIRG bill with 25% recycled content for plastic packaging by 1995. Â• 1991: Massachusetts Legislature considers PIRG bill with 30% recycled content for packaging larger than 15 cubic inches by 1996. Â• 1991: At the federal level, the House and Senate consider re-authorization of the Resource Conservation and Recovery Act (RCRA),. Both legislative bodies are considering a:~ :ndr-,,<;nts to Subtitle D, ihe section of the Act dealing with municipal solid waste, w,1ich :0d re ;uirti naticn4l r4cyclind mandates. During the plan period, environmental issues will continue to be a concern as environmentalists gain momentum in their efforts to force product specifications on the marketplace. Cigarette cartons and hardpacks currently made from virgin paper may be forced to meet recycling mandates. Additionally, hardpacks are under scrutiny because they are made from a variety of materials: SBS board, aluminum-paper laminate and plastic (PET) which makes them difficult to collect by curbside "recycling" programs. Environmentalists are also focusing on cigarette filters as a disposal problem. Smoking as a Social Issue The 1G91 Study of Smokers' and Non-Smokers' Attitudes marked the tirst time this study was .;:nducted during a recession. Possibly as a result, the attitude survey's findings suggest that the imoortance of smoi<ir.n issues has dpcreased. Non-Smokers' Attitudes The 1991 Study of Smokers' and Non Smokers' Attitudes indicates that a number of non- smokers are best described in terms of a new attitude segment, economic pragmatists. Despite mixed feelings about smoking, they are relatively likely to allow smoking in their homes and cars; pleasant smelling and smokeless cigarettes would make them even more tolerant. These non-smokers believe that cigarette companies should be allowed to operate like other companies, and they recognize the importance of the tobacco industry's contribution to offsetting the trade deficit. A narrow battery of basic questions regarding smoking reveals that non-smokers' attitudes towards smokers have remained essentially stable during the past year.

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TOTAL NON-SMOKERS Percent Agree Completely More willing to ask people not to smoke Becoming less tolerant of smokers Should be more pressure on smokers to quit 1991 1990 1988 19% 19% 17% 23% 24% 22% 18% 19% 17% However, based on a broader battery of questions, non-smokers' opinions concerning smoking and particularly public policy impacting smoking point to a greater acceptance of cigarette companies and their consumers. For example, between 1990 and 1991, non- smokers have become more accepting of cigarette advertising and more likely to believe that smoking restrictions have gone too far. The timing of the emergence of these attitude trends and the Identification of economic pragmatists, may indicate a relationship between these shifts and the recession. r~_ ----- PERCENTAGE OF NON-SMOKERS WNU FEEL THAT anlC;tiNG REST R(CTiCNS... 1988 13 1990 Â® 1991 Have gone too far Are about right ; :::";;.n't yone far enough Percent of Non-Smokers Surveyed

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I WHERE CIGARETTE ADVERTISING SHOULD BE ALLOWED Non-Smokers 0 1988 01990 1991 Anywhere, including radio and TV As it is today Nowhere at all 0% , . , ..... '+KiSe~/.1G/+.~ Y'-aiti~s'Jfrr) 10% 20% 301/6 40% 50% Percent of Non-Smokers Surveyed 60% A new segment has arisen among smokers, thorough enjoyment smokers. They are more specific about the benefits they derive from smoking. They also appreciate accommodation at restaurants and hotels, and are likely to avoid establishments that do not accommodate smokers. TOTAL SMOKERS Percent Agree Completely 1991 r More comfortable when there is a smoking section in a restaurant Nice to know ahead of time whether a restaurant has a smoking section lf I know ahead of time that a hotel or motel prohibits smoking in their rooms, 1'll stay somewhere else Thorough Enjoyment Balance of ~~.M--Q?a 64% 46% 44% 32% 56% 38% ; These trends among smokers, combined with relatively stable findings among non-smokers concerning vocial pressures, suggest that mon;eY+tum for increased anti-smokirg sentiment has siGwed.

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COMPETITIVE STRUCTURE SUMMARY Recent increases in domestic cigarette profitability and international growth opportunities have caused manufacturers to refocus on tobacco as a source of current earnings and future income growth. Additionally, price increases for premium brands have created an opportunity for manufacturers to attract consumers with discount cigarettes. The lack of well established trademarks in the discount segment allows all manufacturers to compete for discount volume on a more equal basis than in the premium segment, where brand equity provides PM-USA and Lorillard a substantial advantage. International opportunities exist in both export and joint ventures with foreign manufacturers. The value of U.S. trademarks and more advanced manufacturing techniques provide U.S. firms with a competitive advantage in many overseas markets. This combination of industry dynamics has increased competition among domestic participants. During the plan period, the industry participants will have different objectives. RJR is attempting to increase profitability to enhance its equity valuation. B&W is attempting to r.-nde+1ne the ir `t;;:try ,:'`e in virder to take advantage of its success at marketing ;cvj marqin nrodr,ctG. A : .:adc=n, ... :'~ rd ... :1 Li,-lett are -7;'ernpting to maintain incorne croÂ°~~tti for asp in ac'-!uisitior.s, divider,us and reduc,ing debt. Because these objectives are different, competitors' strategies and tactics in p:irsuing opportunities are conflicting. Â• R.J. Reynolds Tobacco Co. will attempt to stabilize its share overall, replacing lost premium volume with discount units. To stabilize share, RJR will increase premium brand promotions and introduce a stream of new attributes such as the "Wrap" on Winston and Salem, Vantage hard/soft pack and Camel Wides. RJR will aggressively price at the low end and increase its presence in the discount segment by competing with B&W, PM- USA and Liggett for black and white units, enhance Magna/Sterling's presence in the sub-generic segment, and maintain Doral's position as the discount segment's leading brand. RJR will also increase its emphasis on retail activities to take advantage of the critical mass only it and Philip Morris have. Â• Brown & W"'Iam._:..:i Tob=.o Co. is anticipated to focus on statJi.izing Kool's volur, e and share de%1ine, compete vigorously to maintain its leadership position in the black and white category, anu attempt to build Viceroy and Raleigh Extra. B&W will also continue to grow its export business which has helped to offset declines in its domestic business. B&W sold 33.9 billion units in exports in 1991, up 26.5 billion since 1985, and currently holds a 17.6% share of total U.S. cigarette exports. Â• Lorillard Tobacco Co. will ''continue to invest in Newport during the plan period. Newport's strength in urban areas and with young adult smokers will enhance Lorillard's position and provide trade advantage for its other brands. However, Lorillard will be hard pressed to maintain Newport's volume because of new competitive marketing initiatives for Kool and Salem, increased menthol discount offerings, and decreased smoking incidence among its core young Black adult smokers. In addition, Lorillard is expected to explore incremental volume opportunities in the discount and export (Carolina Cigarette Company) businesses. Â• American Tobacco Co. will focus on building viable discount trademarks. American's creation of a complete product line at :i7e sub-generic price tier (Mlontclair, Misty, and Bull Durham) has given it a unique selling proposition to retailers and facilitates a coherent discount category ~inarketing strategy. However, American's position in the sub-generic segment will be challenged due to RJR's and B&W's attempt to achieve critical mass in this segment and the minimum price differentiation between sub-generic and black and white products. .'i ..(..M1iuml-.i 37

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I I I I I I I I Â• Liggett will continue to focus on the black and white segment and will price competitively to defend this source of volume. Recent repackaging and new line extensions for Lark and Eve indicate that Liggett will refocus marketing for its premium brands. Also, Liggett will pursue international opportunities like export and joint ventures with foreign manufacturers. Liggett has announced a major restructuring of its field sales organization; in the near future it will be transferring the sale of tobacco products to food brokers in 66 markets nationwide. The potential results of conflicting competitor goals are increased price competition for discount brands, increased price differential between premium and discount brands and increased difficufty in margin attainment from the discount segment, all of which may impact PM-USA's performance. In addition to the six domestic cigarette manufacturers, new competitive forces such as major foreign conglomerates, anti-smoking/health groups, and increased availability of alternative products are converging on the tobacco industry during this plan period. Â• Nicotine releasing skin patches and chewing gum are now available by prescription to smokers who want to quit. It is anticipated that nicotine patches may be available for purchase without a prescription by late 1994. Potential annual sales of skin patches in the United States will exceed $600 million this year and could reach $1 billion by 1995. R&D is also pursuing innovative products. Our proprietary alternative smoking product, Beta, will be marketed in direct response to such products as nicotine releasing skin patches and chewing gum. Project Beta is scheduled to be test marketed in 1995; however, if necessary, the project will be accelerated. I I I I I I I I 8 I

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COMPETITIVE ENVIRONMENT In past years, cigarette manufacturers routinely pursued diversification strategies because of perceived unfavorable long term prospects for the industry. Recent increases in domestic cigarette profitability and international growth opportunities have caused manufacturers to refocus on tobacco as a source of current earnings and future income growth. In addition, price increases for premium brands have created 'an opportunity for manufacturers to attract consumers with discount cigarettes. The lack of well established trademarks in this segment allows all manufacturers to compete for discount volume on a more equal basis than in the premium segment, where brand equity provides PM-USA and Lorillard a substantial advantage. International opportunities exist in both export and joint ventures with foreign manufacturers. The value of American Trademarks and more advanced manufacturing techniques provide U.S. firms with a competitive advantage in many overseas markets. Recent changes in Eastern Europe have further expanded these opportunities. This combination of industry dynamics has increased competition among domestic participants. Between 1986 and 1991, PM-USA was the only manufacturer to gain either volume or market share. While PM-USA's volume grew at a compounded annual rate of 0.57%, the rest of the industry declined at 4.68% annually. PM-USA's share grew 6.47 share points, largely the result of discount brands. Still, among competitors only PM-USA's premium brands posted share gains. MARKET SHARE PERFORMANCE (Share Point Change 1986-1991) Total Premium Discount PM-USA +6.47 +0.13 +6.34 RJR -4.53 -8.61 +4.08 B&W -0.57 -3.47 +2.90 Lorillard -0.82 -0.88 +0.06 American -0.15 -2.83 +2.68 Liggett Source: MSA -0.41 -0.43 +0.02 Competitors' premium trademarks have suffered volume declines well in excess of those for PM-USA. These severe declines are seen as irreversible for two reasons. First, these brands attract virtually no incoming young adult smokers. Second, brand loyalty among premium smokers makes attracting competitive smokers prohibitively expensive. As a result, competitors have focused on developing discount brands to appeal to price conscious smokers. With regard to the discount category, the interests of industry participants are implicitly divided into two camps. PM-USA, RJR and Lorillard derive the majority of their volume from premium trademarks. B&W, American and Liggett derive a higher percentage of their total volume from discount brands, and because of their small premium shares, pursuing discount units results in minimal cannibalization. PREMIUM VOLUME DECLINES 1990-1991 PM-USA RJR B&W Lorillard American Liggett Industry Non-PM Source: MSA 1990 vs. 1991 % Volume Changg -5.8% -14.6 -10.5 -6.2 -14.2 -8.3 -12.4 Difference yersus PM-USA -8.8% points - 4.7 -0.4 -8.4 -2.5 -6.6 I I I I I I I I I I I I I I I ~ 39 ~ ~

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I I I ~ I I I I I I I I I I I I PM-USA's future share gains will come from gaining its fair share of discount category growth, while improving upon its record of superior premium brand performance versus competitors. 1991 ACTUAL AND 1996 PROJECTED SHARES BY CATEGORY and Discount Percent of Company Volume 1991 1996 Discount % of Co. Volume Premium Discount Premium Discount 1991 1996 PM-USA 35.97% 7.38% 37.74% 11.96% 17.0% 24.1% RJR 20.73 7.10 13.66 10.32 25.5 43.0 B&W 5.83 5.29 3.29 7:10 47.6 68.4 Lorillard 7.20 0.06 5.55 0.52 0.8 8.6 American 4.35 2.68 3.14 3.81 38.1 54.8 Liggett 0.92 2.48 0.55 2.37 72.8 81.2 Source: PM-USA Market Research Dept. In the past year the low margin black and white segment experienced rapid growth. Given the increased importance of the segment, PM-USA and RJR contested the existing segment leaders Liggett and B&W more vigorously for a share of this volume. This increased competitiveness fueled further black and white growth, limiting volume and income opportunities from other discount segments. BLACK AND WHITE DEVELOPMENT 1990-1991 1991 h r Change vs. YAG 1991% of Categorv Change vs. YA PM-USA 1.92 +1.26 30% +12% RJR 1.15 +0.55 18 + 1 B&W 2.00 +0.74 31 - 4 Liggett 1.34 +0.25 21 - 9 American, B&W and Liggett are faced with high premium volume decline rates and. increased competitiveness within black and white and other discount segments. Given these realities, they face the choice of either investing to build discount brand volume and to slow decline rates for existing premium trademarks, or milking their existing brands to liquidate their interest in the market. At present, these companies appear committed to remaining viable market participants. N F+ W ' 40 ~

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R.J. Reynolds Tobacco Co. Parent Company Outlook Kohlberg Kravis Roberts & Company continues to pursue a strategy of reducing and restructuring RJR Nabisco's debt while maximizing the company's equity valuation. Since the April 1989 leveraged buyout, RJR Nabisco has reduced its long term debt from $30 billion to $13.1 billion. In 1991 alone, debt was $3.8 billion below year earlier levels. In contrast to the distress experienced by many highly leveraged companies, RJR is in excellent financial condition. As evidence, its bonds were upgraded from "junk" to investment grade by both Moody's and Standard and Poor's. By achieving investment grade status, RJR escaped complicated loan covenants that had restricted its operating flexibility. For 1991, corporate operating income was $2.934 billion, up 4% from $2.818 billion. Total tobacco provided 79% or $2.3 billion. Domestic tobacco operating income was $1.86 billion (-5% vs. YAG), and business unit contribution was $2.23 billion (-4% vs. YAG). Tobacco International operating income was $462 million (+23% vs. YAG), and business unit contribution rose to $500 million (+21% vs. YAG). Food provided the remaining $0.7 billion in operating income (+20% vs. YAG), and business unit contribution of $920 million (+15% vs. YAG). Â• On April 18, 1991, RJR Nabisco Holdings completed the issuance of 115 million shares of common stock at $11.25 per share. It was the first new offering of stock for the company since the buyout. The public now owns approximately 25% of RJR. At present, KKR owns 53% of the equity in RJR. At year-end 1991, total stockholder's equity was $8.4 billion, up considerably from $1.5 billion of equity at the time of the buyout. Â• RJR Nabisco Holdings' market value for 1991 was $11.217 billion in comparison to Philip Morris' market value of $68.77 billion. Â• While KKR will continue to reduce its stake in RJR, it can not rapidly liquidate its position due to the company's size. Consequently, KKR is managing RJR for long term value, as evidenced by high levels of marketing support to slow domestic volume and share declines and reports that RJR will expand its international presence. Â• To lower its cost of capital, RJR Nabisco Holdings Corporation exchanged $1.7 billion of common stock for 11.5% convertible preferred stock, and issued $2.1 billion of 8.32% yielding PERCS (preferred equity redeemable cumulative stock). Combined, these offerings will reduce loan-interest and dividend payments by more than $470 million in the first year alone. Â• The $3.8 billion financial restructuring reduced the company's debt to equity ratio to less than 2-to-1, removing it from the highly leveraged transaction (HLT) category and increasing availability of credit from financial institutions. On December 4, 1991, RJR Nabisco Holding Company's lead banks completed the syndication of a new $9 billion credit agreement, for possible future acquisitions in food and international tobacco. Â• In February 1992, R.J. Reynolds Tobacco International Inc. (RJRI) announced that it will build a $33 million cigarette production factory in Warsaw, Poland. Plant capacity will reach 8 billion cigarettes annually. Â• In March 1992, RJRI announced the new construction of a 135,000 sq. ft cigarette manufacturing plant in the Izmir region of Turkey. $100 million has been allocated towards the plant for a 10-year period. The plant will be operational in the second half of 1992 and will have the capacity to produce 10 billion cigarettes a year. Organizational Changes in 1991, James W. Johnston, the Chairman and Chief Executive of R.J. Reynolds Tobacco Co., realigned its manufacturing operations, as indicated below: Andrew J. Schindler , 47, was appointed EVP, Operations, a new position. All manufacturing operations with the exception of R&D, have been consolidated under Schindler. Mr. Schindler has been with RJR since 1974. His previous position was EVP, Manufacturing and Engineering. 41

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I I I I I I I I I I I I I I I I - Robert DiMarco , SVP, Research and Development now reports to Mr. Johnston. Mr. DiMarco will retire during the second-half of 1992. Other personnel changes during 1991 and the first quarter 1992 included: - Richard W, Kauffeld Jr. was appointed VP, Business Planning. Kauffeld was a principal at consulting firm Booz, Allen & Hamilton, from which RJR recruited current EVP of Marketing and Sales James Schroer in 1990. - David Anderson, 41, joined RJR Tobacco in January '91, as EVP, Finance and Administration. VP of Leaf Operations also reports to Anderson. His previous position was SVP, Finance and Customer Service for the U.S. Grocery Division of Quaker Oats. David Isbister resigned after his new assignment as SVP, Tobacco Leaf Buying and Tobacco Packing. Locke Newlin, SVP of Strategic Planning resigned in May, 1991. Gerard R. Gunzenhauser, CFO, resigned on January 14. He was succeeded by Mr. Anderson. R. Sam Hendrix. was appointed VP, Trade Marketing. Mr. Hendrix will be responsible for building closer alliances with the company's largest customers. Among senior management, the following people still remain at RJR Tobacco since the buyout: Â• Yancy Ford Jr. EVP, Sales Â• David lauco SVP, Marketing Â• Andrew Schindler EVP, Operations Â• Wayne Juchatz SVP, Secretary & General Counsel Â• Robert DiMarco SVP, R&D Â• Robert Gorden SVP, Personnel The new people added to RJR Tobacco senior management since the buyout: Â• James Johnston (1) Â• Thomas Griscom Chairman, CEO EVP, External Relations Â• James Schroer Â• Michael Oglesby EVP, Marketing and Sales EVP, Government Relations Â• David Anderson EVP, Finance and CFO (1) Appointed May 1989. Formerly division executive Citicorp Consumer Banking 1984-89. Previously EVP, RJR Tobacco 1981-84 and President, CEO Asian/Pacific RJR Tobacco (Hong Kong) 1979. Elected to the RJR Nabisco Board of Directors on M arch 3, 1992. 42

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Â• RJR Tobacco has cut employment from 9,650 full-time salaried workers in 1990 to 9,348 as of July 1, 1991. It is believed that an additional 200 full-time jobs were eliminated during the second half 1991. Market ShareNoiume RJR is the second largest U.S. tobacco company with a 1991 market share of 27.8%, down 1.8 points versus year-ago. 1991 volume was 141.7 billion units, a decrease of 12.8 billion units or 8.3%. RJR's premium brands declined 3.0 share points to 20.7% from 1990, due to the continued steep declines of all the company's premium trademarks. Â• RJR's 1991 share provided by premium brands was 20.7%, down from 23.7% in 1990. Â• Premium brands contributed 74.5% of total company volume, down from 80% in 1990. Â• RJR's 1991 premium volume decline of 14.6% is the highest in the industry. RJR's 1991 discount brands share increased 1.2 points versus year-ago to 7.1%, with volume increasing 17.1%, from 30.9 to 36.2 billion units. Growth resulted primarily from a 0.4 point gain for branded generic Doral, a 0.9 point gain for sub-generics Magna and Sterling, and a 0.6 point gain for black and white. Â• RJR's share of the discount category was 28.4%, and it captured 20% share of 1991 segment growth. Â• Discount segment volume now accounts for 25.5% of RJR's total unit volume, up from 20% in 1990. Â• Doral's 4.7 share makes it the industry's leading discount brand. Brand 1991 Share Share Point Change 1990 vs. 1991 % Volume Change 1990 vs. 1991 TTL Premium 20.7 (3.0) (14.6) Winston 7.5 (1.3) (16.5) Salem 5.5 (0.7) (13.3) Camel 4.0 (0.4) (11.3) Vantage 2.0 (0.4) (18.7) Now 0.9 (0.1) (10.7) More 0.8 (0.1) (16.3) TTL Discount 7.1 1.2 17.1 Doral 4.7 0.4 6.4 BL&WHT/PL 1.2 0.6 87.0 Sterling 0.5 0.4 229.2 Magna 0.5 0.1 9.8 Century Source: MSA 0.3 (0.1) (32.8) Marketing Strategy During the plan period, RJR is anticipated to focus on stabilizing the share of its potentially viable premium brands (Winston, Salem and Camel), slowing share erosion of its smaller premium trademarks (Now, More and Vantage), and enhancing Doral's position as the discount segment's leading brand. RJR will also increase its emphasis on in-store fixtures and promotions, to take advantage of the critical mass only it and Philip Morris have. Â• Continuity programs for Camel ("C-Notes") and Winston were added in 1991 to RJR's promotion mix to increase repeat purchases and build brand loyalty at relatively reasonable costs. Previously, RJR typically used on-pack incentives to stimulate trial and 43 N O I I I I I I I I I I I I I I

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I I I I I I I I I I ~ I I I I I ~ I instantly redeemable coupons to hold existing smokers. Camel is estimated to have spent $50 million for promotional giveaways in 1990. Â• RJR reformulated and repackaged Winston, with a reported 100 product changes, as part of an effort to reposition the brand as the industry's quality leader. The "Wrap" or "Flavor Seal" packaging retains moisture and will extend Winston's shelf life by three times. In November, Salem was given the same overwrap. Â• In January 1992, new Doral non-filter 85's were nationally introduced. This new packing is the first non-filter entry into the branded generic category. Â• RJR introduced a new package for two packings in its Vantage line in the Northeast markets only. The package can be opened two different ways. Consumers can use the flip-top lid, or opt for the corner opening that is characteristic of the soft-pack package. Â• The national introduction of Camel Wides was launched at retail effective March 1. It is positioned as a "wide gauge" cigarette. Â• RJR plans to launch a new cigarette in May '92 called Winston Select. It will deliver a new blend of tobacco, intended to give a slightly smoother, milder flavor and will deliver about 18 milligrams of tar and 1.4 milligrams of nicotine. Â• RJR President James Johnston has stated that all discretionary expenditures which do not directly build volume will come under review for possible cuts. Possibly as a result, RJR will reportedly cut its 1992 media budget and abandon its typical long term commitments for print and outdoor advertising. Sports marketing expenditures are also expected to be cut. Â• In May 1991, RJR repositioned branded generic Magna and price-off Sterling to the sub- generic segment, a key price-point where it had not competed. The brands had not shown much potential in their previous segments, however, the shifts provide RJR with additional tools to compete at the low end of the discount category. In October, RJR added 8 new packings of Sterling to broaden the brand's appeal and to reduce the availability of retail space for competitors. Â• For 6MM-March 1992, RJR captured 30% of the discount category growth versus year ago. Their discount brand share gain of 1.5 points was due primarily to the repositioning and new packings for Sterling and growth in the black and white/private labels. RJR's Best Value captured 15.8% of the black and white/private label growth. Â• RJR maintained a lower volume requirement under its 1991 permanent counter display program (170 cpw vs. PM 200 cpw) for top payment and a more specific positioning bonus (RJR at register vs. PM 3 ft. prime) which resulted in a sightiine advantage in many outlets. Â• RJR's new lighted overhead pack master is gaining in popularity. Some retailers are receiving up to $650 for the installation. At present, PM does not pay retailers for installation of PM OPM's. Marketing Spending It is estimated that RJR increased total marketing expenditures in 1991 by 10.6% to $1,874 million or $13.20 per thousand cigarettes. RJR's per unit spending is the industry's highest, a result of high couponing levels required to slow the erosion of its premium brands and to build volume for its discount brands. Â• RJR's 1991 reported media spending decreased 15% to $158 million from a year earlier. Spending on Camel declined 18% to $57.7 million from $70.6 million, making it the industry's third most advertised brand with a 9.1 share of voice. Â• Media spending for Winston increased $34.5 million, from $21.8 million to $56.3 million. The increase was tied to a new campaign to reposition Winston as the industry's quality leader, featuring its new "Wrap" packaging. Winston's increase was funded by a reduction in advertising for Camel (-$12.8 million to $57.7 million), Salem (-$16.6 million to $20.8 million) and Vantage (-$16.5 million to $1.1 million). Â• RJR moved its Camel account from Young and Rubicam (Y&R) to Mezzina/Brown, an agency comprised of the two Y&R executives who previously managed the account. The move is expected to provide considerable cost savings for RJR through reduced commissions. Â• Media spending for discount brands was focused on Magna ($4.6 million) and Sterling ($7.4 million) which were repositioned during the year. Expenditures for Doral, RJR's third largest and fastest growing brand, were minimal ($2.0 million). 44

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I Â• Throughout 1991, RJR aggressively couponed most of its premium brands in supermarkets. Within the premium segment, Winston (41% of supermarket carton volume was sold on deal with an average carton coupon value of $1.84), Salem (49% at $1.80) and Vantage (52% at $1.85) were among the industry's most heavily promoted brands. Starting in the fourth quarter, new $3.00 coupons for Salem, Vantage, Now and More were made widely available. Â• Throughout 1991, RJR couponed competitively in the discount segment. Doral (79% at $3.47) has consistently outspent Cambridge (80% at $3.32) and has increased the availability of $4.00 coupons in the second half of the year to be more competitive with B&W's expenditures for Viceroy. Â• RJR has provided Magna (51% at $1.56) and Sterling (81% at $1.84) with category leading levels of coupon support since their repositioning as sub-generics in May. Â• RJR's sales force is organized into six regions and is comprised of approximately 2,500 full-time sales personnel and 700 part-time merchandisers. In a September marketing blitz, RJR reportedly provided at least one part-time merchandiser to each of its field sales representatives. In February 1992, it was reported that RJR has assigned two part- time merchandisers to each sales representative to concentrate effort on promoting Salem "Fresh Wrap" and couponing Doral. R&D RJR Tobacco's R&D Department has a staff of about 700, down from 800 before the buyout. Additional reductions are expected in 1992. Despite these cuts, RJR's current staff remains larger than PM-USA 's R&D. . RJR's product development focus is in two areas: a Premier-type smoking article and flavor and scent innovations. Â• The Premier team is essentially intact, and the level of related patent activity remains high. Â• RJR continues to patent actively. In the twelve month period from July 1, 1990, to June 30, 1991, they issued 36 U.S. patents. These included 6 related to a premier type article, 5 for on-line inspection devices, and 5 for non-burning devices. Â• RJR has the industry's only in-house flavor facility which produces flavor-release compounds. These have been used in test products for Horizon and Chelsea. Â• RJR may adopt a long term strategy regarding the development of paper technology programs, aimed at reducing ignition propensity (visible smoke from the lit end of a cigarette) with minimum subjective cost. Products tested by RJR have relied on advanced paper technology and reductions in tobacco content to achieve less visible smoke. A number of recent patents describe a smokeable filler comprised of both tobacco and other fillers. Operations RJR Tobacco continues to manage its domestic manufacturing costs as a means of improving cash flow and overall competitive position. Â• Since 1988, RJR has increased its output per labor hour by 29%, while reducing other operating costs by more than $150 million. Â• RJR Tobacco has reduced the number of its hourly factory workers from 6,700 in 1988 to 5,400 in 1991. Â• Other cost cutting measures include replacement of flax paper with less expensive wood pulp paper, increased use of off-shore and lower grade domestic leaf, and switch from a Freon Expanded Tobacco (ET) process to PM-USA's DIET (Dry Ice Expanded Tobacco) process. 45 I I I I ~ I I I I I I I I I I

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I I I I I I I I I I I I I I I I I I I All domestic and export production is in Winston Salem, N.C. Tobaccoville (built 1986) and Whitaker Park (re-equipped 1988) have a combined annual capacity of approximately 220 billion units, against total domestic and export requirements of 192 billion. RJR increased its export volume 14 billion units to approximately 50 billion units, offsetting a 13.5 billion unit domestic decline. Total excess capacity was still 28 billion units for the year. Â• RJR uses 8000 cpm makers and 400-500 ppm packers, giving RJR the industry's fastest average manufacturing speeds. Â• Approximately 36% of the RJR Tobacco International's cigarette volume for 1991 was manufactured in the U.S. for sale in foreign markets. Competitive Advantage KKR will continue to maintain a major role in decision making within RJR. Their key objective is to increase profitability to enhance the company's equity valuation. In the future, RJR will rely on several competitive strengths. Â• Manufacturing Efficiency: The combination of high speed modular equipment and non- union labor makes RJR the most flexible and efficient manufacturer. Â• Cost Reductions: RJR has reduced overhead and manpower, while also reformulating its products to achieve production cost advantages. Since the LBO, RJR is estimated to have cut $500 million from its cost structure. Â• Retail Fixtures: RJR continues to be the dominant retail fixture supplier which supports relationships with retailers and enhances its control over retail space. This advantage is particularly strong in supermarkets, which historically have been a critical channel for discount brands. Â• Discount Brand Leadership: Doral is the industry's leading discount brand. The company's entry into sub-generics with the re-positioning of Magna and Sterling, its increasing share of the black and white/private label growth through Best Value and the more recent introduction of Monarch (a branded black and white), will collectively strengthen RJR's long-term competitive position in every sub-segment of the discount category. Â• Camel Filter Momentum: Camel is the first brand to be successfully repositioned as a brand for young adult smokers. In 1991, Camel attracted 8.0% of 18-24 year old smokers, up from 3% in 1987. Among competitive premium brands, Camel appears to be the only significant threat to Marlboro's smoker base. February 3, 1992 marked the national introduction of Camel Wides filter and hard pack. It is about two millimeters thicker than a standard cigarette with packaging similar in size to the traditional 25's. Â• Direct Marketing: RJR's database of names is maintained by internal staff and is reported to contain 30 million names or over one-half of the total U.S. smoker population. As a result, RJR's direct marketing activity level (branded mailings/multiple coupons) was 2.5 times greater than PM-USA's level (5 months ending 12/91). RJR has started to create a database of store clerk names for the future introduction of an RJR Trade Club Program. BROWN & WILLIAMSON TOBACCO CO. Parent Company Outlook BAT Industries completed the divestment of its retail department store and paper manufacturing subsidiaries in 1990, narrowing its core businesses to tobacco and financial services. The Financial Services operating unit performed poorly in 1990 and 1991 and BAT is now more dependent on the profitability of its tobacco businesses than at any time in recent history. In 1991, BAT's income from continuing operations was $2,240 million, down 2.2% from 1990. Tobacco generated approximately 85% of BAT's income in 1991. Tobacco income from continuing operations in 1991 was up 14.2% to $1,892 million. BAT's U.K. insurance company Eagle Star incurred a substantial operating loss in 1990 and was again negative in 1991. Results for the financial services unit are expected to steadily improve and account for 40% of corporate operating income by 1995. 46

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Â• BAT is the world's second largest cigarette manufacturer, with 1991 volume up 3% to 571 billion. Recent overall volume gains reflect significant growth in BAT's U.K. and U.S. exports and a stabilization of previously deteriorating performance in Germany and Brazil. BAT's total cigarette exports rose 24% in 1991. Â• BAT derives a majority of its global cigarette volume from marginally profitable, economically underdeveloped markets. Brown & Williamson, BAT's American unit, accounts for only 10% of corporate volume but generates 39% of total tobacco operating income. B&W's profitability is being threatened by the continued erosion of its premium volume which has been only partially offset by discount growth. B&W's profit margins remain low due to the high level of promotional expenditures necessary to compete effectively in the discount segment. B&W has been successful at building export volume, particularly to the Far East. Â• B&W sold 33.9 billion units in exports in 1991, up 26.5 billion since 1985, and currently holds a 17.6% share of total U.S. cigarette exports. The company's primary export trademarks are Kent and Lucky Strike. Over the plan period, BAT Industries is anticipated to pursue the following courses of action: Â• Stabilize the performance of Eagle Star Insurance to increase the financial services units' contribution to BAT's operating income. Â• Continue to derive a majority of profits and cash flow from tobacco. The company is investing in its tobacco business and will compete aggressively in all markets. Due to its significant contribution to corporate income, BAT will invest in B&W to maintain or grow its profitability. Â• Increase worldwide tobacco volume and profits through U.S. and U.K. exports. BAT is pursuing opportunities in Japan, the Middle East, Eastern Europe and the Soviet Union. Early this year BAT completed its acquisition of the Pecs Tobacco Factory in Hungary. It also signed a letter of intent to negotiate a cigarette-manufacturing joint venture with three factories in the Ukraine. The three Ukraine factories currently produce 25 billion cigarettes annually for the 80 billion cigarette Ukrainian market. Â• The dividend increase of 8% for 1991 demonstrates BAT Board's continuing commitment to dividend increases substantially in excess of the rate of inflation, even in a difficult year. Organizational Changes (February 1992) - Robert A. Fitzmaurice , 51, was appointed SVP, Marketing and Sales, with responsibility for all domestic marketing and sales. He previously served as SVP, marketing and field sales support. Prior to joining B&W in 1988, Mr. Fitzmaurice served in various executive management and marketing positions at PMI and PM-USA. - Hoyt E. Higgens was appointed to VP, Domestic Sales. He replaces Larry Butler, who retired after 32 years with B&W. Mr. Higgens has held various sales positions since joining B&W in 1963, most recently that of Area Sales Director - Southwest. - Warren G. Halset was appointed Director, Trade Development. Mr. Halset has held various positions in sales since joining the company in 1979, most recently serving as director of trade relations. Market ShareNolume Brown & Williamson is the third largest U.S. tobacco company with a 1991 market share of 11.1%, up 0.8 point versus year-ago. 1991 volume was 56.6 billion units , an increase of 2.9 billion units or 5.3%. B&W's premium brands declined 0.5 share point to 5.8% from 1990, I I I I I I I I I I I I ~ O W ~ ~ O 47 I

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I I I I I t I I I I I I I I I I I I I due largely to the continued decline of the company's largest brand Kool. It accounts for 41.5% of total unit volume and 79% of premium volume. Â• Kool has been hurt by a relatively older smoker base that is concentrated in highly developed discount markets and its lack of share among young adult smokers. B&W is implementing a marketing program including new advertising, new packaging and increased couponing to stabilize Kool's volume and share decline. B&W's discount brand's increased their share of industry volume by 1.3 share points to 5.3% in 1991. Growth resulted from sub-generic Raleigh Extra's 0.7 share point gain to 1.3% and GPC-black & white's 0.7 point gain to 2.0%. Due to intense competition in the branded generic category from RJR's Doral, PM's Cambridge and many lower priced sub-generics, Viceroy increased only 0.2 points to 1.4%. Â• B&W's premium volume decline of 10.5% was the third highest in the industry. Â• B&W 's share of the discount category was 21.3%, and it captured 24.3% share of 1991 segment growth. Â• Discount segment volume now acdounts for 48% of B&W's total unit volume, more than double its 1986 level of 20%. Brand 1991 Share. Share Point Change 1990 vs. 1991 % Volume Change 1990 vs. 1991 TTL Premium 5.8 (0.5) (10.5) Kool 4.6 (0.3) (8.7) Capri 0.5 0.1 9.6 Raleigh/Belair 0.5 (0.2) (33.8) TTL Discount 5.3 1.3 30.8 BL&WHT/PL 2.0 0.7 54.9 Raleigh Extra 1.3 0.7 117.8 Viceroy 1.4 0.2 13.2 Belair Source: MSA 0.2 (0.1) (31.3) Marketing Strategy During the plan period, B&W is anticipated to focus on stabilizing Kool, compete vigorously to maintain its leadership position of the black & white category, and to attempt to build discount brands Viceroy and Raleigh Extra. In September, retail activity began in Cleveland for several reformulated and repackaged packings of Kool. In total, nine new packings of Kool are being tested. In October, a similar test market was initiated in Richmond with an updated advertising campaign using a penguin-"Willie", similar to Camel's "Smooth Character." "Willie" is based on a penguin used in advertising for the brand from 1933 to 1960. in September, B&W introduced Viceroy Box in KS and 100's packings. Viceroy, RJR's Magna and American's Bull Durham are the three discount products available in a flip-top box and appear to be positioned against Marlboro. To date, the new packings have attained a 0.2% share with the majority of volume net to brand. B&W introduced a sub-generic brand Savannah (Slim Lights 100 Box/Slim Lights 100 Box Menthol) in Florida, Georgia and Alabama on April 28, 1992. Savannah represents an obvious threat to Virginia Slims. 48

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Marketing Spending B&W's 1991 estimated marketing spending increased 15% to $516 million or $9.75 per thousand cigarettes. The increase was due primarily to higher advertising spending and price promotion/coupon expenditures for both premium and discount brands. Among major manufacturers, excluding Liggett, B&W has the lowest per unit marketing expense due to its high percentage of black & white volume. Media expenditures increased 53% to $61 million in 1991 with the majority of incremental spending for Kool. In total, premium spending was up $21 million to $45 million and discount spending declined $0.5 million to $16 million. However, B&W spent aggressively behind Raleigh Extra in 1991; spending increased from $3.1 million to $11.4 million. Raleigh Extra's increase was funded by the reduction in advertising for Belair (-$12 million to 0.1 million). In 1990, B&W substantially reduced media support behind Kool and other premium brands, cutting spending from $60 million in 1989 to $23 million. These cuts were probably made to boost B&W's profitability and offset poor results at BAT's financial services units. While these units are performing better in 1991, B&W's current premium brand spending is still $8 million less than 1989 spending of $53 million. B&W's couponing support for premium brands decreased from 14.9% of volume sold on coupon in 1990 to 7.6% in 1991, while discounts brands increased in 1991 from 42.4% to 53.2%. There has been increased price competition among menthol products this year, mainly stemming from Salem's average percent of supermarket volume sold on deal increasing from 36.4% in 1990 to 41.9% in 1991 and competition among discount menthol products. Â• Kool's average percent of supermarket volume sold on deal in 1991 was 12%, with an average carton coupon value of $2.90. Â• Capri's average percent of supermarket carton volume sold on deal in 1991 was 10%, with an average carton coupon value of $1.96. Â• In 1991, Viceroy was the supermarket coupon promotion leader of the branded generic segment (63% at $3.60). At year end 1991, Viceroy offered $4.00+ carton coupon values in 65% of supermarkets. Viceroy had traditionally offered higher average coupon values and lower incidences than its competitors, but more recently it has matched competitive coupon incidences as well. Â• In the sub-generic segment, Raleigh Extra also maintained high coupon incidence and values at 61% and $1.26, respectively. Starting in the fourth quarter 1991, new $2.50 carton coupons for Raleigh Extra were introduced. Â• GPC is currently in the process of buying down and couponing all major accounts in selected markets. Coupon values range from $1 to $2. GPC's goal is to be the lowest priced cigarette in the store. B&W's sales force is organized into six regions including 1,550 full-time sales people and 625 part-time merchandisers. In February 1992, B&W's sales force was redeployed and full-time representatives are called territory managers. B&W also added more part-time merchandisers at 16 hours per week. R&D BAT has demonstrated that it is committed to enhancing its competitive position through R&D and to the upgrading of manufacturing facilities. B&W benefits from R&D efforts in the U.S. and from European BAT units. B&W's U.S. staff is estimated at 300 and is divided among blend, cigarette, filter and package R&D. The company's patent activity is defensive, primarily used to block competitive exclusivity in emerging technologies. In comparison to PM and RJR, B&W also devotes a disproportionate amount of resources to process development. I I I I I I I I I I I i I I I I 49

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I I I I I Â• From July, 1990 to June, 1991 BAT issued 39 patents, 7 of which pertained to premier type articles. Other B&W patent activities indicate a focus on process development and modification of QA inspection devices. Operations B&W recently upgraded manufacturing equipment at its major domestic facility in Macon, GA. Equipment at the plant is between 5 and 15 years old and is comprised primarily of 7200 cpm makers and 400 ppm packers. B&W's manufacturing utilization is estimated to be at or near capacity. An increase over the last five years of U.S. exports has offset declines in B&W's domestic business. Â• Current production capacity of 94.1 billion reportedly will be expanded to 110.4 billion by 1993. The company employs approximately 1,900 unionized hourly factory workers (versus PM-USA's 10,000, Lorillard's 1,700, American's 1,350, Liggett's 640, and RJR's non-unionized 5,400 hourly workers). Â• In 1993, BAT Southhampton's facility will complete an upgrade that will make it the world's fastest and most advanced cigarette factory. The factory will include sixteen 11,000-12,000 cpm makers, as well as other technological advances. Competitive Advantage B&W's competitive advantage is derived from being part of a large multi-national parent whose primary business is tobacco. BAT senior management team is comprised exclusively of executives with decades of global tobacco management experience. B&W is able to draw from BAT's extensive knowledge base in marketing low margin products in very tough economic environments. In addition, B&W can benefit from BAT's: R&D activity carried out in Europe, global business relationships that enable them to source raw materials efficiently, and manufacturing expertise. BAT also provides B&W's growing export business with extensive logistical, marketing and government relations support. LORILLARD TOBACCO CO. Parent Company Outlook Lorillard's parent, Loews, is essentially an investment holding company operated by the Tisch family. The Company's core businesses and investment interests include tobacco, insurance, hotels, oil and gas drilling rigs, watches and timing devices and 22.9% ownership of CBS. Loews Corporation announced that net income from continuing business operations declined 0.5% to $668 million in 1991. Cigarette net income rose only 9.1% for the full year, the smallest increase since 1988. Lorillard made a strategic decision several years ago not to enter the generic cigarette market because margins were too low. It never became involved in overseas cigarette sales either, and both these sectors are rising more rapidly than U.S. premium brands. Tobacco contributed $430 million, up 9.1% from $394 million in 1990, and accounted for 64% of Loews net income in 1991. This gain reflects cigarette unit price increases and lower advertising and sales promotion costs. Security analysts estimate free cash flow at $3 billion over the plan period. Â• Lorillard should provide 60% or more of Loews' operating income in 1992. Â• With fairly flat profits in 1991 at its insurance unit CNA, coupled with difficulties at CBS, Loews has increasingly relied on Lorillard to generate income growth and cash flow for investments and acquisitions. Â• Loews' Chairman Laurence Tisch broke off talks for the possible purchase of R.H. Macy & Co. He holds a 15.6% stake in Macy's and was expected to inject as much as $1 billion to buy out stockholders. 50

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I Organizational Changes - Dr. Alexander W. Spears has been appointed to Vice Chairman and Chief Operating Officer reporting directly to Chairman and CEO, Andrew Tisch. Dr. Spears, who is 58 years old, was formerly EVP/SVP, Operations and Research (1975-91). Dewey R. Tedder was promoted to SVP, Operations. Tedder, who is 54 years old, previously was SVP, Leaf and Support Systems. Martin Orlowskv succeeds Tom Mau (who resigned) as SVP, Marketing. Mr. Oriowsky was recruited from specialty retailer DMK Holding in October 1990, where he was CEO. Â• During the fourth quarter 1991, Lorillard eliminated its New York based Public Affairs Department, including the dismissal of Sara Ridgeway, VP-Public Affairs. The function will be handled by the Manager of Community and Media Relations, Joyce Jarett, who is based in Greensboro, NC. Market ShareNofume Lorillard is the fourth largest U.S. cigarette company with 1991 market share of 7.26%, a decline of 0.36 share point versus year-ago. 1991 volume was 37 billion units, a decline of 2.8 billion units or 7%. Premium volume declined 6.2% from 39.1 to 36.7 billion units. Lorillard's share of the premium category was 9.6%, contributing 99.2% of total volume. Newport's share was 4.7% and it contributed 64.6% of total company volume. Volume for other major brands Kent and True declined 16.9% and 8.7%, respectively. Brand 1991 Share Share Point Change 1990 vs. 1991 % Volume Change 1990 vs. 1991 TTL Premium 7.2 (0.3) (6.2) Newport 4.7 0.1 (0.1) Kent 1.6 (0.3) (16.9) True 7 0 (0 1) Discount . 0.1 . (0.1) (54.5) Heritage Source: MSA <0.1 < (0.1) (51.1) Marketing Strategy In 1991, Lorillard continued to focus on its premium brands Newport, Kent and True. Discount brands contributed only 0.8% of company volume. However, Lorillard is expected to pursue the discount business more aggressively in 1992. Style, a low-tar Â•100 length sub- generic, was introduced in six packings in the first quarter. In the premium segment, Lorillard will continue to focus its resources on Newport, but is also expected to increase marketing support for Kent and True to slow their declines. Virtually all of Lorillard's sales are in the U.S. because its international trademarks were sold to BAT in 1977. However, Lorillard recently created the Carolina Cigarette Company to develop export opportunities. Marketing Spending Lorillard's 1991 estimated total marketing spending increased 13.8% to $444 million or $11.73 per thousand cigarettes. Much of the increase went to higher promotional spending for True and Kent to slow their volume declines. Â• Lorillard's 1991 reported media spending dropped 20% to $86.9 million from $108.6 million a year earlier. Newport's spending declined to $58.6 million from $64.8 million, but it became the industry's second most advertised brand with a share of voice at 9.2%. 51 I I I I I I I I I ~ I I N I W 1 I

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I I I I I I I I I I I I I Â• Media spending for True dropped sharply from $18.3 million to $3.5 million, as support was shifted to Kent's new "Portraits of Pleasure" campaign. Spending was increased from $12.5 million to $24 million. Â• Throughout 1991 versus year-ago, Lorillard's overall percent of supermarket premium volume purchased with a coupon increased from 24% to 29%. While carton couponing for Newport remained low (13% at $2.80), Lorillard maintained relatively high levels of on- carton coupon support for Kent (33% at $2.12) and True (57% at $2.12). Â• Lorillard is using the new Catalina coupon system, which delivers $5.00 Newport coupons on cash register receipts via scanning technology when consumers purchase specific competitive brands. Â• Lorillard's sales force is organized into four regions and is comprised of approximately 1,305 full-time sales personnel and 105 part-time merchandisers. R&D/Operations Loews has not shown much commitment to enhancing its competitive position through R&D or upgrading its manufacturing equipment. The average age of its packing equipment technology is over 30 years. Production capacity at its Greensboro N.C. plant is 70.5 billion units, relying primarily on (5000 cpm) MK9's and AMF 379's (175 ppm) for making and packing. Lorillard employs approximately 1,700 hourly workers. With 1991 sales of almost 37 billion units, Lorillard's excess capacity will top 30 billion units. To enhance factory utilization, Lorillard is beginning to pursue discount and export volume. Lorillard's research and development activities are limited, and focus primarily on products with "fire safety" attributes and scent applications. Competitive Advantage The Newport Franchisei Newport's strength with young adult smokers will enhance Lorillard's position and provide trade leverage for its other brands. However, Lorillard will be hard pressed to maintain Newport's volume because of new competitive marketing initiatives for Kool and Salem, increased menthol discount offerings, and decreased smoking incidence among its core young Black adult smokers. Â• Newport is the second most popular brand among smokers 18-24. Consumer research in 1991 revealed that over 50% of all 18-24 menthol smokers chose Newport. Â• Newport unseated another menthol brand, Kool, in 1991 to become the industry's fourth largest brand. While Newport is popular in many regions, its core remains in the Northeast where the discount segment is less developed. Newport's strength in urban areas has also helped insulate it from the growth of discount brands. AMERICAN TOBACCO CO. Parent Company Outlook Â° American Brands operates 5 core businesses: tobacco, distilled spirits, insurance, office products and hardware. American's corporate strategy is to generate stable earnings growth and to support dividend increases and strategic acquisitions for its core business units. For 1991, American Brands' corporate operating income was $1,631 million, up slightly from $1,602 million in 1990. American Tobacco Co. ("ATCO") provided $541 million or 33% of corporate income, up 6.7% from $507 million in 1990. U.K. cigarette subsidiary Gallaher provided $540 million or 33% of income, with income from continuing operations down from $594 million in 1990. Gallaher results were down, because of unfavorable currency translations and weakening sales of premium brands, following an 18% excise tax increase in the U.K. Additional problems at American's office products group, down from $87 million to $38 million, have increased profit pressure on ATCO from its parent. As a result, ATCO has not matched competitive promotional spending in the second half of 1991, weakening sales 52

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for some of its brands. Just the same, ATCO achieved a milestone in 1991, with its first unit volume increase in over 25 years. During 1991, American Brands acted to strengthen its position in the distilled spirits industry. It purchased 41.3% of the outstanding ordinary shares of U.K. based Invergordon and has completed a $372.5 million purchase of seven trademarks from Seagrams. The completion of the Invergordon acquisitions would make American the world's third largest distiller. Effective January 1, 1993 all trading barriers within the European community will be eliminated. It is possible that it will cause a shift in sales of tobacco products brands from certain member states, such as the United Kingdom, to other member states in which prices of those brands are lower. In 1991, Gallaher's market share in the U.K. cigarette market fell from 45% to 43.5% and total unit sales decreased by 6.3% while unit sales by foreign and domestic manufacturers decreased by 3%. It is believed that Gallaher will experience further reductions of unit sales in 1992 and 1993. Organizational Changes In November, Donald S. Johnston was appointed President and Chief Operating Officer of American Tobacco. His previous position had been Executive Vice President of Sales, and his promotion underscores American's increased emphasis on sales activities. It is likely that additional personnel changes will take place in American's marketing group, as 64 year old SVP Bill Moore approaches retirement. In February 1992, Jacobus M. Ockers was appointed to VP, Strategic Planning and New Products in the Marketing Department at American Tobacco Company. Mr. Ockers joined ATCO in 1987 as senior product manager. In 1989, he was promoted to group product manager and in 1990 to director, strategic planning and new products. Market ShareNolume American is the fifth largest U.S. cigarette company with 1991 market share of 7%, up 0.22 share point versus year-ago. 1991 volume was 35.8 billion units, an increase of 0.3 billion units or 0.8%. American's premium brands declined 0.6 share points to 4.4%, but discount brands increased 0.8 points to 2.7%. Â• American has a leading 29.9% share of the Sub-Generic segment and a 10.7% share of the discount category. Â• American derived 38.1 % of its total 1991 volume from discount products, an increase from 27.3% in 1990. Â• ATCO's premium volume decline of 14.2% was the second highest in the industry. 86% of American's 1991 premium volume is generated from the rapidly declining non-filter, charcoal filter, and the "lowest" segments which it dominates. American's share of premium volume within these segments: Non-filter (42.3%), Charcoal (12.5%), Lowest (30.8%). Share Point Change % Volume Change Brand 1991 Share 1990 vs. 1991 1990 vs 1991 ATCO Premium 4.4 (0.6) (14.2) Pall Mall 1.7 (0.5) (25.7) Carlton 1.4 (0.2) (16.0) ATCO Discount 2.7 0.8 40.4 Montclair 1.3 0.6 82.3 Misty 0.5 0.4 417.0 Bull Durham* 0.2 N/A N/A * launched in 1991 Source: MSA 53 t I ~ i I I I I I ~ r I ~ I I I I

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I I I I I I I I I I Marketing Strategy Due to volume and share losses from its aging premium trademarks, American's product strategy is focused on building viable discount trademarks and holding Carlton's volume. The introductions of Montclair (1989), Misty (1990) and Bull Durham (1991) position American as the industry's premier sub-generic manufacturer. Â• Misty has gained share steadily with little promotional support. Despite its relatively narrow female orientation, and only two packings, Misty has a 7.8% share of the sub- generic category. Misty introduced two new full flavor packings in January 1992. Â• Bull Durham has performed poorly at retail since its introduction, achieving only a 0.3% share of consumer take away, despite high levels of promotion. Â• American is testing a free standing menthol sub-generic, Riviera, in Detroit. Riviera's test market results from Detroit indicate a 0.5 share with two Full Flavor packings (49% distribution). Field sources report that American will introduce Riviera (4 packings) nationally during the second quarter of 1992. A national menthol sub-generic would complete American's product assortment at that price point. Â• Montclair gained a leading share of sub-generic volume by achieving superior distribution during the category's development. Marketing Spending American's 1991 estimated total marketing spending increased 14% to $451 million or $12.32 per thousand cigarettes. American's per unit expense is the second highest in the industry's after RJR, due to extensive support for its new brands and scale inefficiencies. In 1991, American's advertising expenditures were $65.8 million, down from $68 million a year ago. American's 1991 share of voice was 10.3%, an increase from 9.5% in 1990. American was the industry's leading discount segment advertiser in 1991 with $43.5 million or a 39.6% category share of voice since its discount brand strategies have been more image based than those of its competitors. Â• American spent $22.1 million or 33.6% of its total media budget in 1991 on Carlton with ~ discount brands receiving most of the balance. Â• Since its March introduction, Bull Durham has received $15.6 million in media support. Other major expenditures were split between Misty ($14.7 million) and Montclair ($12.1 mitlion). ~ Throughout 1991, American maintained low levels of couponing support for its major premium brands Carlton and Pall Mall. Average supermarket carton coupon values for both brands were below $1.85 and percentages of volume sold with coupon were under 7%. ~ American's 1991 percentage of sub-generic supermarket carton volume sold with coupon averaged 42% for Montclair, 29% for Bull Durham, and 6% for Misty. Couponing levels were under 20% for the first half of the year, but escalated sharply during the second half in ~. response to heavy promotion by competitive sub-generics. In 1991 American resisted increasing carton coupon values beyond $1.00, despite competitive values as high as $2.50. Â• American reportedly will increase the size of its permanent field sales force from 700 to ~ 1,200 people. The additional manpower is needed to service an estimated 32,000 permanent discount brand pack fixtures and to provide couponing support of same. Approximately one-third of American's permanent pack displays were placed in Region 2, ~ where Misty display placements are aimed against Virginia Slims' strong hold. As a direct result of the significant increase in the number of full time sales positions, ATC may downsize the present number of part time sales positions (400). American is testing hand-held computers in West Virginia with national implementation scheduled for ~ ~ December 1992. ~ ~ ~ 54 ~ ~

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R&D/Operations American historically has focused on generating cash for acquisitions and dividend growth. As a result, American maintains a limited R&D organization and has made limited plant or process improvements. American operates 48 manufacturing modules with making capacity of 74 billion units matched against volume requirements of 38 billion. The majority of plant equipment is 15 years old. American employs approximately 1,350 hourly workers at its Reidsville, N.C. location. Â• American is building a 200,000 sq/ft annex to its manufacturing center to house its Protos 9,000 cpm high speed makers. The move is necessary because vibrations from these makers pose a hazard to the existing facility. Two new high speed makers will be added to the seven currently in use. Â• In 1991, ATCO's unit sales of cigarettes in the U.S. accounted for 96.8% of its total unit sales. Products (i.e. American Filters) are also sold overseas, principally in Japan and other Asian countries. Competitive Advantage American's creation of a complete product line at the sub-generic price tier has given it a unique selling proposition to retailers and facilitates a coherent discount category marketing strategy. Due to the rapid aging of its premium smokers and its reliance on niche product segments, American can pursue discount opportunities without significant cannibalization. BROOKE GROUP (Liggett) Parent Company Outlook in November 1990, Bennett S. LeBow merged his heavily indebted investment vehicle Brooke Partners L.P. with Liggett holding company Brooke Group Ltd, of which he is Chairman and 84% owner. LeBow restructured his combined holdings so that pre-tax income could be used to pay the $45 million annual interest expense on interests in MAI Basic Four (Information Systems) and Western Union (now New Valley). The core businesses of Brooke Group Ltd. now consist of Liggett, Impel Marketing (sports trading cards-a $1 billion industry), MAI and New Valley. Â• Parent company, Brooke Group, will continue to use funds generated by tobacco to service the debt of its highly leveraged subsidiaries MAI and New Valley and to invest in Impel. Liggett's operating income of $92 million in 1991 offset $165 million in combined income losses from other units. For 1991, the company reported a net operating loss of $73 million. (This includes $100 million non-recurring charges associated with its restructuring of MAI/Systems segment and the Impel division.) Going forward, Brooke should benefit from $33 million in anticipated annual savings from the 1991 restructuring of MAI. Â• Brooke Group is actively pursuing opportunities outside the U.S. for its cigarette business. In 1991 Brooke arranged a joint venture, Liggett-Ducat, to manufacture and sell cigarettes in the Soviet Union. Seventy percent owned by Brooke, Liggett-Ducat will construct a new plant near Moscow by late 1993, with an initial annual capacity of 22 billion cigarettes. Organizational Changes In 1991, Liggett made several personnel changes to strengthen its sales and marketing functions. In each case, Liggett went outside its organization to hire executives from premier packaged goods companies. This suggests that Liggett will attempt to revamp its current marketing strategy by applying consumer and trade practices used in other product categories. 55 2U ~ I I I I I I I I I I ~ I

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I I I I I I I I I I I I I I I I a Spencer J. Volk was appointed President, CEO. Former No. 2 executive of Church and Dwight Co., maker of Arm & Hammer products (July '89 - Oct. '90). From 1987 to 1988, he was President and CEO of The Volk Group, a company formed to conduct leveraged buyouts. In 1985 and 1986, served as President and CEO of the Tropicana Products Co. Mr. Volk is 57 years old. He succeeds James C. Turner, 58, a 33-year Liggett veteran who retired in October, 1991. Jerry Reid was appointed SVP, Marketing. Mr. Reid joined Liggett from General Foods USA, where he was credited with several of the coffee division's successful product introductions. He was previously with Brown & Williamson's product development unit. Tony Buno was appointed SVP, Sales. He was formerly with Pillsbury in a sales related position. floland J. Allen was appointed SVP, Human Resources. Formerly at General Foods USA, Director of Human Resources. Mr. Allen began his career with GF in 1965. Mark Stewart was appointed SVP, CFO. He replaced David M. Welsh who resigned. Mr. Stewart was former EVP, Consumer Group at Simon & Schuster. Robert W. Robinson, VP Marketing, resigned in August '91, with only seven months of service. He is a former ad executive who worked on RJR Tobacco Company business. Market ShareNolume Liggett is the smallest and weakest of the six domestic cigarette manufacturers with 1991 market share of 3.4%, virtually unchanged from year-ago. 1991 volume was 17.3 billion units, a decrease of 0.4 billion. Premium volume declined 8.3% from 5.1 to 4.7 billion units. Discount volume remained flat at 12.6 billion units, however, still contributing 72.8% of total volume. Liggett gained 1.1 billion units or 0.3 share points in the black & white discount segment. This category generated 39.4% of 1991 volume. Liggett's largest brand, sub- generic Pyramid, which had grown steadily since its introduction in 1989, fell 1.6 billion units to 5.1 billion, a decline of 23.8% or 0.3 share points. Brand 1991 Share Share Point Change 1990 vs. 1991 % Volume Change 1990 vs 1991 TTL Premium 0.9 (0.1) (8.3) Eve 0.4 (0.0) (3.2) Lark 0.1 0.0 (8.7) L&M 0.2 (0.1) (18.5) TTL Discount 2.5 0.1 0.6 BL&WHT/PL 1.3 0.3 20.0 Pyramid Source: MSA 1.0 (0.3) (23.8) Marketing Strategy Due to the weakness of its premium trademarks, Liggett will continue to focus on the discount segment of the market. Marketing and sales functions are being reorganized to improve Liggett's execution at retail. Â• Liggett will increasingly depend on black & white units and will price competitively to defend this source of volume. Coupon promotion for Pyramid, that has lagged competitive levels should increase to reverse the brand's recent slide. Â• SVP of Marketing, Jerry Reid, has stated that Liggett will refocus marketing for premium brands Lark and Chesterfield on regions where their core constituency of older smokers reside. In April 1992, Liggett introduced two new Full Flavor Lark packings (85's/100's, charcoal filter) and repackaged Lark Lights (85's/100's, charcoal filter). The charcoal 56

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category holds a 0.9% market share. Liggett's Eve Slim Lights 100's was re-introduced nationally with new packaging in February 1992. This line extension was discontinued in June 1990 when it was replaced by Eve Slim Ultra Lights 100's. Marketing Spending Liggett's 1991 estimated total marketing spending increased 19% to $100 million or $5.73 per thousand cigarettes, the lowest figure in the industry. Given its minimal advertising and couponing expenditures, the largest expense component was sales support. Â• Media spending for Liggett increased 49.2% to $9.1 million for the full year 1991. The spending was focused on its two largest brands Pyramid ($3.4 million) and Eve ($5.6 million). Â• Throughout 1991, Liggett actively couponed Eve in supermarkets (40% at $2.24), and was increasing coupon values for the brand at year end. Â• Throughout 1991, Pyramid's average supermarket couponing support were low (20% at $1.35). However, Liggett increased coupon availability sharply during the second half of 1991, reaching 54% in December in response to high competitive spending and Pyramid's weakening share. Â• In February 1992, Pyramid ran an FSI in Sunday newspapers nationwide (24.4 million circulation), offering $2.00 off 2 packs or carton (expires 6/30/92). The new Pyramid ad slogan reads, "You may never put another Camel to your lips." Â• In February 1992, Liggett announced its plan to replace part of their sales force (total size: 400 direct sales people and 460 merchandisers) with 45 contract brokers (2,000 commissioned employees). Liggett's parent group expects to save approximately $11 million annually with a similar program it initiated last November in its Impel division. The contract brokers will be used to call on chain accounts. The downsized sales force will continue to call on independent accounts. R&D/Operations Â• Parent c develop ompany Brooke G ment activity or to roup lacks the res upgrade antiqua ources to pursue high levels of r ted packing equipment at its Du esearch and rham plant. Liggett has relatively modern Protos 7,200 cpm making equipment, but continues to rely on aging AMF-379 175 ppm packers which have no box capability. Â• Liggett has a 31 billion unit capacity and domestic shipments of below 18 billion. Liggett lacks export volume which would enhance its factory utilization. Â• On November 25, 1991, Liggett agreed to a three-year contract with members of the Bakery, Confectionery and Tobacco Workers Union Local No. 176-T. Liggett employs approximately 640 hourly and union employees. The contract included new provisions for health care, profit sharing, retirement benefits and steps to increase productivity. An industry co parison is shown below: WAGES 1992 1993 1994 PM $2,000 US (BCT) $2,000 US (BCT) 3% GWI $2,500 US (Craft) $500 US + $0.30/hr GWI 3% GWI AMER $2,000 US $2,000 US 3% GWI LOR $2,000 US $2,000 US 3% GWI LIG $3,767.90 US (1) + 4% GWI 4% GWI 4% GWI B&W 3Â°lo GWI N/A (2) N/A O RJR N/A (3) N/A N/A ~ (1) Liggett paid a one-time lump sum of $2,500 (after taxes) in consideration for profit ~ sharing and benefit changes. (2) B&W is scheduled for negotiations in 1993 . 4 00 57 O I I I I I I I I ~ I I I I I I I

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(3) RJR is non-union. 1992 increase is to be announced 5/21, effective 6/1. No projections available at this time. I I I I I I I I a I I I I SIGNIFICANT BENEFIT CHANGES am Â• Managed Care Networks established as primary health care provider effective 1/1/93. Â• Capped Craft post-retirement life insurance at $25,000. American Â• Capped post-retirement life insurance at $10,000. Â• Established loan program under Profit Sharing Plan. 1ll r Â• Major medical deductible doubled to $200/$600. Â• Employees to pay 25% of dependent premium (was 20%). Â• Established loan program under Profit Sharing Plan. Liggett Â• Established 80/20 premium payment, previously company paid 100%. Â• Established 80/20 health care payment plan. Â• Instituted precertificaiton on hospital admissions. Â• Instituted dental plan. Â• Capped company contribution to Profit Sharing Plan at 6% of employee pay. Â• Established loan program under Profit Sharing Plan and provided an additional company matching of up to 3% of employee contribution. B&W Â• No known change; negotiations occur in 1993. BsLH Â• No known change. Competitive Advantage Liggett derives the industry's highest percentage of total company volume from the discount segment. Consequently, it has virtually no stake in the current industry profile and can pursue discount units with little cannibalization of its premium brands. In addition, as the industry's smallest participant, it can pursue opportunities which provide it with substantial marginal benefit but which do not trigger immediate competitive responses. ~ N W ~ 58 ~ ~ ~

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NEW COMPETITION/ANTI-SMOKING FORCES There are many new competitive forces converging on the U.S. tobacco industry: major foreign conglomerates; anti-smoking/health groups; and increased availability of alternative products. Â• It is possible for a cash-rich foreign conglomerate such as Japan Tobacco Inc., and/or Mitsubishi to acquire a major stake in RJR Tobacco or another U.S. cigarette manufacturer. Both Japanese firms realize the profit potential stemming from the global demand for American-blended cigarettes. Â• Nicotine releasing skin patches and chewing gum are being made available by prescription to smokers who want to quit. The new set of competitors who manufacture/market one or both of these items include ALZA, Marion Merrell Dow, Lederle, Elan, Warner Lambert, Pharmarcia, and Ciba-Geigy. Ciba-Geigy has publicly stated that it will use approximately 1,000 of its U.S. sales people to promote the sale of its product called Habitrol (12/91). Elan Corporation received approval from the U.S. Food and Drug Administration on January 28, 1992, to start to market its nicotine skin patch (ProStep) through American Cyanamid Co's Lederle Laboratories. The ProStep patch, sold outside the United States under the name of Nicotrans, has been launched for over the counter sales in Italy. It is anticipated that nicotine patches will be available for purchase without a prescription in the U.S. by late 1994. Wall Street analysts predict the patch market will exceed $600 million this year in the U.S. and could reach $1 billion by 1995. Â• Anti-smoking/health groups such as the World Health Organization, American Cancer Society, and the American Lung Association are combining forces to achieve a smoke- free society by the year 2000. Efforts are in two areas. First, to continue to raise the consciousness of the alleged harmful effects of tobacco on health. Second, to expose the public relations strategies of the tobacco industry. The above issues are covered in more detail in the Corporate Affairs and Operations sections of the plan. 59 I I t I I I ~ I I I ~ I i ~ I

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uesd Aued r= sq-L

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Business Objectives Philip Morris USA's primary business objectives during the plan period are: Â• Grow Income and Cash Flow $ Billions Actual Actual CAGR 1990 1991 11992 1993 1994 iM 1M 91-96 Operating income 4.2 4.8 5.4 5.9 6.6 7.4 8.3 11.7% After Tax Cash Flow 2.6 2.6 2.8 3.4 4.0 4.5 5.1 14.3% Â• Achieve Aggressive Share Targets 1991 1996 Chance ..'_i .. r .. _ . . . ...ar . .1nr 7"a . .. ~ '~'.'~~~0 >t<:! -i 3t:~.Â• ._ ......-.., {` , .. .... ..... .. -.. .~ s:v.v . v.~ ~ otal FM-USA Share of Discount Category -21 ;3.5 33.1 + 3.6 Â• Maintain Unit Volume Units in Billions Actual Actual CAG% 1990 1991 1992 1993 1994 1995 1996 91-96 Industry 521.8 509.2 495.3 478.5 466.5 , 454.8 443.5 (2.7%) .5 220.7 2'),)-.0 220.4 2"0.2 =:?20.%1 220.4 0 ckground PM-USA has been the leading cigarette manufacturer in the U.S. since 1983 and currently markets four of the top ten brands. Marlboro is the leading brand, with over three times the crare of its closest cemi:;ei;tor, and Benson & Hedges, Merit and Virginia Slims are numbers 8, 9 and 10, respectively. In 1991, PM-USA achieved a market share of 43.3%, accounted for 44% of estimated industry revenues and 52% of estimated industry operating income. PM-USA's operating margin of 41.2% was the highest in the industry due to a favorable volume mix as weil as marketing and operating efficiencies. f` 60 GO ~

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Performance in Key IndUstiy Segments PM-USA has a leading share in several key industry segments, including Premium, Discount, Full Flavor, Flavor Low Tar, and Non-Menthol. The Company, however, continues to lag in the Menthol and Ultra Low Tar segments. During the plan period, PM-USA will improve its performance in all industry segments through a combination of line extensions and innovative marketing and sales efforts. PM-USA'S SHARE OF INDUSTRY SEGMENTS M 1991 Â® 1996 Percent of Segment tW T so I Total Premiun Dscount Full Flavor Ultra Non- Menthol Flavor Low Low Menthol Source: MSA and Market Research Estimates Demographic Performance PM-USA's demographic profile is the industry's strongest, with 55.7% of its smokers under age u1) . E3 Under 35 35-54 U 55+ P,'rtSA RJR B&W fndUstry Median 40.8 39.8 Age 37.2 32.8 Source: PM-USA ConsumerTracking 61 LOR 32.7 FM 50.5 LIG 50.4

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Over the past five years, PM-USA has successfully retained the majority of its smokers as they aged. Since 1986, the Company has held or increased its share among all smokers who were age 25 or over , but has lost share among adult smokers under 25. PM-USA SMOKER RETENTION 1986-1991 o M ~ 1986 Age 18-19 20-24 25-29 1991 Age 18-19 23-24 25-29 30-34 Source: PM-USA ConsumerTracking 1986 Â® 1991 30-34 35-39 35-39 40-44 40-44 45-49 45-59 50-54 50-54 55-59 55-59 60-64 Since 1986, Marlboro has grown its share among adult smokers under 25 at the expense of competitive and other PM-USA premium brands. During the plan period, Marlboro will hold its share among this key demographic group through image reinforcing advertising and promotion as well as continued support of Medium and the launch of Medium 100s. Benson & Hedges and Virginia Slims will increase their penetration of this group through 85mm line extensions and more relevant positionings. j Â° ?~JS~4Y . Â•;s.fLT S:40KEt`.~,.'; WiC E 25 PM-USA Marlboro j Source: PM-USA CorisumerTracking Virgina Slims 62 ~.s ~o n & Hedges !,Ierit

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Demographic Model To predict the potential impact of past sociodemographic and market performance factors on our brands' volumes during the plan period, we constructed a demographic model - built up with data from the U.S. Census, Roper and Consumer Tracking sources. We applied four basic factors to the model: sociodemographic effects (e.g., aging and quitting); entering adult smokers; contribution to discount growth; new products (net of cannibalization) in order to forecast 1996 volume. The demographic model predicts that Marlboro's volume in 1996 will be 117.6 billion units. This predicted volume is 10.6 billion units below the 1996 volume in our plan. Across all of our brands, the model predicts our total volume for 1996 will be 206.7 billion cigarettes, 13.7 billion below plan, all in the premium segment. Plan Volume vs. Model Volume 1996 am Model Difference "F"a.r't,0ro 128.2 117.6 -10.6 39.2 36.1 -3.1 Discount 53.0 53Â•0 Q Total 220.4 206.7 -13.7 Source: PM-USA Business Plannin Demo ra hic Model The strategies to achieve our 1992-1996 business objectives take all major industry dynamics into account and involve across-the-board changes in the way PM-USA competes in the U.S. cigarette business.

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I I I I I I I I I I I I ~ I I Long Term Goals and Strategy Beginning with the 1991-1995 Five Year Plan, PM-USA established three long term goals: Â• Reverse the practice of offsetting volume/share declines with accelerated premium pricing. Â• Maximize PM-USA's competitive advantage. Â• Improve the profitability of the low end of the market. In 1991, to achieve these goals PM-USA began the implementation of a four-point strategy to extend the equity of its premium trademarks, capture its fair share of the discount category's growth, develop economies of scale and restructure profitability. Extend the Equity of Premium Trademarks PM-USA's primary advantage versus its competitors is the equity of its premium trademarks. Our strategy is to add consumer value to our premium brands to reinforce and extend their equity. This will insulate our smokers from the allure of price discounts as well as revitalize our brands' appeal to competitive smokers. As we execute against this strategy, we will ensure that each brand's positioning is unique and relevant in today's environment; we will run advertising that reinforces positioning and is truly superior; we will competitively promote our brands with incentives, events and price-offs that extend the imagery conveyed by the advertising; and finally we will launch newsworthy new products with attributes that deliver consumer benefits and broaden the appeal of our franchises. Marlboro will enhance its perceived value through continued heavy advertising, loyalty and image building promotions, leadership merchandising, preemptive line extensions and alternative packaging configurations. Marlboro will also deliver targeted price promotions to competitive smokers. PM-USA's other premium brands will develop positionings with greater relevance to today's premium smokers and launch line extensions into untapped segments to broaden their appeal and attack competitive pockets of profitability. Product and packaging attributes which add value to the consumer will be developed and tested on our premium brands. Under this value umbrella, the development of extensions of premium trademarks into the discount category will be explored. PM-USA's premium performance is forecasted to outpace the industry's, with our volume declining an average of 1.8% annually compared to 10.2% for the rest of the industry. Marlboro's volume is forecasted to decline only 0.5% annually due to its demographic strength, appeal among entering young adult smokers and three line extensions. On average, PM-USA's other premium brands are forecasted to decline at rates lower than competitive premium brands on the strength of their line extensions which will offer product attributes that deliver meaningful benefits and broaden their appeal. As price competition in the cigarette industry continues to escalate, it is critically important to reinforce the equity of premium brands so their ability to sustain a price differential is assured. Over the plan period, several indicators of brand equity will be monitored for PM-USA premium brands: Smoker Share Unaided Awareness W In/Out-Switching Rate Imagery/Popularity C Own Brand/Alternate Brand Ratio Purchase by Competitive Smokers ~ If a brand appears to be losing equity, diagnostics will be evaluated and corrective actions C3 taken. Cj 64

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I 4 Oapture Fair Share of Discount Categoly Growth PM-USA will capture its fair share (approximately 40%) of the category's new volume. To meet its volume objectives in the discount category, PM-USA will differentiate Cambridge and Bristol more clearly from competitive brands and add brand equity that extends beyond price. In addition, PM-USA will employ targeted offensive price promotions on Cambridge and Bristol where incremental volume can be gained without damaging its premium brands. Finally, private labels will be given preference over black and whites (Basic) to foster partnerships with key customers to strengthen PM-USA's family of trademarks. Our strategy calls for integrating private labels with the Retail Masters program, a comprehensive incentive package that marries the trade's goals to ours. Retail Masters provides retailers with incentives for selling all Philip Morris products -- premium, discount and black & white/private labels. By joining Retail Masters and partnering with the industry leader, the trade gains great flexibility to develop its own tactics to maximize sales and profits across their entire cigarette line. However, due to the way the private label incentives are paid, the decisions on pricing will be made at headquarters, rather than at the store level where the manager may be overly concerned with building volume. This fits with our plan to push our private labels aggressively at retail, to replace the everyday low price positioning of our competitors' branded discount products, but in a way that allows the trade the option to maximize unit profitability by pricing just beneath sub-generics and branded generics. During the plan period, PM-USA will outpace the industry in the discount category, with our volume growing 7.2% annually compared to 3.6% for the rest of the industry. Cambridge and Bristol are forecasted to increase 3.5% and 13.3% per year, respectively. FVB is forecasted to increase 13.0% annually, with private labels comprising 38.6% of FVB volume in 1996. Develop Economies of Scale Unlike other consumer products, cigarette companies' shares of industry profits have traditionally been proportional to their market shares; PM-USA, as the industry leader, has not fully benefited from its size. In the beer and snack foods industries, market leaders enjoy profit shares 1.7 times greater than their market shares. During the plan period, PM-USA will restructure the retail environment with Retail Masters, a merchandising program that links payments to building PM-USA volume, captures prime selling locations for premium brands, ensures a fair share of well positioned visible inventory, incents retailers to focus on selling premium brands, and uses private labels to build partnerships with key customers. PM-USA Operations is committed to lowering its total manufacturing cost per price segment by utilizing global purchasing power, developing partnerships with suppliers, applying new technology, and converting factories to highly flexible production areas which are responsive to changing market conditions. In addition, new proprietary technologies will be used to enhance premium brands' value to smokers by providing them with benefits unmatched by competitors' products (e.g. lower sidestream smoke, less ashtray odor, higher taste/lower tar). Restructure Profitabilitv In 1990, each company in the industry derived over 75% of its profits from premium brands even though this volume declined by as much as 20% for some manufacturers. These profits were realized by price increases on products which frequently did not require marketing support, since they competed in uncontested niches. The margins on these premium products provided our competitors funds to support new discount brands targeted at premium segments in which PM-USA enjoys a leadership position and derives much of its income. PM strategies are designed to pressure competitors to seek profitability across the entire product line. 65 I I I I I I I I I ~ I ~ I I I I

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During 1991, PM-USA acted to impact its profitability in two ways. First, it improved the profit potential of its discount products through differential price increases for discount and premium brands. Second, it competed more vigorously for volume in niche premium segments dominated by competitors via new line extensions. At the same time PM-USA captured 40% of the growth of the discount segment. These efforts were designed to result in competitors deriving a greater share of their profits by improving unit profitability of discount products rather than from milking premium brands or growing discount volume. Consequently, our competitors would have limited funds available to support new discount initiatives. During the plan period, PM-USA will deliver income results superior to its competitors due to the volume performance differential between its premium brands and its competitors' (volume for PM-USA's premium brands will outperform the competitors' by 9% annually). The company will also, through its pricing and marketing actions, realize improved net margins from its discount brands. I Net Contribution (Per Thousand) " 2 iM ~.' ~ i M Marlboro $^2.59 $37.65 $41.64 $45.58 $50.55 O.P.B. 31.60 32.07 33.67 36.18 40.76 Branded Generics/ Players 25's 8.88 12.67 17.38 21.98 17.22 Bristol 9.17 13.09 16.53 22.02 24.99 Basic/AAV/Private Label 3,87 ~Q 9-M 13.13 16.65 Total $28.11 $31.15 $33.87 $37.51 $41.25 $55.09 45.08 21.28 30.64 j9.95 $45.72 During the plan period, PM-USA will make efforts to reduce real variable costs to improve marc!lr;a and differentiate the 1.:~.riable ~l per thousand of premium vs dis~~wunt products. i=rr; "!ry::is will La plac,-a:f or, mayac.ing fix..~i costs through beater headcount control. The and effs ~*,'~I'aness of our esies efforts will also he irr?nro"Â°rf ~y ^or:rr,l~f'-:~ a G6Â•s~grup;~ic/crganizGtion restructuring to support local market management, focus on strategic customer development as well as improve in-store merchandising. All departments will become more effective by streamlining their business processes, eliminating non-value added efforts, adjusting organizational structure and improving information systems. N 66.

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ING During the 1980's, as industry volume started to decline, manufacturers maintained profitability by increasing premium cigarette prices in excess of infiQ'.ion. Due to the reiative price inelasticity of the cigarette category, this strategy of increasing premium prices to compensate for volume losses proved to be highly profitable. In fact, between 1985-1990 every company except American Tobacco grew its operating income at over twice the rate of the CPI. MANUFACTURER LIST PRICE vs CP( (PREMIUM 85 mm) 20 0 Percentage 15 T---- 1970-75 Source: PM-USA Market Research CAG% fl List Price Â® CPI 1975-80 1980-85 ESTIMATED COMPETITOR FINANCIAL PERFORMANCE 1985-1990 ($ MILLIONS) Â® RJR PM- USA Source_Business Plarving Estimates B&W LOR AM 1985-90 L!G 67

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Incrvasing premium prices also fueled the growth of the discount segment which put ar siiional precsure on premium brands' volume, and led to charirg6:.~ in manuia.cturers' oroauct mix. Essentially, a vicious cycle was created as greater profit rÂ°r-=;:sure was being t-, 'n,-.-wd o; ipremium products which required aggressive pricing !- nd generated the aro;itera,tion of discount brands which put even more pressure on premi~tm profits. By 1990, every company except Lorii,-urd was competing vigorously in the discount segment, but as demonstrated in the chart below a11 were still dependent upon prumium brands for their profits. PREMIUM PRODUCTS PERCENT OF VOLUME vs PERCENT OF P'RC}FiTS (Not Contrib.) 1m 13 % Premium Volume G % Premium Profits PM-USA RJR B&W Source: MSA and Business Planning Estimates Pricing Strategy LOR AM UG !.,-i.~~ ;L.'s pricing strateL'; will continue to b3 c4rJw ,Ij r n ;,ni~~rin,. nt r i2_:C m_ ! i'] the profitability of the d'scount catcgu:-y and not the d;:;;;;;r;;; rate. During the plan period PM-USA will take semi-annual price increases and will continue to increase profitability of our discount brands while moderating our premium price increases. We have structured PM-USA's premium price increases to average 8.6% annually. We forecast that if our key competitors choose to match these increases, the additional revenues obtained on their premium brands will offset the lost profits from their premium volume declines, which we forecast will range from 6.5 to 9.6 percent. We assume that these competitors will achieve their income growth through increased margins on discount brands. In 1995, we expect a consolidation of discount price tiers such that the list price of all of our branded discount products will be at the sub-generic level. PM-USA PRICE INCREASES Branded Premium Oeneric Sub-Generic 1992 $5.50 $5.75 $7.00 1993 6.00 7.00 7.25 1994 6.00 8.00 8.50 1995 6.25 ' 8.00 1996 6.50 8.00 *The Plan assumes the branded generic and sub-generic categories wifi be consolidated In 1995. 68

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Pricina actions for FVB will be structured to ensure that the retail price of our black and white/private lab=::t products is comparable to the lowest priced branded products in the industry after coupon discounts. 69

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Income Growth PM-USA's ability to deliver overall share growth through superior premium performance and competitive discount performance has resulted in income growth rates higher than our peers and the majority of consumer packaged goods companies. (Between 1986-1991, PM-USA delivered about 60% of the industry's income growth.) Past plans have projected over 13% income growth, but we now recognize that the pricing this performance requires undermines the strength of our premium brands and could ultimately shorten their life cycles. This plan forecasts compounded annual income growth of 11.7%. Our projected pricing and brand volume could deliver 12.2% growth annually. However, in 1993 we expect our income to grow only 10.1% since additional marketing funds will be required to defend our premium brands against the heightened price competition which will result from the FET increase. Even with these efforts, our total 1993 volume will decline 1.6 billion units. In 1995, we expect income growth of 11.3% due to reduced discount income, resulting from higher promotion levels as a result of the consolidation of discount price tiers. Risks to the Plan I I I I I Because this is an aggressive plan there are, of necessity, risks to its success. One such risk is that marketing spending for Marlboro may not be sufficient to deliver the forecasted volume and share. Our response would be to lower our income targets to allow us to adequately fund our marketing efforts. In addition, if we cannot successfully defend Marlboro against heightened price competition, it could be necessary to lower Marlboro's price in order to stabilize its volume, resulting in lower income over the short-term. The plan assumes a relatively conservative industry decline of 2.7% per year. In the event of a greater decline, rather than suffer volume losses PM-USA's response would be to accelerate our marketing and sales efforts in order to capture more market share. The plan is also based on our achieving a 9% performance differential vs. the premium brands of our key competitors. In 1991 we achieved an 8% differential, but in recent months the differential has been in the range of the 7.4% differential we achieved over the past 5 years. Forecasts based on sociodemographic trends and the assumption that we hold our share of entering smokers, indicate a 4.2% advantage for Philip Morris. Therefore, Philip Morris must strengthen its premium trademarks relative to competitive premium brands, in addition to lessening the incentive for competitors to shift marketing investments to discount products, thereby encouraging consumers to switch from our brands. Current industry trends indicate the discount category would reach 42% in the last year of the plan. Our plan assumes that growth in the discount category will slow from its current rate of growth to reach 36% of industry volume. Premium price increases will be moderated in order to effectively decrease the price distinction between premium and discount brands. Concurrently, discount prices will pass the $2.00 per pack threshold. Premium brand product enhancements will provide added value for the customer, thereby justifying the price distinction. Finally, our plan allocates up to 10% of the premium retail carton price as promotional funding for our other premium brands to combat growth of the discount segment. If these actions do not slow the rate of discount category growth, then the plan will have to be reevaluated and compared to a plan which emphasizes maximizing share. 7Q

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Departmental Plans

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~:~ '1 ~;i a ea ~

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MARKETING I I I I I I I I I I I I I During the plan period, PM-USA is projected to increase its market share 6.4 share points to 49.7%. In spite of a continuing industry decline of 2.7% compounded annual rate, PM-USA will maintain its unit volume at 220.4 billion units. Marlboro will increase its share 3.1 share points to 28.9%. Our other premium trademarks will decline 1.3 share points. To achieve these results, promotion funds will be allocated to Marlboro and our other premium brands to total 3.5% and 10% of retail sales, respectively. The industry discount category is forecasted to grow 11.1 share points to 36.1 %, with Philip Morris capturing 40% of that growth. As a result PM-USA's share of the discount category is projected to be 33.1% in 1996 up from 29.5% in 1991. Marlboro Marlboro's primary challenge over the next five years will be to grow share in the face of heightened consumer price consciousness and accelerated price competition. Marlboro's strategy will be to leverage its unique distinction as h~ premium brand by adding value in every aspect of the marketing mix. To sustain growth during the plan, Marlboro must maintain its strength among young adult smokers, retain more smokers as they age within the franchise, convert competitive smokers and capitalize on alternate brand purchasing. Againstthese objectives, Marlborowill enhance its perceivedvalue and justify its higherprice through continued heavy advertising, loyalty and image building promotions, leadership merchandising, preemptive line extensions and alternative packaging configurations. Marlboro will also target competitive smokers' price consciousness with high impact price promotions to generate incremental volume. Using direct mail and freestanding insert coupons (FSI's), Marlboro will be able to deliver price savings through low visibility, yet image reinforcing vehicles. Key strategies for maximizing growth are: Â• Maintain brand of choice status among young adult maleswith contemporary, breakthrough advertising and value-added promotion. Â• Target aggressive offensive price promotion against competitive prospects to leverage consumer price sensitivity for incremental volume. Â• Improve leadership visibility and presence in all trade classes, commensurate with Marlboro's #1 brand position. Â• Launch preemptive new products and packaging configurations, such as: Medium 100's, to extend the excitement of Medium KS; Ultra Lights/other line extensionn to prepare for an aging franchise's increased desire for lowertar; half-cartonss to deliver a more affordable packaging alternative to cartons; and 15 or 20 pack cartons for mega- volume shoppers. Premium Brands The performance of PM-USA's other premium brands remains important to the company's competitive advantage and overall profitability. These brands have lost their relevance to 71

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today's smokers, and as theirconsumer base ages, they will become increasingly vulnerable to the discount category. During the plan period, PM-USA's premium brands must not only remain attractive to their current consumers but also attract young adult smokers and competitive smokers. In order to accomplish these objectives in a heightened price environ- ment, the following actions are planned: Â• Benson & Hedges Kings, planned for 1992, will increase PM-USA's penetration of the menthol category and introduce a length that is appealing to young adult smokers. Merit Ultima, planned for 1992, will provide PM-USA with a viable entry into the Super low tar category, enabling parent Meritpackingsto be restaged at lowertar levels laterinthe plan period. Virginia Slims line extensions will be developed to increase the brand's attractiveness to young adult smokers. Â• Instead of broad national programs, all marketing programs will be targeted to take advantage of the unique characteristics of geographic markets and retail trade classes to maximize the brands' profitability and volume. Â• Added value will be created through product/packaging innovations to keep the present franchise and to attract inswitchers. Discount Brands The discount category is projected to continue to grow its share of the industry overthe plan period but at a slower rate.. Discou nt category volume is forecasted to increase 4.7% annually through 1996 and its share of the industry will increase 11.1 share points to 36.1 Â°lo. PM-USA's discount brands will significantly outperform the overall category, achieving a compounded annual growth rate of 7.1%. In addition, our discount brands must source this volume disproportionately from competitors. Strategies to accomplish these volume objec- tives are as follows: Â• Continue to invest in Cambridge and Bristol as these trademarks provide an underlying unit base within our discount portfolio. Â• Change the current strategy of merely matching competitive price offers by employing targeted offensive price promotions on Cambridge and Bristol in specific geographic and trade classes where incremental volume can be realized from competitive discount brands. Â• Consider introducing- new discount brands in certain geographic markets where considerations warrant (e.g. California) or in categories where the risk to our premium brands is relatively low (e.g. Menthol targeted to the urban young adult smokers). Â• Promote smaller discount brands such as Alpine on a more targeted basis to take advantage of additional volume opportunities. ' Â• Utilize the Retail Masters program to aggressively pursue private labels. This will foster partnership with key customers which will benefit the total PM-USA family of trademarks. Â• Create a price structure that ensures long term profitability growth of the discount categories (including black and white). 72 ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 1 04 1 W Gb I

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I I I 1 ~ I I I I I I I I ~ During the plan period, PM-USA will introduce the following new products, line, extensions and packaging configurations: 1992 Merit Ultima Marlboro Medium100's Marlboro 5-pack carton B&H King Size line extension 1993 Marlboro Express Parliament Menthol Free standing discount menthol 1994 Marlboro Ultra Lights 1995 King Size B&H Deluxe Ultra Light line extension 1996 Marlboro Red line extension ~ N N W CJ CD ~ -40 73

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I MARLBORO Positioning Where men smoke for flavor. Geography National marketing to support consistent overall brand imagery supplemented by localized marketing to defend against competitive initiatives and capitalize on market opportunities. Â• Continue, and where possible accelerate, share momentum where growth has been restored. Â• Capitalize on significant growth potential opportunity markets where Marlboro share is growing and the Brand is underdeveloped. Â• Reverse share erosion in geographies where Marlboro sales are softening. Demographics Core Audience - young adult male smokers; attract young adult smokers, primarily men, and retain them as they age. Key Audience - adult smokers 25-44 years of age; defend older smokers, prevent them from switching, buying alternate brands and trading down to the discount category. Trade Class Marlboro's primary objective in all trade classes is to enhance our position as the leading brand in all cigarette outlets nationwide. To accomplish this, Marlboro must achieve "Big Brand" status in important outlets through improved merchandising and promotional programs. Convenience Outlets - Pack purchases Â• Accelerate Marlboro's momentum among young adult pack buyers by capitalizing on Medium's strength, improving merchandising presence and focusing loyalty/image building promotions on pack sales. Supermarket Outlets - Carton purchases Â• Capitalize on trade class growth opportunities given Marlboro's under-representation in the supermarket environment and anticipated demographic shifts. Also defend against discount and competitive price off initiatives by implementing innovative, relevant end-aisle carton display promotions as well as offensive merchandising and promotion programs to increase visibility/ presence and generate incremental volume. In addition, Marlboro must explore special merchandising, promotion and packaging vehicles to increase penetration in mega volume outlets, an area of under-representation for the brand. Trademark Strengths Â• Number one in the U.S. and number one in the world. Â• Number one among men and women smokers. Â• Marlboro Country Advertising. Â• Full, rich flavor in a filtered cigarette. Â• Bridged the flavor gap by introducing Marlboro Medium. Â• Brand of choice among 60%+ of adult smokers under 25. .74 I I I I I I I I I I I I I I I I

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I I I I I I I I I I I I I Strategic Approach A key to Marlboro's success over the next five years is the brand's ability to deal with continued consumer price consciousness and accelerated competitive price competition. Marlboro will capitalize on consumer price consciousness with price promotion aimed at competitive smokers, thereby generating incremental volume for Marlboro. We will combine value-added promotion with more impactful image building measures including media and in store presence to provide current Marlboro smokers a greater sense of value. In addition, new product and packaging options, many of which will be unique to Marlboro (e.g. Medium), will further insulate the brand against competitive price offers. Â• Marlboro will accelerate its present share momentum by using a value-added approach which permeates advertising, promotion, merchandising and new products. Â• Price promotion will be employed as a volume generation tool aimed at competitive smokers. Â• Image orientation will continue to be focused on young adult men. Â• Volume orientation will continue to focus on retention of smokers within the 25 to 44 year old segment. Â• Keys to maximizing growth: a) New Products: Medium 100's, Ultra Lights and other line extension options. b) Improved visibility and presence in all trade classes. c) Maintaining brand of choice status among young adult males with contemporized impactful advertising and value added promotion. d) Aggressive offensive promotion to leverage smoker price sensitivity and provide incremental volume opportunities. e) Maintaining "premium status" in the eyes of consumers. ~ 0 W r n ! CO 1 75

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Marlboro A crucial element in achieving share and volume objectives is the brand's ability to respond to heightened price competition without jeopardizing Marlboro's positioning as the industry's premier brand. The industry has currently absorbed the impact of crossing the $2.00 per pack threshold, with over half of Marlboro's volume sold in that environment. The next important price threshold could be $20.00 percarton which will become an issue beginning with the 1/1/93 Federal Excise Tax Increase. In addition, pricing assumptions for this plan place the retail price gap between Marlboro and subgenerics at over $1.34 per carton in 1996 versus about $5.00 in 1991. Widespread price competition on a brand the size of Marlboro would deter rather than add value to the brand. In addition, such discounting would be prohibitively expensive, preventing Marlboro from contributing double digit income growth to PM-USA. Competitors such as Winston have shown that high levels of price promotion erodes brand loyalty and undermines image building investments. Rather, Marlboro must develop new means of dealing with price sensitivity in all significant trade classes. Issue: Marlboro's future share growth Is dependent on Its abiiityto defend against competitive price Initiatives without resorting to widespread price discounting which Is both cost prohibitive and detrimental to long term image efforts. Marlboro's challenge is to develop a means of price Insulation outside of direct price-off vehicles to protect the brand. Strategy: Marlboro must combine better merchandising and retail visibility with retail promotion to create a value-added image for the brand, thereby giving it some insulation from cigarette Â°sticker shock." However, Marlboro will continue to lose some smokers to discount brands and afternate buying as retail cigarette prices continue to rise faster than consumers' ability to pay. To counter this trend, Marlboro will use price promotion as an offensive tool aimed at competitive smokers. In addition, Marlboro will continue to offerproducts (Medium; other line extensions) and packaging configurations (5 pack cartons) which would be either difficult or infeasible for competitors to copy, thereby providing ,Mariboro with a unique competitive advantage. Action Plan: 1992-1996 Retail Presence/Availability Â• Launch 5-pack carton as "savings" alternate for price sensitive smokers. (1992) Promotion Â• Respond to discount category growth primarily by reinforcing Marlboro's image equity with high perceived value added incentives in both pack and carton outlets. (1992) 1992-1996 Â• Execute two strong bonus product promotions in carton outlets and two in pack outlets behind quarterly themes to reward Marlboro smokers with product value. (1992) Â• Develop additional price promotions as a con- tingency plan to be used if the business war- rants. (1992) Â• Deliver high value Marlboro coupons to price sensitive competitive smokers four times throughout the year via direct mail. (1992) Â• Field one $2.00 off carton national price promo- tion in 1 Q'92 behind a sleeve offer to insure continued share growth momentum. (1992) Â• Deliver Marlboro Menthol price off coupons via Catalina Marketing to generate incremental volume at participating supermarkets. (1992) 76 N C I I I I I I I I I I I I I I I I

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I I I I I I I I I I I I 1993-1996 New Products Â• Test Marlboro Express, a shorter cigarette for value sensitive smokers. (1993) 77

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I Marlboro Historically, a key component of Marlboro's volume and share growth has been the brand's ability to attract increasing shares of young adult smokers. Marlboro's share of young adult smokers has increased from 33.2% to 58.6% over the last decade. This momentum has more than compensated for a declining number of young adults over the same time period and has resulted in Marlboro achieving "brand of choice" status. However, in recent years Marlboro has experienced market share erosion among its core smoker group. Marlboro's 58.6% share of young adults (age 18-24) at year-end 1990 represented an 0.6% share point decline from 1989 when the brand peaked at 59.2% Competitive inroads have come primarily from Camel, which has a 7.6% share among 18-24 year olds and a 12.3% share among males in that age category. In addition, discount products have attained a 4.1% share. Camel's growth has resulted from its repositioning as a contemporary fun loving flavor choice for young adult male smokers. Camel's significant levels of price, product, and incentive promotion have increased trial and alternate purchase for the brand, sourcing largely from Marlboro smokers. Discount category growth is expected to continue among young adults as retail cigarette prices increase given the group's lower income levels relative to older smokers and the heightened visibility given discount brands in convenience (pack) outlets.. Marlboro Medium represented a significant measure in reversing the brand's share erosion. Marlboro Medium provides Marlboro smokers a cork tipped, lower tar option, thereby blunting the growing appeal of Camel Lights. Marlboro's smoker share among 18-24 yearolds grewto 61.3%, with Medium supplying 2.2 share points. Camel did not exhibit any growth during this same time period. Issue: Marlboro's challenge Is to continue Its recent share momentum among young adult smokers by building on the recent success of Marlboro Medium. To achieve this, Marlboro must continue to fend off competitive Initiatives by Camel, Winston, and discount products. Strategy: Marlboro will invest to maintain and grow its core young adult male smoker franchise nationwide. To achieve this, the brand's image must be reinforced and contemporized through advertising and promotion to remain relevant. National marketing will be complemented with heavy-up efforts in opportunity markets, where Marlboro is growing and its share is underdeveloped, and with special programs for problem markets. Line extensions, including new packaging options, will be investi- gated to address the issue of affordability and value consciousness among this age group. Action Plan: Advertising 1992-1993 1992-1996 Â• Continue to use "Marlboro Country" Â• Deliver highest reach/frequency and as core image. (1992) total advertising impressions utilizing outdoor as primary reach/ Â• Field creative for maximum impact: frequency vehicle against core Fewer, more intrusive subjects, run young adult smokers. (1992) deeper in both print and outdoor. (1992) 78 I I I I I I ~ I I I I I I I I

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~ I I I I I ~ I I I I I I I I 1992-1996 Â• Run five special space/impact units behind Marlboro Mainline, three special space/impact units behind Marlboro Racing and one other special unit behind retail promotion in print. (1992) Â• Create and maintain sustaining advertising behind Medium packing group. (1992) Â• Expand outdoor leadership program to four additional key markets. Focus on painted walls and other new technology. (1992) Â• Reduce scope of event marketing programs to focus on Auto Racing. Introduce image enhancing racing advertising support utilizing "Marlboro World Championship Team" headline. (1992) Retail Presence/Availability Â• Strengthen Marlboro's visibility in pack outlets by graduating to an optimal look consisting of permanent P.O.S. signage featuring bold Red Roof graphics. In addition, pack merchandising programs will be modified to insure ht~, prime position near the cash register. (1992-1993) Â• Provide continuous set-sells to urban outlets and other stores without permanent Marlboro merchandising to improve presence/ visibility. Extend '91 urban permanent display test to major metro markets. (1992-1993) Â• Insure strong presence is maintained in critical non-cycled accounts by offering permanent pack display alternatives to vending machines as they are eliminated in select geographies. (1993-1996) 1992-1996 Promotion Â• Field loyalty/image building promotions geared to young adult men. Emphasis will be on added value incentives and bonus product versus price-off. (1992) Â• Use higher perceived value incentives to reinforce Marlboro's leadership position while rewarding Marlboro smokers and generating competitive trial. (1992) Â• Build promotion elements to create large, themed events. Major 1992 themes will be Racing and Adventure Team. (1992) Â• Leverage Marlboro Menthol's growth among young adult male smokers using targeted menthol promotions as well as direct mail. (1992) Â• Raise top-of-mind awareness among young adult males by executing multi-dimensional blitz marketing programs in Â°problem" markets where Marlboro's share is in decline and Camel remains a threat. Four markets will be blitzed with Mini-Grand Prix auto racing, retail extensions and local sponsorships. (1992) Â• Expand the proprietary Adventure Team program to dimensionalize the Marlboro "experienceÂ° against young adult males following the successful '91 test. Â• Co-promote on a monthly basis events tied to national professional sporting activities in 8 large sports clubs in metro markets. (1992) 79

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1992-1996 New Products Â• Launch Marlboro Medium 100's, a low tar 100's entry for adult male smokers, with cork tipping/red package. (1992) Â• Introduce five pack carton. Deliver a value package for young adult male smokers. (1992) I I t Â• Test Marlboro Express, a shorter cigarette for value sensitive smokers. (1993) N 0 I I I I I I I I I I I ~Â°& I W ~ ~ I ~ 80

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I I I I I I I I ~ I I I I I I I I I Marlboro Marlboro's ability to retain and grow share among current smokers while limiting alternative purchase is a crucial element in achieving the brand's unit volume and share forecast. Marlboro has historically grown'by increasing its share of new smokers entering the marketplace, while maintaining and growing share among current smokers as they age. Marlboro's performance in terms of smokershare retention has been impressive; the Brand has grown smoker share among all age groups over the last decade despite the emergence of price as a dynamic in some consumers' minds. However, alternate brand purchasing by Marlboro smokers (based on the percent of smokers buying outside the franchise within the last two weeks) has increased from 17% in 1987 to 20% in 1991 and may represent as much as 6 billion lost units. Based on current population and incidence trends, Marlboro will need to accelerate retention/growth of smoker shares among its current smokers above historical levels while minimizing alternate purchase behavior to attain forecasted volume levels in the five year plan. The aging of Marlboro's prime smoker base has several strategic implications for the brand. For example, older smokers tend to be more price sensitive, purchase more in supermarkets/mass merchandisers, buy cartons and are more susceptible to switch to lower tar. Currently, 25-44 year olds represent 58.3% of Marlboro's total estimated smokers with a large concentration in the 25-34 age bracket. Marlboro has an 38.7% share of smokers in the 25-34 age category and an 23.7% share in the 35-44 age group. A key challenge for Marlboro is develop a merchandising, promotion and new product strategy which keeps these smokers in the franchise. In addition, Marlboro's lower share in this age group allows the brand the opportunity to attract competitive smokers, either through outright conversion or alternate buying. Issue: Maintaining share among Marlboro's large base of smokers currently between 25 and 44 years old Is critical to achieving Marlboro's volume forecast over the next five years. To achieve this, Marlboro must successfully respond to changing demographics and buying patterns for these smokers. Strategy: Marlboro must increase its retention of smokers as they age into and within the well developed and . vulnerable 25-44 yearold segment. Marlboro will support smokers with Marlboro Country advertising and reward brand loyalty with value-added promotions. Marlboro will use offensive promotions to attain incremental volume by attracting competitive smokers. The brand will use defensive price promotion only where necessary to reverse declining share trends. In addition, Marlboro will investigate new packaging and product options to further broaden the brand's appeal among older smokers. Action Plan: 1992-1993 Promotion 1992-1993 Â• Extend all mainstream carton promotions to Â• Insert two blind value-added continuity mega-volume outlets (800+CPW) where programs in select carton packings to opportunities for incremental volume are reward price sensitive Marlboro smokers as greatest. (1992) a defense against alternate buying. (1992) 81

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1992-1993 Â• Extend all retail carton promotions to military outlets and maintain couponing at competitive levels. (1992) Direct Marketing Â• Use offensive direct mail programs (quar- terly, Medium 100's, Menthol) to target competitive smokers with high value, image building offers to generate volume and gain conversion. (1992) Â• Test defensive price promotion that protects the brand without eroding equity. (1992- 1993) 1992-1996 New Products Â• Launch Marlboro Medium 100's, a low tar 100's entry for adult male smokers, with cork tipping/red package. (1992) Â• Launch 5-pack carton as value alternative for price sensitive smokers. (1992) Â• Launch Marlboro Ultra Lights as a Lights line extension. (1994) Â• Test Marlboro Express as a shorter cigarette for value sensitive smokers. (1993) Â• Launch a Red line extension. (1996) 82 I I I I I ~ I I ~ I I I I I I

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I I I I I I I I r I I ~ I I I I I I I Marlboro Convenience outlets represent Marlboro's most important and best developed trade class. These outlets represent approximately 50.4% of Marlboro's volume and Marlboro maintains a leadership position in convenience stores with 28.9% share. It is in these outlets that young adult smokers, an important Marlboro demographic group, purchase cigarettes. Marlboro returned to a share growth trend in convenience stores at year end 1991, increasing share 0.5 points on a 6mm basis versus the previous six month period of June 1991. To maintain its momentum, Marlboro must continue to fend off competitive initiatives from brands such as Camel and Winston, which have promoted heavily in convenience stores. In addition, the discount category continues to grow, increasing 13.9% share points to 25.0% compared to 11.1% in 1988. Issue: Marlboro's competitive position in convenience stores has been challenged by both premium and discount products. To maintain Marlboro's current momentum In the trade class, Marlboro must set itseif apart from Increasing retail clutter and heightened price competition. Strategy: Marlboro will continue its retail promotional support behind pack outlets nationally, with a primary emphasis on convenience outlets. Marlboro must improve its visibility and presence to achieve a"Big Brand" status commensurate with its share. Promotional supportwiii be managed to provide Marlboro sufficient volume opportunities without conditioning smokers to deals, reducing inherent value and committing to increasing support levels to achieve volume targets. Marlboro's level of promoted voiumefor1992isanticipatedtobeatorbelow1991e inaddition,Marlborowiilalsoencourageretailer driven special pricing, including two and three pack specials. Action Plan: 1992-1996 Retail Presence/Availability Â• Evaluate and implement use of altemate packaging and consumer payment vehicles (i.e., half-carton, credit cards) to encourage Marlboro versus discount brand/deal pur- chases. (1992-1996) Â• Capitalize on increasing use of retail driven special multi-pack pricing with a permanent 5-pack carton SKU. (1992) Â• Develop pack promotion distribution for non- cycled outlets (less than 100 CPW) which can be placed by distributors. (1992-1993) Â• Expand promotion opportunities into non- traditional outlets such as video stores and home/auto centers. (1992-1993) 1992-1996 Promotion Â• Execute 7 national pack promotions consisting of 5 value added and 2 product offers. (1992) Â• Provide heavy base level of display quanti- ties to achieve 80% penetration of 100+ CPW pack outlets versus 50% in '91. Reserve display quantities will increase promotion breadth and depth in key opportunity markets. (1992) Â• Execute 2 customized promotions in 5 convenience-gas and 2 convenience-food national accounts, linking additional merchandising programs where applicable to strengthen presence/visibility in these key chains. (1992) X

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I 1992-1996 Â• Include a Hispanic version of all 7 national pack promotions to provide ongoing support. (1992) Â• Execute 2 Asian promotions around key holidays and 2 Menthol programs in 8 select geographies to leverage growth. (1992) Â• Create special programs to reverse Marlboro share declines among pack outlets in Texas/Oklahoma. (1992-1993) Â• Utilize self-shippers/distributor assembly for all retail pack promotions to minimize salesforce labor in execution. (1992) Â• Provide field with catalog of customized promotions and P.O.S. materials to better respond to local opportunities/threats. (1992-1993) 84 I I I I I I I I I 1 ~ i

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I I I I I I I I I I I I I I Marlboro Supermarkets and mega-volume outlets represent a significant opportunity for Marlboro. The brand has been historically under-represented in the supermarket environment, posting a 19.4% share compared to Marlboro's 25.8% share overall. Supermarkets will be increasingly important to Marlboro due to anticipated demographic trends. Marlboro's largest demographic group, 25-44 year olds will continue to grow, pushing more of the brand's franchise into the price driven carton universe. Older competitive premium franchises are more susceptible to price discounting, decreased brand loyalty, alternate purchase behavior, and switching to discount brands. Thus, while Marlboro must defend its core business, the brand has an opportunity for incremental volume through offensive promotions aimed primarily at competitors. Issue: Carton outlets, an area of historic under-representation for Marlboro should provide growth opportunities. A key challenge for the brand Is to provide new, unique means of packaging, product and promotion to differentiate the brand In an environment which will continue to be price sensitive. Strategy: Leverage Marlboro's strong heritage with offensive promotion to attract new smokers in the carton environment. Marlboro will investigate new means of packaging to address the price issue while still allowing for multiple purchase options. Where possible, these new configurations will serve as an entree into new merchandising and visibility vehicles for the brand. Defensive carton promotions will be used only where necessary to revitalize share trends. In addition, we must continue to capture a significant share of smokers trading down from carton purchases by maintaining strong front-end merchandising presence. Action Plan: 1992-1996 Retail Presence/Avaitabitity Â• Capitalize on the supermarket trend toward non-self-service cigarette merchandising by encouraging the placement of Marlboro service centers to provide leadership visibility. (1992-1996) Â• Merchandise a 5-pack carton in supermarkets to capitalize on the trend toward increased front-end pack sales. (1992) Â• Introduce a 15/20 pack carton in high volume carton outlets where multiple carton purchase behavior is the norm. (1993) 1992-1996 Promotion Â• Execute 5 national carton promotions with large displays in 300+ CPW supermarket universe with 2 value-added incentives, 2 product offers and 1 price promotion. (1992) Â• Utilize arresting, high impact displays with stopping power in place of traditional "pole and shelf" displays for nationally scheduled carton promotions in self-service mega- volume accounts (800+ CPW). in non-self- service mega-outlets, two value-added promotions will be executed. (1992) Â• Provide heavy base level display quantities to achieve 50% penetration of 300+ CPW self-service accounts, with heavy-up display quantities in key opportunity markets. (1992)

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I 1992-1996 Â• Provide field management with a menu of promotions/materials in addition to national programs to leverage local market opportunities. (1992-1993) Â• Continue to strengthen impact and build penetration of themed "super" carton promotions. (1993-1996) I I I I I I I I ~ I I I i I LI w cR r+ 86 ~ ~

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I I I I t ~ I I I I I I PREMIUM BRANDS OVERVIEW The premium brand segment of the industry continues to experience significant volume declines at an annualized rate of 9.4%. Premium brand performance is a function of declining incidence and consumption levels combined with a current discount category unit growth rate of 26.7%. During the plan period the industry premium category volume is projected to decline at 5.8% annually. It must be pointed out that the challenges facing ourpremium brands differ significantly from Marlboro. The variances, beyond franchise rates of decline, can best be explained by three major factors: 1) Unlike Marlboro, our other premium brands have been unable to capture entry level smokers and are therefore faced with rapidly aging franchises. 2) These brands are each positioned against a limited industrysegment (e.g.100mm, low tar, female smokers), whereas Marlboro can satisfy almost the entire range of consumer requirements from a flavor, tar level and length perspective. 3) Marlboro's industry leadership position and corporate importance ensures significant retail presence, while our other premium brands have limited opportunity/resources to establish a substantial marketplace presence. PM's premium brands' decline will be minimized by: 1) INTRODUCING LINE EXTENSIONS TO BROADEN THE APPEAL/PARTICIPATION OF THESE BRANDS. Through an annualized investment strategy (spending for promotions and new products) commencing in 1992, major line extensions will be introduced for our premium brands. Neither Merit nor B&H has launched a significant new product for a decade, and Parliament, a strong regional brand, has been limited to three packings for 22 years. 2) TARGETING PROMOTIONAL/ADVERTISING DOLLARS AGAINST KEY MARKETS. Beginning in 1992, a geographic spending strategy will be the core of the individual brand plans. Specifically, we will allocate disproportionate resources against key markets to slow our volume declines and increase brand presence. In these designated markets, we will leverage our consumer popularity to gain Sales and Trade support. 3) CAPITALIZING ON SHIFTING DEMOGRAPHIC TRENDS. By the year 2000, Blacks, Hispanics and Asians will represent nearly 25% of the adult population. Increasing our share among ethnic smokers will be paramount in reversing our current rate of decline. Targeted promotions, improved marketplace presence and relevant advertising are all necessary to achieve these goals. 4) PROVIDING ADDED VALUE TO OUR CURRENT FRANCHISES. We must add value to the premium end of our franchises. We will utilize product/packaging innovations to encourage 'loyalty among our existing smoker base as well as to attract inswitchers. By adding value to our brands, we will give smokers a reason to choose paying a premium price versus selecting a low price alternative. ~ In addition to the above, it will be necessary'to utilize aggressive direct mail/continuity offers ~ against our current smokers to encourage loyalty within the premium end of these franchises. Â® ~ During 1992, we will implement a Brand name generation program against our own smokers to ~ significantly increase our current level of penetration (48%). . C~ N 87 r W

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I BENSON & HEDGES Positioning Â• America's premium quality cigarette. Geography Â• Focus spending in key markets: B&H is the most geographically concentrated major brand, (West, Southwest, Southeast). Demographics Â• White female skew, 40+ Â• Black and Hispanic, female skew, 30+ Â• B&H King Size: male skew, 25-34, mainline and ethnic Trade Class Convenience Outlets - Pack Purchases Â• Increase in promotional support. Supermarket Outlets - Carton Purchases Â• Occasional couponing (FSI's, Direct Mail) in conjunction with "Signature Collection" premium offers. Urban - Pack Â• Continue market penetration pack program. Trademark Strengths Â• The premium cigarette in 100mm length. Â• Upscale packaging. Â• Viable non-menthol and menthol offerings. Â• Strong ethnic appeal. Strategic Approach Â• Market to diverse target groups. Â• Build on premium image. Â• Build ethnic franchise. Â• Line extend to Kings smokers. w I I I I I ~ I ~ I I I I ~ I I

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I I I I I I I I I I I I I I I I I I BENSON & HEDGES The Benson & Hedges franchise is experiencing disproportionate volume declines versus the category as the result of younger adult smokerinswitching being siphoned off by Marlboro, Camel and Newport coupled with increased outswitching due to sustained competitive activity by other premium 100's and discount brands.ln addition, Benson & Hedges 100mm only length proves a barrierto entry for younger smokers; 100's are skewed toward older, female smokers and are perceived as such. Issue: The accelerated volume decline and the aging demographic profile risks Benson & Hedges' long term viability. Benson & Hedges' future rests on gaining and building share among adult smokers under 35, while at the same time providing incentive for current users to remain within the franchise. Strategies: Through the introduction of a King size line extension, Benson & Hedges isto be positionedto be more relevant to smokers under 35. The Kings' packaging, advertising and retail activity will be contemporary and relevant to younger smokers but consistent with Benson & Hedges' positioning in order to reinforce the trademark's strengths. Direct marketing and media will deliver continuity programs designed to retain smokers within the 100's franchise. Product/packaging based benefits will be sought to provide a sustainable point-of-difference for premium brand smokers. Action Plan: 1992-1993 1992-1996 Â• Introduce B&H King Size line extension (non-menthol, menthol, Full Flavor and Lights) directed at young adult male smok- ers. (1992) Â• Pack trial, which focuses on the purchasing patterns of young adult smokers, will be initiated via an extended reduced price offer. Â• B&H Kings introduction will be communicated through the "Black and Gold" creative. Â• Introduce "Long Smooth Premium Move" 100's advertising (print only) as a separate campaign to Kings. Â• Use multiple "Signature Collection" and Direct Mail offerings to reinforce Benson & Hedges 100's premium quality positioning within current franchise. (1992) Â• Focus 100's retail promotional activity in top 13 markets, 53% of total volume. (1992) Â• Develop urban PPP in 9 key markets for greater market presence to capitalize on brand's demographic strength. (1992) Â• Develop and test a product/packaging point- of-difference on 100's. (1992-1993) 1994-1996 Â• Expand trademark acceptance among growing ethnic groups via targeted promotions, improved advertising, and relevant line extensions. Â• Launch King size Deluxe Ultra Light line extension. (1995) Â• Relaunch 100's business with product/ packaging point-of-difference. (TBD) 89

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ositioning VIRGINIA SLIMS I I Â• Thg cigarette for women. I Geography I Â• Defend share position from competitive premium/discount brands' attack and capitalize on geographic opportunities for growth in key volume/share contribution markets. I Demographics Â• Primary Audience Â• Secondary Audience Trade Class Drug and supermarkets - Adult female smokers 35-44 - Adult female smokers 22-34 I I Â• Maintain momentum among current carton buyers. Â• Increase momentum among pack buyers. Convenience/pack outlets I Â• Maintain share position among current adult women smokers. Â• Stem decline in share among young adult women. I Trademark Strengths Â• First slim cigarette made especially for women. Â• Fashion-oriented and stylish image. Â• Viable non-menthol and menthol offerings. I Strategic Approach I Â• Maintain position as the most le itimate brand for women. Â• Position brand as contemporary and unique. Â• Add value with packaging innovations. Â• Volume goals will be reached by maintaining smoker share among adult female smokers 25+. Â• Defend core franchise with aggressive product, price and continuity offers that counter competitive price pressures yet add value and reinforce imagery. Â• Improve positioning against young adult female smokers. I I ~ 90 I

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I I I I I I I I I I I I I I I I Virginia Slims Virginia Slims is showing a volume decline for the second consecutive year and is expected to continue in the immediate future. Significant volume is being lost to discount brands which are growing rapidly, especially since the introduction of image based sub-generics. Historically, volume growth was driven by line extensions which helped retain women smokers as they aged. Unfortunately, these new entries, all of which were 100mm products, did not offer a compelling reason for young adult women smokers to join the franchise. In addition, the popularity of Marlboro and recently Camel among young adult women, as well as, Newport among the ethnic audience has Â°locked out" Virginia Slims from this key smoker group. In 1991, the average Virginia Slims smoker was 36 years old. Finally, Virginia Slims is no longer the only slim brand designed exclusively for women, and as a result, has lost its unique positioning and competitive product advantage. Issue: The Virginia Slims franchise is aging rapidly since it has not been able to attract young adult female smokers. This is a serious threat to future voiume goals. Simultaneously, rapid growth among female oriented, Image based, discount brands presents threats to short term volume goals. Strategy: Contemporize and add value to the brand through advertising, promotion, packaging and product innovation. All promotions including retail, direct and media will be uniquely themed and linked to maximize big brand presence. Direct marketing will serve both defensive and offensive objectives. Broaden brand appeal to young adult women through a new product and positioning. Action Plan: 1992-1993 Â• Run "freshened" Old Time/New Time creative. Develop unique image based special units to generate visibility and maximize impact. (1992) Â• Develop new altemative advertising for current franchise/product proposition. (1992) Â• Contemporize Virginia Slims packaging. (1992) Â• Utilize retail and media delivered promotions with "themed" imagery to create relevant big brand presence. (1992) Â• Use direct marketing to develop dialogue with significant numbers of current Virginia Slims smokers, which will add value and maintain loyalty. Deliver image based product, price and continuity offers to approximately 500m current Virginia Slims smokers. Include vulnerable competitive smokers in mailings. (1992) Â• Develop a unique non-100mm line extension directed toward young adult female smokers. (1992-1993) 1994-1996 Â• Evaluate potential price options including couponing, additional product lines, price reductions. Â• Continue evolution of campaign directed against women smokers. 91

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MERIT Positioning Â• The low tar cigarette that delivers taste out of proportion to tar. Geography Â• National - 1992 Ultima introduction. Â• Regional - Aggressively defend Merit against discount brands on a geographic basis. - Target consumer promotions to key strength and opportunity markets. Demographics Â• Primary Audience - 35-54 year old smokers Â• Secondary Audience - 25-34 year old smokers Trade Class Supermarket Outlets-Carton purchases Â• Defend Merit carton business against discount brands. Â• Capitalize on opportunities for growth via Ultima. Drug Outlets-Pack and Carton purchases Â• Capitalize on opportunities for growth via Ultima. Convenience Outlets Â• Restore Merit momentum among young adult pack buyers. Trademark Strengths Â• First low tar cigarette to deliver on taste promise. Â• Low tar expert. Strategic Approach Â• Introduce Merit Ultima (4 non-menthol packings), a super ultra low tar line extension to attract competitive smokers and keep Merit downswitchers in the franchise. Â• Increase the percentage of Merit's promoted volume to 15-20% annually. Â• Develop targeted retail promotions that address specific areas of brand and competitive strengths/weaknesses. Â• Address the key critical issue of relevance in the marketplace, particularly among adult smokers under 35, by exploring restage opportunities for the core franchise. Explore restage on an integrated basis - involving product, packaging, advertising and promotion. 92 I

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I I I I I I I I I I Merit Merit is currently the ninth largest brand in the cigarette industry. Although it is still an important and profitable brand, Merit is at a critical point in its product life cycle. Severe volume and share losses are being driven by the combined effects of explosive discount category growth and the lack of a relevant positioning in today's marketplace. Introduced in the mid-70s as a technological breakthrough in low tar smoking (the first low tar with flavor), Merit now stands as one of a multitude of flavorful low tar brands available. its "rational choice" platform has been usurped by the proliferation of even more rational low tar/good flavor discount alternatives. With virtually no following among entry level smokers, and a demographic profile (educated, white collar, aging) that is vulnerable to discount brands/quitting/super ultra low tar downswitching, Merit's volume is suffering. In 1991, Merit's volume declined 14% versus 1990. Issue: Merit's brand identity as a technological breakthrough product has diminlshed In recent years due to the proliferation of more "rational" low tar/good flavor discount aiternatives. Strategies: In orderto defend the Merit trademark and create a stable platform for the future, Merit's position as the expert in low tar technology must be re-established. Over the next five years, the following strategies will be implemented to address the critical issues forthe Brand and revitalize the trademark: Â• Provide a competitive alternative in the super ultra low tar segment via the Merit Ultima line extension. Â• Protect the core franchise in the short-term by encouraging current and occasional Merit smokers to continue purchasing the Brand. Â• Restage the Brand to regain a unique selling proposition/product superiority in the current marketplace. Explore changes to the product, packaging, advertising and promotions. Action Plan: 1992-1993 1992-1996 I I I I I I Â• introduce Merit Ultima, the first.cork tipped "lowest", as the new standard in super ultra low tar smoking. Suqport via extended trial price-off's during the introduction, coupled with intrusive, "newsy" advertising support and targeted direct mail. Â• Use integrated retail, media and direct mail programs on a targeted basis to encourage brand loyalty and purchase continuity. Â• Utilize Ultima as the flagship packing throughout the year in advertising and POS communication. 3 Â• Post-introduction, target promotional support to key geographies (35 markets/68% volume) where Merit is well-developed or showing opportunity for stabilization. Segment consumer offer to the needs of "price-oriented" versus "image-oriented" markets. Â• Use multiple direct mail offerings ("The Lighter Side") to reinforce the loyalty of the core Merit franchise and encourage purchase continuity.

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Increase promo 20%. ted volume from 12% to I I Develop and te Merit (product a existing light an Restage lights/u nationally. st a "new and improved" nd packaging) to replace the d ultra light packings. ltra lights business 1994-1996 I I I Explore product Ultima. improvements to Merit I I I I I I I I I I I Â• Â• Â• Â• C~3

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I I I I I I I I I I I I I I 1 I I PARLIAMENT Positioning Â• The only cigarette with a recessed filter that provides a rewarding "getaway". Geography Â• Focus marketing efforts in Region 1. Demographics Â• Primary Audience - Adult male/female LA (Legal Age) - 34 Â• Secondary Audience - Adult female 35 - 44 Trade Class Convenience Outlets - Pack Purchases Â• Maintain momentum among young adult male and female smokers. Carton Outlets Â• Encourage purchase continuity among 100's smokers. Trademark Strengths Â• Famous recessed filter. Â• The perfect recess ad campaign. Strategic Approach Â• Refocus marketing efforts in Region 1. Â• Maintain relevancy to critical young adult smoker target. Â• Diversify marketing between advertising and promotion. Â• Support both King's and 100's packings. Â• Increase brand's promotional activity. Â• Line extend the franchise. 95

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Parliament I Parliament is a strong regional brand, with the majority of its volume in the Northeast. The brand's strength lies in its vitality among young adult smokers. This age group will continue to be the focus of marketing efforts. However, the older female 100's consumer will also be supported. Both advertising and promotion will be used to speak to the consumer. Line extensions will be evaluated as a venue for growing the brand's market share. Issue: Although the brand has remained a strong franchise In Region 1, its growth has been constrained by the lack of product "news" and the need for Improved retail visibiiity. In addition, the franchise's hig h percentage of older smokers makes it vulnerable to inroads from discount brands. Strategies: Parliament will continue to be positioned as the aspirational, sophisticated brand choice with particular emphasis on the young adult smoker. Our efforts will focus on three areas: Â• Promotional activity will be increased to complement the brand's strong advertising and to encourage brand trial and purchase continuity. Direct marketing and other promotional programs will be developed to address the older female 100's consumer. Â• Retail visibility will be heightened to give Parliament big brand presence in Region 1. Â• Lineextensionswillbeusedtoincreasethebrand'sconsumerreach,andconsequentlygrowshare. Action Plan: 1992-1996 Â• Increase brand's presence in Region 1. Â• Increase brand's promoted rate to 7% in 1992. Â• Balance marketing activity between advertising and promotion. Â• Support both King's and 100's packings. 1992-1996 Â• Evaluate potential of 100's Box and Ultra Lights line extensions. Â• Explore contiguous geographic expansion (e.g. Baltimore/Washington). Â• Utilize bounceback items on all promotions to encourage purchase continuity and to generate database names. Â• Use Direct Marketing to reward the Parliament 100's consumer. Â• Continue to refine the "Perfect Recess" campaign. Â• Introduce Parliament Menthol in Region 1. I I I I I I I I I I I I I ~ I 96 N..

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I I I I I I I I I I I I I I . . . =:_.Â• The discount category's profitability improved in 1991 as a result of industry pricing actions. At the same time, the category's volume growth rate slowed from 28.7% in 1990 to 26.7% in 1991. The continued compression of branded discount prices in 1992 and 1993 will cause the category to experience sharp reductions in growth in the first two years of the plan period. Compounded annual volume growth in the discount category during the planning period is projected at 4.7%. For Philip Morris to achieve its volume and share objectives, PM-USA discount brands will need to significantly outperform the category overall, achieving a compounded annual growth rate of 7.2%. Most importantly, PM-USA discount brands must accomplish this level of growth by sourcing volume from competitors. Specifically, PM-USA must capture 40% of the category's volume growth. Our strategies to accomplish these objectives are as follows: Â• A two brand focus (Cambridge and Bristol) designed to provide an underlying unit base within our discount portfolio augmented by private labels and carefully targeted niche products (Alpine) capable of delivering incremental volume. Â• Creation of a pricing structure that continues to increase the profitability of PM discount products. Â• Tactical use of price reduction designed to escalate price subsidy levels in PM premium-low risk environments, which will force competitors to defend discount products. Â• Maintenance of a meet competition defensive posture in mainstream (premium-high risk) environments. Â• Aggressive pursuit of private label partnerships among key customers and a reduction in the overall mass of discount brand display. We will, at the same time, defend against broad market black & white (non private label) initiatives with price subsidy on branded products. Â• The introduction of niche products and utilization of programs against competitive premium products, e.g. menthol, non-filter and lowest tar, where PM risk of premium cannibalization is low. Â• When and where necessary, assume the risk of cannibalization by launching discount products into segments, traditionally PM premium strongholds, to defend against competitive initiatives e.g. slim circumference and 100mm. 1 97

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I CAMBRIDGE Positioning Â• Sensibly priced high quality cigarette - smart choice. Geography National Scope Â• With greatest emphasis and resource support in highly developed discount geographies. Trade Class Carton Outlets Â• Increase promotion penetration in chains. Â• Maximize volume in mega volume outlets. Pack Outlets Â• Generate trial and purchase continuity. Â• Maintain visibility. Strategic Approach Â• Maintain price competitiveness. Â• Improve retail presence. Â• Heavy-up marketing efforts in key geographies and trade classes. Â• Gain retail presence and drive volume with value added retail programs with modest media support communicating a smart shopper positioning. 96 I I I I I I I I I I I I I I

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I I I I I I I I I I I I I I BRISTOL Positioning Â• A quality product at the lowest branded price point in the industry. Geography Â• Achieve broad geographic distribution while focusing retail support and marketing resources in a limited retail environment in which off-rack display and signage can be secured on a regular basis. Demographics Â• Key Audience - 35+ years of age - Lower income and education - Predominantly white - Nielsen C&D counties Trade Class Carton Outlets Â• Utilize off-rack display and traditional packaged goods deals to maintain momentum. Pack Outlets Â• Secondary in importance to carton outlets, our objective is to ensure Bristol availability with limited promotional support to provide trial. Strategic Approach Â• Generally utilize a defensive price subsidy approach in mainstream outlets. Â• On a targeted basis in premium low risk environments, Bristol will offensively price subsidize exceeding competing values by $1.00. Â• Gradually expand distribution where the opportunity for sub-generic performance exists. Â• Utilize standard package goods "deals" to obtain off-rack display as well as find a permanent merchandising position for Bristol. Â• Keys to maintain growth: 1) Provide Field Sales Force tools such as co-op advertising, P.O.S. and displays to continuously work the Brand outside PM-USA's promotion schedule. 2) Aggressive promotion that adds value for the consumer and retailer. 3) Utilize "boxing glove" mnemonic in consumer communication, primarily at point of sale, referencing price, value and quality. ~ ~ 1 99 N Ul

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I ALPINE Positioning Â• Legitimate refreshing menthol alternative for SatemJmenthol smokers at a lower price. Geography Â• Alpine will continue to develop regionally with regions 2, 3, 4 contributing over 72% of Alpine's volume. Heavy-up support in highly developed menthol and Salem markets. Demographics Â• Core-Audience - Nielsen B&C counties, slight female skew, 35+ years. Â• Key Audience - Premium, Salem/menthol smokers. Trade Class Carton Outlets Â• Achieve trial and prominent merchandising and promotion to access menthol's traditionally strong pack performance. Pack Outlets Â• Correct merchandising and distribution shortfalls to provide Alpine sufficient availability in carton outlets to support loyal buyers. Strategic Approach Â• Targeted utilization of promotion in key (menthol & Salem) geographies. Â• Utilize Direct Marketing offensively against Salem smoker base. Â• Target price reduction expenditures against competitive premium brand audience. Â• Use of media delivered offers pulsed coincident to retail promotion in key geographies. Â• Utilization of pack offers in Nielsen A county pack outlets. I I I I I I I I I I I I I I I 100

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I I I I Discount Brands Industry pricing actions have created a low price vacuum at retail. The low manufacturer list price and rebate structure creating substantially high levels of wholesale and retail trade profitability in private label and black & whites has resulted in explosive growth in this segment in 1991. The growth of FVB at the expense of branded discount products within PM-USA's portfolio hinders our ability to meet profitability objectives. Nonetheless, participation in these trade driven segments is required to protect and to grow our share in the discount category. Issue: The absence of profitability In the low end of the discount segment requires that we gain competitive advantage In merchandising not just gain volume. Strategy: A comprehensive sales and marketing strategy that integrates pricing, merchandising, and trade rebates is planned. PM-USA needs to achieve a low end performance that optimizes our overall position at retail. Our strategy necessitates: Â• Construction of a PM-USA pricing structure to qualifying trade customers that incents private labels as opposed to a black & white approach. Â• Reduction of the minimum required annual performance for production of private labels. Â• Creation of a PM-USA pricing structure and customer credit terms that allows for shipment frequency options reducing pressure on manufacturing capacity requirements for private label production. Â• Retention of sufficient Basic volume in outlets that do not qualify for private label partnership to ensure that PM-USA meets its overall discount brand volume objective. Â• The introduction of profitability in FVB. Action Plan: 1992-1993 1992-1993 I I I I Â• Differentiate the pricing and rebate struc- tures of Basic and private labels to incent private label. Â• Integrate private label partnership with premium merchandising and discount category presence at retail. Â• Solicit private label partnerships among retail chains with projected private label volumes in excess of 100mm units per year. Â• Standardize private label graphics to allow uniqueness within widely separated geographies while simultaneously limiting packaging alternatives at the point of manufacture. Â• Freeze Basic DME and rebate levels thereby introducing profitability into the franchise. 1994-1996 I I I I Â• Convert wholesale and retail customers selling in excess of 100mm units of Basic per year to PM private label partnerships. Â• Construct a matrix of shipment and production criteria linked to payment terms to allow for greater private label participation. 1 Â• Increase PM-USA's private label/black & white profitability. Â• Reduce PM-USA's reliance on non private label/black & whites i.e., Basic, to under three billion units enabling PM-USA to carry discount volume in branded products and private labels delivering merchandising values to PM brands overall.

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I Discount Brands Segmentation and media support have been used with recent launches, e.g., Misty, Bull Durham and Style to provide brand equities beyond price. Issue: PM-USA must create equities and values on behalf of Its branded discount products beyond price alone to achieve differentiation as the category becomes more cluttered with new Image base entries. Strategy: A three point strategy is planned: s I I I I Â• While not changing the fundamental focus on price in Cambridge and Bristol's consumer communications, both brands' campaigns will evolve to achieve two objectives; First, to differentiate Cambridge and Bristol and second, to subtly introduce Brand equities beyond price. Â• New entries by PM-USA into the discount segment will, in packaging, positioning and communication, place higher emphasis on non-price related equities. Â• Consumer communication on behalf of Alpine, Bristol Lowest, and Cambridge Lowest will be single-mindedly focused on competitive targets. Taste claims and comparative advertising will be increasingly used on behalf of these brands. Action Plan: 1992-1993 1992-1993 Â• A new Cambridge campaign with a"smart shopper" emphasis will be created and launched. Â• Bristol's "Price Fighter" campaign and - boxing glove mnemonic will evolve in both advertising and POS to include other equities, e.g. flavor knockout, value cham- pion, etc. Â• Cambridge Lowest and Bristol Lowest will continue to be featured in pulsed media executions with explicit Now/Carlton comparisons. Â• Alpine's campaign in 1992 will be modified to achieve a more intrusive presence in retail executions and be more explicit in its communication to Salem smokers. Â• PM-USA will introduce a new, sub-generic free standing menthol targeting younger adult (under 30), urban smokers utilizing an image based campaign with price communi- cated as a secondary benefit. Â• PM-USA will significantly shift resources away from price subsidy to sustainable campaigns communicated in both media and point of sale executions sufficient to allow a modest carton price disadvantage against the lowest priced branded product without suffering share erosion. I I I I I I I I I I I i 102 I

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I I I I I I I I I I I I I I I I Discount Brands The growth of the black & white segment eroding PM-USA's discount brands' aggregate profitability coupled with escalating levels of price subsidy will restrict our ability to simultaneously meet profit contribution objectives, maintain support on four national brands, and introduce new discount products where warranted. issue: The unit contribution of Bristol, Cambridge and FVB require spending levels adequate to ensure net retail price competitiveness and will inevitably drain discount brand resources from other initiatives. However, these three franchises alone will not provide sufficient volume for PM-USA to meet objectives during the planning period. Strategies: The discount brand portfolio of PM-USA will be restructured as follows: Â• Resources supporting Bucks will be reduced to allow spending on otherdiscount brand initiatives to be increased. Â• Funding of Alpine initiatives during the plan period will be limited to 30 key Salem geographies in offensive programs solely designed to source incremental volume. Â• In key markets, PM-USA will launch a second free standing menthol into the discount category against young adult urban smokers-rounding out our menthol alternatives to source incremental volume. Â• In key markets, PM-USA will launch a free standing 100mm full circumference and slim circumference discount product to capture disenfranchised Benson & Hedges and Virginia Slims smokers. Action Plan 1992-1993 Â• Bucks spending and marketing programs will be front loaded in 1992 to achieve high levels of trial and maintenance of retail distribution. Â• PM-USA will launch a full circumference and slims 100's at the sub-generic price point in California in 1992 and gradually expand where necessary in 1993. 1994-1996 Â• Bristol and Cambridge price subsidy levels will be stabilized and volume will erode slowly. Â• Support against Monterey, Alpine and a new free standing menthol will be increased as we source incremental units. Â• Alpine will continue to investment spend in 1992 becoming more explicit in its communication against a Salem audience with resource support in 1993 and beyond being limited to offensive programs in 30 select geographies. Â• Bristol and Cambridge promotional and media support, will as required, be converted into price subsidy to ensure competitiveness at retail. 103

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I Discount Brands industry pricing actions in 1991, coupled with greater than anticipated unit shortfalls among our competitors, have resulted in extremely aggressive price reduction activity. Further, the predictability of PM-USA's meet competitive strategy has enabled competitors to undercut our discount brands' net retail prices during periodic unit drives. Issue: Philip Morris'strategy of universally responding to competition has become predictable.and resulted in our discount products being price disadvantaged on a regular basis. Strategy: While generally employing a defensive/meet competition strategy, PM-USA will: Â• Leadintheescalationofpricesubsidylevelsinoutletsidentifiedaspremium/lowriskenvironments. Â• Periodically lead in price reduction in mainstream outlets to eliminate predictability -timing such periods against excessive competitive retail inventories. Action Plan: 1992-1993 With the exception of the circumstances listed below, PM-USA will generally meet competitive price subsidy levels: Â• In mega-volume retail outlets (accounting for 20% of the discount category's volume) Cambridge and Bristol couponing inci- dence will be increased to 90% with values of $1.00 above prevailing competi- tive levels. 1992-1993 Â• Price subsidy levels will be stabilized at values sufficient to ensure a net price differential between premium brands and lowest price branded discount products of no greater than 25% of brand net retail prices. Â• In carefully identified mainstream carton outlets (Nielsen D county), Cambridge and Bristol will increase couponing incidence to 90% with values of $1.00 greater than prevailing competitive levels. Â• PM-USA will respond to excessive competitive discount brand retail inventories by exceeding the competitive coupon value on such inventory by $1.00 on PM discount brands. Â• PM-USA will pursue Bristol Lowest and non filter aggressive price reduction in developed competitive markets. I I I I I I I I I I I I I I I I I 104

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I I I I ~ I I I I I I I t I I Direct Marketing Direct Marketing has become a key component of brand strategies for PM-USA. It has grown in its importance as an integrated marketing element in promoting conversion and a proven tool in delivering incremental volume. The Direct Marketing database contains a large, diverse smoker population which is critical to the support of PM-USA brands' initiatives. Issues: Â• The marketing environment is likely to become more restrictive during the plan period, inciuding additional restrictions on outdoor and event sponsorship. This necessitates creating alternative avenues of reaching the consumer. Developing a smoker name data- base will enable us to effectively reach a large number of smokers. Â• The growth of the discount brand segment has put increasing pressure on our premium brand smokers. Direct will be an essential tool for engendering loyalty among our current franchises. Â• Volume objectives have put increasing emphasis on short term Initiatives that will generate incremental volume. Direct's ability to reach specific competitive targets makes It an efficient and effective tool for building business. Â• As the database becomes more critical to our marketing plans it becomes essential that we protect It from iegislated restrictions. Operating procedures and policies will ensure the Integrity of the database. Strategy: Continue to develop a database of 50% of the smoking population (25mm - 27mm adult smokers) by gathering names through internal and external processes. Develop new unbranded name generation and requaiification techniques that will generate names that will broaden the profile of the database and will fail within our targeted cost per smoker range. Use on-going Brand, Events, and Corporate Affairs efforts which have requalification and/or name generation application. Action Plan: 1992-1993 Â• Requalify for signature and Date-of-Birth. Â• Expand name generation efforts in proven traditional and non-traditional media vehicles. Â• Increase presence at major events and use as a source for name generation. Â• Improve response rate for direct mail requalification and names generation packages by continually testing new creative offers. Â• Continue relationship with co-op survey supplier which identifies smokers through surveys delivered through FSI's and direct mail. Â• Expand package/carton insert efforts to increase penetration of PM smokers on database. 1994-1996 Â• Develop internal sources of smoker name identification and requalification such that external efforts are minimal. Â• Maintain presence at all Events for smoker name identification. Â• Develop, test and roil-out Philip Morris Companies corporate co-op survey to maintain and enhance each operating companies' data- base. Â• Use Database to impact volume targets. 105

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Promotional Services Promotional Services' Mission is to develop and deliver Brand consumer programs that can protect existing franchises, build business and enhance brand imagery. Promotion programs are delivered via retail, direct and/or media vehicles. Issues: Â• Increasing advertising clutter and the restrictive marketing environment has required Increasing promotional support (both added value and price-off strategies) to secure brand volume objectives. Â• Competitive pressures have required a streamiine approach to developing and executing promotions with a minimum response time. A "menu" of promotion concepts will give us needed flexibility. Â• Our ability to support our premium brands has been limited due to our focus on Marlboro and discount brands. Thematic multi-brand promotion concepts will be a specific need In the coming years. Â• Volume objectives cannot be achieved through traditional retail promotions alone placing more emphasis on a combination of media and direct efforts. Strategy: Build expertise in all areas of promotional services and, in conjunction with Trade Marketing, exploit opportunities for local and account specific programs. Continue to support Brand promotion objectives with thematic promotions and enhance event sponsorship visibility through retail, media or via direct to leverage event-related tie-in activities. Action Plan: 1992-1996 Â• Build promotional expertise internally. Â• identify key external creative resources. Â• Build "menu" of creative ideas for field sales. Â• Plan promotion programs 12 months ahead of time. 106 I I I I I I I I I I I I I I I ~ I

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I I I I ~ ~ ~ I I I i ~ I I I I Media/POS Development PM-USA maintains solid overall leadership in terms of tobacco media spending, with significant dominance inthe magazine and outdoorcategories. Spending in 1991 forcurrent established brands was $251 million and estimated to be $249 million for 1992 including current planned introductions. During the rest of the plan period, industry and PM-USA media spending are expected to remain fiat to slightly down, with print declining more significantly than outdoor (in the absence of legislative restrictions). However, it is possible that certain key competitors, most notably RJR, may significantly reduce advertising expenditures for all or part of the plan period to free marketing dollars for other activities. This will allow PM-USA to substantially improve its leadership advertising position, even with some shift of resources from media to promotional programs. The altemative strategy of increasing advertising spending for maximum impact against the core audience will also be analyzed on an individual brand basis. Forthe retail environment, PM-USA will pursue an aggressive unified visibility strategy for Marlboro to insure leadership positioning. In addition, premium and discount brand visibility programs will be implemented consistent with brand retail strategies throughout the plan period. Issue: Despite the Increasingly promotion-driven and regulated market environment, media and POS advertising will provide a key way for PM-USA to not only differentiate Itself from the competition but also provide a leadership position for its brands within the tobacco category. In order to accomplish this, PM-USA must proactively provide maximum creativity, impact and effiency in all media, and POS programs consistent with our leadership position. Strategies: Aggressively create new and refine existing media and POS opportunities for maximum impact and efficiency. This will be facilitated by establishing an environment that fosters teamwork and the development of creative alternatives to marketing problems. Within this environment, specific focus will be placed on identifying key media and POS partners and proactively establishing the on-going relationshipswhichwillchallengethemto maximize creative input in all submissions. In addition, take leadership advantage of all opportunities by analyzing and accurately anticipating the actions of competitors and the market. Finally, refine print, out-of-home and POS planning, negotiation and evaluation systems to insure effectively and efficiently reaching defined audiences in appropriate geographies consistent with brand creative. Action Plan: 1992-1993 Â• Develop specific strategies for core media and POS suppliers to insure that PM-USA receives maximum efficiency and creative impact consistent with our leadership position. (1992) Â• Implement internal program to generate impactful brand specific media advertising/ promotionaV merchandising opportunities for all vehicles. (1992) 107 1992-1993 Â• Refine PM-USA/KGF/Miller media negotiating framework to insure maximum on-going rate efficiencies through a focused negotiating strategy and selective use of media vehicles. (1992) Â• Complete comprehensive evaluation of all PM-USA out-of-home inven- tory for maximum impact, efficiency and scheduling flexibility. (1992)

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1992-1993 Â• Integrate in-store advertising evaluation, planning and implemen- tation irito the POS Development process. (1992) Â• Complete final refinement of computerized media scheduling system (COMPASS) to maximize effective use of Media group personnel. (1992) Â• Complete development of and fully integrate a comprehensive tracking and analysis system of competitive media and POS to allow for proactive program response. (1992- 1993) Â• Develop and implement specific out- of-home and in-store space utilization program to allow Operating Companies access to PM-USA inventories to protect continued availabilities of key vehicles. (1992-1993) 1993-1996 Â• Develop dialogue with Operating Companies to maximize potential for cost efficient multi-media agreements. (1993-1996) Â• Fully utilize all media merchandising/promotional opportunities on a PM Companies basis. (1993-1996) 108 I I a I I I I I I I I I I

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I I SALES I a I Since 1987, the PM-USA Sales Plan has focused on three major trends within the cigarette marketplace: pack sales strength, discount category growth, and promotional activity. Priorto 1991, Sales time was utilized primarily to increase carton and pack rack presence consistent with different trade channel opportunities (discount racks in pack outlets, carton and pack racks in carton outlets) and to implement increasing levels of promotion activity. Demand for rack/promotion labor increased 44%from 1987 to 1990 and available man-days increased 41% through the addition of part time resources. It became apparent in 1990 that our sales focus on merchandising and promotion implementation was not meaningfully impacting the business. Despite a 41% increase in manpower devoted to these efforts, we had not gained a sustainable competitive advantage. In 1991 we began to take the Sales Force role beyond in-store execution. We redefined Sales' role to include geographic market management and strategic customer development, as well as traditional in-store merchandising. To fulfill this role, we established four major strategies designed to change the PM-USA Sales Force from a merchandising force to a premier consumer package goods sales organization. Â• Operate with a simple direction setting process and structure that localizes decision making. Â• Create a people advantage. Â• Combine people quality, relationship building, and category expertise to become the first tier (preferred) supplier to customers. Â• Streamline retail execution to create new brand, existing brand, and promotion advantages at the point of consumer purchase. During 1991, PM-USA Sales made substantial progress against its strategies. Specifically, we: RESTRUCTURED Â• Restructured the U.S. into 5 regions, 24 sections, and 76 markets to increase focus on regional/local opportunities (Exhibit I). Â• Established the position of District Manager, reporting to the Section Director, as the key market management role. Â• Restructured the Southwest region to increase focus on selling and people development. The balance of the U.S. will be restructured in 1992 (Exhibits II, III). Â• Restructured our NY based resources to establish a Trade Marketing group and an Operations group to support Field Sales and customers (Exhibit IV). Â• Established region based strategic planning and promotion planning systems to improve individual market results. Â• Positioned a national sales results tracking system called STEP UP & GROW (Exhibit V). 109

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a) a, ia U)

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UPGRADED THE ORCANIZATION Â• Defined a job specific review process and reviewed all field and NY management personnel. As a result of these reviews, a 49% change in management personnel occurred (Exhibit VI). Â• Increased female/minority enrollment in key management grade groupings (Exhibit VII). Â• Provided key management training in leadership/change management, supermarket and conve- nience store operations, strategic planning, and organizational development. Â• Established executive account assignments as well as account assignments at all management levels (Exhibit VIII). Â• Started a PM-USA Customer Advisory Council to improve communication on key customer issues (Exhibit IX). Â• Developed a category management story that outlines for retailers the right principles to maximize category profitability and growth. These principles are: maximize return on inventory investment, meetthe demands forpacks, promote the category, and maximize discount brand profitability. This can be achieved by focusing on prominently displaying the leading brands; managing the overall number of displays; offering a private label/black & white product price sensitive shoppers (where appropriate); managing overall inventory levels in proportion to sales; and using cigarette promotions to build store traffic. STREAMLINED OUR MERCHANDISING AND PROMOTION PROCESS Â• Designed and tested a direct to retail promotion premium delivery and tracking system that reduces Sales Force labor. Â• Expanded a distributor promotion assembly system. Â• Successfully executed trade performance allowance promotions that increased carton display and brand share. Â• Developed an innovative merchandising program (Retail Masters) in 1992 that encompasses the principles of category management and pays for PM-USA performance, captures prime real estate, and focuses retailers on PM-USA brands. Through these actions in 1991 and the first quarter 1992, Sales laid the foundation to achieve a leadership position with customers. For the remainder of this year, we will implement what we have developed and capitalize on what we have implemented. The issues we face in 1992-1993 have evolved, but remain essentially unchanged from last year. Consequently, our strategies have also evolved, but are directionally the same. We have recognized the increased competitive environment with a strategic focus that seeks to fully utilize our resource base in the coming years to increase efficiency. Action plans have been refined or added to reflect our accomplishments and changes in the market place. 110 I I I I I ~ I ~ ~ I A I t I

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Issue: I I I I I Increased promotion and pricing activity continue to strain our resource base and divert resources to labor intensive In-store and administrative activities. We need to become more efficient and to refocus in selling. Strategy: Increase Sales Rep/Unit Manager/Senior Account Manager productivity. Action Plan: 1992 -1993 1994 -1996 Â• Expand "PM Express" direct store promotion Â• Continue to develop streamlined promotions. delivery system. Â• Automate the Sales Reps' administrative re- Â• Test "Price Offs" as an alternative to coupons. quirements. Â• lnstall a two call/cycle coverage system that increases calls per day by 25%. Â• Develop and implement an "Electronic" Sales Data/Administration system with all manag- ers. Â• Implement a new item ("Two Week Blitz") system to increase speed to market. Â• Test manufactured coupon packs and B1 G1 F promotions. 111

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I Issue: An increasingly complex sales environment requires better quality people with new skills, broader business experience, and more focus on selling. Strategy: Build a people advantage. Action Plan: 1992-1996 Â• Continue/expand the performance manage- ment system positioned in 1991. Â• Train key Sales management in negotiation, market analysis, and recruiting. Â• Implement an entry level college recruiting program in 24 targeted schools. Â• Implement a KGF Cross-Training program at the unit manager level. Â• Design a customer/PM-USA management exchange program to expand our learning process with customers. I ~ I I I I A I I I I I 112

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I 1 ~ I I Issue: As brands continue to segment the marketplace, we need to capitalize on regional/market account specific opportunitites through better localized sales management. Strategy: Localize decision making and accountability. Action Plan: 1992-1993 1994-1996 A 1 V a I I I I I Â• Complete Field Sales Force reorganization by July 1992. Â• Make the region the focal point for planning. - Establish operating, merchandising, promotion and trade relations budgets. - Develop volume planning process at the region level. Â• Push budget responsibilities and volume objectives down to district level. Â• Continue STEP UP & GROW. - Set and measure objectives at all levels. - Publish by section and district on a monthly level. - Expand and refine measures. Â• Enhance existing section sales information system and develop a similar one for the district level: - Customer Tracking/Retail Direct Manage- ment System - Wholesale Shipment Activity reports used for Modelling/Production Forecasting Â• Improve NY/Field Communications. - Issue monthly Brand/Sales Management Report (covering the most important issues and/or new strategic directives) to the field sales force. 113

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1 issue: Trade customers are becoming Increasingly reliant on a few key suppliers to help them grow their business. These customers are influential in developing consumer needs. Strategy: Establish first-tier supplier status with key customers. Action Plan: 1992 -1993 1994 - 1996 Â• Execute customer specific trade relations Â• Differentiate us from the competition. events at the local and national level. - Design a computer-aided, profit based shelf Â• Complete the first Trade Council cycle of meet- plan-o-gram selling program. ings and review for improvement. - Explore the use of DPP to build store profit- ability. Â• Evaluate and improve the National Accounts group and strategy. Â• Expand private label presence and profitabil- ity. Â• Analyze the results of the "Preferred Supplier Survey" and assess how PM measures up to other first-tier suppliers. Implement appropri- ate steps. I I I I I I r I a I 114

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! I I r I t r I I I I I Issue: Competitors are escalating couponing rates and expanding merchandising payments to Include overhead merchandisers in pack outlets, challenging our strong position in these channels. PM-USA must develop programsthat compete effectivelywithout escalating costs. Strategy: Meet competitive spending with volume based programs and PM-USA/KGF convenience store synergistic promotions. Action Plan: 1992-1993 Â• Implement a volume based merchandising plan that rewards building PM-USA volume through total store participation. Â• Impierrient a volume based Retail Masters plan that rewards building PM-USA volume through reducing out-of-stocks, supporting new items, and developing private labei partnerships. Â• Implement a cost based quantity discount program to encourage more efficient order- ing/distribution from direct customers. Â• Develop and test PM Inc. convenience store promotion plan that includes cigarettes, hot dogs and coffee. Â• Develop and implement a private label strategy that contributes to our overall profit goals. 115

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I 115a A I I I ~ 11 I i 1 I i I 1 I I I I

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I a I I r I I I I I t a I : W REGION 3 REGION 4 & 5 REGION 1 & 2 EXHIBIT III RESTRUCTURE SCHEDULE 116 EFFECTIVE DATE JANUARY 6 MARCH 30 JUNE 29

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'91 EXHIBIT V TOTAL PMÂ•USA STEP UP & GROW INDEX vs INDEX vs JM EE@ ME APH M9X JUK ~'L~C AM M M rL4Y M Y9SZ OBJECTIVE MARLBORO INV TO SALES 58 53 52 52 53 55 57 56 59 60 59 58 57 104 [ 98 A!0 PM 6NV TO SALES 117 117 117 117 116 117 117 117 117 117 118 118 117 98 100 I WORKLOAD COVERAGE 95% 88% 90% 92% 91% 88% 85% 85% 86% 88% 88% 90% 88% F 102 . 87 EFFECTIVE DISTRIBUTION 98 95 95 95 95 95 95 95 95 95 95 95 95 100 97 PACK PROMO PENETRATION (A) 40% 44% 40% 40% 43% 44% 41% 42% 38% 41% 37% 42% 41 % 96 100 CARTON PROMO VOL COVERAGE (B) 35% 36% 35% 36% 39% 44% 44% 45% 39% 39% 36% 38% 37% F 103 100 PACK MERCH PRESENCE 75% 76% 77% 77% 78% 78% 78% 78% 78% 78% 78% 78% 78% F 103 104 CARTON MERCH PRESENCE 50% 50% 51% 53% 54% 55% 56% 57% 58% 58% 58% 58% 58% F121 116 (A) Percentage of Pack Outlet Industry Volume Coverage (Source: S.P.A.C.E.) (B) Percentage of Carton Outlet Industry Volume Coverage (Source: S.P.A.C.E.) BUDGETS ($'S IN MILLIONS) $257.4 AU PROFITABLE VOLUME (UNITS IN BILLIONS) 220.7 1991 BUDGET 1991 ACTUAL PM VOLUME = 1Nm 223.2 99 [ $255.9 FM VOLUME 9CI = lM 183.2 184.3 99 1 PROFITABILITY SCALE YTD 12/91 5.27 mom ~ ~ ~

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I I EXHIBIT VI I I V I I MANAGEMENT CHANGE TOTAL MANAGEMENT EMPLOYEES IN PLACE EMPLOYEES REMAINING % HAN , REGION V.P. 5 3 40% SECTION DIR. 29 22 24% SUPERVISOR/DM 79 32 59% NY DIRECTORS 12 7 42% TOTAL 125 64 45% EXHIBIT VII MINORITY/FEMALE REPRESENTATION I I I I V I IN PLACE DEQ,'90 IN PLACE DEC.'91 % CHANGE REGION V.P. 1 0 _1000/, SECTION DIR. 4 4 0% SUPERVISOR/DM 20 25 25% NY DIRECTORS 2 5 150% 118

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1 I I EXECUTIVE ACCOUNTS W.I. CAMPBELL D. DANGOOR C. JOHNSON F. LAUX E. MERLO J. NELSON H. STEELE M. SZYMANCZYK L WEXLER EXHIBIT VIII MC LANE SOUTHLAND SAM'S - WALMART KROGER CIRCLE K MOBIL A&P CORE MARK K-MART I I ~ I I I I MASS MERCH/ CHAIN DRUG PACE MEMBERSHIP CLUBS BIG D DRUG MAYS DRUG STORES MEDIC DISCOUNT DRUG STORES FAYS DRUGS EXHIBIT IX TRADE COUNCIL MEMBERS SUPERMARKETS CONV/GAS-CONV WHOLESALE GROCERS/DIST FAREWAY STORES PIGGLY WIGGLY ABCO MARKETS SAVE MART DOMINICKS FINER FOODS GRAND UNION CO. OUICKTRIP CLARK OIL EMRO MARKETING SPECTRUM STORES SOUTHLAND CORP. ARCO PETROLEUM SHEETZ INC. MAVERICK MARKETS 119 MCLANE WETTERAU OLD DOMINION M. SOSNICK SAMELSON LEON AMCON DIST. ELI WITT FLEMING COMPANIES TRIPIFOODS EBY BROWN o` I I I I I I

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St1oiy. • ." :~i!

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I I I I I I I 1 I I I I I I I I I OPERATIONS The proliferation of discount brands and overall growth of the discount segment have heightened the vulnerability of our premium brands to these less expensive products. Operations will focus its efforts on developing technologies which provide consumer benefits in order to enhance the equity of our premium trademarks. The decelerating volume growth in both the domestic and international cigarette markets, combined with increased market fragmentation, will require Operations to improve manufacturing flexibility and provide cost efficient products. Similarly, the shift coming from a high volume growth business towards a market with flat volumes and pressured margins will require a change in management focus. Product Development R&D will continue to pursue innovative product breakthroughs that provide value-added benefits to consumers. Targeted programs are underway to improve product attributes, namely, reduced sidestream smoke and reduced odor. New product development efforts will focus on products which have reduced ignition propensity, in response to expected regulation in this area. In addition, work will continue on the Beta program - our proprietary alternative product. Production Flexibility Operations will limit manufacturing cost increases by keeping them below inflation over the five year planning period. One of the primary forces behind cost increases will be the continued segmentation of both the domestic and international markets. In response to this proliferation, Operations will focus on improving manufacturing flexibility. In addition, particular emphasis will be placed on managing fixed costs through, headcount control. The principle objective will be to become the lowest cost producer per category. Product Cost Differentiation The rapid increase experienced in the discount segment during the past two years is projected to continue. Correspondingly, to more appropriately reflect this segment's profit contribution, manufac- turing will lower the cost of direct materials and tobacco components on a cost per thousand basis forthese brands. Similarly, we will strive to consolidate where appropriate, both direct materials and tobacco blends to improve our manufacturing and procurement efficiencies. Leaf Supply Tobacco leaf contributes 40% of the manufactured cost of cigarettes. Curbing the rising cost of tobacco, either by reducing stock prices or by using alternative tobacco substrates, will be a key objective during the planning cycle. Also of importance will be maintaining our competitive price position in producing our discount blend through the use of scrap material. A defensive strategy to retain this competitive price position will be implemented. Expanding volumes of oriental tobacco growing in Thailand and the development of new growing practices in Malawi, and Albania will ensure an adequate feedstock over the plan period. Both burley and domestic flue-cured tobacco feedstocks are sufficient for the planned forecast. Lower import 120

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prices will drive the business to incorporate larger percentages of imported tobacco. Domestic political issues on rising import volumes will continue to be a concern during the plan period. Environmental Protection PM-USA will take a proactive approach to resolve environmental issues. During the next five years, PM-USA will conduct an extensive discovery program to review and develop a comprehensive data base on all releases at each facility. Work will also continue on developing aftemative processes that eliminate or drastically reduce current emission levels and evaluate new control technologies. Management As PM-USA progresses from a high volume growth, high margin business to one which shows low or limited volume growth and pressured profit margins, new demands will be placed on Operations management. As evidenced by the demand shift in the global marketplace, cigarette growth will come from our international markets. Correspondingly, we envisage a major shift away from a domestic management point of view towards a global management perspective. Likewise, performance standards that were developed for a high capacity, high margin business will gradually become obsolete and require new measures to adequately judge business performance. Lower profit margins will demand that cross-functional alliances be formed to better utilize our strengths and competitive advantages. Already, Manufacturing and Sales are jointly developing a domestic distribution network which will revolutionize the way we service our customers. Further cross-functional alliances will be needed and developed to maintain our competitive edge in this changing environment. 121 W I I 1 I I I I I I I I I I I I I

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I I I I I I I I I I I 1 I R&D - Product Development R&D product development efforts during the five year plan period will focus on 4 major areas: (1) enhancing the attributes of our brands, particularly in the area of social acceptability, to retain the loyalty of consumers of our brands; (2) developing new and enhanced methods of addressing consumer health concerns; (3) defending our products against both domestic and international regulations; and (4) developing innovative products for long-term growth. Social Acceptability Smoking restrictions continue to increase in the U.S. Currently, 26 states and more than 300 localities have enacted laws to restrict smoking in restaurants. Twenty-eight states and approximately 300 localities have laws governing smoking in the work place. Sixty percent of all U.S. companies now restrict smoking, up from 16% in 1980. One-quarter of 283 companies surveyed in 1989 by the Administrative Management Society were smoke free, up from 14% in 1988. Therefore, any change that would make smoking more socially acceptable to non-smokers will promote added value to our consumers. These restrictions are clearly having a negative effect on cigarette sales. R&D will address the following three cues identified by non-smokers: visible sidestream smoke, sidestream odor, and irritation caused by sidestream smoke. Issue: Smoking restrictions are expected to increase during the Plan period. These restrictions will negatively impact cigarette sales. Strategy: Enhance the product attributes of existing premium products to address smoking restriction issues and defend against market share erosion. Action Plan: 1992 - 1996 1992 -1996 Â• Project Lotus Develop a full circumference product with at least 70% reduced visible sidestream and acceptable subjectives with respect to an appropriate control. The project is sched- uled to have an optimum low sidestream paper selected by mid-1993. Â• Project Ambrosia Develop a product with a more neutral sidestream aroma. Preparation of a viable release agent is scheduled to be completed in the second quarter of 1992. Â• Reduced Sidestream Irritation Identify potential irritants that are present in sidestream smoke and determine approxi- mate quantities. Initiate studies to reduce or eliminate these irritants. Â• Ash Tray Odor Investigate the possible use of a commercial deodorizer to decrease ash tray odor. Â• Lingering Odor Carry out an initial study to determine if low sidestream products are lower in lingering odor than conventional products. Â• Consumer Research Determine what additional aspects of social acceptability have the greatest appeal to consumers, and whether there is likely to be a viable market for such products. 122

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I Consumer Health Concerns An analysis of the cigarette market overthe last 50 years suggests that there have been oniy two major influences on smokers' buying patterns; namely, smokers seeking to address their health concern and smokers seeking price relief. Previous product changes driven by health concerns were the growth of filtered products from 3% to 70% of the market between 1945 and 1953, and the growth of the low tar segment to nearly 50% of the market by 1985. Both of these approaches are essentially complete. Filtered cigarettes now make up over 96% of the market, and the growth of low tar products has slowed considerably. It is likely that a successful product in this health segment will be based on a completely different approach than simply lower tar levels. Issue: Consumer health concerns are a primary Influence on buying patterns of existing smokers. Strategy: I I ~ I I Develop products which address consumers' health concerns. Action Plan: 1992-1993 1993-1996 Â• Continue development of the Web Filter Program - "Merit Ultima technology". Develop a cigarette filtration system which addresses consumers' concerns particularly in the area of ultra low delivery products. The specific goal is to develop a web filter material which combines the filter efficiency properties of paper with the subjective response of cellulose acetate. This project is scheduled to be completed by the fourth quarter of 1992. Â• Refine development of the Half-nic product. Develop a 100mm, 9mg cigarette with 0.3mg nicotine delivery with subjectives equal to a 0.6mg nicotine product. Tech- niques which will be used include optimiza- tion of papers, new casing systems, and investigation of alternate filtration systems. This project is scheduled to evaluate the most promising product during the third quarter of 1992. Â• Reduce Mainstream Carbon Monoxide (CO). Develop catalysts to incorporate into ciga- rette filters which reduce the amount of CO delivered to smokers. A number of catalysts are currently being investigated, and project feasibility will be determined by the end of 1993. Â• Create low tar/high flavor products. New activities will be defined that will examine the benefits of combining New Expanded Tobacco (NET) with technologies developed from the paper and filter technol- ogy programs to develop an ultra low tar product with improved taste attributes. Â• Develop product attribute that can be used to re-establish Merit's position as the expert In low tar technology. Explora- tion in limiting the tar to more volatile and flavorful components will be designed to support Merit as "the low tar expert". I I I I I I I I 123 I

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I I I I I I I I Federal and Export Regulations Federal, state, or local governmental regulations that affect PM-USA's business are a constant concern. The most pressing current issue is the Fire Safe Cigarette Act of 1990 which may ultimately result in a mandate that U.S. cigarettes be "fire safe" (as determined by an as yet undeveloped test) by 1994. Should this mandate be issued, it could impact every product we manufacture today. There are a numberof countries inwhich tarand nicotine levels are regulated, and R&D has supported PMI in ensuring that products for these countries have optimal subjectives while meeting delivery ceilings. On January 1, 1992, the first round of tar ceiling goes into effect for the EEC. At that time, cigarettes in most member nations cannot exceed a delivery of 15 mg tar. On January 1, 1995, the second tarceiling goes into effect forthe EEC; namely, 12 mg. The vast majority of products marketed by PM-Europe in the EEC can be reformulated to meet the 15 mg ceiling with relatively few problems. Meeting the 12 mg tar ceiling, however, will require considerable effort in order to maintain current subjectives. Additionally,dutyfreeproducts-specificallyMarlboro-exportedfromtheU.S.to Europe, must also be reformulated. Issue: Future governmental regulations will likely Impact products we manufacture today. Strategy: Closely monitor and be prepared to comply with proposed government regulations. Action Plan: 1992 -1996 I I I I I Â• Complete Project Tomorrow - Ignition Propensity Develop a product that will meet federally established criteria for ignition propensity. The technical feasibility will be assessed in the second quarter of 1994. Two different product development approaches are being considered: - Low mass burn rate - Self-Extinguishing. ~ Meet International Tar and Nicotine Levels. PM-USA R&D will continue to support PMl in the development of products to meet government tar and nicotine ceilings. L 124

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I I I I I I I I I I I I I I I I Manufacturing - Cost Effectiveness Operations Objective Operations will limit manufacturing cost increases to less than expected Inflation for the five year plan cycle. Manufacturing cost pressures during the plan period will arise from three distinct areas: (1) the projected proliferation of new products and packages; (2) the historical price increases and percentage of manufacturing costs associated with leaf tobacco; and (3) the projected increase of the discount segment. Production Flexibility Product Proliferation The decade of the 1990's is projected to continue the brand and product proliferation experienced in the 1980's. Ever Increasing numbers of filters, tobacco blends, packaging and unique products will create new levels of manufacturing complexities. The growth in brand packings has been phenomenal, increasing over 68% in the last five years. In 1990, PM-USA sold 58 billion units, which represented 26% of our sales, under brand names or packings that did not exist in 1980. The proliferation of products and product components is primarily attributable to the growth in the export market, which is forecasted to continue, although at a slower rate. Because of the number of individual countries now supplied by PM-USA, the associated product variation has increased significantly. The opening of additional export markets has prompted the development of new blends, new cigarette designs, and new packaging designs. Many brands produced for export also have unique specifications and require special or dedicated equipment such as charcoal plug filter makers and carton overwrappers. The complexity of our brand mix is also influenced by trends in the domestic market. Increasing numbers of promotional programs and "niche" products, such as Merit Ultima, Marlboro Express, Marlboro 5/15/20 pack cartons and packs with rounded corners, are being targeted at specific, and often, small market segments. "Niche" products frequently require special manufacturing attention because of their differential characteristics. WeexpectthetrendtowardÂ°niche"products,promotional programs and line extensions to continue during the plan period. As the number of brands and packings increase, both domestic and export, the number of change- overs increase. Our most "flexible" facility, Stockton Street, presently experiences 11 to 15 brand change-overs per day within athree shift operation. As a direct result of these frequent change-overs, Stockton Street is our ieast efficient plant with a rated production of less than 10,000 cigarettes per labor hour. This rate is one-third of the typical productivities achieved at both the Manufacturing Center and Cabarrus. Over the plan period, the number of changes is expected to increase. A consequence of these change-overs is a corresponding increase in down time, since cigarette making equipment requires significant adjustment when blend, paper, or adhesive changes are made. All of these production issues highlight the need for improved flexibility, optimized sourcing and clearly focused factories. Further, improved coordination among plants is vital. Issue: Product proliferation Is projected to Increase 35% during the Plan period. This growth In the number of manufactured units will put tremendous pressure on operations to maintain cost structure. 126

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Strategy: Develop (retrofit) a cost effective, multi-product manufacturing capability to produce low volume products, support brand line extensions and provide new product launch capabilities. Action Plan: 1992 -1996 Cigarette Manufacturing Cabarrus Expansion Maximize available flexibility and aliocate brands accordingly. Stockton Street/Louisville Investigate retrofitting andlor consolidating one or both of these facilities to accommo- date long range forecasts. Manufacturing Center Consider projects to upgrade efficiencies and provide greater flexibility. Primary Processing 1992 -1996 Â• Consolidate Blend Variants: Flavor Formulas Reduce the number of ingredients by 2% to 3% per year during the plan period. Tropical Fillers Determine whether there is a need for separate tropical filler specifications or whether they can be eliminated. A recom- mendation for consolidation will be made in the third quarter of 1992. Menthol Application Processes Determine the single most effective process to apply menthol to our mentholated ciga- rettes. Â• Create a cost-effective, flexible primary that blends and delivers components on demand. Develop a new, highly flexible primary process with reduced conversion costs. The benefits of this program will be greater flexibility for new products. Additional benefits will include a potential cigarette weight reduction of approximately 50 mg and a reduced primary conversion cost. Implementation is anticipated to be com- pleted by 1993. This is expected to be used as the primary processing approach for the Cabarrus expansion. Other Â• Reevaluate Verticai Integration. Evaluate our current policies regarding vertical integration and review the strategic benefits of maintaining an internal source against any financial benefits from divesting facilities. Areas under consideration include: stemming, export blended strips, cigarette paper perforation, and printing. Â• Manufacturing Systems integration Develop a mechanism to realize just-in time delivery and lower inventory costs for all direct materials. The long range objective is to develop a"Business Systems Integration" perspective - supplier to distributor ap- proach. 127 I I I I I I I I I I I I I I I I I

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I I I Product Cost Differentiation The growth of the discount category has, by necessity, heightened our financial consciousness and sharpened our focus on the importance of cost control and productivity. Discount brands as a percentage of PM-USA's total volume is expected to grow from 17.0% in 1991 to 24.1 % by 1996 with growth primarily from FVB, Bristol and Cambridge. Market share in this category is largely driven by price. Consequently, the discount category is subjected to intensely competitive pricing - correspondingly, the low cost producer will have a competitive advantage relative to profitability. As shown on the graphs below, the marginal contribution of Basic and All American Value brands is less than the marginal contribution of the premium brands. However, there is little or no difference in the manufacturing costs among these brands. 1991 Marginal Contribution By Category 50 T 40 ~ 37.66 30.00 Prem ium Branded Generic Bristol Basic AAV/Private, Label 1991 Total Variable Cost By Category 20.00 1- 17.40 17.26 16.06 17.33 17.79 10.00 0.00 Premium Branded Bristol Basic AAV/Private Generic Label 128

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Issue: The lowest cost manufacturer will have a pricing advantage in the discount segment. As the percentage of PM-USA's volume shifts more towards discount brands (24.1% In 1996), Operations must become more cost effective. Strategy: Continue to drive down the manufacturing cost of our discount brands and increase the differential between this category and our premium brands. Action Plan: 1992-1996 Â• Reduce Cigarette Rod Weight. The new primary under development has as one of its goals the reduction of rod cigarette weights by 50 mg. Â• Optimize PriceNalue Blend. - Investigate the use of Reconstituted Leaf (RL) to significantly increase filling power. - Investigate the possible use of burley stems in the blend. Â• Consolidate Blends: - Carbon consolidation to one type from three. - Wood pulp to replace flax base paper. - Humectant reduction. - Menthol flexibility to use natural or syn- thetic menthol. I I I I I I I I I I I I I t 0 I 129

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I I I I I I I I I I r I I I I I I Leaf Supply Global Leaf Utiiization Americanblendcigarettesusethreetypesofleaf:burley,flue-curedandoriental. PM-USApurchases both burley and flue-cured tobaccos in the U.S. and offshore. There is currently a good supply of quality leaf both here and abroad, but domestic leaf is generally more expensive. Current estimates project that the average price differential of offshore burley and flue-cured tobacco versus domes- tically grown tobacco will be $1.15 per pound in 1996. Domestic tobacco is expected to increase in price at a rate of 4% to 4.5% per pound per year during the plan period. For 1991, our strip imports increased by 61 % over 1990, reflecting our growing market share in the domestic discount segment, growth of the export market, as well as additional leaf purchases required to reestablish optimal target inventory levels. Leaf imports for the aggregate domestic cigarette industry are projected to increase by 19%, during this plan period largely driven by PM-USA purchases. The difference in price between offshore and domestically grown tobacco will intensify the desire to increase inclusion rates of offshore tobacco, in order to reduce the cost of leaf during the plan period. However, the significant growth in offshore tobacco usage last year and the expected increase during the plan period, is a concern which may result in adverse political activities. The domestic farming community could influence congressional support of tobacco industry issues and potentially impact excise and local taxes. Considering our large tobacco requirements, desired product characteristics, and political issues, PM-USA will continue to depend heavily on domestically grown leaf. Sufficient burley and flue-cured tobacco will be available to meet forecasted demand. Sixty-five percent of our oriental tobacco requirements are sourced from Turkey, where production is stable. However, leaf production continues to decline in Greece, Yugoslavia, and Lebanon. All of these aspects are currently being reviewed from a domestic point-of-view. But, as the volume overthe plan period shifts fromthe domestic market to the international market, eitherbyway of export or local international manufacture, the purchase of leaf and its usage becomes a global issue, not simply a PM-USA issue. Issue: Tobacco remains the largest variable cost item for our cigarettes, which when combined with casing accounts for 40% of the cost of cigarettes. Strategy: Utilize the combined purchasing power of PM-USA and PMI in developing a global leaf buying and utilization plan that secures quality leaf forthe lowest price to supply Company needs for both leaf and "processed leaf." 130

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Action Plan: 1992 -1996 Â• Consider offshore alternative of lower grades and less expensive tobaccos for generic products. Â• Pursue the possibility of adjusting growing and harvesting processes of domestic farmers toward greater mechanization and lower operating costs. Â• Develop oriental tobacco pricing strategies to minimize foreign exchange rate exposure. Â• Approach grower organizations about contracting directly with farmers to grow a specific type/grade of tobacco to meet our specifications. I I I I I I I I Â• Encourage U.S. burley farmers to consoli- date their quotas for acreage and designate acreage for standard harvesting and for mechanical harvesting. Consider the contracting for this with a cooperative rather than working through a warehouseman. ~ I I I I I I I ~ W ~ I ~ I ~ ~ 131

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Scrap Supply The discount product category (third tier) is experiencing rapid growth which is projected to continue throughout the plan. PM-USA's third tier blend has a competitive price advantage of approximately $1 per thousand cigarettes versus competitive blends. Our concept relies on using scrap materials in a single blend, to produce 15, 11 and 6 mg tar cigarettes in both 85mm and 100mm lengths. The variations in delivery are produced by adjusting dilution with filter and paper changes. The competition fulfills this segment with at least two blend types using Expanded Tobacco (ET) at different inclusion rates to control the burn rate. At present, the competition is not in a position to take advantage of our blend concept due to an insufficient scrap supply. The rapid growth of the discount segment, and the possible emergence of a fourth tier during the planning cycle, may strain available world-wide scrap volumes. Additionally, Japan Tobacco incorporated (JTI) has reformulated their sheet manufacturing process from a paper technology to a slurry technology which will increase their scrap demand. Issue: Obtaining a sufficient scrap supply Is critical to maintain our competitive price advantage In the discount category. Strategy: Maintain a sufficient global scrap supply. Action Plan: 1992 -1996 I I I I I I Â• Purchase Oriental Scrap. Negotiations are under way to purchase scrap from Tekel, in addition to the 5 million pounds we currently receive. Â• Optimize PM-USA's Global Scrap Volumes. PM-USA, as the largest generator of scrap tobacco, must optimize its use of scrap to maximize utilization. Other development efforts, namely the modification of the full margin blends to accommodate a shrinking supply of tips, will reallocate scrap to this category. 1 132

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I Tip Supply (Premium Category) Increased volumes combined with changes in leaf production practices will strain the availability of tips that are required in our premium blends, particularly Marlboro. Both our burley and flue-cured blends incorporate a higher percentage of tips than are produced in a given tobacco crop. PM-USA's increased demand combined with the growing PMI demand for tips will make it difficult to secure the required amounts. Compounding this volume effect, changes in production practices, especially with burley, are resulting in a decreased volume of tips being grown on an annual basis. Issue: Securing tips In the appropriate blend ratio Is critical to maintain our subjective product quality. Strategy: Reduce our dependence on the higher ratio of tips in our premium blends, while maintaining equivalent subjectives. Action Plan: 1992 -1996 Â• Modify Full Margin Blends. Reduce the % of tips and increase the inclusion of Expanded Tobacco (ET) by 1% to 2% in 1992. Â• Optimize the use of New Expanded Tobacco (NET) in premium brands. New Expanded Tobacco provides an opportunity to offer better subjectives. I I I I I I I I I I I I I I UI ~ I 133

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I I I I I F I I I I I I I I I I I Environmental Protection During the previous decade, industry emphasized controlling and treating emissions and discharges, whether it was to the air, water, or land. In many cases, control and treatment will continue as viable options. However, the focus is shifting towards preventing the generation of pollutants at the source. As environmental regulations become more stringent, there is an advantage in reducing emissions altogether. Permits, particularly for air emissions, may seriously impair manufacturing flexibility as the approval time for permits increase. The list of environmental laws, both federal and state, is extensive. In addition to 94federal laws, there are 20 laws in the state of Virginia, 13 in the state of North Carolina, and 12 applicable to the state of Kentucky and Jefferson County. Currently, PM-USA is in compliance with all of these. However, the federal and state agencies that are responsible for the enforcement of these laws also issue regulations which set out what is required for compliance. These regulations may change, even though the laws themselves do not change. Consequently, the fact that an organization is in compliance with a law today, does not guarantee that it will be in compliance in the future. Moreover, the regulations are subject to interpretation which may also change over time. Over the next five years, these trends will intensify with a renewed emphasis on enforcing existing regulations and an increased emphasis on reducing emissions not previously regulated. In 1990, Congress passed the amended Clean Air Act, which will cost industry and the taxpayer about $21 billion. Hazardous and solid waste disposal will continue as a high priority as landfills are reaching capacity and the cost for disposal escalates. Most states are legislating recycling to meet the national goal for reducing landfill disposal by 25% in 1992. By far, the most important law is the amended Clean Air Act of 1990. Two aspects of this law are of critical importance. First, permits will have to be renewed periodically. The renewal process will require emission data to identify compounds that are emitted, emission rates, and most importantly, where the compounds go. Secondly, as part of the Clean Air Act, the EPA will phase in a federal air toxics program. This program will mandate control limits on 189 listed hazardous air pollutants. The effect of this activity will impact PM-USA's current emissions. Another future area of importance involves the National Pollution Discharge Elimination System permits which affect both Park 500 and the Manufacturing Center. These permits deal with waste discharges from manufacturing operations and are good for five years. In the coming years, tighter state water quality standards, resulting from the expansion of the list of chemicals monitored and the lowering of the concentration of those already monitored, will be of concern to PM-USA. Critical areas in which PM-USA must concentrate in 1992 to ensure that PM-USA remains in compliance are the reduction of total volatile organic compounds in our factories and processing facilities. Issue: increased governmental compliance regulations In the areas of air, water, solid and hazard- ous waste will require extensive PM-USA resources. Strategy: PM-USA will take a proactive approach and become an industry leader in the areas of discovery and remediation of environmental issues. 134

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I I Action Plan: 1992 -1996 1992 -1996 I Â• Carry-out Environmental Audits and Process Verification. Environmental audits are scheduled for all factories. They will start the fourth quarter of 1991 and will be completed in 1994. Audits will typically include reviews on waste, air pollution, water pollution, spill plans, chemi- cal disposal practices, and all available documentation. Â• Establish a Corporate Database. A database will be established of all re- leases at each facility that contain materials regulated by environmental laws or subject to permits held by each facility. The pro- gram will be completed by 1993. Â• Implement Project Grain. The major contributors to volatile organics in the factories are ethanol, used both in burley top casing and aftercut flavorings, and propylene glycol, a humectant. Project Grain will reduce emissions through lower- ing alcohol usage and humectant reformula- tion for flavor application. This project is scheduled to be completed in the fourth quarter of 1992. Â• Reduce Stack Gases at the BL Plant and the Richmond Leaf Processing Facility. Although incineration of stack gases is a viable technology for reducing emissions, it is expensive from both a capital and opera- tion standpoint. Consequently, the objective of this project is to evaluate technologies that are equally viable but more cost effec- tive to reduce ammonia, volatile organic compounds and nicotine stack discharges. Both scrubbing and absorption techniques are under consideration as is the reduction in the usage of these materials. Final recommendations are expected in the third quarter of 1992. Â• Waste water discharge projects - execute these projects to eliminate the burley stem wash water at the BL plant. Â• Phosphorous - testing of the biological treatment pilot.plant at Park 500 will be completed in the third quarter of 1992. A full scale chemical treatment plant at Park 500 is scheduled to be completed by the end of 1992. Â• Nitrates - evaluate various options to address stemwashing at Park 500. Â• Control Solid and Hazardous Waste. Solid waste recycling programs will be established in Cabarrus and Louisville in 1992 and 1993, respectively. Drying technology to reduce sludge at Park 500 is being evaluated and, if successful, will be implemented. In view of potential liabilities, regular audits of hazardous disposal sites will continue. I I I I I I I I I I I I 0 !ilk ~ w I 135

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a I I I I I I I I I I I I I Management Cultural Change PM-USA Operations has experienced considerable success in manufacturing a quality product at a reasonable cost to meet marketing and sales needs, and helping PM-USA reach a leading industry share. During the plan period, PM-USA is committed to maintaining this leadership in spite of a declining market, severe price competition and margin erosion. One of the ways to ensure success is to work smarter and harder than our competitors. PM-USA Operations is developing a new management approach to meet the challenges of the changing market place. The Operations organization has committed to becoming a results oriented, people sensitive culture. It has begun developing a mechanism to successfully execute the operating principles of participative management to achieve superior results. The processto developthis mechanism began in.Leesburg, Virginia last spring when the management group identified the "As Was" and the "As Is" of the Operations culture. Six topics were used during the meeting to identify the past and present, and to develop recommendations for the future. The subjectswere: the Planning Process, Operations Integration, Communications, Employee Partnering, Authority/Decision-making and the Vision forthe Future. Each topic was analyzed and a"To Be"was identified. After sharing the "To Be" at a meeting in Amelia Island, Florida, senior Operations management met to develop a plan to implement the recommendations it has accepted. Issue: The PM-USA operations culture has been characterized by autocratic behavior. This approach thrives on'the mandated execution of work, but does not maximize the thinking, Initiative, or creativity of the people doing the work. The culture must be changed to support the participative management style needed for a results oriented, people sensitive culture In changing market. Strategy: Use the Grade 14 and above management team as the role model for the desired participative behavior. Influence their performance by rewarding communication, team work, and results. Action Plan: 1992 -1996 1992 -1996 Â• lssue white paper describing Operations philosophy, vision and business system for new culture. (1991) Â• Implement 360 degree behavioral analysis of management. (1992) Â• Review and analyze each key department. Â• Re-evaluate what we do and how we do it. - Qualitative assessment - Quantitative assessment. Â• Model commitment to new culture with behavioral examples among senior manage- ment. (1992) Â• Reorganize functional areas to eliminate duplication and reduce managerial layers. This will reduce fixed costs by reducing managerial positions. (1992) - _ ~ ~ 136

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1 I 1992 -1996 Â• Assess who should hold position(s) in the new organization. Â• Remove people who do not fit or cannot thrive in the new environment. (1992) Â• Recognize and reinforce examples of participative behavior. (1992) Â• Continuously reassess the best approach and the best people to meet our changing needs. I I I I I I I I I I ~ I 137 91 I

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~Z& Corporate Affairs

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I I A A I I I I I I I I I A I I I I CORPORATE AFFAIRS PM-USA's Corporate Affairs objective is to minimize excise taxes and government interference in the production and marketing of cigarettes, and to protect the right of our consumers to smoke. During the plan period, PM-USA will have to accomplish its volume, share and profit objectives in an increasingly hosti le socio-political environment. One of the greatest threats to the industry is taxation. Federal taxes will increase at least 20% (4 cents per pack) in 1993 and will certainly be a threat throughout the plan period. In addition to the legislated federal excise tax increase to take effect in 1993, state excise taxes are forecasted to increase over the plan period between 7% and 10%, annually. PM-USA's objective is to defeat any additional federal taxes, to keep state annual cigarette excise tax increases under 7% and promote the development of stable fiscal/tax policies which distribute the tax burden equitably. Other major challenges over the plan period include providing a balanced, accurate picture of environmental tobacco smoke (ETS) and preventing further marketing restrictions on sampling, POS displays, vending, sponsorships, and advertising. PM-USA will continue to work with industry associations, business coalitions, non-profit organizations and government officials to promote legislation protecting smokers from discrimination by employers. Also, we will work to defeat any legislation mandating unreasonable product specifications in the areas of "fire safe" cigarettes, ingredient labeling or packaging composition. PM-USA's Corporate Affairs goals for the next five years are: Taxation Â• Minimize overall rate of excise tax increases. Â• Reform legislative ballot process to limit tax increase initiatives. Â• Promote a progressive and equitable tax structure. Â• Refute myth of "social costs" placed on society by smokers. Â• Eliminate ad valorem tax systems. Product Â• Preserve freedom to advertise/promote products. Â• Demonstrate our commitment to market only to adults. Â• Prevent onerous or burdensome mandated product specifications. Consumers Â• Defeat or modify state public or workplace smoking bans. Â• Prohibit employment discrimination against smokers. Â• Promote accommodation of smokers and non-smokers in public and private sectors. 138

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Marketing and Sales Restrictions The organized anti-smoking movement is attempting to restrict or ban our ability to reach existing smokers with marketing and sales vehicles considered legitimate tools for virtually all other products. Restrictions on advertising, sponsorship, sampling, couponing and sales practices limit our efforts to increase market-share. By restricting the industry's ability to use widely accepted marketing and sales techniques, the anti-smoking forces are attempting to reduce public acceptability of cigarettes. PM-USA's goal is to defeat proposed marketing and sales restrictions orbans. PM-USA is proactively supporting state legislation to preempt local restrictions, as well as to establish tobacco industry marketing and sales guidelines as state law. The company is also responding to the "youth" issue by developing programs to demonstrate its commitment to ensuring that smoking remains an adult practice. Issue: The anti-smoking movement is using false charges about the targetting of youth, women and minorities to advance legislation restricting or banning the marketing and sale of cigarettes. Strategy: PM-USA will use two strategies to combat marketing restrictions. First, we will advance our position that smoking is an adult custom, that PM-USA does not want minors to smoke and is working in cooperation with retailers to prevent minors from purchasing cigarettes. Second, we will demonstrate to elected officials, public policy decision makers, the media and consumers that advertising, sampling and sponsorship are forms of free speech protected by the First Amendment. To increase awareness of company/industry initiatives we will use advertisements on the Youth Initiative in selected publications and PM-USA communication vehicles (PM Editorial Services, PM Magazine and the Smokers' Advocate). I I I I I I I I I I Action Plan: Youth & Smoking 1992-1994 1992-1994 Â• Promote and enforce industry positions on responsible marketing and sales practices: - Responsible Living Program (Helping Youth Say No) - Advertising/Marketing Guidelines - Responsible Vending Program - It's the Law Awareness Program - Pass industry age limit (18) in 6 states presently without limits. Â• Run PM-USA Youth Ads and expand press coverage of PM-USA's "Actions and Initia- tives" Program. Â• Sponsor Family C.O.U.R.S.E. Consortium Public Service Advertisements in place of anti-smoking ads. Â• Work with state law enforcement groups to develop "Helping Youth Say No" school curricula. I a I I I a ~ ~ 139 I

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I I I a I I A I I I I I a I I I 1992-1994 Marketing Freedoms Â• Develop state legal fellowship programs with the American Civil Liberties Union and Washington Legal Foundation to oppose bans or restrictions (Freedom of Speech). Â• Develop Sports Sponsorship Coalition to promote/defend corporate right of sponsor- ship. Â• Coordinate with minority interest groups to counter anti-smoker's claims on "targeting". Â• Work with our advertisers and advertising associations in developing grass roots lobbying activities to assist Government Affairs. Â• Work with the National Conference of State Legislators and other government associa- tions to oppose resolutions on bans and restrictions. Â• Continue to broaden coalition of free speech advocates and work with other industries "targeted" for marketing bans or restrictions. Long Term Goals Â• Counter ASSIST Program in 17 states: - Work with grass roots organizations to divert state health department funds, equivalent to the amount of ASSIST funding, to support other health programs (pre-natal care, half-way houses, etc.). Â• Rollback Program: - Particularly in localities, introduce legisla- tion to reinstate marketing activities, such as sampling and couponing, that have been banned or restricted. - Pass state preemption. 1992-1994 Sales Freedoms Â• Develop retailer mobilization program to aid in identifying and fighting local sales restrictions, particularly vending and free standing display bans or restrictions. Â• Coordinate with minority business organiza- tions to demonstrate the economic benefits of the industry on minority communities. Â• Use PM-USA communication vehicles (PM Editorial Services, Magazine, Advocate and Smoker's Caucus, Globe) to increase aware- ness of responsible sales practices. Â• Work with the National Conference of State Legislators and othergovemment associations to oppose resolutions on bans and restrictions. Long Term Goals Â• Rollback Program: - Particularly in localities, introduce legislation to reinstate sales practices, such as free standing displays, that have been banned or restricted. - Pass state preemption. 1 140

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"Social Costs" Cigarette smoking has been inappropriately associated with a number of adverse social and economic consequences. Productivity losses, absenteeism, rising health care costs and increases in various types of insurance coverages are just a few. The association of smoking with these social problems has spawned numerous anti-smoking policies. Smoking bans and restrictions, divestiture of tobacco stocks, attacks on the tobacco price support program, segregations of smokers and privacy infringement are activities which have been promoted in the name of "social cost" offsets. Issue: The association of smoking and alleged health/socio-economic costs Is being leveraged by anti-tobacco forces to advance anti-tobacco legislation and justify higher cigarette taxes. Strategy: Educate the media, policy makers and relevant business and civic groups to create a truthful, balanced view of the "social cost" issue. Action Plan: 1992-1994 Â• Develop and publish studies: - Systematic, external micro-economic models to provide a clear picture of smoking's impact on society. - Applicability and measurement of social costs and social benefits to fiscal/tax policy development. - The value of free choice in a democratic society. Â• Identify and address political groups, fiscaV tax analysts groups and appropriate govern- mental bodies on social costs and the value of individual freedoms. 1992-1994 Â• Develop studies comparing social fund performance vs. PM and industry as a whole. Â• Write op-ed pieces in financial publications on dangers of fund mismanagement, emphasizing managers' fiduciary responsi- bility. Long Term Goals Â• Sponsor sessions at annual conferences on social cost theory and its application in public policy development. Â• Develop, disseminate and publish editorials on social cost theory. Â• Write op-ed pieces on various policy deci- sions which have incorrectly used social cost theory as a basis for justification. Â• Co-sponsor symposiums with Centers in Public Policy and Society of Government Economists on social cost theory for legislators and other government officials. 141 11 I I I I I I I I I 1, A I I Li N O

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I I I I I I I I i I I I I a I Accommodation PM-USA is taking a proactive approach to smoking bans and restrictions by promoting accommo- dation programs as the primary legislative and private sector alternative. Issue: Onerous restrictions and bans reduce the number of environments In which individuais can elect to smoke. Strategy: Demonstrateto elected officials, public policy decision makers, industry, unions, andtrade associations that the public supports accommodation programs. In addition, bans and restrictions impose costs on the private sector, reduce tax revenue and promote government interference in business. Action Plan: 1992-1994 1992-1994 Â• Introduce and market restaurant accommo- dation program with state restaurant asso- ciations, restaurateurs and chains. Â• Promote building systems approach over source control. Â• Promote innovative HVAC (Heating, Ventila- tion Air Con ) Systems. Â• Develop and market workplace and service venue accommodation programs with: - National Federation of Independent Businesses - American Manufacturers Association - International Council of Shopping Centers - Hospitality/Service Associations. Â• Use indoor air quality experts as witnesses, testimony, op-ed and editorial visits to promote sound indoor air quality programs and demonstrate the problem of sick build- ing syndrome. Â• Sponsor study of: - Costs of workplace bans (e.g. morale, productivity). - The fallacy of costs savings (e.g. health, absenteeism claims). - Present results in trade journals. Â• Publicize Pittsburgh Benedum Project and other innovative indoor air quality technology through journal articles and trade publica- tions. Â• Implement EPA "Class A" mitigation strat- egy: - Host Indoor Air Quality Workshop with NFIB Foundation and National Chamber Foundation. - Develop a business coalition to advocate uniform federal risk assessment guide- lines. - Persuade OSHA to establish acceptable ETS threshold levels for the workplace. - Encourage further investigation of proce- dural biases in EPA review process. Long Term Goals Â• Enact acceptable ventilation rates in state building codes. I Y 142

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I Taxation In addition to the federal deficits, forecasts of state fiscal and economic conditions conducted by the National Conference of State Legislatures and the National Association of State Budget Officers, as well as others indicate that more than half the states are under substantial fiscal stress. Congress, governors and legislators face great pressure to provide services and fund escalating infrastructure, education and medical costs. This significantly raises the probability of increased cigarette excise taxes which continue to be a revenue source for legislators seeking to close budget deficits. In addition, the Hawaii ad valorem tax system places more of a burden on premium priced products. Issue: Federal, state and local excise tax increases raise the retail price of cigarettes and contribute to industry volume decline. Strategy: Defeat cigarette excise tax proposals by participating in the development stages of tax policythrough the dissemination of i nformation to public policy analysts, as well as executive officers and legislators. These efforts are designed to cultivate them into reliable and informed allies. Action Plan: 1992-1994 Â• Develop and publish studies on: - Bootlegging/cross-border activities. - Regressive nature of proposed taxes. - Inflexibility/instability of "earmarked" taxes. - Progressive solutions to deficit reductions. - Efficiency of local taxing authority. - Wasteful government programs and exces- sive spending. - Tobacco economic impact analysis. - Stability of taxes derived via the ballot vs. those derived via the legislature. 1992-1994 Â• Initiate, coordinate and develop grass roots lobbying activities through Smokers' Cau- cus, "Mobilizations", Smokers' Advocate. Â• Identify and address community, civic and business groups on excise taxes and tax ballot initiatives. Â• Publish editorials on tax developments inefficiency of tax ballot initiatives, govern- ment waste and regressivity. Â• Promulgate analysis of aftemative revenue sources. Â• Co-sponsor forums and special events to strengthen constituency development: - Role of private sector in the delivery of government services and efficient govern- ment. - History of the tax initiative and its impact on development of fiscal and tax policies. A I I I I ~ f I I I I I N I I 143 I

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I I I I I I ~ I I I I I I ~ Anti-discrimination and Privacy Increasingly, legal off-the-job activities and lifestyle choices are used as criteria for employment decisions including hiring, promotion and dismissal. Employee privacy rights are violated by employer mandates regulating off-work activities and testing mechanisms established by employers to ensure compliance with these mandates. Employers argue that these measures are necessary to control costs, including health care benefits and productivity allegedly linked to certain lifestyle choices and behavior. Issue: Legal avocationai activities such as smoking, unrelated to job performance, are being used by employers In matters of hiring, promotion and dismissal. Strategy: Demonstrate to elected officials and private sectordecision makers thatthe public supports individual privacy rights that protect legal avocational activities. In addition, show that the public favors only the use of job performance criteria for employment decisions. Action Plan: 1992-1994 1992-1994 Long Term Goals Â• Further develop coalitions with labor unions, Â• Pass anti-discrimination legislation in all 50 ACLU, human resource officials to promote states. anti-discrimination efforts. Â• Demonstrate public support for privacy rights and nondiscrimination. Â• Use privacy experts for speeches, expert wit- ness testimony in court cases, legislative/rule making bodies, media: op-ed, editorial visits and feature articles. Â• Place privacy/anti-discrimination news items in print and broadcast media. Â• Utilize PM-USA communication vehicles such as PM magazine, Smoker's Advocate and Smokers' Caucus to: - Identify aggrieved parties. - Raise public awareness of privacy and dis- crimination issues. - Specifically alert smokers to private/public sector infringements. 0 Â• Pass legislation prohibiting discrimination in employment based on smoking status in a total of 40 states. 144 I CA '"d CJ

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I Mandated Product Specifications - "Fire Safe" Cigarettes Through mandated product specifications, anti-smoking groups are attempting to eliminate brand competitiveness, increase manufacturing costs, or ban the sale of tobacco products in their present form or packaging. Presently, an effort in this area that poses a significant threat to the tobacco industry is "fire safe" cigarettes. Anti-smoking groups allege that cigarettes are the most identifiable causes of fire-related deaths in the United States. In 1990, the Moakley Bill was signed into law reauthorizing the Technical Study Group (TSG) for three years to create a standard for measuring cigarette ignition propensity. in 1993 the TSG will report to Congress on its efforts to create a test to measure cigarette ignition propensity as well as to examine the feasibility of producing and marketing a "fire-safeÂ° cigarette. Issue: Efforts by anti-smoking groups to mandate a"fire safe" cigarette could destroy the competi- tiveness of leading brands and Increase the cost of manufacturing cigarettes. Strategy: During the plan period, PM-USA will expand coalitions among the fire prevention community and public policy makers to diffuse support for "fire-safe" legislation at the state and federal level, as well as build public awareness of fire safety and prevention. A number of fire professionals believe that cigarette-related fires are just one symptom of a more serious problem in the United States: the lack of public fire safety education and awareness. This is demonstrated by the fact that in all categories of fire, the U.S. has one of the worst fire records of any industrialized nation, including Japan and Germanywhere the incidence of smoking is as much as twice as high as the U.S. and yet the incidence of fire in all categories is very low. Careless smoking in the U.S. ranks only sixth among causes of fire after electrical distribution, incendiary and suspicious fires, appliances, heating equipment, other equipment and open flame. Action Plan: 1992-1994 1992-1994 Â• Work with National Conference of State Legislators and other government associa- tions to oppose resolutions. Â• Coordinate lobbying activities on state bills with state fire, police and paramedic organi- zations and unions. Â• Feature articles in PM publications highlight- ing significant achievements of fire, police and paramedic professionals. Â• Sponsor fire-safety awareness programs with leading associations representing the fire community (smoke detector use, Exit Drills in the Home, Stop Drop and Roll). Â• Use experts to develop information on costs other causes of fire and study combustibility of foreign products. Long Term Goals Â• Develop database of PM employees who serve as volunteer fire fighters in their communities. 145 I I I I ~ I I I I I I I I ~

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I I I I I I I I I I I I I I I I Mandated Product Specifications-Packaging/Material Bans With the growth of environmental awareness in this country, the anti-smoking forces could also seek to ban cigarette packaging that does not meet minimum recycled content requirements, or ban certain packaging elements, such as polypropylene oraluminum-paper laminate which are difficultto recycle or parts of cigarettes, such as filter TOW, which do not naturally biodegrade when disposed. Issue: Public concern over environmental Issues could place unreasonable requirements on our products and packaging. Strategy: The establishment of a PM Companies Inc. Solid Waste Task Force has led to cooperative efforts among operating companies' Corporate Affairs departments. Moreover, establishing unified PM goals and objectives has enabled PM-USA to demonstrate a growing leadership position with state legislatures as well as within many trade associations. In order to protect and enhance this position, PM-USA and each operating company will continue to develop strategies in order to promote our own progress. In addition to reducing the threat of harmful legislative proposals, the following activities can also realize financial savings for the company: Post-Consumer Wastes Â• Establish targets to reduce packaging waste materials through source reduction, recycling and degradability; Â• Define long-term political objectives related support for either state or federal government actions; Â• Coordinate Corporate Affairs/Operations/Legal activities to protect Company interests; Â• Conduct and sponsor research on new methods for waste reduction, particularly in the area of packaging development. Staff Activities Â• Expansion of office waste recycling programs (sorting copier toner, computer ribbons as well as waste cleaning solutions and solvents for collection and disposal); Â• Promoting the use of recycled copier/computer paper and stationery; Â• Where practical, establishing double-siding programs to eliminate paper waste; Â• Initiating water and electricity conservation programs (turning off computers, copiers and lights at night, using water restriction devices at all facilities); Â• Ensuring that commissaries are participating in office recycling programs where possible; Â• Developing joint education programs with administrators of curb-side collection programs where our facilities and employees are located. 146

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Manufacturing Activities 0 Development of Richmond facility-type MRFs in other plan communities; Compliance with federal, regional and state air and water standards for plan emissions. Action Plan: 1992-1994 Â• Promote research on solid-waste manage- ment through third parties and provide to government associations. Â• To assist Government Affairs, cross- reference our data-base to locate areas where PM employees are concentrated, or where major suppliers are located. Â• Develop programs (curb-side, education) with favorable environmental groups. Â• Participate in business coalitions: - Tobacco Institute - National Association of Manufacturers - Grocery Manufacturers - Coalition for Solid Waste Solutions - National Waste Management Association. Â• Use PM-USA communication vehicles (PM Editorial Services, Magazine, Advo- cate and Smoker's Caucus, Globe) to increase awareness of environmental practices. Develop advertorials, op-eds, editorials and opponent responses on PM-USA's environmental position and the company's progress. Conduct polling and publicize results supporting our positions. Long Term Goals Â• Draft and sponsor our own ballot initiatives concerning solid waste and recycling. Â• Draft model state legislation. Â• Develop consumer courtesy program regarding the disposal of cigarette filters (consumer polling, fixed ashtray program). I I I r I I I I I I I I I I I 147

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I I I I I I I I I I I I ~ I I I I I I EMPLOYEE RELATIONS Achieving income targets will become increasingly difficult due to the hostile business climate and competitive forces affecting our industry. Our need to manage the work force through an integrated Human Resource plan, married to the overall business plan, is key to overcoming these obstacles. Our Human Resource efforts must support productivity and cost effectiveness. Optimization of employee performance at all levels is keyto meeting the future productivity demands. Thiswill require improved communication and a clear linkage between our performance management, leadership development and training systems. Cost effectiveness can be achieved through a wholistic approach that addresses compensation, benefits, environmental safety and health, and the labor component. It is imperative that both management and employees recognize, understand and support the thrust of the Human Resource plan and its focus on development and proper resource utilization. Â• Performance Management Productivity improvements are a key to our ability to meet income objectives. Our ability to improve productivity can be affected most by improved performance management. Â• Leadership Development: It is critical to develop the best and brightest people to ensure future challenges are met. Â• Manufacturing Training Developmenf: The success of the organization depends heavily on having a well-trained work force, both salaried and hourly. Â• Total Compensation: Development of a philosophy on total compensation is vital to effective management of human resource cost. Â• Benefits: Weighing the pressure of work force satisfaction with rising benefit costs continues to pose a significant challenge to management. Â• Compensation: The linkage of financial rewards to desired business results must be clearly understood by the total work force to maximize its effect on performance. Â• Environmental Health & Safety: A corporate EH&S program needs to be developed for all functional areas, with emphasis on ergonomics, audits and training. Ergonomically designed equipment and facilities add value by encouraging maximum productivity and quality, while ensuring a safe operation. Â• Labor Relations: Our focus must be on reducing operating costs directly attributable to hourly labor and ensure continuing operations provided by hourly labor. Â• Affirmative Action: From now until the end of the century, 85% of workforce growth will come from women, blacks and people of Hispanic or Asian origin. The diversity of the new work force, coupled with recently enacted legislation, will present continued challenges for PM-USA. Â• Employment As negative perceptions about the industry continue to evolve and internal promotional opportunities become more limited, our challenge is to attract, identify and retain qualified employees who meet the specific and varied needs of our organization. 148

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Performance Management Achieving extraordinary business results requires clear and well communicated corporate goals that are effectively cascaded throughout the organization, coupled with clearly defined and understood professional competencies required to achieve those goals. A system of Performance Management that facilitates the cleartranslation of PM-USA business goals to all levels, clarifies the competencies required at each level of the organization and integrates tools for identification, assessment, development and motivation should be at the core of our human resource efforts. This system must be clearly understood at all levels of the organization. Issue: Manage PM-USA employee performance through an understandable and cohesive process that Is compatible with processes In other PM Companies. Strategy: Manage performance through a system that integrates a clear goal setting process with clearly defined critical competencies and position specifications. Use evaluations from the system as a basis for further assessment, training, development, career and succession planning, promotion, displacement and outplacement. Action Plan: 1992-1993 1992-1993 Â• Work closely with the corporate staff to investigate how best to implement Managing and Appraising Performance (MAP) PM-USA-wide, using existing initia- tives as a priority. (1992-1993) Â• Develop a model for translating PM-USA- wide plans in terms meaningful to a specific business unit. The ensuing Business Unit Plan would then be shared with all employees in the unit. Each employee's contribution to the plan's achievement would be defined in terms of targets, strategies and action plans. (1992-1993) Â• Define the critical competencies necessary at each level of the organization, i.e., director, manager, supervisor/professional, technical, administrative. (1992-1993) Â• Ensure that position descriptions accurately reflect the technical specifications of all positions. (1992-1993) Â• Complete all realignment processes initiated in 1991 prior to commencement of the performance management (MAP) education process. (1992-1993) Â• Support the organization-wide implementation of the Business Unit Planning Process by developing the model, format and timing guidelines. (1992-1993) Â• Develop a comprehensive organizational review process incorporating critical competencies, technical job requirements and performance against business unit goals (MAP). (1992-1993) Â• Develop guidelines for training the work force on new competencies, technical job requirements and specific work unit goals. (1992-1993) Â• Implement organizational review process in preparation for introducing MAP in 1993. (1992-1993) 149 I I I I I I I I I I I I I I I I

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I I I I I I I I I I I I 1993-1996 Â• Administer MAP on an ongoing basis; maintain the integrity of the process, i.e., review/update competencies, technical requirements, new business goals, etc. Continue to investigate MAP enhancements, e.g., quarterly performance discussions, collaborative appraisal sessions, other operating company innovations, etc. (1993- . 1996) Â• Utilize MAP evaluations to identify high potential performers (hipo's), highly professional performers (hipro's), solid performers and candidates for displacement/ outplacement. These identifications become a springboard for assessment (EADP, CLE), development (LDP, MMTP), career and succession planning, promotion, displacement/outplacement. (1993-1996) Â• Review other HR systems, i.e., Employ- ment, Compensation, Affirmative Action, OMD to measure their alignment with the Performance Management System. (1993- 1996) 150

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Leadership Development Our long term business goals mandate that our human resources possess the motivation, business acumen and commitment necessary to lead our growth and future prosperity. Ourfuture leaders need not only be able to think strategically, they must also lead strategically. The critical first step in the process is the identification and selection of the best and the brightest to be developed to meet future challenges. Our Company's long term commitment to the identification and advancement of qualified minorities and females must continue to be at the forefront of management's human resource decisions. The effective performance management of our people will ensure that our human resources can meet the challenges of our long term business goals. Issue: Ensure that highly skilled and motivated people are Identified, selected, trained and devei- oped to lead In both today's and tomorrow's business environments. Strategy: I I I I I I I Through the use of valid selection and evaluation devices, human resources planning and sophisticated development programs, identify and prepare the company's future leadership to be able to deal with tomorrow's opportunities and challenges. Action Plan: 1992-1993 1992-1993 Â• Continue to implement the Center for Leadership Effectiveness (CLE) as both a selection tool for attending the Middle Management Training Program as well as a development tool for other middle manag- ers. (1992-1993) e Â• Continue Middle Management Training Program (MMTP) III; start-up MMTP IV and V for employees identified as successors to key positions or below. (1992-1993) Â• Continue to offer the Leadership Development Program (LDP) for employees at lower levels who have been identified as successors or hipos (high-potential performers). (1992-1993) Â• Develop and implement the Employee Assessment and Development Process (EADP) for use in the LDP or for a stand- alone development tool. (1992-1993) Â• Research, develop and implement a pro- gram of targeted development for high potential minorities and females. (1992- 1993) Â• Link succession planning to Upward Mobility and Affirmative Action planning process and expand the process to identify future job requirements. (1992-1993) 1992-1996 Â• Develop a format for the integration of PM- USA's succession plan with those of the other companies in the Philip Morris family. (1994-1996) Â• Develop new approaches to in-house executive development programs to include cross-functional job assignments and/or lateral moves. (1994-1996) 151 I I I I I I

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I I I I I I I I I I I I 1992-1996 Â• Emphasize continuous improvement by mandating continuous learning as an expectation for employees' initial assign- ments through the executive level. (1994- 1996) Â• Expand succession planning process to identify future job requirements and better prepare candidates for these future jobs. (1994-1996) Â• Expand and improve the sales training of the Tobacco Sales Force. (1992-1996) Â• Get a valid rigorous District Manager (Tobacco Sales Force) selection process up and running. (1992) Â• Emphasize strategic planning, customer- orientation and leadership training in all Sales training programs. (1992-1996) Â• Continue to work on the cultural change and structural improvements throughout the organization, in particular, Operations and Sales. (1992-1993) 152

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I Manufacturing Training Development The increasing complexity of our work environment brought on chiefly by electronically-controlled, high-speed technology has, in many cases, created a skills gap between the knowledge and skills possessed by supervisors, operators, mechanics and craft personnel and the knowledge and skill needs of the jobs they perform. This problem is expected to become more acute in the future. An understanding of these deficiencies is essential to well-focused, cost-effective training programstied specifically to the needs. Our ability to address the skills gap also depends directly on the quality of the training we develop and the manner in which it is delivered. Issue: Selection and training of current and future work force (hourly employees and supervision) Is critical to productivity Improvement. Strategy: Utilize job and skills analyses to identify skills gap and develop selection instruments and training programs to meet job needs and address deficiencies. Action Plan: 1992-1993 Â• Develop and evaluate a career progression ladder to aid recruitment and retention and foster self-development and professionalism of supervisors. (1992-1993) Â• Establish current and future job requirements and assess skill levels of existing operators/mechanics. (1992-1993) Â• Develop and implement a program leading to improved communication and teamwork on the factory floor. (1992-1993) Â• Promote development of professional and subject-matter expertise of training instructors through cross-functional rotation, career progression, and more on-the-job follow-up and customer interface. (1992- 1993) Â• Establish a system to provide for proper allocation of training resources. (1992- '1993) 1992-1993 Â• Implement a Systems Approach to Training (SAT). This is an integrated and comprehen- sive approach developed by an internal technical training task force and outside Hay consultants for identifying training needs and evaluating/improving training programs. (1992-1993) Â• Develop and evaluate prototype training program for hourly and first-line supervisory personnel designed to enhance skills and knowledge related to troubleshooting. (1992-1993) Â• As part of the Louisville Skills Enhancement Training Program, develop and evaluate prototype training program designed to supplement skills and knowledge of existing hourly and supervisory personnel and assess cost-effectiveness of program with the goal of extending results to other manu- facturing locations. (1992-1993) 153 I I I I I I I 1 I I I I .1 I

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I I I I I I I I I I I I I I I 1992-1996 Â• Determine current and future job require- ments and skill levels of existing first-line supervisors. (Ongoing) Â• Critically evaluate/modify existing supervi- sory training programs in all locations to ensure that core skills as identified by job analysis are included. (Ongoing) Â• Modify/develop operator/mechanic selection/ training programs to ensure that they address skill needs. (Ongoing) Â• Continue efforts aimed at addressing current and future skill needs of crafts. (Ongoing) Â• Pursue competency-based evaluations of craft personnel for major machine mainte- nance programs. (Ongoing) Â• Develop and evaluate new and better training methods for craft personnel. (Ongoing) Â• Extend results of Troubleshooting Training Program with the goal of improving the troubleshooting performance of all supervi- sory and hourly personnel involved in manufacturing. (Ongoing) 154

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I Total Compensation During the 1992-1996 plan period, the key focus will be determining "Total Compensation" philoso- phy, policy and programs which facilitate aggressive organizational change designed to attain long- term business goals. These actions must be taken with consideration of internal forces that are impacting our "total compensation" resources, as well as market issues affecting our competitive position. Issue: Need for a "total compensation" phiiosophy. Strategy: Determine "Total Compensation Phifosophy"that is an appropriate mix of fixed and variable elements of both cash compensation and benefits to facilitate accomplishment of our long term business goals. Action Plan: 1992-1996 Â• Develop appropriate group to research total compensation. (1992) Â• Research and analyze the elements of total compensation and where they stand com- petitively (Benefits & Compensation)(fixed vs. variable). (1992) Â• Assess the mix of other relevant companies and how the mix enhances achievement of business goals. (1992) Â• Develop specific total compensation models. (1992) Â• Finalize/obtain approval of "Total Compensation" philosophy. (1992-1993) Â• Develop communications on "Total Compensation" philosophy for the workforce. (1993) Â• `Assure'Total Compensation" philosophy is considered in the development and execution of all Compensation and Benefit programs. (1993+) 155 I I I I I I I I I I I I I I I I

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I I I I I I I I I I I I I I I I I I Benefits The cost of offering a comprehensive and competitive benefits program wili conti nue to rise unabated. Health care costs increased 14% between 1989-1990 and are estimated to rise another 22% in 1991 to approximately $105 million. In this escalating cost environment, we must meet the benefit needs of a diverse workforce and be positioned to attract new talent, while working to control costs within planned parameters. Our benefit programs must continually be reviewed to assess their competitive position with respect to internal and external constraints. Government regulations, other operating company equity issues, and employee and company tax effectiveness concerns are major issues which need to be affected in future benefit development efforts. issue: The benefit package represents a significant cost and must be managed to ensure com- petitiveness at a reasonable cost. Strategy: Evaluate and implement programs that provide cost effective benefits which are competitive and address the needs of employees. Action Plan: 1992-1993 1992-1993 Â• Implement Managed Care Plan; medical, and psych/substance abuse provisions effective 1/1/93 at: -York Engineering - Williamsburg -Louisville - Kentucky -Tobacco Sales Force - National -New York Office, PM-USA - New York - Colonial Heights Packaging - Colonial Heights, Virginia(1992) Â• Implement Managed Care Plan for BCTWIU employees (subject ;o negotiations/ ratification; will also cover lAM employees) effective 1/1/93. (1992) Â• Implement benefit related changes resulting from contract negotiations/ratification for BCTWIU and IAM effective throughout 1992. (1992) Â• Analyze and recommend changes to salaried benefits based on impact of negotiated benefits (effective dates to be determined). (1992) Â• Conduct post implementation review of health care utilization resulting from Managed Care Plan changes effective 4th quarter 1992. (1992) Â• Conduct/direct audit of Richmond Blue Cross/Blue Shield health plan (medical, dental, TPA vision) effective 2nd and 3rd quarters 1992. (1992) Â• Voice Response System - Determine feasibility of voice enrollments effective 3rd quarter 1992. (1992) Â• Tesseract task force project,- Integrate HRM/Payroll and Benefits effective 1992 and 1993. (1992) Â• Survey salaried employees on issues related to benefit offerings in the context of flexible benefits. (1993) 156

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I 1992-1993 Â• Develop a PM-USA benefit philosophy which will provide a framework for consider- ation of total compensation issues. (1993) Â• Address corporate issues pertaining to Deferred Profit Sharing plan design. (1993) 1992-1996 Â• Implement a flexible benefit program. (1994- 1996). Â• Develop autonomous PM-USA benefit programs that reflect our operating company needs. (1994-1996) Â• Implement and communicate benefits towards a market position at 75th percentile of a select group of companies. (1992-1996) 157 I I I I I I I I I I I I I I I

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I I I I I I I I ~ I I I I I I I I Compensation During the plan period, the key focus for compensation will be the continued development and refinement of programs that clearly link compensation to results against business goals. This must be accomplished while assuring that competitive, aggressive pay policies are maintained to attract, retain and reward the diversity of knowledge and skills required in our business. i Issue: Compensation programs must be competitive and aggressive to attract and retain the knowledge and skilis needed in our business. Incentive plans must have a clear link to business goais to develop an environment conducive to motivating employees and rewarding desired results. Strategy: A multi-step strategy will be employed to: Â• Develop overall pay policies and programs that provide a cohesive foundation for recruiting, cross- training, transferring and rewarding employees. Â• Design and implement incentive compensation programs that motivate employees to achieve business goals and reinforce those efforts. Action Plan: 1992-1993 _Pay Policies Â• Continue to streamline salary ranges and merit guidelines. (1992) Â• Complete the Richmond Lump Sum program. (1992) Â• Continue to focus merit program on performance against standards. (1992) 1992-1996 Management Incentive Plan Â• Implement a balance among financial, strategic and personal goals for company, department and individual incentive com- pensation (IC)goals. (1992) Â• Obtain feedback on the perceived effectiveness and fairness of the IC goals and program design. (1992) Â• Assess impact of pav policies on key technical groups, production and technicians. (1992) Â• Continue educating employees on compensation goals and policies. (1992- 1993) Â• Continue to improve the Sales Force pay position. (1992-1993) Â• Continue to obtain input on the effectiveness of the program. (1992-1993) Â• Enhance communications on IC program. (1992-1993) Â• Propose and implement any necessary design modifications. (1992-1993) Â• Assess impact of plan on improving com- pany/department performance. (1993-1996) 158

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I 1992-1996 . Sales Incentive Plan Â• Administer the first plan awards. (1992) Â• Determine whether modifications are required (targets, goals). (1992-1993) Â• Obtain feedback on impact of program. (1992-1993) Â• Assess impact on company results. (1993- 1996) Incentives for Professionals and Deaartments Â• Conduct research on possible expansion of incentives (e.g. Manufacturing). (1992) Â• Determine appropriateness of incentives in context of total compensation. (1992-1993) 5116ff , Â• Implement the new severance policies across all PM-USA units. (1992) Â• Assure job descriptions are current. (1992) Â• Continue to evaluate the effectiveness of job evaluation approaches. (1992-1993) Â• Audit department job grades as appropriate. (1992-1993) Â• Study grade banding for management positions. (1992-1993) I I I I I I I I I ~ I I I I rv I 159 I I

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Environmental Health & Safety Comprehensive senior management supported Environmental Health & Safety (EH&S) programs maintain shareholder value by preventing/avoiding losses, controlling/reducing costs and eliminating unnecessary risks. For example, well-planned procedures ensure that work is done correctly the first time. Further, a well-managed program adds value by ergonomically designing equipment and facilities to encourage maximum productivity and quality, while ensuring a safe operation. Nationally, environmental health and safety emphasis is expanding beyond traditional manufacturing settings to include non-traditional work places where significant losses are occurring due to lack of attention. Compared to Operations, the Sales Force loss experience is nearly two times higher for total injuries per 100 employees and fourtimes higherfor days lost from work per 100 employees. Total workers' compensation cost per employee is approximately 36% higher. Nationally, just the opposite experience occurs: in the nondurable goods industry, the wholesale trade sector experiences fewer iossesthanthemanufacturingsector. The Operations EH&S program works. Overtheiastfiveyears, total injuries and days away from work per 100 employees have decreased by 62% and 33%, respectively. Issue: PM-USA needs to modify and expand its existing EH&S program Into a corporate program encompassing all functional areas. Strategy: Establish environmental health and safety as a senior management responsibility. Develop a corporate EH&S program for all functional areas, through the modification and extension of the Operations program. Action Plan: 1992-1993 Â• Issue senior management EH&S policy statement. (1992-1993) Â• Continue the Operations EH&S program. (1992-1993) Â• impiement EH&S program for Sales Force. (1992-1993) Â• Develop a well-defined and documented workers' compensation and OSHA recordkeeping program for the Sales Force. (1992-1993) 1992-1993 Â• Develop and conduct formalized EH&S training for all PM-USA functions. (1992- 1993) Â• Develop a formalized ergonomics program for all PM-USA functions that conforms with guidelines proposed by OSHA. (1992-1993) Â• Develop equipment ergonomic design criteria. (1994-1996) Â• Audit all PM-USA functions and report to senior management. (1992-1993) 160

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I Labor Relations In addition to negotiating new selection procedures for critical jobs in Richmond and Louisville, the company has negotiated a three-year extension to the Long Term Agreement (LTA) with all its BCTWIU bargaining units in conjunction with an economic settlement which will abate escalating hourly compensation costs during the next three years. The LTA extension, which assures non- interruption of production by BCTWIU employees through at least June of 1997, has not yet been discussed with the Craft bargaining units. If the Craft bargaining units are unwilling to enter into an economic settlement which abates hourly compensation similar to the BCTWIU agreement, the Company will need to defend its position in interest arbitration in 1992 and prepare a strike contingency plan relative to its Craft employees for 1995. Issue: Positively impact operating costs directly attributable to hourly labor by Identifying and developing capable employees forseiection to critical jobs, maximizing manpowerutiiization through more efficient manning and work assignments, and ensuring hourly iaborsuppiy for continuing operations. Strategy: I I I I I I I impiement and utilize recently negotiated internal selection systems; revise manning and job responsibilities through discussions with Union leadership; administer existing labor agreements to utilize manpower in the most efficient manner. Extend the LTA with all craft bargaining units or have a viable strike contingency plan in place prior to 1994. Action Plan: 1992-1993 1992-1996 Â• Attempt to negotiate economic package and LTA similar to BCTWIU with Craft unions. Failing this, attempt to achieve a parity economic package through interest arbitra- tion. (1992-1993) Â• Discuss manning and job assignment issues with Richmond and Louisville BCTWIU. (1992-1993) Â• Discuss Cabarrus expansion job design and manning with both BCTWIU and IAM. (1992- 1993) Â• Develop and implement internal selection systems for BCTWIU employees at all locations. (1992-1993) Â• Initiate communication process to focus Company's long-term Labor Relations objectives with Union leadership. (1992- 1993) Â• Prepare a strike contingency plan if the LTA is not extended with our Craft unions. (1992- 1996) Â• Modify negotiating format to reduce potential for whipsaw. (1992-1996) Â• Identify and establish "core" and "secondary" operations, jobs, and/or functions with corresponding economic differentials. (1992- 1996) Â• Evaluate LTA extension for 1995 negotiations. (1992-1996) Â• Evaluate current job structure and design relative to materials handling, equipment operation, and line maintenance. (1992- 1996) 161 I I I I I I I I I

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1992-1996 I I I I I I I I I I I I Â• Investigate the possibility of: - Establishing pay for knowledge and/or line of progression compensation systems. (1992-1996) - Establishing 6th and 7th day pay proce- dures at all continuous operations. (1992- 1996) - Expanding Statistical Process Control (SPC)/Total Quality Management (TQM) operating procedures at all operating locations. (1992-1996) - Directly linking Direct Profit Sharing (DPS) distributions to marginal contribu- tion of bargaining unit employees. (1992- 1996) 1 162

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Affirmative Action As we move toward the year 2000, the work force is becoming increasingly diverse. Projections indicate that over the next ten years, 85% of new entrants into the labor force will be minorities, females and/or immigrants. Although we have been successful in hiring females and minorities into entry level jobs, the upward mobility of these individuals is a continuing issue. With changing work force demographics, on-going issues surrounding upward mobilityfor minorities and females, cultural diversity and family/work life concerns will require action. Issue: Continuing changes In work force demographics are altering the culture and climate of the work place and demand management's full attention to capitalize on our human resource potential. Strategy: To accomplish this, athreefold strategywill be implemented. First, continue aggressive recruiting and development programs aimed at upward mobility gains. Second, develop and implement work/life programs to enhance the partnership between the Company and its employees. Third, develop and implement appropriate awareness, education and training programs. Action Plan: 1992-1993 1992-1993 Â• Continue to introduce family /work life programs that coincide with employees' needs to balance their personal and professional responsibilities. Establish pilot child and elder care programs in Rich- mond. Research the feasibility of program expansion to other PM-USA locations. (1992-1993) Â• Develop and implement management awareness/training programs and action plans to comply with the Americans with Disabilities Act and the 1991 Civil Rights Act. (1992-1993) Â• Continue ongoing diversity training pro- grams for all PM-USA management. Working closely with executive manage- ment, develop and implement a compre- hensive in-house program that addresses the needs of Operations personnel. As- sess the effectiveness of the New York Office and Sales Force programs. (1992- 1993) Â• Enhance communications of AA/diversity efforts by introducing videos, brochures and other visuals that reinforce our commitment to work force partnering, family/work life programs and legislative compliance. (1992- 1993) 1992-1996 Â• Utilizing identical timing sequence, tie together the annual goal setting process for Upward Mobility, Succession Planning and Affirmative Action Planning as a joint process. Involve appropriate management and hold them accountable for plans and results. Discuss succession plans, career potential and development plans with identified successors. (1992-1996) - Provide development opportunities, challenging assignments and high-visibility projects for high potential minorities and females. Routinely monitor the perfor- mance of these individuals to ensure they are being accurately appraised, using uniform standards and criteria. 163 I I i I I I I I I I I I CJ ~ I I

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I I I I I I I I I I I I I I I I 1992-1996 1992-1996 Â• Ensure that opportunities arise to make placements. (1992-1996) - Implement an annual executive review of grade 15+ employees and an annual management review of grade 12-14 employees to determine relative strength and projected contribution. Identify those employees to be outplaced. - Implement a formal outplacement program to include counseling, communication, and financial components. Â• Continue to assess employee needs and research program offerings to address specific family/work life issues. Continue participation in area family/work life consor- tium groups. (1992-1996) Â• Commit to external hiring at any level when necessary to meet annual representation and targets. (1992-1996) - Devote adequate human and financial resources to aggressively recruit minority and female talent at all levels of the organization. - Ensure that MBA hiring reflects targeted placement rate. Â• Continue to strive for our long term desired targets of 20% minority and 50% female representation in all salaried grade group- ings by 2010. (1992-1996) Â• Commit resources to the educational systems that provide talented candidates and increased education/training for employees. (1992-1996) - Establish strong relationships with a small number of excellent colleges and universities that graduate minorities in the disciplines for which we recruit. Provide financial support, faculty exchange programs, and internships in the appropriate disciplines. - Establish strong relationships with several high schools in each of our locations. Provide financial support and leadership for programs that support our needs. - Continue the onsite undergraduate and graduate level programs for employees. - Provide remedial education/training to our employees on site, after work hours, free of charge. 164

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Employment We must increasingly use creative measures to stimulate career opportunities, to match employees and candidates to those opportunities in ways that increase the probability of success and to attract high caliber candidates to our candidate pools. There is less opportunity in some functional areas . than in the past within our managerial and professional ranks with which to attract ambitious, high potential talent. Issue: Identify and attract high potential candidates and target them toward positions that will enhance their probability of career success and insure/maximize their long term contributions to the organization. Strategy: I I I I I I Ensure that opportunities exist to promote and/or cross-train the most promising managerial and professional talent. Improve recruiting and screening tools to increase the probability of successful placements. Action Plan: 1992-1993 1992-1993 Â• Emphasize the longevity, profitability and stability of PM-USA in all recruiting efforts. (1992-1993) Â• Continue to review managerial and professional ranks and organization structures with an eye toward creating career opportunities and continuous improvement. (1992-1993) , Â• Cite the many existing career development and planning tools (MMTP, LDP, CLE, Training Courses, Succession Planning, etc.) in recruiting literature and efforts, where appropriate. (1992-1993) Â• Capitalize on career and succession planning efforts when filling jobs internally. (1992-1993) Â• Continue to fill jobs internally when possible an~Lwhen upward mobility goals can be met, and recruit externally as necessary. (1992- 1993) Â• Develop an employee referral system for identification of qualified external candidates (particularly minorities and females). (1992- 1993) Â• Work with OMD to incorporate the PM-USA Leadership Competency Model (for directors) and the Middle Management Competency Model (for managers) into selection systems as appropriate. (1992- 1993) Â• Refine hourly selection systems which will maximize selection accuracy, defensibility, efficiency and fairness. (1992-1993) Â• Implement the (proposed) aid-to-education program which will complement our campus recruiting efforts. (1992-1993) Â• Project hiring needs and match recruiting and selection resources appropriately to maximize hiring quality while minimizing cost and response time. (1992-1993) Â• Automate the employment process in a manner that maximizes the utility of candi- date information and minimizes administra- tive expense, liability and response time. (1992-1993) 165 I I I I I 1, I I I I

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I I I I I I I I I I I I I I I I 1992-1993 Â• Review relocation policy, procedure and methodology across PM-USA (Operations, Sales and New York Office) and implement "best practices" as appropriate for each location. (1992-1993) 1992-1996 Â• Work with Organization and Management Development (OMD) to develop and incorporate a "professional competency model", a "supervisory competency model" and an "administrative competency model" into selection systems. (1994-1996) Â• Continue to build on relationships with universities which produce graduates whose academic training is compatible with our entry-level positions. (1992-1993) Â• Target professional organizations, conferences and colleges to increase applicant flow. (1992-1993) 166

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I I FINANCE I I I I I I I I V I I During the plan period, Finance will work with other functional areas such as Operations, Market- ing and Sales to ensure that PM-USA meets its quarterly and annual targets for income from operations and cash flow. To help provide maximum flexibility to respond to marketplace oppor- tunities, Finance will also work to eliminate unnecessary controls, streamline approval procedures and establish a budgetary process which provides for more effective business management. New financial measures will be developed and applied to the business as warranted to generate better information for proper decision making and to help encourage fiduciary responsibility throughout the organization. 167

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Activity-Based Accounting in some instances, PM-USA engages in a business activity where the true costs are not fully reflected in reports. These underlying costs are often spread over other areas and lead to underestimating the investment and activity necessary to conduct the specific activity. Issue: Identify all relevant costs which are a part of a specific business activity. Strategy: To employ activity-based accounting as a guide to modifying business practices which are not cost effective for PM-USA. Finance's objective will be to institute at least five such costs studies in 1992 and build an activity-based cost system. Action Plan 1992-1996 Â• Work with representatives from each of PM- USA's functional areas to identify business activities which may have significant hidden costs. Â• Prioritize the identified activities based on the magnitude of the hidden costs. Â• Assign a Finance representative to work with a functional area representative who is responsible for each identified activity. Â• Determine the magnitude of the underlying costs of each business activity. Â• Develop recommenGations to modify the activity to either reduce the underlying costs or eliminate the activity. This action plan will be implemented in 1992, and subsequently will become an on-going activity throughout the plan period. 168 I I I I I I I F I k I I I I

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Establishing An Ownership Cufture I I I I I I Because the responsibility for financial control has historically resided largely within Finance, there has been a heavy reliance on transaction-based controls to manage our financial exposure and to ensure that PM-USA's fiduciary responsibilities are met. These controls are manifested in tight monetary approval levels for middle management, job order requests, purchase order controls and comprehensive accounts payable procedures. Taken together, these controls are often viewed as impediments to making and executing business decisions quickly, yet are necessary so long as financial control remains largely a sole responsibility of Finance. Issue: Exercising financial control Is the responsibility of all employees, not just Finance. Strategy: To develop within PM-USA a stronger "ownership" culture where exercising internal financial control is an accepted responsibility of all employees. The establishment of this culture will provide middle management with increased fiduciary responsibility. Action Plan 1992-1996 I I I I a 9 Â• Gain the acceptance and support of an ownership culture within each functional area of PM-USA. (1992) Â• Provide guidance and procedures which employees should use to ensure that proper business controls are being utilized. (1992) Â• Monitor business activities to determine if the proper internal controls are being employed within each functional area. (1992-1996) Â• Modify existing transaction-based controls to reflect the' heightened awareness and application of financial controls at the business activity level. (1992-1996) C 169 ~ Â®

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{iV'lev 1 A ~

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I I I I I I I I I I t I I I F I t I INFORMATION SERVICES The environment in which PM conducts business is not only changing rapidly, but also becoming increasingly complex. To succeed, PM-USA must change with it. We must seek new volume opportunities, act aggressively to pursue marketing and cost efficiencies, decentralize decision making and compress decision windows. Most of the problems PM faces require broad, cross functional solutions. To craft these strategies, PM is changing the way we do business by re- engineering the business process of each functional area. Within this framework, the mission of the Information Services (IS) department is to re-engineer the systems to supply all necessary informa- tion to the new points of decision, at the time of decision, to change the way PM does business. As a result, PM can "get it done" FASTER, BETTER, CHEAPER and pursue new business opportunities. In their 1991 study of Information Services operations, A.T. Kearney found that department capabilities and performance met the needs of today's environment as a high-quality, cost effective providerof computing services. However, to meet planning period needs, Information Services needs to utilize fully its existing strengths and build new skills. The Information Services organization must be repositioned to become a proactive partner with the business areas that are the users of information technology. Information Services is committed to taking a more active role in understand- ing the "business" of its customers, and a commitment is needed from the business areas to play a more active role in the decision process regarding the use of information technology. This will allow Information Services to become a value-added provider of strategic business systems. Early inthe plan period, significant changes will be made to the Information Services decision-making process and a new organization put in place to facilitate change. Also, mechanisms must be put in place that allow decision makers to more effectively match cost with benefit so that IS resources can be targeted to effectively support company strategies and minimize overall long term costs. Some strategic projects to be implemented by Information Services over the plan period are: Â• Reorganize IS resources based on a"Tomorrow" and "Today" focus. Planning and developing tomorrow's needs will be the responsibility of Business Systems Planning groups that serve each functional area. Today's day to day business needs will be handled by a separate group. Â• Development of the "Decision Makers Information System" will focus on providing information pertaining to Sales, Marketing, Manufacturing, and Finance. This system is not just data retrieval but is designed to enhance the decision maker's application of resources. Â• The Manufacturing Supply Chain project will eliminate multiple data entry and paper processing, reduce inventories, and streamline production planning and scheduling. Â• The Manufacturing Maintenance Management project will increase machine utilization by signifi- cantly streamlining and expediting maintenance operations. Â• Equip Field Sales Force with portable computers and establish a communication network to 2 expedite information flow. 4 CJ ~ ~ 170

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I Restructure Resources and Decision-Making At present, the Information Services department has significant strengths in the area of computer operations and system delivery. However, planning and linkage with the business must be improved in order to make "strategic" contributions to Company goals. To become strategic, IS must change the decision process and proactively deal "up the organization" with management strategists. The resulting partnership will drive the identification of systems opportunities and the assignment of resources to specific initiatives. To achieve this, Information Services must have a strong planning function to focus efforts on high value-added opportunities as well as flexibility in the systems development area to efficiently move resources between projects that cross functional boundaries. Issue: Information Services needs to become more focused on strategic opportunities. Strategies: I 1 ~ I I I Â• Forge strong linkage with key strategic decision makers by reorganizing IS department and changing the decision process. Â• Institute a decision process for information technology based on an integrated consideration of total Company costs and benefits. Action Plan: 1992-1993 1992-1993 Â• Reorganize IS resources based on a "Tomorrow" and "Today" focus. Planning and developing tomorrow's needs will be the responsibility of Business Systems Planning (BSP) groups that serve each functional area. Development resources will be "pooled" in order to facilitate flexibility and cross-functional synergies. Today's day to day business needs will be handled by a separate group. The organization will be headed by a VP Information Services who will ensure strategic and cross functional integration. Â• Develop a planning system that matches project needs with appropriate resources. This system (used by the VP Information Services in working with the Steering Committees) tracks progress of BSP project development and benefit realization as well as the cost effectiveness of ongoing comput- ing. Â• institute a system of charge-backs to ensure that resources are targeted toward projects with significant ROI and/or strategic value and that overall long term costs are mini- mized. Â• Utilize Management Steering Committees with accountability for setting IS develop- ment priorities. An Executive Steering Committee will be responsible for approval of all major development efforts. Functional Steering Committees will identify and approve all intermediate level development projects within their area and bring forward any major projects to the Executive Commit- tee for review and approval. Minor develop- ment, maintenance and support will be done on a first-in-first-out basis by resources dedicated to each functional area. Level of support resources will be negotiated annu- ally and will be based on targets for project turn-around. 1994-1996 Â• Continue to adjust and evolve organizational processes and structures to maintain strategic "fit" with changing Company goals and objectives. 171 I I ~ I I I I

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I V I a ~ I I r I I I I I I ~ ... I Deliver Critical Information to the Point of Decision Given the increasing complexity of the U.S. cigarette business environment, PM-USA is in the process of changing its decision making to respond quickly to marketplace changes. This philosophy is driving decision making further down the functional organizations and increasing inter-functional dependencies. Decentralized decision making requires more powerful tools to convert data into value added information that can be easily accessed. These information systems must include drill-down capability and decision support analytical tools that enable diverse functional users to quickly diagnose problems and opportunities. This will result in betterdecision making and faster marketplace response. PM-USA is a company within an industry that are both very rich in data resources. Competitive advantage wi ll be achieved by the company that can access and analyze this data quickly, and rapidly implement programs against identified opportunities. Issue: To meet'the needs of an increasingly complex business and to improve our ability to supply complete and accurate infonnation to decislon-makers throughout the organization on a timely basis. Strategy: Â• Provide consistently designed application tools that allow line organization personnel to directly access and manipulate pertinent information without IS intervention. Â• Provide Senior Management easy and timely drill-down access to key operational and market information to support quick identification of problems/opportunities in an increasingly complex and decentralized environment. Action Plan: 1992-1993 1992-1993 Â• During this period, development of the "Decision Makers Information System" will focus on providing information pertaining to Sales, Marketing, Manufacturing, and Finance. This system is not just data re- trieval but is designed to enhance the decision maker's application of resources. It will include "drill-down" access to PM sales, manufacturing and "outside" data such as Nielsen. Achieving this involves combining drill-down information access and decision support tools such as trend analysis, excep- tion and cross-sectional analysis capabili- ties. These tools will foster an integrated view of Company information that allows sharing among all components of the user community to support more efficient man- agement of increasingly complex and inter- related business processes. Â• Develop an integrated Manufacturing data base and query tools to allow operational information to be accessed directly by Manufacturing personnel for more complete and timely problem analysis and decision making. Â• Expand the reach of decision support tools past the "staff" population to individuals in line jobs in Manufacturing, Sales, and Marketing to improve the quality and timeli- ness of operational decisions and applica- tion of resources. This will require modifica- tion of existing systems' tools to promote ease of use and development of delivery platforms other than traditional office-based workstations. Examples include Sales Force Automation, Manufacturing Trouble Call System, Maintenance Management System, etc. 172

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I 1992-1993 Â• Design and implement tools to support a PM Competitive Intelligence network to include a document/image database and network communication software. 1994-1996 Â• Incorporate information from other functional areas into the Decision Makers Information System. Â• Enhance the Sales, Marketing and Manufac- turing data bases with information from operational systems and external data sources. Â• Continue to assess easy-to-use tools to support the analytical and decision-making process and provide on-going systems support. 173 I 1 i I 4 I 1 I I I I 1 I I

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V t I I p I t I I I I r I I', I Support Functional Re-Engineering and Business Expansion As PM key functional areas continue to change in response to new business realities, it is key that systems not only reflect new procedures, but also allow information to flow freely and quickly across functional areas. Many current systems were designed to serve needs within individual functional areas at differing points in time. Information Services needs to exercise a strategic view across functions and departments, helping the PM enterprise identify opportunities to reduce costs and increase operational efficiencies by re-engineering existing business practices. This involves re- examining not just individual systems but entire business processes. Issue: Partner with functional orgainzations In changing/re-inventing business processes to sig- nificantly reduce cost, increase quality and expand revenue. Strategies: Â• Manage overall PM systems planning and development as an enterprise (as opposed to project) process, to encourage overall efficiencies and reduced costs. Â• Utilize technology solutions that promote ease of integration and build platforms that offer commonality and synergy advantages. Â• Facilitate change and marketplace response by reducing "cycle time" from point of decision to implementation. Action Plan: 1992-1993 Â• The Manufacturing Supply Chain project will eliminate multiple data entry and paper processing and significantly reduce invento- ries. These systems will also streamline material logistics, production planning and scheduling so the right material is available at the right time. Â• The Manufacturing Maintenance Manage- ment project will bring machine trouble call history, machine diagrams, expert training modules, parts ordering and preventive maintenance techniques together at the workstation on the production floor when needed by operators and technicians. This will increase machine utilization by signifi- cantly streamlining and expediting mainte- nance operations. 1992-1993 Â• The Cabarrus expansion project will focus on upgrading and/or replacing existing materials handling, process monitoring and reporting systems to support the additional capacity. In addition, the Direct Materials Warehouse Management and Materials Picking systems will be re-engineered to support increased materials flow and anticipated changes in cart-loading opera- tions. Â• Equip Field Sales Force with portable computers and establish a communications network to expedite information flow. These will automate several administrative/report- ing functions and also facilitate development of new logistics that will permit: - Targeted store level promotion/ marketing tactics. - In-store Point of Sale display and material order entry. - Drop shipping Promotional and POS material to stores through third parties. 174

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I 1992-1993 Â• Develop and implement a micromarketing system by matching a store's location and profile to the psychographic and demo- graphic data of consumers in that stores' geographic location. In conjunction with the above Sales Force automation project, this allows improved targeting and effectiveness of promotional tools. Â• Develop a database of wholesaler weekly shipments of each individual brand packing to individual retailer. When combined with Sales Force Automation tools and the micromarketing project, this database will supply the Company with the critical information necessary to more pro-actively increase and manage volume. In addition, we will have a more efficient and complete early warning system for competitive activity and a mechanism to measure consumer response. Â• Rewrite the Customer Billing system to tie in section sales personnel with customer backorder and allocation issues. This will be integrated with Accounts Receivable and Sales reporting systems to support timely implementation and analysis of more flexible and targeted volume management pro- grams. Â• Institute activity-based accounting systems, Â•bottom up" capital forecasting and project level budgeting systems. The latter is particularly important in re-engineering Field Sales section office budget accountability. Â• Develop new systems for ordering, ware- housing and deiivering Point of Sales and Promotional material to stores. These systems will likely be paired with those of vendor partners who will drop ship to retailers. Â• Develop a new Leaf Management system that tracks purchases during buying season, enabling buyers to fine tune strategy on a weekly basis. 175 1994-1996 Â• Partner with Finance and Employee Rela- tions functions to redefine employee infor- mation and compensation systems. This will not only eliminate duplicate effort and streamline processes such as payroll, benefits administration and employee information processing, but also allow renegotiation of benefit programs with labor unions. Â• Develop tools that will re-engineer the role of the Field Section offices. The resulting changes in business procedures are de- signed to reduce administrative burdens, leverage key account selling and improve field management through easy-to-access value-added information. 1 i I I I ~ I I t I I V

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I r I I I I I r r I r r 1 I f I I Aggressively Pursue internai Efficiencies The pace of technology advancement is so rapid that, according to some experts, it is recreating itself less than every three years. Given the reliance of the PM re-engineering process on technology and systems, it is critical that Information Services stay on the forefront of technological change to ensure appropriate service levels. New technology can deliver expanded services or increased capacity at lower unit costs. Also, manual functions made superfluous by new technology can be eliminated. Information Services is committed to being the low cost provider of computing services. We will continue to pursue new technologies that can deliver expanded services or increased capacity at lower unit costs. issue: Maintain a commitment to consistently re-engineer IS operational systems to drive down costs and Improve reliability and service levels. Strategies: Â• Aggressively drive our primary vendors to partner with us to improve operational efficiencies Â• Continually scan the market for new technologies and processes that can be applied at PM-USA. Action Plan: 1992-1993 Â• Enhance data and voice communication networks to improve performance, reliability, and cost effectiveness. Â• Establish technical environment support for 24 hour, 7 day/week operation of the IBM mainframes. implement one call "Help" capability and upgrade the backup and recovery process for storage devices to promote continuous availability of data. Â• Extend Computer Aided Software Engineer- - ing tools to improve programmer productivity in the DEC and workstation environments. Â• Develop systems that permit electronic data interchange (EDI) with PM's suppliers and customers. 1994-1996 Â• Evaluate new computing technologies and develop the most cost effective approach to satisfy business demands for the next five years, such as: - The cost/benefit of consolidating all Richmond Data Centers into one location. - The newly emerging fields of object oriented programming and parallel processing. - Cost savings available through use of CD storage (eliminate microfiche) and optical scanning technology (avoid manual entry of financial documents). - Integrating imaging technology into our systems. 176

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I Redeveloping IS Human Resources Nurturing the business evolution of the reorganized IS department will require significant new initiatives that support the redevelopment of our human resources. Whereas past needs required specialized expertise in specific systems and programming approaches, tomorrow's opportunities will be met by forming diverse work teams composed of PM employees and vendor partners. Therefore, we need to develop a broader skill base among our employees by building on the current portfolio of skills and experiences, cultivating greater understanding of PM's strategies, and developing new skills. Issue: Information Services needs to develop its employees to meet future technological needs. Strategies: I I i I 4 I Â• Develop programs to familiarize IS employees with PM strategies and their resulting missions. Â• Use skill base development programs and job rotation to develop a flexible work force. Action Plan: 1992-1993 1994 -1996 Â• Institute quarterly planning meetings and workshops for IS employees to ensure understanding of the major strategies and tactics of each functional area and expecta- tions for IS support. Â• Facilitate intra-IS communication through regular interchange meetings between key BSP, development and operation staff. These are designed to facilitate cross pollenization of ideas and avoid duplication. Â• Develop training programs customized for unique needs of Business Systems Planning groups and the operations team. BSP training will emphasize selling, negotiating, business management and "imagineering" skills. Operations training will focus more on building technological skills that support day to day computing needs. These will be supplemented by a new Performance Appraisal/Development process that helps individuals build'a wide portfolio of skills and experiences. Â• Establish policies for the proper mix of PM employees, internally contracted program- ming consultants and consultants from vendor partners. Â• Institute a program of job rotation not only between BSP and operations groups, but also between Information Services and its functional user groups. 177 11 I ~ I ~ I f A I I

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Legal

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I I I I I I I I I I I I I I LEGAL As the industry leader, PM-USA will continue to be targeted by competitors, anti-smoking forces and the government. The competitive business environment and hostile social climate expected during the plan period will present challenges to every part of our business. The Legal Department will be instrumental in molding PM-USA into a vehicle able to adapt to meet those challenges. Key areas to be addressed by Legal over the plan period are: Â• Legal will continue to aggressively defend all product liability actions against the Company. Â• Increased regulation will require strict compliance measures. Environmental issues, lobbying issues, sales and marketing practices will all be addressed to ensure good business practices and strict compliance with applicable regulations. Â• PM-USA's marketing activities may increase exposure under existing laws and face increased legislative scrutiny. We will assume an active role in the creation of marketing programs and take offensive action on legislative proposals when appropriate. Â• Legal will become involve at the earliest stages of projects to minimize laterintervention and provide legal direction for emerging issues. Â• The social and political impact of the ETS issue will become more apparent during the plan period. We will work to minimize restrictive measures and to accommodate smokers. Â• PM-USA's complex business environment mandates legal involvement in daily activities. We will continue to provide legal guidance and support for PM-USA's daily activities. Â• Litigation will be pursued where necessary to protect trademark and patent positions. Legalwill also refine and administer the PM-USA crisis management plan and train all relevant personnel in preparation for unanticipated events. r 0 W n 178

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I Product Liability Claims For more than 35 years the courts have been addressing the issue of cigarette manufacturers' liability for the alleged health risks of smoking. The industry has never settled any of these suits and has never paid any plaintiff damages for such claims. It is imperative that we defend the Company vigorously and continue to strengthen our position in the courts. In early 1992 the Supreme Court will rehear Cipollone. If there is an adverse decision, we may see an increase in the number of case filings. Additionally, there is now a pending ETS case in the U.S. During the plan period we may see increased attention to ETS liability issues. As of November 1991 there were 51 product liability cases pending against the industry, 22 of which are against PM-USA. Issue: Protect the Company from product liability claims. Strategy: Our dual strategy will continue to be to defend all product liability actions aggressively and seek legislative relief through tort reform. PM-USA has assumed a more active role in the industry's tort reform project overthe past year and the Legal Department will continue to support that role and will address the issue in other forums. Action Plan: 1992-1996 Â• Defense of all cases. Â• Develop expert witnesses. Â• Train defense counsel. Â• Establish tort reform goals. Â• Review political contributions. Â• Advise on lobbying/reporting require- ments. Â• Civil Justice Reform Project. We will be actively involved in this effort, a part of the White House Competitiveness Council. 179 r i I I I I 1 I I I I

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I I I I I I I I I I I I I I I I I Anti-trust and Compliance Issues The coming years will see increased focus on environmental issues ranging from solid waste to source control. Working with Operations we have begun an extensive compliance audit process designed to ensure compliance with all applicable environmental requirements in our plant facilities, and to point out procedures for continued vigilance in our attention to these issues. The competitive market will encourage aggressive action on our part to secure the success of our premium brands. Our efforts to maintain a competitive edge, especially at retail will be closely monitored. It will be necessary to develop strategies to guide ourbusiness objectives and to maximize opportunities. PM-USA personnel will need to address topics which may raise anti-trust and compliance issues. A number of states have enacted legislation effective in 1992, which will change the regulations applicable to gifts and honoraria for elected officials. We are implementing procedures to address the impact of those changes and will work closely with Corporate Affairs in 1992 to ensure compliance with a prudent interpretation of all such regulations. Issue: Highly regulated areas are at risk for attack by government, competitors and anti-tobacco forces. Strategy: Educate PM-USA employees; implement procedural remedies to minimize exposure. Action Plan: 1992-1996 Â• Support and participate in environmental review process. Â• Conduct educational seminars: - Anti-trust - Bring education/compliance program to SSD level - Include new positions (Trade Marketing) in seminars - Ethics laws - Document Issues Â• Work with auditors to design effective controls. 180

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Marketing Restrictions Duringthe initial phases of the plan period, a major effort will be made by the Marketing, Sales, Trade Marketing and Legal Departments to introduce decentralization and account partnering into the company's promotional programs in order to provide a localized market response to consumers and to maximize the effectiveness of promotions. The Trade Marketing Group was formed to facilitate this strategy. The strategy contemplates increased promotional flexibility, and as a result may increase the risk of advertising or promotional infractions. At the same time and throughout the plan period, the Corporate Affairs group will be confronted by local governing bodies' efforts to impose restrictions on all aspects of our business (vending machines, advertising, sampling and other promotional activities). The combination of these two factors will demand increased attention to a variety of local market and legal requirements. In addition to an increased focus on the local level, attempts to restrict our business will continue in broader forums. We anticipate recent FTC activity in the area of event promotions to spur greater scrutiny of our practices in this area. The Legal Department has formed a Task Force consisting of senior representatives of Legal, Corporate Affairs, Marketing, Washington Relations and outside counsel to review the regulation of our industry, evaluating marketing practices in light of the FTC's recent activities. We expect that Task Force to be active in the beginning of the plan period. The redirection of advertising efforts into direct mail activities will require support from the Legal Department in the areas of legal compliance, organizational support and the enforcement of industry voluntary codes. We will continue to work closely with the Marketing and Corporate Affairs groups responsible for programs which encourage direct consumer contact to clarify the practical application of stated industry positions. Issue: Our marketing activities may Increase our exposure under existing laws and face Increased legislative scrutiny. Strategy: Assume an active role in the creation of marketing programs; educate PM-USA personnel on program implementation; take offensive action on legislative proposals when appropriate. Action Plan: 1992-1996 1992-1996 Â• Create effective promotional programs to take advantage of local marketing activities and maintain competitive advantage. Â• Develop and support arguments to manage restrictions at all levels. Â• Provide guidelines to sales force on local Â• Task forces: Form new task force consisting of Legal, Corporate Affairs and Trade Marketing representatives to guide local sales activity. Participate in existing task force on industry regulation. level. Â• Conduct compliance seminars. Â• Protect proper use of our trademarks. Â• Added support to Direct Mail. Â• Support for proactive legislative proposals. ~. ~ I I I I I I I I I I I I I I I 181

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I I I I I I I I I I I I I I I I I Increased Participation Within and Outside the Company To support a complex business environment the Company recognizes the need forgreater exchange among its many components. We will participate in a number of cross functional teams to anticipate and address issues arising in the business areas, contribute to the creation of sound programs, speed the process of review and affect cost savings when possible. The Legal Department currently contributes to a number of Task Forces consisting of lawyers from the operating companies. Participation inthese groups affects cost savings, th rough both purchasing synergies and by reducing the need for outside counsel involvement. It also has the added advantage of broadening the knowledge base available to clients and allowing for an exchange of ideas among operating companies. Issue: Delayed legal invoivement can have a negative Impact on timely and efficient work proce- dures. Strategy: The Legal Department will become involve at the earliest stages of projects to minimize later intervention and provide legal direction for emerging issues. In addition, Legal Department members will seek out and become personally active in associations that offer us the opportunity to further the Company's goals and provide a forum for the Company's positions. Action Plan: 1992-1996 Â• Participate in cross functional teams. Â• Contribute to inter-company task forces. Â• Participate in outside associations. Â• Attend client staff/project planning meetings. 182

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Environmental Tobacco Smoke (ETS) The Legal Department is currently directing a coordinated effort to manage the world-wide ETS issue. In the United States we are currently fighting restrictions on when and where consumers can smoke. Internationally, the focus on indoor air quality represents an opportunity for us to put environmental tobacco smoke in the proper perspective. Issue: The environmental tobacco smoke Issue introduces the potential for increased regulation of smoking. Strategy: It is our goal to develop programs generating a more balanced media presentation of the ETS issue and to define and promote the issue in specific targeted areas. We are actively communicating our concerns over the use of poor science and the politicization of science to the government and the public. Action Plan: 1992-1996 Â• Prepare response to OSHA RFI. Â• Establish contact with other industries at risk for regulation. Â• Examine legal implications of "Group A". Â• Develop indoor air company-wide policy. Â• Develop expert witnesses. Â• Continue review of internal publications. Â• Prepare law review articles or other legal publications. 183 I

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I I I I I I I I Support Daiiy Activities of the Company The Legal Department is committed to protecting the Company's traditional way of doing business and preparing it for the challenges that the social climate and business environment will present in the coming years. We expect to continue to do so without increasing our use of outside resources. Issue: Our complex business environment mandates legal Involvement In daiiy activities. Strategy: Continue to provide legal guidance and support for PM-USA daily activities in a timely and cost effective manner. Action Plan: 1992-1996 Â• Provide full legal support to new product launches. Â• Contract production. Â• Develop form contracts where appropriate. Â• Support technological solutions to competitive goals. I I I I I I I Â• Review political contributions/requirements. Â• Advise re: lobbying registration and reporting. Â• Structure sound marketing and sales programs. Â• Continue timely review of advertising and pro- motional programs. Â• Review copy for PM publications and presen- tations. - 4

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Protection of Technologies, Products, and Practices The Legal Department is positioned to secure legal protection for various facets of our business. It is our goal to provide for the protection of our technologies by procuring patents, and we will protect our trademarks from unauthorized use. it is also necessary to protect the position of our brands and the integrity of our advertising by challenging competitors' claims. Our business practices in the Government Affairs area will receive our full support and attention to protect the Company from any violations or potentially embarrassing attention. We will encourage good management practices, good record keeping and the proper treatment of Company records through various educational and practical programs. We will identify high risk areas or practices for alleged violations of legal guidelines or company policy regarding work conduct and recommend strategies to avoid negative incidents. Where necessary we will extend the scope of review to include work generated by consultants, in order to avoid inappropriately written or ili-conceived goals. We will continue to direct the Crisis Management program and provide training for the Crisis Response Team and Screening Committee members. Issue: Our technologies, products and practices are vulnerable to competitors and anti-tobacco forces, presenting the risk of business loss or negative public relations. Strategy: Continue to provide patent and trademark support; direct preparedness programs to protect our interests. Action Plan: 1992 Â• Enforce records management policy imple- mentation. Â• Widen scope of review in Consumer Research. Â• Conduct training sessions for members of the Crisis Response Team, Screening Committee and their back-ups. Â• Expand training to all relevant personnel who may receive product-related information as to the proper handling and dissemination of the information. 1993-1996 Â• Address competitive claims. Â• Protect ourtechnologywith patents and patent enforcement. Â• Protect our trademarks. Â• Continue administering the crisis management plan and training of the Crisis Response Team members. Â• Schedule regular Screening Committee meet- ings to refine existing procedures. Â• Assess and finalize Recall Plan. 185 I I I I I I I I I I I I I I I I I I

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Tobacco Documents Online

Anne Landman's Collection