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PHILfP_' M_O_RRIS COMPANIES INC. INTER-OFFICE CORRESPONDENCE . ,1 120 PARK AVENUE, NEW YORK, NY 10017-5592 To: Michael A. Mil s Date: September 16, 1993 From: Craig L. Full Subject: August Mo thlx/ Report HIGHLIGHTS On tax matters, the WRO worked to ensure that no provision to change the tax treatment of foreign source income or increases to the corporate rate above 35% were added during the conference negotiations on the deficit reduction/budget reconciliation package. Both objectives were realized. The Administration continues preparations for the unveiling of the President's health care reform package, which is now expected to occur at a joint session of Congress during the latter part of September. The President and his senior advisors are in the process of making the final major decisions on the scope of his plan including how to pay for it. The President touched on the broad outlines of his plan in a speech before the National Governors Association (NGA) on August 16, where he revealed that an employer mandate will be the central component of his package (Additional details are included in the Washington report). We organized a number of plant tours for Members of Congress. Rep. Rick Lazio (R-NY) visited the Entenmann's headquarters and bakery in Bayshore, Long Island, Rep. David Minge (D-MN) visited the KUSA plant in New Ulm, Minnesota, Rep. Gene Green (D-TX) visited the Maxwell House plant in Houston, Texas, and Rep. John Spratt (D-SC) visited the Louis Rich plant in Newberry, South Carolina. In each case the focus of these visits was the importance of the individual facility to its local community as well as its role as part of the Philip Morris family of companies. In addition to the congressional plant tours, on August 16, Assistant Secretary of Agriculture for Marketing and Inspection Programs, Eugene Branstool, was the guest at Oscar Mayer's bacon plant in Coschocton, Ohio. The focus of his visit was regulatory proposals now pending to reform the meat and poultry inspection system. Finally, Kraft General Foods was one of the corporate sponsors of the National Food Processors Annual Congressional Staff Field Trip to central California. The three day tour included visits to the GF/Post cereal plant in Modesto, the NFPA Food Science Laboratory in Dublin, and Del Monte and Frito Lay facilities. Met and worked with Burson-Marstelfer on numerous occasions to advance the recommendation, strategy, and actual activities of the corporate image program. We are currently developing a three-scenario document on how the program could play out over the next 12-18 months. We worked extensively with finance, planning and human resources on the corporate cost review. In addition, we are establishing a mandate throughout Corporate Affairs to address carefully the issue of cost control. For example, we recently developed a new budget and expense tracking system with IS which will

I improve each department's ability to manage effectively their budgets; reduce staff time of data entry and allow for more analysis; provide greater flexibility to manipulate information; solve problem of developing maintenance-laden spreadsheet for Financial Planning & Analysis' new budget system; enhance our ability to identify coding errors in generating monthly journal entries; creates comparison of year-to- date actuals against year-to-date budget by project for the first time; and, if needed, allows for tracking budget by objective. Testing in September for transferring budget information to Financial Planning and full implementation in 1994, but will use on an ad-hoc basis by fourth quarter of 1993. Washington Relations The WRO coordinated efforts with R.J. Reynolds in developing a list of U.S. Senators and Representatives to be contacted by lobbyists from our respective organizations during the August recess on tobacco excise taxes. The WRO also continued to monitor the health care reform financing issue. At our urging, several key members of Congress expressed concern directly to President Clinton about raising tobacco excise taxes to fund health care reform. On the subject of President Clinton's health care reform package, he made no mention of new taxes during his August 16 NGA speech, but Health Care Task Force Executive Director Ira Magaziner told the governors in private briefings that increased tobacco taxes will be the "only new major tax needed." The tobacco tax will likely be used to finance a long term care program for the elderly. The Administration has been highlighting tobacco taxes as the sole new tax needed as part of a broader political effort to play down the costs of its program and other financing sources such as employer mandates and insurance premium cap price controls. Reports continue to indicate, however, that higher beer taxes will not be included in the Administration's final package. The business community is gearing up for a possible Senate floor vote on striker replacement legislation in September. The measure passed the House in June, but proponents are still several votes shy of the 60 necessary to beat back an expected filibuster. While organized Labor and its supporters have not yet decided whether to advance compromise legislation in an effort to gain the necessary votes, the business community is unified against the bill and any compromises offered by Labor. At this point, the legislation is highly unlikely to pass. The full Senate is expected to vote in early September on an FTC reauthorization bill passed by the Commerce Committee on August 3. In contrast to the House- passed bill, the Senate measure would permanently ban the use of the FTC's unfairness rulemaking authority and codify a pro-advertiser definition of "unfairness" that would apply to unfairness proceedings the FTC brings under its case- by-case authority. Upon passage by the Senate, efforts will be made in conference by both House Energy and Commerce Committee Chairman John Dingell (D-Ml) and Senate Commerce Committee Chairman Ernest Hollings (D-SC) to reach a compromise on the FTC's use of unfairness rulemaking authority against commercial advertising. The WRO has worked with the PM operating companies to develop a consensus position and has opened discussions with key staff. Limiting the deductibility of general advertising expense will be the subject of a hearing before the House Ways and Means Committee's Select Revenue 2

Measures Subcommittee in September. The hearing will focus on revenue sources that may be looked to fund tax bills being proposed by various individual members of the Ways and Means Committee. The WRO is working with the advertising community to educate Members on why such a proposal is unwarranted. On federal tort reform issues the House Judiciary Committee's Subcommittee on Intellectual Property and Judicial Administration marked up a bi-partisan bill supported by PM that would delete a mandatory, pre-discovery disclosure rule from a package of changes to the Federal Rules of Civil Procedure that will otherwise become law automatically on December 1, 1993. The full House Judiciary Committee is expected to set a markup for this bill shortly after Congress returns from its August recess. Similar legislation is expected to be introduced in the Senate sometime in September. The WRO is working behind the scenes to push this legislation through Congress in the face of the December 1, 1993 deadline and a tight legislative calendar for the fall. In addition, Senator Herb Kohl (D-WS) introduced a bill that would severely'limit availability of protective order and sealed settlements in federal court cases. Senator Kohl's staff has indicated that he will seek hearings on his measure this fall. WRO will be working to oppose Kohl's legislation. With regard to environmental tobacco smoke (ETS) and indoor air quality (IAQ), the WRO has continued to support adherence to the principles of sound science in risk assessments as welt as an OSHA regulation of workplace air based on ventilation standards. Although we have made some progress in advancing sound science and preventing OSHA from separating ETS from the broader IAQ issues, our challenge will intensify this fall. As previously reported, Senator Lautenberg (D-NJ) attached his smoking ban legislation to the Treasury and Postal Service Appropriations bill on the Senate floor. The WRO has been working to have such language deleted during the conference between the House and the Senate. Regarding an executive order to ban smoking, Carol Browner's congressional testimony indicated that the Administration was actively reviewing such an order. To date, our sources have been unable to confirm or refute a reactivated review of an executive order. However, earlier reports disclosed that an executive order announcing a goal of a federal workplace smoking ban was being considered as part of the release of the Clinton Health Care Plan. An executive order would certainly reinforce the prevailing view that smoking needs to be restricted, if not banned, to protect the health of non-smokers. Issues of sound science notwithstanding, given increased public perception of risk/potential risk of ETS, the debate is not whether there will be smoking restrictions, but what kind of smoking restrictions. Rep. Joseph Kennedy (D-MA), working with Rep. Henry Waxman (D-CA), has introduced new indoor air quality legislation, H.R. 2919. The bill was drafted to be referred only to the Energy and Commerce Committee and thus Rep. Waxman's Health and Environment Subcommittee. The legislation not only makes EPA the central regulatory authority on indoor air quality, but requires the agency to promulgate guidelines for identifying and eliminating indoor air hazards, certifying indoor air contractors, as well as establishing a federal civil action for violations. Reportedly, Rep. Waxman is working on his own indoor air legislation to protect school children from the allegedly adverse effects of ETS and other indoor air pollutants. Waxman is expected to combine his proposal with Kennedy's, perhaps after a hearing, and move to a quick subcommittee markup. His effort will be to avoid/minimize multiple committee jurisdiction in the House in order to go to conference with Majority Leader Mitchell's (D-ME) legislation, which is currently awaiting action by the full Senate. Our challenge is to focus on amendments N Q -p ~ N ~

requiring the application of sound scientific principles to the proposed indoor air legislation while responding to the continued urges to ban or severely restrict indoor smoking by arguing for a broader ventilation solution, referencing the number of schools which are sick buildings where smoking has already been eliminated or restricted, as well as the current air problems on domestic airplanes where smoking has already been banned. Originally, our work on legislating the principles of sound science were targeted at the EPA cabinet status bill. In the Senate, Senator Bennett Johnston (D-LA) amended the cabinet status bill to require the EPA to public comparative analyses of risks and perform cost benefit analyses. As part of the House debate on cabinet status, Chairman John Dingell (D-Ml) has proposed language requiring the EPA to publish guidelines on the use of the best and most credible science, the process of peer review, and a quality assurance program. Rep. Carlos Moorehead (R-CA) has introduced free standing legislation, H.R. 2910, the Risk Communication Act of 1993, which would, most importantly, require the EPA to establish a process for re-review of a risk assessment when confronted with new information. Although all of these bills need substantial improvement, the groundwork has been laid for a debate. The WRO will be exploring the potential of a congressional hearing on Safeguarding the Future and the problems of the ETS risk assessment, in the Technology, Environment and Aviation Subcommittee of the House Science, Space and Technology Committee chaired by Rep. Tim Valentine (D-NC). With regard to OSHA reform, the expected confirmation of the Administration's OSHA nominee Joe Deere, as well as its support of legislative reform, will likely lead to committee approval along party lines in both the Senate and the House this fall. Last Congress, PM was prepared to endorse OSHA reform with some amendments since the legislation contained a mandate that OSHA adopt certain regulations on IAQ. This year's version does not contain such a provision and includes a definition of significant risk as "one death in a million" which would create a major problem for all the operating companies. The WRO has provided analysis of the legislation to the operating companies in order to be able to discuss the legislation with organized labor and make a timely decision on our legislative strategy. Additional hearings on food safety legislative reform were held in the House on August 2, by Rep. Charlie Stenholm (D-TX) in his House Agriculture Subcommittee. The hearing focused on H.R. 627, which is supported by KGF and other members of the Food Chain Coalition. Witnesses included the principal sponsors of the legislation, Reps. Richard Lehman (D-CA), Tom Bliley (R-VA) and Roy Rowland (D- GA), as well as representatives of agricultural interests, the food processing industry, environmentalist, and chemical interests. At the conclusion of the hearing, Chairman Stenhoim announced that the subcommittee would solicit the Administration's views on the bill and then proceed to mark up the measure. Later in the month, the Clinton Administration announced that its pesticide reform legislative package will be defined by a "white paper," or a set of principles, that will be released in September. On August 18, a draft of these principles was circulated to interested parties for comment. The draft proposed to replace the Delaney Clause with a negligible risk standard defined in narrative rather than rigid numerical terms but neglected to include a provision for national uniformity of pesticide tolerances, an issue crucial to obtain KGF's support. In a related development, Rep. Henry Waxman (D-CA) and Sen. Edward Kennedy (D-MA) have announced a joint hearing on•pesticide reform in September. The focus of this hearing will be the NAS

report "Pesticides in the Diets of Infants and Children." At that hearing, Administration witnesses will be asked to appear to outline its pesticide policy. A broad coalition of FDA regulated industries and consumer groups mounted a successful effort to have $175 million in FDA user fees deleted from the Agriculture, Rural Development and Independent Agencies FY 1994 Appropriations bill. The conference report was cleared by the House on August 6 and the Senate is expected to take it up in September. While defeated this year, user fees remain an attractive revenue raising option. A 90-day moratorium on the sale of BST, effective upon FDA approval, was included in the final budget reconciliation legislation. Senator Russell Feingold (D- WI), who had successfully pushed for a one-year moratorium on BST, insisted on inclusion of some moratorium language as a key to his support for the broader budget package. On beer, Miller is continuing to work with a broad-based coalition to oppose the Sensible Advertising and Family Education (SAFE) Act, which would require rotating warning messages on all electronic and print advertisements. In an effort to diffuse support for the legislation, the Board of Directors of the National Association of Broadcasters endorsed a stepped-up public service announcement campaign regarding several alcohol abuse issues. On August 19, President Clinton appointed veteran Democratic Party political activist William Daley (currently a partner in the Chicago law firm of Mayer, Brown and Platt) to lead "a positive, bipartisan campaign to explain the benefits of the North American Free Trade Agreement to the country and to the Congress." Daley will serve as chairman of the Administration's Task Force on NAFTA. This appointment comes less than a week after the three governments announced that they had concluded side agreements to the NAFTA to cover labor, environment, and import surges. Immediately following the announcement, House Majority Leader Richard Gephardt announced his opposition to NAFTA, raising a significant, obstacle to its approval by Congress. The Administration expects to have the legislation ready for congressional consideration by early October. On state solid waste issues, Oregon Governor Barbara Roberts signed into law industry-supported legislation, which delays enforcement of the rigid plastic container provisions of the "rates and dates" law, SB66, until January 1, 1996, and until the Department of Environmental Quality (DEQ) publishes the 1995 rigid plastic container recycling rate. The California Assembly Natural Resources Committee reported industry-supported legislation, sponsored by Senator Boatwright, to provide a two-year extension for FDA regulated food and cosmetic products of the rigid plastic container "rates and dates" law (SB235) from January 1, 1995 to January 1, 1997. The bill also establishes a recycling rate methodology and calls for an industry report, due January 1, 1996, on "best efforts" to achieve the goals. Due to technical drafting problems, it is unclear whether or not the Waste Board can block the extension if the industry report is unsuitable. At this time, the industry coalition is working to resolve this technical discrepancy so that the Waste Board cannot block the extension. SB466 must be acted upon prior to the September adjournment date. 5

In -a surprise legal maneuver, Massachusetts Attorney General Scott Harshbarger, a supporter and former member of MassPERG, issued a controversial ruling concerning the state legislature's July action eliminating the MassPIRG negative check-off funding mechanism. The Attorney General ruled that because the MassPIRG provision included in the state's final budget bill was unrelated to a state appropriation, it is open to the referendum process. To qualify for a referendum, thus suspending the law, MassPIRG must collect 46,868 signatures by October 18. It is likely that MassPIRG will succeed in collecting the required signatures, thus placing the issue on the November 1994 ballot. The legislature's action eliminating the negative check-off was estimated to have reduced MassPIRG revenue by $300,000 to $400,000. In Florida, the Department of Revenue has issued a ruling which eliminates many food containers from the list of containers subject to the state's one cent advance disposal fee (ADF). The industry effort, led by Kraft General Foods, to ensure that the Department's interpretation remained consistent with the statutory language, means that KGF will not be competitively disadvantaged by the ADF law. On other issues, Kraft General Foods succeeded in leading an industry effort to persuade Governor Edgar of Illinois to issue an amendatory veto of legislation, which would make broad changes to laws governing product promotions, contests, and sweepstakes. Though HB1687 is aimed at curbing illegitimate contests and promotion, the provisions of the bill severely affect the legal and legitimate promotional activities of product manufacturers and retailers. The legislature will consider the veto in late September. The industry is mounting an effort to ensure that the veto is sustained. Policy and Administration Began coordinating with the WRO and KGF Corporate a briefing for your participation at the upcoming GMA Board meetings. Also, developing a briefing for your meeting with the new Chairman and CEO of the New York Chamber of Commerce and Industry/New York City Partnership. Finalizing VAT positioning for PM based on the quantitative study performed by the Washington office of KPMG Peat Marwick and the internal analysis conducted by the PM Task Force on the VAT (consisting of Bruce Brown, Ted Downing, Roy Marden and Bob Reese). This analysis encompasses alternative possibilities of federal excise tax increases on cigarettes and new and higher estimates of elasticity of demand. Preparing to make VAT presentation to KGF Corporate and the newly formed GMA Tax . Committee's Subcommittee on the VAT. Prepared a briefing for efa off-the-record meeting with Sens. Nunn and Domenici concerning their concept for structural tax reform ("full consumed income tax"). Worked with the WRO to help coordinate your briefing for the upcoming BRT Policy Committee and International Trade and Investment Task Force meetings. Worked with KGF Corporate in the development of GMA goals for 1994, including the prioritization of VAT analysis. Met with BRT's staff executive on risk assessment to communicate PM concerns and place risk assessment on an upcoming Policy Committee meeting agenda. 6

Leveraged numerous contacts in the public policy arena and the media to generate positive publicity for PM and/or a fair hearing on our issues, with particular reference to the misapplication of science by the EPA and the resulting poor public policy (Alexis de Tocqueville Institute (AdTI), Capital Research Center, The Claremont Institute for the Study of Statesmanship and Political Philosophy, The Heartland Institute, National Center for Policy Analysis (NCPA)), and the policy arguments against the use of excise taxes to fund proposed health care reform (The Acton Institute for the Study of Religion and Liberty, AdTI, Americans for Tax Reform, Consumer Alert, Mackinac Center for Public Policy, NCPA). Working with two of our policy group affiliates in Michigan (Acton Institute, Mackinac Center) to oppose the proposed exorbitant hike in that state's cigarette excise tax to replace the revenues lost through the recent property tax rollback. Making preliminary plans with the Education and Research Institute/National Journalism Center to develop a policy forum for journalists and legislators on health care reform, with particular emphasis on funding mechanisms, i.e., why excise tax hikes are not the way to go. Worked with Corporate Planning in developing argumentation and public policy organization support (American Enterprise Institute for Public Policy Research, The Conference Board, Hudson Institute, National Planning Association) for a speech by on America in the year 2000, with particular reference to.trends, demographics, etc. Political Action Committee - Working on special edition of PHIL-PAC News for KGF employees during the solicitation and developing the next edition of the PHIL-PAC News. Planning focus groups at GF USA in September. All solicitation material for the KGF solicitation will be printed and delivered around September 2. Managed the accounting process for PHIL-PAC and KGF PAC on combined activity of $35,818 in receipts and $17,750 in disbursements. Prepared political action committees financial reports for each Treasurer. Coordinated PHIL-PAC interim board meeting on August 12. Financial Controls - Continued aggressive financial controls program which to date has produced significant savings ($999,898) and positive impact ($686,000) on the 1993 budget totaling close to $1.7 million. By reaching final agreement on the Visnews audit, it produced savings of $249,330 from unreconciled billings and $600,000 because of contract negotiations. Also to date, the group has prevented $150,568 in payments by identifying unacceptable and duplicate billings. Additionally, the staff has reduced the impact of unaccrued 1992 expenses on the 1993 budget by tracking and reversing these expenses against open accruals ($686,000). Completed three weekly expenditure review meetings with Vice President, Corporate Affairs Policy & Administration, to examine our payments exceeding $5,000. We continued to support company efforts to address the EPA's risk assessment on ETS. Conducted an ETS briefing for PMI Corporate Affairs staff. Reviewed and analyzed scientific articles on ETS and submitted letters to the editors of newspapers responding to the claims made in the studies. Briefed Walter Williams, an economist and syndicated columnist, on the ETS issue and excise taxes. W 7

Provided additional ETS background material to various policy groups and media contacts. As a result, EPA Watch, The Heartland Institute and Capital Research Center wrote commentaries addressing the EPA and ETS. These commentaries are expected to appear in various newspapers around the country. Participated in an OSHA reform legislation meeting. Met with the chairman of the Environment Committee from the Business Round Table in an effort to get the BRT to address the issue of risk assessment reform. Environmental Efforts - Participate in the Superfund Task Force meeting. Coordinated PM's comments to the Investor Responsibility Research Center (IRRC). In cooperation with the PMI Latin America group, we submitted extensive comments to IRRC to address a negative comment which appeared in the first draft of the survey. Met with The Conservation Fund, a moderate environmental group, to discuss areas of mutual interest with respect to PM sponsorship of various conservation projects. Communications Wall Street Journal -- Fairly quiet month with Eben Shapiro taking a two week vacation. He reiterates wanting something other than tobacco stories. Working with operating divisions for ideas. International is one obvious one. Currently working with him on a tobacco marketing wrap-up story through PM USA. New York Times -- Also quiet as Mike Janofsky covers Philadelphia bureau for three weeks. He does call us about rumor he's heard about Marlboro developing a "short cigarette." He tried Corporate after he gets nothing from V. Han. We don't comment. Another European reporter requests interviews on Eastern Europe tobacco wrap-up story. G. Bible requests guidance. We recommend it be done as they'll do it anyway, and we should try to get in the positive messages of what we're accomplishing there. Business Week -- Laura Zinn gets married and is away for extended period of time. We're following up on some of the story ideas we suggested to her in our last meeting. Fortune -- Our relationship with Patti Sellers remains distant. We simply handle her requests. They do a brands story with neutral to fair coverage of Marlboro and some of our other products. Kraft Jacobs Suchard -- Held numerous discussions with Walter Anderau, Rich Collins and Ned Moy. Gave input and changes on releases, Q&A, media event, etc. Attended event in Zurich. Europe Media Plan -- Working with Brussels office on some investor/analystlmedia events for Europe/UK. Will meet with all parties in London to discuss Burson-Marsteller plan. Will liaise with food group. Miller Can Plant -- Worked with Miller CA staff on developing strategy for announcement of selling of can plants to Reynolds aluminum. MacDonough Announcement -- Wrote and distributed senior personnel changes at Miller. Handled press calls with Q&A, etc. Breyers Divestiture -- Wrote statement and handled media calls. 8

Dividend Release -- Drafted two versions of release and Q&A prior to final decision. Distributed after Board approved. Handled press calls. lnternal Communications Audit -- Interim report distributed. Qualitative analysis begins. Virginia Slims Brunch -- Hosted event, well attended by West Coast media. Quarterly Report -- Redesigned and distributed. Instituted major cost savings. Annual Report -- Saw three designers. Selected two for consideration. PM Globe -- Have drafted proposal for major overhaul and cost savings. More details will be available next month. FYI -- Will become "FYI AM." Afternoon edition will be eliminated. Hans Storr Interviews -- Have arranged or are in process of arranging major interviews with international publications: Handelsblatt (Germany); Capital (France) as well as CFO Magazine. KGF/American Heart Assoc.-- Provided input/counsel to KGF on statement in response to new AHA endorsement program concerning food companies who are connected with tobacco. NYT Publisher's Lunch -- Preparing briefing for your lunch in late October. Public Affairs We sponsored or supported: Luncheon at U.S. Conference of Mayors executive committee meeting, hosted by USCM President and Louisville Mayor Jerry Abramson (with PM USA), Louisville. This was the first PM-sponsored event since a resolution opposing "tobacco" support 8 years ago. Signage, food and beer, PM logo pens and PM representatives were big hits, suggesting renewed official ties are increasingly possible. Annual convention, National Urban League, including PM Cos. exhibit at trade show and the Herbert H. Wright award breakfast; PM Cos. received special NUL award for 25 years of support for having initiated and supported exhibit/trade show program. Annual conference, California State Package Store and Tavern Owners Association. First annual conference, National Federation of Hispanic-owned Publications. Annual conference, National Black Chamber of Commerce. Annual conference, Tuskegee Airmen Inc. We attended or participated in: Senior Corporate Advisory Board meeting, U.S. Hispanic Chamber of Commerce. First national forum, National Network of Hispanic Women's Organizations. Other. Continued to coordinate Midwest flood relief efforts, check presentations and related media issues, both internal and external. 9

Our Black History Month radio documentary series for 1992 and 1993 won the Arrerican Bar Association's Silver Gavel Award and the National Association of Black Journalists annual production award, respectively. Distributed PM-produced video summary of National Council of La Raza Silver Anniversary conference to NCLR Board Members, other notables. CULTURAL AFFAIRS - Philip Morris Presents Ailey in the Park in celebration of the 35th Anniversaries of Alvin Ailey and Philip Morris' support of the arts. Approximately 275 guests of Philip Morris attended a reception prior to the performance which drew more than 15,000 people, the largest crowd ever for a dance performance in Central Park. George Knox spoke on behalf of Philip Morris. Other speakers were Barbara Fife, Deputy Mayor, who read a letter from Mayor Dinkins complimenting PM, and Judith Jamison, artistic director of the Ailey company. Corporate Contributions - working on a media strategy for the release of the Urban Institute study on hunger among the elderly. Site visits were made to Louisiana and Texas to explore with concerned parties the feasibility of raising funds for the refurbishment of the Sate Capitol buildings. Made several check presentations to environmental groups in Washington, D.C. and discussed possible funding opportunities with other national environmental groups. 10