Tobacco Documents Online

Investors may face downside risk of 10-15% in the event of a plaintiff verdict in Rogers. Isportant Disclosures (code definitions attached or available upon request) MO : M, CP, CF RN : M Further Information This investment commentary was made available on the Goldman, Sachs & Co. Research Xpress at 09:05 New York time on 8121/96. Please contact your Gold.an Sachs representative for additional details. (C) Copyright 1996 Goldman, Sachs & Co. First Call Corporation - all rights reserved. 617/345-2500 END OF NOTE • ~

• 09:08am EDT 21-Aug-96 Goldaan Sachs (CQHEN**) MO RN GSNDTE MO,RN : Rogers Lawsuit Nearing Completion G5 G$ GS 6S GS GS GS GS GS GS 6S GS GS GS 6S GS GS GS GS GS G5 GS GS GS Goldman, Sachs & Co. Investment Research Philip Morris Companies, Inc., RJR Nabisco Holdings Corp. +• Rogers Lawsuit Nearing Completion * e- Marc Cohen (212) 902-0004 - NY Equity Research NOTE 8e59 AM Stk Latest 08/21/96 52 Week Mkt Cap YTD Pr Cur Rtg --- Philip Morris Companies, Inc PL RJR Nabisco Holdings Corp. RL Close ------ 91.50 26.63 Range ------- 108-73 36-25 (s f) ------- 75922.3 7271.1 Change ------ 1% -13% Yield ----- 4.4% 6.9% --------------Earnings Per Share--------------- MO 1997 FY Mar Jun Sep Dec FY 9.00 CY 1996 FY 1. 89A 1. 97A 7.70 1995 FY(A) 1.60 1.67 1.71 1.53 6.51 RN M J S D 1997 FY ar un ep ec 3.05 1996 FY 0.57A 0.63 2.60 1995 FY(A) 0.51 0.56 0.59 0.60 2.28 s MO RN -Abs P/E on- -Rel P/E on-- P/NxtFY LT EPS Cur Nxt Cur Nxt EBITDA Growth FY 11.9X 10.2X 0.76X 0.72X 6.39X 15% FY 10.2 8.7 0.65 0.61 2.31 18 ~ There are no changes to our estimates of $7.70 for 1996 and $9.00 for 1997 for MO and $2.60 and $3.05, respectively for RN. * Defense testimony in the Rogers v. RJR tobacco product liability lawsuit is scheduled to conclude today. Closing arguments are scheduled for Thursday at which point the case will be handed to the jury. * While it is not possible to predict jury behavior, reports fro our courtroom observer indicate that defendants have been raising a more effective defense than we believe was raised in the Carter trial. ~ Plaintiff}s have made points against key defense witnesses, but defendant have apparently presented credible testimony that showed: (a) high public awareness of dangers of smoking, (b) responsive of the companies to the controversy and (c) changes in product design in response to concerns. * We continue to believe that the continuu of litigation still does not clearly suggest that these lawsuits will raise obligations that damage 7 the financial integrity of the industry participants.

e We continue to recommend purchase of both Philip Morris and RJR Nabisco based upon p/efs and yields that already reflect high investor concern. • • . ADDITIONAL DETAILS: 1. DEFENSE TESTIMONY DRAWING TO A CONCLUSION - Our courtroom observer reports that defense testimony in Rogers v. RJR is expected to conclude this morning. Closing arguments in the case are now expected Thursday morning, at which point the jury will be instructed and deliberations will begin. A unanimous vote is required for the 6 person jury to reach a verdict. It is important to note that Indiana is a modified comparative fault state. The jury eust find that Rogers was less than 50% responsible for his own injury through his own behavior in order to award damages in this case. 2. JURY COMPOSITION - The Rogers jury is co.posed of 5 women and 1 eale. 4 of the women are in their 20's and 30's, the 5th is in her 40's. The nale is also in his 40°s. There is 1 current smoker and 2 ex-smokers a.ong the group. 3 are college graduates, i has some college, while the other 2 are high school graduates. All answered yes to a pre-trial jury question as to whether smoking is addictive, but both ex-smokers qualified this. One referred to caffeine as also addictive, while the other said smoking is addictive for some. 2 also said that they believe s.oking causes cancer. 3 have family members who have some type of cancer, either lung or throat cancer. 3. INDUSTRY APPARENTLY ORCHESTRATING MORE EFFECTIVE DEFENSE - Our updates indicate that the report in today's newspaper that the industry is ounting a•ore effective defense appears to be true. Several things have apparently changed or been strengthened in the industry's strategy. First, the defendants introduced testi.ony fro an RJR scientist about the how cigarette design has changed over time in response to controversy about the health issues. Second, the defendants brought testimony by a historian about high levels of common awareness of health risks in Indiana, including particularly impressive examples of political cartoons even prior to 1940. Third, the defense yesterday brought a witness who produced credible testimony that definitions of addictive substances have changed over time and that cigarettes would not be considered addictive by pre-1988 definition. Importantly, the industry has also succeeded in keeping some potentially damaging documents out of the record. Plaintiff's have clearly had some success in rebutting some of the points raised by the defense with this testimony, which still akes the outcome unpredictable, but our overall impression is that defense presentation is stronger in this case than was true in the recent Carter v. Brown & Williamson episode. 4. CONIINUE TO RECOMMEND PURCHASE OF PHILIP MORRIS AND RJR NABISCO - As we presented in our research note last week, the recent sell-off in both stocks appears to indicate that market participants believe that the Carter case provided clear evidence of an atmosphere change whereby juries will heretofore view smokers as innocent victims. We continue to believe that the Carter verdict was ambiguous and that the legal challenges against the industry are best viewed in the context of a continuum of decisions in which the industry has generally prevailed. We see good investment potential in both Philip Morris and RJR Nabisco on the basis that the p1e for each stock - at about a 30% discount relative to the S&P 500 - stands at about the same level as after the Cipollone verdict 8 years ago, while the dividend yield on each is more attractive than at that point relative to both the S&P 500 and the long treasury bond. However, this viewpoint is not to suggest clarity in the legal situation where ambiguity reigns.