Supplemental Management Employees' Retirement Plan - Philip Morris Cos. Inc.


               SUPPLEMENTAL MANAGEMENT EMPLOYEES' RETIREMENT PLAN

                                       OF

                          PHILIP MORRIS COMPANIES INC.



                           Effective October 1, 1987

                (As amended and in effect as of January 1, 1997)

               SUPPLEMENTAL MANAGEMENT EMPLOYEES' RETIREMENT PLAN
                                       OF
                          PHILIP MORRIS COMPANIES INC.


            The Supplemental Management Employees' Retirement Plan of Philip
Morris Companies Inc., as hereinafter set forth shall be effective with respect
to an Employee designated as a Participant (as defined herein) whose date of
retirement (as specified in an application for retirement in Article II, B of
the PM Retirement Plan) is on or after April 1, 1993, or who has filed an
application for an Optional Payment pursuant to Article II D(3) of the Plan
after March 1, 1992 and with respect to former Employees designated as
Participants on or after April 1, 1993. The rights of an Employee or former
Employee designated as a Participant who retired before such dates shall be
governed by the provisions of the Plan as in effect on the date of retirement
or, if later, the date of designation as a Participant, unless an application
for an Optional Payment was filed after March 1, 1992.


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                                    ARTICLE I

                                   DEFINITIONS

            The following terms as used herein shall have the meanings set forth
below. Capitalized terms used herein and not defined below shall have the
meanings set forth in the PM Retirement Plan or the Profit-Sharing Plan, as the
context may require.

            (a) 'Accredited Service' shall have the same meaning as in the PM
      Retirement Plan, provided, however, that Accredited Service shall also
      include the additional periods of Accredited Service which may be credited
      to a Participant under the provisions of Article II, A(1)(a) of the Plan.

            (b) 'Actuarial Equivalent' shall mean a benefit which is equivalent
      in value to the benefit otherwise payable pursuant to the terms of the
      Plan, based on the actuarial principles and assumptions set forth in
      Exhibit 'I' to the PM Retirement Plan; provided, however, that a Single
      Sum Payment shall be the Actuarial Equivalent of the Supplemental
      Retirement Allowance payable in equal monthly payments during a twelve
      (12) month period for the life of the Retired Participant, using the
      actuarial principles and assumptions set forth in Exhibit 'A' to the Plan.

            (c) 'Administrator' shall mean the Senior Vice President, Human
      Resources and Administration of Philip Morris Companies Inc. (or his
      delegatee) designated by the Committee to carry out certain
      responsibilities in connection with the administration of the Plan.

            (d) 'Allowances' shall mean a Supplemental Retirement Allowance and
      a Supplemental Profit-Sharing Allowance.

            (e) 'Appointee' shall mean the person or entity who, pursuant to the
      provisions of the Plan, is empowered, in his, her or its sole discretion,
      to designate an Employee as a Participant and grant one or more Allowances
      under the Plan. The Appointee for an Employee who is not a chief executive
      officer of a Participating Company shall be the chief executive officer of
      his Participating Company. The Appointee for a Retired Employee and an
      Employee who is a chief executive officer of a Participating Company other
      than the Company shall be the Chief Executive Officer. The Appointee of
      the Chief Executive Officer shall be the Committee.

            (f) 'Benefit Equalization Plan' shall mean the Philip Morris Benefit
      Equalization Plan, effective as of September 2, 1974 and as amended from
      time to time, but only to the extent that benefits are payable pursuant to
      Article II, A thereof.

            (g) 'Change in Circumstance' shall mean (1) the marriage of the
      Participant or Retired Participant, (2) the divorce of the Participant or
      Retired Participant from his Spouse, provided such Spouse was designated
      as the beneficiary in the currently effective application to receive an
      Optional Payment, or the



      Participant or Retired Participant elected to receive an Optional Payment
      pursuant to clause (1) of Paragraph (u) hereof, (3) the death of the
      beneficiary designated in the application to receive an Optional Payment,
      or (4) a medical condition, based on medical evidence satisfactory to the
      Administrator, which is expected to result in the death of the beneficiary
      (including the Spouse) who is designated to receive a benefit after the
      death of the Retired Employee in accordance with the application to
      receive an Optional Payment originally filed with the Administrator,
      within five (5) years of the filing of an application for change in
      Optional Payment method pursuant to Article II, D(3) hereof.

            (h) 'Change of Control' shall mean the happening of any of the
      following events:

                  (1) The acquisition by any individual, entity or group (within
            the meaning of Section 13(d)(3) or 14(d)(2) of the Securities
            Exchange Act of 1934, as amended (the 'Exchange Act')) (a 'Person')
            of beneficial ownership (within the meaning of Rule 13d-3
            promulgated under the Exchange Act) of 20% or more of either (i) the
            then outstanding shares of common stock of the Company (the
            'Outstanding Company Common Stock') or (ii) the combined voting
            power of the then outstanding voting securities of the Company
            entitled to vote generally in the election of directors (the
            'Outstanding Company Voting Securities'); provided, however, that
            the following acquisitions shall not constitute a Change of Control:
            (i) any acquisition directly from the Company, (ii) any acquisition
            by the Company, (iii) any acquisition by any employee benefit plan
            (or related trust) sponsored or maintained by the Company or any
            corporation controlled by the Company or (iv) any acquisition by any
            corporation pursuant to a transaction described in clauses (i), (ii)
            and (iii) of paragraph 3 of this subsection (h); or

                  (2) Individuals who, as of the date hereof, constitute the
            Board (the 'Incumbent Board') cease for any reason to constitute at
            least a majority of the Board; provided, however, that any
            individual becoming a director subsequent to the date hereof whose
            election, or nomination for election by the Company's shareholders,
            was approved by a vote of at least a majority of the directors then
            comprising the Incumbent Board shall be considered as though such
            individual were a member of the Incumbent Board, but excluding, for
            this purpose, any such individual whose initial assumption of office
            occurs as a result of an actual or threatened election contest with
            respect to the election or removal of directors or other actual or
            threatened solicitation of proxies or consents by or on behalf of a
            Person other than the Board; or

                  (3) Approval by the shareholders of the Company of a
            reorganization, merger, share exchange or consolidation (a 'Business
            Combination'), in each case, unless, following such Business
            Combination, (i) all or substantially all of the individuals and
            entities who were the beneficial


                                       -2-

            owners, respectively, of the Outstanding Company Common Stock and
            Outstanding Company Voting Securities immediately prior to such
            Business Combination beneficially own, directly or indirectly, more
            than 80% of, respectively, the then outstanding shares of common
            stock and the combined voting power of the then outstanding voting
            securities entitled to vote generally in the election of directors,
            as the case may be, of the corporation resulting from such Business
            Combination (including, without limitation, a corporation which as a
            result of such transaction owns the Company through one or more
            subsidiaries) in substantially the same proportions as their
            ownership, immediately prior to such Business Combination of the
            Outstanding Company Common Stock and Outstanding Company Voting
            Securities, as the case may be, (ii) no Person (excluding any
            employee benefit plan (or related trust) of the Company or such
            corporation resulting from such Business Combination) beneficially
            owns, directly or indirectly, 20% or more of, respectively, the then
            outstanding shares of common stock of the corporation resulting from
            such Business Combination or the combined voting power of the then
            outstanding voting securities of such corporation except to the
            extent that such ownership existed prior to the Business Combination
            and (iii) at least a majority of the members of the board of
            directors of the corporation resulting from such Business
            Combination were members of the Incumbent Board at the time of the
            execution of the initial agreement, or of the action of the Board,
            providing for such Business Combination; or

                  (4) Approval by the shareholders of the Company of (i) a
            complete liquidation or dissolution of the Company or (ii) the sale
            or other disposition of all or substantially all of the assets of
            the Company, other than to a corporation, with respect to which
            following such sale or other disposition, (A) more than 80% of,
            respectively, the then outstanding shares of common stock of such
            corporation and the combined voting power of the then outstanding
            voting securities of such corporation entitled to vote generally in
            the election of directors is then beneficially owned, directly or
            indirectly, by all or substantially all of the individuals and
            entities who were the beneficial owners, respectively, of the
            Outstanding Company Common Stock and Outstanding Company Voting
            Securities immediately prior to such sale or other disposition in
            substantially the same proportion as their ownership, immediately
            prior to such sale or other disposition, of the Outstanding Company
            Common Stock and Outstanding Company Voting Securities, as the case
            may be, (B) less than 20% of, respectively, the then outstanding
            shares of common stock of such corporation and the combined voting
            power of the then outstanding voting securities of such corporation
            entitled to vote generally in the election of directors is then
            beneficially owned, directly or indirectly, by any Person (excluding
            any employee benefit plan (or related trust) of the Company or such
            corporation), except to the extent that such Person owned 20% or
            more of the Outstanding Company Common Stock or Outstanding Company
            Voting


                                       -3-

            Securities prior to the sale or disposition and (C) at least a
            majority of the members of the board of directors of such
            corporation were members of the Incumbent Board at the time of the
            execution of the initial agreement, or of the action of the Board,
            providing for such sale or other disposition of assets of the
            Company or were elected, appointed or nominated by the Board.

            (i) 'Chief Executive Officer' shall mean the chief executive officer
      of the Company.

            (j) 'Committee' shall mean the Corporate Employee Benefit Committee
      of the Company charged with the administration of the Plan as from time to
      time constituted.

            (k) 'Company' shall mean Philip Morris Companies Inc.

            (l) 'Deceased Participant' shall mean any former Participant who
      died while he was a Participant, provided that no Optional Payment
      pursuant to clause (3) of Paragraph (u) hereof will be made under the Plan
      after the death of the Deceased Participant.

            (m) 'Deceased Retired Participant' shall mean a Retired Participant
      who has elected to receive an Optional Payment but who has died prior to
      the date his Optional Payment commences to be paid.

            (n) 'Deferred Retirement Allowance' shall mean the Retirement
      Allowance payable pursuant to Article II, A(2) of the PM Retirement Plan.

            (o) 'Early Retirement Allowance' shall mean the Retirement
      Allowances payable pursuant to Article II, A(3) of the PM Retirement Plan.

            (p) 'Employee' shall mean any person who (1) is employed on a
      salaried basis by a Participating Company, (2) is a member of a select
      group of management or a highly compensated employee of his Participating
      Company and (3) is eligible to receive a Retirement Allowance under the PM
      Retirement Plan. An Employee shall cease to be such under the Plan upon
      termination of his service for any cause whatsoever; provided, however,
      that he shall be deemed to be an Employee during the periods of service
      accredited to him pursuant to Article III of the PM Retirement Plan.

            (q) 'Exchange Act' shall mean the Securities Exchange Act of 1934,
      as amended from time to time, and any successor thereto.

            (r) 'Fiduciary' shall mean the Committee, the Management Committee
      and the Administrator to the extent that such person or body (1) exercises
      any


                                       -4-

      discretionary authority or control respecting management of the Plan, or
      (2) has discretionary authority or responsibility in the administration of
      the Plan.

            (s) 'Full Retirement Allowance' shall mean the Retirement Allowance
      payable pursuant to Article II, A(1) of the PM Retirement Plan.

            (t) 'Management Committee' shall mean the Philip Morris Management
      Committee for Employee Benefits designated by the Committee to carry out
      certain responsibilities in connection with the administration of the
      Plan.

            (u) 'Optional Payment' shall mean the following forms in which a
      Supplemental Retirement Allowance of a Participant who has made an
      election pursuant to Article II, D(3) hereof may be paid: (1) in equal
      monthly payments for the life of the Retired Participant, (2) as a
      Supplemental Joint and Survivor Allowance, or (3) as a Supplemental
      Optional Payment Allowance. Any election to receive an Optional Payment
      with respect to a Retired Participant's Supplemental Retirement Allowance
      under the Plan shall be independent of any election with respect to his
      benefits under any Other Plan.

            (v) 'Other Plan' shall mean (1) the Retirement Plan, (2) the Benefit
      Equalization Plan, (3) any other plan, except a defined contribution or
      similar plan, maintained by the Company, or any domestic or foreign
      subsidiary of the Company, which provides retirement income to one or more
      employees on or after termination of employment and (4) any employment
      contract or other agreement between an Employee and the Company or any
      other member of the Controlled Group providing for retirement benefits or
      benefits in the event of a termination of employment or a Change in
      Control of the Company or of any other member of the Controlled Group.

            (w) 'Participant' shall mean an Employee or Retired Employee who is
      designated as such by his Appointee pursuant to the terms of the Plan. The
      designation of an Employee or Retired Employee as a Participant by a chief
      executive officer of a Participating Company shall be communicated in
      writing to the Committee. An Employee or Retired Employee shall become a
      Participant as of the date designated in writing by his Appointee. Except
      as otherwise specifically provided for in the Plan, a Participant shall
      cease to be such whenever he ceases to be an Employee.

            (x) 'Participating Company' shall mean the Company and any other
      corporation which is a member of the Controlled Group and which, with the
      approval of the Committee determines to participate in the Plan for the
      benefit of its Employees and executes such instruments of participation as
      the Committee deems necessary.

            (y) 'Plan' shall mean this Supplemental Management Employees'
      Retirement Plan of Philip Morris Companies Inc., as amended from time to
      time.


                                       -5-

            (z) 'PM Retirement Plan' shall mean the Philip Morris Salaried
      Employees' Retirement Plan, effective as of September 1, 1978 and as
      amended from time to time.

            (aa) 'Profit-Sharing Plan' shall mean the Philip Morris Deferred
      Profit-Sharing Plan, effective as of January 1, 1956 and as amended from
      time to time.

            (bb) 'Retired Participant' shall mean a Participant who ceases to be
      such but is eligible for, or who has retired and is receiving a
      Supplemental Retirement Allowance from the Plan. A former Employee shall
      cease to be a Retired Participant as of the date he receives a Single Sum
      Payment.

            (cc) 'Retirement Plan' shall mean the PM Retirement Plan and each
      other defined benefit plan qualified under Section 401(a) of the Code
      maintained by a member of the Controlled Group in which a Participant has
      an accrued benefit.

            (dd) 'Single Sum Payment' shall mean (1) in the case of a
      Supplemental Retirement Allowance, the normal form of distribution to a
      Retired Participant who is eligible for a Full, Deferred or Early
      Retirement Allowance, which distribution shall be made in one payment to
      the Retired Participant (or his designated beneficiary) at the time set
      forth in Article II, D(2)(a) hereof and which is the Actuarial Equivalent
      of the Supplemental Retirement Allowance payable in equal monthly payments
      during a twelve (12) month period for the life of the Retired Participant
      and (2) the sole form of distribution of the Retired Participant's
      Supplemental Profit-Sharing Allowance.

            (ee) 'Supplemental Joint and Survivor Allowance' shall mean the
      total amount payable during a twelve (12) month period as a reduced
      Supplemental Retirement Allowance to a Retired Participant for life and
      after his death the amount payable to his Spouse for life equal to
      one-half of the reduced Supplemental Retirement Allowance payable to the
      Retired Participant, which together shall be the Actuarial Equivalent of
      the Supplemental Retirement Allowance of the Retired Participant.

            (ff) 'Supplemental Optional Payment Allowance' shall mean (1) the
      total amount payable during a twelve (12) month period in accordance with
      one of the payment methods described in Article II, A(4)(d) of the PM
      Retirement Plan designated by the Participant in the application for an
      Optional Payment under Article II, D(3) hereof pursuant to which the
      Participant receives for life after his retirement a reduced Supplemental
      Retirement Allowance and after his death after retirement his beneficiary
      receives for life a benefit according to the option elected by the
      Employee, which together shall be the Actuarial Equivalent of the
      Supplemental Retirement Allowance payable in equal monthly payments for
      the life of the Participant after his retirement, or (2) the total amount
      payable during a twelve (12) month period in accordance with one of the
      payment methods described in Article II,


                                       -6-

      A(4)(d) of the PM Retirement Plan pursuant to an election described in
      Article II, A(4)(c) of the PM Retirement Plan and designated by the
      Participant in the application for an Optional Payment under Article II,
      D(3) hereof pursuant to which the Participant receives for life after his
      retirement a reduced Supplemental Retirement Allowance and after his death
      his beneficiary receives for life a benefit according to the option
      elected by the Participant, which together shall be the Actuarial
      Equivalent of the Supplemental Retirement Allowance accrued to the date of
      election.

            (gg) 'Supplemental Profit-Sharing Allowance' shall mean the benefit
      determined and payable in a Single Sum Payment upon termination of a
      Participant's service with the Controlled Group pursuant to Article III
      hereof.

            (hh) 'Supplemental Retirement Allowance' shall mean the benefit
      determined under Article II, A hereof and payable at the time and in the
      manner set forth in Article II, D, provided, however, that, except as
      otherwise required by Article II, A(1) or Article II, D(3) of the Plan,
      payment to a Retired Participant in any form shall be the Actuarial
      Equivalent of a Supplemental Retirement Allowance expressed as a benefit
      payable in equal monthly payments during a twelve (12) month period for
      the life of the Retired Participant commencing at the Retired
      Participant's Normal Retirement Age.

            (ii) 'Supplemental Survivor Allowance' shall mean the total amount
      payable during a twelve (12) month period in equal monthly payments for
      the life of the Spouse of a Deceased Participant or Deceased Retired
      Participant who has died after the date of his retirement and prior to the
      date his Optional Payment under Paragraph (u)(1) or (2) hereof commences
      to be paid in an amount equal to one-half of the reduced Supplemental
      Retirement Allowance which would have been payable as a Supplemental Joint
      and Survivor Allowance to the Deceased Participant or Deceased Retired
      Participant. Payment of the Supplemental Survivor Allowance to the Spouse
      of a Deceased Participant or Deceased Retired Participant who is eligible
      for such benefit under Article II, B hereof shall be payable at the time
      set forth in Article II, D(4) hereof.

            (jj) 'Supplemental Survivor Income Benefit Allowance' shall mean the
      total amount payable during a twelve (12) month period to the Spouse of a
      Deceased Participant or Deceased Retired Participant equal to one-half of
      the reduced Supplemental Retirement Allowance which would have been
      payable to the Deceased Participant or Deceased Retired Participant had he
      elected to receive a Supplemental Joint and Survivor Allowance. Payment of
      the Supplemental Survivor Income Benefit Allowance to the Spouse of a
      Deceased Participant or Deceased Retired Participant who is eligible for
      such benefit under Article II, B hereof shall be payable at the time set
      forth in Article II, D(4) hereof.


                                       -7-

            (kk) 'Supplemental Survivor Income Benefit Plan' shall mean the
      Philip Morris Survivor Income Benefit Equalization Plan, effective as of
      January 1, 1985 and as amended from time to time.

            (ll) 'Survivor Income Benefit Plan' shall mean the Philip Morris
      Survivor Income Benefit Plan, effective as of February 1, 1974 and as
      amended from time to time.

            (mm) 'Vested Retirement Allowance' shall mean the Retirement
      Allowance payable pursuant to Article II, A(6) of the PM Retirement Plan,
      provided, however, that a Participant who is only eligible for a Vested
      Retirement Allowance may be deemed to be eligible for an Early Retirement
      Allowance for any and all purposes of this Plan if in accordance with his
      designation as a Participant in the Plan.

As used in this Plan, the masculine pronoun shall include the feminine and the
feminine pronoun shall include the masculine unless otherwise specifically
indicated.


                                     -8-

                                   ARTICLE II

                       SUPPLEMENTAL RETIREMENT ALLOWANCES

A. Supplemental Retirement Allowances payable under this Plan shall be as
   follows:

      (1) A Participant may be granted one or more of the following Supplemental
Retirement Allowances under the Plan:

            (a) A Supplemental Retirement Allowance in an amount determined by
using the formula for calculating the Participant's Retirement Allowance under
the PM Retirement Plan, but, subject to the limitations of Subparagraph (2)
hereof, crediting Accredited Service in addition to that credited to the
Participant pursuant to the PM Retirement Plan in recognition of previous
service by the Participant deemed to be of special value to the Company or his
Participating Company;

            (b) A Supplemental Retirement Allowance in an amount equal to (i) a
stated dollar amount per year, or (ii) a stated percentage of not more than
sixty (60) percent of the Participant's Five-Year Average Compensation, or (iii)
the Participant's Retirement Allowance under the PM Retirement Plan, which
Supplemental Retirement Allowance accrues at a rate as a percentage of the
Participant's Five-Year Average Compensation which is greater than the rate of
accrual under the PM Retirement Plan, such Supplemental Retirement Allowances to
be calculated in individual instances on the basis of specific instructions
which may depart only for such purpose from the terms, conditions and
requirements of the PM Retirement Plan; or

            (c) A Supplemental Retirement Allowance in an amount determined by
using the formula for calculating the Participant's Retirement Allowance under
the PM Retirement Plan, such Supplemental Retirement Allowance to be payable on
and after the Participant's retirement in an amount which is greater than the
Retirement Allowance otherwise payable to the Participant at such age.

      (2) If a Supplemental Retirement Allowance under Subparagraph (1) hereof
is determined pursuant to a formula in the PM Retirement Plan using the
Participant's Compensation (including awards under incentive compensation plans
of the Company), the aggregate number of years of Accredited Service used in
calculating the amount of the Participant's Supplemental Retirement Allowance
under this Plan shall not exceed thirty-five (35) years.

      (3) The name of each Participant and the Supplemental Retirement Allowance
awarded to him pursuant to Subparagraph (1) above shall be set forth in Appendix
I to the Plan.


                                       -9-

B.    Supplemental Survivor Allowances, Supplemental Survivor Income Benefit
      Allowances and Supplemental Optional Payment Allowances payable to the
      Spouse or beneficiary of certain Deceased Participants and Deceased
      Retired Participants shall be as follows:

      (1) (a) If a Deceased Participant has died prior to date he would have
attained the age of sixty-five (65) years, his Spouse shall be eligible to
receive a Supplemental Survivor Allowance determined in accordance with the
applicable provisions of Article II, A(1) of this Plan.

            (b) If a Deceased Participant who is eligible for a Supplemental
Retirement Allowance under Subparagraphs (a), (b)(iii) or (c) of Article II,
A(1) has died prior to date he would have attained the age of sixty-five (65)
years and has (or is deemed to have) completed five (5) or more years of
Accredited Service, his Spouse shall be eligible to receive a Supplemental
Survivor Income Benefit Allowance determined in accordance with Subparagraphs
(a), (b)(iii) or (c) of Article II, A(1) as applicable to such Deceased
Participant, assuming such Deceased Participant had continued in the employ of
his Participating Company until the age of sixty-five (65) years, that his
compensation (as defined in the Survivor Income Benefit Plan) for all periods of
time subsequent to his death and until age sixty-five (65) had been his
compensation as in effect immediately prior to his death and that the Deceased
Participant died the day after attaining the age of sixty-five (65) years,
reduced by the amount of any Supplemental Survivor Allowance payable pursuant to
Subparagraph (a) hereof.

      (2) If a Deceased Participant has died after attaining the age of
sixty-five (65) years his Spouse shall be eligible to receive a Supplemental
Survivor Allowance determined in accordance with the applicable provisions of
Article II, A(1) hereof.

      (3) (a) The Spouse of a Deceased Retired Participant (other than a
Deceased Retired Participant who is only eligible for a Vested Retirement
Allowance) whose request for an Optional Payment pursuant to Article I(u)(1)
hereof has been granted by the Management Committee, but who has died prior to
the date his Optional Payment commences to be paid shall be eligible to receive
a Supplemental Survivor Allowance determined in accordance with the applicable
provisions of Article II, A(1) of this Plan.

            (b) The Spouse of a Deceased Retired Participant (other than a
Deceased Retired Participant who is only eligible for a Vested Retirement
Allowance) who prior to his death commenced to receive an Optional Payment
pursuant to Article I(u)(1) hereof shall be eligible to receive a Supplemental
Survivor Income Benefit Allowance.

      (4) The Spouse of a Deceased Retired Participant who is only eligible for
a Vested Retirement Allowance under the PM Retirement Plan but who has died
prior to his Benefit Commencement Date shall be eligible to receive a
Supplemental Survivor Allowance determined in accordance with the applicable
provisions of Article II, A(1) of this Plan.


                                      -10-

      (5) The beneficiary of a Retired Participant whose request for a
Supplemental Optional Payment Allowance in accordance with Article I(ff)(1)
hereof has been granted by the Management Committee but who has died after the
date of his retirement and prior to the date his Optional Payment commences to
be paid shall be eligible to receive that portion of the Supplemental Optional
Payment Allowance elected by the Retired Participant which is payable after the
death of the Retired Participant.

      (6) The beneficiary of a Deceased Participant or Deceased Retired
Participant whose request for a Supplemental Optional Payment Allowance
described in Article I(ff)(2) hereof has been granted by the Management
Committee shall be eligible to receive that portion of the Supplemental Optional
Payment Allowance elected by the Deceased Participant or Deceased Retired
Participant which is payable after the death of the Deceased Participant or
Deceased Retired Participant.


C.    Reduction of benefits under the Plan

      (1) (a) The Supplemental Retirement Allowance payable to a Retired
Participant pursuant to Article II, A hereof shall be reduced by the greater of
(i) the Actuarial Equivalent of the benefits payable pursuant to any Other Plan
to the extent that service used to determine the amount of benefits payable from
such Other Plan is also used to calculate the amount of a Retired Participant's
Supplemental Retirement Allowance under this Plan, or (ii) the amount set forth
in, or determined in accordance with, the Participant's designation as such
pursuant to Article I(w) hereof, assuming in each case that the Participant
elected to receive such benefits in equal monthly payments for his life;
provided, however, that (1) in the event the Supplemental Retirement Allowance
is paid to the Retired Participant (or his beneficiary) in a Single Sum Payment
prior to the Retired Participant's Benefit Commencement Date, such Supplemental
Retirement Allowance shall be computed in accordance with the applicable
provisions of Paragraph A(1) hereof, as reasonably estimated by the
Administrator, reduced by the Actuarial Equivalent of the projected annual
amount of benefits payable pursuant to any Other Plan assuming that such
benefits are payable to the Retired Participant in equal monthly payments for
life and (2) in the event the benefit equalization retirement allowance under
the Benefit Equalization Plan is paid to the Retired Participant (or his Spouse
or other beneficiary) in a single sum payment (as defined in the Benefit
Equalization Plan) prior to the Retired Participant's Benefit Commencement Date,
the amount of the reduction to the Participant's Supplemental Retirement
Allowance shall be determined in good faith by the Administrator.

            (b) Any Supplemental Survivor Allowance or Supplemental Survivor
Income Benefit Allowance payable to the Spouse of a Deceased Participant or
Deceased Retired Participant pursuant to Article II, B hereof shall be reduced
by the Actuarial Equivalent of the maximum benefits for which the Spouse was
actually eligible under the Retirement Plan, the Benefit Equalization Plan, the
Survivor Income Benefit Plan and the Supplemental Survivor Income Benefit Plan
assuming that the Participant elected to receive a


                                      -11-

Retirement Allowance under the Retirement Plan and a benefit equalization
retirement allowance under the Benefit Equalization Plan in equal monthly
payments for the life of the Retired Participant.

            (c) Any Supplemental Optional Payment Allowance payable to the
beneficiary of a Deceased Participant or Deceased Retired Participant pursuant
to Article II, B hereof shall be reduced by the Actuarial Equivalent of the
benefits payable pursuant to the Retirement Plan and the Benefit Equalization
Plan assuming that the Participant had elected to receive such benefits in equal
monthly payments for life.

      (2) The Supplemental Retirement Allowance of a Participant, who as a
result of employment outside of the United States has benefits accrued to him
under the social security, or similar laws, of a country other than the United
States may, in the discretion of the Administrator, be reduced by the Actuarial
Equivalent of such benefits, assuming that such Participant elected to receive
such benefits in equal monthly payments for life.

      (3) No benefits shall be payable to the Spouse or other beneficiary of a
Deceased Retired Participant pursuant to Article II, B hereof, if prior to his
death the Deceased Retired Participant received a Single Sum Payment from this
Plan or the Single Sum Payment is made after his death to his Spouse or a
beneficiary.


D.    Notification for Supplemental Retirement Allowances; Commencement and
      termination of Supplemental Retirement Allowances

      (1) An application for a Retirement Allowance, Survivor Allowance or
optional form of benefit under the PM Retirement Plan shall be deemed
notification to the Administrator that payment of a Supplemental Retirement
Allowance or other benefit is to be made or commence to be made to the Retired
Participant, Spouse or other beneficiary in accordance with the terms of the
Plan. In the event the Participant shall not have elected an Optional Payment
method with respect to his Supplemental Retirement Allowance, any such
notification shall specify the beneficiary to whom payment of the Single Sum
Payment shall be made in the event the Participant dies after the date of
retirement and prior to the date the Single Sum Payment is made, provided, that
if the Participant shall fail to designate a beneficiary or if the beneficiary
shall predecease the Participant, the Administrator shall distribute the Single
Sum Payment to the duly authorized representative of the former Participant's
estate.

      (2) (a) A Retired Participant who is eligible for a Full, Deferred or
Early Retirement Allowance shall receive his Supplemental Retirement Allowance
in a Single Sum Payment no later than sixty (60) days following the Retired
Participant's date of retirement (or, if the Retired Participant dies after the
date of retirement and before distribution of his Single Sum Payment is made, to
his beneficiary as determined pursuant to Subparagraph (1) hereof, in a Single
Sum Payment within sixty (60) days following the date of the Retired


                                      -12-

Participant's death) unless the Participant has elected to have distribution of
his Supplemental Retirement Allowance made in accordance with Subparagraph (3)
hereof.

            (b) The Supplemental Retirement Allowance with respect to an
Employee who is only eligible for a Vested Retirement Allowance shall be
distributed as an Optional Payment under clauses (1) or (2) of Article I(u)
hereof (which Optional Payment shall be in the same form which the Retired
Participant's benefits are paid from the PM Retirement Plan) and shall commence
on the Participant's Benefit Commencement Date.

      (3) A Participant who is eligible to retire on a Full, Deferred or Early
Retirement Allowance and whose Supplemental Retirement Allowance is otherwise
payable in a Single Sum Payment pursuant to Paragraph D(1) hereof may make
application to the Administrator to receive an Optional Payment. The application
may be filed prior to the date the Participant is eligible for an Early
Retirement Allowance and shall specify the form of Optional Payment, the
beneficiary and the date on which the Optional Payment is to commence to be
made, which date shall be on or before the first day of the month coincident
with or next preceding the Participant's Required Benefit Commencement Date, but
in no event shall the Participant's Optional Payment commence to be paid prior
to the later of the first day of the month following the first anniversary of
the date of the filing of his application with the Administrator or the
Participant's Benefit Commencement Date; provided, however, that in the event
the Participant incurs a Change in Circumstance on or after the date of the
filing of the application and prior to the date his Optional Payment commences
to be paid, the Participant may file an application with the Administrator
within ninety (90) days of the Change in Circumstance, but in no event later
than the date his Optional Payment is to commence, to change the form of
Optional Payment or to change the beneficiary who is designated to receive a
benefit after the death of the Retired Participant in accordance with the
Optional Payment method originally filed with the Administrator; provided,
further, that any election to change the form of Optional Payment filed after
the date of his retirement and prior to the date his Optional Payment is to
commence may only change the form of Optional Payment to one of the forms
specified in Article I(u)(1) or (2) hereof. In the case of a Participant who
eighteen (18) months prior to attaining the age of sixty-five (65) years could
be compulsorily retired by his Participating Company upon attaining the age of
sixty-five (65) years pursuant to Section 12(c) of the Age Discrimination in
Employment Act, any application to receive an Optional Payment must be filed
with the Administrator more than one (1) year preceding the date the Participant
attains the age of sixty-five (65) years. The Administrator shall notify the
Management Committee of all applications for an Optional Payment. The Management
Committee may grant or deny any such application in its sole and absolute
discretion. Any such application shall be of no force and effect if (i) the
Participant does not retire on a Full, Deferred or Early Retirement Allowance,
(ii) the Participant incurs a disability at any time before the date his
Optional Payment commences to be paid which causes him to be eligible for
benefits under the Philip Morris Long-Term Disability Plan, or (iii) the
Participant is retired for ill health, disability or hardship under Article II,
A(3)(a) of the PM Retirement Plan, provided that in the event the application is
of no force and effect under clauses (ii) or (iii) hereof, payment of the


                                      -13-

Participant's Supplemental Retirement Allowance shall be made in a Single Sum
Payment pursuant to Paragraph D (2)(a) hereof within sixty (60) days of the date
of his retirement, but otherwise such application shall be irrevocable and
effective on the Participant's retirement on a Full, Deferred or Early
Retirement Allowance and the Participant's benefits shall commence on the date
specified in the application; provided, however, that (A) if within the one (1)
year period following the date of the filing of the application with the
Administrator the Participant's service with any member of the Controlled Group
is involuntarily terminated other than by reason of the Participant's death,
disability or misconduct (as determined by the Management Committee), such
Participant's Optional Payment shall commence to be paid on the Participant's
Benefit Commencement Date, or (B) if within the one (1) year period following
the date of the filing of the application with the Administrator the Participant
voluntarily retires or his employment is terminated for misconduct (as
determined by the Management Committee) by any member of the Controlled Group,
the Optional Payment shall be reduced as specified in Subparagraph (6) hereof.

      (4) The Supplemental Survivor Allowance payable to the Spouse of a
Deceased Participant pursuant to Paragraphs B(1)(a) or B(2) hereof or to the
Spouse of a Deceased Retired Participant pursuant to Paragraphs B(3)(a) and B(4)
above shall commence to be paid on the later of (a) the first day of the
calendar month coincident with or next following the date the Deceased
Participant or Deceased Retired Participant would have attained the age of
fifty-five (55) years, or (b) the first day of the calendar month in which the
Deceased Participant or Deceased Retired Participant died, provided that the
Spouse may elect in accordance with the provisions of Article II, A(5)(c) or (f)
of the PM Retirement Plan, as applicable to the Spouse, that the Supplemental
Survivor Allowance shall commence on the first day of any month thereafter, but
not later than the first day of the calendar month in which the Deceased
Participant or Deceased Retired Participant would have attained his Normal
Retirement Age and any such Supplemental Survivor Allowance shall terminate on
the first day of the month in which the Spouse dies. The Supplemental Survivor
Income Benefit Allowance payable to the Spouse of a Deceased Participant
pursuant to Paragraph B(1)(b) above or to the Spouse of a Deceased Retired
Participant pursuant to Paragraph B(3)(b) above shall commence and terminate
simultaneously with the date on which a survivor income benefit allowance would
have been payable to the Spouse pursuant to Article II, A(2)(b) or A(4), as
applicable, of the Survivor Income Benefit Plan. The Supplemental Optional
Payment Allowance payable to the beneficiary of a Deceased Retired Participant
pursuant to Paragraph B(5) hereof or to the beneficiary of a Deceased
Participant or Deceased Retired Participant pursuant to Paragraph B(6) above
shall commence on the first day of the calendar month following the month in
which the Deceased Participant or Deceased Retired Participant died.

      (5) (a) Notwithstanding the previous provisions of this Paragraph, the
Committee may cause the distribution of the Supplemental Retirement Allowance or
other benefit to any group of similarly situated Retired Participants, or
Spouses or beneficiaries in a Single Sum Payment or as an Optional Payment.


                                      -14-

            (b) Notwithstanding the preceding provisions of this Paragraph, the
Administrator shall distribute a Participant's Supplemental Retirement Allowance
in a Single Sum Payment if the Supplemental Retirement Allowance payable in
equal monthly payments is not more than $250.

      (6) (a) The Supplemental Retirement Allowance payable to a Retired
Participant pursuant to clause (B) of Subparagraph (3) hereof shall be further
reduced by one percent (1%) for each month (or portion of a month) by which the
month in which the Retired Participant's termination of employment precedes the
first anniversary of the filing of the application with the Administrator.

            (b) The Supplemental Survivor Allowance of a Spouse of a Deceased
Participant or Deceased Retired Participant commencing at an age other than the
Deceased Participant's or Deceased Retired Participant's Normal Retirement Age
shall be the Actuarial Equivalent of the Supplemental Retirement Allowance
payable as a Joint and Survivor Supplemental Allowance at the Deceased
Participant's or Deceased Retired Participant's Normal Retirement Age unless
otherwise required by Article II, A(1) of the Plan. The Supplemental Optional
Payment Allowance payable to the beneficiary of a Deceased Participant or
Deceased Retired Participant commencing at an age other than the Deceased
Participant's or Deceased Retired Participant's Normal Retirement Age shall be
the Actuarial Equivalent of the Supplemental Retirement Allowance payable as a
Supplemental Optional Payment Allowance at the Deceased Participant's or
Deceased Retired Participant's Normal Retirement Age unless otherwise required
by Article II, A(1) of the Plan.

E.    Cessation of accruals of Supplemental Retirement Allowance

      Any right or claim to any Supplemental Retirement Allowance or other
benefit under the Plan which any Participant, Spouse or designated beneficiary
may have shall terminate if the Committee shall find that such Participant has
been guilty of fraud or dishonesty towards a Participating Company, or has
willfully damaged the property of a Participating Company, or has wrongfully
disclosed any secret process or imparted any confidential information, or has
done any other act materially inimical to the interest of a Participating
Company.


                                      -15-

                                   ARTICLE III

                     SUPPLEMENTAL PROFIT-SHARING ALLOWANCES

      A Participant may be granted a Supplemental Profit-Sharing Allowance equal
to the amount, if any, by which the sum of the Contribution which would have
been made to the Profit-Sharing Plan and the amount which would have been
credited to his account under the Benefit Equalization Plan had such Participant
been eligible to participate in such plans for a plan year, exceeds the amount,
if any, of employer contributions (excluding any contributions which the
Participant has elected to have an employer make on his behalf pursuant to a
cash or deferred arrangement) actually made or credited for the plan year on
behalf of such Participant under a defined contribution plan qualified under
Section 401(a) of the Code, an excess benefit plan (as defined in ERISA) and a
plan maintained primarily for the purpose of providing deferred compensation for
a select group of management or highly compensated employees maintained by any
other member of the Controlled Group.

      Any amounts credited to a Participant's account pursuant to the provisions
of this Article III shall be deemed to have been invested in Part C of the Fund
under the Profit-Sharing Plan and shall be valued in accordance with the
provisions of the Profit-Sharing Plan.

      A Retired Participant shall receive his Supplemental Profit-Sharing
Allowance in a Single Sum Payment no later than sixty (60) days following the
Participant's date of retirement or other termination of employment with the
Controlled Group.


                                      -16-

                                   ARTICLE IV

                     FUNDS FROM WHICH ALLOWANCES ARE PAYABLE

      An individual account shall be established for the benefit of each
Participant (and Spouse or designated beneficiary) under the Plan. The Plan
shall be unfunded. All benefits intended to be provided under the Plan shall be
paid from time to time from the general assets the Participant's Participating
Company and paid in accordance with the provisions of the Plan; provided,
however, that the Participating Companies reserve the right to meet the
obligations created under the Plan through one or more trusts or other
arrangements. The contributions by each Participating Company on behalf of its
Participants to the individual accounts established under the Plan, whether in
trust or otherwise, shall be in an amount which such Participating Company and
the Management Committee, with the advice of an actuary, determines to be
sufficient to provide for the payment of the benefits under the Plan. No
Participant, Spouse or designated beneficiary shall, unless the Plan expressly
provides otherwise, have any right or claim whatsoever to any specific assets of
a Participating Company or of any trust.

      Each Participating Company shall maintain such reserves on its books with
respect to Participants who are employed by such Participating Company as
determined by the actuary for the Plan.


                                      -17-

                                    ARTICLE V

                  APPLICABILITY OF PROVISIONS OF PM RETIREMENT
                      PLAN AND SURVIVOR INCOME BENEFIT PLAN

      Except as expressly provided to the contrary, all of the provisions,
conditions and requirements set forth in the PM Retirement Plan and where
applicable, the Survivor Income Benefit Plan, with respect to eligibility for
and payment of benefits thereunder shall be equally applicable to the granting
of Supplemental Retirement Allowances and other benefits to Participants and
Beneficiaries pursuant to this Plan and the payment thereof pursuant to the
provisions of Article III hereof. Whenever a Participant's rights under this
Plan are to be determined, appropriate reference shall be made to the PM
Retirement Plan.


                                      -18-

                                   ARTICLE VI

                                 ADMINISTRATION

      The Committee, the Management Committee and the Administrator shall be
responsible for the general administration of the Plan. The appropriate
Fiduciary shall have full authority to determine all questions arising in
connection with the Plan; provided, however, that any Fiduciary who makes a
request for payment of a Supplemental Retirement Allowance in accordance with a
form of distribution authorized under the Retirement Plan shall excuse himself
from any and all deliberations and decisions in connection with such request.
Decisions of the appropriate Fiduciary shall be conclusive and binding on all
persons.

      The Fiduciaries may employ and rely on actuaries, legal counsel,
accountants and agents as they deem advisable.


                                      -19-

                                   ARTICLE VII

                         CERTAIN RIGHTS AND LIMITATIONS


A.    No benefit under the Plan shall be subject in any manner to anticipation,
      alienation, sale, transfer, assignment, pledge, encumbrance, or charge,
      and any attempt to do so shall be void; nor shall any benefit be in any
      manner liable for or subject to the debts, contracts, liabilities,
      engagements, or torts of the person entitled to such benefit. In the event
      that the Administrator shall find that any Participant, Retired
      Participant or Spouse or other beneficiary under the Plan has become
      bankrupt or that any attempt has been made to anticipate, alienate, sell,
      transfer, assign, pledge, encumber, or charge any of his benefits under
      the Plan, then such benefits shall cease and determine, and in that event,
      the Administrator shall hold or apply the same to or for the benefit of
      such Participant, Retired Participant, Spouse or other beneficiary or
      apply the same to or for the benefit of such Participant, Retired
      Participant, Spouse or other beneficiary, in such manner as the
      Administrator may deem proper.


B.    Except as otherwise expressly provided in the Plan, Supplemental
      Retirement Allowances and other benefits shall be payable only if the
      Participant meets all of the requirements for benefits under the Plan.


                                     -20-

                                  ARTICLE VIII

                      AMENDMENT AND TERMINATION OF THE PLAN

A.    The Board may, by resolution, from time to time and at any time, amend or
      modify, in whole or in part, any and all of the provisions of the Plan;
      provided, however, that authority to amend the Plan is delegated to the
      following Fiduciaries where approval of the Plan amendment (or amendments)
      by the shareholders of Philip Morris Companies Inc. is not required: (1)
      to the Committee, if the amendment (or amendments) will not increase the
      annual cost of the Plan by $10,000,000, (2) to the Management Committee,
      if the amendment (or amendments) will not increase the annual cost of the
      Plan by $4,000,000, and (3) to the Administrator, if the amendment (or
      amendments) will not increase the annual cost of the Plan by $500,000;
      provided, further, that no such amendment or modification shall adversely
      affect the rights of any Participant, Retired Participant, Spouse or
      beneficiary to benefits accrued at the time such amendment or modification
      is adopted or becomes effective, whichever is later.


B.    (1) The Board may terminate the Plan for any reason at any time, provided
      that such termination shall not adversely affect the rights of any
      Participant, Retired Participant, Spouse or beneficiary to benefits
      accrued to the date of termination.

      (2) In the event the Plan is terminated, each Participant, whether or not
      such Participant is eligible to receive benefits under this Plan, shall be
      immediately and fully vested in the benefits set forth in Article II
      accrued to the date of termination of the Plan. Payment of any such
      benefits shall be made or commence to be made at the time such Participant
      (or his Spouse or designated beneficiary) meets, under the terms of the
      Plan at the time of its termination, the requirement for payment of
      benefits under the Plan.


C.    Notwithstanding any other provision of the Plan to the contrary, in the
      event of a Change of Control of the Company, each Participant shall
      immediately be fully vested in the benefits set forth in Article II which
      have accrued through the date of the Change of Control and, upon the
      Change of Control, each Participant (or his Spouse or designated
      beneficiary) shall be entitled to a Single Sum Payment in an amount which
      is the Actuarial Equivalent of such accrued benefits, which amount shall
      be paid within 30 days of the Change of Control.


                                     -21-

                                    EXHIBIT A

               SUPPLEMENTAL MANAGEMENT EMPLOYEES' RETIREMENT PLAN
                         OF PHILIP MORRIS COMPANIES INC.
          ACTUARIAL ASSUMPTIONS USED TO CALCULATE A SINGLE SUM PAYMENT

      INTEREST RATE: Average of the interest rates established by the Pension
Benefit Guaranty Corporation to value immediate annuities in the case of a plan
termination for the 24 months preceding the Participant's date of retirement,
less 1/2 of 1%.

      MORTALITY ASSUMPTION:         UP-1984 Unisex Mortality Table


                                      -22-