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Brown & Williamson Tobacco Corporation ANNUAL REVIEW 1996 People ~l~e It H~ppen PRODUCED FROM B&W WEB SITE 622018668 ~ CORPORATE OFFICERS N. G. Brookes Chairman 8, Chief Executive Officer C. L. Schoenbachler Executive Vice President & Chief Financial Officer ENIOR VICE PRESIDENTS R. L. Bexon MarketinE 8, Sales I. N. lewell Operations M. I. McGraw Law, Human Resources & Public Affairs E. C. Pepples~ Jr. Government Affairs VICE PRESIDENTS E A. Burke Law 8, Genera[ Counsel B. M. Dawson Government Affairs J. A. Eckmann Controller H~ C. Frick, Jr. Human Resources ~,!~ C. R. Green Japan R. F. Harrison Leaf J. S. Helewicz Public Affairs M. S. Kovatch Sales J. R. M~ha'hd' Manufacturing T. R Riehl Research 8, Development PRODUCED FROM B&W WEB SITE CHAIRMAN'S REPORT 1996 marked the first full year of operation for the restructured British American Tobacco group of comp.a- hies. Under the reorganization, British American Tobacco has created five regions covering the globe. Brown & Williamson represents the Ame,rica Pacific Region, which includes the markets o[ the United States, Mexico, Japan and Korea. These markets together contribute around 40 percent of the operating profit of the British American Tobacco group. Continuing this performance, and improving upon it, remain a sig- nificant but achievable objective for Brown & Wllliamson. Thanks to the American Tobacco acquisition, our larger U.S. cigarette business has given us the potential to be a much greater competitive force in this market, and we have every inten- tion to realize that potential in the years ahead. Our business in Japan remains strongly based despite a weakeryen. As the number two cigarette importer, we are very optimistic for the future growth of our business in this impor- tant and profitable market. Korea and Mexico represent im- portant opportunities for future busi- ness growth. We have already taken steps to improve our business in Korea and will be looking for opportunities to enhance our presence in Mexico. Our operat!ons, led by our world.- class manufacturing facility in Macon, Georgia, continue to produce out- standing performances and have helped us significantly reduce our cost of production. Our business is in very good order and ready to grasp the opportunities ahead. The external environment, how- ever, particularly here in the U.S., con- tinues to be challenging. The pastyear saw more litigation against the U.S. tobacco industry and a contentious public issues environment. While the clamor may have risen, the facts are the same--smoking is a matter o1: personal choice for adult 622018669 consumers who are well aware that smoking is a risk factor in relation to certain, 91iseases;., Individual [i~festyle choices are the prerogative of the individual and should remain so. We will continue to do everything we can to vigorously defend our busi- ness against spurious accusations and attacks and will seek to ensure that adult consumers of tobacco products have the same rights and privileges as are guaranteed to all Americans. The fact that the tobacco industry 1996 :Net',Sales Revenue $4,248.5 Million • DOMESTIC [] INTERNATIONAL EXPORT LEAF TOBACCO PRODUCED FROM B&W WEB SITE continues to thrive in the midst of these attacks says a great deal about the integrity, strength~ and re~solve of our people. They have continued to demonstrate unceasing dedication and tremendous commitment to the suc- cess of our enterprise. It is an enormous pleasure to be associated with such people. They are the principal reason behind our current success and the cause of our confident expectation for the contin- ued. growth of Brown & Williamson. N, G. Brookes, Chairman & CEO ' Trading Profit Dollars in Millions (U.S. Basis) $973.4 $988.4 1995 1996 Domestic Brands Full Revenue KOOL CARLTON CAPRI LUCKY STRIKE BARCLAY BELAIR ': RALEIGH PALL MALL TAREYTON SILVA THINS TALL Value-For-Money GPC , MISTY VICEROY RALEIGH EXTRA RICHLAND AMERICAN LIGHTS ..... i Prhrate [abel : :, PRIME ' PRIVATE STOCK SUI(ClMIT international Brands LucKY S-rmKE KENT !. BARC LAY ...... CAPRI "~,~ ' '"FINESSE ~' i'":'-., VICEROY Speaalty Tobacco ~ ' KITE :~ :' BUGLER SIR WALTER RALEIGH BLOODHOUND BROWN & WlLLIAMSON'S SUN CURED RED JUICE TUBE ROSE 622018670 + ' 125 YeaPs /~,, tn ~ne lvl~ung . i +B&w is te~ting a n~ approach ) revitalize LUC~,STRIKE, a rand with 125years ~ histo~ and. ~dmon and once t~mos~~,o#a~ " arett~ m the U.S~;~" ' N~ advenisin~"is being te~ted the U.S. which-is designed t0 ~mmunicate LUC~ STRIKE's her- ~ge as an American Original WitCh smoking smoothness that is right r todays contem~ora~ adult male-' Th¢ n~ adv¢rtisin~ is promi.- mt~ f+atur¢d at ~ar ~romotions ]d adult-oriented concerts~that " e~ein~ sponsored by ~.OC~ ~ While ~e~ pOpula[ around the ~rld, B&W3 goal is to update the ~r~ePtions of LUC~ ~RIKE and ~tld awareness of the brand as a II flavor alternative :for .S. consumers. MARKET In 1996, U.S. industry shipments of cigarettes were slightly higher than the previousyear, which is an indicator that industry volume may currently be on a slightly lower decline rate than the historic decline in shipments of about two to three percent peryear. Smoking continues to be popular with nearly 45 million adult American consumers. During 1996, the U.S. Federal Trade Commission approved the sale of consent order brands, including Montclair. While U.S. industry ship- ments for the year were marginally higher, B&W domestic volume was lower, primarily due to declines in the brands subsequently sold. Shipments of KOOL, CAPRI, and MISTY increased while CARLTON volumes decreased and GPC volumes remained relatively flat. Even as competition remains in- tense, however, the outlook for the company's strategic brand p.ortfolio is excellent. KOOL completed its third consec- utiveyear of stability after manyyears of decline. Growing KOOL and im- proving its image with contemporary adult smokers remain high priorities for B&W. In 1996, the company began its motor sports sponsorship program by sponsoring its first Indy Lights rac- ing team, a new venture that will assist in efforts to reposition KOOL as a +GPC APPROVED ktlSTY LIGHT N SASSY B&W's MISTY brand continued its growth trend in 1996 with increases in both shipment volume and market share. PRODUCED FROM B&W WEB SITE 622018671 B&W's sales team is supported with state-of-the-art technology and training to closely monitor brand performances and build retailer satisfaction. contemporary brand. B&W's expansion into the sponsorship of an Indy car racing team in 1997 represents the next level of this exciting activity. Despite the industry decline in the value-for-money segment, GPC grew its share of that segment, reflecting its continuing strength over the past sev- eral years. GPC finished 1996 as the fourth leading brand in the U.S. Expanding GPC's distribution and modi~ing the brand's packaging and advertising are ingredients in the mix to drive future gains. CARLTON is the lowest tar brand offered in the U.S. Market. While its market sham declined slightly in 1996, introduction of a new box style is ex- pected to improve performance. Value-for-money brand MISTY has demonstrated rapid and consistent growth since its launch seven years ago. This slims product's 1996 market share reached 1.41 percent, reflective of its loyal franchise and expanding brand awareness among adult full revenue smokers. Super-slims, full revenue brand CAPRI, with market share of .64 percent, also showed good performance in 1996. 1996 U.S. Market Share • REST OF MARKET l: am I OOL 'i[~ ~shl of B&W's ~,~6 sponso "p Indy Lights:motor car racing has led to the ~pan~'s 1997 involve- m~t in the premiere sport,, of Indy ~r racing.'~~ ~.~ Indy car competition is oneof ~ihe f~test gr~in~ spectator spo~ n America. ~h of the maior rac- '~' in~ events features a ve~ strong ~KOOL presence; including racing ~ I 1 ~ tFams, wor d-c a~s hospitality and promotion acUviti~s that include a :new 15-stoF-high~OOL hot air ~,.ballogn. Aw~ from thF race events, consumer communi~tions include '~atlo,hal adverUsin~ an~ promotion ~he Tea~ ~OL Greefi organi- zaUon h~ a h~sto~ of being one of the ~st sdccessful organizad0,ns on the~North ~merican motor car, Bar~ 6teen, the Team two y~ars ha~ ~arnered One PPG IndyCar World Seri~ title and four PPG Cup ~ce wins, including the prestigious Indianapolis 500. B&~,~ sp6nsorship of Team KOOL 6reen;,~ul~t~ the modern image the company is seeking for i~ flagshi~KOOL brand. PRODUCED FROM B&W WEB SITE 622018672  I cigarette markets in the world, saw in-' dustry sales increase shghtlyover 1995. As in recent years, the dominant trend in Japan continues to be growth the mport segment, which creased share 6,1 percent against last year. mported brands now hold 22 percent of the Japan Market. America Pacific's sa es volume increased 8.1 percent with a .4 percent growth in KENT Growth In Japan total market share to 5.6 percent. • Prospects for future growth appear ' Since U.S. cigarettes began , excellent as the company's brands are finding good acceptance with Japanese :ompeting in Japan in 1987, growth ff America Pacific brands such as CENT and LUCKY STRIKE has ~een steady and strong. , .Especiallly over the last several 'ears, the KENT family of brands ias done excepti6q,ally well in apan, with incremefital business )eing gained througl~ the launches ff KENT Super L!ghts IO0's' and (ENT I. These gains have been re- ~lized i,n one of the fastest growing ;egments in the i~pan Mark~t--th~ ow tar segmedt, where KENT has ~stablished ai~'trong foothold. • ~ The KENT brand family features [i c~arcoal filter, a popular product ,ittribute n Japan. KENT's continu-¢ ', !n~ ~rowt[~ and strong market po~i- [[ion are reflective of the brand's i] ty to meet Japanese consumers" expectations. : • consumers. KENT's volume increased 7.6 per- 1 cent against 1995 to achieve a market share of 3.7 percent. KENT is now the ! : i sixth best selling brand and is close to being the number one import brand in Japan. KENT 1 100's, launched in ,i ~.~°~'~,, ,~, ...... ,., February 1996, continued to provide most of the growth. LUCKY STRIKE is the ,Japan Market's 16th largest brand. LUCKY STRIKE has strong support among -~- young adult urban male smokers and --~,~.~" ~ KENT I 100's helped the KENT brand achieve 3.7 percent market share in lapan. demonstrfited solid growth, with a three percent improvement in volume over 1995. Sales of KOOL continued to benefit from KOOL Milds, introduced in late June. as well as growth for the parent styles. KOOL is now the fastest growing import brand in Japan with volumes increasing 35 percent over 1995. CAPRI's volume increased 24 per- cent versus lastyear, as the brand ben- efited from being more popularly priced against local and import brands. PRODUCED FROM B&W WEB SITE 622018673 MExico MARKETS Worldwide demand for U.S. international brands continue5 to ,grow in most markets around the worJd. 'Korea is the eighth largest ciga- rette market in the world with an an- nual consumption of over=100 billion units. Over the last fiveyears, growth in import volume has been substantial, with imported brands reaching 11 percent share-of-market in 1996. In Korea, B&W's focus has been on developing FINESSE and KENT. A telephone sales system implemented in 1995 has shown great promise, as have brand promotions in licensed ho- tels, coffee shops and night life areas. SILK CUT was launched in Korea inearly 1997 to further increase B&W's share of this promising market. Mexico, with an annual market of over 50 billion cigarettes, still repre- sents a major opportunity for B&W. The company's primary focus in Mexico is rigorously exploring the best methods to operate in this market. 1996 U.S. Cigarette Exports Billions of Units • B&W • OTHER CIGARETTE EXPORTS i,,I Innovations in Korea Innovative selling techniques by Brown & Williamson Korea, Ltd. are helping build the company's business in this country with annual consumption~ of more than 100 bil- lion cigarettes. A telephone selling system is . the primary sales and distribution to,ol, generating nearly 75 percent of B&W's volume in Korea. This is supplemented~ by programs which encourage consumers who smoke competitive p~ducts to switch to B&W brands. !!i~ Coffee shop~, which increas- ingly are an important meeting place for consumers in Korea, are rewarded with premiu,.ms for promi- nently displaying and stocking B&W brands. Over i~500 coffee shops are part of this activity which began in, April 1996. ~,~, ~r~i . PRODUCED FROM B&W WEB SITE 622018674  .... ,"!', Talent is Primm "" ,.; Expanding t~e ~productmn ~"p~city by' SO pe~aent at ~MacOn dgarette ~ro~u~t~on ,re~u~red more-t~h ~s~uare footage, profusion e~u~p- and the latest '.:ment ,., An ~ceptional ~vel ;.work and m&wduabcontnbut~o s ~w~ required across.any functions to ensure the expansion fit the requirements and met the~ :o~ ~panys -.rigorous ~ualit~ and producBon~ lhe des~~ and ~nstallation two new Iin~ ~n Pr~ma~--~here tobacco is cut, dried and prepared for use ~n~clgarettes-~;was gu~ded~ by a "co~e team" fr;~ the corn~- • panyi~!i:ngineering, general plant ~.,3erv. ces and production ran cs ~ '~ : , , ~ ", '~ After threeyears q[ intensive ~rk, pmdudion'of the n~ prima~ ~ li~es began ~n lu~ 1~96.,Quali~ of ~ ,.'~ .~ . ~ ~' ~ 4. ~ the tobacco ~ superb a te~monv ~:tO me team ol ~wacon employees :~)who's;w the "p~oj£ctt' ~'--gh to PRODUCED FROM B&W WEB SITE OPERATIONS Investments in new technology, and the toolsi necessary for increased ca- pacity have provided significant chal- lenges for Brown & Williamson's Operations organization. Outstanding contributions by employees at each B&W facility ensured that the company realized significant progress. In Macon, transition to continu- ous, seven-day operations has required exceptional efforts and commitment by B&W's 2,700 Macon manufacturing employees. assist the transition effort, including technical, safety! and cross training, Substantial progress has been made in improving efficiencies so that further production cost reductions can occur over the next twoyears. The Export Leaf Tobacco facility in Wilson, North Carolina, continues to play a leading role in British American Tobacco's global leaf strategy. In 1996, the facility processed over 200 million pounds of leaf for custo.mers around the world. Macon manufacturing employees have shown adaptability and dedication in a challengingyear of new technology, training and work schedules. This transition has occurred as Macon's production capacity was ex- panded, making the plant the largest and most modern cigarette manufac- turing facility in the world. Over 960 new employees were hired in Macon over the last twoyears, enabling the company to gear up for • future production requirements. As new technology and equipment have come on line, an enhanced The Winston-Salem branch real- ized maior improvements in produc- tion and conversion costs. As a manufacturer of Specialty Tobacco Products, its leading brands include the popular SIR WALTER RALEIGH pipe tobacco and BUGLER roll-your- own cigarette tobacco. The Hanmer tobacco sheet manu- facturing facility, located in Chester, Virginia, produced 44 million pounds in 1996 q 19 ncrcent inmrovement 622018675 COMMUNITY Dare To Care ,I~ Each year, the Dare to Care ~rganization uses donations of :ood, money and volunteer services :o relieve the hunger;of the needy in the Louisvil,le metropolitan area. Founded in 1971, Dare to Care -l~stnbutes food ..[~oxes to over ~.5,0,00 families e,~chyear. In 19.95, :he orgamzat~on provided five mll- ion pounds of~.od to the needy." Brown & Williamson employees n Louisville are loyal supporters lnd regu ar~ontributors to Dare to ~.are, prodding their contribution, tollars and canned goods to Dare o Care's 29 distribution centers. .astyear, these centers served food o over 85,000 people. ,.~ ~ B&W employees'. Support of )are to Care helps this effective ~rganization reach out to the. com- atinity even n~ore broa.dlj, than ~ould have othe~ise been,, possi- ~le--he.lping individuals and fatal- PRODUCED FROM B&W WEB SITE Brown & Williamson has long maintained a poJi~cy o:f generously su~p- porting non-profit organizations in its operating communities. The company believes strong corporate citizenship and community involvement help strengthen a community, thereby cre- ating an attractive environment for its current and future employees. As a company, B&W assigns its highest priority to contributions that meet humanitarian needs. The com- pany regularly supports non-profit or- ganizations that provide food, clothing and shelter to those who are unable to help themselves. Further, B&W employees pitch in and donate thousands of hours to community service projects that make a difference in the lives of many. Every year, they also contribute generously from their own pockets to a wide array of charitable causes, such as United Way. In Louisville, Kentucky, B&W has provided major assistance to Proiect One, ayoung adult employment and training program, since the program's inception in !986. T:he company, also supports the Wayside Christian Mission, which feeds and shelters the community's poor and homeless. Every year, B&W sponsors the "Light Up Louisville" celebration and Derbyfest concert for thousands of local resi- dents. B&W employees are enthusiastic volunteers in the Salvation Army Angel Tree program, Clothe-A-Child, and numerous other community events. Macon employees proudly partici- pate every year in the city's Cherry Blossom Festival by building and dec- orating the company's award-winning parade float entry. Macon employees have led the nation in employee giving to the United Negro College Fund. In Macon, United Way gets its single largest annual contribution from B&W employees, who are regularly involved in projects addressing the needs of the community, including rehabilitating inner city homes for the elderly. After selling the Reidsville, North, Teamwork moved beyond the plant into the community, where Macon employees refurbished the home nf a~l elderly CouPle_ 622018676 An annual source of pride for employees and the city of Macon is B&W's float, constructed for the Cherry Blossom Festival. Carolina, facility in 1996, B&W initi- ated an extensive Commu,nity Support Program to help the Reidsville com- munity attract new businesses. B&W also pledged to support various chari- table organizations and to provide di- rect financial support for a mandated water treatment pipeline proiect. A truly productive and prosperous community is one in which govern- ment, businesses and individuals collaborate to create and implement solutions to urgent community chal- lenges. Corporate and individual citi- zens have a responsibility to step forward and lift up those who need assistance. Continuing to meet this substan- tial responsibility--and encouraging other businesses and individuals to join in the effort--will be at the center of the company's community support activities for theyears to come. 1996 Corporate Citizenship $4.67 Million Employee Involvement 4% Community Relations 15% Humanitarian, Education, Economic Development & lob Training Events & Sponsorships 22% )orate Jtions 22% PRODUCED FROM B&W WEB SITE Investment,, In The Future In 1996, more than 800 Louisville families--representing more than 1,400 children--turned to Clothe-A-Child for help provid- ing back-to-school or winter cloth- ing for theiryoungsters. B&W e~p'ioyees have been enthusiastic participants in this program everyyear, helping select and purchase clothes for these needy children. Clothe-A-Child, by providing p~,actical clothin.g to school age children, increases their ' school attenda.,,nce and decreases the likelihood'of these children dropping out of}chool. ' B&W is the largest single con- tributor to this ~ organization, reflecting the company's hearty endorsement of Clothe-A-Child's philQsophy that children are our futur~ and are entitled to support services, ass'istance and encourage- meant to h~Ip them maximi~e,~their pote~'t!,,~l.. "~~ 622018677