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BROWN & WILLIAMSON TOBACCO CORPORATION PRELIMINARY FIVE YEAR PLAN 1993 - 1997 RESTRICTED OCTOBER 1992 690951884

pRELIMINAR¥ pLAN 1993 - 1997 TABLE OF CONTENTS II. ~MZSTZC IV. V. VI. Corporate ResponslbiliSy and Financial Overview Key strategic Issues Domestic Environmental Overview, Assumptions and Forecmmz Develop KOOL Grow Value-for-Money Other Significant Domestic IssueB INTEF.NATION~L VII. International Enviror~ental Overview~ ABs~p~lons and Forecast VIII. Expand and Grow Internationally STRATEGIC OPERATIONS IX. Manufacturing Capacity X. Other significant Operations - Engineering, Manufacturing and R&D IsBums XI. Improve Management Strength XII. InfQrmation Technology XIII. Consumer satisfaction and Quality Focus ~IN~2~CIAL pERFOPd~%NCE 1 2 2 5 6 7 7 8 9 i0 11 11 690951885

1991 1992 Act ua[ Estimate Brown & WilHamson Tobacco Summary Five Year Plan Performance U.K. Basis (Units In BiKl~on$; Dollars in Mirlions) 1993 1994 1995 1996 Dome~ 566 60.6 Unit Volume 7+0% % Change Vs. Last Year 11.1% 12.2% Market Sham 2,~39 2,888.0 Gross Turnover 8,8% % Change Vs, Last Yur 867.0 932.5 Profr~ Contribution 7.6~,~, % Chan,qe Vs LAst Ylar CGR 1997 1992-1@97 66.5 66.7 66,3 ~.3 65.6 1.5% 8.7% O.~P~ -0.6% 0.1% -1.2% 13.6% 14.3% 14.6% 15.1% 15.5% S,370,7 8,549,4 5,702,8 5+903,5 4,(~7,0 6,9% 16.'P,~ 53% 4,3% 5.4% 5,4% 1,007.7 1,104.6 1,170,4 1.254,1 1.285,9 6,6% 5,1% 56% 6,0% 7.2% 2,5% IntemaSonat 59+1 46,9 UnR Volume 20,1% % Change VS. Last Y~r 684,8 793,3 Gross Turnover 15+8% % Change Vs+ Last Year 215¸8 235,7 Prom Con~'ibubon 7.2% % Chan~e Vs Last Year Tofal Brown & Wil{~amson ~,2 107,9 Unit Volume 12,1% % Change Vs La~ year 3,473.4 5,526.0 Gross Turnover 51.8 5~.0 63.9 69.0 75.5 10.0% 10.4% 12.0% 10.2% 5.2% 5.2% 812,1 1,037.9 1+165.2 1,293.5 1,426.4 12.5% 1S.0% 13.8% 12,6% 11.0% 10,~'~ 261,O 293,8 525,7 354:7 380,9 10.1% 10 "P~, 12¸6% 10~'~ 0,9% 74% 118,7 125.2 130.7 136~' 141,5 5.6~ 10+0% 5.5% 4,4% 4,7% 3+5% 4+438,5 4,746,5 5,024,0 5,356~ 5,626,1 8,C~,~ % Cf~ange Vs. Last yiBr 832.6 (~0.1 Tm cEing Profit 6.2% % Change Vs. LIst ymlr 24,~ 23.3% % of Gross Turno~teT B32,5 ~0.1 Trad'mg Profit Adjured Fon - FAS 106 1+5 BJ~.T Notat;onat Adjustments -- 832,5 891+7 Adjust~ Trading Pr~it 7+1% % Change Vs, Last Year 24,0% 23.3% % of Gross Tumovt r 16.0% 5.9% 5.6% 8,6% 5.0% 946,0 1,043,5 1+123.2 1~23.2 1,2~,5 8.4% 10.0% 7.6% 5.9% 5.'/% 21.3% 22.0% 22¸4% 22¸8% 225% 946,5 1.043.5 1,1232 1,223,2 1,268.5 16.9 184 20,1 21.'$' 23,5 4,4 8+5 17.2 26.6 3~,0 9~.1 1,070.7 1,160.5 1,271.5 1,330.0 5.6"% 10.(P,~ 8.4% g.9% 4,6% 21 ~P/~ 22,6% 23,1% 23,3% 23.6% 7.5~ 5.3% 690951886

I. CORPO~TE ~JESpoN$1B|LI~-f ~ FINANCI~d~ O~RVIS~4 CORpOF-%TE P~SPONSIBILITY - Brown & Willi~son Tobacco Corporation is responsible for the management and development of B.A.T'S tobacco interests In the USA and for promoting and managing the sales of U.S. international brands worldwide thrQugh e~ports and through licensees within and outside the group. B&W will deliver consistent and projectable earnings growth as required by its shareholder. FINANCIAL OVERVIEW - Achievement of higher than planned volumes for KOOL, the dr~atic growth in GPC volume, and progressive bugin~ss in Japan will anable B~W to grow volume 12.1% in 1992 to 107.9 billion units, 1.9% above plan. Trading profit will reach $89D.I million, representing a 6.9% increase over 1991. H~wever, this is $61.0 million less than plan due to the dramatic increase in domestic consumer downtradingf the Impact of the price reduction on RALEIGH Extra/VICEROY, strong price competition and unfavorable mix lhlftl internatlonallp~ Looking forward, the financial p~oJections included in B&W'~ Preliminary Plan reflect continuing strong volume growth in the U.S. and in international marketB. But profit growth will be constrained domestically by the impact of continued consumer downtrading, increased price competition and continued load reduction. similarly, the outlook internationally recognizes the matoring of the Japanese USIB market, limited feasibility of price increames in 3span and growth opportunitles in China and Eastern Europe where margins are lower. While underlying profit growth of 8.3% is below the g~ideline and the level reflected in the prior plan, it representm a ~aJor ~hallenge, glven the c~rrent envlroru~ent° The Sununary Five Year Plan Perfo~an=e Schedulm rm~onciles the un~erlyin~ p~ofit growth to reporte~ trading profit ~r~w~h of 7.3~. Price increases on Domestic full revenue products and high cp~ality VFM offerings will result in the continuing dramatic growth of the VFM segment. B&W's VYM volumes are anticipated to in~rease 24.0% durin~ 1993 on the Btrength of GPC, RALEIGH EXTRA and SAVANNAH, and then experience slower growth as profitability improves. Full revenue volumes are expected to decline ~t a CGR of -10.6%, in line with the see~ent. B&W's ability to maintain share in the full revenue menthol segment with KOOL will be key to achieving a 6.6% CGR in domestic profit contribution over the plan period. Ex~e~ted lower price in=reases in the VFM segment, cot0bined with the July 1992 price reposltioning of VICEROY and RALEIGH EXT., will reiult in reduced levels of discounting in 1993. over the balancl of the plan period B&W'S dimcount mpending will increame based on increased VFM volume and requirements to compete with expected competitive net price positioning. Media and promotion spending plans have been increased to improve KOOL's trend and to develop a point of diffez~nce for VICEROY as a quality value alternative to full revenue products. A mensitlvity presents the financial implications of • 1994 rollout of a new ca~palgn ~o morm drastically revltalizm KOOL. International export volumes are estimated to increase at • 10.4% CGR over ~he plan pezlod as the maturing Japanese USZB market will constrain overall ex~ort growth ratla. International profit contributio~ will increase st an innual rate of 12.5% including notational adjustments. MOre rapid growth will be constrained by an increasingly competitive pricing environment worldwide. 690951887

-2- II. ~y ST~T[QIC ISSUES B&W'u Preliminary Plan focuses o~ five major strategic issues. B&W'8 strategies address performance imsues and provide short- and long-term performance improvements. DEVELOP KOOL - ReduciNg the decline rate of KOOL and developing strategic options to stabilize the brand lodger ter~ i8 B&W's top priority. K(~DL remains B&W*S flagship brand, contributing over 65.B% Of total domestic brand contribution in 1992. B&W'S Preliminary Plan includes reduced discounting and restoring media an~ image-based promotion spending to levels that historically achieved improved performance for the brand. Test marketing of a third revamped tOOL revitalization cau~paign is being glve~ major emphasis based on laarnlng from thl two 1992 test markets and positive COnB%h~er EeB~nSe. GROW VALUE-FOR-MONEy - VFM remains the major domestic growth opportunity as consumer downtrading c~ntlnuel. This se~ent offers B&W an opportunity to grow vol%u~ep share and profits in the highly profitable U.S. market, where growth in the lowelt priced offerings has accelerated. B&W's Preliminary Plan concentrates resources behind those brands which offer greatest demonstrated long-term potential and allow participation at each price positlonl,g. Phasing out poor performing brand style~ and reallonatlo~ of resources will Qnhance B&W's marketplace cc~npetitivenesB. The VFM segment will offer major long range profit opportunities. Improved VFM profltability is a key element of the plan. EXPAND AND GROW INTERNATIONXI~ST -- Expanding and opening International markets, including a growing demand for USIBs, offers elgnlficant future opportunity for vol%h~e and profit growth. B&W'B Preliminary Plan concentrates resources on selected priority markets to improve the c~pany's C~pe~itive position and increase return o~ Its lo~g-term investment. Asia, as well as emerging opI~0rt~nitles In Eastern Europe, the M~ddle East and Latin ~unerica have management focus. Consistent management of strategic brands is central to lo~g-te~ growth. MA~FACTURING CAPACITY - Providing manufacturing capacity to meet all profitable global market opportunities will present s critical challenge over the plan period with the major international growth opportunities, shift to box styles, and growth of domesti~ brands. Reserve capacity mu~t be put in place to provide flexibility should demand exceed volume ex~ctatio~s. IMPROVE MANAGEMENT ETRENGTE -- B&W will continue to up,rode the lkilll and capabilities of itl human ~esourCel and ensure an appropriate organizational stz~4cture, to be ~le to tak~ advantage Of future marketplace opportu~itleB, Byste~B and technologies. This will all~ the company to increase productivity, mfficiency and overall performance. The entire organization will be reexamined and aligned to ensure superior consumer satisfaction and flexibility in the marketplace. SiX. ~)M~STIC ~VIRON~AL OVERVIEW, ASS~/IOMS ~ FOREC/tST K~Y ASSUMPTIONS - Over the next five years, the U.S. tobacco industry Is exacted to confront an even more aggressive &~d h0Btile envizonment On legislative, regulatory and social fronts. Anti-smoklng initiatives at all levels of government will escalate. Cigarette consumption will decrease a~ an increasing rate and competition among the manufacturerl will increase, particularly at retail. B&W's plan assls increased state and local taxes~ f~rther restrlctlonl on consumer oppor~unlties to smoke, more restrictlonm on salel and marketing, and potential lSmltatlonl on manufacturers' ability to export cigarettes from the U.S. The Federal Excime Ta~ . 690951888

-3- will increase by $.04 to $.24 per pack January I, 1993. The plan assumes no additional FET increases, although an incre&se in 1996/1997 is posalble. However, risk of incremental Industry volume dgcline8 due to a ~ederal tax increase is viewed sl minimal. ZC0~0My - The U.$. econDmy i8 expected tD remain s 81Qw-growth e.vir0rd~ent, Brief periods o£ higher economic growth will occur, but are not expected to be sustainable due to shattered consumer confidence. Real GNP growth will be limited to 2.0-2.5~ per year, inflation will bl llightly higher than 1992"s 2.9% but below 4.5%. Unemployment will continue st high levels throughout the plan period. Interest fates are expected to rise modestly in the out years of the plan. PRICING aSSUMPTIONS - B&W projects continued significant list price increases, (particularly for full revenue brands) and that retail prices will remain at a moderate level compared to world s~andards, based on conc~usiDnm of a recent pricing study. Philip Morris and R.J. Reynoldl both require substantial price increases to fund corporate strategies and fulfill profit growth expectations. Lels aggressive price increases are anticipated for low price and extra low priced offerings to maintain relative retail price spreads aJ~ong the price tiers and attempt to moderate discounting over the plan period. Future levels of discounting are expected to continue to increase, but at a slower pace with a significant portion of price i~crea~e8 flQwing through because of financial performance requirements. Any VFM price increases above the plan ass~ptions that would change the pric~ spread would more than likely be offset by discounting, DOMESTIC FORECAST - Industry shipments for 1992 are projected to decline 2.8% after sdjustmen~ for the year-to-year effects of trade loading. The decline for 1992-1997 is forecasted ~o increase each yeaz at a 3.1% compound ~ate. However, industry decline is marginally more optimistic than forecasted in the prior plan. Overallp factors driving the industry decline ~nclude legislation restricting consumers' opportunity to smoke, taxation and continued anti-smoking social preleures. MQderating these pressures £i the continued growth of the value se~men~ with availability of cigarettes at deep discounts to full revenue prices. XAJOR DO)(~ST~C SEG~ PROJZCTIOMS Price Segen%l - Full revenue share of the market is projected to decline from 71% in 1992 to 48% by 1997t despite manufacturers supporting key full revenue brands with higher levels of promotion to sustain volume. The rapid growth Of VFM el being driven by rising retail prices, quality VFM offerings, and aggressive net prioing of VFM pEoducts. The greatest share growth is pro~ected fo~ the E~P segmentw which his established a wide and growing price differential versus all Other price segments. prf©e se~le~t proje¢l(~ (Shire o( ~rkei %) @utt Rtv~ 7~.0 71.0 47.7 -23.3 glL~-For-M~y ~.0 29.0 S).3 +~.3 L~U Prl~e t8.$ 17.9 ~0.(. + ;L5 Extra Lc.~ pri)e 6.5 ll.1 )119 +)0,~ 690951889

-4- Other Segmsmtmtion - The menthol segment is expecte~ to continue its gradual long-term share ~@cline from 25.9% in 1992 to 23.4% in 1997. The shift to lower tar delivery products will continue as will the trend to 100mm products and box packaging. Box share of market is projected to Increase from 26.4% in 1992 to 32.7% in 1997. The profile of the smoker population is projected to skew increasingly toward ~emale, oldert and lower i~come ConsLh~ers. DOMZSTIC CO~ETITION - C~pmtltio~ in the domeltic tobacco enviror~ent will continue to intensify as competitors attempt to limit share declines of full revenue products while at the same time aggressively participating in the expanding VFM segment. Anticipated competitive focus includes: I~res$~ c~nc~tra~i~ Of re$~rcs$ behi~ key ~uI[ rev~ bramds. LI~ ex~ s~ ~r0du~t m~h~e~e~ of existi~ full rev~ ~t$. I~rti~ effQrI$ t~ c~trsL diEtr~tI~ ]~rsa$~ rslia~e om ma~fDsturers~ LI~t prices 0~ l~i ~s sf C0u~i~ to infl~cmce r©tli[ prlce$. ]~re~s~ ELP c~mpe~iti~ f~r ~$, ~e~&IL s~¢e m~ di$~ri~i~, philip Morris - pM,s domestic tobacco business is under additional pressure for esrnings ~row~h due ~o slow earnings ~row~h in foo~. This comes at a difficult time as pM'B flagship brand, Marlboro, has begu~ to show some weakness. Full Eeve~ue volume declines are severely l lmit~ng domestic profit growth even with aggressive price incrmases. TO combat the problem, PM has adopted a three pronged approach. First, the c~pany is increasing mpend and concentrating promotional suppor~ on key full revenue brandE. Second, through the Distributio~ a~d Retail Masters progra2~$, ~M is attempting to leverage its market power to dominate distribution. Finally, PM im resorting to line extensions a~d increased i~ventory levels ~o p~gh prod~ct into the distribution chann~l. Moweve~, eve~ wi~h these efforts~ PM will have a difficult time obtaining the domestic earnings growth necessary to support their ~orporate 20% EPS ~rowth expectations. PM continues to develop its International business s~pported by hi,her lev~l~ of spend and i~vestme~t to assure sourcin~ capabilities. R.J. Reynolds - R~-R's financial strength has improved dramatically due to capital restruct~rings. However, d~estic full revenue 8hare declines for Winsto~ and Sal~ continue to be a major probl~. Recent product enhancements such as J~mpr~ved blends and the "Flavo~Seal" packaging combined with substantial promotional support have done llttl~ to arrest historic decline trend~. Pr0~pe~ts for RJR continue t~ be much of the same - high promotlon levels in an attempt to arrest full revenue share declines and increased emphasis on VFM and Intermatlonal ~rowth. RJR is the competitor viewed as m0B~ likely t0 make a dramatic/unexpeate~ move in the market place, as operating i~com~ premiere8 i~crease. Lorillard & ~u~erisan - Lorillard and American will continua to follow cash and profit ~ptimization strategies with Increased emphasis upon VFM and International opportuni~lel. Lorillard will increase Newport support levels as the company becomes even more dependent on Newport contribution to achieve operating ear~inga growth. Liggmtt - Liggett will lose financial flexibility during the plan period au serious flnan~ial problems at their parent, Brooke Group, extend downward. Cash constraints aze ~xpected to further limit promotional programw and the possibility of significant new product introductions. Pri~e promotion will be difficult for Liggett. 690951890

-5- japes Tobacco inc. - Over the last couple of years, JTI has become aggressive in developing its export business and manufacturlsg capabilities. AS s result, today iTS is highly profitable and • more formidable competitor, as evidenced by the plowing gro~th of Japanese ~ports and gro~h of their ow~ ex~orts. There is s ri.k that JTI could acquire Lorillard or Liggett to gain a fOOthold in the H.S. market. They would likely choose to be • strong competitor in VFM to grow share. WHOLZSALE/RETAIL TRENDS - Higher cigarette prices continue to drive thB consist towards pack purchases and shift vol~e fr~ supermarket/grocery to convenience and gas outlets. Brand and style proliferation and marginal brands will increase. There will be more conversion to no,-self ssrvlce merchandlJing and consolidation of wholesale accounts. Future distribution issues and alternativls will be closely monitored as changes in the system contlnue to evolve. IV. ~T~OlC ISStFE 1~ DK~P KOOL pERFORMANCE OBJECTIVES - AS B&W's large|t brand and most importa,t p~oflt contributor, KCOL'S decline rate must be minimized while achieving acceptable profit levels. The plan objective is for Keel to hold share of the full revenue menthol Be97Nent° SITUATION ANALYSIS - The menthol segment will continue to decline slowly. Since 198B, full revmnue ~nthol has declined by 5.5 share ~ints as VFM menthol entries have experienced steady growth. Extra low priced menthol styles have been particularly successful, growing from 1.2 share ~ints in 1991 to 2.2 ~hsre pointm in 1992. KCOL'B decline has continued to be driven more by its low rate of attracting ~ew and com~titivm smokers than by its outflows. Deterioration has been greatest among key young adult (21 years and older} and Black smoker groups. XOOL plan strategies are designed to maintain KeeL's position in the full revenue menthol s~ent while continuing to evaluate revitalization options, which offer improved long-term perfo~snce. Resources will be focused behind buildlng brand and advertising awareness, with support behind image/awareness building promotions designed to appeal to both franchise and competitive smokers. Price discounting will be reduced and used sparingly, primarily as a competitive business building tactic in urban markets. Keel spend plans are based upon • level of sup~rt behind image-based advertising and promotIQn that have proven successful in holding share of the full revenue menthol segment, as demonstrated by the bra~d's performance in 1989 and 1991. Alternate Keel plan~ were considered, including a short-term profit maximization strategy. However, these failed to meet the g~ideline and had significant negative impacts on long-term profitability because they exacerbated KeeL'S decline by putting it at a severe dlsadvantage to key menthol ¢~petition. Revitalization of Keel is a top priority. The two existing KeeL revitalization tests have both mhotm promise and will oontlnue to be evaluated, with both receiving maintenance level of spend. In addition, plans are underplay to open a third tRst market that incorporates the learning gained from the exlmting tests. Like Cleveland a~d Ric~u~ond, the new test will he monitored through a cogitation of measures, including brand~ ad and pro~tion awareness, trial and conversion rat~s~ and consumer cormnents~ i~ additio~ tD voles/share measures. The new test market will begin in early 1993. A Keep rmvitallzation roll out is included as a sensitivity. 690951891