Tobacco Documents Online

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~B&W) PROTECTED BY MINNESOTA TOBACCO LITIGATION PROTECTIVE ORDER THE T~BACCO CONFERENCE June 7 - June 12, 1983 Z Tuesday~ June 7 - Winston-Salem ~.'00 - 6:~5 p.m. ~:~5 - 8:30 p.m. Wedmesda),~ June 8 - Winston-Salem 7:00 - 8:00 a.rn. 8:15 a.m. 8:30 - 8:~,5 - 9: I 5 ~.m. 9:15 - 9:30 a.m. - 9:30 - I0:~ a.rm 10:00 - 10:30 o.m. I0:30 - II:30 a.m. I 1:30 a.m. I 2:00 - 1:00 p.m. 1:00 p.m. R.J. Re/raids Welcome J. P:ul Sticht, Chairman of the Board Corporate Overview of Non-Tobacco Businesses Joseph F. Aberly, Jr. Vice Chairman Reception and dinner Hotel: Hyott House 300 West 5th Winston, Salem 27102 Breakfast Depart by bus for Reynolds Plaza Building Opening Remarks and introductions - J. Tylee Wilson, President Corporate Strategy of Domestic and Intenational Tobacco Businesses - E.A. Horrlgan, Execut ive V~ce President Break R.J. Reynolds Tobacco Company Operations, Present Prospects for the Future Gerald H. Long, President and Chief Operating Officer R.J. Reynolds Tobacco International, Inc's Operations, Present and Prospects for the Future - Lester W. Pullen, President Question and Answer Period Depart for World Headquarters Building Buffet lunch at World Headquarters Building Video presentation on tobacco from field to cigarettes

~ ,. ~ ,5...-,'~'r,- ........... "~rC-S~TA "r,C)Bs, CCO LITIG.&TI_ON PROTECTIVE ORD.ER 2:00 - ~:.~S p.m. ~:45 p.m. S:00 p.m. 5:30 p.m. 7:00 p.m. Thvrsdo,/~ June Y - Richmond Y:00 a.m. 10:IS a.m. I 0:30 o.m. 12:00 noon 2:00 p.m. 3:15 p.m. 3:30 p.m. 6:30 p.m. on Tour Whltaker Park, Distribution Center and Research and Development Center Wrc;p-up at R&D Center Depart for Winston-Salem airport Depart for Richmond Dinner at Holiday Inn Richmond, Va. Roundtable: The Tobacco Institute William O'Flaher~, Counsel The Tobacco Institute William Kloepfer Jr. St. V.P. - Public Relations Coffee and Soft Drink Break Universal Leaf Tobacco Co. Gordon L. Crenshaw, President Lunch break Lorrill~d Curtis H. Judge, President J. Robert Ave, Executive V.P. - Marketing Coffee (~nd Soft Drink Break Brown & Willlamson John Alar, President Henry F. Frlgon, Chief Financial and Administrative Officer, BATUS, Inc. B&W reception and dinner at Virginia Museum of Fine Arts

PROTECTED BY MINNESOTA TOBACCO LITIGATION PROTECTIVE ORDER Frlda),~ June I0 -,Richmond Morning through lurw::~ 2:30 p.m. ~:00 p.m. SaturdayT June [I - Willlamsburq 12:00 noon Sunday~ June 12 2:30 p.m. Philip Morris Hugh Cullmon, Chairman, Philip Morris Hans G. Storr, V.P. and Chief Financial Philip Morris, Inc. buses wiil deport from Philip Morris to Williamsburg, VA Hotel: Colonial Williamsburg American Brands - reception and dinner Luncheon and presentation by Ameri~ Br~x~ Edward W. Whittemore, Cha{rman of the ~i and Chief Executive Officer Charles A. Mehos, Executive V.P. and Chi~ Financial Officer buses will depart from Williamsburg to Nor~t~ airport (I/2 hour away)

PROTECTED BY .~IINNESOTA TOBACCO LITIGATION PROTECTIVE ORDER Welcome and Corporate Philosophy Remarks by J. Paul Sticht Chairman and Chief Executive Officer R.J. Re~nolds ~ndustries, Inc. to the Tobacco Seminar Winston-Salem, North Carolina 7 June 1983

_ ,n ~.u:~ PP__C~TF~'~'FD BY 3IINNEgOT~. TOBACCQ.I_LTIGATION PROTECTI'~E ORDER =. Z -1- On behalf of all of us at R.J. Reynolds, I want to welcome you to Winston-Salem. I'm pleased that Jack Maxwell agreed to kick-off his 1983blennial Tobacco Conference here. It means, of course, that we'will have significantly more time to tell you what is going on at RJR. And, I hope that the time spent with us this evening and tomorrow will give you adequate indication of where we are currently and where we expect our businesses to be heading. Time will also allow us to demonstrate to you the degree of put commitment to the tobacco business worldwide not only in terms of physical and financial resources but in terms of human resources as well. At our annual meeting of stockholders in April, I said that OUr major accomplishment of 1982 was the successful, friendly acquisition of Heublein. And, with the acquisition, we essentially achieved the goal we established for RJR early in the 1970s to bec~me a world class, diversified consumer package goods company. This year our consumer businesses aione will likely produce sales in excess of S12 billion dollars. Not only are those sales being generated by a vast array of products that meet consumer demands around the world, but we are now one of the predominant suppliers to the U.S. supermarket. Also, when you consider that almost one-third of our sales are generated outside the U.S. and almost one-half of our i00,000 full-time employees perform their duties outside the U.S., it is apparent that we have largely become what we set out to be. Thus, while I would not rule out further diversification through acquisition, I can say that for the foreseeable future our attention and our priority will be to concentrate our efforts to develop fully the companies that we now have. We will do so in order to realize the extraordinary potential that we see for those businesses. As all of you well-know, these past dozen years during which the transformation of RJR has taken place have not been without problems. It has been a period where the world economy, for the most part, has been in a continual state of disarray, and capital formation markets have not only been volatile but uncertain, at best. In short, it has been a difficult time in which to diversify and grow. ~0 0 °° Nevertheless, I take considerable pride in the record of cur company in meeting our goals during this most difficult and challenging period. Despite rapid internal change and generally difficult external conditions, our company has prospered and produced more than a decade of successive record results. If history is in fact a prologue, I can confidently predict bright and prosperous future for R.J. Reynolds. Certainly, th~s is not only our objective but our expectation.

IB&W) PROTECTED BY MINNESOTA TOBACCO LITIGATION PROTECTIVE ORDER 7- ! would now like to turn the program for the evening over to our Vice. Chairman Joe Abely who I no introduction to this group. Joe. ### rest of. the am sure needs

tB&W) PROTECTED BY MINNESOTA TOBACCO LITIGATION PROTECTIVE ORDER Corporate Overview of Non-Tobacco Businesses Remarks By Joseph F. Abely, Jr. Vice Chairman of the Board R.Jo Reynolds Industries, ~nCo to the Tobacco Seminar Winston-Salem, North Carolina 7 June 1983

~B&~,$") PROTECTED BY .~II.N...NI.E. SQTA TOBACCO LITIGATIO.'s PROTECTIVE ORDER Thank you, Paul, and good evening ladies and gentlemen. I also want to welcome you to Winston-Salem and to RJR as well. is a pleasure to See so many familiar faces. It Since I am sure all of you know R.3. Reynolds Industries in somedetail, I am not going to belabor you this evening with a historical review of our businesses. What I plan to do in the next 25 minutes or so is to outline the various factors, some internal, but most primarily external, which will affect our performance this year and in the immediate Z Z: future. Within this discussion, I'll also tell you about the strategies we've implemented to deal with those factors. I will not discuss tobacco as a separate line of business since, as you know, most of tomorrow will be devoted to a detailed discussion of that business. Let's.start with our food and beverage business. With the Heublein merger last October, we virtually doubled our worldwide food and beverage business. I believe we have met the challenge of integrating these businesses into RJR smoothly and efficiently. Our Food and Beverage Group -- consisting of Del Monte, Heublein Spirits & Wine and Kentucky Fried Chicken -- is only six months old. The three companies all report to Hicks Waldron, who merger, was chairman and chief executive officer of Heublein before the These companies, which will have combined sales this year of about four and one-half billion dollars, are largely self-sufficient and free-standing organizations. Most staff services that previously had been centralized are now integrated into the three companies and their operating units as part of the reorganization. The objective of this 'move was to make the staff functions more immediately responsive to the needs of each of the businesses. With this structure, we think that the companies will be able to react quickly to their own specific opportunities and problems. As part of this process, we have isolated and addressed a number of opportunities of a synergistic nature. Synergy is a word that has been much abused. But if it does have a use, it would be to describe most of the 30 pr6jects under study or under way in our Food and Beverage Group. Some are already paying off. These projects, by current estimates, will save the company in excess of $I0 million annually by allowing us to do a more effective job with existing resources.

"tB&V,') PROTECTED BY 3IIN.'SESOTA TOBACCO LITIGATION PROTECTI~,E ORDER --2-- For example, we will save a significant amount through advertising ef£iciencies. Oust by combining Heublein's print advertising purchases'with those made by the domestic tobacco company, we can get ~the same advertising reach for a good deal less money. And, in the next few months, we will be combining television advertising purchases across our food and beverage businesses as well. Packaging also offers potential savings. Del Monte is exploring the economies of making cans for new Heublein products. Heublein Wines has a glass bottle manufacturing plant that may be able to supply Del Monte with catsup bottles. And Kentucky Fried Chicke, is beginning to use its expertise to help Del Monte buy chicken more economically. Zn looking at the Group's operations, a good place to start iS with Del Monte Fresh Fruit. In the last half of 1982, results were penalized by a worldwide over-supply of bananas, resulting in severely depressed prices. While this situation had already begun to improve in this year's first quarter, it was further impacted by a major storm that swept through Central America in March. That storm wi~ed out approximately 15 million boxes of the industry's banana crop, of.which approximately i0 million boxes were Del Monte's. But the realities of the marketplace are such that it is likely our volume loss will be more than offset by the supply/demand effect on prices. For example, when the news of the blowdown was reported, the price of bananas jumped quickly on the East Coast from 19 cents to 49 cents per pound. So our expectation is that the net of all this will be a return to somewhat more normal results in 1983. In looking at the remainder of Del Monte, which now includes Heublein's specialty grocery products, the restructuring which involved Plant consolidation, pruning product lines and reducing overhead, has been compl6ted. And the related charge-offs are now behind us. We're now in the final stages of completing the conversion of Del Monte from a production-driven to a consumer-driven company. This means you should soon see the introduction of the kinds of value-added products that will make this transition work. While this is not a short-term project, this year we expect dramatically improved operating earnings from Del Monte. And this expectation is based on the cost reduction efforts and the inventory and pricing disciplines which are now making themselves felt.

l,l~ e.ur~ pDr~T.EC_TFD RV X1I\'\'E.q/)~ T~__ TOBACCO LITIGATION PROTECTIVE -3- Moving to spirits, I know you are aware of the adjustment occurring in that"industry. Spurred in part by the lingering recession in 1982, the whole category recently has been in decline. Most of this decline,-however, came from the share drop in brown goods -- the bourbon and whisky segment of the market. But white goods -- the vodkas and tequilas -- did relatively well. And while Smirnoff's domestic case volume was flat for the year, market share improved and worldwide volume was up 3 percent. Our strategy in the U.S. spirits business is to increase our share of market in the segments characterized as either light or flavorful products -- where we are already the market leader. So, our advertising and marketing efforts will be concentrated behind Smirnoff, Jose Cuervo tequila and Black Velvet Canadian. In the spirits business, we are embarked on an aggressive new product development program and have 16 new products planned for Introduction-this year. While most will be line extensions such as the new 10-proof Club Cocktail Bloody Mary, at least two of the introductions will be entirely new beverage concepts aimed at appealing to changing consumer tastes. The new low-proof cocktail, and those to follow, have been made possible by a technological breakthrough which enhances shelf-life, even with lower proof numbers. In the wines business, a bumper crop of grapes has caused significant dislocation in the marketplace, and eroding margins. Our strategy is to concentrate our marketing and selling resources behind Inglenook and Beaulieu. Inglenook, a premium table wine generating a healthy profit, is in a growing category, we plan to increase market share by about I percent per year over the next five years. Over the last decade, this brand has grown from 68,000 cases to more than six million cases annuall9 -- so our target is realistic. Beaulieu is a highly profitable, super-premium brand which has no difficulty selling out its entire production. Looking ahead, our immediate objective is for Heublein wines to hold relatively steady in terms of total case sales. But we will change the mix from the lower-prlced wines with lower margins to the higher-priced, higher-margin products. With the Heublein merger, we obtained a highly profitable, fast growing, quick service restaurant system in Kentucky Fried Chicken. We intend to move quickly to capitalize on our advantage.

(B&W) PROTECTED BY .MINNESOTA TOBACCO LITIGATION PROTECTIVE ORDER --4-- Z We are employing a two-pronged growth strategy for KFC, First, we are going to continue to increase per-store sales by continuing to improve our in-store operations. KFC has worked hard to establish its'impressive record of five consecutive years of real sales growth. And, I'm happy to say, we see that continuing. Longer term, we will probably have to add some new products to take advantage of shifting consumer trends as we already have done with our made-from-scratch biscuits, and our spicy chicken menu especially designed for urban areas. But we have no intention of trying to be everything to everybody, and our major emphasis will be to continue to do what we have been doing -- only better -- and of course, staying with chicken. The second element of our KFC strategy will be to increase the number of stores that we open each year. Over the last five years, we opened an average of 20 new company stores per year in the United States. This year we'll open 80 new stores. And next year, we will increase the number of new store openings by an additional 50 percent, opening 120 stores. This will take us along the path to our objective of 200 new stores per year. It's worth noting here that the returns from new stores start on opening day. We think the U.S. market needs another 2,000 KFC stores, which is an increase of nearly 50 percent over the 4,300 stores that we have today. And this year, franchisees will open almost as many new outlets as the company, thanks in part to lower interest rates. Internationally, we have 1,300 Kentucky Fried Chicken stores -- about one-third of them company-owned. We plan to open more than 500 franchised and company-owned units over the next five ~ears. We can only guess how many KFC stores will ultimately be uilt overseas. But I can say with conviction that the number is staggering, and that KFC's future is bright indeed. As you have heard, there's a great deal going on in our Food and Beverage Group, and we believe it will grow and prosper in the years ahead. Now let me turn to transportation. You will recall that 1982 operating results were at a record high, even in the face of a world trade environment which was probably as bad as any of us can remember. This, of course, was because Sea-Land has worked hard to achieve fleet efficiency and lower fuel consumption, to build a worldwide structure of efficient land-based facilities and to pare costs generally. Of course, the earlier sale of the high-cost SL-7s was a key contributor to this improvement.

, Ilq&V~3 PROTECTED BY ~II.N.~ESOTA TOBACCO L_ITIGATION PROTECTIVE ORDER -5- While we expgct a minimal increase .in containerizable world trade in 1983, it is difficult to predict how this w~.ll affect operating results. Two of outmajor trade routes appear poised for substantial changes. In the Atlantic trade, indications are that in 1983 we will see significant advances in European exports to the United States. In the Pacific, historically our strongest and most profitable trade lane, we expect continued strengthening and modest growth through the remainder of this year. Unfortunately, despite some volume increase and continued progress in reducing costs, we are experiencing major rate erosion. As a result, our average revenue per load -- the key performance measurement in this business -- presently lags last year. If this continues, it will offset the volume gains, and negatively impact earnings. The current softness in rates is due primarily to excess capacity, and new carriers entering the major trades. Our strategy for dealing with the near-term situation is to maintain tight cost controls and maximize cargo volumes while working through conference groups to restore rate stability. A regulatory bill, =The Shipping Act of 1983," has been passed by the Senate, and it's been through one committee in the House and is now in the hands of another. This bill would reduce Justice Department second-guessing of operating decisions approved by the Federal ~aritime Commission, whose function it is to regulate shipping. It would also permit rationalization among carriers, and greater flexibility in intermodal rates. We believe this regulatory reform legislation will pass, and be signed into law sometime this year. The factor affecting our energy business which has received the most publicity, is the current world crude oil surplus and the resulting price declines. We believe the market is stabilizing at current price levels barring any serious dislocation within the major producing countries. And we anticipate a gradual increase in the volume of~ energy consumed as economic activity picks up. The key to earnings performance during the remainder of 1983 is the continued upturn in world trade -- principally the Asia/U.S. and Atlantic trades -- and progress in securing higher rate levels early in the second half of the year. With our fixed costs lowered, any significant upturn will have a positive influence on rates, and of course will leverage earnings quickly.

PROTECTED BY .MINNESOTA TOBACCO LITIGATION PROTECTI\E ORDER Z In Amlnoil's case, we have no concern over the marketability of our U.S. crude oil production, since substantial quantities of imported oil will still be required to meet domestic demand. Domestic crude prices will, however, be determined by the international situation. So far this year, our average domestic oil price has been about l0 percent below last year. However, because the Windfall Profits excise tax takes up to 70 percent of the difference between actual sales price and the regulated base price, these crude oil price cuts have had more effect on the government's tax revenue than on Aminoil's EFO. I wish we had more businesses like that. Of greater concern to us is the supply/demand situation for natural gas. Reduced economic activity, warm weather, rising prices and significant curtailments have resulted in a marked decline in U.S. natural gas production. Although total United States gas production capacity is difficult to determine, there appears to be about a 2.5 trillion cubic feet per year surplus capacity against a 1982 total demand of 18 trillion cubic feet. However, given today's increasing level of economic activity and reduced exploration efforts in the gas provinces, we believe this so-called "gas bubble" will disappear in two to three years. Importantly, this implies competitive pricing with residual fuel oil. Aminoil's strategy to deal with this uncertain picture has been implemented in a logical, consistent and flexible manner. Once the over-supply and price softness began to develop~ we immediately perceived the need to review and initiate reductlons in our capital spending and our operating costs, based upon reduced cash flows and the less favoraDle economic outlook. These cuts are already effective. We have also significantly improved our selectivity in exploration and development projects. On the plus side, lease bonus levels are down in almost all areas. Pipe and rig costs are down 30 to 50 percent and drilling efficiency has improved markedly. Well completion charges are down anywhere from 25 to 40 percent, and equipment costs are down almost 20 percent. This should result in a decline in industry finding costs from a peak of around $13 per barrel in 1981 to an industry average perhaps in the $i0 range this year. Another way of looking at this is to observe that the law of supply~demand is alive and well in the oil patch.

~r~.B:zPROTECTF_D BY .M|,NNE$OTA TOBACCO LITIGATION PROTECTIVE ORDER Z From Aminoil's perspective, the reduction in industry activity levels has several desirable aspects. We have been able to reduce oosts'~hrough less expensive drilling and service contracts, and we can choose from the more competent operators. We have reduced our tubular goods and other materials inventories, as our suppliers have become more anxious to please. And we've been able to employ high-quality professionals at reduced recruiting costs. X should add that the strengthening of Aminoil's management team with the highest quality people available, had been a high priority for us for some time, and that objective has been achieved. Another beneficial effect of the shake-out in the industry is the increased availability of opportunities to purchase properties or companies. Although competition will be keen, these opportunities will likely become better during the latter part of 1983 and into 1984. As I've said on previous occasions, we will not hesitate to do some of our prospecting on Wall Street if the economics are there. TO sum all this up, we continue to see our energy business as an area of prime opportunity for us, and with a bright future. We believe the energy price/supply equation will improve with a continuation of present economic trends, and our operations are now benefitting from a substantially improved cost picture. During the present transition, our strategy will be to manage our investment and control our costs carefully, while still building for the long-term. This continuing commitment is well illustrated by the success Amihoil enjoyed at the May 25th offshore Louisiana lease sale, where we bid on behalf of ourselves and in partnership with ARCO and Elf Acquitaine. Nearly $4.6 billion was bid by the industry on 656 tracts offered for lease by the federal government. Aminoil and its partners bid on 38 blocks and emerged as the apparent winner on 27. These blocks present us with long-term opportunities to replace or increase reserves near areas where we currently are producing crude oil and natural gas. In the Development Corporation, we are moving quickly to take advantage of emerging trends affecting our many businesses.

"(B&W) PROTECTED BY MINNESOTA TOBACCO LITIGATION PROTECTI%E ORDER -8- Consumer and industrial needs have created demands for new types of packaging -- particularly lightweight, flexible materials that have'special protective qualities and are less expensive than ca~s or boxes to transport and store. RJR Archer is strengthening its position asa supplier of high value-added flexible packaging materials. We acquired a flexible tube manufacturer earlier this year, and have now entered into a joint venture agreement to produce aseptic packaging under the Combibloc name in this country. We will continue to look for ways by which our Development Corporation can complement our major lines of business. I think you might want to ask Ty Wilson about progress in the foodservice area during the question and answer session. That wraps up my discussion of the operational factors affecting our non-tobacco businesses currently, and our strategies for dealing with these. Now let me turn to some key financial factors. The first is foreign currency management. As you know, we adopted FASB-52 for the 1982 second quarter. We did so after a great deal of study, and concurrent with the opening of our new Finance Company in Europe which functions as an "in-house" bank for our overseas operating units. The Finance Company acts to redeploy the liquid assets of our overseas units by borrowing their excess funds, converting them into other currencies as appropriate and on-lending to units needing funds. Through these newly created financial links, we are currently recycling more than $i00 million among our companies around the world. That same entity also serves to concentrate exposures arising from the crossborder trading activities of our foreign operations, by hedging net exposures in the foreign exchange market from one central point. In this manner, we have removed future currency risk from our operating companies and cut attendant transaction costs by more than 30 percent. Next is capital spending. While consolidated capital expenditures for 1983 were initially projected to be $1.4 billion, an all-time high for the company, it's now likely that they will be somewhat less -- perhaps $i.1 billion -- based on cancellations and deferrals. Combined spending by Domestic Tobacco and Aminoil accounts for more than 65 percent of the total. And, the most significant portion will be spent on the domestic tobacco company's plant modernization and expansion program which you will hear more about tomorrow. Cash generated by operations will be up significantly this year and it is unlikely that we will have to use external sources to fund our requirements despite a record-level capital program.

_ Jn,~.w) PRr3TFC'TF_D RY MINNESOT_~Q_L_ITIGATION PROTECTIVE ORDER -9- Z Our financial ratios are still well within the rating agencies' statistics for a high quality, "Double-A" credit. At year-end 1982, our ratio of total debt to total capital was 33 percent and our fixed charge coverage was 6.1 times. Both of these will improve this year. Well, we've covered a lot of ground here in a short period of time. So let me sum up. While the vagaries of the marketplace this year were not unexpected, it has been a tumultuous five-plus months. But we believe the balance we have struck in the management of our businesses will again produce a year of record operating results for R.J. Reynolds Industries. In the tobacco business, we see the improvements in shipments to the trade and retail take-away, which began early in the second quarter, continuing through the year. The introduction of Century, aime~ at capturing a new market segment for the long term, should contribute to the brightening picture in the domestic business. Internationally, we continue to grow market share in most of our markets, and the base of our business continues to strengthen. You'll hear more about this tomorrow from Ed Horrigan. In foods and beverages, we will see a dramatic upturn in earnings performance this year. And that upturn is a result of both the inclusion of Heublein for the full year and the long-awaited impact of the improvements we have made at Del Monte. We also are moving quickly to seize the opportunities provided by Kentucky Fried Chicken both here at home and overseas. Aminoil will hold its own this year as the petroleum industry returns to normal from the go-go decade just past. Traditional market forces and sound management decisions have replaced the boom psychology approach to doing business. For Aminoil, which traditionally avoided the excesses common to other companies during the past several years, growth will continue to come frcm its ability to replace reserves by expJoration or acquisition, and to grow production with lower costs. Sea-Land is poised for incremental gains in earnings as rates stabilize and then return to more normal levels, we believe we should see this change in rates begin to occur later this year. With cost discipline already a way of life at Sea-Land, we are in a position to leverage our earnings significantly with better rates. I think you can sense from my remarks that we believe our businesses to be strategically well-positioned for an upturn. But while we expect operating results to improve, 1983 quarterly bottom line comparisons will vary from previous experience.

PROTECTED BY .MINNESOTA TOBACCO LITIGATION PROTECTIVE ORDER -10- The doubling of the federal excise tax on cigarettes, the voluntary separation program in Winston-Salem which reduced first quarter EFO by more than $30 million, and the Heublein dilution have.made the early part of the year challenging for us, to say the least. The 7.$ million additional common shares issued at the time of the merger with Heublein, the dividend on the incremental preferred, plus the cost of financing the cash portion of the acquisition price, will mean that EP$ improvement will not track operating improvement on a one-for-one basis in 1983. 1984, of course, will not be subject to these problems of comparison and therefore should show results more in line with our historic patterns. In 1983, we are concentrating on making our businesses more efficient, more productive, more innovative and more profitable. we expect our earnings trends to improve during the second half -- most noticeably in the fourth quarter. And, as I said earlier, we do expect to produce another record year in operating earnings per share in 1983 -- excluding only the extraordinary Kuwait gain earned in 1982. Now we're ready for your questions. Thanks very much.

PROTECTED BY MINNESOTA TOBACCO LITIGATION PROTECTIVE ORDER Remarks by E.A. Horrigan, Jr. Chairman and Chief Executive Officer R.J. Reynolds Tobacco Company to the Tobacco Seminar Winston-Salem, North Carolina June 8, 1983 ~ >

,R.R.~V) pl~CqTFf'TPD RV XII~.'NFRf3TA TOR~_CCO.LITIGATION PROFECTIVE ()RDER It's not often that anyone in a responsible position in business will truthfully say that they are happy to have the opportunity to appear before~a.group whose function is to place every part of a business under a microscope, and then to make judgments which may have a significant impact on the price of our stock in the marketplace. But that, ladies and g~ntlemen, is exactly what I am saying to you. All of us associated with R.J. Reynolds Tobacco Business do truly feel that our time with you today is an opportunity. It is an opportunity to answer questions, and address concerns, we know you have about our business, to demonstrate that we are driving our business ahead in a carefully planned way, and to clearly show that we are doing so in a financially responsible manner. It is certainly no secret to anyone that the tobacco industry as a whole has faced difficult times during the past year and a half. Every tobacco company has felt an impact from the doubling of the federal excise tax on cigarettes. But in the face of these problems, R.J. Reynolds has taken steps to ensure that our tobacco business remains as vibrant and progressive as it has been since we began building renewed momentum in 1980. I can assure you that we are particularly mindful of your concerns, which we believe are quite legitimate, about the manner in which we at R.J. Reynolds Tobacco have addressed its future in terms of market share, unit volume and, most importantly, its continuing profitability. With this in mind, this morning's presentations have been designed to provide enough general information about our goals, strategies and accomplishments not only to provide a well-rounded picture, but to do so within the framework of the issues you and your peers have raised and placed before the invesLment community. While Jerry Long, the president of R.J. Reynolds Tobacco Company, and Lester Pullen, the president of R.J. Reynolds Tobacco International, will cover most of our major points f=r their respective operations, there are a few key observations : have reserved for myself. I have done so because I think they provide a framework for what will follow, and because they are very important in your consideration of our companies. For some time, We have been aware of and understood the concern of many of you that our determination to remain .numZer one in the domestic tobacco industry is so all-encompassing we will make any sacrifice to hold the top spot.

Z (B&W) PROTECTED BY MINNESOTA TOBACCO LITIGATION PROTECTIVE ORDER Certainly we are proud to have led our industry for a quarter of a century, and we intend to take every reasonable action to remain on top. But our number one objective is tO continue to increase our unit volt,me and share of market in amanner which allows us to procu:e ~onsistent, predictable and quality earnings, regardless of our overall industry position. ~n other words, ladies and gentlemen, no matter what speculation you may have heard, we have no intention of buying market share at the expense of reduced earnings simply to maintain domestic industry leadership. We intend to produce controlled, predictable earnings growth, and we also intend to further improve productivity and cost-effectiveness within our operations along with consistent improvement in the quality of our products. In 1980, when we began our drive to reverse R.J. Reynolds Tobacco Company's market share decline, our emphasis in maintaining market leadership was upon product quality. Very candidly, we felt our product quality was not what it should be in some of our product lines, and that without the necessary quality we could not halt our decline. We have made great strides in this area, as you will see during jerry's presentation -- such strides that we have now returned our major emphasis to continued improvement in profitability while maintaining market leadership. ~n virtually every area of our company, we are implementing improved, more cost-effective programs and methods while maintaining high productivity and quality standards. In 1983, as I indicated, all tobacco companies are facing a great deal of uncertainty in the marketplace because of the doubling of the federal excise tax in combination with increased state taxes. Hence, industry and market share numbers so far this year have little meaning unless they are linked with last year's numbers. And, because of this, it is just not possible at this time to accurately forecast our earnings this year. However, ~ think it is quite significant that if you normalize first quarter '83 against year ago by eliminating the excise tax and the effect of the voluntary separation program, our operating margins are almost identical; proof that our profitability is under control. The uncertainty which characterizes our domestic market, as well as various other markets around the world this year, has convinced us that we are going to continue to see a constantly changing world marketplace in coming years. The challenge for all of our tobacco operations will be to adapt to these changes. Because of the different situations we face in the U.A as compared to abroad, different strategies and objectives for our domestic and international operations are required.

,~.~.xv~ I~12F~T~rCTI~D BY .MI~NI~SOTA TOBA.C__CO LITIGATION PROTEC'rIVE ORDER In the U.$., we face a mature market where growth, for the most part, will have to come from increasing share of'market. We are well positioDdd to ~o this as we are the only tobacco company to have leading brands in every important market segment. With this kind of leverage, in what We feel will be a much more stable marketplace after this year, we~can concentrate on fully exploiting the potential of our existing brands while developing innovative new brands and methods to meet changing market conditions and consumer demands. The best examples of the type of. innovation needed are Bright, which is doing very well, and our new brand, Century. As you. know, Century represents some new thinking for our industry. But as you will see in Jerry's remarks, it is a brand designed to meet the needs of the marketplace today while meeting our objectives in terms of market share, unit volume and profitability. Internationally, we face a very different ball game. Since our international company was formed in 1976 it has done well financially, about tripl~ng its earnings in ~he midst of turmoil in several of its importantmarkets. However, in total, we have about 2 percent of the international market as compared to our 33.5 percent in the U.S. Our market shares cover a wide spectrum in areas overseas, ranging from 2.5 percent in Greece to over 80 percent in Puerto Rico. We are still young in the international tobacco business, but we have already established solid franchises and strong brands in o some key markets, of which Germany is a good example. And we intend to push for further growth in theseareas. At the same time, we are now seeing a growing trend toward American blend cigarettes overseas, a development which affords us some significant opportunities which we will exploit fully.. So in our international business, we are taking a decidedly entrepreneurial approach. We are doing this because we must be aggressive, opportunistic and willing to take calculated risks when the potential rewards are there. Yet at the same time, our principal objective is to achieve predictable earnings growth in this unpredictable market environment. 9ortunately, in both our international and domestic companies, we have experienced management teams able to move cur companies ahead in a structured but aggressive manner. This is particularly tr~e in the top jobs. Lester Pullen, who heads our international company, has rye: 16 years' experience with R.J. Reynolds Tobacco International. He has served in a variety of executive positions in all four our worldwide operating areas and has headed our Asia/Pacific area, our canadian tobacco subsidiary and Latin America area.

tB&W) PROTECTED BY MINNESOTA TOBACCO LITIGATION PROTECTIVE O RDER Jerry Long, our next speaker, has been with the Reynolds zndustries organization since 1969 when he Joined our old Foods Company. He has bee~ a part of our tobacco operations since 1976 when he joined Tobacco Internationa~ as vice president marketing. He moved to the domestic company as executive vice president in 1979, and has been instrumental in the turnaround R.J. Reynolds Tobacco has achieved. As I believe you can see, both of these men are extremely well qualified for the responsibilities they have been given. now let me step aside so they can show you in more detail the very exciting things that are happening in their companies. So Jerry, it's all yours.

tB&W) PROTECTED BY MINNESOTA TOBACCO LITIGATION PROTECTIVE ORDER • Z Remarks by Gerald H. Long President and Chief Operating Officer R.J. Reynolds Tobacco Company to the Tobacco Seminar Winston-Salem, North Carolina June 8, 1983

,~,~-xv~Puc~TKCTF~D BY .XIL\'NI~$OTA TOBACCO LITIGATION PROTECTIVE ORDER , -1- Thank you, Ed. Let me begin-Sy ~aying I am particularly happy that John Maxwell has made R.J. Reynolds ~ stop for his program this year. First, while we can talk to yo~ about a great many things at meetings such as this in Richmond or New York, nothing can compare with giving you the opportunity to take a firsthand look at our programs and facilities that we could only show you through words and pictures in other locations. Second, since the meeting comes at a time when there are so many uncertainties about the future of the tobacco business and our place within it, it gives us the opportunity to address in quite some detail these issues firsthand with you and to specifically address all of the questions which are so important to you. And, in this sense we have been guided in putting together today's presentations by our evaluation of the questions and concerns the financial community has been expressing about the industry and our company. Through that process we have attempted to determine the key questions uppermost in your minds, and my remarks have been developed to address these by giving you the basic information for your own evaluation and consideration. To start, let me address the subject which I believe is most important to you -- the impact of the doubling of the federal excise tax on cigarettes, Reynolds Tobacco's steps to offset the impact of the tax and the implications of these for the future of our company and industry. In the past year, the cost of cigarettes to the consumer has risen sharply, primarily due to taxation. The per pack price of cigarettes averaged 69 cents in the first quarter of 1982. This price has now increased to an average of 84.5 cents per pack, an increase of 22 percent. More than 50 percent of this increase is due to the federal cigarette excise tax increase, and most of the rest is due to state tax increases. Our reaction to the passage of the federal tax increase was to begin development of a carefully planned, measured response. We wanted a program which would help ease the impact on the consumer, help minimize negative financial impact in the tcbac:o trades, but which would, at the same time, work to our competitive advantage. We settled on a three-part approach. For the tobacco trade, we offered special incentive programs on our brands whereby tobacco wholesalers ccu!~ obtain additional funds to ease the negative financial effect of the floor tax on January i.

Z (B&XV) PROTECTED BY MINNESOTA TOBACCO LITIGATION PROTECTIVE ORDER • For consumers we offered special brand promotional programs, the most visible being our December great rebate coupon program offering savings of up to 510. We fully expected this program would have the extra benefit of attractingcompetitive, smokers to our brands. In addition, we increased our prices one-half the amount of the tax boost in october in order to make the increase more gradual and to supply the funds for the other two elements of our plan. We implemented the second half of the price increase to cover the excise tax increase on January i. We, of course, knew that implemention of these programs late in 1982 would adversely affect our volume during the first quarter of 1983, particularly in comparison tO other companies, which chose to take no action during December but which timed their "price increase" protection offers to continue to sell at old prices after the first of the year. That strategy, of course, tended to inflate first quarter shipments at the expense of the fourth. Whereas, ours tended to inflate the fourth at the expense of the first• Being unaware of or not tracking the effect these activities can have on manufacturers' shipment figures can result in misperceptions as to what is really happening in the industry. Accordingly, we tend to track relative performance on a roll~ng 12-month basis, and when we do this it is obvious that Reynolds Tobacco is maintaining the momentum we began building in 1980, and that any short-term volume swings or aberrations'do not reflect an interruption of that momentum. Response analysis indicates that not only did our coupon drop help ease the burden on our consumers, but one out of every four respondents was a competitive smoker• I can tell you that we are quite happy about the number of competitive smokers who have switched to our products because of the coupon program. We are also very pleased with the cost-effectiveness of the program because our total redemptions ran between 2.5 and three times higher than normal In total for the first quarter, our evidence indicates the negative impact of the tax increase at the consumer level at over 6 percent, while industry shipments were off about 8 percent. However, in the case of RJR, we have seen steady month-to-month share improvement since the end of January, and have now had eight consecutive weeks of sales increases• In regard to unit volume trends for ~he industry once 1983 is behind us, we see a return to a more predictable situation, as long as the federal or state governments do not make further exorbitant tax demands we see a return to a stable or moderately increasing market, and, ~ should add, a market in which R.J. ~eynolds Tobacco will have an increasingly larger share.

IB&W) PROTECTE-D-5"Y'fCH~.'~ESOTATOBACCO LITIGATION PROTECTIVE ORDER Now, if I may, I'll change the focus to our present environment. We also know'that many of you have questions and even some reservations codcerning our voluntary separation incentive program and the short work weeks we scheduled early this year. There seems to be a feeling among at least some members of the financial community that the program reflected either the fact that we were caught by surprise by a sharper-than-anticipated drop in our first quarter volume or that we felt the drop signaled a permanent or long-term contraction in our business. Of course, neither perception is correct. As to the former, we understood fully that our December shipment programs would cause fewer work hours in January. And this is exactly what happened. Also now that production has returned to more normal levels, we currently are working overtime and weekends in some of our manufacturing plants to meet production needs on some brand styles. AS tO the latter perception, the answer very simply is to be found in our 10-year expansion and modernization program. This.program involves a 2-million-square-foot factory now under construction just north of Winston-Salem, a 30,000-square-foot addition to our whitaker Park facility and the potential of a new.cigarette manufacturing plant planned for downtown. Winston-Salem. It also includes modernization of our existing production equipment and generally bringing state-of-the-art technology to bear throughout our operations. In addition to this program, w~ have just completed a major expansion of our research and development facilities, only of the most modern distribution recently brought on-stream one facilities in any industry, and are constructing a major toDacco processing facility downtown. ~n other words, we are taking steps which will tremendously increase our operational productivity and cost effectiveness and maintain and improve product quality. The new machinery we are installing, for example, has the capability to manufacture cigarettes with consistent quality at 8,000 or more per minute, as compared to 4,000 to 5,000 per minute on our older equipment. From the beginning of this program, we knew such improve:e::s would mean we would need fewer people at given production and, I might add, a different mix of people due to newer technology in the long term. Over the i0 years of the we felt attrition and higher volume would balance in relation ~,~ productivity gains. For e~ample, cigarettes per labor hour projected to be twice our current output when our program is completed.

tB&W) PROTECTED BY MINNESOTA TOBACCO LITIGATION PROTECTIVE ORDER --4-- But we also felt a voluntary separation program might be needed. So when the near te~-m impact of the excise tax increase on ~983 volume was determined in late December, we felt that the lessening production needs it would bring in 1983 provided the opportunity to takea major step in-our long-term program, and a voluntary separation program was put into effect. As you may know, some 1,000 personnel took advantage of the offer at RJR Tobacco. And this will be very helpful to us in the future, in fact, it already has given us the opportunity for significant organizational and personnel moves that otherwise would have been virtually impossible. So consistent with sound management practice, our VSIP program was simply nothing more than taking advantage of an excellent timing opportunity to achieve a necessary head-count reduction consistent with our long-term requirements. Returning to our expansion-and-modernization program briefly, one additional point should be made. This program does represent expansion for R.J. Reynolds Tobacco's manufacturing capacity in the range of 20 percent above our current output, not just modernization, when completed, our 2-milllon-square-foot manufacturing complex at Tobaccoville will have a production capacity about equal to our Whitaker Park complex. At the same time, we are upgrading Whitaker Park, and we are planning for the possibility of an additional manufacturing facility downtown. When you consider these facilities, and the fact that all areas will be receiving higher speed manufacturing equipment, it is obvious we are expanding our overall production capacity, based on our belief that we will need this capacity as we intend to grow our unit volume, both in the U.S. and overseas. Even so, the primary justification for the facilities programs is to assure that RJR is the industry leader in lowest cost production, and that we produce the best quality products. Also, all areas are designed to maximize the production flexiSility, which is extremely important. The next area of activity I believe would be of most interest to you is what we are doing to continue increasing our unit volume and market share, why we are doing it and the results we expect. When Ed and I joined R.J. Reynolds Tobacco Company from Tobacco International in 1979 and 1980, we came at a time when the company was experiencing flat to declining market share. L~ L~

~B&W PROTECTED BY .MINNESOTA TOBACCO LITIGATION PROTECTIVE ORDER -5- After a close look, we saw two primary problems which had to be addressed immediately -- product quality was notup to the standards of some of our major competitors, and a fragmented marketing approach in which the major brand styles in our product lines were all being approached individually and often in opposing fashion in terms of advertising imagery and spending. The quality problem was critical, because smokers are quite willing to change brands if they feel the product does not deliver the attributes they require. So we began a company-wide intensive quality program involving every element of the manufacturing process and our research and development units. I won't go into all the details of how we made it happen, because I think the results say enough. By the end of 1982, 21 of our brands were rated superior to their major competitors and 13 were'rat6d equal in consumer tests. This compares to only five superior ratings and 18 parity ratings in 1981. And I should add that in 1982 our consumer complaints declined by 5 percent and the trend continues downward. The other critical step we took was to begin brand family marketing for all of our major cigarette lines. For each of our brand families, we began development of a unified, consistent image. Now, no matter what style of Winston, Salem,'or Camel a consumer chooses, he or she knows what their particular brand stands for. We extended this concept of unified imagery to every level of our marketing and promotional efforts. If a consumer sees Camel advertising in a magazine or newspaper, in a grocery or convenience store, on a billboard or bus card, or at a special event, there is one consistent message about the brand. And for the past three years, we have made continuing improvements in our advertising and promotional programs, and in our methods for getting the most from them in terms of consumer awareness and cost effectiveness. Here are some of the current campaigns for our major brand families. I will skip all the details of test results for such things as consumer recall, and will just summarize by saying that by every measure, our advertising today is some of the most effective and efficient in consumer impact in our history, and consistently outclasses its competition among consumers. Our promotional programs are targeted to local events and activities and work in concert with our basic advertising programs. These are intended not only to encourage competitive switching, but also to increase our volume among our major franchises.

IB&$V) PROTECTED BY 3IIN.NESOTA TOBACCO LITIGATION PROTECTIVE ORDER --6-- In all cases, our promotional programs are tied to our product imagery. They are carefully planned events designed to reinforce the concepts consumers have of our brands to make our brands even more a part of their lifestyles. Another key element in our overall program, as it has been for a number of years at R.J. Reynolds, has been new brands -- new innovative brands. Since 1971, six major totally new brands have been introduced by the industry which each captured at least a .5 share of market. Four of those belong to R.J. Reynolds -- Vantage, More, Now and Bright. The competitive new brands were Merit and Barclay. Since 1978, we have introduced over 20 totally new brands and line extensions nationally without a failure. A great deal of our new product success has been due to the continually increasing sophistication of our market research capabilities. The evidence indicates we employ some of the most accurate marketing research methods in any industry. We have the capability to segment the market geographically, demographically, by brand style, even to the extent of the type of packaging preferred. We have also developed our own methods for considering product categories and describing smokers and their preferences. For example, some of the segments we consider are the virile, coolness, stylish and moderation segments. In other words, when we introduce a new product, it is not a shot in the dark; it is the result of careful evaluation of every aspect of the concept from packaging and advertising'to taste performance agains~our competition. Today, I want to concentrate on our two newest entries -- Bright and Century -- as we have had a number of questions from you regarding both. Both Bright and Century represent the kind of innovative thinking that is not just important, but critical, if Reynolds or any tobacco company wants to move ahead in today's marketplace. Bright's performance to date has been excellent. It is now selling at a rate equal to a .6 share of market after only six months in national distribution. What's more, thanks to lessons we learned from an advertising and promotional standpoint in the pre-introductory tests, it is significantly outperforming what we believed were good results in those preliminary markets. With Bright, we entered a new area. we gave smokers a new taste in cigarettes that broke with tradition, because all of our research said the market was ready if someone was willing to try for it. We did, and it's paying dividends. The same holds true for Century. Obviously, we knew this brand was going to cause a stir, not only in our industry but in the financial community as well.

• "'~'~'~"-"~"-'~ ?,HXNE~TA-'t'OBACCO LITIGATION PROTECTIVE ORDER -7- The launch of Century was a very carefully considered decision, partigularly in terms of howit would be viewed by you and your peers. But the concept had been proven by experience in other countries, and every indicator told us the time was right here. To simplify a great deal, the economic troubles of the past few years have had a profound effect on all consumers, including smokers. It is apparent that in the future, value and quality are going to be increasingly critical elements to many smokers in their choice of brand. Our marketing research has shown this is true across almost all demographic lines -- young and old, lower income to affluent, high school graduate or Ph.D. There will remain a great number of smokers to whom brand imagery, along with quality and value, will remain important. But there is also a vast audience to whom the concept of a value brand like century will be a prime motivator. I'd like to stress that new Century is not competitive to generics that are purchased by consumers only interested in price. Century is developing a new segment -- the value segment -- where both value and good quality are important. In Century we offer smokers quality equal to our other brands. We have not cut back at all in the quality of tobaccos and other materials. At the same time, we offer a rez:ognizable name and the backing of a major company. We offer greater value through a 25-cigarette pack. We are able to do so because we have cut back on the things our [esearch has shown value-conscious smokers do not require, such as imagery reinforcement through vehicles such as gatefold ads or color advertising in newspapers. Additionally, 37 percent of all smokers today smoke Cantury's two style offerings -- 85mm full-flavor and low "tar ..... so this _~.~. tremendous volume potential, combined with lower marketing and ~ D- production costs, will enable the brand to achieve our financial ~ standards with no sacrifice in our brand contribution :argins. ~ Looking at year five for the brand, which is about the ameunt of time it takes for a new brand to reach a truly sustaining level, the percentage of brand contribution for century to cur net sales will be only slightly lower than the company average. On an absolute dollar basis, Century's contribution per one thousand cigarettes will be in line with a number of our other brands. Of course the contribution of each of our brands to will vary according to individual brand volume, manufacturing efficiencies and marketing expenses and other variables. will "not make a margin sacrifice with Century. [,7

(B&W) PROTECTED BY MINNESOTA TOBACCO LITIGATION PROTECTIVE ORDER --8-- Again, I would stress that the results we have achieved since 1980 speak for themselves in regard to the moves we have'made in brand family advertising, product quality improvements, greater manufacturing efficiencies, tighter ~argeting of our promotional programs and our new brands. We have leading brands in every important product category, and have taken significant steps toward establishing one, and possibly two, entirely new categories. At the end of 1982, we had three of the five leading low "tar" brands, two of the five fastest-growing brands and market share growth by five of our six brand families. We also had four of the top 10 brands. Basically, we have a fine balance among consumer segments. Importantly from our standpoint, we had the highest share of market, 33.5 percent, enjoyed by any tobacco company since 1963 following three straight years of market share increases. And most importantly from your standpoint and ours, we are realizing these achievements without sacrificing our long-term financial performance. We are well aware of the general concern on the part of the financial community that we either were or might begin to pour money into our pursuit of market share at the expense of our profit margins. And we believe you should have the facts. - Operating'profit as a percentage of R.J. Reynolds' cigarette sales, net of excise tax, declined about 2 percentag~ points between 1979 and 1982, as, I should note, have the profit margins of others in the industry. Additionally, we expect a further slight decline in our margins in 1983. The reasons for this planned short-term decline are really quite simple. In 1980, we did make a significant increase in our marketing spending, and we increased spending in support of other elements of our business as well. Our capital spending for 1982 and 1983 is almost twice the total of the previous five years. As a result depreciation and project expense related to our capital program have had a short-term drag on operating profit margins. Also, expenditures for research and development and for our quality assurance program tripled from 1979 to 1982 and will continue at these levels in these critical areas. we felt this was money that needed to be invested for the long-term benefits and that the programs we had developed warranted such increased spending in a targeted manner against critical areas. We realized this would have a short-term negative impact on margins, but we were willing to make that decision and, at this point we are convinced that this spending is returning dividends.

~B&W) t)t>C~-t-r-'rrrv, ~),t-,,,,-.-~-vec~-rx TOBACCO LITIGATION PROTECTIVE ORDER It is true that our marketing expenses from 1979 to 1982, during the most inflationary period in recent history, more than doubled and now'account for'an additional 6 percent of our net sales. Here £oo, we intend t~ continue to support our proven marketing programs. You should be aware that our yearly increases in measured media spending have been about equal to the industry average since 1980. Last year, for example, we grew 8 percent, as compared to a 7 percent average for the rest of the industry. And we expect to be no more than equal to the industry's average increase for this year, if not somewhat below it. Additionally, Reynolds Tobacco's share of tobacco industry measured media increased less than one-half a share point in 1982 as compared to 1981. this is in contrast to an increase of 1.5. share points for Philip Morris, 2.5 share points for Brown and Williamson and Liggett and Myers' increase of about .5 share points. What all of this means is that we are supporting and investing in our business while managing the impact on our profit margins. R.J. Reynolds Tobacco's temporary margin decline is planned and reflects our conscious strategy to invest in and revitalize our base business. For example, our variable product costs per thousand cigarettes have improved about 7.5 percentage points from 1978 to 1982, reflecting improved leaf buying programs, increasing productivity and broad scale resource management programs. Our long-term plans call for continual margin improvement through 1987, the horizon of our current strategy plan detail. And I would emphasize that this is before we realize the maximum benefits from our new facilities which will come on stream in 1987 and which will provide steadily increasing efficiency benefits in subsequent years. In other words, ladies and gentlemen, it is not possible to fully realize the implications of our strategy by the analysis of historical financial data alone. To fully understand our direction, you must also have a flavor of our business as it relates to the strategies we are pursuing in an orderly and well-planned manner. But as both Ed and I have said, we expect further improveme~t~ in our margins as new equipment, new facilities and more :D cost-effective procedures come on line. Therefore, watch us in ~ the future, as we continue to improve our cost position. ~

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o ,,.~ ..,~-~,-~-~-~,~ r,x, ,,x'vrcn'r ~ TOI~,.~ ('CO LITIGATION PROTECTIVE ORDER ~ ~,B,.,. ,, ~ • ,.,-, Cigare~e Price Average per pack 84.5 Increase 22 % Tax Increase Impact Consumer Volume (6+)% Industry Shipments (8)% Measured Media Increases [] R JR .5 [] Philip Morris 1.5 !~ Brown & Wiiliamson 2.5 ~a Liggett & Myers -.5

(B&W) PROTECTED BY .MINNESOTA TOBACCO LITIGATION PROTECTIVE ORDER Remarks by Lester W. Pullen President and Chief Executive Officer R.~. Reynolds Tobacco International, Inc. to the Tobacco Seminar Winston-Salem, North Carolina June 8, 1983

-l- Z Good morning, ladies and gentlemen. For the next 30 minutes, I "would like-to turn your attention to the international tobacco • marketplace~ Like Jerry, I will attempt to deal with those key questions we believe you have concerning our overseas operations, and hopefully simplify to the extent possible a very complex business environment. Wor you to fully appreciate R.J. Reynolds Tobacco International's current status as a global manufacturer and marketer of tobacco products, you should first have a clear picture of what we have accomplished in a very short time. It was only seven years ago that Tobacco International became° a separate subsidiary of R.J. Reynolds Industries. Prior to that~ time, overseas operations were handled as a division of the o domestic tobacco company, and our business was primarily through exports. o But an international marketplace several times as large as the [}.$. and growino several times as fast offered significant opportunities. These oiDportunities justified a separate company with a full management structure devoting full attention to ~'~ building a strong overseas presence. And so R.J. Reynolds Tobacco International came into being. Our performance since 19~6 demonstrates the correctness of that decision. In 1975, the last full year before the formation.of Tobacco ~.'~ " International, RJR's international cigarette sales totaled 56 billion units with earnings from opera~icns of about 545 million.- By the end of 1977, sales increase~ by 30 percent to 72 billion units and EFO had grown more than I00 percent to nearly $i00 million. ~_. By the end of the decade, our volume increased another 12 percent and EFO was up an additional 50 percen~ to about 5150 million. In 1981, we reached unit sales cf 09.2 billion units and EFO Of about $180 million. _'-.$ In short, in only a few years beginning from a relativel.¢ small base, R.J. Reynolds Tobacco ~nternational became a ~i~.-.l.v successful "international" marketer, we moved swi£t!y !r.t~ "coal markets, picking the best targets of opportunity and fast. We employed individual strategies for each local mark_t~ which allowed best use of our resouces. As a result, we gained substantial shares of the many important markets,.and we have generally held those as well as exploiting new opportunities. 539004157

Z PROTECTED BY .MINNESOTA TOBACCO LITIGATION PROTECTIVE ORDER But as Ed said in his remarks, we are now seeing some profound changes in the global marketplace, particularly in the last 18 months. So within this framework, we are continuing the evolution of our company in order to build upon the solid foundation established during our first seven years. we have established one critical objective for R.J. Reynolds Tobacco International, and that is to obtain an appropriate balance between necessary autonomy for local market managers and worldwide strategic control and resource allocation -- or to state it very simply, "to be globally competitive and locally responsive." I believe a review of the events of the last 18 months within the international marketplace and the results achieved during the period by Tobacco International will clearly demonstrate why we feel we could set no more appropriate objective. The recent and current market environment overseas can be characterized by three major factors: currency fluctuation, recession, and particularly hard-hitting, overtaxation. Currency translations had a negative impact on Tobacco ~nternational's reported earnings from operations in 1982 of $7 million. The adoption of FASB 52 helped mitigate the effect of currency translations last year, but mver the past two years the have had a total impact of $28 million on reported earnings. The international recession demonstrated that the tobacco industry was not recession proof, and its most important effect was to trigger a round of excessive tax increases, which depressed unit volume in a number of major markets. For example: • Taxes are up 39 percent in Germany, • 75 percent in Malaysia, and • 128 percent in Brazil. In addition, we have experienced unusually large excise tax increases in such other countries as Canada and Australia, and have seen a 300 percent increase in the duty rate in Hong Kong. As you would expect, such exorbitant increases have caused volume declines. Ig Germany alone, industry volume dropped about 16 percent in 1982, and we have had similar experiences in other countries. The effect of overtaxation must be measured not only in volume declines, but in pressure on margins as well. Manufacturers in Germany, including R.J. Reynolds, have introduced lower-priced brands in an attempt to maintain volumes and appeal to the new price consciousness of consumers.

-3- Another environmental factor influencing our business is the issue of trade barriers. Ameri.can cigarettes are generally unavailable to smokers in countries such as South Korea, Taiwan and Thailand. And they are barely accessible in Japan, the largest free world market outside the United States. R.J. Reynolds has been particularly aggressive in pushing for an opening of the Japanese market which totals about 308 billion units. We have made some progress as the Japanese monopoly has expanded distribution of our cigarettes and the tariff on imported cigarettes has been reduced from 35 to 20 percent. However, there Is still a sizable price differential between ~ our brands and Japanese brands, as well as marketing, " distribution and advertising restrictions, so we intend to maintain all possible pressure for further concessions. We have also seen some progress in other monopoly-controlled markets such as Spain and France, and remain convinced that such areas will represent a major opportunity for Tobacco International as these barriers fall, however slowly. Finally, from the external standooint, every international business is subject to the unstable ~olitical situations which exist in such areas as the Middle East. Operating within this complex environment, R.J. Reynolds Tobacco International experienced a year of mixed results in ~ 1982. In many of our major markets, we set new share of market records for our company. But for the first time in our history, unit volume declined. ~ Shipmentswere off 9.6 percent to 80.6 billion units. In -" addition, 1982 saw the first earnings decline we have ever ~: experienced. Net sales actually increased, but earnings from ~ operations were off about 24 percent from the previous year. : This reflected declines in high-margin U.S. exports as well as "--" the softening of total industry volumes in many major markets due ~ to the round of tax increases ~n the positive side, we are particularly proud of the fact that we increased share of market in 17 of our top 22 markets because we believe it indicates the strength of the essential bvsiness foundation we have established. That growth was not centered in one region, but took place in all four of our operating areas. The 17 markets showing share growth nearly doubled the 1981 total of nine markets, and was five more than the company record ~ of 12 markets showing share growth in 1980. ~.~ This slide shows where that share growth came. The average ~ growth in those 17 markets was nearly nine-tenths of a share (.~ point.

IB&W) PROTECTED BY 3IINNESOTA TOBACCO LITIGATION PROTECTIVE ORDER --4-- Z In only three markets did our share decline, and this was half of the number of markets with share declines compared to the previous year. In Brazil, our share declined slightly to 8.9 percent --- not altogether surprising considering the consumer shift toward lower-priced brands during the latter half of the year. ." Nevertheless, our River brand was one of only two top I0 brands recording share and volume growth. And we were extremely encouraged late in the year by the performance of Camel, which moved out o~ test market ahead of schedule, and by the successful november introduction of low-price Mustang FILTER. The one major market of ours which does not appear on either slide is Puerto Rico, where we held our position of 82.1 percent of the market in spite of vigorous competitive pressure. Let me touch on some of the highlights of our recent marketing performance. Tobacco International was the fastest-growing tobacco company in Germany during 1982, with its share increasing from 9.9 percent to i0.8 percent. RJR Tobacco International has not been hurt as much as other companies in Germany. With that 16 percent volume decline for the German industry I mentioned, our volume decline was only 8.5 percent, and our share of market actually increased by .9 share points. And Significantly, Camel's volume was off only 4.7 percent, and its share went up a full point to 8.4 percent. Tobacco International was also the fastest-growing company in Switzerland, where its share went from 3.4 percent to 4.1 percent and its volume increased by more than 25 percent. Our largest share growth anywhere came in Spain, where we gained 2.3 share points for a total share of 6.3, mostly on the continuing st.rength of Winston in that market. In the intensely competitive Canadian market, our RJR- Macdonald subsidiary increased its share to 18 percent -- our first growth there in several years. The company had two major product introductions -- an Export "A" mild addition to the export family, and Macdonald Select, an entirely new family of low "tar" styles -- which added incremental volume to our basic export franchise.

LITIGATION PROTECTIVE ORDER_______. -5- 1982 was a particularly strong year for our affiliate comp~ny in Ecuador, where we now have three of the top flve'best-selling brands. In addition to 14 percent industry growth in that market, we were also able to take advantage of one of the most successful new brand launches anywhere in the world last year. Dotal Suave, although introduced only in May, had nearly 4 percent of the Ecuadorian market for the entire year, and today enjoys a 12 percent share. In Malaysia, where winston virtually created the American blend segment just a few years ago, the brand finished 1982 with 8.5 percent of market and Tobacco International's total share was 10.6 percent, up from 9.2 percent in 1981. Camel has remained our bellwether in Europe, accounting for an average of more than 80 percent of our volume in France, Germany, Holland and Switzerland, and increasing its share of market in each of them during 1982. Those are the highlights. I could add more about France and Holland, two of our established markets where we also showed growth, and Greece which we consider an important emerging market for our brands and where we gained more than a full share point. I think such market share growth during one of the most difficult and disruptive years the international tobacco industry has ever encountered is clear evidence that R.J. Reynolds Tobacco International is indeed capable of sustained growth ~nd progress. Turning to 1983, we see several key trends within the marketplace environment and within our own operations which justify our confidence and optimism. Looking first at the general environment, the world economic situation seems to be easing, although no one expects a rapid recovery from the effects of the past two to three years, with this upturn should come an easing of the pressures on goverzmen~ revenues and, in turn, a lessening of the tax pressures upon our industry. In terms of currency translation, no one has a crystal Da!!. Even though current rates are disappointing, we are hopeful c~ some relief in the long term. We believe the truly extraordi~a[? currency swings of the past few years which have seen the deutsche mark decline 41 percent, the French franc drop 82 percent and the Hong Kong dollar drop 46 percent against the ~g.3. C.3 dollar, will not continue. ~ In short, currency swings should be a considerably less~" important factor on our earnings in the future. In fact, ~f ~.te ~.~ world economy improves, we may even see some upsides. ~-~

tB&V,) PROTECTED BY MINNESOTA TOBACCO LITIGATION PROTECTIVE ORDER --6-- Z Z Zn spite of the price competition in Germany and several other markets, the industry still enjoys profit margins which are enviable to most other businesses, which provide it with the flexibility to tailor its level of investment to market conditions. Most encouraging is the growth of the international cigarette market as a whole. We would all feel safer waiting to see final industry numbers, but it appears that the market grew by about one percentage point during 1982 and is continuing to grow at about the same pace this year. We would all like to see the compound annual growth rate of 2 percent of the 1976-81 period eventually return, and I don't think that is a totally unrealistic expectation. The subject of market growth is an appropriate point from which to return to the accomplishments of R.J. Reynolds Tobacco International, for we are showing strong performance th~s year. The marketing strengths we have shown in the past year nave put us in an excellent position to capitalize on industry growth. In Brazil, where we experienced one of our three share declines in 1982, we have already recovered that slippage, and our share of that market during the last two months has exceeded I0 percent. In Germany, our Overstolz brand, relaunched in February at a reduced price, has achieved its objective of protecting our position in the market, and its share of market is now 4.3 percent. In total, through April we have a gain of almost one full share point in Germany. Additionally, we have recorded an increase of 1.2 share points in Switzerland and Greece, a gain of nearly half a share point in France, as well as continued progress in several other key markets. You can also see clearly on this chart some of the effects of the Dotal Suave introduction in Ecuador. In addition to the 12 full share points picked up by Dotal, some of our established Ecuadorian brands have also gained and we now have more than one-third of that total market. But of all the trends now taking place internationally, one of the most important for. R.J. Reynolds is the fast-growing popularity of American-blend cigarettes in overseas markets.

_ (B&V,'~ PROTECTED BY >II,NSESOTA TOBACCO LITIGATION PROTECTIVE ORDER -7- z Overall, the American-blend segment is now recording some phenomenal growt~ in several important markets. This chart shows what happened just from December 1981 to December 1982 in five primary RJR Tobacco ~nternational countries. In Malaysia, the total American-blend segment went from 11.3 percent in 1981 to 18 percent at the end of last year. American blends have gained more than 12 percent in both France and Spain, where local black-tobacco brands are declining rapidly. In Greece, the segment increased by a full six share points and in Switzerland, by Ii share points. Perhaps the largest beneficiary of that trend recently has been Camel, the brand that created the Amerlcan-blend cigarette in the United States 70 years ago. Camel has now emerged as the f~stest-growing major international cigarette brand. In four important markets -- France, Germany, Holland and Switzerland -- Camel's growth so far this year is a total of 5.5 percent. In fact, Camel's worldwide appeal has now become so strong that we believe it is on the verge of becoming a truly global power brand. Around the world, whether in the mature markets of Europe or in newer markets now opening, we see extraordinary potential for a brand such as Camel, which can have a universal positioning appealing to smokers in any country. Because of this potential, we have made Camel our company's highest-priority brand, and we intend to fully expl~it its potential. we are confident that all of these factors -- the general improvement in the international tobacco market environment, the fact that we have continued our market share growth in important markets, the increasing strength of Camel globally and of a number of our more localized brands -- will allow us to put the negatives experienced in 1982 well behind us this year. We are considering 1982 as a base year from which to grow, and we are 6onfident that in 1983 we will resume a steady upward trend in both total unit volume and in earnings which will allow us to meet our objectives for the year. I said earlier that in o~r formative years we became a highly successful international marketer. Now, it is our intention to be a truly successful global marketer. We are no longer the new kid on the block. We can no io~er take our competitors by surprise. Now, while we must maintain the flexibility to take advantage of opportunities in local markets, we must also allocate our resources on a global basis. As I said earlier, our key objective is to be globally competitive and locally responsive. And we are moving vigorously to meet that objective. t. : ,-%

IB&W) PROTECTED BY MINNESOTA TOBACCO LITIGATION PROTECTIVE ORDER Z We have put in place a global strategic framework that allows our resources to be managed on a global basis, but which at the same time provides our "local operating companies the authority to make the fast, tactical decisions necessary to respond to the ever-changing needs of their individual markets. Within that strategic framework are five fundamental el~ments. First, we have established a global priority of markets and allocated the bulk of our resources against these priorities. This focus will remain consistent over time until the full potential of each of those priority markets is reached. Second, within each of those priority markets we will concentrate our resources on priority brands. In 1983, we are spending about 70 percent of our marketing resources agaigst these priority markets and priority brands. Third, Tobacco International's development resources will be managed to take advantage of key opportunities. This will be consistent, long-term development support, and resources will not be diverted to short-term needs. Fourth, we have revised our internal management process to decentralize the tactical management of resources so that each operating unit can react quickly to local market conditions. And fifth, we have established Camel as the company's highest-priority brand because we believe it has shown the strength and appeal to become a truly global'power brand. Those are the elements of our strategy. In combination, they provide the discipline of a clear and single focus for the company, and simultaneously, the flexibility to adapt our tactics to a changing environment. I am going to conclude my presentation this morning by emphasizing one final point, the same one Jerry made so strongly. While we must deal in a more unpredictable environment than the domestic company, we too are committed to predictable earnings performance. I've just detailed how we intend to do that. Let me review some of the reasons why we are confident that we will continue in the future to achieve the success we have in the past, and to provide our parent company with steady earnings improvement. we have established solid and expanding franchises in some of the most-competitive international markets. We have, in Camel,.a brand with broad worldwide appeal that is on the verge of becoming a global power brand.

!E ~.W) Vo~T~:rTcr~ r~v ~!INSESOT-A-T£)BACCO LITIGATION PROTECTIVE ORDER We have the proven marketing expertise to stand toe-~o- toe with the strongest competitor. I~e h.a~e the ability.to generate internally the financial resources to invest heavily where investment is justified. We have a scope of operations broad enough to provide a buffer to drastic downside changes in individual markets. -- We have a strong combination of international and local brands, allowing us to appeal to both broad and narrow consumer preferences. -- We have a long and continuing track record of successful brand introductions. " -- And we have a business strategy that is both ambitious and realistic. we believe those strengths provide a certain predictability for our future, no matter how unpredictable our enviornment may be. we believe they will allow us to achieve minimum volume growth of about 5 percent per annum, and earnings growth in the range of 15 percent --- both far in excess of industry averages. I'm sure you now have some questions about both our domestic and international companies, so I will ask John Dowdle to ste.z up and moderate. Thank you for your attention. Z CJ C~

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(B&W) PROTECTED BY MINNESOTA TOBACCO LITIGATION PROTECTIVE ORDER Z IRJRT! Share of Market Share Pt. 1981 1982 Change % % France 3.1 3.4 .3 Holland 10.0 10~ .2 Germany 9.9 10.8 .9 Italy .7 .8 .1 Spain 4.0 6~3 2.3 Switzerland 3.4 43 .7 Belgium .8 1.3 .5 Greece 14 2.5 L1 Portugal .4 .5 .1 United Kingdom .2 .3 .I Canada 17.7 18.0 .3 Argentina .7 2.0 L3 Ecuador 21.6 23.3 1.7 Peru 20.6 21.2 .6 Japan 9.5 11.0 1.5 Malaysia 9.2 10.6 1.4 Singapore 13.8 15.4 1.6 I~J~T![ Share of Market Share Pt. 1981 1982 Change % % Brazil 9.3 8.9 (.4) Australia 1.7 1.6 (3) H, ong Kong 19.0 17.9 (1.1)

..... _~B&W) PROTECTED BY MINNESOTA TOBACCO LITIGATION PROTECTIVE ORDER RJRT! Share of Market ~'~ a ro ~pri1198~'~- April 19~ Germany 10.8% 11.8% S~tzerl~d 4.0% 5.2% ~r~ec~ L8% 3.0% F~nc~ 3.2% 3.6% Bels~u~uxembours .9% 9.4,~ Italy .7% .8 ,% S~naapore 13.6% 17.5% Ecuador 20.6% 34.3% ~e~can- Blend Share ef Market 1981 1982 M~aysia 11.3% 18.0% F~ce 25.8% 39.2% Spain 24.8% 37.4% Greece 13.2% 19.2% 28.0% 39.0% S~merland

{B&~') PROTECTED BY MINNESOTA TOBACCO LITIGATION PROTECTIVE ORDER ". Remarks by A,R, Mitchem Senior Agricultural R&D Coordinator R.J. Reynolds Tobacco Company to the Tobacco Seminar Winston-Salem, North Carolina June 8, 1983

-1- Tobacco belongs to the pla~t family solanaceae which includes such diverse plants as jimson weed, potato and tomato. Of the 66 species in the nicotiana genus, only two are cultivated. Nicotiana rustica is a peasant crop produced in southern Russia and India. It is a coarse, strong, high alkaloid tobacco. The second cultivated species is nicotiana tabacum from which the commercial types ranging from Oriental to cigar types are derived. This species is milder, less coarse, and considerably lower in alkaloids than rustica. Approximately 500,000 farm families are involved with tobacco production in the United States. In 1981, these families grew over 970,000 acres of tobacco, producing more than 2 billion pounds with a gross crop value of $3.5 billion. Today, we will take a brief look at the production of the three domestic cigarette types of tobacco: flue-cured, burley~ and Maryland. Flue-cured Flue-cured tobacco i.s produced in the Coastal Plain and Piedmont areas of five southeastern states from northern Florida to Virginia. Annual production ranges around 1 billion pounds from approximately 550,000 acres. Per acre yields vary somewhat with the season but usually average 2,000 pounds per acre. In 1982, flue-cured tobacco averaged $178.67 per I00 pounds yielding a gross income per acre of $3,573. Tobacco is a sub-tropical species, therefore, great care must be exercised in temperate zone production of the crop. Beginning in late December in the Georgia/Florida belt and continuing through mid-March in the North Carolina/Virginia old belt, tiny tobacco seed (approx. 340,000/ounce) are sown into protected sterilized plant beds to produce the seedlings for transplantin~ to the field. While the plants are growing in the seedbeds, farmers prepare their fields. Flue-cured tobacco is planted on "high wide beds" in the field because the plants are very susceptible to drowning. When the plants reach about six inches in height and the weather is war~ enough, they are pulled individually for transplanting. The seedlings are transplanted to the field mechanized transplanters. Beginnign seven to I0 days after transplanting, the crop is cultivated several times to aerate soil and kill weeds ana grasses. During dry seasons, it is ~!59 necessary to irrigate the crop to maintain rapid growth and obtain the best quality tobacco. Assuming the produber does everything right and in a. timely manner, overcoming disease ~.~ problems, keeping harmful insect pests under control, and avoiding the detrimental effects of extended dry weather; he should, at the end of &0 to 70 days, have a crop that is ~'~ converting from vegetable to reproductive growth.

(B&W) PROTECTED BY .MINNESOTA TOBACCO LITIGATION PROTECTIVE ORDER -2- In order to produce, the maximum yield and maintain reasonable quality in the leaf, the apical reproductive growth must be removed either by hand or by a mechanical topper. When the plant goes to flower or is topped, the source of a hormone which suppresses axillary reproductive growth is removed and "suckers" begin to grow in the leaf axils. This sucker growth may be controlled by hand, but is most commonly controlled by sequential spray applications of fatty alcohols and maleic hydrazide. The producer's objective is to have a clean uniform field which will make harvest operations easier to manage. The crop will begin to ripen around topping time. Ripeness in flue-cured tobacco is indicated by a change in color from dark green to yellowish green. Two to four leaves per plant per week will ripen sequentially from the bottom to the top of the plant. Ripe leaves may be harvested by hand, by walking primers or may be mechanically harvested by a machine developed by R.J. Reynolds Tobacco Company in cooperation with agricultural engineers at North Carolina State UNIVERSITY. This machine has been available since 1972, and today about 50 percent of the flue-cured crop can be mechanically harvested. The flue-cured tobacco type takes its name from the unique heat-curing process to which the ripe leaves are subjected. Curing flue-cured tobacco is basically a five-stage heating process wherein the dry and wet bulb temperatures within the curing unit are carefully controlled. ~he flue-curing process was discovered in the mid-1860s and was originally carried out in log barns using wood-fired furnaces with flues extending across the floor of the barn. Later structures were built from sawed lumber and fueled by oil or gas fired stoves within the barn. Both these structures cured by convection and required the leaves to be "strung" on sticks for curing. The first commercial bulk curing barns became available to ~rowers in 1962. This type curing barn operates with an oil or ~as fired furnace with a forced hot air system for moving the air through the tobacco, and is more efficient because more tobacco can be cu~ed per unit volume of barn space. Leaves of tobacco to be cured in bulk barns are compacted into curing =racks" with each rack containing 120 to 180 pounds of green leaf which will yield 20 to 25 pounds of cured tobacco. Either type barn is capable of curing tobaccos which do not differ in physical, chemical or smoke taste properties. The entire curing process takes five to seven days to complete depending upon the plant position from which the tobacco was taken and condition of the tobacco at harvest.

,,, o ,,.~ ,~.,-,~-~,~-~:,~ ,,v ,,,,~'x-v~-~-r ~ TOBACCO LITIGATION PROTECTIVE ORDER -3- Z Upon completion of the cure the tobacco is ready for presentation for sale.to buyers through an auction system. Rurley and Maryland Because of the similarity of culture, harvesting and curing of hurley and Maryland tobaccos, I will briefly talk about these types together with emphasis on hurley. Burley tobacco is produced in Kentucky and seven nearby states. Approximately 330,000 acres of hurley tobacco were produced in 1981 with an average acre yield of around 2,200 pounds. At the 1982 average price of $180.59 per 100 pounds, gross acre returns for burley would run around $3,900. Maryland tobacco is produced on 20,000 to 25,000 acres in an area just east and south of Baltimore and Washington, D.C.. The yield is only around 1,200 pounds/acre. Gross return per acre at this average yield, and the $175.57 per I00 pounds paid for the 1981 crop, would be $2,100. The 1982 crop of Maryland has just been sold, and the final statistics are not available. Burley and Maryland tobaccos differ from flue-cured in culture, harvest, and 6uring methods. Transplants of each type must be grown in protected beds as in the flue-cured type. Transplanting of these two types usually takes place around the first of June. Both types are susceptible to the same diseases and insects as those found in flue-cured. Topping and suckering practices are similar to those for flue-cured tobacco, but maleic hydrazide is the major chemical used for sucker control. The objective of the producer, again, is to have a uniform crop when it reaches its full growth potential. Unlike flue-cured tobacco, hurley and Maryland are not primed a few leaves at a time and ripeness of the crop is determined by a compromise between the loss of leaves from the bottom of the plant and the immaturity of the leaves in the top. Harvest of hurley and Maryland is done by cutting the whole stalk. The cut stalks of tobacco are speared onto sticks - usually five to six plants per stick and allowed to wilt in the field for one to three days before moving to the barn for curing. Very little mechanization has taken place in the production of the air cured tobacco types. A small cutting machine, which allows a man to ride while harvesting, was developed by the University of Kentucky, but the harvest rate is no greater than that obtained by a man on foot.

(B&W) PROTECTED BY MINNESOTA TOBACCO LITIGATION PROTECTIVE ORDER -4- Z After the tobacco is wilted, it is picked up on wagons or trucks~and transported to the curing.barn. The curing facilities range from lean-to sheds, to open structure log sheds, to very large, well designed, well ventilated structures found in the high production volume areas. It is necessary for the curing structure to be well ventilated to obtain the proper cure for the tobacco. The sticks of green tobacco are hung on tier rails in the barn, and during the six to eight weeks of curing under ambient conditions, the tobacco progresses from the green to a yellow-tan stage, and finally to a buff to tan of fully cured tobacco. After the tobacco is cured, it is allowed to come into order, taken down from the tier rails and bulked to hold moisture while it is being graded and prepared for market. Burley tobacco naturally falls into five-plant position grades. Traditionally, these individoal grades are removed from the stalk by hand in an operation called "stripping'. Also, the tobaccos of similar grade were tied into "hands" and the "hands" placed on sticks for transport to the market. At the sales warehouse it is necessary to separate the sticks of hands into piles of similar grade and then remove the hands from the sticks to a neatly stacked basket for the auction sale. Today, another method of marketing is available which saves the producer many hours of time and may save him from 4 to 8 cents per pound in labor cost for market preparation. The hurley and Maryland producers may now market their tobacco in compressed bales of leaves of similar grade weighing approximately 70 pounds. Auctions of these tobacco types are conducted in the same manner as those for flue-cured. Tobacco quality does begin with the farm and this simplified presentation only hints at the complexity of the tobacco production operation. The complexity continues through all processing, manufacturing and R&D operations. Each summer, usually in late July, Reynolds Tobacco's leaf buyers and their competitors converge on the southernmost flue-cured markets in Florida and Georgia. Later in the summer, they "follow the sale" north through South Carolina, North Carolina and southern Virginia. Since burley tobacco is harvested later and takes longer to cure than flue-cured, auction markets in that region do not begin until late November. The same R.J. Reynolds buyers who work on the flue-cured markets in the summer head west to the burley markets in winter and finish their season in Maryland in MAY. There are more than 170 market towns and several hundred tobacco sales warehouses in the United States. During each auction sale, a buyer has only a few seconds to decide if each pile of tobacco will meet R.J. Reynolds' high quality standards as well as the leaf department's more specific grade requirements.

-5- Z o • In total, theremay be more. than 3.00 different grades of leaf, determined by type, stalk position and quality. As many as 150 different grades may be included in one cigarette blend ~ ~ formula when grades are compounded with crop years. Generally, mild flue-cured tobaccos are the basic ingredient in most O domestic cigarettes. Burley is somewhat stronger and more able 5"~ tO absorb casing and flavoring, and Maryland tobacco is known for ~ ~ its excellent burning quality. :" Because of the complex and generally demanding nature of the leaf buying process, reynolds tobacco management sees distinct advantages in having its own experienced buying force. Some other companies hire independent leaf dealers to buy for them, but R.J. Reynolds feels it has a more cost-effective system, providing direct control over the quality of leaf inventories. Consumers have learned to depend on the consistency of Reynolds Tobacco products in the marketplace. The first step toward achieving that consistency is the selection of quality tobacco by the company's leaf buying force which, with more than 90 members, is the largest of any manufacturer. Tobacco purchased by the company at auction warehouses usually arrives on trucks at one of our three processing facilities (Brook Cove and Davie County, N.C., and Lexington, Ky.). Each 30,000-35,000 pound truckload may contain eight to i0 different grades of tobacco. After the individual grades are accumulated in quantity, the tobacco is moved to the stemming area where processing begins. The tobacco is placed on a conveyor, the sheets removed, and it is conveyed into a delaminator that rotates to loosen the leaves. Loosened leaves are inspected for foreign objects, weighed, then enter conditioning drums where moisture is added. The moistened tobacco is placed in a sanding drum to remove sand from the leaves and is then ready for stem removal. After the stemming process, the tobacco is sent to separators where the stem and lamina portions of'the leaf are separated. The lamina portion, now called strips, are conveyed to strip dryers. Stems and lamina particles too small to be used in their natural state are kept aside for eventual use as components of reconstituted tobacco products. Following the stemming process, tobacco enters the dryi:~ packing area. Strips, stems, scrap and tobacco dust enter separate drying machines and exit the machines onto conveyor systems that weigh and transport each batch to packaging equipment. T6e redried lamina is conveyed to a compactor and lots of approximately 1,000 pounds are shaped into a 40-by-46 inch rude called a terse bale. Protective wrap is placed around the bale and it is then ready for storage.

(B&W) PROTECTED BY MINNESOTA TOBACCO LITIGATION PROTECTIVE ORDER T~rsa bales are fas.t replacing the round, wooden hogs~iead containers that have been a tradition, in tobacco storage. The bales dramatioally increase storage capacity and are much easier to handle and transport. The switch from hogsheads to tersa bales has increased our useable storage space by about 25 percent. The finished bales of tobacco are then placed in warehouses, by grade, where they age for one and a half to two and a half years before being used to make tobacco products. The stored tobacco is periodically monitored to assure that quality is maintained for satisfactory use in our products. Tobaccos are drawn from storage by grade as needed and trucked to one of reynolds tobacco's 12 manufacturing facilities in winston-Salem. Before it is made into "cigarettes, the tobacco is blended, processed, moistened, flavored and cut according to very specific proprietary requirements for each brand. Later this afternoon, you will observe the path the tobacco follows on its way from seedbed to cons~rmer when you tour our Whitaker Park facility. The cigarette manufacturing process is c~mplex. . .and rapid. The growing and processing of leaf tobacco takes infinitely more time, but it is just as complex. Nevertheless, all those involved with producing the crop, processing for storage, making consumer products from it, or doing research and development work on it, have a great pride. . .a pride in tobacco. I hope you enjoy the rest of your visit with us, and I will now try to answer any questions you have on these subjects.

~ ,B&V, PROTECTED B~" .~I~.'~ESOTA TOBACCO LITIGATION PROTECTIVE ORDER the tax burden on the business sector, there was the strong pos- sibility ~hat there would be pressure to increase the federal excise tax on cigarettes, w~Ich in reality Is a sales tax. As you are aware, the Congress did, indeed, increase the federal excise tax on cigarettes effective 5anuary 1 of this year..a • 100 percent increase in the tax, doublin~ it from $4.00 per thousand cigarettes to $8.00 per thousand or from eight cents a pack to 16 cents a pack• And since that £ateful day, the gloom and doom boys have really been at it. Obviously, it has not been a season of re- joicing for the tobacco industry, bu~ at the same time funeral bans have not been posted either. Well, I don't intend to stand before this group and paint you a rosy picture of the tobacco industry. It is very apparent to you and to those of us associated with the tobacco industry that there are a host of problems facing it. few of the obvious problems: • There's the new federal excise ~ax. Let's just list a Several states have also increased their state cigarette tax rates. Many more sza~os have legislation pending at this date to increase taxes on cigarettes. Yes, there are real problems facing this in4ustry But, I suggest to you that none of these are "new" problens. Certainly, some of them are more acute than they were five ~ears ago, but these are all problems that the industry faces year ~n and year out. Whi~e we-don't want to look at the tobacco in- dustry through rose-colored ~lasses, we do, at look at it realistically, and realism zells us ~here is no reason

~B&W) PROTECTED BY MINNESOTA TOBACCO LITIGATION PROTECTIVE ORDER °3° While ! can't address all the problems today, 1errs look a little closer at the s~veral layers oF c~gare~te taxes that appear to be one o£ the most pressing oF the problems £acing the industry today. The Federal Tax ~]~ile many smokers may still be unaware of the state taxes they pay on each pack o£ cigarettes, very £ew o£ them can claim ignorance any longer about the federal tax on cigarettes. The bitter fight in Congress over the cigarette tax and the subsequent news stories swirling about it, made the £ederal tax hike a to smokers even be£ore the price went up. In a last ditch struggle, the industry was at least able to win a grudging hal£- victory by having a sunset clause attached to the bilI. On November 1, 1985, the £ederal cigarette tax will revert £rom 16 cents a pack back to eight cents a pack. 0£ course, we have seen-sunset legislation that just gets extended time and time again until the sunset provision is amended out o~ the law. ~e don't intend to let that happen w~th the £edera1 cigarette tax. ~e expect a promise made in good £aith to be kept. During late summer and early £allwhen the cigarette tax .i~crease proposal was being seriously considered by Congress, the industry predicted that i£ the ta~ weredoubled at the ~ede- ral level that there would be a loss in taxable sales o£ up to as ~uch as seven percent. The mid point o£ all the estimates is 4.7 percent as the anticipated loss in sales. Federal estimates o£ losses ran higher. 0£ course, this estimate was not predicated on £urther increases in state tax rates which may well magnify

Z ,~ ~.~-~ n~TvwTcn DV ~,,~'~'V~DWa _Tf~R~CCD LITIGATION PROTECTIVE ORDER -4- the decrease in sales. It is really too early.ln the year as far as the available data goes, to make any real ass~ptions about the expected loss in.sales for the year. As things now stand, the outlook is mixed. For the first three months of the calendar year, cigarette sales taxed by the states are down 10.7 percent. Naturally, some part of this decline reflects the loading by retailers of inventory in late 1982 in anticipation o£ price increases as a result of the t~x. But, none-the-less, sales of cigarettes in the states have diminished for the moment.~ Hopefully, there will be a smoothing out of the data, but we can still e~ect to see a fairly substantial drop in tax-paid sales o£ cigarettes this calendar year in comparison to 1982. That ~he mid point estimate does hold Ca ~.7 percent decline~.~ in cigarette sales), the f~deral government will nonetheless collect about $4.967 billion in federal excise tax revenues from cigarette sales throughout calendar year 198~. This will be by far the highest federal excise tax revenue from any single commodity and will account unfairly for about 12.5 percent of all federal excise tax revenues. It is cert=iniy not that any group of consumers or any single commodity should be taxed at this raze and be forced to provide so much tax revenue in comparison to all other commodities and services sold in :he market economy :hat are either taxed at much lower rares cr not taxed at all. Despite the adverse effects of the federal tax increase. the tobacco industry is still a profitable business contributing strongly to the national economy. The industry has staved off repeated atte~pzs to increase the federal tax in the las~ 53990,11_.S0

{B&W) PROTECTED BY MINNESOTA TOBACCO LITIGATION PROTEC.~I.VE ORDER Few years. The last time the federal excLs~ on cigarettes was increased was ~2 years ago, That's a pretty good.track record...3Z years without a tax increase. And what happened over those intervening years7 In. 1951 the states taxed 13.8 billion packs of cigarettes. In 1982 the states taxed 30.0 billion packs. Now that's not quite a fair comparison because a few o£ the states weren't taxing cigarettes back in But when North Carolina joined the ranks of the taxing states in late 1969, it became the last state to impose a cigarette tax. So let's look at another comparison...1971, a Full year and a half after North Carolina's tax was imposed, against the 198~ data. In 1971 the states taxed 24.8 billion packs of cigar- ettes against ~0.0 billion packs in 1982. That's a gain o£ 20.7 percent. 0£ course population has been growing durin~ that time too, but on a per capita basis the 1971 data showed 13Z.4 packs sold per person versus 137.9 packs a person in 1982. He are, however, beginning to see a trend of decreasing per capita con- s~ption which had reached a high of 145.3 packs per person in 1976. These increases in state tax-paid sales occurred while states were increasing taxes, the Federal goverru~ent was threatening to increase the Federal excise, bootlegging caused by dispropor- ~--.~ tionate taxes was draining cigarette revenue away From the states -'~< and smoking restrictions were being pushed in the stales by vociferious interest groups. State Taxes In a period o~ time when social programs are costing the states more and at the same time states are experiencing reven~e short-falls, the cigarette tax is being used as an expedient method to gain funds for the state for the short-run. Commodity taxes can only supply band-aid relief when more drastic surgery

~E~___~') oDr~T~-r-Trn RV .X.!!NNESOTrLTOEACCO.LITIGATION PROTECTIVE ORDFR is needed, hut, for the short-run, many states are opting zo increase excise taxes on con~er goods, postponing the inevitable, before venturing into the field of broad-based tax increases. for the short-run at least, cigarettes are among the targets of the tax-makers in state legislatures. After the relative respite from taxes during the period 1972~ through 1981, states are turning more and more to the cigarette tax as a quick source of additional revenue. During the ten years (1971 - 1981) in no year did more than six states increase the state cigarette tax raze. This happened twice 197S and ~'~ 1981...when there were six increases. The rest of that period saw even £ewer tax increases passed each year. (See the attache~ Table I). In 1982 nine states increased their cigarette tax rates, one of them twice. 0£ course, the total £s not yet compIeze for 1985, but thus far in 1985 8 tax increases have already passed and 31 tax increase bills are pending in 14 states. 0£ these states, one increase is £n New York which has over 7.5 percent o£ the domestic market £or cigarettes. The tax increase in New York was for six cents, bringing the state tax raze there to 21 cents a pack. Currently Wisconsin has the distinction of having~ the highest state rate az 25 cents a pack. ten states now have state tax rates in excess o£ 20 cents a pack. (See attached With an expected deCline i~ cigarette sales o£ 4.? caused by the recently enacted ~ederal increase, state cigarette tax revenues will also £a11. The states are realizing this fact all too well ~nd compensating by introducing legislation to crease state tax rates. Although a loss in tax-paid sales is

I.B&W) PROTECTED BY MINNESOTA TOBACCO LITIGATION PROTECTIVE ORDER expected this year, tax-paid s~les for the calendar year 1982 showed a slight gai~'-over 1981 sales despite ten state cigarette tax rate increases in 1982. We are also seeing a rash of bills to remove cigarettes fro~ the sales tax exe=ption in a number of states which cur- rently provide £or this exemption under the law. In other states the sales tax rate itself is being increased, which, of course, adds more taxes to the cost of a pack o£ cigarettes. Conclusion So what is the tobacco indt~stry doing about all this? The industry is fighting a concerted battle against the many foes that are besetting this stable and properly profitable enterprise that traces its heritage to colonial days. Unfortunately, the battle must be waged on many fronts. In the Congress we are facing bills to increase the federal excise tax on cigarettes again, bills to tie increases in the federal cigarette tax to social security or other social welfare programs, and bills to repeal the sunset provision of the recently enacted doubling of the federal tax. And these are ~ust the tax bills! In the states we currently face 51 tax increase bills in 14 states with the likelihood that more bills will be introduced as the year wears on. We face the repeal o£ sunset legislation in several states. ~ven a tar and nicotine variable tax has b~n proposed ~n one state. On the local scene, some city councils may vote to increase a tax on cigarettes without notification. We also must combat enabl~ng legislation at the state level to give more and more counties and cities the option of enacting a municipal cigarette !ax. C~ ~J

.... ,-.. nr~,~'rr~..wvn ,~,~. ~"~'~'~'¢nT~ TC~R± CC_O LITAGATION PROTECTIVE ORDER -8- Z It is time....it is past time...for smokers and non-smokers to unite in an effort to stawe off further tax increases on cigarettes and if at all possible to reduce the current levels of cigarette taxation. Many federal and state legislators seem to have adopted an attitude that has resulted in tax abuse toward smokers. This continuous pressure to increase the rates of re- gressive cigarette taxes could and should result in voter reactio~ as these rates fast a~proach luxury levels Legislators and businessmen both must realize that cigarette taxes do not have a neutral effect. Cigarette taxes distort spending and resource use, penalize smokers as a group, and pre- vent so~e other consumer purchases, ~hich helps to slow down what~ we hope is the current recovery. Increased tax tales reduce the sale of cigarettes which results in some combination of idle production, layoffs or hiring freezes, shifts in expenditures, or higher prices to recoup losses.. Additionally, while the feder~ gover~ent has a policy on the one hand to combat organized cigar~.~ ette smuggling which is draining off legitimate revenue from the~ the taxation policy of the federal government encourages ~ states, greater casual and ~rsanized interstate bootlegging of cigarettes~ by causing through taxation a price rise that is sufficient motivate additional s~uggling of cigarettes. The tobacco industry and those closely associated with it ~ill have to make a deliberate effort to build additional ~d deeper understanding for the industry while maintaining the old relationships in order to prevent further unwarranted and taxation of cigarettes. Those of us directly involved ~ith :he industry will have to become more familiar with the great

4B&W) PROTECTED BY MINNESOTA TOBACCO LITIGATION PROTECTIVE ORDER contributions made by this industry to our economy, our national' growth and our verT.way of life and be ready to interpret the impact of this industry on our society to both state and federal legislators. We must work untiringly to link the needs and demands of all the disparate groups who have an interest in tobacco from the farmer to the consumer. In doing this, legislators must be made aware of the effects that their legislative choices have on all the support groups connected with the industry. An article in The Wall Street Journal on May 24, 198~, points out the severe financial condition of the states. Twenty ~ght states believe their fiscal 1984 balances will equal or be lower than their balances at the end o£ the current fiscal year. Seven of them anticipate a deficit next fiscal year unless they take special action. For the current fiscal year, 26 states expect their year- e~d surpluses will be less than 1% of spending. Seven th£s year anticipate deficits. Taxes are not just the tobacco industry's problem - they are every citizens' problem. We are trying to do something about them. We will be successful in our efforts, and this distinguished group of stockbrokers will see the results through increases in revenue, and continued growth in earnings and profits. Thank you. ~>

O! IB6I 0~6I ~L6I ~L61

tB&W) PROTECTED BY MINNESOTA TOBACCO LITIGATION PROTECTIVE ORDER Table Z State Cigarette Tax Rates That Exceed Twenty Cents A Pack State Tax Rate Arkansas21¢ Con.~ectlcut Zl Florida Hassachuset~s 21 ~ch~Ean 21 New Jerse7 24 ~ew York Rhode Island Z3 Washington Wisconsin 25

- tB&W) PROTECTED BY MINNESOTA TOBACCO LITIGATION PROTECTIVE ORDER REMARKS $F WILLIAM.KLOEPFER, JR. SENIOR VICE PRESIDENT, THE TOBACCO INSTITUTE TO THE 1983 BI-ANNUAL TOBACCO SEMINAR RICHMOND,VIRGINIA JUNE 9, 1983 Standing before this audience two years ago, I finished up my remarks with a passing reference to my admiration of the tobacco industry's response capacity in the areas of public affairs and public concerns. In hindsight I should have expanded on that. I will this morning. Because the evidence is in. You're looking at an industry that's" been ambushed and assaulted for nearly a generation. But it's an industry that's become street-wise in public affairs second to none, a survivor in robust health.. Sure, there's a war on smoking -- and on smokers. But history provides many examples of aggression in which the aggressor winds up the loser. There are lots of reasons and the common one simply is the aggressor's miscalculation of his own potential. The leaders and planners in the antl-smoking movement have tried two decades of health scares presented in every imaginable form of communication. Twenty-two billion packs of cigarettes were sold in the U.S. the year they began and nearly thirty billion last year.

'r~ ¢, ,,', r~nt"~T~'t'T'~21"} [IV ~-~l~/~/l=~nT-~ Tf)I~-~CCO_LI]-IGATION_n~-,-,-,---,-,, ,--t,l.culm~-r_. ORDER _ Ten years ~go they shifted into their portrayal of smoking as a social menace. Their soclal planning has been more than simple communications and demands for legislation. has been marked by occasional violence and frequent rudeness. Yet most of that sales increase has occurred since they began it. The sight and sound of the movement is familiar throughout the world. In Sweden, after thirty-two different warnings have been rotated on cigarette packages, smoking is on the rise. In Australia, n~ one has been known to quit Just because antl-smoklng vandals have found it chic to deface cigarette brand billboards. In Poland and Italy the absolute prohibitions of advertising have not interferred with the popularity of tobacco. From Indiana a smokers' organization has sprung up and is currently getting national publicity. In Winnipeg the organizers of the Fifth World Conference on Smoking and Health, scheduled for next month, are admitting their concern about obtaining qualified speakers. On the Staten Island ferry, smoking is back. The anti-smokers have preoccupied the presses and the pulpits, the airwaves and the auditoriums, the city councils and courtrooms and the Congress, the regulatory tribunals -- and with what? In most cases with a superficial case, perhaps worthy of being heard, but then in the last analysis found wanting.

tB&W) PROTECTED BY MINNESOTA TOBACCO LITIGATION PROTECTIVE ORDER Let me focus in one arena and give you some numbers. The place is the legislatures of our fifty states. The time is these first six months of 19B3. There are 59 bills pending to restrict smoking. Twenty-two others have been defeated. None was enacted. There are four bills pending to regulate cigarette advertising. Three have been defeated. None has been enacted. There are eight bills pending to regulate sa~npllng. One was enacted. One was defeated. ~"nere are five pending which would penalize smokers on insurance rates. One has been defeated. None enacted. Those are not all of the legislative approaches of the anti-smoklng movement. But in these and others the key words have been miscalculation and defeat. I have no intention of detaining you this morning with similar recitations in all the other arenas where the movement is playing itself out. One of them, of co.urse, is the Congress, where the question is whether we will have a new labeling law. Fortunately, you have an eyewitness on your agenda after lunch today. Curt Judge was a participant in that proceeding and his report and analysis of it will be incisive. But there are a couple of other interesting developments. I mentioned the forthcoming World Conference on Smoking and Mealth. This has occurred every four years since 1967, a sort of rally of self-styled antagonists who spend a week trading

c 'tl'" nnt~T17rTl--h ttX' ~,Tk'\'VrurITi TOB,t~CO LITIGATION PROTECTI-~ E ORDER ~ ~.I{~,,~ ......................... anti-tobacco wa~ stories and quite candidly restating their dlsappolntment's'at their lack'of progress. Tobacco in this world is a growth industry. There will be a few of us in Winnipeg next month on the same basis as we have been before, watching the proceedings but saying nothing, vigilant for surprises but really expecting none. Afterward, we may possibly have this year's report of the Surgeon General on smoking and health, required by law annually, as most of you know. He says it will be about smoking and heart disease and therein lies a potential major irony. We usually get this in January. Perhaps it is late for good reason. For years we have been told of the estimated excess deaths said to be due to smoking. The biggest part of this guesswork relates to heart dlsea~e which is, of course, the major cause of death in this country, regardless of its possible causes. And also for years, we have been drilled about its risk factors and we know them by heart: high blood pressure, high cholesterol, and smoking. Recently, scientists have been putting these deductions to the test, sorting high-rlsk men randomly into groups for intensive intervention against these risk factors, and groups who were left to their own devices, and all of them trac:~ed for several years with regard to their health. In our country, one of the largest of these studies was mounted ten years ago by the federal government which spent $115 million and attracted more

PROTECTED BY .\[INNESOTA TOBACCO LITIGATION PROTECTIVE ORDER than 12,000 male volunteers. ~hen It was all over, It was apparent that the fel~ows who behaved themselves did no better than those who did not. Stopping smoking, lowering cholesterol and blood pressure, simply made no difference. Other similar studies from abroad are reporting similar findings. As something more than Just a footnote, there was a sclen~tflc Journal article from Sweden last month that for all of that country's preachments about the right ways to llve, heart disease mortality is rising alarmingly. And so at this moment the conventional risk factor concept is being newly scrutinized. How the Surgeon General will handle this news remains to be seen. One other effort now being embraced by the antl-smokers -- and then I will conclude these remarks with an Inv±ta~ion for you~ questions -- may at one time have seemed absurd and yet is now gettlng serious attention. There have al~ays been a few people careless with fla~able materials, and that Includes a few smokers. In many If not most cases alcohol or drugs contribute to the careless discarding of a cigarette and In some cases the results are disastrous. And so there is an e~or~ to regulate the product, requiring the production o~ a self-e~ti:~gulshlng cigarette. The approach is somewhat analagous to requiring a crash-proof car as a solution to the ~roblem o~ careless driving. This year the legislatures of flv~ states have defeated such proposals and six others are still

__ _ ~_~._ .~_X'~DDC3TIrCTlg'13 IRV \IINN'I:'qCIT-~ TORSCCD.LIYIGAT!ON PROTECTIVE ORDER looking at them. A similar measure is pending in Congress and in all these c~ses we are abl~ to provide very rational explanations of the technologic barriers that are involved. I£ the tobacco adversaries have miscalculated their potential on this issue, we appreciate the seriousness of the accidental fire problem in this country and we are out to make practical ¢ontrlbutlons to its solution. A study completed under a Tobacco Institute grant showed U.$. tlre rates tlve times higher than in comparable countries of Europe. It identified all sor~s of reasons. We have chosen three areas to attack -- Improvlng tlreflghtlng resources, heightening public awareness ot the problem, and educa~Ing the public on tire safety measures. Among other thinss, we have provided co~unlca~ions techni@ues, equipment and materials ~o a number of blg-clty fire departments and to the volunteer department~ throughout the country through ~helr na~lonal council. The credits are coming back in from fire authorities who are recognizing a public-interest co~itment on the par~ ot the tobacco industry. And so, to sum up, I hope I have demonstrated and shared this morning my own abldlng ~alth. I know you would not expec~ any doomsday message and I can assure you ~hat none is justlfled. I've been looking at our industry's role in public attalrs and public concerns For the better part ot these twenty years, and for me it all comes down to one word: durability.

- tB&W) PROTECTED BY MINNESOTA TOBACCO LITIGATION PROTECTIVE ORDER Z REMARKS OF GORDON L, CRENSHAW MAXWELL S~INAR JUNE 9., 1983 THANK YOU ONCE AGAIN FOR ASKING US "tO APPEAR AT THE JACK MAXI4ELL SEMINAR, WE WELCOME THIS OPPORTUNITY I"O DISCUSS OUR BUSINESS WITH YOU, I WOULD FIRST LIKE TO GIVE YOU A BRIEF VIEW OF OUR COMPANY~ ITS HISTORY~ AND THE NATURE OF OUR OPERATIONS~ FOLLOWED BY COMJ'IENTB CONCERNING OURPAST AND RECENT RESULTS, TRENDS~ AND A LOOK INTO THE FUTURE, AS YOU ARE PROBABLY AWARE~ WE HAVE BEEN IN THE TOBACCO BUSINESS FOR A LONG TIME, HAVING OUR BEGINNING IN 1888 AND WERE INCORPORATED IN 1918, WE HAVE BEEN .-::,;/,;-:.. ON THE {'fEW YORK STOCK EXCHANGE SINCE 1927 AND ARE STILL ~.~_ _. ,~" -~;, -'-t ~- ... .. -'-~'~~ .....THE ONLY COMPANY IN OUR BUSINESS ON THE BIG BOARD, .-~ ~-. -... , ; 2:~;:: ARE INCORPORATED AND HEADQUARTERED IN VIRGINIA AND~ ~HROUGHOUT THE YEARS, HAVE EXTENDED OUR OPERATIONS INTO ALL STATES OF THE UNITED STATES CROWING TOBACCO AND MANY FOREIGN COUNTRIES, ~IE ARE THE WORLD'S LARGEST INDEPENDENT LEAF TOBACCO DEALER, OUR ONLY SIGNIFICANT DIVERSIFICA- TION WAS MADE IN 1980 WITH THE ACQUISITION OF THE ROYSTER COMPANY, A FERTILIZER COMPANY HEAVILY ORIENTED TO PHOSPHATE,

:R,~-~'~ PI~f)TFCTFD R~" "~IIXX'E~r}T~ TOFI.-%CCq I~ITIGATION PROTECTI\E ORDFI~_. Z PAGE 2 NOWj TO ADDRESS OUR PRINCIPAL BUSINESS -- TOBACCO YOU ARE AWARE, WE MAKE NO ~IGARETTES OR. ANY OTHER CONSUMER PRODUCT, WE PROVIDE A VARIETY OF LEAF SERVICES FOR MANU- FACTURERS OF TOBACCO PRODUCTS THROUGHOUT THE WORLD, THE FUNCTIONS INCLUDE: ACTING AS AN AGENT IN BIDDING IN TOBACCO. 2. BUYING FOR OUR OWN ACCOUNT AND SELLING THE PROCESSED PRODUCT, 3 LOADING AT POINTS OF PURCHASE AND SHIPPING. ~, PAC~GI~G IN BALES FOR SHIPMENT TO PROCESS- PROCESSING OF THE TOBACCO, ~HICH IS PERHAPS THE MOST IMPORTANT FUNCTION AND IYILL BE EXPLAINED LATER, BUT SI~PLY STATED, THIS IS THE PROCESS NECESSARY TO PUT TOBACCO IN A FORM AND CONDITION READY FOR STORAGE 6. STORING. THE MIX OF THESE SERVICES HHICH WE RENDER DIFFERS HITH EACH CUSTOMER AND THIS ~.tlX CHANGES FROM TIME TO TI:".E.

(B&W) PROTECTED BY MINNESOTA TOBACCO LITIGATION PROTECTIVE ORDER PAGE 3 Z LEAF TOBA.CCO IS MARKETED IN DIFFERENT WAYS THROUGHOUT THE ~ORLD. IN THE UNITED STATES, THE AUCTION SYSTEM IS THE VEHICLE, IN CERTAIN COUNTRIES ABROAD, THIS SYSTEM, OR VARIATIONS OF IT~ ARE EMPLOYED~ WHILE IN OTHERS~ CONTRACTS FOR GROWING ARE MADE BY THE BUYER WITH THE FARMER. IN MANY FOREIGN COUNTRIES~ OUR AGRONOMY ~'TAFF PROVIDES ASSISTANCE TO THE FARMERS FROM WHOM WE BUY, FREQUENTLY WE MUST FINANCE THESE FARMERS AND IN CERTAIN COUNTRIES WE DO THE GROWING OURSELVES, IN ALL INSTANCES~ HO~VEVER~ THE GRADE SELECTION AND ESTABLISHMENT OF PRICES HAS TO BE DONE BY A CORPS OF EXPERIENCED PEOPLE WHO ARE EXPERT IN TOBACCO. THIS IS THE SELECTING AND PURCHASING SERVICE TO WHICH I HAVE REFERRED. As FOR THE PROCESSING FUNCTION~ THIS TAKES SEVERAL DIFFERENT FORMS. BUT LET ME FIRST EXPLAIN THAT TOBACCO IS A PERISHABLE COMMODITY; HENCE~ TO AVOID DETERIORATION~ IT MUST BE PUT INTO KEEPING CONDITION VERY QUICKLY. THIS IS DONE BY THE REDRYING PROCESS WHICH INVOLVES THE REMOVAL OF THE NATURAL MOISTURE FROM THE LEAF AND RESTORING THE PROPER AMOUNT OF MOISTURE FOR THE PRODUCT TO REMAIN IN SOUND CONDITION FOR AN INDEFINITE LENGTH OF TIME. PRIOR TO REDRYING~ WE ARE ABLE TO IMPROVE THE QUALITY OF THE PRODUCT~ FIRST BY REGRADING FOR UNIFORMITY

~ ~B&V,') ~'ROTECTED ".¥....,.,~o.,," ,T-'-'r~'a'r ~..~ .'rc~t~C~_.~_,...,~,.._~_, LITIGATION PROTECTIVE ORDER PAGE 4 AND THEN BY:THE REMOVAL OF CERTAINUNDESIRABLE LEAVES AND FOREIGN MATTER. IN ADDITION~ THE STEM MUST BE REMOVED~ AND THIS INVOLVES A VERY COMPLEX THRESHING AND SEPARATING PROCESS, WHICH MUST BE DONE TO STRICT QUALITY CONTROL SPECIFICATIONS. A GREAT DEAL OF SOPHISTICATED EQUIPMENT~ OPERATED BY HIGHLY TRAINED PEQPLE~ IS REQUIRED TO ENABLE US TO ADHERE TO THE RIGID TOLERANCES OF MOISTURE~ STEM CONTENT~ AND THE SIZE OF THE" LAMINA REQUIRED BY OUR CUSTOMERS -- THE MANUFACTURERS OF TOBACCO PRODUCTS. To EXPLAIN THE NEED FOR US IN THE TOTAL TOBACCO INDUSTRY, LET ME POINT OUT THAT COMPLETE COVERAGE OF ALL WORLD TOBACCO MARKETS REQUIRES AN EXTREHELY LARGE STAFF WITH SUPERVISORS~ BUYERS~ AND SUPPORTING PERSONNEL. IN ADDITION, MODERN PROCESSING FACILITIES t4UST BE AVAIL- ABLE AT THE SOURCE. ~ITH FEN EXCEPTIONS~ MANUFACTURERS THROUGHOUT THE WORLD HAVE NOT FOUND IT PRACTICAL, FEASIBLE~ OR ECONOMICAL TO MAINTAIN THE EXTENSIVE BUYING ORGANI- 7_ATION NECESSARY FOR THIS COVERAGE NOR TO HAVE THEIR OWN PROCESSING FACILITIES IN EACH TOBACCO AREA OF THE WORLd. IN SERVING SO MANY MANUFACTURERS, OUR LARGE BUYING VOLUME ENABLES US TO SPREAD THE COST OVER A VAST NUMBER OF POUNDS AND PROVIDE THE SERVICE AT A LO~ PER UNIT COST. THE SAME APPLIES TO THE SERVICE OF PROCESSING.

~" (B&~,V) PROTECTED BY 311NNESOTA TOBACCO LITIGATION PROTECTIVE ORDER PAGE 5 Z AS FOR THE GEOGRAPHICAL SCOPE OF OUR OPERATIONS, HE OPERATE IN 20 'COUNTRIES WITH BUYING ORGANIZATIONS IN ALL OF THEM AND PROCESSING FACILITIES IN ALL BUT A FEN, CIGARETTE MANUFACTURERS NOH USE A HIDE DIVERSITY OF TOBACCO GRONTHS; AND, BEING POSITIONED IN ALL OF THE WORI.D~S SIGNIFICANT TOBACCO GROWING AREAS, WE ARE ABLE ~ TAKE CARE OF VIRTUALLY EVERY NEED THEY MAY HAVE, SO, BASICALLY WE ARE IN A SERVICE INDUSTRY PER- FORMING FOR CIGARETTE~. CIGAR, PIPE, AND CHEWING TOBACCO IVLANUFACTURERS AN IMPORTANT FUNCTION MORE ECONOMICALLY THAN THEY HOULD BE ABLE TO PERFORM IT THEMSELVES, ALTHOUGH OUR OPERATIONS NON EXTEND AROUND THE WORLD, OUR MAJOR SINGLE BUSINESS IN STILL IN UNITED STATES TOBACCO, IN THIS COUNTRY, VCE HAVE FIVE LARGE PROCESSING FACILITIES -- THREE IN I~ORTH CAROLINA, ONE IN VIRGINIA, AND ONE IN KENTUCKY -- SUPPLYING BOTH THE DOMESTIC MANUFACTURERS AND THE MANUFACTURERS OF TOBACCO PRODUCTS THROUGHOUT THE WORLD. ToBAcco IS SOLD ON 86 AUCTION MARKETS IN THE FLUE-CURED, WHICH EI~COMPASSES GEORGIA, SOUTH CAROLINA, NORTH CAROLINA, AND VIRGINIA, AND 60 MARKETS IN THE BURLEY GROOVING AREA, KENTUCKY AND TENNESSEE, ~E COVER EACH MARKET WITH BUYERS AND BACK- UP PERSONNEL AND, IN ADDITION, HAVE A LARGE SUPERVISORY STAFF WHICH COORDINATES THE BUYING ON THE INDIVIDUAL MARKETS,

Z PAGE 6 0~R METHOD OF OPERATION VARIES IN EACH OF THE MANY COUNTRIES IN WHICH WE OPERATE, IN CANADA., TOBACCO IS I~OUGHT UNDER THE AUCTION SYSTEM AND WE HAVE FACILITIES -.~ WHICH PROCESS FOR BOTH THE DOMESTIC MARKET AND THE EXPORT MARKET, IN MEXICO AND KOREA, THROUGH FACILITIES E,~ OWNED JOINTLY BY US AND NATIONALS OF THE COUNTRY, HE 0.9. "~ PROCESS FOR SALE TO THE EXPORT MARKET, IN ITALY, HE ~ .2:. ACQUIRE OUR TOBACCO THROUGH CONTRACTS WITH FARMERS AND ~ ~ .: WE ALSO GROW SOME TOBACCO OURSELVES, I'IE SUPPLY BOTH THE L-'. LOCAL ITALIAN MARKET Ah'D THE EXPORT HARKET, WE HAVE RECENTLY CONSTRUCTED A NEW PLANT THERE AT A COST OF ABOUT $].3 MILLIONS,. IT REPLACED THREE OLDER PLANTS ,VHICH ~_"~ WERE It~ DIFFERENT LOCATIONS, IVITH THIS NEW PLANT ON ,~,.< LINE,, CUR PROCESSI~G.EFFICIE~CY HAS BEEN VASTLY IMPROVED AND SUBSTANTIAL COST SAVI~GS HAVE BEEN REALIZED, IN ~rLALA~,/I., WHERE PURCHASES ARE HADE THROUGH THE AUCTION SYSTEM., WE HAVE A RELATIVELY NE~'~ FACILITY ~'/HICH IS CERTAINLY THE LARGEST AND MOST MODERN TOBACCO FACTORY IN THAT COUNTRY., AND PROBABLY THE LARGEST FACTORY OF -'_.. ANYKIND IN THE COUNTRY, BRAZILIAN .PURCHASES AF, E t'IADE THROUGH CCJNTRACTS WITH ABOUT ].3.,000 FARMERS., WE HAVE TWO LARGE PROCESSIt~G FACILITIES THERE, ONE HAS SIGNIFICANTLY EXPANDED FOUR YEARS AGO AND LAST YEAR ~/E BUILT A COMPLETELY r~E~'~ FACILITY AT A COST OF ABOUT $9 MILLION, -THE GRO~'~TH OF OUR BUSINESS IN ~RAZIL "~ CONTINUES AT A RAPID RATE

"(B&W) PROTECTED BY MINNESOTA TOBACCO LITIGATION PROTECTIVE ORDER PAGE 7 WE HAVE EXTENSIVE HOLDINGS IN ZIMBABWE WHERE, UNTIL A FEW YEARS AGO, WE WERE PRECLUDED FROM DEALING BECAUSE OF THE UNITED ~ATIONS' ECONOMIC SANCTIONS IM- POSED IN 1965. DURING THE SANCTION PERIOD, DIVIDENDS TO US HERE BLOCKED FROM PAYMENT. SINCE 1981, WE HAVE BEEN RECEIVING INTEREST ON BLOCKED DIVIDENDS AND ANNUAL INSTAL~IENTS OF PRINCIPAL ON THOSE ACCUMULATED FROM 1969 THROUGH 1973. ALSO, HE ARE NOW PERMITTED TO REMIT ;IVIDENDS OF UP TO 50 PER CENT OF NET INCOME FROM CURRENT OPERATIONS.. ZIMBABWE IS A MAJOR TOBACCO PRODUCING AREA OF THE WORLD, ITS FUTURE !S LARGELY DEPENDENT UPON POLITICAL DEVELOPMENTS AND, AS IS THE CASE WITH MOST AFRICAN COUNTRIES, ONE CAN BECOHE A BIT NERVOUS IN READ- ING FREQUENT NEWSPAPER REPORTS OF HAPPENINGS THERE. THUS FAR WE HAVE OPERATED WITHOUT INTERFERERCE OR DIS- RUPTION; AND, ASSUMING THERE IS CONTINUING STABILITY OF GOVERNMENT AND ITS CURRENT ATTITUDE TOHARDS BUSINESS • DOES NOT CHANGE~ ZIMBABWE SHOULD BE ABLE TO MAINTAIN A VIABLE ECONOMY~ OF WHICH TOBACCO WILL SURELY BE A MOST IMPORTANT PART. UNDER THESE CONDITIONS, WE ~OULD EXPECT OUR COMPANY IN ZIr~BABWE TO BE AN IMPORTANT SOURCE OF EARNINGS IN THE YEARS AHEAD. PROBABLY THE MOST~OTE~VORTHY DEVELOPMENT IN THE LE,F TOBACCO TRADE DURING THE PAST SEVERAL YEARS HAS

z z " PAGE 8 BEEN THE .I~CREASING IMPORTANCE OF FOREIGN TOBACCOS AS A SOURCE OF SUPPLY FOR "I;OTAL WORLD DEMAND, I OBACCO GROWN ABROAD CONTINUES TO GAIN MARKET SHARE RELATIVE TO U, S, TOBACCO, THIS IS ALMOST SOLELY BECAUSE OF "~'~ PRICE, IN THIS COUNTRY WE CONTINUE TO OPERATE WITH = AN ANTIQUATED GOVERNMENT SUPPORT PROGRAM UNDER WHICH o_ "T'~ RIGHT TO GROW TOBACCO IS LIMITED TO THOSE WHO HOLD ,-~': QUOT~S FARMERS WHO DO NOT HOLD QUOTAS MUST PAY EXORBI.TANTLY. HIGH RENTS FOR THE PRIVILEG~ OF GROWING, ,_--'.~ FURTHERMORE~ I)ECAUSE OF THE ARCHAIC PRICE SUPPORT FORMULA WHICH MANDATES A SHARP RISE OF THE SUPPORT LEVEL = EACH YEAR, U, S, TOBACCO CONTINUES TO FIND ITSELF AT A COMPETITIVE DISADVANTAGE COMPARED WITH TOBACCOS GROWN IN COUNTRIES UNDER A FREE V&RKET SYSTEM, FOR YEARS WE HAVE SPOKEN OUT ON THIS SUBJECT AND WORKED IN WASHINGTON IN AN ATTEMPT TO INDUCE CORRECTIVE LEGISLATION, FOR, IT HAS BEEN Ot~VlOUS TO US FOR SOME TIME THAT UNLESS SUBSTANTIVE CHANGES ARE MADE IN THE U, S, ~.~ GOVERNMENT SUPPORT PROGRAM, U, S, TOBACCO FACES A CON- TINUING EROSION OF ITS SHARE OF THE WORLD MARKET, FINALLY THERE SEEMS TO BE RECOGNITION IN CONGRESS THAT SOMETHIHG MUST BE DONE, AND WE ARE EXPECTING VERY SOON LEGISLATION TO BE INTRODUCED WHICH WILL CALL FOR SOME IMPOR- TANT CHANGES, THIS LEGISLATION WHICH APPARENTLY HAS

PROTECTED BY .'~IIN'N'E$OT,-k TOBACCO LITIGATION PROTECTIX,E ORDER PAGE 9 z CONSIDERABLE SUPPORT WILL PROBABLY INCLUDE THE FOLLOW- ING PROVISIONS: 1, PRICE SUPPORTS WOULD BE FROZEN IN THE 1983 AND 1984 CROPS AT THE 1982 LEVEL, "" 2, IN 1985 AND SUBSEQUENT YEARS, THE SECRETARY OF AGRICULTURE WOULD BE GIVEN AUTHORITY TO LIMIT THE INCREASE IN PRICE SUPPORTS TO 65 PER CENT OF THE AMOUNT CALLED FOR IN THE PRICE SUPPORT FORMULA, 3, LEASING OF QUOTAS (OR THE RIGHT TO GROW) WOULD BE ABOLISHED IN 1986, IN OTHER ~IORDS~ QUOTA HOLDERS WOULD HAVE TO GROW TOBACCO ON THEIR OWN LAND OR GIVE UP THEIR QUOTA, ALTHOUGH..WE CONTINUE TO BELIEVE THAT STRONGER ACTION IS NECESSARY~ NAMELY TO REDUCE THE SUPPORT LEVEL RATHER THAN INVOKE A FREEZE~ ONE MUST AGREE THAT THESE CHANGES ARE SIGNI- FICANT AND SHOULD IMPROVE THE COMPETITIVE POSITION OF U. S, TOBACCO OVER THE NEXT SEVERAL YEARS. FOR THE COMING FEW YEARS, WE STILL LOOK FOR OUR COMPANIES ABROAD TO BE THE PRINCIPAL SOURCE OF OUR GROWTH IN BUSINESS, WE FEEL THAT WE ARE WELL POSITIONED FOR

PAGE 10 THE INCREASING DEMAND FOR OVERSEAS TOBACCO IN VIEW OF OUR BROAD~ND EFFECTIVE £~VERAGE OF ALL OF THE IMPORTANT WORLD SOURCES OF SUPPLY, IN ADDITION, WE HAVE THE TECHNICAL STRENGTH AND PROCESSING CAPABILITIES FOR A WIDER AND MORE EFFECTIVE SERVICE THAN OUR COMPETITION AN.D, HENCE, AN OPPORTUNITY TO GAIN HARKET SHARE, • As ONE LOOKS AHEAD, TOTAL WORLD CIGARETTE CON- SUMPTION AND, IN TURN, LEAF USAGE IS OBVIOUSLY A VERY IMPORTANT FACTOR, THE MOMENT~ IN VIEW RECENT EVENTS, THIS IS MOST DIFFICULT TO ASSESS, THERE HAVE BEEN SIGNIFICANT CIGARETTE EXCISE TAX INCREASES IN MANY OF THE DEVELOPED COUNTRIES OF THE WORLD DURING THE PAST.YEAR. THE IMPACT WHICH THE ACCOMPANYING CIGARETTE PRICE INCREASES WILL HAVE ON CONSUMPTION IS YET UNKNOWN. ~K:TUALLY THE FULL IMPACT OF THE EXCISE TAX INCREASE HAS NOT BEEN PASSED ALONG TO THE CONSUMER IN MANY INSTANCES, FOR PRICE CUTTING HAS BEGUN TO TAKE PLACE IN A NUMBER CF THE DEVELOPED COUNTRIES OF THE WORLD, So THE SITUATION AT THE HOMENT IS UNCLEAR, BUT, ON BALANCE, | DO NOT THINK ONE CAN EXPECT LEAF USAGE IN THE DEVELOPED COUNTRIES THIS YEAR TO BE ANY GREATER THAN LAST YEAR, AND PERHAPS IT MAY BE SOMEWHAT LESS. WE SEE A DIFFERENT PICTURE, HOWEVER, IN THE DEVELOPIt~G COUNTRIES WHERE CIGARETTE SMOKING CONTINUES TO INCREASE

(B&W) PROTECTED BY 3IINNESOTA TOBACCO LITIGATION PROTECTIVE ORDER PAGE 11 AT A VERY RAPID RATE, HENCE, WORLDWIDE, I BELIEVE ONE COULD EXPECT A MODEST INCREASEIN CIGARETTE CONSUMPTION AND, IN TURN, USAGE OF LEAF TOBACCO, TURNING NOW TO OUR FERTILIZER BUSINESS, ROYSTER CONSISTS OF TWO MAJOR COMPONENTS -- THE MATERIALS GROUP A,'V~.THE ~OMESTIC FARM I~RKETING GROUP, THEMATERIALS GROUP INCLUDES: THE MULBERRY, FLORIDA~ PHOSPHATE COMPLEX, WHICH PRODUCES PHOSPHATE FERTILIZER MATERIALSI THE NATIONAL ACCOUNTS SALES DIVI- SION, WHICH SELLS NATIONHIDE NITROGEN, PHOSPHATE, AND POTASH FERTILIZER MATERIALS IN BULK TO LARGE U, S, DISTRIBUTORS AND MANUFACTURERS; AND THE INTERNATIONAL MARKETING DIVISION, WHICH SELLS PHOSPHATE FERTILIZER MATERIALS IN THE WORLD MARKET, THIS DIVISION ALSO MANAGES SEVERAL TERMINAL OPERATIONS; AN ANHYDROUS AMMONIA PIPELINE THAT REACHES FROH ROYSTER'$ TERMINAL AT TAMPA TO OUR MULBERRY COMPLEX AND SEVERAL OTHER PHOSPHATE MANUFACTURERS IN THE BoNE VALLEY AREA OF CENTRALFLoRIDA; MARINE PORT TERMINALS, WHICH PROVIDE STEVEDORING, SHIPS AGENCY~ AND WAREHOUSING SERVICES AT THE PORT OF BRUNSWICK IN GEORGIA; DELCHEM, WHICH DEVELOPS SOURCES OF RAW MATERIALS; AND THE DISTRIBUTION AND CROP PROTECTION CHEMICALS DEPARTMENTS, WHICH SUPPLY

,~, l:'.'L~_'~. DD r,lTl~"r'Tl;l'3 I:IV \||\'Y];'CLrIT..~ TOR-~C'C~ I.ITIC, ~,TION PROTECTI\'E ORDER __ _ PAGE 12 FERTILIZER MATERIALS AND .CROP PROTECTION CHEMICAL PRODUCTS TO THE DOMESTIC FARM MAR'KETING GROUP, THE DOMESTIC FARM ~IARKETING GROUP I~NUFACTURES AND BLENDS MIXED FERTILIZER AND GRANULAR MICRONUTRIENTS, IN,ADDITION, IT SELLS FERTILIZER MATERIALS, CROP PROTEC- T'~..uN CHEMICAL AND SEEDS, THE LATTER THO CATEGORIES BEING PROPRIETARY BRANDS PURCHASED FROM OTHER COVIPANIES. SALES ARE MADE TO INDEPENDENT RETAIL DEALERS, SMALL DISTRIBUTORS AND FARMERS. -- LET ME NON DESCRIBE ROYSTER .TODAY, IF FISCAL 1982 WAS THE "YEAR OF SURVIVAL" FOR COMPANIES IN THE ~~ FERTILIZER INDUSTRY, AS ONE INDUSTRY EXECUTIVE DUBBED --' IT, THEN THE CURRENT FISCAL YEAR ENDING THIS MONTH COULD Z Z BE LABELED THE "YEAR OF SURVIVAL - CHAPTER TWO." DOMESTIC AND WORLDWIDE ECONOMIC PROBLEMS CONTINUED TO BE PRESENT. THE PROBLEMS HAVE BEEN HIGH INTEREST RATES; A STRONG DOLLAR~ WHICH REDUCES FERTILIZER EXPORTS AND PRICES OF FARM COMMODITIES; A DEPRESSED ECONOMIC AGRICULTURAL ECONOMY CHARACTERIZED BY LOW COMMODITY PRICES; SHRINKING FARH INCOMES; AND THE U. S. GOVERNMENT PAYMENT IN KInD PROGRAM. YET DESPITE PERHAPS THE TWO WORST YEARS IN THE HISTORY OF THE FERTILIZER INDUSTRY~ ROYSTER IS SHOWING

PROTECTED BY MINNESOTA TOBACCO LITIGATION PROTECTIVE ORDER PAGE ].3 A SMALL PROFIT AND SHOULD END THE YEAR JUNE 30TH AT ABOUT THE SAME LEVEL AS LAST YEAR. EVEN THOUGH THAT PROFIT DOESN'T SATISFY OUR RETURN ON INVESTMENT CRITERION~ WE FEEL THAT IT IS STILL A CREDITABLE ACHIEVEMENT WHEN ONE CONSIDERS THAT MANY FIRMS IN THE INDUSTRY ARE OPERAT- ING AT A LOSS, THE REASONS ROYSTER WAS NOMINALLY PROFITABLE THIS YEAR ARE THE SAME AS LAST YEAR. FIRST, ROYSTER IS NOT JUST A FERTILIZER MANUFACTURER, ROYSTER SHOULD ALSO BE VIEWED AS A MARKETING AND DISTRIBUTION COMPANY. SECOND~ ROYSTER HAS EXPANDED INTO PROFITABLE BUT LESS CYCLICAL ACTIVITIES SUCH AS TERMINAL AND PIPELINE OPERATIONS, STEVEDORING SERVICES~ AND THE BROKERING OF FERTILIZER MATERIALS, THIRD~ ROYSTER HAS STREAMLINED ITS ORGANIZA- "TION AND REDUCED SG & A EXPENSES EACH OF THE PAST THREE YEARS. FOR NUMBER OF REASO~;S~ WE FEEL THAT ROYSTER IS WELL POSITIONED TO TAKE ADVANTAGE OF THE INEVITABLE TURN- AROUND IN THE AGRICULTURAL ECONOMY. LET DIE CITE SOHE CHANGES AND TRENDS OCCURRING IN ~HE INDUSTRY, DURING THE 1970'S, THE MAJOR U. S. PHOSPHATE PRODUCERS EXPANDED MANUFACTURING CAPACITY TO SATISFY A WORLDWIDE DEMAND FOR PHOSPHATES, THESE FOREIGN MARKETS

z PAGE 14 DID NOT DEVELOP BECAUSE OF. A STRONG U, S, DOLLAR, WEAK FOREIGN ECONOMIES, AND THE ENTRY OF SEVERAL FOREIGN COUNTRIES INTO THE PHOSPHATE MANUPACTURING ARENA, SUB- STANTIAL OVERCAPACITY OP THE U, S, RESULTED AND HUGE I~VENTORIES ACCUMULATED, OVERPRODUCTION AND THE RESULTANT EXCESS INVENTORIES HAVE NOT TAKEN PLACE ~URING THE LAST ~0 DEPRESSED YEARS. PHOSPHATE INVENTORIES TODAY ARE VERY MUCH IN LINE ~ITH DEMAND, SEVERAL MANUFACTURERS CUT'BACK PRODUCTION AS HUCH AS 40 PER CENT, 'BECAUSE ROYSTER SELLS MORE PHOSPHATE TONNAGE THAN IT PRODUCES, OUR MULBERRY PLANT HAS CONTINUED TO OPERATE AT NEAR CAPACITY. ANOTHER t~AJOR INDUSTRY CHANGE IS IN THE METHOD OF MARKETING, ~HAT HAPPEIiED Iil THE LAST DECADE 'HAS THAT St'tALL LOCAL FERTILIZER BLENDII'~G OPERATIONS TCOK OVER THE MARKET FROM lARGE PRODUCER-OPERATED N'J~ONIATION FACTORIES, BLENDERS ARE NO~'~ BUYING RAW ~,ATERIALS AND CUSTOM BLENDING THEM TO ~'~EET THE LOCAL IIEEDS OF THEIR CUSTOMERS, THROUGH REORGANIZATION AND STREAt'~LINII'iG, ROYSTER SUCCESSFULLY POSITIONED ITSELF FOR THIS CHANGE, ',VITH THE RESULT THAT IT IS AMONG A HANDFUL OF COMP.A;IIES THAT HAVE BLENDED FERTILIZERS AVAILABLE TO ALL RETAIL OUTLETS, AS FOR ROYSTER TGI.IORRO',% VIE ARE GOING TO CONTINUE TO PURSUE GRO%WTH II'l A DELIBERATE ~.ANNER, I.'IE'RE READY

PROTECTED BY 3IIN.~'ESOTA TOBACCO LITIGATION PROTECTI'VE ORDER PAGE 15 Z TO TAKE ADVANTAGE NOT ONLY OF A TURNAROUND IN THE FERTILIZER MARKET, BUT ADDIfIONAL OPPORTUNITIES IN RELATED AREAS, ~E SEE NO NEW BIG INVESTMENTS IN PRODUCTION FACILITiES~ BUT HILL MAKE CAPITAL INVESTMENTS WHEN PRODUCTION COSTS CAN BE REDUCEg, WE ARE CONTINUING TO EXPLORE INVESTMENT OPPORTUNITIES SUCH AS ADDITIONAL TERMINALS IN THE MATERIALS GROUP AREA; AND, IN THE DOMESTIC FARM MARKET AREA, WE ANTICIPATE GAINS IN MARKET SHARE THROUGH ACQUISITION, AS HE FEEL THAT NOH IS THE TIME, DURING A SLUMP, FOR SELECTIVE CONSERVATIVE EXPANSION, BECAUSE OF THE SUCCESS OF THE GOVERNMENT'S PAY- MENT ~N KIND PROGRAM~ CROP SURPLUSES SHOULD DECLINE, COHMODITY PRICES SHOULD START RISING AND THEN FARM IN- COME, WHICH HAS A POSITIVE CORRELATION V~ITH FERTILIZER CONSUMPTION, IN ADDITION, THE FEDERAL GOVERNMENT IS CONSIDERING PLACING MORE EMPHASIS ON OFFERING EXPORT INCENTIVES ~0 FOREIGN BUYERS AND IS SEEKING A LONG-TERM GRAIN CONTRACT WITH RussiA, FOR THESE REASONS~ WE ANTICIPATE HEALTHY GAINS IN FERTILIZER CONSUMPTION DURING THE NEXT FEW YEARS, IN SUMMARY~ ROYSTER TODAY IS READY TO REAP THE BENEFITS OF A CYCLICAL TURNAROUND IN THE PHOSPHATE SECTOR AND IN THE FARM ECONOMY, ~IE EXPECT IMPROVEMENT DURING OUR NEXT FISCAL YEAR~ AND ONCE THE TURNAROUND

'E ~__:,.t.) ppra'ra~c"rrr~_p~ 'SLXtTN_~'_C, DT.X TCIR-~Cf'CI I.ITIGATION PROTECTIVE ORDER -.,,,-. PAGE 16 BEGINS~ ROYST£R SHOULD FtAKE AN IMPORTANT CONTRIBUTION TO UNIVERSAE'S OVERALL RESULTS, AND NOW SOME CO~ENTS ABOUT UNIVERSALeS RECORD AND WHERE WE ARE THIS YEAR. EARNINGS PER SHARE HAVE GROWN OVER THE PAST FIVE YEARS AT 12 PER CENT PER YEAR COw, POUNDED, AVERAGE ANNUAL GROWTH OF DIVIDENDS OVER Th%SE YEARS HAS ALSO BEEN ABOUT 12 PER CENT, RETURN ON EGUITY FOR EACH OF THE PAST THREE FISCAL YEARS HAS BEEN ABOUT 19 PER CENT, " . " IN OUR NINE MONTHS REPORT FOR THE PERIOD ENDED ~VL~RCH 31ST THIS YEAR, WE REPORTED PER SHARE EARNINGS OF $3,q5 WHICH WAS ABOUT 7 PER'CENT ABOVE THE COMPARABLE PERIOD IN THE PREVIOUS FISCAL YEAR, OUR IMPROVED RESULTS CAN BE ATTRIBUTED PRINCIPALLY TO BETTER PERFORMANCE OF OUR FOREIGN TOBACCO OPERATIONS WHERE WE ARE EXPERIENCING SIGNIFICANT GROWTH, IN OUR U, S, OPERATIONS, ALTHOUGH EXPORTS DECLINED SLIGHTLY, OUR PROCESSING VOLUME IN THIS COUNTRY WAS APPROXIMATELY THE SAME AS THAT OF THE PREVIOUS YEAR, THIS WAS THE RESULT OF GOOD DOMESTIC ORDERS PLUS A LARGER VOLUME OF PROCESSING FOR THE FLUE- CURED TOBACCO STABILIZATION CORPORATION, OPERATING RESULTS OF OUR FERTILIZER OPERATIONS WERE SOMEWHAT BELOW THAT OF THE PREVIOUS YEAR,

~B&~V) PROTECTED BY .~II.~,NE$OTA TOBACCO LITIGATIO.~" PROTECTI~,E ORDER PAGE 17 IT WILL B~ NOTED IN OUR NINE MONTHS. REPORT THAT CONSOLIDATED GROSS REVENUES HERE BELOW THAT OF FISCAL 1982. THIS APPARENT ANOMALY, IN LIGHT OF THE 7 PER CENT EARNINGS INCREASE~ IS PARTIALLY A REFLECTION OF THE FACT THAT MOST OF OUR OVERSEAS COMPANIES ARE NOT INCLUDED IN OUR CONSOLIDATION; HENCE, THESE FOREIGN SOURCE REVENUES DO NOT APPEAR IN THE CONSOLIDATED FIGURES. COMPANIES NOT INCLUDED WILL HAVE REVENUES OF ABOUT $400 MILLION FOR THE FISCAL YEAR. IT SHOULD BE NOTED, TOO~ THAT AN UNUSUALLY LARGE PORTION OF OUR TOTAL PROCESSING THIS YEAR WAS FOR THE FLuE-CURED TOBACCO STABILIZATION CORPORATION; AND, SINCE HE DO NOT TAKE TITLE TO THIS TOBACCO, ONLY CHARGES RECEIVED RATHER THAN TOBACCO VALUE ARE INCLUDED IN GROSS REVENUES. " LOOKING FOR FISCAL 1984, WE EXPECT THAT THE VOLUME OF TOBACCO HANDLED IN OUR U, S. OPERATIONS, FLUE- . CURED AND BURLEY~ WILL BE AT APPROXIMATELY THE SAME LEVEL AS LAST YEAR. OUR OVERSEAS COMPANIES SHOULD SHON IN TOTAL AN INCREASE IN BUSINESS AND IMPROVED RESULTS. As TO OUR FERTILIZER BUSINESS~ HE FEEL CONFIDENT THAT THE BOTTOM OF THE CYCLE WAS EXPERIENCED DURING THE CURRENT YEAR, AND HE BELIEVE THAT IN FISCAL 1984 wE HILL SEE THE BEGINNING OF THE UPSWING~ .AND THIS HILL BE ACCOMPANIED BY IMPROVED RESULTS IN THIS SEGMENT OF OUR COMPANY.

~=_~.u.,~Dot~a-~-C~Trr~ Rv ~i]~.'~'~t3T_-kTOR.~CCt) LI'EIGATION PROTECTIVE ORDER PAGE 18 So~ ON BALANCE~ HE BELIEVE THAT THE COMING YEAR HILL BE A SATISFACTORY ONE, IT'S BEEN NICE HAVING THE OPPORTUNITY TO SPEAK WITH YOU, PERHAPS THERE ARE SOME QUESTIONS WHICH EITHER i OR ONE OF MY COLLEAGUES MIGHT BE ABLE TO ANSWER FOR YOU,

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~', ~!.W-F _r~P..OTECTE-n _ny 5!!yYESOT_X_ TOBACCO J..IZIG.-~.TION PROTECTIVE ORDER MAke'ELL SEMINAR RICHMOND, VIRGINIA JUNE 9, 1983 THANK YOU, JACK. GOOD MORNING, LADIES AND GENTLEMEN. I REALIZE THAT YOU HAVE SPENT QUITE A BIT OF TIME WITH OUR GOOD FRIENDS IN WINSTON-SALEM. BECAUSE I DID NOT ATTEND THOSE SESSIONS AND HAVE NO IDEA OF THE CONTENT OF THEIR MESSAGE, I HOPE I DON'T BORE YOU WITH TOO MUCH REPETITION CONCERNING THE CIGARETTE INDUSTRY. I BRING YOU GREETINGS FROM ~EW'S CHAI~MA.N, ~Y TISCH, AS WELL AS HIS REGRETS THAT HE IS ~LE TO BE WITH YOU TODAY. AS YOU KNOW, LO~'S HAS GROWN TO A CO~Y WITH $10½ BILLION IN ~SETS ~D ~NU~ ~NUES OF $4 3/4 BILL:O~ FROM A SINGLE LE~ED HOTEL IN 1946. WE ARE NOW IN THE HOTEL BUSINESS, INSURANCE, MOVIE E~IBITION, CONSU~R FIN~CE, WATCHES ~D OTHER T~..I.,~ ~ DEVICES AND, OF COUPE, TOBACCO. ~ ~ A DIRE~OR OF LOEW'S AND CEO OF LORILLARD, ~ ~0 KNOWLEDGE OF OUR OTHER DIVISIONS IS BROAD ~THER TH~ ~ SPECIFIC. YOU HA~ OUR ~NUAL REPO~ ~ND THERE'S ~O ~EED

~. (B&W) PROTECTED BY ,~ILNNE$OTA TOBACCO LITIGATION PROTECTIVE ORDER FOR ME TO RECITE INFORMATION FROM THERE. I'LL BE HAPPY TO ANSWER ANY Q~ESTIONS ABOUT THE OTHER DIVISIONS TO THE BEST OF MY ABILITY, BUT. WILL RESTRICT MY KES~RKS TO LORILLARD AND THE TOBACCO INDUSTRY. BOB AVE, OUR EXECUTIVE VICE PRESIDENT-MAP, KETING, WILL DISCUSS LORILLARD'S BUSINESS IN DETAIL, BUT, BEFORE WE GET TO LORILLARD, LET'S TALK A BIT ABOUT THIS INDUSTRY AND SOM~ OF ITS PROBLEMS IN WASHINGTON NOT ALREADY COVERED BY BILL KLOEPFER AND BILL O'FLAHERTY OF THE TOBACCO INSTITUTE STAFF. YOU MAY OR MAY NOT BE AWARE THAT I PRESENTLY HOLD THE CHAIR OF THE TOBACCO INSTITUTE EXECUTIVE COMMITTEE. PERHAPS, "HOT SEAT" WOULD BE MORE APPROPRIATE. IN ANY EVENT, IT HAS BEEN MY RESPONSIBILITY AND PRIVILEZE TO REPRESENT OUR INDUSTRY SINCE LAST DECEM~BER. A PART OF THAT DUTY INCLUDED TESTIMONY BEFORE CONGRESSMAN WAX24.~N'S SUB-COMMITTEE OF THE HOUSE COMMERCE COMMITTEE IN MARCH ON H.R. 1824 AND BEFORE SENATOR HATCH'S LABOR COMMITTEE IN MAY ON S. 772. BOTH OF THESE BILLS ARE QUITE SIMILAR. AMONG OTHER THINGS, THEY CONTAIN "FINDINGS" ON HEALTH ISSL'ES; CALL FOR ROTATIONAL WARNING NOTICES IN PACKAGING ~ND/OR ADVZRTISING; AND WOULD RZQUIR.E DISCLOSURE OF ALL !NGREDiEXTS USED IN THE MANUFACTURE OF CIGARETTES.

- 3 - THE ADOPTION OF LEGISLATION IS GENERALLY NOT FINALLY DECIDED BY COMMITTEE HEARINGS, BUT WE BUILT A FINE KECORD IN ALL THESE AREAS IN BOTH HOUSE AND SENATE. MR. WAX.MAN HAS NOT CALLED FOR A MARK-UP OR VOTE IN HIS SUB-COMMITTEE. IN THE CASE OF THE SENATE BILL: DURING THE HEARING, SENATOR QUAYLE OF INDIANA ASKED IF WE, THE INDUSTRY, WOULD BE WILLING TO SIT DOWN WITH REPRESENTATIVES OF HHS TO SEE IF AGREEMENT COULD BE REACHED ON A SINGLE STRONGER WARNING NOTICE QUITE NATURALLY, WE AGREED TO SU& NEGOTIATIONS AND THEY A~E ON-GOING. SENATOR HATCH GAVE US AND HHS UNTIL JUNE 15TH TO PEACH SUCH AN AGREEMENT. IT WOULD BE INAPPROPRIATE FOR ME TO SPECULATE ON THE OUTCO~iE OF EITHER OF THESE BILLS. HOWEVER, IT IS APPROPRIATE TO SAY T~.AT I AM OPTIMISTIC THAT WE WILL BE ABLE TO SOLVE THESE PROBLEM~ ~._~ AND REMAIN IN A POSITION TO EFFECTIVELY MARKET OUR PRODUCTS TO THOSE ALMOST 60 MILLION AMERICANS ~'HO ENJOY THEM. NOW, HOW DOES LORILLARD SEE INDUSTRY PERFOKMA~CE THIS YEAR? FIRST, LET ME SAY THAT, IN THIS BUSINESS, WE NE\~R HAVE NICE CLEAN SALES GRAPHS -- THEY ARE ALWAYS FL~L OF ABERRATIONS WHICH CAN BE CAUSED BY TRADE LOADING AT THE TIME OF A PRICE OR TAX INCREASE OR OTHER I~EASONS. CERTAINLY, 1982 AND '83 ARE NOT EXCEPTIONS. '82'S FCURTH QUARTER AND FULL YEAR MARKET SHARES WERE DRAMATICALLY 5390043.15

PROTECTED BY *ILN'NESOTA TOBACCO LITIGATION PROTECTIVE ORDER AFFECTED BY TWO COMPANIES' SHIPMENT OF LARGE QUANTITIES OF CIGAI%ETTES IN THE FOURTH QUARTER WHICH CIGARETTES WOULD NORMALLY HAVE BEEN SHIPPED IN THE FIRST QUARTER OF 1983. CONSUMPTION PATTER.NS DIDN'T CHANGE -- ONLY INVENTORIES. CONSEQUENTLY, IN OUR VIEW, '82 INDUSTRY P.ESULTS W~RE OVERSTATED AND '83 WILL BE UNDERSTATED, AND ACTUAL COMPETITIVE POSITIONS, i.e. , CONSUMER FRANCHISES, CAN PROBABLY BE BEST GAUGED BY DISREGARDING AT LEAST THE FIRST MONTH OF THIS YEAR. BOB AVE WILL SHO~9 YOU ACTUAL GRAPHS ON THIS, BUT I WANT TO SAY THAT LORILLARD, IN UNITS FOR THE FULL YEAR TO DATE, IS 2.5% AHEAD OF '82, WHILE THE'INDUSTRY IS 5.9% BEHIND. WE BELIEVE THAT A BETTER WAY TO JUDGE '83 PER2ORMA.NCE IS BY COMPA/~ISON OF DAILY SHIPPING AVERAGES FOR THIS YEAR WITH DAILY SHIPPING AVERAGES FOR THE FULL YEAR OF '82. THIS NEGATES THE WIDE SWINGS AND ABERRATIONS REFEKRED TO EARLIER. SUCH A COMPARISON REVEALS THAT LORILLARD IS VIRTUALLY EVEN FOR THE YEAR-T0-DATE, WHILE OUR TOTAL COMPETITION IS RUNNING 12% BEHIND. IN FACT, DURING THE MOST RECENT EIGHT WEEKS ENDING MAY 27TH, THE SA/KE 12% DIFFERENCE PREVAILED WITH LORILLARD ONLY 2% BELOW WHILE OUR COMPETITION WAS 14% BELOW.

. ~,~_ ?:~v~, pp.OTECTE_n _~y .x_~!NNESOTX- TOr~.kECO.I ITIGATION PROTECTIVE ORDER _ ONE INTERESTING POINT: SEVERAL MONTHS AGO, THE NEW YORK SUNDAY TIMES DID A BUSINESS SECTION COVER STORY ON THE BATTLE FOR FIRST PLACE BETWEEN PHILIP MORRIS AND R. J. REYNOLDS. INCLUDED WAS A PIE-CHART SHOWING 1972 AND 1982 MARKET SHARES. IN THAT I0 YEARS OF COMPETITION, LORILLARD WAS THE ONLY COMPANY WHICH DID NOT GIVE UP ANY TERRITORY TO THE TWO BIG GUYS. IN FACT, WE GAINED A FRACTION. I SUBMIT THAT THIS IS NO MEAN PERFOR/%%NCE IN SUCH A COMPETITIVE ARENA, PARTICULARLY WHEN YOU CONSIDER THAT WE SIGNIFICANTLY INCKEASED PROFITS DURING 8 OF THOSE i0 YEARS. IN FACT, DURING THOSE i0 YEARS, OUR DOLLAR VOLUM--~ DOUBLED A~ND OUR OPERATING PROFIT TRIPLED. WERE IT NOT FOR A CHANGE TO LIFO IN 1974, OUR PROFIT WOULD HAV~ BEEN UP IN ALL l0 YEARS. MORE IMPORTANTLY, THIS YEAR-TO-DATE, ON A REAL BASIS, WE ARE INCREASING OUR MARKET SHARE. NOW, IT IS MY PLEASURE TO INTRODUCE BOB AVE, EXECUTIVE VICE PRESIDENT-MARKETING, WHO, AS MUCH AS ANYONE ELSE, IS RESPONSIBLE FOR THAT PER2ORMANCE. BOB -- C. H. auclcj~

"(B&W) PROTECTED BY.XIINNESOTA TOBACCO LITIGATION PROTECTIVE ORDER Z Mr. J. Robert Ave Presentation at the Maxwell Seminar Richmond, Virginia June 9, 1983

Z Thank you, Curt. And thank.you, Jack, and Lehman Brothers Kuhn Loeb for inviting us to spend a few minutes with you today. Curt has offered to answer any questions you may have of the status of our parent, Loews. And he has shown you a special view of Washington through the eyes of a leading tobacco industry executive. I am now going to try to give you a look at 5orillard - a feel of Lorillard - and again, without a lot of numbers, tables and charts. From your.active schedule Tuesday evening and all day .E;.~.~ yesterday, I suspect you have a fairly decent idea what our friends in Winston-Salem think of the cigarette markeU. ~_.:~ You most likely have a better idea of what RJR thinks ~_ than we do. And I'm certain you all know that a standard pack of cigarettes has only 20 in it. And Century, 25. However, the answer to the key question on Century is yet to come. _~.:~. It's not appropriate for us to co~ent on that. We're not economists; we're not philosophers. And I've said before marketing expert is a contradiction in terms; so we're not those either. However, in this regard we are much like the Chinese philosopher-economist who in 1910, some 20 years after the French Revolution was asked, "What do you think of the effects of the French Revolution on that natlcn? And internationally? What do you draw now 20 years later?" 539004219 His reply was simple, certainly, and, perhaps profoL~!. He said, "I think we'll have to wait and see."

tB&W) PROTECTED BY MINNESOTA TOBACCO LITIGATION PROTECTIVE ORDER That pretty well describes our comments on 25 pack cigarettes, but that's really not .at all a typical Lorillard position. "Wait and see" has notbeen a Lorillard by-word in its modern history. Two years ago, I showed you a number of projects that failed. But we were trying and perservering. We weren't waiting and seeing. I didn't show you this. (SATIN) And that's succeeding. And succeeding well. I'll talk about that in detail in a bit, too. The first point about Lorillard in this time and with this management is that Lorillard is not a "wait and see" company. Lorillard is a "do and find out" company. And if we're going to be criticized for doing, hooray for that. We'll take the criticism for the positive action rather than the comfort inthe passive avoidance. We'11 fail with some, but we'll succeed more than most. Almost half our revenues are derived from products that were not on th@ market a short l0 years ago. Our little cigar and smokeless tobacco business are "on budget", each maintaining about a 10% share in their respective markets, each well managed and each returning a fair profit to the operation. While that is good and true and has aided the company in attaining eight successive years of record profit contributions to our parent, Loews, Lorillard is, in fact, a cigarette cor.pan.v~ That is our major line of business. And I'm going to speak about and show you our major brands - the Kent Family, True, Newport... and Satin.

~ L~'~') .°.°.©TECTE-n 8Y -x!!Y-xEgOT,S TOBACCO LITIGATION PROTECTIVE ORDER Before I go that, however," I'm going to build you a picture of this cigarette industry as it stands todaY. Suffice it to say about Lorillard at this point is that through five months of this year, each and every one of Lorillard's cigarette brands - both major and minor - is exceeding its sales budget...except Newport, and it's only a mere 10+ % ahead of last year through five months. But, we'll get it on budget by year end. And by year end 1983, Lorillard will have increased sales volu~e over 1982 and increased share of market, too. "Comparisons are odious" was first articulated some six centuries ago. Both Shakespeare and Swift ingrained it into common vocabulary. But that's wrong; comparisons aren't odious. Comparisons are basic to the way we all construct data to aid us in business decisions. Comparisons are critical. How are you doing against last year? Last quarter? How is your company doing versus last year? How is this industry going versus last year? And where will it be at the end of 19837 That's what I'm going to show you. (Slides of industry sales through 22 weeks of 1983 which show that compared to the rate of sale for ali of 1982, the industry is 11% behind last year, and that a reasonable projection for 1983 would fall in the range of minus 3 to 5 percent.) In our best judgment that's where the industry will be at the end of 1983. And Lorillard will be doing better than our competitors.

v~d3&W) PROTECTED BY MINNESOTA TOBACCO LITIGATION PROTECTIVE ORDER So if the first point about Lorillard is that Lorillard is not a "wait and see" but a "do and find out" company, then these charts reveal the second point about Lorillard. And that is, Lo~illard generaliy finds out that what it has done has produced positive results. The Kent Family of brands is a perfect example of that. And also a good example of open attitude and change. When here in 1980, I showed you separate advertising pictures for Kent and for Golden Lights and for Kent III. Now that Golden Lights has established itself, we're going to put the Kent name back on the Golden Lights package, alter both the Kent pack and the Kent III pack and embrace a marketing strategy of a tightly knit f~mily of reduced tar brands. That's over 40% of Lorillard's sales volume. Over one-half billion dollars in total revenues and over 4% share of market - 4.1 in 1982. Since each of these brands was introduced intb different market segments at different times, each has been marketed separately to specific target audiences, But advertising and promotional marketing efforts now will be combined for greater presence and exposure for the Kent name. Each of the brands has important demographic and geographic similarities. They also have some differences. Kent is split evenly among male and female users who tend to be 35 years of age and older. Kent Golden.Lights is more female and consumers more likely to be 30 - 49. Kent III is more female and is also more 35+. All three are more popular in city and suburban areas (A&B counties) than small city or rural (C&D counties). But, most importantly, each has a similar, if not same identity in the consumer's mind - and that is embodied best in the concepts of confidence and independence and achievement.

And the Kent brand namedoes have a long and full history. And today it has a single-minded focus, a commitment and an investment intensity that is capable of sustaining and building the franchise for the foreseeable future. Something you can count on. You can, too. And perhaps the third point about Lorillard is what every good horseman knows: When you have a good mount, give him his head...and be sure to feed him the best quality oats you can buy. That's what we are about with the Kent Family. And what are we about with True? True is an interesting case~ It's been around almost 20 years• Virtually every smoker has heard of the brand. Most smokers of any description easily position True in the low-low end of the tar spectrum of brands. It has a plastic mouthpiece which appeals greatly~-~ to some and equally puts off some others. What this means • . in a marketing sense is that True wxll never become a gl~nt brand, because of that difference, True has higher brand loyalty and the sales bottom will never fall out. And True's.~%~ 15% of our business volume. What we are about %;ith True cigarettes is simply creating the most visible advertising possible to stimulate s~okers to re-think the proposition that True is the best-tasting ultra low tar cigarette available. The next part of our business I'd like to address is really a totally different story, a different set of lessons. Two marketing lessons have been carved into the Loril!ard ~ cornerstone from our years of experience on this brand. ~ - 5 -

IB&W) PROTECTED BY MINNESOTA TOBACCO LITIGATION PROTECTIVE ORDER The first is a variation of the old saw, "if it ain't broke, don't fix it". It has the same inherent wisdom.. It takes longer to fix something than it does to break it! And the second is th~ lesson of the'P's. It takes planning, patience, perserverance and perspicuity to make progress and profit. Maybe a lit~tle palmistry, too. The brand is Newport. Today At is 30% of our business and 1983 will be the seventh consecutive year of double digit growth. The picture has not always been that rosy and glowing. It was introduced in 1957 and by the early 1960's had grown into a nice business, four or five years...some growth... some decline. In its tenth year, 1967, the brand was totally revamped - package design...blend...filter. In three years the brand lost over 60% of its business... not only was the volume decimated, great gapping holes emerged in its distribution system in broad geographic areas... by 1970 - 1971, the choices were to throw in the towel and milk it or make one last effort to save the brand. In 1972, the plan to save Newport began. Some of the original elements were restored, the blend improved and an advertising campaign selected. A marketing budget of two million dollars was allocated to be spent in 36% of the U.S The only remaining population areas where Ne~o~ had any sort "of fo~dation...in fact 851 of its sales were in that part of the country. In 1975, three years into re-stage, N~wport had gro~ by ~0l but still short of its heyday volvo. The brand was now showing signs of life in other parts ~f the eo~t~, particularly the Southeast. - 6 -

In 1978,. ~he marketing budget was $10MM dollars, marketing support was in 44% of the U.S. And Newport was back to its original best volume level. In 1982, Newport is actively supported in 88% of the country and it sells 100% more than it did in its highwater mark year of 1965. And 1983 is more geography and greater sales. Planning...the brand has moved in carefully planned stages. over 70% of its marketing effort is on a local basis... the remaining a national overlay. It does most everything differently than the "average" brand. Patience...waiting to move from .city to city like a vaudevil~_~. act, ignoring the urge to go national too quick, too soon. Wait till the time is right to introduce line extensions... Perserverance...Newport appeals to both Black and White. young adults who are the hardest audience to reach with any advertising message...let alone try to get their attention and convince them to switch to Newport. competitors...success does breed imitators and Newport must be at least a step ahead..so far we've managed - 7 - and I think we'll continue.

- (B&W) PROTECTED BY MINNESOTA TOBACCO LITIGATION PROTECTIVE ORDER Today, Newport has a 2.8 SOM on a national basis... not enough to place it in the top ten, but its share ievel in a number of markets places Newport in the top five. And in. New York, Newpo.rt is the #2 brand. In 1972, Newport sold 4.1 billion units, a SOM of .78 . In 1982, Newport sold over 15 billion units at a 2.6 SOM. It took 25 months to ruin the brand. It took eight years to regain its original highest volume level. The past six years have seen a steady double digit growth pattern. Today Newport sells 100% more than it did in its highwater market year of 1965. Tomorrow, Newport will continue to be alive with pleasure at Lorillard. And now Satin. If there is no one passing among you to give you a Satin sample pack, I'm sorry. But those sales people of ours ought to be out shaking the consumer trees to loosen all "only-partially-satisfied" smokers of competitive brands. We're going to do business with Satin. We already are doing business with Satin. And you may already know Satin is the most tangible evidence of both our desire and ability to invest appropriately in a new brand. This introduction is the most vigorously supported and heavil~ funded in Lorillard's history. Which, incidentally, is the fourth poiHt about Lorillard you might wish to carry away with you. If we're going to do it, we're going to do it right. Satin is probably the most tested product and ccncept in Lorillard's history...and for a very strange reason. Things didn't go poorly; everything went well. In fact, everything went too well. From day one it all looked too good.

about t~e product...the concept...the advertising because we couldn't find anything wrong with anything. Not even anything weak with any element. And that was, honestly, a bit frightening. Must be something wrong with something - but there wasn't. Satin achieved over a 1% SOM in its test markets of Milwaukee and Denver within the first quarter of its life there. And as you know, we launched Satin nationally in February of this year. And we're ahead of projected national sales by 4 - 5% right now. Being'ahead of projections is wonderful since projections kill more products than performance. When anticipation exceeds fact~ even good performance gets only a polite smile instead of . applause. But let me take you back in time. About three years ago we saw nascent weaknesses in our brands' positionings. We saw impending softness in our growth of the ~revious years. Hell, since March of 1980, True cigarettes, .~ the pioneer in ultra low tar products, has had to withstand the onslaught of introductions of 20 different competitive packings trying to carve out some niche in that market segment. At any rate, we saw tougher times ahead and set out then, two and one-half - three years ago, to create a cigarette for the ~0's - in Satin's cas~... for the women of the 80's. Our marketing development management and on~ of our advertising agencies thought of offering wom~n sm¢.kers a specially tipped cigarette and christened their conce~= "Satin". They sketched a pencil drawing of z lady added some words, and talked to smokers ebout Sztin a!ez= .with several other ideas.

Z ~ ~B&W) PROTECTED BY MINNESOTA TOBACCO LITIGATION PROTECTIVE ORDER Women liked the idea of Satin a lot. They thought the satin filter would be different - and special. They knew the product would.be smooth and satisfying...and they could easily imagine themselves smoking Satin. So we created a shiny, satiny filter. We developed a very smooth, satisfying blend, we clothed it in an elegant, light, understated package, we took a picture of the product and package and talke~ to women again. After looking at the picture, 50~ of the women committed to trying the product. After smoking the product, 90% said Satin met or exceeded their expectations. Nobody needs another cigarette. But everybody needs some change, something new. Not a major life change, but a little one. Preferably something easily affordable. Everyone needs to feel special sometimes, to feel good about themselves. Everyone needs to dream a little, to fantasize, to escape from hecti~ lives, busy schedules and dailystresses for a few minutes, to just relax and take a "mental break" - a Satin moment, if you will. So we recognized these needs in our advertising. In an advertising test measuring this brand's advertising, Satin broke the standard we've been using for ten years and created a new one. So when we took the brand £o Denver and Milwaukee, Satin's performance exceeded both our projections and expectations; for the first time in recent history we ran out of product and material in about two months. Three weeks after our national launch in February, we thought the levels of awareness and trial reported on a tracking study were mistakes - we thought they were too high; but the report was accurate. We ran a toll free number for free cigarettes and a satin pouch and rewrote the history of toll free numbers offered in print mcdi~ for any product in any category.

Satin is the stuff from which myths aremade. I don't have to embe'lllsh the "Satih Story" because the facts are magical enough. But we didn't just happen on Satin. We worked hard to create it and perfect it. A lot Qf people striving for the best in product, packaging, advertising and sales. And as I said before, this division and parent is more than prepared to invest appropriately and competitively in supporting new product activity. We'll feed the good horse good oats~ And the fifth point about Lorillard we'd like to leav~ you with is this: As action oriented as we ara as individuals - and, hence, as a company - w~ are not impulsive. When the difficulty or complexity of a situation demands a breadth and depth of insight and study to prepare a vector or purpose we will take the time Satin is such an example. And the sixth point about us is si=ply - when it's over, it's over. We don't hold on to things beyond their usefuln ss either as f~ction in the present or as guides to the futur_. don't ook to place blue eople but only to un ersta , ge don't want to repeat failure; ~e want to replicate success. People are our assets.. We believe that the best things in llfe are not things. When it's done, it's done and I'm done. Mr. Judge and I will be happy to answer any questions you may have. Thank you. - ii -

tB&W) PROTECTED BY .MINNESOTA TOBACCO LITIGATION PROTECTIVE ORDER Statement by John Alar Before Maxwell Seminar June 9, 198} Richmond, Virginia Z Z Two years ago when I addressed Lhls group I was extremely optlmlstlc about my company's future. The reason? Brown & Wi111amson had Just introduced an Innovatlve clgarette called BARCLAY, and arrested a flve-year decllne in market share. Two years have passed, and as you have probably read in Maxwell's annual report, 1982 BARCLAY sales were lower than anticipated. Furthermore, our company lost market share in 1982. Considering these rather grim facts, It may come as a surprise to you that I remain quite confident in Brown & Wlllamson's prospects. Is there a basis Pot such confidence? I'm convinced there is. It's almost a platitude -- but not always adequately acknowledged -- that long telm investments usually don't show up as major gatns in the short term. And I firmly believe that in the past few years we have made the investments in terms of people, produce development and manufacturing facilities that will make Brown & Wtlllamson a more dominant force.in the national cigarette market in the next decade. For those of you not familiar with Brown & Willlamson, we'~e the third largest cigarette manufacturer in the United StaLes. We a~e owned, however~ by the largest tobacco company In the world -- BAT Industries.of London, England. Our immediate parent is BATU$, Inc., a holding company formed in

- '~-L~~ -~P-OTECTE-n B~-" .~!!.~NESO~I~O LITIGATION PROTECTIVE ORDER~ - 2 - 1980 to manage BAT's U.$. business Interests. Besides Brown & Wtlllamson, these interests ~nclude AppletonPaper Company and several major retail businesses -- among them Sake Fifth Avenue, Gtmbel's, Kohl's Department Stores, and Marshall Field & Company. Mr. Henry Frlgon of BATU$ will provide more information on these other businesses following my comments. As ! Just explained, Brown & Wtlltamson is pa~t of a major diversified o~gantzation with excellent financial, manufacturing and marketing resources worldwide. Our headquarters are in Louisville, Kentucky, and we have manufacturing plants in Petersburg, Virginia; Wlnston-Salem, North Carolina; and Hacon, Georgia. We also own Export Lea? Tobacco Company in Wilson, North Carolina, which supplies our tobacco lea? needs, and exports to 40 countries around the world. Within an industry notorious for its love of tradition, Brown & Willlamson has consistently been a leader in product development. Over the years we hBve frequently set industry standards by successfully marketing such innovations as menthol flavoring, cellulose acetate filters and premium coupons. we displayed our technical and marketing strength with the entry of BARCLAY into the ultra low "tar" market. Thanks to its unique filter and a bold marketing campaign, BARCLAY ga!~e¢ a 1.~ share of the entire cigarette market within a year of its introduction, making it one of the top 20 selling cigarette brands.

• B&~,~,~ PROTECTED BY .XlINNESO_I'.~TO_B.-XCCO LITIGA]'ION PR()TE(_ [Ix /-i, ,rci~/- i< we certainly expected BARCLAY to continue its upward in market share. But, as you know, that ¢iCn't happen last year. We think there, are some good explanations why 5ARCLAY hasn't Ccne better. According to Maxwell's report, BARCLAY's market snare ~ecrease~ .2% in 1982 -- from a i.}% share to 1.1% snare. dro~ in market share is baseC on what Maxwell repoIts as a ~n BARCLAY sblpments -- from 7.9 Dil!ion in 1981 to 7.2~ billion in 1982. These figures, however, are somewhat mis!eaOing. T~ey ~on't take into account the 1 billion ~ARCLAY cigarettes ~nitially re~uire~ to Fill the Cistritution pipeline. shipments in 1981 were 7.9 billion, as Maxwell reports. when you subtract those i billion cigarettes use~ to stock the ~irst year, the actual consumption of ~ARCLAY inlgBl tur~ out to be 6.9 billion. ~ARCLAY consumption in !9~2 was 7.2~ billion, so consumption actually grew Dy ~40 mi!llcn cigarettes, a .5~ increase. BARCLAY's performance, then, was consiceraD!y stremger the shipment figures might indicate. Nevertheless, it was as strong as we'd or~ginally anticipateC, an~ ! won'~ cony we are dlsappolnte~. We attribute 8ARCLAY's ~isappointing performance to a phenomenon that caught everyone in the U.5. tobacco inCustry surprise -- that is, the recent slow @rowth of the entire l~- "t~z" segment.

PROTECTED BY .xIINNESOT.~, TOB.-~CCO LITIG.~I-IO5, PROTELTIX F_ ~)R[~ER z When we !ntro~uce~ .AR~_AY, the ultra low "tar" segmen: been growing rapi~!y. From a ~% share of all c"garette in !9~, the percentage of u!tza iow "tar" ci;a:entes soi~ inczeaseQ to i0.)~ in 198I. An~ ~e, along with the rest ~ndustry, tCr~iy bel!eve~ tr.at the segment wo~i~ grow at a fairly r~pid pace. However, f~r re~sons we're o~l'/ beginning to un~ers:~c, ~, A the ultra 'cw Cmme~ate!y Bft~: we la~c~e~ -~-~Y, segment ~egan to level off. In :me last year, it :n!y .~, compareO to an average .yearly growth of aDout 2 . Of course our expectations for ~ARCLAY were h!nge~ continueO expansion of the ultra low "tar" segment -- haven't thrown in the towel ~y any ~eans. in snite cf disappointment in t~.e recent .cerfcrzance oF the ultr--_'-, "t~'~_.K segment, we still predict that it will continue to gr~~, ~z~.~~ at a slower pace. An~ a~ it expanCs, B~RCLAY is we!l- ~ positioned to garner a ~is~roocr:~c~e sha-= of tha: ~rz..z- In a remarkably shor~ time, BARCLAY. has firmly es~at' :s-=z ~ itself as the thir~ best-se!!i~g ultra low "tar" • after Carlton and True, so we eviCently have crea~e_~ ~ -:--in of preference. investment for our company. We strongly te!zeve 9ARCLAY was ant

, B,.%~,~I PROTECTED B%" XII\LNESOTA TOBACCO LITIG.%I-ION PRO-FEC FI\ E ~ ~R"I'" Obviously, our competitors are also convinceO that is a success and constitutes a serious threat. They oouiO neither duplicate mot defeat this imgenious product, sO sought other means to OiscreOit the cigarette, claiming t~at its innovative filter coul~ not be accurately measureo for "tar" by the FTC machines. Controversy over this issue iS still alive, so it isn't appropriate for me to discuss it publicly at this time. However, I woulO llke to emphasize that we ~o not consiOer the debate to have had any serious impact on BARCLAY sales. Our research shows little consumer awareness of the controversy, which, in my opinion, is best characterizeO as an intra-in~ustry issue. At this point, I'O like to turn to our es~ablisheO -- KOOL, VICEROY, BELAIR, and RALEIGH. Eac~ of these ~rancs continued a ~ecline in 19~2. This ~ecline is consistent an overall industry trend -- a gradual erosic~ of the marke~ shareof most older bran~s. If you look at the ent!re clgar~tte market, a full third of cigarettes sol~ last year comDrise~ of items that weren't on the market im 1975. ~s know, the market is not growing, so it's apparent that bran~s and line extensions are growing at the expense of of the old favorites.

z PROTECTED BY .%II.NNESOTA TOBACCO LITIGATIO.~ PRO 1-E(_TI% E (>RDE R While we recognize that this trend is inevitable, we still !._~ believe that with the proper marketing and advertising support~]~ an established brand can be revitalized and stabilized. That,$~ why we began new advertising campaigns for several of our olOer=.:~ brands, and the results so far have been encouraging. ~..~. Our striking KOOL campaign, which Oraws on the universal ~ ~ appeal of music as its plat?orm, has been successful in s!owin~0 KOOL's rate of decline ~ ~ Another. brand, VICEROY, had been virtually unadvertised .~._~.~.. two years when we launched a new cam~algn in late 1982. It's ~:~ too early to Judge its success, but so far we're Quite ~',~ o~timistic. ~R ~'" RALEIGH and 8ELAIR are two older brands whose popu!arity~ ~. peaked many years ago. However, we continue to support them, ~ because together they represent 85~ of the COUpOn segment. ~ Coupon savers are a dedicated group, and while the market shar~ = ~'Z' is small, it's stable and worth maintaining. ~ ~ ~ . Meanwhile, a new environment appears to be emerging in the~ U.5. cigarette industry. The introduction of generic ~.~. cigarettes which have gained a 2-i/2 market share, an~ the mor~ recent announcement of the 29-pack, represent a, Quote, value for money proposition.

,B&'~V~ PROTECTED B'f .\[I.~~ESOT.a, TOB.a, CCO LITIG.-~I-ION PR()TELTIxE ~,RDER Each time these kCn~s of ceve!ccments occur in the it represents new opportunities wnicm go ~eyon~ traC!tlcnal market segmentation of the ~n~us~ry. at ~rown & w!!!iamson, we are seeking optimum de~loyment of resources to take aCvantage of these new oppcrtunlties incluc~n~ the ~n~roduc:~on of new products. We know our business well enough to reBllze that we're go~ng to get to the top just Wy working w~th KOOL. If BrOwn Williamson ~S going to gain a more significant share of the market, it's going tO be wCtb new opportunit3es, we that fact, and we're working a~ress~vely towar~ that ~ ~ We've already ~emonstrated our R & O caoaDi!~ties. We've already proved that we have the resources to create Drccucts that are actually techno~og~ca! breakthroughs -- no: just products in new packages. And when I say, we hBve resources, I'm not only referring to B & ~'s extensive 3B~ora:cr~es 3n Louisville. We also have access to t~e worlcwi:e researc~ capabilities of BAT. And, more critically, we have the finahc~al support of our parent, BATUS, in unoertaking new ventures. Brown & WC13iamson has the marketing creat~vlty to Co Justice to a truly Cnnovat~ve product. In t~e ~ast three

z PROTECTED BY 5IINNESOTA TOB.~CCO LITI(~.~TION PROTELTI~ E years, we've improved our marketing capabilities and techniques. We've also increased our sales force by more tb~ 7g in the past year, so that our products will get even more~'~ support at the retail level. All these actions will insure that when we do introduce our next product, we'll be fully prepared to give it the support it needs. Looking towards the future, I'm also encouraged by ~rown Wllllamson's Increase~ success in.t~e international export market. ~hile our international sales OiO ~ecline last year~ 6.~, much of this loss has been offset by local manufacture~ these brands in foreign markets. Also, the volume of U.S ~ exports as a whole ~ecrease~ by i0.99~. The net effect ,~s t~.a~ : cur share of the international export market increaseO Dy i m-_ share point• Furthermore, BARCLAY has been successfully launche~ in Switzerland and has already captured a 2 ~.% share of • market. We've also recently introduced BARCLAY in ~e!gl;n a_~.~ . Holland. We'll continue to introduce BARCLAY in apprcsrla~e=~~ foreign markets, an~ expect continueO ~rowth intern~!:r=, y. I've already touted our innovative achievements it. c.-:e~ct development and marketing, and I should ado manufac:urlr; to that list.

PROTECTED B'f-\IIN.SESO..T.~TC)BACCO LITIG ~,TI(.).% PR() IECTI\ E, )RL~- R At our latest state-of-the-art facility in ~acon, Ceo:gla, .e've put together an unbeatable comclnat!on. High s~ee~ machinery and a progressive approach to the managsment of our human resources have enabled us to increase our efficiency by an impressive ~0%. And working in rotating, mo~u!ar teams, Macon employees have also made significant gains in insuring the high Quallty of all our products. At this point, let me return to the Question I Posed at the beginning of my comments. That is, why ShOuld I be optimistic about Brown & Williamson's future? Certainly during the course of this talk, I've outlined some soCering fac:s about cur recent performance. But I've also outline~ some of our strengths -- in research, in marketing and manufacturing -- that make up a solid foundation from which to grow. And I'm confident that drawing on these strengthS, @town & willlamson will grow in the next decade. We continue to have confiCence -- not only in ourselves, but in the CCntinueO vitality of industry as a whole. There are many who have sounde~ the tobacco industry's death knell for years, but somehow those dire pre¢ictlons refuse to be reallzed. Instead, the inCustry has prove~ :o re Zesil~ent in the face of staggering obstacles, and I'm co.nvince~ it will continue to be ~o.

z PROTECTED BY .~II.N.NESOT.~ TOB.XCCO LITIG.~rIOX PR()[EL 1-I\ E, ~RL~ER - i0 - Last year in particular was traumatic for all of largest Federal Excise tax increase since the 1950s created us. The :! what we believe will be a temporary "hiccup" in ccnsumption. In anticipation of this rather significant price increase, the market at the beginning of the year, anQ s,~i~,,ments thus in ~£83 have Deen !ower than norma~. However, we're trace increased inventories, resulting in shipments which exceedeO actual consumption in 1982. ConseQuently, there was a gocd Qeal of extra inventory that actual consumDtion has not Cecreased as mucm as the shipment figures might incicate. In short, we're not alarmed at recent trenCs -- ~n ~ industry as a whole, or in Brown & Will~amson's own ~erformance. we, too, are resilient, an~ look forward :c realizing Brown & williamson's full potential in the nex: Ceca~e.

B&~V, PROTECTED BY~IISNESOTA TOBACCO LITIG.kTION PRO FELTI\ E~)RDER Eefore ~ax~el! 5e~ina: June 9, 19~3 Ric~monO, Virginia Z~ I am pleased to have this opportunity to join my colleague from .mrown & ~illiamson in speaking with you to¢ay. ~ile ~ArUS Inc. i~ a relatively young coe~any, are probably fam[llar with t~e principal businesses comprise our corporation. Certainly you are a~are of our association ~ith the tobacco industry through @&~ * To~y I hope to p~esent to you a picture of our various nationwide interests. We'll take a close look at inCustry position, as well as financial performance. An~ within t~is framework, we'll focus on a subject of particular interest to this audience -- Brown & Williamson, an~ what its progress means to the BATUS Group as a w~ele To establish a proper perspective, !'~ like to begin s~me backgoun~. BATUS was fcrmed in 3amuary, 19~0, as the ho1~ing and management firm responsible for the major U.S. business interests of our corporate parent, B.A.T In~ustrles p.l.c. Headquartered in London, Eng!an~, B.A.T Industries is t~e free worlO's largest manufacturer of tobacco prcCucts. ~chlevlng sales In 1982 of 11.5 billion -- converte~ at a December 31, 1982 rate of $1.62 to the poun~ -- sales dollars were $18.6 billion. It is Britain's thir~-largest industrial enterprise, with products manufacture~ ~n 77 - countrles. Of ~ts total annual revenues, about 56~

, B&~, ~ PROTECTED BY .\II.~L~ ESOT.~. TOBACCO LITIG..kTIO.'4 PRUFEL TI x E ( ~RD V~ R attributable to the sale of tobacco products. ~ut in addition to tobacco, B.A.T Industries has substantial worldwide holdings in ~etailing, paper, printing and packaging, cosmetics, and the home improvements industry. This diversity of Investment Is also reflected in the operations of BATUS Inc. To give you a perspective on the relative size of 8ATUS within the B.A.T organization, BATUS represents about 30% of worldwide B.A.T Industries sales, about 3~% of its assets and about 47~ of its operating income. So even standing alone, BATUS is ~ulte a sizable and successful business 8ATU5 is organized by three industrial divisions -- tobacco, retail, and paper. Brown & williamson is, of course, the tobacco ~ivislon. Paper is represented by Appleton Papers, ~. headquartered in Wisconsin, and is the world's leading producer of carbonless copying paper. In retail you will readily recognize several members of our group -- Saks Fifth Avenue, Gimbe!s Department Stores and Kohl's Department Stores. includes ~. B. Ivey's & Company, Frederick I Nelson, The Crescent and Breuner's Furniture Stores. The combined annual sales from this group of businesses Increased 20% in 1982 to $~.9 billion, placing BATUS amor.~ ~-,e nation's I00 largest corporations. During 1982, one of major events of the year for BATUS was the acquisition cf

,B&$V~PROTECTEDBY~IIZ~ESOT.~TOB.~CCOLITIGATIO~PROTEcFI~E~)RL)~R Marshall FlelO & Co., which inc!~ental!y, was the ~gest acquisition ever ma~e by the B.A.T Orcu~. In an organization of this magn!tu~e an~ sc~pe, diversification is a major source.of strength. ~ur !9~2 results are testimony to this statement, with cAT,S :~stla~ :he highest profits in the history of t~e company, at $214 millizn for the year, total net income increasec 19~ over 1981. This achievement is especially significant in a year which was characterized by extremely ~eoresse~ economic con~!t~cns in the U.$. and aroun~ the world. NOw let's take a look at our performance in eac~ of :~e threo industries. Since John Afar has ccvere~ muc~ of the tobacco site of cur business, my remarks on the subject will be relatively brief At Brown & Wil!iamson sales revenues increase~ by nearly to $2.1 bi!l~on in i~2. This growth in sa;es was acccm:anlec ~y an increase in operating iacome ~y a~ou: aS~ to ~3~5 mi!llz=. Over a a-year period, starting in 1979, the ccm~oun~ grow:~ rate in sales revenue from toba:co is 9.5%. Similarly the compound growth rate for operating income is !5.S~. Capital expenditures inthe same period -- excluOing outlays for trademark acquisitions -- amounted to $310 million. ~ost ~? this ~as spent to expand and improve productivity at the ~a:: Georgia, manufacturing facility. By the end of 1982, this plant was operating at close to full capacity and mace E&~ °-= most efficient producer in the inCustry.

z , B&~,~,~ PROTECTED B'~ .~II.N.NESOT.k TOB.-~CCO LITIG.~,TION PROTEC I1\ E ~.~RDER - 4 - YOU have already heard of the unusual factors affecting the tobacco industry last year. In spite of this environment and the resulting confusion in the market, B&W was able to maintain its position as the nation's thlrd-largest cigarette manufacturer. Like its industry competitors, B&w's results benefitted from the series of tax-lnduced price increases late In the year. However, lower inventories and reduced manufacturing costs have contributed signiflcantZy to higher earnings. th3s effort'to achieve greater proCuctlvity continues in areas of B&W's operations. We are confident that Brown & willamson can achieve long-term growth. And thls confidence is enhanced by the strength of our resources and those of B.A.T InCustries. Turning to our retail business, the entire retail inC~stry was affected in 19B2 by a poor economy. The BATUS Retail businesses were affected by these con¢~tions, but, with t~e add~tlon of Marshall Field & Co., retail ended the year sales of $3 bi111on, and operating income of $I(I mi1!ic~, which represented an increase of 27~ over 1981. Because of the poor economy, the base businesses cf acquisition G~mbels Department Stores, Saks Fifth Ave~ o Koh1's Department Stores, Kohl's Food Stores and Thimbles C~ Specialty Stores -- registered a sales decrease ~n 19~2, ":,n ~ income, ~ropplng 2~.8% to $9~ mill~on. ~

:B&$$.~PROTECTEDBY3IINNESOT.kTOBACCOLITIG.kTIONPR~)FECII\E~RDER In terms of the trend, our retail picture is brighter. Starting from the base year, 1979, retail sales have improved year-to-year with a compound growth rate of 16.7%. Operating income has also improved year-to-year and its ccmpound growth rate is 27.}% Without Marshall Field, those rates woul~ have • been 4% and 6.1% respectively. The Marshall Field & Company acquisition added to the breadth and depth of the Retail Division. It broaOened the Division's geographic base, giving 8ATUS stronger penetration into the national retail market while adding new dimensions in goods and services offered by BATU$ Retail to the American public. We remain very positive about this acquisition and because of Marshall Field, 1982 was a very exciting year for the BATUS organization. As I am sure you are aware, because of the improving economy, the retail industry has made a strong comeback in and the BATUS retail businesses are fully sharing in this recovery we are optimistic that 1983 will be a very positive year for the ~ATU$ Retail Division. Another extremely bright spot ?or BATUS in 1982 was the Paper Division. Appleton Papers occupies a unique posit~on in the paper industry. Its key products are designed to serve growing business forms and information-processing industries, plus the more mature graphic arts and specialty converting fields. Meeting these needs, the company did better in !as: year's poor economy than most of the paper industry.

z PROTECTED BY 3II.NNESOTA TOBACCO LITI~.-kI:IO.~ PRL/I-ECTI~ E ~)RbhR --- - 6 - AS the world's largest producer of carbonless paper and the industry leader in the manufacture of thermal paper, Appleton possesses particular strength in its innovation ability to efficiently manufacture specialized products. Sales revenue rose slightly in 1982, reaching $412 million. This was a 2.1% increase over sales in 1981. Operating income showed significant improvement in 1982, to $64 million. This represents a 7~.1% increase over that of 1981. steaOily at a compound growth rate of 7.9%. Operating income, ~,.~..~ though, essentlaliy flat in 1979-80 and 81. The big improvement came in i~82, producing a compound growth rate of 21.1%. This was the result of two factors. First, there was a conscious effort to reduce the sales of lower margin mill grace 5 paper products and to concentrate on the sale of higher margin ~_., coated paper products. Second, the flow-through impact of several years of capital investments yielded significant productivity improvements. Thus, capital expenditures over the four-year period amounted to $116 million. ~.. No~ that we have reviewed the three 8ATUS Divisions, I Over ~he four-year trend sales revenues have i~creased would like to call your attention to the BATUS consolidated record results for 1982 and key trends for the last four years.

,B&kV, PROTECTED BT 3IIN~ESOTA TOB.kCCO LITIG.kTIOX PR()rELrlx • Sales have increased from $).9 billion in !979 to $5.5 bi111on ~n 1982. The 19~2 sales reccr~ of $5.5 ~i1!ion represents an increase of 20~ over 198!. }9% of ~he EATUS sales was from Tobacco, 5~g was from Retail and was from Paper. • Operating income which amounted to $)~0 million in i~79 has increased dramatically to $990 million in 19~2. Of this record result, Tobacco contributed 62~, Retail 27~ and Pacer • Operating assets have increased from 52.1 billion in !979 to $).7 billion in 1982 with 59% of the 19~2 assets ~eing Retail, )1% Tobacco and 10% Paper. As ! sai~ earlier, the BATU$ net income ~or 1952 amounteC to $21~ rail!ion, an increase of 19% over 1981.- we were obvlously very pleased with these results, esDecia!!y slnco_ eivisions contrieuted to the increase with improved coeratlag results. We are also please~ with the growth an¢ strength of th BATUS dlversiflcation program. I am sure you have notlceC the annual report an~ from the information we have reviewez today, that a number of key elements such as the non-tobRcco sales, operating income an~ operating assets been trendlng upward over the last three years. In ~982, of the BATUS sales, )8% of the operating income and 69% cf operating assets were from our non-tobacco businesses. T-:s

Z , B&V,) PROTECTED BY MINNESOTA TOB.-~CCO LITIG.-~TION PRO TECTI\E, )Rl~t-. ~*: higher, and in most cases much hlgher,.than the Civersiflca:icn percentages of our two major comoetito~s. While obvious!y the return (o~erating income as a return on assets) for our non-toWacco businesses is not as attractive as the return on the tobacco business, I think it is significant to Doim~ out Turning to :he f~nancing of ~he business, cur operations have consis:en~ly generate~ funds tha: give us consi~era~!~ flex~i!ity. For ~me I~80-~2 period, cash ~rovi~e~ by c~erations amoun~e~ to cver $i ~i~!!on. After the manca~ry expenditures of $240 miili~n for eeDt an~ lease o~liga~icms, ~iscretiomary fun~s 3n excess of $~00 million remalne~ available for use to pay clvicenos ($2~ mill!~n) cr for cacital ~×:enci~ures ann accuisitlons. that the return on the BATUS non-tobacco businesses was ,~!~,erE'-~ than the return achieveO by either Re?nolOs or Phillo Morris 'i~ ~ each of the 1~st th:e~ yeBzs CoZ thelz non-tobacco buslc~sses.~ ~ T~e final point I wisa to i11us~rate reflects the st--~ E'Z Capital structure in the BATUS balance sheet. The c.:-~si'izn~ of our ~ebt an~ equity is an follows: ~ ~ $2~i million or about ~0% in shcr~-term Ce~t ace ~ long-term Oe~ due within cne year; million or about million or about 27% in long-term suoor~i~at~z zez:: * and $i,091 million or about ~2% in shareho!¢er e:.i~,.

, B&X~,, PROTECTED BY MINNESOTA TOBACCO LITIG-~TI()X PROTELTI\ E ~)RbER z - 9 - The subor~InateO ~ebt -- the $663 million -- however, is Dayable to afflllate~ comDanles an~ can be consi~ereO a~!tlonal equity. $o, BATU$ is well posltioneO to continue its future prog:am of capital investment. In regard to capital investment, slgn!f!cant fun~ing commitments will continue to be ma~e for all businesses. It is well-re~ognlze~ that the U.5. market for tobacco products is no longer growing in total market size; however, as John Alar po~nte~ out in h~s remarks, new oDportun!ties ~ontinue to develop. The Tobacco Division is responsible for the majority of profits generate~ by the BATUS business an0 we will support ~rown & Willlamson in its efforts to exploit such opportunities.

,B&V~) PROTECTED BY .~II.~NESOTA TOBACCO LITIGAI-ION PROTELTI'~ E ( )RDF R z Remark~ for Hugh Cullman Group Executive Vice President Philip Morris Incorporated Maxwell Seminar Richmond, Virginia June 10, 1983

• B&~,~,I PROTECTED BY SIINNESOTA TOBACCO LITIGATION PROTELTI\ E ~)RDER -2- Good morning Ladies and Gentlemen and welcome. On your way here you crossed the James River. If instead you had traveled downstream some 70 miles, you would have come to Jamestown. There just 371 years ago this spring James Rolfe planted the first crop of Spanish-type seeds -- nicotiana tabacum -- which were superior to the native variety. Rolfe also had the good sense to marry Pocahontas and guarantee peace with th~ Indians. Rolfe's first crop helped save the early colonists from starvation and extinction. From that first harvest Rolfe sent a few hundred pounds of tobacco for sale in London, making the Golden Leaf our first cash crop. Last year Virginia sent abroad for sale some 132,000 tons of leaf plus another 67,000 tons of manufactured tobacco products...mostly cigarettes. America's oldest industry remains its most consistent. economic performer. Tobacco companies rank.among the highest in profitability and the lowest in import penetration as do beer and soft drinks. Note: All brand.share data are based on MSA statistics.

Z ,B&V,, PROTECTED BY .\II.N'.~ESOT..k TOB.kCCO LITIG.kFIO", PR()rt..L [I~. E (.,RL~ER -3- Tobacco offers a refreshing contrast to most other American industries. Foreign cigarettes are virtually unknown to American smokers while our brands are enjoyed by smokers all over the world. The lion's share of those cigarette exports last year came from this and other Philip Morris plants. And that's what I want to talk to you about this morning...Philip Morris' role as a multinational company. We operate mainly in three major agricultural based industries...in cigarettes with Philip Morris USA and Philip Morris International ... in beer with Miller Brewing Co .... and in soft drinks with Seven-Up. We supply pleasurable low-priced consumer products to millions of people daily. Our core businesses are high turnover, high volume industries. At retail each of these thre~ businesses has annual sales in excess of $23 billion and considerably more billions around the world.

z Z Z 7 ,B&V,) PROTECTED BY MINNESOTA TOBACCO LITIG.~,I-IC)N PR(9 lEt 1-1x E. ,~:, :.. -4- Our two other companies, Mission Viejo and Philip Morris Industrial also derive revenues and income from the land. At the time of your last visit two years ago, Philip ranked 45th among the Fortune 500 companies in sales and 30th in net income. In 1982 we climbed to 32nd in sales and 18th net income. We are the second largest publicly held cigarette company in the world. All told Philip Morris has close to i0% o£ the~ 4.6 trillion unit world cigarette market. The bedrock of our corporation remains Philip Morris OUr domestic cigarette company. ~M USA is a huge company its own right If it were independent, PM USA with well over . $4 billion in revenues would easily rank among the 200 laches.=. companies in the United States . even after subt~actln~ excise taxes. PM USA continues to outpace the US industry. Since were last here PM USA's sales have advanced by over 13 Z~i:on units. That's almost 2 1/2 times the gain for the whole industry. Those sales of course translate into increasec market share.

,B&~V, PROTECTED BY MINNESOTA TOBACCO LITIGArIO> PR() FELTI\ E ~)RL)ER -5-- Abroad, PM International sells even more cigarettes than PM USA ... 243 billion units in 19B2 versus 204 billion units for USA. PM International's market share is now 15% or higher in over ~0 countries. Abroad we sell more than 140 brands in 170 countries and territories. And our 22% indirect investment in Rothmans extends that coverage even further. We are also America's biggest cigarette exporter ... every second cigarette sent abroad is ours. So much for the moment fo~ cigarettes. In beverages just last month Miller Brewing signed a distribution agreement with Sapporo Breweries ... Japan's second largest brewer. Starting July 4 Miller High Life will go on sale in the greater Tokyo metropolitan area which accounts for nearly a third of the Japanese beer market. Miller has also started selling in Canada and we see opportunities ahead in the international beer markets. In soft drinks 7 UP last month introduced its new no artificial colors, no artificiil flavors advertising campaign. You probably saw some of those headlines and TV coverage.

PROTECTED BY SIINNESOTA TOBACCO LITIGATION PROFEL FIx E ()RDER _ --6-- 7 UP is building on last year's no-caffeine campaign whic helped increase unit sales and which has been emulated by soft drink manufacturers. .~.~c To play in the big leagues ... to play the global game need more than just marketing prowess. You have got to makE " global investments. We have. Since 1977 we have spent nearly $4 billion on capital. expenditures. We are in excellent physical shape whereve= operate. Fully 70% of our worldwide fixed assets are less 5 years old. How many other companies do you know that ca make that claim? z X A good chunk of that capital spending -- roughly 40% -- went into expanding our breweries. .-- In cigarettes we've expanded our presence both domes~call~=~ Z_. and internationally. We've built and expanded plants lien. ~.~" Merlo, outside Buenos Aires to Wes~ Berlin and Bergen in the Netherlands. Our Bergen plant is the largest in E~:3pe and well situated to supply the Dutch, French ~nd I~alian markets.

, B&V,~ PROTECTED BY .MINNESOTA TOBACCO LITIG.%TION PROTECrI\ E ~ ~RDk R -7- Here in Richmond you drove by our new Operations Center. In Louisville we're modernizing our primary processing facilities. And in Cabarrus County, North Carolina our latest factory opened in January -- on time and within Dudget. We continue to build our cigarette business on innovation, on the creativity of our employees and on our unique ability to make products of superior quality. To maintain an edge over the competition we've added an extra component ... our ToDacco Technology Groop. We set up the Tobacco Technology Group early in 1980 as a corporate staff department based here in Richmond but reporting directly to Clifford Goldsmith, President of Philip Morris Incorporated. As Clifford once put it, "The Tobacco Technology Group is charged with making the best use of all available technology ... whether developed within Philip Morris or outside ... in order to capture the opportunities provided by our continuous and rapid growth."

PROTECTED BY ~II.~(~E~bTA TOI~'A(_'(O LII'I-G.-~TIO\ PR(21-ECTI\I-L 1~7, -8- For example, if there is a solution in Switzerland to a problem in Canada the Tobacco Technology Group's joD is t9 ~ transfer technology to best solve that problem. Remember the fire that destroyed the factory of our Philippines licensee? We could have been out of the market there for many, many months. Instead the Tobacco Technolqg~ Group coordinated a worldwide engineering effort that had th~ plant up and running in 17 weeks ... truly a remarkable worldwide team effort. What does all this mean for us? It means ... the application of the late~t and be~t technolocv ... available wherever we operate. It means new products designed to suit national, regional and international consumer tastes and preferences. It means adaptability to cope with proDlems and exploit opportunities in the cigarette industry. Now, as to the more signficant marketplace develop.-..e.q'-3 ~n ~q 1982 ... ~

,B&~~ PROTECTED BY 3IISNESOTA TOBACCO LITIG.~,TI()~, PR() TECTIX t-~ ~ ~<,' ,i.. i< -9- ... AS you know, the single biggest factor affecting the cigarette business in 1982 was last August's congressional action that increased the federal excise tax 100% ... doubling the federal tax on cigarettes from 8~ to 16~ a pack. we didn't want our consumers to suffer what the auto industry calls "sticker price" shock, so PM USA raised prices in stages last fall before the tax went into effect on January 1. Our aim frankly was to lower consumers' resistance and to discourage consumer stock piling. You'll remember that wholesale accounts faced paying the extra tax on all merchandise on hand at the end of the year. How did it all work? We need several more months to de~ermine consumption. At this point our share of market has never been higher but industry unit volume is still slightly soft. I will focus this morning on market shares since these a:e more reliable indicators of brand and company performances ~nan volume figures.

and full flavor segments. .-~ -lO- First let's look at changes in the trends of the low In low tars we only include those packings which have always been advertised at 15 mgs. or less. Low ta~s continue to grow but at a slower pace. Full flavors continue to lose around but at a slower pace. In fact hath categories ar~ converging at a market share' of a:=:oximately 46%. The significance? Fewer and fewer full flavor s=oke~s are switching to low tars. So most low tar ~ackin~s are no longer gaining share. Likewise, the ultra lows ... the zero to 6 mg. of tar ... are s~abilizing. Between 1977 and 1981 they climbed f:cm ~ :o a 9.8 share. Last yea~ ultra low tars inc~ease~ jus~ a share point. Whatls important is that growth was due entirely to the introduction of Benson & Hedges 100s Del~xe :itraLights.~'~ ~nother key factor in the marketplace is the persis-_z: e.vg.-ansion of 100MM cigarettes ... up from a 26 share in '7~ to .'~- 35 share this year. ~- • os~ a

, B&~,'~~ PROTECTED BY $II.N.\ESOTA TOBACCO LITIGAFIO>, PR() FEt[I\ E ~RDER The 120 millimeter brands account for about 2 snare po~n~s, and" are relatively flat. The big change last year was the significant drop in new product introductions. Only nine new packings introduced nationally -- the lowest number since the low tar boom began in 1976. Add it all up and you find Philip Morris USA in 1982 reached a record 32.8% market share. Ours was the largest gain of any cigarette company ... for the 16th successive year. one in 7 smokers switched to a different brand or packing, the smallest switch rate since 1976. Still, eight million smokers did switch. Who are they? More are women ... more are likely to be under 35 ... but the7 are similar to all smokers in terms of race and income. Last year four of the five leading packages attracting switchers belonged to Philip Morris: Benson & Hedges 100s Deluxe Ultra Lights regular and menthol and Marlboro Lights ' Kings and Marlboro 100's.

, B&~,~,~ PROTECTED BY 3II.N.NESOTA TOBACCO LITIG.-kTIO.X PROTECTI'~E ~ ) RDER -12- Two indications of Philip Morris' vitality: We thrive in a competitive environment. We have strengthened our position in every ma3or demographic group. ~ Let's look at those demographics. o -__ • , BY SEX. Since 1977, Philip Morris has enhanced its • o'= wDmen by some 7 points. And remember, women smokers ~ are a faster growing market segment than men. PM increased its penetration in every age We overwhelmingly dominate the 18-24 yea." BY AGE. group. with a 50% plus share. What's more we are ma~ing ~-~ great strides in the 25 to 34 and the 35 to 44 a~e =~, ~_. categories. ~. BY RACE. We're gaining among blacks and our progress among the Spanish-speaking is dramatic. Hispanics are the fastes~ growing minority in country. And you Know,

,B&W) PROTECTED BY .MINNESOTA TOBACCO LITIGArIO.X PROTELTI\ -13- NOW our individual brands. First Marlboro. Marlboro continues to be the industry share and growth leader. The brand increased its overall sha~e to 19.2 percent, a 0.9 share gain. Marlboro also maintained its leading share among men ... among women ... among those in the 18-24 year-old age groups ... among the 25-34 year-old age groups ... and among Spanish-speaking smokers. Mar!boro's success comes from the solid base provided by Marlboro Red and Marlboro 100's, the two full-flavored packings. ~dd in the strong growth of Marlboro Lights and you see wly the Marlboro brand keeps increasing its share each year. MarlDoro Lights for ~nree straight years has ou%paced ~very brand in the industry and in 1982 became the largest selling low-tar brand. Behind Marlboro we have strong promotion activities, including the Marlboro CountrY Musiz Tour. Let's turn now to Benson & Hedaes. Benson & Hedges was one of only three brands that impro':ec share in 1982 growing from 4.4 to 4.7, the largest snare gazn the brand has enjoyed since 1978.

PROTECTED BY 3II.~.~ESOT.% I'OB.%CCO LITIG ~[it).~ PRt)[EL Fix E Both Benson & Hedges' Full-Flavor and Lights packing~ declined modestly in 1982. But that share loss was primarily and was more than compensated by our successful due to launch just a year ago of Benson & Hedges 100s Deluxe Ultra In its first year Benson & Hedges 100s Deluxe Ultra ui~h~s has gained over a one percent market share. Benson & Hedges. Deluxe Ultra Lights is the most successful Ultre Low-Tar line extension ever and drew fewer smokers than expected from other Benson & Hedges packings. We developed the Deluxe Ultra Lights introductory program with its distinctive box to generate maximum awareness and trial in a cluttered marketplace. It worked. Merit ... the largest selling free standing low-tar Drand in the industry ... was flat at four and a half pe=cenu. that blame the firming-up of the full-flavor category ... traditionally.the source of new Merit smokers since i~5 For -~ o introduction in 1976.

,B&$V~PROTECTED BYMINNESOTA TOBACCO LITIGATION PROTEcFI\ E~RD~.R VirGinia Slims. Last year Virginia Slims matched its previous years' performance at two and a h~if percent. The brand probably has fully tapped the growth potential of Virginia Slims Lights introduced in late 1979. Also in 1982 VirginiaSlims faced intense competition. virginia Slims continues to sell well in the black community with a 2.7 market share overall and a 5.2 share among black females. Last January Virginia Slims renewed its involvement with women's tennis sponsoring a worldwide women's tennis tour which includes virt.ually every major women's tennis tournament. Publicity for the Virginia Slims tour has been extraordinary. Now the new comer ... and I mean comer. In February, we introduced Players in test markets in Portland, Maine and • Phoenix, Arizona. The response was so outstanding that we expanded distribution in mid-March to cover 20% of the country. Then on April 18, we went national with Players King Size Select Blend and Special Menthol.

,B&~,~.~ PROTECTED BY .~IINNESOTA TOBACCO LITIGATION PROFEC71",. E Players is a new and exciting cigarette with an apDealing. '~;~, upbeat image. Players is targeted towards smokers who are ~C constantly on-the-go, like to have lots of fun, and a sophisticated and stylish cigarette. ~'~ We put Players in an exciting, styiish and innovative and we're backing Players with exciting, styllsh and innovati~Z advertising. We think we have a winner. On July 5 we go national with Players 100s select blend special menthol. of 1982 and the exceptional distribution actions by some manufacturers and most wholesale=s, what happened in the five months of 19837 O.K. Now, given what happened to prices in the la~er firs~ First of all industry shipments compared to the same peri~ last year have declined between six and seven percent. But the real question is what's consumption?

,B&W~PROTECTED BYMINSESOT,,~DBACCO LITIGATION PROTECTI\E{)RDER We believe consumption is o£f only abou~'.two to four percent. The difference between shipments and consumption is accounted for by inventory adjustments. In other wo~ds, year-end loading is being digested. Now, let's look at Philip Morris International and our worldwide cigarette operations. Around the world as in the U.S. there are some tough challenges. Frankly, since we met here two years ago conditions abroad have been tough. Unit sales worldwide ... excluding the United States -- for the entire industry were up only fractionally from 3.8 to 3.9 trillion units. During this two year period PM International also increased unit sales, but in 1982 for the first time in many years we experienced a small decline in unit volume. We weren't alone. All major international tobacco companies also lost volume.

,B&$~) PROTECTED BY MINNESOTA TOBACCO LITIGATION PROTECTIXE ()RDER -18- Abroad we face as many different marketing challenges, regulations and restrictions as there are countries. In some countries we face total advertising bans. In others there are government monopolies. In still other countries we face both. Abroad, too, consumer tastes vary markedly from black to oriental tobaccos ... and from straight Virginias to American blends. Our share of US exports ke~ps growing... Some good news. up from less than 40% five years ago to over 50% last year. Now I'd like to look at several market developments that affect our business and then move on to take a closer look a~ some key markets for Philip Morris International. First of all taxes. Taxes are as big a problem abroad as they are in the States. We've faced big increases in countries as far ap~,'~', a~ Britain, Nong Kong, India and now West Germany. In Germany a market price increase in January 1982 '.'as followed that June by an enormous tax increase. Overnz.~.:, ~: consumers saw the price of a pack jump from the equivalen~ of ~ $1.20 to $1.50. "~

PROTECTED B't .MINNESOTA TOBACCO LITIGATION PROTEt_TI'~ E (~RD~R -19- Several things happened including: Severe price cutting, which is reducing industry revenues. A big jump in roll-your-own cigarettes. This category increased in 1982 from the equivalent of 12 billion cigarettes to 18 billion cigarettes and accounted for close to 15% of the West German market. How did we fare in West Germany? We adapted quickly ~o what consumers wanted. Today Philip Morris' marke~ share is higher than before the price cutting and our newly launched is already in the Top Ten selling Drands. Right now we nave test a Marlboro roll-your-own. We don't like what's happened to taxes and prices in Germany. But we've adapted ... met the challenges and moved ahead. Canada and Australia also continue to be challenging markets. However, we're more than holding our own ... and again we're optimistic about our future in those two countries. These are mature markets, and our growth must cone from increases in market share. We have good products an~ ~:~ people. Hence our optimism.

In Asia we continue to build substantially. The growth of Marlboro in Hong Kong and Singapore and Lark in Japan all helped our unit volume in 1982. In Japan we have made some progress in getting better access, but more top-level negotiations will be needed to give us satisfactory access to this huge market. For the long term we see great potential the Japanese market and PM already has over 75%~of the import In the European Common Market our buslness is good, with large increases last year in Greece and the Benelux. We're tbe~ ~ major'non-monopoly marketer in Italy and we did exceedingly well in France. In France we picked up two market sha~e points to a 12 ~ o share Marlboro had the highest increase in uni~ voluble of t.e~:. French smokers also are switching to low tar brands. Tzat ~ I segment Increased about seven and a half per cent, while ?.~.~lip Morris Super Lights, our leading brand in this category, by almost 35 percent.

~'~ m~nu~uoos~p ~ ~qD ul -s~Ims ~un ~mol uo s~o~H 5uo:%s .e~ue~ pu~ oTlqndaa ~ u~u~oG ~q~ ~open~ u~- - p~onpo:~u3 o~ Z~ • amnlo^ ~3un u~ ~s~=ou3 "Xu~d~oo ~o~Id puooss ~q~ ~^o P~I =no p~uap~.~ ~ mu~ '~61 u~ ~'~£ p~o~ 8~qs ~m =no pu~l=sz~$ ul

,B&~,v~ PROTECTED BY .~II>,NESOTA TOBACCO LITIGATION PROTECTIVE ORDER -22- Philip Morris' indirect investment in Rothmans ~ International continues to benefit the company. Rothmans ~ results have improved substantially over the past 18 months. ~ ~ The European Economic Community has raised objections to our ~'~-. investment in Rothmans but this was not unexpected. The number of years since any decision may be appealed by either ~ party. ! could go on. much to cover in one meeting. Let me just say we remain unabashedly optimistic about the world cigarette business. But 170 countries and territories are too ~.~.i Philip Morris is well positioned. We're big and getting bigger in three key consumer industries. We have high quality products that meet and anticipate consumer demands everywhere we operate. We have excellent resources -- our plants and equipment are in place. We have excellent technology and research ... our Tooacco5 Technology Group is up and operating worldwide. ~

PROTECTED BY $II.NNESOTA TOBACCO LITIGATION PROTECTIVE ORDER We have excellent people. We're highly skilled .,. we're eager to seize most every marketing opportunity ... and we're adaptable. We've proved that by growing steadily and consistently over the past three decades Philip Morris has prospered and grown during every period of tumult and change in the marketplace. We've geared up to meet the challenge of change. Where others merely cope with change, we prosper and grow. Now Hans Storr will review for you the financial side of our operations.

,25 30

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(~()NI,'il)I,.'N'I'IAI. I~liNNI,~.~;()'rA T()I|ACC() i.rrI(;ATi()N PHILIP MORRIS U.S.A. 18-2437.6 51.1] -I-14.2 25-3429.7 38,.0 -}- 0.3 35-4421.1 25.5 + 5,.5 45-5420.4 23.3 + 2.9 55+ 15.5 18.7 + 3.2 (.~jj!lUF, l,l,:~q ~tl!,~doD aoJ p,~l,~.~lOS pug UO!lp.,~!l!'l oooeqoj, elO.~Oi~U!lA[ u! ~ ,~'~! ,~q poonpo~,! lUOtunoo(1 jo ,(doD) t&~ti '~il poonpo.u :NOI,I.VDI.i.rl

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[PMlllLI]I , A WORLD.CLASS PLAYER • ! Products,|oreve~ consumer need • Efficient plants and equipment ,•,Worldwide technology and research • "Skilled and-adaptable people • ,Three decades of growtli • Challenged by change (sjj!itt]el~/(q ~u!Kdo,-') aoj pal3ZlaS pin: Uo!le+~!l!'l o3av.qo.L v+lo.~mtu!w u! ,Nk <'4'tl Xq paanpoa,i luamnaoQ jo gdoD) A~tl ,{tl PaanP°a,l :NOIJ,VDI,I, ri 3~!00~

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PROTECTED BY .MINNESOTA TOBACCO LITIG ~,FIO. GOGD MORNING LADIES AND G~NTLE#IEN. AM VERY PLEASED TO BE HERE WIT~ YOU TODAY AND APPRECIATE THE OPPORTUNITY TO IELL YOU A~OUT PHILIP MORRIS. • 1982 ~k~RKED ~EE 29TH CONSECUTIVE GROWTH IN REVENUES A~D EARNINGS. • WB.~T ' $ PARTICULAPJ.Y IMPOP, TA~NT TO NOTE TEAT SINCE 1953 ~EVE~UES EAVE GROWTH AT A COMPOUND F~ATE OF 13.3% WHILE EAIININGS GR~.~ AT A RATE OF 15.7%. I

- ~B&~,~,~ PROTECTED BY .~II.~.~ESOTA TOBACCO LITIG.~,I-IO~ PRO FEC FIX E ~ ~'RL,~-.N THE 1982 RECESSION HAD A SEVEkE EFFECT ON U.S. INDUSTRIAL CORPOP, ATIONS AS RiVEhUES OF TME FORTUNE 500 DECLINED ON AVERAGE OF 5.7% WHILE PROFITS FELL 27.1%, ~ERKAS OUR REVEI~UIS INCHIASiD 7.6% A~D PKOFITS INCKEASED 18.5%, OUk 1982 KESULTS WOULD MAVi BEEN EVEN 5E~TER IF hOT FOR THE DNFAVOP~ABLE CDP.KENCY FLUCTUATIONS WHICH kEDUC!D OUK OPERATING KEVkNUES BY $2~0 MILLION AND OPi[~A~ING IN6~ME BY $~0 bILLION. 2 2

,B&W~ PROTECTED BY .MI.N.~E$OTA TOBACCO LITIGATION PROTECTI'~ E ~RDELR IN TEE CURRENT FCRTUNE 500 DIRECTORY ~'E ARE RASPED 32ND IN SALES AND 18TH IN NET INCOME ~ICM IS ~UITE AC~O~LI~IEDT CO,SIDelOnG ~E WERE ~TED ~ISTH IN S~ES ~D 137TH IN N~T INCOME T~ FIRST FORTL'NE 500 LISTING IN 19~4. IN FEBRU~Y OF ~HIS Y~ ~'E OUR COhMON STOCK DIVIDEbD 20.8% TO AN ~NU~ ~TE OF $2.90 PER S~E. TEIS ~ED ThE 16T~ CONSECLTIVE ~ OF SVCH IhCRE~. DURING THIS P~IOD DIVIDE~DS ~VE GRO~ AT AN AV~GE OF 19.2% Y~Y.

PROTECTED Bt MI.X.XESOT.k TOBACCO LITIG.-~TIO.', PROTECTIX E t,RL)k1R 4:: .~.~.. .-. 4 OUR 1983 FI.kST QUARTER RESULTS MA2~ED TI~E 75Th CON$ECUTIVE QUA~RTER OF INCRF.ASES OVER THE COMPAKABLE PERIOD OF THE PEECEDING YF.AE. OUR EEVEBDES WERE UP 9.5% OUR PRE-TA.X INCOME WAS UP 17.5% OBR BET F_AYd~INGS WEEE UP 10.9% ~D E~NI~GS PER SHARE WERE UP 10.4% 4

,B&~V, PROTECTED BY ~II~.XESOTA TO,B.~CCO LITIG.-~rIu~ PR{)FF..L i-i', E ~)RL~ER ~ Z MOVING TO OUR SOURCE AND APPLICATICN OF ~UND$ STATEMENT: IN 1982 WE UTILIZED $1.3 BILLIQN, CO~$1$TIRG PRIF~kRILY OF CAPITAL EXPENDITURES ($921 MILLION) AND LIVI~END$ ($302 MILLION). O%~ OPERATIONS PF, OVIDED NF_A.ELY $1.2 BILLION IN ~Ut~DS ALMOST 90% OF OLI~ FUNDS RE(~U IIKLMENE S. 5 5

PROTECTED BY .~IINNESOTA TOBACCO LITIG.~,TIO.' PRO IELFIX E : >RI~ER FUNDS FROM GPI:ILATIONS ADVANC!D 16.9% o_~ IN 1982 AND IN THE PAST FIVE YEARS HAVE RI$~ OVER 21 i/2% A~NDALLY" TI'LA'T'$ OV~-R ThR~EE PERCLNTAGE POINTS ~ASTER ~~ ~ET ~Z~GS. TH~ H~GHe~ G~O~TH ~Te FOR ~i.~ Ft%DS F~OM OPE~TIO~S IS L~G~LY B'= AT~IBU~ABLE TO ~PID I~CR~S~$ IN D PRECIATION ~D DEFIED INCOME T~ES, ~ICH IN TU~ ~E GhNL~TED ~GhLY BY C~IT~ EXPEhDITL~iS . LR C~

Z z ,B&W) PROTECTED BY MINNESOTA TOBACCO LITIGATIO\ PROTEt_TI\ g I ~<i,i-.R ," ~ IN 1982 CAPITAL hXPgNDITDRES TOTALED $921 MILLION. OVER THE PAST FIVE YEARS, WE HAVE SPE~T NEARLY $4 BILLION ON ADDITIONS TO OUR FIXED ASSETS. AT YE~'END 1982, ABOUT 70% OF OLR ASSETS WERE LESS THAN FIVE YEARS OLD WHICH WILL ADD ~'O OUR COMPLTITIVE STRENGTH IN THE YF.ARS AEF.AD. WE ME PROJECTING CAPITAL EXPENDITURES OF APPROXIMATELY $3 BILLION OVER THE NE~XT FIVE YEARS. 7 7 ~J

, B& ~,~, ) PROTECTED BY .%II.N%ESOTA I-O.B.#CCO LITIGATIO\ PRO FELTI'~ E ( ~ RDF. R OUR TOTAl. ASSETS RAVE GROWN 19% AhhUAI.L¥ OVER THE LAST 5 YEARS TO $9.7 BILLION AT ~E.EK-EI~D 1982; WHICH IS SIX T~IE~ GRkATEK T}hkB OUR ASSET BASE TEN Y E.EY, S AGO.

,B&W~ PROTECTED BY ~IINNESOT.k TOBACCO, , LITIGATION PROTELTI\E ()RDt-TR -.~'~ 9 ThE AI~OPTION OF LIfO ACCGDN~ING fOR INVENTORIES IN 1980 WAS A REfLECTIr~N OF O~R CGNSERVATIVE M~THOD OF ACCOUNTING AND ~PROVKD THE ~I~ Of GDR ~NI~GS. OV~ A I/g BILLION DOL~S OF ADDITIGN~ COS~ (~'ITH OVE~ 80% ~E~T!~G TO TGBACCO L~F) ~VE FLOWED T~GUGM OUR I~ICOME STATeMeNT ~INCE TNE ~OPTION 0F LIFO. DESPITE TMIS REDU~TI6N IN ~R~-T~ ~NINGS LIfO ~S BEEN A ~OK SG~RC~ O~ ED~DE ~CR FhlLIP MO~IS DUE TO R&DDCED T~ PA~SNTS AND INT~EST SAVINGS. ~ ~ II~CR~SED OUR ~ ~OW BY $286 MINION SINCE TEE INCEPTION OF LIFO. 9 9

,B&W, PROTECTEDBY.XlISNESOT.-~TOBACCOLITIGATIO.NPR)~EL ~I Es,RD~-IR ALSO DNDER LI}O WE CF.~KGED OL'~ 19E2 ~EAk-~ND CIGARETTE IhWENTORIES TEE ~'~ ~T~T OF THE J~U~Y I, 198B ~CISE T~ IhCR~SE, ~Th~ T~ WAITING 198B. REIS C~GE G~ ABOUT ~40 IN ~Ki-~~ lhCO~ WAS SPE~ EVENLY OV~ ThE ~I~ ~D FO~K~ QU~ OF 1982. ~ WE NOT ~Di THIS ACCURU~ 1952, CLR 19~3 PKE-~ I~CC~ WOULD ~Vh 5£KN ~V~SELY EF~ECTED BY T~ iXCISI T~ IECK~SE. i0 i0 L~

, B&V,~ PROTECTED BY ~II.~.~E$OTA TOBACCO LITIG.~I'IO.~ PRO rECTI~, I-~ ~)RD~-.R ~-~ :" 11 11 OUR CO~IYANI ADOPTED }AS #52, FOREIGN CURRENCY ACCOUNTING, IN 1982. UNDER FAS 52 ASSETS AND LIABILITIES DENOMINA~'ED IN FOREIGN CLP.KE~CIE$, ARE TRANSLATID AT CURRENT EXCHA~.GE KALES, RA~HiK Tlu%h AT CtIKENT AND HISTORICAL RATiS. ADDITIONALLY, KELATID TRA~SLATIGN ADJUSTMENTS AP.E KEPOITED AS A SEPARATE CGMPOI~ENT O~ STOCKHOLDERS' EQUITY AND hOT INCLUDED IN DE~EK~INA~ION OF NiT EAk~INGS, EXCiPT FOR hIGMLY INFLATIO~AR¥ COLN~KIES. THE ADOPTION OF FAS ~52 ~ITIGA~ES IMPACT O} CLq~RENCY ~LUCTUATIGhS ON REPORTED iAR~ INGS.

PROTECTED BY MI.~NESOTA TOBACCO LITIGATI().~ PROTELTIX E (,RDER

,B&V,~ PROTECTED BY 31I.~.'sESOTA TOt3.~CCO LITIGATIOn, PR()TEL[I AS A RESULT OF OUR DEBT M~A~AGEMENT POLICY, OUR INTEREST SENSITIVE DEBT DECLINED TO A~OUT 20% OF TOTA/. DEBT AT TP~E END OF 1982 COMPARED WITH 40% IN 1977." ThIS KELUCTION IN ThE I~TEREST SENSITIVE PORTION O~ DEBT kAS SAVED OUK COMPLY MILLIONS OF bOLLAKS ;~ND hAS PROVIDED US WITH CONSIDERABLE FLiXIBILITY IN TI/E MANAGEMENT OF OUR DEBT. ALSO, I SHOULD POINT OUT THAT THE AVEP, AGE INTEIiEST RATE ON OSK DEBT 13 13 o.9. ~0

...... ~,., .~ r_~) l.k ~'OBACCO LITIGA l'IO.X PR~.) I-EC T~~. E ~ ~R '~. 14 IN 1982 ~AS A2~ROXI~k~TELY 9% COMPARED TO 7-1/2% IN 1977; A ~IODEST LIFFEKENTIAL CGNSISiKIhG OSR HKAV~ LEVEL OF }INA~CIhG A/qD A SURGE IN I~,EEREST iATES OVER THE PAST FIVE YEARS. 14 14 II l

PROTECTED BY .%IINNESOTA TOBACCO LITIG kl-IO~, PR~)rE,_ :IX E, ,Ri.:., 15 DURING 1962 WE RECEIVED PROCEEDS O~ $396 MILLION FROM NEW bEBT OF $338 MILLION (OR 85%) WAS DENOMINATED IN SWISS ~RAZCS OR DEUTSCHE M~S. TI~ESi PGKEIGN ISSUES KA~GE IN MAIUKITY FROM SEVEN 10 TWELVE YL~RS AZD CARRY AVE}<AGE COUPON RATE OF A.BOUT 7%. 15

,B&~V, PROTECTED BY MI.~NESOTA TOBACCO LITIG xTIO.~ PR~_; FEe TI\ E ~ ~RL~ER 16 OUR LONG TERM FOREIGN BOP, f~OWINGS AT YF_AR-~,I~D EOTALED $695 MILLION. THE INTEREST ~TES ON T~ESE ISSUES ~E LESS TI~ ONE ~F YME ~TE ~'~ %'OULD OBTAINED ON EQUIV~E~T T~ U.S. FI~A~CINGS • THIS INTEREST DIF~E~ENT~ ~S T~S~EED INTO AN II~TEREST SAVINGS O~ eVER $~7 MILLION THUS F~. I SHOL~D ~D T~T THESE ~OREIGN BG~OWINGS ~E FELLY ME~ED GN TME B~RCE SMELT BY ASSETS ~OMII~ATLD II, T~E S~E C~NCIES. 16 16

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.B&k~l PROTECTED BY 3IIS.~ESOTA T(~B'ACCO LITIGATION PRO [E(_FI'~ E ~RDklR OUR LINES OF CREDIT FOR THIS YEAR TOTAL $I.8 BILLION DOLLARS. THESE LOW COST LINES PROVIDE A SUBSTANTIAL CUSHION fOR UNEXPECTED EVENTS. }UkTMEM LINES A/ik hEEDED, ~HEY CAlq BE OBTAIhiD ON Sh(~KT h(~TICE. IN 1982, DUE TO OLR STRONG CASH OUR TO%AL DEBT ODESTANDING DICKEASED BY $58 MILLION. EHIS PkA/~KED Th! FIRST SUCH KEDDCTICN I~ ii YE~S. AS A ~ESLLT, OEk DEBT/I~UITY RATIO IMPRGViD FROM 118 TO 102 -- WELL BELOW OUR 18 18

19 TEN-YEAR AVERAGE OF 109. WE-EXPr.-CT CONTINUED I}IPROVEMENT IN TBE YEARS AHEAD. WE HAVE ALWAYS FELT COMFORTABLE WITH A RELATIVELY HIGH LEVEL OF 5EBT DUi TO TKi CONTIhUITY OF O~K LA.RNINGS AND TMI STABILITY OF OUK IRDUSTKIES. MOKkOVEK, A UNIQUE CKAKACThKIEYIC OF OUK BALANCE SHEKT IS ThE LAKGi qUANTITY AND BELOW MAR/<KT VALUE OP ITS TOBACCO L.KAF IhVENTOKY. OUR TOTAL DEBT AT ThE EhD OF 1983'$ FIKST qUAKTIK APPKOXL~TES T~E MARKET VALDE OF ALL OUR INVENTOKY. 19 19

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PROTECTED BY ~II.NNESOTA TOBACCO LITI(;.~IiO~ PRO let II\ E ~ ,RDIiR IN SLI~L~RY, OUR BALANCE SHEET ~ANAGE~IENT PROGRAM PROVIDES NOT ONLY STRONG BALANCE SHEET, BUT INFLDENCE ON OUR REPORTED ~INGS AND CASH ~LO~. THIS PROG~ ~S BEEN SUCCESSFUL IN NIN~IZING ~ME SIZE ~D CO$T O~ OUR ~ENDS RE~5IR~hNTS, ~XINIZING OUR RETSKNS ON ASSST$ AhD EQUITY ~D FKOVlDING A S~OhG BASE F0K T~ }UR'LKE GKOWTH OF OUR 21

,B&~V, PROTECTED BY .~II.~NESOTA TO, B,-~CCO LITIG-kTIO\ PR() FECTI'~ t-~ 22 BEFORE WE FIELD YOUR QbESTIONS, I WANT TO EEPH~IZE THAT A CO}IBINATION OF I~CREA$1NG CASH FLOWS A/~D SUFFICIENT P~T, PKGP~TY ~D E~blPMENT IN TO ~DLE N~ T~ C~ACITY NEEDS OFF~ PHILIP NO.IS A DEGKEE O~ FINAN~ ~IBILITY ~D STKENGTH IT ~ ~OT SEEN DDRI~G I~S RECINT ~P~SION YE~S. WE CONTIN~E TO FOK LOW COS~ }IN~CING OPPOKTUNITIES TO KEDUCi T}iE C05T OF OUR ~ISTING DEBT. 22 22

, B&;v, PROTECTED B Y ~IINNESOTA TOBACCO LITI(3.x I-ION PROTELTI\ E ( ) RD E, z PHIL%P MOILEIS IS INDEED SOUI~DLY fINANCED A~D ~ELL I~OSITIO~ED TO TAIKE AI3VAI%TAGE OF THE GEG~TH WE SEE A_hLA~. hOW }ibGll CULL~AN A~D I WILL AI~SWER YOUR QIJESTION$ . 23

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EDWARD W. WHITTEMORE .. Chairman of the Board and Chief Executive Officer We are delighted to be here in Williamsburg and to have this opportunity to talk with you about American Brands. Although our Company is based in New York, we are very much at home here in Virginia. The ~:nerican Tobacco Company ~.as a number of operations in the state, including a modern r~se~rch in Richraond, and Acme Visible Records employs nearly 700 people in Virginia. " Today, I am going to give you a glimpse of the omDor'.unities in some of the growth areas i~ which American Brand~" is well positioned. Then Charlie Mehos, our Executive Vice President and Chief Financial Officer, will give you an analysis of the financial strength of the Company. American Brands has had excellent growth through the years. That strength was again evident this past year. Although net income • did decline $5 million, or i%, to $381 m±!lion, the comparison was distorted by the presence ~n 1981 of $41 million in non- recurring tax credits. Pretax. income moved strongly ahead in 1982, and in a year in which unemployment and business failures ~. ~'~ were at the highest levels in 50 years, seven of our busine~sses had record sales, five had record net income, and ever.v si.~cle line of business was .Drofitab!e. "' ~.~ Furthermore, we did particularly well compared to the other lar=est corporations in America. In the new Fortune 500 survey, Ame.~ican Brands net pro.it ra..k mo~ed up eigh. posi.ions from" nut, her 46 to number 38. We are quite capable of sustaining our growth, and ~he reason is ~'~ that we have kept pace with changing times Let me explain. • • . We started as The American Tobacco Company a premier consumer _.~< produc:s marketing company selling packaged goods• These packaged goods were cigarettes with great trademarks - Tareyton, Carlton, Lucky Strike and Pall Mall. In 1966, we began to diversify into areas where we could apply the skills that had made us successful. Our first acquisition was Sunshine Biscuits. Now, what do we have in Sunshine? We have PaCkaged goods with great names like Krispy, Wheat Wafers, Cheez-It and Hi • ,~ ~ ..... I II II II II I I i I II

,B&V,~ PROTECTED BY MINNESOTA TOBACCO LITIGAI'IO.\ PROTE(.IIX E ()RDER ',Ce went on to accuire s_z~l more packaged goods companies great names, such as - • Jergens Lotion - The #2 hand lotion . . Jim Beam - The #i bourbon in :he world . . . • :.faster Lock - The #i padlock in the world . . . • Swinqline - The =I stapler in the world, and • Titleist - The ~i golf ball. In Enqland, we have the #i cigarette brand, Benson and Hedges, and the ~I low tar, Silk Cut. So today, we are a group of related packaged goods companies wi stron~ market positions. As we have expanded, we have developed new skills, enabling us to move into prcmis'.ng new areas• Over the past few years, service businesses have emerged as the fastes~ growing segment of ~he economy. We now have two premier service co.-.~panies. Franklin Life, a superb, profitable marketing organization, and Pinkertcn's, the ~.I secur~,ty and investigative services company in the world. Now, Pinkerton's. We are a Company of great names and ~ra-e ..... .Ks and Pinkerton's is one of the best known names in America. that has enjoyed ccmzound qrc-wt~.= years. a nu..~ber of our other ozera:izn--, ~he premier firm in an industry exceeding 14% for more than ~en Pinkerton's also fits well with including - • Master Lock, which makes padlocks to protect property . • ~i!son Jones, which sells paper shredders to protect information, and • Franklin Life,. which sells insurance to protect families. The future.mossibilities are enormous, and the key ingredle.:n Zs an American Brands forte - aggressive marketing. We already have a strong service business in Franklin Life,-whlcn has been an outstanding success for us. With Pinkerton's, we have substantially broadened our presence in this promising category. So we are bullish on Pinkerton's, and we are ccn:izu- ing to move aggressively to direct our assets into areas with exceptional promise. - 2 -

.B&~,PROTECTED BY~IINNESOTA TOB.XCCO LITIG~[IO\ PROTECTV, E~R:~.k Our acquisition program has been extremely successful. Acquired businesses now account for well over half of operating income. They also contribute significantly to our pool of talented executives. Since we beqan our acquisition proqram in 1966, we have invested more than $2 billion in new operations, including $200 million in just the past 12 months, and we have the resources to continue our aggressive program. We will continue to take advantage of promising, profitable opportunities. We are also investing for growth in our existing businesses. So our Company is changing as we deploy our growing assets. T~ see that change, let's look at the growth in operating income since 1965, the year before we began diversifying. (See Chart In that year, we had operating income of $157 million, which came solely from domestic tobacco. As we have diversified, our dozes- tic tobacco business has continued to grow impressively. Over those years, operating income from domestic tobacco more than doubled. Last year, growth was especially robust, with income up 14% to $344 million. International tobacco income came with our 1968 acquisition of a U.K. company, Gallaher Limited. In 1972, international tobacco contributed $65 million. By 1982, it had reached $120 million - a great new source of income and cash flow. Tobacco growth has been impressive. Now, the fastest qrowinq segment is nontobacco operations. Operating income here has increased nearly fivefold to $318 million in the past ten years, and now represents 41% of the total. The ~,~erican Tobacco Ccm?an/ Let's review our operations in more detail, starting with The A~erican Tobacco Company. You have already seen the increase in profits from domestic tobacco. This growth has been accompanied by a very heavy stream of cash, which has provided, and will continue to provide, funls both for further diversification and to fuel internal growth. American's strong profit increases have been achieved despite unit decreases for our older brands. However, higher selling prices, along with faster equipment and greater productivity, have increased profits. Pall Mall Red year after year remains the top selling nonfilter cigarette and is fifth among all brands. Pall Mall provides tremendous cash flow that will continue for many years. - 3 -

PROTECTED BY 3II3.~ESOT.% TOBACCO LITIGATION PROTECTI~-E ORDER Tareyton dominates the cPmrccal filter market, with a ~9% snare. Ultra-low-tar brands, that is, those with 6 milligrams of tar or less, now account for !0% of industry sales. Carlton was the pioneer in this market. This sector has become hotly contested. Five years agD, there were just five brand franchises with ultra-low entries. Today, there are 19 franchises with 60 entries. But despite the competition, Carlton remains on top as the industry's ~i ultra low tar, with a fifth of this market. Half the cigarettes sold today are in the 7 to 15 milligram low-tar range. This sector represents a great opportunity for American Tobacco. That is why we introduced the most researched cigarette in our history, a product with one of the greatest trademarks in America. I am referring to ~he new Lucky Strike Low Tar Filters - LS/MIT. We have been selling Regular Lucky Strikes for more than 65 O years. When researched, we expected that older smokers would a remarkable 97% of young adult smokers responded to the trade- mark. Americans reme~ber Lucky Strike as a winner, and they respect its fine tobacco heritage. :~ow we have a grea~ succes- sor - Lucky Strike Low Tar Filters - The filter says "aild"! The name says "taste"! This new cigarette is presently offered in lust one style, kin: size, with a tar level of 12 mil!iqrams, in box and soft pack. It has been available in half ~he country for some months and is currently being rolled ou~ in another quarter of the ceunzry. N3w, how is it doing? From the start, the new Luckies have exceeded our expecz~tions. In this enormous market, a single share poin~ represents more than $170 million in manufacturer's sales. Among 12 ccmpe:l:i'.'~ brands introduced in the past three years, only one has more than a third of a point per s~yle, and some are much Icier. While this new product arena is intensely comDetitive, the . uncontested champion is Lucky Strike. With better than a share in half the U.S. market, Lucky Filters is. ~I, placinc firmly among the most successful introductions in years. Chart II.} With this great franchise, there is excellen~ opportunity for expansion. The rollout is continuing, and expec~ full national distribution hy the third quarter. that, we are in test markets with a 100-millimeter version, an/ the early results give us further encouragement. So make no mistake about the strength of our co~itzent to :he U.S. ~obacco market. We have superD brands, a strong, prcf .... "--' --.

,B&$~,, PROTECTED BY 311S.~ESOTA TOBACCO LITIG.~TIO.X PRUTE(_-I-I\ E ' ~,R~,~ ~ business, and the firm resolve to develop and def_..d that bu~c- heSS with vigor. Before leaving domestic tobacco, let me comment on two rez~nt deve!cpmen~s - the growth of generics and. the announcement ~v R. J. Reynolds of Century, with 25 cigarettes to a pack. Generics, of course, have been a factor in.a wide variety cf consumer products, from soup to napkins. The success of these entries varies widely. Lower priced cigarezte brands have also been tried from time to time. For example, a brand called Eagle, priced 50 cents a carton below regular brands, was tested and withdrawn by Liggett in 1976. Today, generic cigarettes sell for about $1.75 less per carton than branded products and have about 2.5% of the market. The pricing for Century, the new Reynolds brand, is equivalent to a discount of about 84 cents per car:Dn of 200. That is an 11% reduction, or hal~ the 22% savings offere4 by g@nerics. Now, what does this mean to us? Brand loyalty for our leading brand, Pall Mall Red, and for Strike Regular, both nonfilters, is especially high. Century is not available in a nonfilter version. Carlton also enjoys high loyalty, with its positioning as "The Lowest." Furthermore, we have been running strong consumer price promotions on Lu=ky Strike and Carlton. The Lucky Strike promotion actua!i? brings Luckies below the regular selling price for Century. We p!an continue these successful marketing programs and expect strong performance from these brands. Let me also say this. I know many analysts have been concerned about the impact of generics and the new Century brand on the industry. Despite some dire opinions, we think :here is abso- lutely no reason for panic. Quite the contrary, we expect this industry to remain profitable and attractive. Furthermore, with regard to vulnerability, American Brands shc.ui~ not be compared with the larger tobacco companies since, as in Chart III, we derive a substantially greater portion o ating income from nontobacco businesses. Far more than or Philip Morris, we are reaping the benefits of a very success- ful diversification program. Over the years, as our competitors have entered such capital intensive industries as shipping and beer, we have been expanding in the area we know best, profita=ie consumer products businesses, which are no= capital intensive. Furthermore, as consumer products marketers, we expect and ipate change. We watch the marketplace very closely. Tas:e~ volatile, so we always hedge our bets. We are well prepared for all possibilities. If consumer preferences change, American Brands will be ready. - 5 -

PROTECTED BY MINNESOTA TOB.-~CCO LITIG.krION PRO rECfP,E ¢~RDER International Tobacco Now, international tobacco. Last year, 15% of operating income came from international toba~_-~ co, virtually all of that from Gallaher Limited. This well- managed company has had spectacular success since we acquired Despite the weakness of the British pound, sales and operating 5" income have increased impressively in dollars. In sterling, th~ growth has been dramatic. Last year, Gallaher's operating incc~--. reached ~91 million on sales of more than B2.2 billion, and the~ just completed their best quarter ever. Paced by our Benson and Hedges, the top selling brand and our brand in the U.K., Galla-~ her's market share g~ew to 30% last year and has continued to = grow this year. As Chart IV shows, Gallaher has a strong pcsi-o" tion in each of the tobacco categorles. Furthermore, they at_ = well-positioned ,or contlnued growth, especlally In the low-tare cigarette segment, .where their share is up ten pbints in the two years. Silk Cut is strongly established as ~he ~op sell..g~.~ low tar in the U.K. o We have the means to move tobacco products very efficiently with our 435 Forbuoys stores so'fling newspapers, candy, station~r~ and tobacco. We also have a chain of 636 Tobacco Kiosks in hic~ t--{~ff-[~ ~ations, and we own 47,000 vending machines, a the total in the U.K. ~ - Silk Cut is also being developed as an Internatlonal brand and ~s~ available at selected outlets in the Unlted States. We have worldwide rights for the name Silk Cut and believe this brand h#~s_ the potential to develop significant international vol~-..e. Gallaher is also diversified, with more than a quarter o~/ i'_s operating income now generated by nontobacco businesses. ~. Nontobacco Operations For American Brands, the greatest growth through the years has come from nontobacco operations. Operating income last year was $318 million, 41% of the tzt~l, up 122% in t~e past five years and -qual to our entire operazcz~ income just ten years ago. While nontobacco operations were affected by the severe recession, there were notable exceFtzzns. Sales and profits for Titleist Golf, Sunshine Biscuits ant ~eam Distilling were records. In the U.K., Gallaher's Optical 3rzup ~q had record results in sterling. ~2 Financial Services Our biggest nontobacco operation is Franklin Life. - 6 -

, B&',~,) PROTECTED BY MINNESOTA TOBACCO LITIG.klION PRO FECl-IX E ()RDER Franklin has had a long, profitable record. It has performed well since acquisition in 1979. Last year, it generated opera=- ing income of $130 million. Franklin is a strong, sound finan- cial institution. It has a $2.4 billion inveszment portfolio and no Hebt. The life insurance.industry has been undergoing a period of great change with new kinds of competition. This has affected near- term profitability of many life insurance companies. Even Franklin, which has great resources, is not immune. However, their operating income declined lust 3% last year, in spite of all the problems• Over the past three years, Franklin has grown impressively - • Premium and net income are both up 13% . . • • Insurance in force is up 21% . . . • Investment income is up 31%, and • Operating income is up 33%. Furthermore, Franklin generates tremendous cash flow - $159 million last year. This year, operating income rose 3% in the first quarter and the basic progress indicators of sales, insur- ance in force and premium income continued to move ahead. With conditions still volatile, it is difficult to predict results fzr !993, but we are encouraged by the early signs. Looking further ahead, with a seasoned management team and great financial strength, Franklin is well-positioned to take advantage of the tremendous opportunities in financial services. Distilled Beveraces Now, the James B. Beam Distilling Co., makers of Jim Beam Bourbon. Operating income reached a record $33 million last year. In 1982, ~ Jim Beam registered its 14th straight year as the world's best 5.~ selling bourbon~ selling over four million cases! Jim Beam also ~.~" gained market share and achieved a major milestone, according :o ~ two leading analysts, by moving ahead of Seagram's V.O. as the #4 distilled spirit in America. Beam's phenomenal marketing success was broad-based, with near!? every product line showing growth during the year. For example, Spey Royal Scotch was up 25%, and Kamora was the fasuest grcw~n~ coffee liqueur in the U.S. Beam also has many other produczs, including vodka, cordials and the very popular Mr. &-Mrs. ' .... Bloody Mary Mix. -- 7 --"

Z Beam is off to another great ':,ear. First-quarter results were records, and unit sales are ~ubstantia!ly ~head of last year. Food Our major food company is Sunshine Biscuits. Sunshine had another outstanding year, with record sales and profits. The flagship Krispy, Hydrox, Cheez--~t and Ch'i.D-A-Roos~'~ brands continue to do well. Sunshine's aacressive and successful marketing programs include~. ste p,a- p aaGertising a .d lower ?ri:ed package si es sandwich cookie line• Sunshine has led its industry_ in =rc'.¢tho for two of the past years, and they had a record first quarter in 1983. ~ardwa Two majc ~rowth areas are hard:care and office products. :Vhi!e both these segments were-adverselyaffected by the recession, each fiquras prominently in our future Hardware sales last ,.,ear. were $174 million. We have three entries - Mas~er Lock . . . • W. R. Case, makers of fine cut!er?~ and Sw~ngline, which pioneered the .-.ass-marketed electric staple gun. Master Lock has further broadened ~ts excellent distributi:n making significant inroads into mass-merzhandising re~axl cna~n~" with an aggressive in-store campaiTn. Master continues emphasize new ~roducts with siqn~.:icant promise, including high-security shackle bike lock. Office Products In office products, our worldwide revenue exceeded $300 mii" for the first time last year. This is a huge industry in we have four major entries. Wilson Jones has been making business forms, ledger outfits, filing supplies and binders for 100 years• Our c~her major companies are Acme Visible Records, Swingline, and Ofrex, a acquisition in the U.K • One of ~.he most promising ~rojects is underway at Wilson Jc.-.es - B -

and Acme Visible. Rapidly declining computer costs have ~ade i: possible for businesses to automate many of their zradi:icnal recordkeepinq systems. So it was logical for Wilson Jones and Acme, longtime leaders in manual business systems, to create a business computer division. The division offers microcomputer software, hardware and related supplies, which perform many of the jobs now done by manual systems. The automated systems will be sold by Wilson Jones through 12,000 "Main Street" dealers and Acme will provide systems tailored for its 70,000 direct custom- ers. Some aspects of this program are still in test. However, both Wilson Jones and Acme are selling business forms, computer furniture, software and related produc~s right now! Late last year, Swinqline introduced two major products - the 767 manual and the 5000 electronic staplers. The 5000 is a revolutionary cartridge-type which staples 5,000 times without reloading - ideal for heavy and frequent usage, such as airlines, hotels, photocopiers and stores. Initial re- sponse was so overwhelming, Swingline has the largest backlog in its history. Ofrex has given our U.S. companies access to distribution in world markets for their U.S.-made products and in turn, Xilson Jones is now selling Ofrex's premier line of shredders in :he U.S. Shredders are a growth business, with industry sales up [~ times to 550 million in the past decade, and Wilson Jones is fast becoming a leader. In the U.K., Gallaher's Ofrex unit is :he leading office products distributor and manufacturer, with sales of nearly $i00 million. It is the largest stapler manufacturer in the U.K. and has signi; icant worldwide sales. CFt!ca! ...Goods and Services In optical goods and services, we now have the largest in Europe Dollond & Aitchison, a subsidiary of Gallaher, has had rap~_d growth. Sales last year reached $117 million and rose 33% "-n sterling. Dollond & Aitchison has 462 outlets in the U.K., "4 Italy and, as a result of a 1983 acquisition, 35 in Spain. ~-. the largest chain of its kind in all three countries. Golf Another anchor of our packaged goods business is Titleist Pinnacle golf products, sold by the Acushnet Company. Titleist had another banner year, with. record sales and income, and i~ just had the bes~ first quarter in its - 9 -

PROTECTED BY .XlINNESOT.-k TOBACCO LITIGAI-ION PRO 1-EL FIx' E t~RDi- R Last year, we sold a record 72 million golf balls and cap=ured more than 40% of the U.S. market. New products figured nently in their success, including a more durable and longer distance Titleist DT, offered in orange and yellow, as well as white, along with three new Bulls Eye putter models and a line Pinnacle clubs. The Andrew Jercens Company The Andrew Jergens Company had sales of $120 mi!licn, a rezzrd. Profits were down last year, but moved uo well in ~he firs: quarter of 1983. Jergens has always been a leader with new products, and year was no exception. New products doing extremely well inc~u~ Lotion-Enriched Liquid Soap, Aloe & Lanolin hand lotion and Fiesta deodoran~ soap. S u~ a ry In summary, we have come thr3ugh a period of severe recess~-n stronger uhan ever. Last year, all our lines were we fared very well indeed, because the s~reng~h of ~.erican Brands is our diversification, both geoqraphical!y as well as products and markets. Our Company now stands on many legs and all of them are Now, what about the future? The force that dri~-es our growth is aggressive markeuing. (Various high-izpac: com.~ercials were shown at this point.) As to 1983, we are off to a fast start. Although econ==!: continue to be somewhat mixed, evidence of recovery con:izue~ build. American Brands' net income moved ahead z.__ :hzn million in the first quarter and sales, operating inccne pretax income were all at record levels. We are optimistic about the future. We have excellent in many major markets, we have exciting new products acrz~ board and we will continue our successful acqulsition - l0 -

PROTECTED B'f .~II.~NESOTA TO,B..kCCO LITIG.kl'IO\ PR(~ CHARLES A. Executive Vice President and Chief Financial Officer Z Z The financial story of American Brands has not changed since our last meeting with you here in Williamsburg. The successful redeployment of assets, while maintaining our co~men~ to existing lines of business, is continuing. Since all of the capital being generated by The American Tobacco Company cannot be employed productively ~n the domestic tobacco business, management has embarked on a program which has trans- formed American Brands into a diversified consumer products company, consisting of 14 major subsidiaries and divisions. Nontobacco companies have been acquired, which produced $308 million of operating income in 1982, while qeographical diversi- fication of our tobacco business has been accomplished through the addition of international tobacco, which contributed another $120 million of operating income last year. Altogether, acquired companies accounted for $428 million, or 55% of to~al operating income in 1982. From the beginning, our acquisitions have primarily been consumer product companies having strong manage- men~s and positive growth potential, noncyclical businesses that were neither ~apital nor labor intensive. Above all, our acqui- sitions have had financial capabilities sufficient to generate positive cash flow and provide a favorable return on our invesz- ment within a reasonable period of time. The acquisition in January of Pinkerton's continues this pattern. Pinkerzon's, the largest security firm of its kind in the world, is a highly profitable operation with outstanding financial strength. Its profit margins are the best in the industry, and the company had a return on equity of 20% in 1982. Pinkertcn's has no debt, capital expenditures are minimal and, of course, the acquisition results in no dilution. Chart V clearly illustrates the success that has been achieved in "obtaining a favorable return on capital.invested in acquisitions. Through 1982, cumulative net income of acquired companies tczaled $1.8 billion, or nearly 86% of the total investment of billion. At the same time, $953 million had actually been returned to American Brands in the form of cash dividends from acquired companies. In fact,, total dividends received thus far from Gallaher, our British subsidiary, have surpassed our investment of $290 million in that company by almost $45 mili~.:n. This record of return on investment in the form of earnings dividends from acquired companies is even more impressive when one considers that our largest acquisition, Franklin Life, accounts for $640 million, or 30% of our total investment in acquisitions, was made only four years ago. - II-

PROTECTED BY .~II.~.NESOTA I'C~BACCO LITIG.~TION PRO I'ECTI\ E ~ )RDER While profits from the original domestic tobacco business have continued to increase, the noncyclical growth businesses added since 1965 have enhanced our ability to produce a steady, pre- dictable stream of increased earnings. During the past five years (see Chart VI), earnings per share have~ grown at a compound annual rate of 15%, five times the rate for the Standard & Poor's 500 during the same period. How have we done in 19837 In the first quarter, net income moved[ ahead on a comparative basis for the fourth successive aua~ter, and operating and pretax income reached the highest levels in our_ history. Had the exchange ra=e for the British pound remained constant, consolidated sales would have been up 17%, or $295 mil-o_ lion higher than reported. Operating income would have been up 12%, and net income up 8%. The net income comparison was also o" adversely affected by a gain last year from the sale of Duffy-Mott, though interes~ charges were substantially lower thiscc year. o Chart VII indicates that our capital base has risen steadil~ the last five years, and now aggregates $2.7 billion. Return on total invested capital has contin.ued at a level of around 17%, return on stockholders' equity was nearly 20% in 1982. During the past five years, as shown in Chart VIII, we have been able to increase dividend payments from $1.49 per share in 1977 to a $3.50 current annual rate and still provide fully for the financial needs of the business and the capital requiremenus of our acquisition program. It is reasonable to expect a contin- uation of cur policy of sharing earnings growth with stockho_aers~ in future years. Chart IX confirms the fact that our shareholders have more than kept pace with inflation in the past five years. Dividend pay- ments have increased by 135% through 1982, compared wi~h a rise 59%-in the Consumer Price Index. How have investors appraised the Co.~pany's perfor~..ance during th~ last five years? Very favorably. As Chart X shows, total on American Brands' Common stock for the last .ive ~" years "'--=s -~,~" ~[ or 23% compounded annually, substantially better than the p_. for- mances of our major competitors and the stock averages. :nc!-'en- tally, this number was 204% as late as May 31 Turning now to the Company's financial condition {Chart X[), :he ability to generate cash flow was an important considerati:n in the selection of acquisitions, and our record of favorable cash flow trends has been extended and improved in recent years. During the past fiveyears, cash flow from operations has exreeded amounts required for capital expenditures and dividends by zearly $319 million. Cash flow generated in 1982 amounted to $446 ~il- lion, compared with $262 million in 1977, representing a ccn;:und annual growth rate of 11%. - 12 -

B&~V, PROTECTED BY ~[I~NE$OTA TOB.XCCO L[TIG.~TIO~ PROTEL Zi~E, Our basic tcbacc~ business is no= ca=ira!, in~ens~'.,e, = ~-n. cur ~cbacco businesses also have only modes~ capital requiremen:s (see Chart X~!). Outlays for capital improvements in 1982 taled $147 million, and the figure for the current year will not be much different. Nearly half of American's.capital expendi- tures in the last five years, or approximately $330 million, have been invested in our tobacco businesses. As ':'ou can see, we con- t~nue to be strong!y.co~i~ted to tobacco. ~h~ highly liquid nature of our balance sheet is we!l-illustrated in Char~ X:Ii by the fact that inventories exceed total deb~ of the Company. Inventories totaled $1.4 billion at the end of 1982, compared with total debt of $91~ million. Furthermore, almost 51% of total assets of $4 billion were current. The combination of a strong earnings performance with favorable cash flow trends has enabled the Company to fund the acquisition program and enhance our financial strength (Chart XIV). Indeed, the percent of total debt to s~ockholders' equity has actually declined during the past five years from 61% to 46%, indicating the existence of considerable unused debt capacity. Long-term debt as a percent of total capitalization was down to 20% at the end of last year. Following the sharp decline in interesu rates, we went to marke~ last October with a $150 million seven-year note issue at a bor- rowing cost of ii !/8%. In May of this year, we again took ad- vantage of a favorable window in the market and sold $150 million of four-year notes at 9 3/4%, thus managing to obtain a single- 4 d.g.. rate for the first time in several years. Since the Fro- coeds were used for the repayment of floating rate debt, the Company's ratios were unaffected. We plan to file another 415 shelf registration covering addition- al long-term debt. This filing will allow the Company consider- able flexibility with respect to possible refinancings over the next two years. Debt ratings continue to be AA3 from Mocdy's and A~ frcm Stand- ard & Poor's, while our commercial paper enjoys a high rating from bothagencies. The Company has short-term credit facilities amounting to 5872 million, including those of Gallaher Limited, and long-term re- volving credit facilities of another $680 million. Of ~his =o:al of $1.5 billion, over $900 million is unco~.mitted. Having emphasized the preservation and enhancement of our finan- cial strength through the careful selection of acquisition candi- dates, I would now like to review briefly the financial condition of our two largest acquisitions, Gallaher and Franklin Life, wh:zh is not readily apparent from our consolidated financial statements. - 13 -

, B&W) PROTECTED BY MINNESOTA TOBACCO LITIGATION PROTECTI\ E Gallaher Limited, our large British subsidiary, contributed than $74 million to net income in 1982. During the past five years, Gallaher's operating income in sterling has increased at a compound annual rate of 12% (see Chart XV). Gallaher's fine op- erating performance in sterling continued through the first quar- ter with sales, up 16%, operating income up 23% and net income up 27%. There is every indication that their second quarter may be even stronger. Chart XVI shows that Gallaher's cash flow is substantial, amount ing to ~66 million in 1982, comoared with capital expenditures ~41 million. As mentioned, we ~ave already recovered through dividends our entire investment in Gallaher, and net worth has Gallaher's total debt is modest (Chart XVII), amounting to 30%. o~ ~ net worth after the expenditure of over ~62 million for recent acquisitions. Franklin Life, ~cquired four years ago, contributed $85 million tO net income in 1982, compared with a purchase price of $640 million. Total insurance in force is $18.2 billion, and invest-h.~ ment income (see Chart XVIII), which contributes significantly earnings, rose to $209 million in 1982. ~.~ Franklin's cash flow from operations, which is not included in the parent company's consolidated figur6, amounted to $159 mil- lion in 1982 Of this amount, Franklin paid $50 million in divi-~ dends to American Brands. At the end of the first quarter, insurance in force was $! 2 lion, or 7.2% above last year's amount. Premium income wa= up "almost 7% and cash flow from operations~was up almost 35%. Franklin's balance sheet is very strong, with no debt and an in-~ vestIr.ent portfolio of $2.4 billion. Chart XIX indicates that in~" vestments have risen steadily and policy loans have not extended% materially in relation to past years. Against the backdrop of a strong and improving financial si~ ~ tion, our projections point to ample cash flow from internal sources well in excess of financial operating requirements, n fact, if we assume about an even split between cash and equi:? in our two most recent acquisitions before Pinkerton's, it .... be possible to spend another $2.1 billion on acquisitions in the next five years and still maintain our strong financial In short, we have the financial resources and we will be on -he alert for acquisition opportunities in the years ahead. - 14-

MOORE I,rI'IGATION: Produced By B&W (Copy of Documen! i'roduced by B&W in Minnesota Tobacco Litigation and Selected for Copying by ~lainliffs) OPE#ATING INCOME ~ NON TOBACCO .i INTERNATIONAL TOBACCO DOMESTIC TOBACCO (IN MILLIONS OF $) $157 $438 $3~8 ~m:~;~;t_..4~!~.::{zJ--.-., , I- ; : ",..,~,'t :, , ~, '," t ' .",~'7,,3.'~1 E . 64 : t35 184 231 157 . 1965 1972 1977 $782 120 ."~ : I 344 1982 41% 15% 44%

MOORE I,ITIGATION: Produced By B&W (Copy of Documcn! I'roduced by B&W in Minncsola Tobacco Liligalion and Selcclcd for Copying by'~l'lainliffs) NEW DRANDS VARIEllES LUCKY STRIKE FILTERS 1 13enson & I-ledges Del|,xe 2 Brigl~l 2 Snloln Slim Lighls I Gene,ic 8 Sale~l Ultra 2 Barclay 4 Merit Ullra Ligllls 4 Winslon Ultra 2 More Lighls 100 2 Kool Ullra 2 Lark Lighls 2 Vanlnge Ultra Menll~ol 2 50% ()1 U.S mn~kel 1331. SIIARE PER VARIEIY *0.62% 0.59 0.33 0.31 0.31 0.29 0.28 0.27 0.25 0.20 0.12 0.12 0.09 NI)I,I,V;)I,I,I'I (I,)Z)VlI(),I, V.I.I~N?INNII~I "IVI.IN)IIlI.'IN(k)

MOORt: I,ITIGATION: Produced By I~&W (Copy of Documen! Produced by ll&W in Minnesola 'lbbacco Liligalion and Selecled for Copying by l'lainliffs) DIVERSIFICATION 1982 Operating Income AMERICAN BRANDS R.J. REYNOLDS PHILIP MORRIS Iqonlobacco 41% :27 14

MOORE LITIGATION: Produced By B&W (Copy of Document Produced by lt&W in Minncsola Tobacco Liligation and Selected for Copying by ~'laintiffs) GALLAHER -TOBACCO U.K. MARKET SHARES 1982 CIGARETIES ROLL-YOUR-OWN CIGARS PIPE TOBACCO N(II.I,V,'II,I.I'I (I;)~)VlI().I, V,I,(I,~:.INNII~ "IVI.I.N:.I(II..I~(I.) >.

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,B&W) PROTECTED BY MINNESOTA TOBACCO LITIGATION PROTECTIVE

360 3OO 240 180 120 6O GALLAHER. TOTAL DEBT AND STOCKHOLDER'S EQUITY (IN MILUONS OF STERLING) ISTOCKHOLDER'S EQUITY [] TOTAL DEBT 1978 1979 1980 1981 1982 RATIO .30 .22 .17 .32 ..' .30 • ~ '" ¢.: ",~1 " o" ........... ,,.,..._,.,~,., ,.., .~..,0.--_~...._.,.,.,~...... :~--,..,~-,.~-,. ,,,~,~ :~ :.,:' ........................ ~..~,...,~ vp-,i-.-pl-.~,,l,~,..~r-t- . . ........ ...~.~., • - ~. ~,. .~,,,...~,

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Plaintiffs) ,.qL1901),13,18 FRANKLIN LIFE INSURANCE COMPANY ANALYSIS OF INVESTMENTS (GAAP' SHORT-TERM & OTHER (IN MILUONS) 52,400 Lt POLICY LOANS I~1 MORTGAGES ~-., ,:i;~ :... 2,100 • BONDS I " 1,500 1,200 900 6O0 300 FRANKLIN LIFE INSURANCE CoMPANY I

BY MINNESOTA "I'O~~GATION