Tobacco Settlement

U.S. Department of Agriculture Agricultural Outlook Forum 1998 February 23 & 24, 1998

Trends in the Global Tobacco Industry & the US Tobacco Settlement

Farrell Delman TRENDSTRENDS ININ THETHE GLOBALGLOBAL TOBACCOTOBACCO INDUSTRYINDUSTRY && THETHE USUS TOBACCOTOBACCO SETTLEMENTSETTLEMENT CoverCover SheetSheet FarrellFarrell DelmanDelman President,President, TMATMA

JapanJapan TobaccoTobacco Inc.Inc. JanuaryJanuary 19,19, 19981998 GlobalGlobal TrendsTrends QQ ProductProduct TrendsTrends QQ FinancialFinancial TrendsTrends QQ USUS TobaccoTobacco SettlementSettlement && PublicPublic PolicyPolicy TrendsTrends QQ EmergingEmerging IssuesIssues andand ProductsProducts GlobalGlobal TrendsTrends QQ ProductProduct TrendsTrends CigarettesCigarettes // AmericanAmerican BlendBlend CigarsCigars OtherOther TobaccoTobacco ProductsProducts LeafLeaf WorldWorld CigaretteCigarette ProductionProduction vs.vs. ConsumptionConsumption (Billions(Billions ofof Pieces)Pieces)

6000 5800 5579 5500 5419 5494 5306 5219 4858 Production 5000 Consumption 4804

45004386 4315 4000 1980 1985 1990 1995 2000e TheThe AdventAdvent ofof WorldwideWorldwide CigaretteCigarette SmugglingSmuggling (Billions(Billions ofof Pieces)Pieces) 450 400 350 300 250 World Exports Minus World 200 Imports 150 100 50 0 1986 1988 1990 1992 1994 1996 1997e WorldWorld AmericanAmerican--BlendBlend CigaretteCigarette ConsumptionConsumption (Billions(Billions ofof Pieces)Pieces) 2163.0 2000 1958.0 1774.0 1800 1667.0 1600

1400

1200

1000 1988 1992 1996 2000e WorldWorld CigaretteCigarette ProductionProduction vs.vs. ConsumptionConsumption (Billions(Billions ofof Pieces)Pieces)

6000 5800 5579 5500 5419 5494 5306 5219 4858 Production 5000 Consumption 4804

45004386 4315 4000 1980 1985 1990 1995 2000e World American-Blend Cigarette Consumption - 1996 Over 22.4 billion pieces consumed. Between 6.6 and 22.4 billion pieces consumed. Between 2.6 and 6.6 billion pieces consumed. LeadingLeading WorldWorld CigarCigar ConsumersConsumers -- 19951995 (millions(millions ofof pieces)pieces)

4000

2000 1442 1300 1158 920 738 465

0 USA FRA DEU GBR BEL ESP NLD U.S.U.S. CigarCigar ConsumptionConsumption byby TypeType (Millions(Millions ofof Pieces)Pieces)

3500 3168 3000 2728 2470 2565 2500 2246 2138 2000 Large 1397 1491 1500 1159 1153 1292 1288 Small 1000 500 0 1987 1989 1991 1993 1995 1996 USUS PremiumPremium CigarCigar Sales,Sales, 19961996 (millions(millions ofof pieces)pieces)

350

300 280.0

250

200 170.0 131.0 150 114.6 100

0 1993 1994 1995 1996 CountriesCountries AroundAround thethe WorldWorld ThatThat HaveHave BannedBanned SmokelessSmokeless TobaccoTobacco ProductsProducts Q Afghanistan Q Lithuania Q Australia Q LuxembourgLuxembourg Q Austria Q Mauritius Q Belgium Q Netherlands Q Denmark Q New Zealand Q Finland Q Portugal Q France Q Spain Q Germany Q Switzerland Q Greece Q Thailand Q Hong Kong Q United Arab Emirates Q Ireland Q United Kingdom Q Italy WorldWorld TobaccoTobacco LeafLeaf ProductionProduction andand ConsumptionConsumption ((MnsMns.. ofof metricmetric tons)tons) 8 6.9 7.34 6.56 7 6.54 6.31 5.9 6.99 6.93 6 6.43 6.44 5 5.49 5.55 Dry Weight Production 4 Consumption 3 2 1 0 1987 1989 1991 1993 1995 1997e WorldWorld LeafLeaf TobaccoTobacco YearYear EndEnd StocksStocks (Millions(Millions ofof metricmetric tons)tons)

8 7 6 5 4 3 2 1 0 1985 1987 1989 1991 1993 1995 1997e WorldWorld LeafLeaf ProductionProduction vs.vs. StocksStocks (Millions(Millions ofof metricmetric tons)tons)

1.4 1.2 1.18 1.17 0.99 1.05 1.04 1 0.94 0.89 0.8 0.6 0.4 0.2 0 1985 1989 1993 1997e

Stocks/Production WhatWhat isis anan AmericanAmerican--BlendBlend cigarette?cigarette? BreakdownBreakdown ofof TobaccoTobacco ContentContent (All(All tobaccotobacco typestypes areare lightlight exceptexcept forfor Oriental)Oriental) QQ FlueFlue--CuredCured 4545--55%55% QQ BurleyBurley 2525--35%35% QQ LightLight AirAir--CuredCured 11--3%3% QQ OrientalOriental 1010--25%25% WorldWorld LeafLeaf ProductionProduction ByBy TypeType -- 19861986 (Figures(Figures areare inin ThousandsThousands ofof MetricMetric Tons)Tons) 201.8 68.4 131.1 1071.4 Flue-Cured Burley 946.2 Oriental Fire-Cured Cigar 601.9 Dark Air-Cured 3000.4 Light Air-Cured

The world produced 6,021,200 metric tons of leaf in 1986. WorldWorld LeafLeaf ProductionProduction ByBy TypeType -- 19961996 (Figures(Figures areare inin ThousandsThousands ofof MetricMetric Tons)Tons) 90.1 53.7 89.9 579.9 934.5 Flue-Cured 829.3 Burley Fire-Cured Oriental Cigar Dark Air-Cured 4597.9 Light Air-Cured

The world produced 7,175,429 metric tons of leaf in 1996. GlobalGlobal TrendsTrends QQ ProductProduct TrendsTrends QQ FinancialFinancial TrendsTrends GlobalizationGlobalization ConsolidationConsolidation PrivatizationPrivatization WorldWorld LeafLeaf DealerDealer ConsolidationConsolidation UniversalUniversal Inc.Inc. Q 8/97 - Acquired the oriental leaf operations of Socotab. Q 7/97 - Acquired the tobacco processing operations of the Polish unit of Reemtsma Cigarettenfabriken. Q 1/96 - Agreement with Shanghai Tobacco Group and Bengbu Tobacco Redrying Co. to start a new leaf processing plant in China’s Anhui Province in which Universal is to purchase all leaf production. Q 10/95 - Canadian subsidiary, Simcoe Leaf, to acquire all leaf operations for RJR-MacDonald. Q 8/93 - Acquisition of Hungarian based Nyidofer Tobacco Processing Co. WorldWorld LeafLeaf DealerDealer ConsolidationConsolidation DIMONDIMON

Q 4/97 - Acquisition of Intabex Holdings Worldwide. Q 5/95 - Agreement with Yunnan Leaf Tobacco Co. and China Tobacco Import Export Yunnan Corp. (both part of CNTC) for the construction of a new neaf tobacco processing facility. Q 4/95 - Acquisition of Austria Tabakwerke’s leaf operations and Austria Tabak Einkaufs & Handelorganisation’s tobacco leaf operations in Greece, Turkey and Bulgaria. Q 4/95 - Merger of Dibrell Brothers and Monk-Austin into a new company DIMON. MatrixMatrix ofof Who’sWho’s WhoWho byby SizeSize andand DegreeDegree ofof InternationalizationInternationalization (Global 3, Size 1) (Global 3, Size 2) (Global 3, Size 3) None R.J. Reynolds (US) British American Tobacco (UK Rothmans (UK) Philip Morris (US)

(Global 2, Size 1) (Global 2, Size 2) (Global 2, Size 3) Austria Tabakwerke (Austria) Reemtsma (Germany) Japan Tobacco (Japan) House of Prince (Denmark) Gallaher (UK) Karelia (Greece) Imperial (UK) Liggett - Ducat (Russia) SEITA (France) Swedish Match (Sweden) Tabacalera (Spain) TEKEL (Turkey)

(Global 1, Size 1) (Global 1, Size 2) (Global 1, Size 3) Coltobaco, Protabaco Eastern Tobacco (Egypt) China National Tobacco Corp (Colombia) Fortune Tobacco (Philippines) DUBEK (Israel) Korea Tobacco & Ginseng Khyber / Souviner (Pakistan) Lorillard (US) Nanyang Brothers (HK) Monopoli di Stato (Italy) Tiedemanns (Norway) TTWMB (Taiwan) TTM (Thailand) CigaretteCigarette CompaniesCompanies withwith LargestLargest InternationalInternational PresencePresence Global 3, Size 1 None

Global 3, Size 2 R.J. Reynolds (US) Rothmans (UK)

Global 3, Size 3 British American Tobacco (UK) Philip Morris (US) TobaccoTobacco CompaniesCompanies withwith SignificantSignificant InternationalInternational PresencePresence and/orand/or FDIFDI Global 2, Size 1 Austria Tabakwerke (Austria) House of Prince (Denmark) Karelia Brothers (Greece) Liggett (Ducat) (Moscow) Swedish Match (Sweden) Tabacalera (Spain) Tekel (Turkey) Global 2, Size 2 Gallaher (UK) Imperial (UK) Reemtsma (Germany) SEITA (France) Global 2, Size 3 Japan Tobacco (Japan) TobaccoTobacco CompaniesCompanies withwith NoNo SignificantSignificant InternationalInternational PresencePresence Global 1, Size 1 Coltobaco (Colombia), Protabaco (Colombia), Dubek (Israel), Khyber / Souviner (Pakistan), Nanyang Brothers (HK), Tiedemanns (Norway)

Global 1, Size 2 Eastern Tobacco (Egypt), Fortune Tobacco (Philippines), Korea Tobacco & Ginseng Corp., Lorillard (US), Monopoli di Stato (Italy), TTWMB (Taiwan), TTM (Thailand)

Global 1, Size 3 China National Tobacco Corp. FactoriesFactories AcquiredAcquired byby PhilipPhilip MorrisMorris SinceSince 19901990 1. Dresden (East Germany) - 4/90 2. Eger (Hungary) - 11/91 3. Samara (Russia) - 12/91 4. Tabak (Czech Republic) - 4/92 5. Klaipeda (Lithuania) - 3/93 6. Krasnodar (Russia) - 6/93 7. Almaty (Kazakhstan) - 9/93 8. Kharkov (Ukraine) - 2/94 9. ZPT-Krakow (Poland) - 1/96 Note: PM has also built a cigarette factory in St. Petersburg, Russia. Philip Morris - Worldwide Interests Co-production agreement Direct Investment Major export market Little or no exports Licensing agreement FactoriesFactories AcquiredAcquired byby RJRRJR SinceSince 19901990 1. Berlin (Former East Germany) - 7/90 2. Satoraljaujhely (Hungary) - 6/92 3. St. Petersburg (Russia) - 7/92 4. Lviv (Ukraine) - 9/92 5. Kremenchung (Ukraine) - 9/92 6. Armavir (Russia) - 11/94 7. Yelets (Russia) - 9/95 8. Baku (Azerbaijan) - 10/96 Note: RJR has also built cigarette factories in the Czech Republic, Romania, Poland, Kazakhstan, and a second facility in St. Petersburg, Russia. R.J. Reynolds - Worldwide Interests Co-production agreement Direct Investment Major export market Little or no exports Licensing agreement FactoriesFactories AcquiredAcquired byby BritishBritish AmericanAmerican TobaccoTobacco SinceSince 19901990

1. Pecs (Hungary) - 12/91 2. Prilucky (Ukraine) - 3/93 3. Saratov (Russia) - 4/94 4. Tashkent (Uzbekistan) - 5/94 5. Yava (Russia) - 11/94 6. Augustow (Poland) - 11/95 7. TEKEL - (Turkey: Co-Production) - 1/98 Note: BAT has also built a cigarette factory in Romania. British American Tobacco - Worldwide Interests Major export market Direct Investment Licensing agreement Little or no exports FactoriesFactories AcquiredAcquired byby ReemtsmaReemtsma SinceSince 19901990

1. Tobakkombinat (Former East Germany) - 7/90 2. Tobacna Tovarna (Slovenia) - 10/91 3. Debrecen (Hungary) - 3/92 4. CSPI (Slovakia) - 4/92 5. Cherkassy (Ukraine) - 11/93 6. Tyutynova (Ukraine) - 2/94 7. WWT Poznan (Poland) - 1/96

Note: Reemtsma is also making an additional $63 mn investment in Poland to produce 15 bn units. Reemtsma - Worldwide Interests Major export market Licensing agreement Direct Investment Little or no exports Rothmans - Worldwide Interests Co-production agreement Direct Investment Major export market Little or no exports Licensing agreement StateState TobaccoTobacco EnterprisesEnterprises ThatThat HaveHave RecentlyRecently PrivatizedPrivatized

Q East Germnay - 1990 Q Estonia - 1993 Q Hungary - 1991 Q Kazakhstan - 1993 Q Russia - 1991-present Q Uzbekistan - 1994 Q Slovenia - 1991 Q Japan - 1994 (First 1/3) Q Czech Republic - 1992 Q France - 1995 Q Slovakia - 1992 Q Poland - 1995 Q Latvia - 1992 Q Azerbaijan - 1996 Q UkraineUkraine -- 19921992 Q Portugal - 1997 ithuaniaithuania -- 19931993 MultinationalMultinational CigaretteCigarette CompanyCompany MarketMarket SharesShares (%(% ofof worldworld market)market) 20

15 Philip Morris BAT 10 RJ Reynolds Reemtsma 5 Rothmans

0 1986 1988 1990 1992 1994 1996 PM vs. BAT in the World Marketplace Countries where Philip Morris holds a larger market share than BAT. Countries where BAT holds a larger market share than Philip Morris. Countries where Philip Morris and BAT do not compete other than a small amount of imports. InternationalInternational CigaretteCigarette BrandBrand MarketMarket SharesShares (%(% ofof worldworld market)market) 10

7.9 7.3 6.8 6.4 5.7 5.9 Marlboro 5 Mild 7 Winston 2.8 2.5 2.4 2.4 2.3 2.1 1.8 1.7 1.6 1.5 1.4 1.3 0 1986 1988 1990 1992 1994 1996 DomesticDomestic vs.vs. InternationalInternational SalesSales -- PhilipPhilip MorrisMorris (Figures(Figures areare inin millionsmillions ofof dollars)dollars)

14000 12800 12000 11300 9882 9609 10000 8547 9664 8000 8856 7491 7904 8494 6000 5185 4000 2000 2018 0 199219921993199419951996

Domestic International DomesticDomestic vs.vs. InternationalInternational OperatingOperating ProfitProfit -- PhilipPhilip MorrisMorris (Figures(Figures areare inin millionsmillions ofof dollars)dollars)

6000 5185 5000 4206 3740 4000 3302 2808 4078 3000 3453 2877 2000 2360 2018 1992 1993 1994 1995 1996

Domestic International DomesticDomestic vs.vs. InternationalInternational SalesSales -- R.J.R.J. ReynoldsReynolds (Figures(Figures areare inin millionsmillions ofof dollars)dollars)

7000 6165 6000 4949 5000 4570 4480 4551 4000 3000 3623 2862 3130 3097 3234 2000 1000 0 1992 1993 1994 1995 1996

Domestic International DomesticDomestic vs.vs. InternationalInternational OperatingOperating ProfitProfit -- R.J.R.J. ReynoldsReynolds (Figures(Figures areare inin millionsmillions ofof dollars)dollars)

2000 1704 1500 1085 1084 1000 954 453 761 500 537 716 546 413 0 1992 1993 1994 1995 1996

Domestic International GlobalGlobal TrendsTrends QQ ProductProduct TrendsTrends QQ FinancialFinancial TrendsTrends QQ USUS SettlementSettlement && PublicPublic PolicyPolicy TrendsTrends AntiAnti--TobaccoTobacco Campaigns,Campaigns, MarketingMarketing Restrictions,Restrictions, IngredientIngredient Disclosure,Disclosure, TaxationTaxation Tobacco Marketing Restrictions: 1997 Tobacco advertising and/or promotional ban. Broadcast and print restrictions. Broadcast restrictions. No restrictions known. Tobacco Promotion Policy Tobacco promotion ban. Collateral advertising and sponsorship restrictions. Collateral advertising restrictions. Sponsorhip restrictions. No restrictions known. ConstituentConstituent LimitsLimits && DisclosureDisclosure (Examples)(Examples)

Q European Union. 15mg Q Thailand. Starting ‘tar’ and 1.5mg nicotine October 20, 1997, by January 1, 1993. 12mg manufacturers will be ‘tar’ and 1.2mg nicotine required to disclose to by January 1, 1998. the public ingredients Q Australia. Voluntary contained in all tobacco limits: nicotine 1.4mg; products. condensate 14mg; CO Q Bulgaria. 15mg ‘tar’ 20mg. limit, effective January Q GCC. 10.0mg ‘tar,’ 0.6mg 1, 1993. nicotine, 12.0mg CO. CigaretteCigarette PricesPrices 19901990 -- 19961996 1990 1996 US $1.60 US $1.95 Norway $5.00 Norway $6.82 Denmark $4.09 Denmark $5.07 Finland $3.66 Finland $4.58 UK $3.12 UK $4.40 Australia $2.06 Australia $4.08 France $1.89 France $3.51 Germany $2.74 Germany $3.32 Hong Kong $1.54 Hong Kong $3.23 Japan $1.52 Japan $2.02 All Prices are in US Dollars per pack of 20. World Cigarette Prices - 1996 Over $2.40 per pack of 20. Between $0.38 and $0.48 Between $1.31 and $2.40 per pack of 20. per pack of 20. Between $0.92 and $1.31 per pack of 20. Below $0.38 per pack of 20. Between $0.66 and $0.92 per pack of 20. Between $0.59 and $0.66 per pack of 20. Between $0.48 and $0.59 per pack of 20. TheThe USUS SettlementSettlement

Q SOSO HOWHOW DIDDID ITIT HAPPENHAPPEN THATTHAT THETHE USUS MANUFACTURERSMANUFACTURERS WENTWENT TOTO AA HOSTILEHOSTILE GOVERNMENTGOVERNMENT LOOKINGLOOKING FORFOR AA LEGISLATEDLEGISLATED SOLUTIONSOLUTION TOTO THETHE INDUSTRY’SINDUSTRY’S PROBLEMS?PROBLEMS?

Q ANDAND WHATWHAT WILLWILL THETHE ECONOMICECONOMIC IMPACTIMPACT BEBE OFOF WHATWHAT ISIS CURRENTLYCURRENTLY ONON THETHE TABLE?TABLE? TheThe GrowingGrowing U.S.U.S. YouthYouth PopulationPopulation (Millions(Millions ofof PeoplePeople AgedAged 1414--17)17)

16 14.9 14.5 14.8 13.9 14 13.5 13.4 12 10 8 6 4 2 0 1985 1987 1989 1991 1993 1995 TheThe DecliningDeclining U.S.U.S. YouthYouth SmokingSmoking IncidenceIncidence (Percentage for those aged 14-17) 20 19.5 16.0 16.0 15.0 15 14.0 13.5

0 1985 1988 1990 1991 1992 1994 YouthYouth SmokingSmoking StatisticsStatistics inin thethe U.S.U.S. According to a recent Federally-funded survey: Q Smoking rates have increased for five consecutive years (1991-96) as the proportion of surveyed students using tobacco has reportedly increased by about 50% overall. Q 34% of high school seniors have smoked cigarettes. Q Between 1991-96, the percentage of 10th-graders that have smoked cigarettes rose from 21% to 30%. Q Between 1991-96, the percentage of 8th-graders that have smoked cigarettes rose from 14% to 21%. Q Between 1995-96, the percentage of 8th and 10th grade students reporting any cigarette smoking in the previous 30 days increased by about 10%. TheThe USUS AttorneysAttorneys GeneralGeneral

Q MayMay 23,23, 19941994 AA thenthen littlelittle knownknown AttorneyAttorney GeneralGeneral fromfrom Mississippi,Mississippi, MichaelMichael Moore,Moore, filesfiles thethe firstfirst classclass actionaction lawsuitlawsuit againstagainst cigarettecigarette manufacturersmanufacturers forfor repaymentrepayment ofof medicaidmedicaid expenses.expenses. Q MarchMarch 8,8, 19951995 FourFour statesstates ---- Florida,Florida, Mississippi,Mississippi, Minnesota,Minnesota, andand WestWest VirginiaVirginia---- announceannounce thethe NationalNational CoalitionCoalition ofof StatesStates forfor TobaccoTobacco LiabilityLiability ChronologyChronology ofof FDAFDA RegulationsRegulations Q August 8, 1995. President Q December 1, 1995. The FDA Clinton announces his releases its findings of support for FDA regulation. focus group testing on Q August 10, 1995. Industry proposed warning labels to files suit seeking to block be carried in cigarette the regulations. advertising. Q August 11, 1995. FDA Q January 2, 1996. Five announces its proposed cigarette manufacturers tobacco rules in the Federal jointly submit their 2,000- Register. page comments to the FDA supported by 45,000 pages Q October 4, 1995. Tobacco of appendices. Arguments companies suing the FDA of appendices. Arguments include that the FDA file a 39-page summary include that the FDA exceeded its legal authority judgment, asking Judge exceeded its legal authority when it issued the proposed Osteen to rule on the issue. when it issued the proposed regulation. ChronologyChronology ofof FDAFDA RegulationsRegulations Q May 15, 1996. Philip Morris Q February 10, 1997. U.S. USA and United States District Judge William Tobacco Co. announce a Osteen holds a hearing on blueprint for the FDA’s tobacco comprehensive Federal regulation. legislation to address Q February 28, 1997. First tobacco use by minors. phase of the FDA rule takes Q August 23, 1996. FDA effect establishing a Federal announces in the Federal minimum sales age of 18. Register its final rule on Q April 25, 1997. U.S. District tobacco. Judge Osteen rules that the Q December 2, 1996. FDA FDA does have regulatory defends its legal authority authority over cigarettes to regulate tobacco products and smokeless tobacco, but in a brief filed in U.S. cannot impose marketing District Court. restrictions. AugustAugust 9,9, 19961996 B&WB&W LosesLoses thethe CarterCarter CaseCase

Q $750,000 awarded to a smoker of Lucky Strike cigarettes in the failure to warn and strict liability case of Carter v. American Tobacco Co. [ATC] in a Jacksonville, Florida court. Q The case marked only the second time damages were awarded to a plaintiff in such cases. But the first case in New Jersey, the Cipollone case, was later reversed on appeal. Q First time internal B&W documents were presented to a jury in a tobacco case. Q Case is now on appeal. FDAFDA FinalFinal Rule:Rule: SalesSales RestrictionsRestrictions AugustAugust 23,23, 19961996

Q 18 minimum sales age. Q Self-service displays Q Photo ID for banned, with certain, individuals 26 or limited exceptions. younger. Q Mail order sales Q 20 cigarettes minimum allowed. pack size. Q Coupons allowed. Q Vending machines Q Free samples restricted to places prohibited. where minors are expressly prohibited by law. FDAFDA FinalFinal Rule:Rule: MarketingMarketing RestrictionsRestrictions AugustAugust 23,23, 19961996

Q Limit tobacco Q Advertisements in advertising in all publications read existing media forms to primarily by adults and a black-and-white, text- advertisements placed only format in adult-only locations (“Tombstone”). are exempt from any Q Outdoor advertising is advertising restrictions. prohibited within 1,000 Q Dissemination of any feet of public non-tobacco item or playgrounds, service that identifies it elementary schools or with a tobacco product secondary schools. is prohibited. FDAFDA FinalFinal Rule:Rule: MarketingMarketing RestrictionsRestrictions AugustAugust 23,23, 19961996

Q Contests, lotteries, or Q Brand name games of chance are sponsorship of race cars allowed, provided ads as well as other teams appear in “Tombstone” or entries are format. prohibited. Q Sponsorship in Q FDA to send letters to Corporate name only. the manufacturers Q Brand name explaining why the sponsorship, logos, agency believes that a color are banned. national, multi-media anti-tobacco campaign is needed. TheThe USUS AttorneysAttorneys GeneralGeneral

Q ByBy thethe endend ofof 19961996 1818 hadhad StatesStates filedfiled MedicaidMedicaid lawsuits:lawsuits: Arizona,Arizona, Connecticut,Connecticut, Florida,Florida, Kansas,Kansas, Illinois,Illinois, Iowa,Iowa, Louisiana,Louisiana, Maryland,Maryland, Massachusetts,Massachusetts, Michigan,Michigan, Minnesota,Minnesota, Mississippi,Mississippi, NewNew Jersey,Jersey, Oklahoma,Oklahoma, Texas,Texas, Utah,Utah, Washington,Washington, && WestWest VirginiaVirginia Q AlsoAlso ErieErie County,County, NY;NY; LosLos AngelesAngeles County,County, CA;CA; CityCity andand CountyCounty ofof SanSan Francisco;Francisco; andand NewNew YorkYork City,City, NYNY filedfiled locallocal lawsuitslawsuits.. LiggettLiggett SettlementSettlement

Q March 15, 1996. Liggett Q Lump sum payment Group announces only to be triggered if settlement with 5 suing Liggett buys, or is Medicaid States. bought by another Q March 20, 1997. Liggett tobacco company. Group settles with 22 Q March 28, 1997. Brooke States seeking March 28, 1997. Brooke reimbursement to Group Ltd., parent to Medicaid accounts. Liggett, announces 1996 losses at $62.5 million. Q Agreement calls for $25 losses at $62.5 million. million lump sum Q March 31, 1997. Liggett payment plus 25% of announces it cannot pay Liggett’s pre-tax profits. its previous debt. PrePre--SettlementSettlement Proposal:Proposal: PM/USTPM/UST vs.vs. FDAFDA SalesSales RestrictionsRestrictions Philip Morris/UST FDA May 15, 1996 August 8, 1995 Q Legislation. Q ReRegulation.gulation. Q Cigarettes and Smokeless Q Cigarettes and Smokeless products only. products only. Q Sales to minors (18) Q Sales to minors (18) prohibited. prohibited. Q Vending machines Q Vending machines effectively prohibited. effectively prohibited. Q Coupons, self-service Q Coupons, self-service displays, sampling restricted displays, sampling all to “face-to-face.” prohibited. Q No less than 20 sticks per Q No less than 20 sticks per pack pack. PrePre--SettlementSettlement Proposal:Proposal: PM/USTPM/UST vs.vs. FDAFDA AdvertisingAdvertising RestrictionsRestrictions Philip Morris/UST FDA Q Ban all advertising within Q Ban all advertising within 1,000 feet of playgrounds or 1,000 feet of playgrounds or schools. schools. Q “Tombstone” only format for Q Ban ads in retail windows all other ads, including ads within 1,000 feet of at retail stores. playgrounds or schools. Q “Tombstone” only format on Q Ban ads at public on or in public transportation. transportation, including Q “Tombstone” only format in stops and shelters. publications in which minors Q Ban ads in publications in comprise 15% of readership which youth account for 15% or mmoreore than 2 million or more of the readership. readers. PrePre--SettlementSettlement Proposal:Proposal: PM/USTPM/UST vs.vs. FDAFDA SponsorshipSponsorship RestrictionsRestrictions

Philip Morris/UST FDA

Q Brand name sponsorship Q Brand name sponsorship allowed. prohibited. Q Brand names allowed on Q Excludes teams or entries in entries and teams in events. events, such as stockcars, Q Event promoter must certify used before January 1, 1995. that at least 75% of the Q Corporate sponsorship only. audience is 18 years of age or older. PrePre--SettlementSettlement Proposal:Proposal: PM/USTPM/UST vs.vs. FDAFDA FundingFunding Philip Morris/UST FDA

Q $250 million in total over a Q $150 million annually or five year period. $750 million over five years. Q Proceeds used to pay for Q Proceeds used for a costs associated with the “corrective education administration and program” of counter- enforcement of the sales and advertising. distribution restrictions. Q If in 7 years smoking by Q Review after 5 years. If minors is not reduced to 50% deemed necessary, further of the 1993 rate, more steps legislation. would be taken. Q Funding based on industry- Q Funding based on dollars wide market share. spent on advertising as reported to the FTC. LiggettLiggett SettlementSettlement MarchMarch 20,20, 19971997

Q Liggett says it now Q Liggett agrees to give believes that cigarettes internal documents to are addictive and cause the suing Attorneys cancer. General most significantly documents of the Committee of Q Liggett agrees to print Counsel. Other new warnings on its Counsel. Other manufacturers claim packs including, manufacturers claim attorney client privilege “WARNING: attorney client privilege and say they won’t be SMOKING IS and say they won’t be coerced into buying ADDICTIVE.” coerced into buying Liggett. LiggettLiggett SettlementSettlement MarchMarch 20,20, 19971997

Q Other U.S. cigarette Q $25 million lump sum manufacturers say payment only triggered terms of Liggett’s deal if Liggett buys, or is show it to be nothing bought by another more than a financial tobacco company. and legal “charade.” Q Liggett not in a position Q 25% of pre-tax profits to buy another cigarette into a fund. Liggett, manufacturer, and no however, is operating at other cigarette a loss. manufacturer is interested in buying Liggett. U.S.U.S. DistrictDistrict CourtCourt RulingRuling AprilApril 25,25, 19971997 Q Ruling made on April 25, Q Manufacturers, ad 1997 by U.S. District agencies and others file Judge William L. Osteen appeal on April 30, 1997 in Greensboro, North in the U.S. 4th Circuit Carolina. Court of Appeals in Q Judge Osteen rules that Richmond, Virginia. the FDA does have Clinton Administration regulatory authority over files appeal shortly cigarettes and smokeless thereafter. tobacco products, but Q August 11, 1997, three cannot impose judge appellate court advertising and hears appeals. No date promotional restrictions. set for ruling. U.S.U.S. DistrictDistrict CourtCourt RulingRuling AprilApril 25,25, 19971997 Q Marks the first time a Q FDA rule presently court has upheld FDA effects retailers. authority to regulate Q Retailers are to: not sell access to tobacco cigarettes or smokeless products. tobacco products to Q Allows FDA regulations anyone under 18; verify implemented February that anyone buying 28, 1997 prohibiting the such products is at least sale of tobacco products 18 years of age or older; to minors to remain in check photo full force and effect identification of anyone pending appeal by under 27 years of age. Plaintiffs. U.S.U.S. DistrictDistrict CourtCourt RulingRuling AprilApril 25,25, 19971997 Q The FDA may regulate Q Tobacco products affect tobacco products the structure or function pursuant to the Federal of the body within the Food, Drug, and Cosmetic meaning of the Act. Act. Q FDA may regulate Q Tobacco products fall tobacco products as within the “drug” and medical devices pursuant “device” definitions of to its device authorities. the Act. Q Tobacco products are Q Tobacco products’ effects combination products are “intended” within within the meaning of the meaning of the Act. the Act. U.S.U.S. DistrictDistrict CourtCourt RulingRuling AprilApril 25,25, 19971997

Q Portions of the FDA’s Q Section 360j(e) authorizes Regulations are not the FDA to impose authorized under the restrictions on access to Federal Food, Drug, and tobacco products. Cosmetic Act. Q Section 352 authorizes Q Section 360j(e) does not the FDA to impose authorize restrictions on labeling restrictions on the promotion and tobacco products. advertisement of tobacco Q But if the FDA has products. jurisdiction over tobacco, how can they do anything but ban it? ChronologyChronology ofof FDAFDA RegulationsRegulations Q April 30, 1997. The four Q May 2, 1997. The U.S. major U.S. cigarette Justice Department files manufacturers file an an appeal with the appeal with the Fourth Fourth U.S. Circuit U.S. Circuit Court of Court of Appeals in Appeals in Richmond, Richmond, Virginia. Virginia. Q Justice appeals parts of Q Manufacturers appeal Judge Osteen’s ruling parts of Osteen’s ruling that the FDA cannot dealing with FDA regulate cigarette regulatory authority. advertising and promotion. ClassClass ActionAction LawsuitsLawsuits (As(As ofof MayMay 20,20, 1997)1997)

Red = Class Actions Filed. USUS SettlementSettlement

QQ INGREDIENTINGREDIENT DISCLOSUREDISCLOSURE Massachusetts:Massachusetts: 19961996 Minnesota:Minnesota: 19971997 Texas:Texas: 19971997

MoreMore reasonsreasons forfor aa USUS SettlementSettlement TheThe USUS AttorneysAttorneys GeneralGeneral

Q ByBy JuneJune 19971997 3737 USUS StatesStates hadhad formallyformally suedsued cigarettecigarette manufacturersmanufacturers withwith tobaccotobacco producingproducing statesstates noticeablynoticeably absent.absent. Q SimultaneouslySimultaneously RJRRJR waswas defendingdefending JoeJoe Camel,Camel, underunder attackattack inin CaliforniaCalifornia Q TheThe USUS JusticeJustice DepartmentDepartment deepeneddeepened itsits thenthen 22--yearyear investigationinvestigation intointo fraudfraud andand perjuryperjury inin testimonytestimony beforebefore CongressCongress inin 19941994 Q ConcernsConcerns aboutabout YY--11 nicotinenicotine--manipulatedmanipulated tobaccotobacco werewere stillstill presentpresent TOBACCOTOBACCO LITIGATIONLITIGATION

Q Private Sector 1. Product Liability (Punitive Damages) a. Individual Cases b. Class Action Cases 2. Worker ETS Exposure / Disability 3. Public Place ETS Exposure

Q Government Sector 1. Nicotine as a “Drug” 2. Product Standards (‘Tar,’ Nic, CO) Additives, Humectants, Flavorings, Pesticides 3. Anti-Trust / Marketing / Smuggling 4. Smoking Restrictions TobaccoTobacco SettlementSettlement AnnouncedAnnounced JuneJune 20,20, 19971997 Q All class action and medicaid suits settled Q Annual Payments: $8.5 billion initially rising to $15 billion annually thereafter indexed at 3% or CPI Q Allows FDA to ban nicotine in 2009 but only if FDA can prove a black market won’t be created. Allows creation of a board to oversee product standards Q $2 billion annual cap if youth smoking does not decline 30% in 5 years, 50% in 7 years, and 60% in 10 years -- the so-called “Look Back” provisions Q Tombstone print ads except in adult publications; point-of-sale only in adult establishments. Other marketing actvities banned. TobaccoTobacco SettlementSettlement AnnouncedAnnounced JuneJune 20,20, 19971997 Q New stronger health warnings on packs to cover 25% of front panels except hinge-lid hard packs Q Bans all vending machines, self-service displays, mail-order sales; set 18 as minimum age and photo identifications for under 27 Q Creates nationwide smoking restrictions for public and work places obviating the need for OSHA’s rule; exempts restaurants, bars, private clubs, hotel rooms, casinos, prisons, tobacco stores Q Tobacco Institute and CTR dissolved though they can be reformed with outside directors Q $17.2 billion for tobacco farmers TobaccoTobacco SettlementSettlement IssuesIssues SurfaceSurface Q Greater nicotine regulatory powers for FDA Q $2 billion penalty cap on “Look Back” provisions should be raised. Q Congressional approval allowing the application of a credit for the new cigarette and smokeless taxes -- worth an estimated $50 billion over 25-years -- against the settlement should be eliminated. Q Higher escrow payments by importers calculated at 150% of their liability should be reduced to 100% the same as the settlement signatories. Q Radical Anti-Tobacco Wing: It requires smokers and chewers to continue smoking and chewing. TobaccoTobacco SettlementSettlement IssuesIssues SurfaceSurface

Q BennettBennett LebowLebow,, chiefchief executiveexecutive officerofficer ofof BrookeBrooke Group,Group, Liggett’sLiggett’s parent,parent, sayssays thatthat thethe settlementsettlement willwill bankruptbankrupt LiggettLiggett…though…though DukatDukat isis splitsplit financiallyfinancially fromfrom LiggettLiggett,, justjust inin case.case.

Q ArguesArgues thatthat LiggettLiggett shouldshould getget specialspecial treatmenttreatment asas thethe “whistle“whistle blower”.blower”. CongressionalCongressional HearingsHearings

Q December 10, 1997. House Committee on the Judiciary Subcommittee on Courts hears testimony from Florida Governor Chiles, and others, that States should be allowed to keep any and all settlement funds. Q December 9, 1997. House Committee on Commerce Subcommittee on Health and Environment listens to the Royal Canadian Mounted Police about Canada’s experience with black market cigarettes following rapid price increases. Q December 8, 1997. Administration officials tell the House Committee on Commerce Subcommittee on Health and Environment law requires the Federal government to recover a portion of money reimbursed to Medicaid that may be part of a State tobacco settlement. CongressionalCongressional HearingsHearings

Q DecemberDecember 5,5, 1997.1997. IndustryIndustry turnsturns overover 834834 documentsdocuments toto HouseHouse CommerceCommerce ChairChair Rep.Rep. BlileyBliley afterafter aa DecemberDecember 44 subpoena.subpoena. PapersPapers postedposted onon thethe InternetInternet onon DecemberDecember 18.18. Q NovemberNovember 13,13, 19971997.. AtAt thethe firstfirst HouseHouse hearing,hearing, CommitteeCommittee onon CommerceCommerce ChairmanChairman BlileyBliley (R(R-- VA)VA) vowsvows toto subpoenasubpoena 834834 industryindustry documentsdocuments contestedcontested inin MinnesotaMinnesota MedicaidMedicaid suit.suit. Q OctoberOctober 29,29, 1997.1997. SenateSenate JudiciaryJudiciary SubcommitteeSubcommittee discussesdiscusses antianti--trusttrust provisionsprovisions ofof JuneJune 20th20th agreement.agreement. CongressionalCongressional HearingsHearings

Q OctoberOctober 27,27, 19971997.. SenateSenate LaborLabor andand HumanHuman SubcommitteeSubcommittee takestakes testimonytestimony onon “best”“best” waysways toto reducereduce smokingsmoking amongamong youth.youth. Q OctoberOctober 9,9, 19971997.. SenateSenate CommerceCommerce CommitteeCommittee holdsholds thirdthird settlementsettlement hearings,hearings, thisthis timetime exploringexploring thethe potentialpotential publicpublic healthhealth benefitsbenefits ofof legislation.legislation. Q OctoberOctober 8,8, 1997.1997. SenateSenate CommitteeCommittee onon IndianIndian AffairsAffairs hearshears fromfrom NativeNative AmericansAmericans onon possiblepossible exclusionexclusion fromfrom SettlementSettlement provision.provision. Q SeptemberSeptember 30,30, 19971997.. SenateSenate LaborLabor && HumanHuman ResourcesResources CommitteeCommittee discussesdiscusses FDAFDA jurisdiction.jurisdiction. CongressionalCongressional HearingsHearings Q SeptemberSeptember 25,25, 19971997.. SecretarySecretary ofof HHSHHS DonnaDonna ShalalaShalala givesgives Administration’sAdministration’s viewview ofof SettlementSettlement legislationlegislation butbut refusesrefuses toto writewrite specificspecific legislationlegislation forfor Congress.Congress. Q SeptemberSeptember 18,18, 19971997.. SenateSenate AgricultureAgriculture CommitteeCommittee holdsholds secondsecond hearinghearing discussingdiscussing tobaccotobacco farmers,farmers, specifically,specifically, assistingassisting farmersfarmers andand theirtheir communities.communities. Q SeptemberSeptember 16,16, 19971997.. SenateSenate CommerceCommerce CommitteeCommittee discussesdiscusses advertisingadvertising andand minorsminors issue.issue. Q SeptemberSeptember 11,11, 19971997.. SenateSenate AgricultureAgriculture ChairmanChairman LugarLugar presentspresents planplan forfor anan $8$8 perper poundpound quotaquota buybuy--outout atat firstfirst AgAg hearinghearing CongressionalCongressional HearingsHearings Q SeptemberSeptember 3,3, 19971997.. SenateSenate LaborLabor CommitteeCommittee testimonytestimony revealsreveals thatthat SettlementSettlement legislationlegislation willwill bebe pushedpushed intointo 1998.1998. Q JulyJuly 30,30, 1997.1997. SenateSenate JudiciaryJudiciary CommitteeCommittee holdsholds thirdthird hearinghearing onon Settlement,Settlement, primarilyprimarily hearinghearing witnesseswitnesses callcall forfor “full“full disclosure,”disclosure,” FDAFDA authority,authority, andand nono immunity.immunity. Q JulyJuly 29,29, 1997.1997. Dr.Dr. KoopKoop andand formerformer FDAFDA HeadHead KesslerKessler telltell thethe SenateSenate CommerceCommerce CommitteeCommittee toto rejectreject thethe JuneJune 2020 agreement.agreement. Q JulyJuly 16,16, 19971997.. JudiciaryJudiciary CommitteeCommittee focusesfocuses onon legallegal issuesissues afterafter JuneJune 2626 testimony.testimony. McCainMcCain SettlementSettlement LegislationLegislation

Q Senator McCain (R-AZ) introduces S.1414 on November 8, 1997. Q Similar to June 20th Agreement. Q Includes Senator Ford’s $28.5 billion grower provisions. Q Upfront Payment: $10 billion Q 25-Year cost: $397 billion. Q Annual Payment Range: $10.6 - $17.1 billion. Q Tax Deductibility: all payments are deductible as normal business expense. Q Youth Penalty: $ 80 million for each p.p. short of target. McCainMcCain SettlementSettlement LegislationLegislation

Q FDAFDA JurisdictionJurisdiction:: FDAFDA fullfull jurisdictionjurisdiction butbut cancan notnot eliminateeliminate nicotinenicotine forfor 1212 years.years. Q AnnualAnnual PenaltyPenalty CapCap:: $2$2 billion.billion. Q AdvertisingAdvertising:: NoNo advertisingadvertising exceptexcept blackblack && whitewhite tombstonetombstone adsads inin adultadult magazines.magazines. LimitedLimited POSPOS advertisingadvertising allowed.allowed. Q SenatorSenator McCain’sMcCain’s billbill simplysimply codifiescodifies thethe JuneJune 20th20th agreementagreement andand addsadds financialfinancial protectionprotection forfor farmers.farmers. HatchHatch SettlementSettlement LegislationLegislation

Q Senator Hatch (R-UT) introduces S.1530 on November 13, 1997. Q Upfront Payment: $10 billion. Q 25-Year Cost: $398.3 billion. Q Annual Payment Range: $9.8 - $16.5 billion. Q Tax Deductibility: all payments are deductible as normal business expense. Q Youth Penalties: $100 million for each p.p. <=5. Increases to $500 million for each p.p. after year 10. Q Annual Penalty Cap: $5 billion cap < yr 10; $10 billion cap > yr 10. HatchHatch SettlementSettlement LegislationLegislation

Q FDAFDA JurisdictionJurisdiction:: FDAFDA hashas jurisdictionjurisdiction toto regulateregulate tobaccotobacco asas aa drug.drug. CanCan regulateregulate nicotinenicotine immediately.immediately. Q AdvertisingAdvertising:: NoNo advertising,advertising, exceptexcept forfor blackblack andand whitewhite tobstonetobstone adsads inin adultadult magazines.magazines. LimitedLimited POSPOS advertising.advertising. Q FarmersFarmers:: $16$16 billionbillion overover 2525 years.years. Q DramaticallyDramatically increasesincreases thethe LookLook BackBack penaltiespenalties fromfrom originaloriginal settlementsettlement andand increasesincreases annualannual paymentspayments modestly.modestly. KennedyKennedy SettlementSettlement LegislationLegislation

Q Senator Kennedy introduces S.1491 and S.1492 on November 8, 1997. Q S.1491 raises cigarette excise tax to $1.89 per pack in 2002, while S.1492 provides for punitive damages. Q Upfront Payment: None. Q 25-Year Cost: $500+ billion. Q Annual Payment Range: N/A. Q Tax Deductibility: No payments are tax deductible. Q Youth Penalties: Significantly higher than June 20th agreement ranging from $0.02 per pack for each p.p. <=5 to $0.06 per pack. If targets not met in 4 years, generic packaging only. KennedyKennedy SettlementSettlement LegislationLegislation

Q Annual Penalty Cap: None. Q FDA Jurisdiction: FDA has full jurisdiction to regulate tobacco products as drug delivery device and all advertising. Can regulate nicotine immediately. Q Advertising: No specific restrictions described, but FDA has full authority to regulate advertising. Q Farmers: $9.2 billion for growers over 3 years for tobacco communities. Q Kennedy rejects June 20th agreement except for two proposals and funds anti-smoking programs. His also includes $1.50 per pack tax increase. LegalLegal Issues:Issues: McCainMcCain && HatchHatch

QQ BothBoth McCainMcCain andand HatchHatch legislation:legislation: QQ NoNo punitivepunitive damagedamage claims.claims. QQ NoNo classclass actionaction claims.claims. QQ NoNo consolidatedconsolidated individualindividual claims.claims. QQ State/LocalState/Local claimsclaims outlawed.outlawed. LegalLegal Issues:Issues: KennedyKennedy

QQAllowsAllows allall formsforms ofof claimclaim againstagainst thethe industryindustry includingincluding punitivepunitive damages,damages, classclass actionaction andand consolidatedconsolidated individualindividual cases.cases. TobaccoTobacco Settlement:Settlement: NextNext StepsSteps

Q MISSISSIPPI: Medicaid lawsuit settled July 3, 1997 for $3 billion over 25 years Q FLORIDA: Broin ETS case (class action) settled October 10, 1997 for $300 million Q FLORIDA: Medicaid lawsuit settled August 24 for $11.3 billion over 25 years Q FLORIDA: Wilner & Engle suits now on hold Q TEXAS: Medicaid lawsuit settled January 15, 1998 for $15.2 billion. Q Minnesota: Medicaid Suit Next TobaccoTobacco Settlement:Settlement: NextNext StepsSteps

Q Settling lawsuits with the States applies pressure on Congress to act Q The Minnesota Case is unique since Blue Cross / Blue Shield is a plaintiff. Can the industry settle with a private insurer? Q Other class actions for private insurers are now moving: Washington State vs. Pennsylvania. Q Asbestos Cross-Actions Now Appear Q And the Appelate Court Decision on FDA Authority has still not been rendered TobaccoTobacco Settlement:Settlement: NextNext StepsSteps

Q And the Appelate Court Decision on FDA Authority has still not been rendered many months after the August 1997 hearing. What really is its significance at this point? Q Has the Settlement Become a Political Football? Trent Lott & Newt Gingrich for the Republicans vs. Bill Clinton & Ted Kennedy for the Democrats Q March 16, 1997 Deadline set by Sen. Conrad (D-ND) for committee proposals Q Hatch-Bliley (R) vs. Conrad-Fazio (D) TheThe USUS SettlementSettlement

Q SOSO LET’SLET’S TAKETAKE AA LOOKLOOK ATAT WHATWHAT THETHE LIKELYLIKELY ECONOMICECONOMIC IMPACTIMPACT MIGHTMIGHT BEBE OFOF THETHE NEWNEW PRICEPRICE LEVELSLEVELS Q ANDAND LET’SLET’S RECOGNIZERECOGNIZE THATTHAT PRICINGPRICING CONSISTSCONSISTS OFOF THREETHREE KEYKEY UNDEFINEDUNDEFINED VARIABLES:VARIABLES: –– COSTSCOSTS OFOF THETHE SETTLEMENTSETTLEMENT –– HIGHERHIGHER STATESTATE EXCISEEXCISE TAXESTAXES –– HIGHERHIGHER FEDERALFEDERAL EXCISEEXCISE TAXESTAXES TobaccoTobacco Settlement:Settlement: EconomicEconomic ImpactImpact

Q $368.5 billion - $750 billion Q $550 billion average over 25 years or $22 billion per year equates to about 4 times the current excise tax of 24 cents per pack = 96 cent price increase. Q Federal excise tax hike of 17 cents per pack plus another 10 cents in 2000 and 5 cents in 2002 for a total of a 32 cent increase or 56 cents per pack overall. Q Total Cost: 96 + 56 = $1.52 per pack TobaccoTobacco Settlement:Settlement: EconomicEconomic ImpactImpact

Q President Clinton stated that cigarette prices need to increase by "up to $1.50 over the next decade." Q The current proposed settlement would achieve this in 5 years. Q The average retail prices on cigarettes would go up from the 1996 average price of $1.85 by 81%, or $1.52, to $3.37 per pack in 2002. TobaccoTobacco Settlement:Settlement: EconomicEconomic ImpactImpact

Q But what about the States? Only 14 States have excise tax rates above 50 cents per pack. The other 36 could double their rates and be under Alaska’s $1.00 rate. Such a doubling would yield another roughly 40 cents per pack overall. Q Total cost = $1.92 per pack Q Savings: litigation $1 billion per year; marketing expenses $5 billion per year = 40 cents per pack; total net hike not far from the $1.50 Mr. Clinton wants TobaccoTobacco Settlement:Settlement: EconomicEconomic ImpactImpact

Q Using an elasticity of 0.4, overall U.S. volumes reportedly may fall by 21% from 484bn units in 1996 to 382bn cigarettes in 2002. Q The 7.6% price hike (7 cents per pack) September 1997, largest ever, to raise settlement funds for Mississippi, Florida, and Texas was reportedly easily absorbed by consumers. TobaccoTobacco TrialTrial CalendarCalendar -- 19971997

January 24 FLORIDA: Medicaid punitive damages hearing.

July 3 MISSISSIPPI: Medicaid lawsuit settled July 3, 1997 for $3 billion over 25 years June 2 FLORIDA: Broin ETS case (class action) settled October 10, 1997 for $300 million August 4 FLORIDA: Medicaid lawsuit settled August 24 for $11.3 billion over 25 years August 4 FLORIDA: Wilner lawsuit now on hold September 8 FLORIDA: Engle lawsuit now on hold September 22 TEXAS: Medicaid lawsuit settled January 15 for $15.2 billion. World Cigarette Prices - 1996 Over $2.40 per pack of 20. Between $0.38 and $0.48 Between $1.31 and $2.40 per pack of 20. per pack of 20. Between $0.92 and $1.31 per pack of 20. Below $0.38 per pack of 20. Between $0.66 and $0.92 per pack of 20. Between $0.59 and $0.66 per pack of 20. Between $0.48 and $0.59 per pack of 20. World Cigarette Prices After the U.S. Settlement Over $2.65 per pack of 20. Between $0.38 and $0.48 Between $1.31 and $2.40 per pack of 20. per pack of 20. Between $0.92 and $1.31 per pack of 20. Between $0.66 and $0.92 per pack of 20. Below $0.38 per pack of 20. Between $0.59 and $0.66 per pack of 20. Between $0.48 and $0.59 per pack of 20. World Tax Incidence - 1996 Over 68.15% BetweenBetween 38.138.1--52.5%52.5% BetweenBetween 55.655.6--68.2%68.2% Below 38.1% Between 52.5-55.6% World Tax Incidence after the U.S. Settlement Over 68.15% BetweenBetween 38.138.1--52.5%52.5% BetweenBetween 55.655.6--68.2%68.2% Below 38.1% Between 52.5-55.6% U.S.U.S. CigaretteCigarette Exports:Exports: Dept.Dept. ofof CommerceCommerce vs.vs. IndustryIndustry ReportsReports (Billions(Billions ofof Pieces)Pieces)

280 269.8 260.7 260 243.9 240 Industry Reports 224.7 231.1 Dept. of Commerce 220 220.2 205.1 206.2 200 205.6 195.5 180 1992 1993 1994 1995 1996 U.S.U.S. CigaretteCigarette Price:Price: ManufacturerManufacturer vs.vs. ExportExport (US(US DollarsDollars perper 1,0001,000 pieces)pieces) 60 54.77 50 46.78 42.32 40 43.95 33.78 Manufacturer Price 28.98 (excl. Fed. Ex. Tax) 30 25.98 22.55 Export Price 20 22.32 20.3 19.09 19.42 10

0 1986 1988 1990 1992 1994 1996 U.S.U.S. CigaretteCigarette ConsumptionConsumption ForecastsForecasts (Billions(Billions ofof Pieces)Pieces) 477 480 458 460

440 431 418 420 410 402 400

380

360 1997 1999 2001 2003 2005 2007

This forecast does not assume any FDA regulations or a tobacco settlement. U.S.U.S. CigaretteCigarette ConsumptionConsumption ForecastsForecasts AssumingAssuming aa 1717 CentCent PerPer PackPack IncreaseIncrease inin thethe FederalFederal ExciseExcise TaxTax TakesTakes PlacePlace inin 19991999 (Billions of Pieces) 477 480

460 439 440 418 420 405 397 400 389 380

360 1997 1999 2001 2003 2005 2007

Note: Once again, these estimates assume no settlement.. U.S.U.S. CigaretteCigarette ConsumptionConsumption ForecastsForecasts AssumingAssuming aa 4040 CentCent PerPer PackPack IncreaseIncrease inin thethe ManufacturedManufactured PricePrice TakesTakes PlacePlace inin 19981998 (Billions of Pieces) 477 480

460

440 435

420 411 399 400 391 383 380

360 1997 1999 2001 2003 2005 2007

Note: The settlement fund would amount to $8.5 bn in 1998.. U.S.U.S. CigaretteCigarette ForecastsForecasts (Billions(Billions ofof pieces)pieces) 500 477 450 No Settlement No Settlement, FET 400 Settlement 350 FTC Settlement Industry 1 (0.5) 300 Industry 2 (0.75)

250 1997 1999 2001 2003 2005 2007 U.S.U.S. LeafLeaf RequirementsRequirements forfor CigaretteCigarette ForecastsForecasts ((MnsMns.. ofof pounds)pounds) 600

550 541 No Settlement 500 No Settlement, FET Settlement 450 FTC Settlement 400 Industry 1 (0.5) Industry 2 (0.75) 350

300 1997 1999 2001 2003 2005 2007 FarmlandFarmland ImplicationsImplications QQ ThreeThree ProposalsProposals forfor DomesticDomestic FlueFlue--CuredCured LeafLeaf IndustryIndustry 1.1. RetainRetain CurrentCurrent TobaccoTobacco ProgramProgram 2.2. ReallocateReallocate QuotaQuota andand RestructureRestructure TobaccoTobacco ProgramProgram 3.3. EliminateEliminate TobaccoTobacco ProgramProgram (Deregulate(Deregulate TobaccoTobacco Production)Production) U.S.U.S. FlueFlue--CuredCured LeafLeaf DemandDemand inin FiveFive YearsYears (Based(Based onon $1.20$1.20 perper PackPack PricePrice Increase)Increase) Flue-Cured Total Domestic Leaf Price Demand Demand Exports ($/lb.) (mns. of lbs.) (mns. of lbs.) (mns. of lbs.) Initial Levels 1.73 890 510 380 Proposal 1: No 1.73 787 407 380 Change in Price Proposal 2a: 1.66 864 433 431 Slightly Lower Price Supports Proposal 2b: 1.62 905 446 459 Lower Price to Maintain Demand Proposal 3: 1.30 1390 590 800 Eliminate Program FordFord TobaccoTobacco GrowerGrower LegislationLegislation

Q SenatorSenator FordFord (D(D--KY)KY) introducesintroduces S.1310S.1310 onon OctoberOctober 23,23, 1997.1997. Q MaintainsMaintains currentcurrent tobaccotobacco quotaquota system.system. Q RequiresRequires cigarettecigarette manufacturersmanufacturers toto paypay $28.5$28.5 billionbillion overover 2525 yearsyears forfor growergrower andand farmfarm communitycommunity assistance.assistance. Q EarmarksEarmarks $2.1$2.1 billionbillion perper yearyear forfor thethe firstfirst 1010 years,years, andand $500$500 millionmillion annuallyannually forfor yearsyears 1111 -- 25.25. Q GrantsGrants tobaccotobacco proproducersducers immunityimmunity.. RobbRobb TobaccoTobacco GrowerGrower LegislationLegislation

Q Senator Robb (D-VA) announces November 3, 1997 that he plans to introduce tobacco grower legislation. Q Limits tobacco production to present Tobacco Producing Regions. Q Pays quota owners $8 per pound for their quota. Five annual installments of $1.60 per pound based on the 3 year average of basic quota. Q New privatized program instituted to give growers only, the right to grow tobacco through the issuance of licenses. Q Price support system still exists. RobbRobb TobaccoTobacco GrowerGrower LegislationLegislation

Q Only tobacco producers would receive a license to grow tobacco. Q Privatized authority would govern production, marketing, importation, exportation and consumer quality assurance. Q Economic development funds for communities. LugarLugar TobaccoTobacco GrowerGrower LegislationLegislation

Q SenatorSenator LugarLugar (R(R--IN)IN) introducesintroduces S.1313S.1313 onon OctoberOctober 24,24, 1997.1997. Q PhasesPhases--inin thethe endend ofof thethe tobaccotobacco quotaquota systemsystem beginningbeginning inin 1999.1999. Q PaysPays quotaquota ownersowners $8$8 forfor everyevery poundpound ofof quotaquota theythey own.own. Q GivesGives tobaccotobacco producersproducers transitiontransition paymentspayments ofof 4040 centscents perper poundpound overover threethree consecutiveconsecutive years.years. Q GrantsGrants producersproducers thethe rightright toto growgrow whateverwhatever amountamount ofof tobaccotobacco theythey choose.choose. Q ProvidesProvides $300$300 millionmillion inin economiceconomic assistance.assistance. GlobalGlobal TrendsTrends QQ ProductProduct TrendsTrends QQ FinancialFinancial TrendsTrends QQ USUS SettlementSettlement &Public&Public PolicyPolicy TrendsTrends QQ EmergingEmerging IssuesIssues andand ProductsProducts AndAnd soso thethe challengeschallenges grow...grow...

Q More and larger package health warnings covering more of the pack Q Advertising and promotional restrictions all the way to point of sale Q Fewer and fewer places to smoke Q Costing consumers more and more as tax hikes become a public policy instrument of choice Q Fewer ingredients available with more disclosure required pushing us towards generic packagings or at least new overwraps Tobacco Marketing Restrictions: 1997 Tobacco advertising and/or promotional ban. Broadcast and print restrictions. Broadcast restrictions. No restrictions known. North South Divide

Tobacco Marketing Policies by 2005 Tobacco advertising and/or promotion ban. Near total promotion ban (Adults only). Collateral advertising and sponsorship restrictions. Sponsorhip restrictions. No restrictions known. RJR’sRJR’s SmokelessSmokeless CigaretteCigarette ProductsProducts

Q Premier - In 8/88, RJR test marketed in the U.S. what was considered the first cigarette brand that would produce no ash or environmental tobacco smoke (ETS) when smoked. Smokers, however, criticized the product as “foul tasting” and lacking in flavor. In March 1989, RJR ended the test marketing. Q Eclipse - In 6/96, RJR began test marketing the brand that self-contains the entire tobacco burning process and therefore does not release ETS into the air. In early feedback, smokers have regarded the product as fine tasting, but complained that the cigarette is difficult to light. Q Hi-Q - Similar to Eclipse, this brand is now being sold in Germany. PM’sPM’s “De“De--NicotinedNicotined”” CigaretteCigarette BrandBrand NextNext -- InIn 1991,1991, PMPM testtest marketedmarketed thethe “de“de-- nicotinednicotined”” cigarettecigarette brandbrand whichwhich containedcontained onlyonly 0.10.1 mgmg ofof nicotinenicotine perper cigarette.cigarette. PMPM usedused directdirect mailmail samplingsampling inin Hartford,Hartford, CT,CT, Omaha,Omaha, NE,NE, Toledo,Toledo, OH,OH, TampaTampa Bay,Bay, FL,FL, andand inin ArizonaArizona toto introduceintroduce thethe newnew productproduct toto smokers.smokers. AfterAfter testtest marketing,marketing, PMPM decideddecided notnot toto launchlaunch thethe product.product. TheThe “All“All Natural”Natural” MovementMovement

Q The US-based Santa Fe Q R.J. Reynolds in June 1996 Tobacco Company’s major began test marketing in brand is Natural American Florida a “no additives” Spirit which contains only version of its Winston cigarette brand. In July flue-cured tobacco leaf and 1997, RJR announced that all is sold at a premium price. Winston cigarettes sold in The brand contains only the U.S. will now only be of quality tobacco leaf and no this variety. Market share additives. Currently, Santa has stabilized as a result. Fe is buying organic burley Q Candian-based Imperial tobacco at twice the current Tobacco in August 1997 price for use in another “all- began test marketing natural” cigarette brand. Mercer, a “no-additives” Sales have exploded and brand, in the northwest US. they are going international. TheThe GrowthGrowth ofof LargeLarge PiecePiece PacksPacks inin AustraliaAustralia Q Due to the 1990 nationwide ban of cigarette advertising in the print media, the tobacco industry began to seek alternative marketing vehicles at a time when cigarette consumption was slowly declining. Q For the first few years, cigarette marketing meant price-cutting which led to a price war. Q Cigarette companies then began to launch cigarette brands such as Philip Morris’ Longbeach, Wills’ Horizon, and Rothmans’ Holiday which contained 40 and 50 cigarettes per pack. The rise of these big packs reduced the market share of top selling brands such as Rothmans’ Winfield. TheThe ProliferationProliferation ofof LargeLarge PiecePiece PacksPacks inin AustraliaAustralia (%(% ofof TotalTotal Market)Market) 45 41.3 41.9 40.8 40 35 30 27.1 25 20 14.8 15 10 7.3 5 0 1986 1988 1990 1992 1994 1996 AndAnd WeWe InnovateInnovate More...More...

Q SellingSelling cigarettescigarettes becomesbecomes moremore likelike sellingselling alcohol…thealcohol…the growthgrowth ofof controlledcontrolled salesale cigarettecigarette stores…largestores…large volumevolume singlesingle salessales Q AsAs eacheach consumerconsumer spendsspends $40$40 aa carton,carton, wewe realizerealize thatthat atat $2,000$2,000 perper yearyear wewe maymay needneed toto provideprovide financingfinancing options…creditoptions…credit cards?cards? Q MailingMailing listslists ofof smokerssmokers becomebecome moremore refinedrefined asas marketingmarketing goesgoes oneone onon oneone EMERGINGEMERGING ISSUESISSUES Q TheThe YouthYouth IssueIssue 1. Smoking by Parents -- “Child Abuse” 2. Custody Proceedings in Divorce Cases Q NewNew && NovelNovel ETSETS IssuesIssues 1.1. SmokingSmoking OutdoorsOutdoors 2.2. SmokingSmoking atat HomeHome ---- CorridorsCorridors Q Taxes,Taxes, Taxes,Taxes, TaxesTaxes ---- AllegedAlleged ManufacturerManufacturer ComplicityComplicity withwith SmugglersSmugglers Q TheThe InsuranceInsurance ConnectionConnection:: SmokingSmoking inin Cars;Cars; ShortenedShortened LivesLives vs.vs. HealthHealth--CareCare ExpExpeensesnses ProductProduct StandardsStandards

Q AA 250250 mmmm cigarette?cigarette? Q AA magnifyingmagnifying glassglass withwith everyevery pack?pack? Q AA throwthrow--awayaway overwrapoverwrap?? Q MoreMore allall--naturalnatural products?products? Q AnotherAnother MoneyMoney TradeTrade--Off?Off? GlobalGlobal TrendsTrends QQ ProductProduct TrendsTrends QQ FinancialFinancial TrendsTrends QQ PublicPublic PolicyPolicy TrendsTrends QQ EmergingEmerging IssuesIssues andand ProductsProducts Relax,Relax, EnjoyEnjoy AA CigarCigar EveryoneEveryone ElseElse IsIs