June 10, 1994 PM-USA Business Planning
Art Padoan - x3682
Lou Lembo - x3620
Competitor Review - May 1994
INDUSTRY - FINANCIAL RESULTS
Competitor Financial Results - First Quarter 1994
Income from Operations (Before Amortization of Intangibles and Unallocated
Quarter Ended March 31, 1994
Domestic Share of IFO Oper.
Tobacco %Chllo Ind .IFO Per M Marain
PM-USA $769 (25)% 53 .1% $15 .48 40 .5%
RJR $393 (21)% 27 .1% $12 .02 34 .7%
B&W $90 100+% 6 .2% $6 .86 20 .0%
Lorillard $133 2% 9 .2% $15 .30 37 .7%
American $55 (46)% 3 .8% $6 .62 19 .9%
Liggett $_$ 400% 0 .6% $ 2 .89 9 .7%
Total Industry $1,448 (20)% 100 .0% $12 .56 34 .5%
PM-USA's income from operations led all competitors during the first quarter,
representing over 53% of total industry income, almost twice that of RJR .
RJR was able to maintain its operating margin (34 .7%) at approximately the same level
as first quarter 1993 (35 .6%) through a better product mix and by reducing marketing
spending, particuiarly price promotions . In addition, the company is reportedly realizing
cost benefits sooner than expected from its restructuring in late 1993 . RJR has paid the
price for its spending cuts by losing market share, particularly for its discount products .
The company lost 1 .3 share points between January and April, according to Nielsen
RJR management has cautioned tobacco industry analysts that operating margins will
be lower in future quarters as RJR responds to its competition . We are already seeing
an increase in Camel promotions in C-stores during April and May . However, RJR is
expected to carefully manage marketing spending in order to increase operating income
in 1994 by 10% to 15% (IFO = $1,325 million to $1,380 million) .
-1- June 10, 1994
In a 10Q report filed with the SEC in mid-May, Loews Corporation reported a net loss
for the first quarter 1994 of $5 .9 million . The loss is attributable to Loews' CNA property
and casualty division, which was hit with a high number of catastrophe claims stemming
from the California earthquake and severe winter storms in the northeast . Lorillard was
Loews' only profitable division in the first quarter with the exception of their investment
in CBS, which yielded $10 .2 million in equity income . Analysts are projecting Loews'
1994 net income to decline 24% to $450 million, with EPS falling 22% to $7 .25 per share.
Tobacco - Lorillard
Lorillard's net income increased almost 2% versus year ago to $78 .4 million as revenue
increased 3% to $457 .6 million . Estimated operating income increased a similar
percentage, rising almost 2% to $133 .3 million . Unit volume for the first quarter was up
26% due to a very favorable comparison with last year as a result of forward buying
by the trade in the fourth quarter of 1992.
We anticipate that 1994 will be a tough year for Lorillard . Although unit volume is
forecast to be up over 7% this year, lower premium brand list prices and increased
competition will make it difficult for Lorillard to match last year's operating income
performance . Based on first quarter margin and quarterly volume estimates, it appears
that Lorillard will post operating income (before any restructuring charge) of $540 million,
or roughly 10% below last year's IFO of $592 million . In order for 1994 IFO to equal
1993, the operating margin would have to improve by 4 points to 41 .7% . The $50
million difference represents an estimated 10% reduction in projected 1994 marketing
spending ($475 million) .
Lorillard's management is taking steps to improve profitability . They have reportedly
hired management consultants McKinsey & Co . to make recommendations for
streamlining and cost cutting in 1994 . Lorillard was the only company not to announce a
major restructuring in 1993.
As mentioned, Lorillard's first quarter unit volume increased almost 27% versus last year
due to forward buying by the trade in the fourth quarter of 1992, which depressed first
quarter 1993 shipments . Newport accounted for the majority of the increase, rising
almost 32% to 5 .9 billion units . The brand represented 68% of Lorillard's first quarter
volume . Discount represents a very small percentage of Lorillard's total units,
accounting for only 4 .2% in the first quarter 1994 . Old Gold, the only brand with a
discount list price, reported 12% lower volume versus year ago .
RJR NABISCO/R .J . REYNOLDS TOBACCO
RJR Expects 15% Annual Growth In EPS Over Next Five Years
RJR Nabisco Holdings Corp . Chief Executive Mike Harper says the company's
objective over a five-year period is earnings trendline growth of 15% . At the company's
annual meeting, Harper said, "We expect a 20% return on equity during that [five-year]
period ." Asked if a dividend or stock buyback was possible, Harper said, "The worst
thing to do would be to pay dividends on buyback stock . We intend to grow the value N
of that stock ." 0
-2- June 10,1994 C13
Chairman Harper added, "We are no longer looking to pay off debt . We are now
challenging our management to find profitable ways of investing money . We are looking
more aggressively at acquisitions ." "The only acquisitions that are effectively ruled out
are in the U .S . tobacco industry . One would probably not buy another cigarette
RJR Split-Up (Speculated by Security Analysts)
On April 28, RJR Nabisco Holdings Corporation completed the offering of 270 million
shares of a preferred-stock issue (that will be converted into common stock in three
years) and raised $1 .625 billion .
Company management indicated that the money raised from the sale will be used for
general corporate purposes, such as refinancing debt and possible corporate deals
such as spinoffs, mergers or acquisitions .
Goldman Sachs analyst Marc Cohen and Bernstein Research analyst Gary Black
believe that RJR will separate its food and tobacco business later this year.
Gary Black predicts an RJR spinoff this fall, and further speculated that RJR would
simultaneously sell or merge its tobacco business with a foreign partner .
Goldman, Sachs Tobacco analysts Marc Cohen and Catherine Oakley believe that
management at RJR will probably soon announce a split-up of the company (within a
three-to-six month time frame) . They stated the following three reasons why it makes
sense for RJR to separate its food and tobacco businesses :
1 . Unlocking value for equity holders ; a split could induce as much as a 55 percent
increase in the stock price (up to as much as 9 1/4 per share) .
2 . KKR's large ownership stake ; KKR, which owns 45 percent of RJR's stock and, in
turn, has in the order of 40-45 percent of its investor funds in RJR shares, has much
greater incentive to unlock shareholder value than Philip Morris .
3 . Strategic advantages ; a freestanding Nabisco would have access to the public debt
market at much lower cost than the current combined entity does today . They also
think a separation from tobacco would mean further, clearer insulation from the liability
Both analysts also believe the company would approach the IRS for a tax ruling that
such a spinoff would be tax free to shareholders .
Here are RJR executive remarks regarding a company split :
May 19 : RJR has no timetable to split the company, if ever . Its Plan is to continue
with an annual 15% growth in EPS over the next five years and provide a
20% return on investments . "There's no plan to split."
. . . .James Johnston
Chairman and CEO
RJR Tobacco Worldwide
- ne 10, 1994 CG
May 16 : "We have been studying all sorts of different situations, some of which
included spinning off the tobacco company . There are no plans ; there are
possibilities . We are looking at some now and we will look at some in the
next 100 years until we find something that says it should be done from
the shareholders' standpoint . We don't have an objective to split the
. . . .Charies M. Harper
Chairman and CEO
RJR Nabisco Holdings Corp .
Chairman Harper also said that there are a lot of trade-offs to be considered in deciding
whether RJR Nabisco should be split or not . The food company would not have
access to the large cash flows of the tobacco company.
RJR Nabisco's Debt Rating Upgraded by S&P
Standard & Poor's Ratings Group has affirmed the investment-grade debt rating of RJR
Nabisco Holdings Corp . due to a stabilization of the U .S . tobacco market . Last
September, S&P placed the debt on CreditWatch with negative implications . RJR
currently has $16 billion of debt outstanding . S&P said it believes RJR's management
intends to maintain investment-grade ratings for its bonds, even if its food and tobacco
units are split. The agency said one possibility for RJR is "taking on a partner to effect
a separation of these businesses ."
RJR Announces New President
R . J . Reynolds Tobacco Company announced this month that Andrew J . Schindler has
been named to the new position of President and Chief Operating Officer - U .S .A .
Schindler was executive vice president of operations . Schindler will report to James W .
Johnston, chairman and chief executive officer of both R .J . Reynolds Tobacco
Worldwide and R .J . Reynolds Tobacco Company . Schindler will have responsibility
for RJR's U .S . marketing, sales, manufacturing, procurement, distribution and finance
Schindler, 49, joined R .J . Reynolds Industries, Inc . (now RJR Nabisco, Inc .) in 1974 as
an organizational development consultant . He has held a series of human resources
and manufacturing management positions at both RJR Tobacco Company and Nabisco
Foods, as follows : 1988-89--VP, RJR Tobacco ; 1987--Director of Manufacturing at
Nabisco ; 1982--Plant Manager at RJR Tobacco ; 1979--Director, Organization and
Management Development, RJR Tobacco ; 1973--National Manager, Sales Personnel,
RJR Tobacco .
Mr. Johnston said, 'Turning over the day-to-day management of the domestic business
to Andy will enable me to focus on strategies for aggressively building our business
around the world as well as external strategy development "
"Andy has been intimately involved in establishing our current plans and programs, and
he is committed to building earnings," Johnston said .
We expect that Mr . Schindler will further consolidate the company's domestic tobacco
plants ; namely, Whitaker Park and Tobaccoville .
-4- June 10, 1994
Vermont Senate Defeats "Joe Camel" Advertising Ban
A proposal to ban cartoon cigarette advertisements allegedly aimed at children has been
defeated in the Vermont Senate . The proposal, which won House approval earlier this
year, was considered dead in the Senate Judiciary Committee until another panel, the
General Affairs and Housing Committee, added it to a separate bill regulating the alcohol
content of beer sold in Vermont stores .
FTC Decides Not to Pursue Joe Camel
The FTC has decided not to pursue a complaint against R .J . Reynolds' Joe Camel
advertising campaign, according to Scott Ballin, chairman of the Council on Smoking OR
Health . The move follows three years of debate and represents a setback for anti-
smoking activists. Ballin, whose group filed the initial petition against the campaign, said
the FTC voted 3-2 not to take action . The FTC would not confirm that a vote had been
The Coalition on Smoking OR Health plans to advocate a "much broader view that all
cigarette advertising is inherently unfair because the product is unsafe and addictive,"
Scott Ballin said.
Joe Camel Ad Campaign Sued by Seattle Woman
A Seattle woman has filed a purported class-action lawsuit aimed at stopping the "Joe
Camel" promotional campaign, claiming it is deceptive and illegal advertising aimed at
young people . The lawsuit, filed in King County Superior Court, was entered on behalf
of "any parent with a conscience ." The plaintiff, Karen Sparks, is the mother of two
children, according to her attorney, Steve Berman . "The plaintiff's view is that the ads
are deceptive and directed toward young people and they're dangerous," Berman said .
The lawsuit seeks an injunction to stop the campaign, corrective advertising on
television and in print, and punitive damages . It seeks to become a class action and a
jury trial is demanded .
R .J . Reynolds Fights Back In Ad Campaign
In an aggressive attempt to sway public opinion, R .J . Reynolds Tobacco kicked off a
multimillion-dollar advertising campaign in May . Full-page ads that ran in major
newspapers including the Washington Post, New York Times, Wall Street Journal, and
USA Today, were designed to express the company's perspective in the smoking
debate . The first ad deals with secondhand smoke, claiming that the amount of
secondhand smoke to which non-smokers are exposed is actually "very little" . Other
ads are expected to tackle smoking bans, taxes, and the rights of business owners .
RJR has named the advertising firm of Doig, Elliott, Scur (New York) as its first agency
handling the campaign .
Reynolds' ads are calling for peaceful coexistence between smokers and nonsmokers .
Reynolds said that people want smoking turf wars resolved without government
Representative Waxman (D-CA) labeled the campaign "a deliberate attempt to buy
credibility and create uncertainty ."
-5- June 10,1994
Marketing and Field Sales Activities . . .
Winston Select Begins "Select Weekends" Sweepstakes
Winston Select has begun its "Se!ect Weekends" Sweepstakes with a direct mailing to
adult smokers . The sweepstakes offers the chance to win one of 21 weekend trips,
including trips to Las Vegas and the Bahamas .
The direct mailing also contains a"Se!ect Weekends Gear" catalog which offers several
items that can be ordered with pack proof of purchase stamps (each pack of Winston
Select has a stamp worth two proofs) . Items available for order include watches,
lighters and a alugJean_iacket w!th a cowboy hat and bull horns embossed on the back .
The catalog also offers the opportunity to "purchase" a money-off coupon, $2 off a
carton or 3 packs. All Sweepstakes and order entries must be received by January 14,
Attached to the back of the mailing are two coupons, one for $2 off four packs or a
carton, and the second for $1 off three packs, and a stamp worth ten proofs for "Select
Winston's other packing varieties are part of another continuity program offering a free
40-year Commemorative catalog .
Camel Smokers Receive V.I .P . Cards
Camel Smokers received their "V .I .P ." cards in May . The card offers Camel smokers
special treatment for V.I .P . events, Smokin' Joe's racing schedule and V.I .P . travel
packages, including weekend getaways to over 35 resorts . A family of four (maximum
of two adults) can stay at any of the resorts for three days and two nights for only $100
plus 20 "C-Notes ." Each pack of Camel Filters includes one (1) C-Note .
The mailing also included ten C-Notes and an order form for V .I .P . t-shirts and caps .
Monarch Takes on Newport
In a direct mailing received by competitive menthol smokers, Monarch offered two
coupons for the purchase of either Monarch Menthol Box or Monarch Menthol Lights
Box . One coupon offers a B1G1 F (pack) while the second offers $1 off the purchase of
two packs or one carton . Monarch is apparently going after premium menthol smokers
as the language on the mailing reads, "now get the balanced menthol taste you like in a
box . . .without paying Newport's pr!ce!" The coupons expire 6/30/94 .
In a more recently distributed direct mail piece, RJR is offering B2G1 F pack on Monarch
Menthol Box or Monarch Menthol Lights Box and a $1 off the purchase of two packs or
one carton of any style of Monarch . The coupons expire 7/31/94 . The tagline reads,
"Great Taste Without Newport's Price!" This mailing was accompanied with a sign-up
card to enlist a friend who'd like to receive "special valuable savings" by mail .
RJR Switch-Selling Marlboro and Marlboro Lights (in Cinclnnatl)
It has been reported that retailers (C-Stores and C-Stores with gas) are switch-selling
smokers who are purchasing Marlboro or Marlboro Lights with free packs of Winston
Select and Winston Select Lights . The smokers then fill out an information card which
the retailer returns to National Smoker Services in Dallas, TX for reimbursement . RJR
has only offered a T-Shirt to retailers who perform the switching .
-6- June 10, 1994
RJR appears to be aggressive in trying to establish an impactful presence at POS for
its Winston Select and Camel brands . Retail activities include the placement of free-
standing promotion displays and stepped up discounting (via buydowns and coupon
Camel appears to be RJR's focus in C-stores, while Winston Select is its focus in
supermarket/carton outlets .
Further emphasis is being placed by RJR on Box styles for both of these brands .
RJR Sales Reps Utifizing New Computer
It has been reported that RJR Sales Reps are equipped with a new hand held
computer system that prints price off stickers and coupons during sales calls . These
units have been utilized in PA, N .Y . and MA .
In Boston RJR Reps now appear to have the facility to print brand and denomination
specific coupons in their vehicles for immediate use at retail . RJR Reps will identify the
price gap between their discount brands (including Forsyth Private Labels) and the
lowest competitor . They then return to their vehicles and generate the coupons to match
competition--not to price below them (i .e . 200 off/Monarch pack, expires 12/31/95) .
The field reports that the new automatic coupon printer will be rolled out nationally during
the second quarter of 1994 .
It is further reported that RJR is using the coupon printer to discount Winston Select and
Camel, but buydowns are the preferred method by RJR because coupons carry an
additional redemption cost of 11 o per coupon .
RJR is using a new permanent lucite catalog holder which attaches to its cigarette
counter displays (Photo forwarded to George Moreo) .
Co-Marketing Accrual Program
RJR Reps apparently introduced to the Charlotte trade the Co-Marketing Accrual
Program via a computer presentation. It is RJR's version of the Retail Masters flex fund.
First quarter accrual monies are available for use during the second quarter of 1994 .
Promotion exam p les where these funds can be applied are : Buydowns, Multi-Pack
Offers, Coffee, Beverage, Gas, Sandwich Offers, and other unique retailer specific
-7- June 10,1994
Planned Promotional Shipments In North Carolina
It is rumored that the following RJR Premium Brands will be promoted during the time
period shown :
May : Winston Select
June-July : Camel
August : Winston Select
September : Camel
November : Camel
B .A.T . INDUSTRIES/BROWN & WILLIAMSON TOBACCO
Executive Remarks re : Acqulsition of American Tobacco
Martin Broughton, B .A .T . chief executive, said, "This acquisition makes immediate
financial sense, enabling B .A .T . to achieve a stronger position by combining the best of
each company's operations in the U .S ."
The American Tobacco Co . acquisition will be financed from B .A .T .'s existing resources,
increasing the forecast year-end debt/equity ratio to about 50% (versus 40% at year
end 1993) .
ATC Acquisition Could Eliminate Some Brands and Build Others
Martin Broughton mentioned that Riviera and Bull Durham were possible candidates for
Wheat, First Securities analyst John C . Maxwell, Jr ., thinks Brown would try to
resuscitate Lucky Strike and Pall Mall and turn them into world brands .
N.C. Governor, County and City Leaders Mobilizing to Appeal to B .A.T. to
Keep American Tobacco Plant In Reidsvllle
The News & Record of Greensboro reported that a task force has been formed to keep
American Tobacco Co . in Reidsville after its sale to B .A .T . Industries . The task force
met and discussed the possibility of tax breaks and other incentives . Local leaders fear
BAT's consolidation of its U .S . cigarette making operations by moving Reidsville jobs to
its B&W plant in Macon, Ga . The Reidsville plant employs 1,018 workers and pays
nearly a quarter of the city's annual tax revenue .
Michael Prideaux, who heads public affairs for B .A.T. Industries said that it is too soon
to tell if it will cut American's work force . The first step in the acquisition is to go through
the U .S . Government's antitrust procedure, which could take six to eight months .
However, the Associated Press reported that union officials indicated that B .A .T . 0
executives would only say that they will retain American Tobacco's work force until 4
June 1995, when the union contract expires . ca
-8- June 10, 1994
B&W Documents Released
Client-Attorney-protected documents from B&W research studies conducted in the
1950s and 1960s showed up in newsprint in May . The documents allegedly
acknowledge that the tobacco industry knew about the dangers of smoking but chose
not to share the information with the public . According to B&W, the documents were
stolen, copied and delivered to various people by a former paralegal .
In response, B&W provided to the Congress and the public the full studies to which the
documents relate and, according to B&W, the studies do not conclude that cigarette
smoking is dangerous. According to a B&W statement, the purpose of the studies was
not to establish or refute any claim that cigarette smoking or nicotine is or is not addictive .
The studies found that nicotine relieves stress and helps reduce obesity, but was
inconclusive on "the phenomenon of addiction ."
B&W states that it does not know which documents were released and would like to
review them prior to responding further . B&W has obtained a court order from a judge in
Kentucky requiring those who have the documents, including Health and Environment
Subcommittee Chairman Henry Waxman, to turn them over to B&W .
Paralegal a "No-Show" at Court Ordered Deposition
A former law firm paralegal who had allegedly stolen privileged documents from Brown &
Williamson Tobacco Corporation violated a court order by not appearing at a deposition
to answer questions regarding his involvement in providing documents to Rep Henry
Waxman (D-Calif), Rep Ron Wyden (D-Ore) and the news media.
Merrell Williams, the former paralegal, said through his attomey that he would invoke the
Fifth Amendment to any questions about his compliance with a court order that
9 rohibited him from copying and distributing stolen attorney-client privilege documents .
&W will seek further sanctions against Williams because of his refusal to appear.
Brown & Williamson Subpoenas Eight for Papers
B&W has sent subpoenas to Rep . Henry Waxman (D-Calif .) and Rep . Ron Wyden
(D-Ore .), as well as six members of the media, for internal documents that B&W says
were improperly leaked by a former employee of its law firm . B&W spokesman Tom
Fitzgerald said, "We feel it's extremely important to set the record straight . We're dealing
with stolen documents and attorney-client privilege . . . . We don't know for sure what
documents the media have . But we do believe that certain members of the press
possess stolen documents that are covered by a court injunction ."
According to a letter Waxman sent to House Speaker Thomas Foley, the subpoenas
flied against him and Wyden are "inconsistent with the privileges and precedents of the
House ." Both Congressmen have vowed to fight the subpoenas .
9 On June 7, U .S . District Judge Harold H . Greene threw out subpoenas to the two
ongressmen, saying that the subpoenas were an effort by the tobacco company to
harass and intimidate the lawmakers) .
-9- June 10, 1994
Waxman Postpones Hearing Until Next Month
Rep . Henry Waxman (D-Calif .), put on hold until June a hearing scheduled for May 20th
in which he wanted Brown & Williamson Tobacco Corp . Chairman Thomas E . Sandefur,
Jr., to testify about the company's nicotine research and use . Waxman rescheduled the
hearing after receiving a letter from B&W attorney Griffin Bell indicating Sandefur would
not appear until an impasse over company documents was resolved .
Rep . Waxman said that he is trying to make every accommodation to work with B&W,
but has no intention of dropping his insistence that Mr . Sandefur testify .
B&W Chairman Responds to NY Times
In correspondence to The New York Times, B&W Chairman Thomas E . Sandefur, Jr.,
accused the NYT of deliberately attempting to "camouflage" its admission of errors in a
previous article that maligned the company .
The letter from Mr . Sandefur (which was run in The Wall Street Journal and The Courier-
Journal) focused on an obscured "Editor's Note" in the Saturday, May 21 issue of the
NYT which admitted the newspaper incorrectly reported that B&W believed "cigarettes
contributed to lung cancer, heart disease and emphysema ."
Marketing and Field Sales Programs . . .
- PM-USA's Western Region reports that broad-based activity by GPC in
mainstream accounts has led to spectacular growth in this brand in the Pacific
Northwest. Now at a 17 .5% share in C-stores, GPC has grown +8 .4 share points
since December. Basic, at a 4 .2% share, has grown only +1 share point over the
same time period . (Western Region will meet with the Discount Group on 6/21 to
discuss a recommendation) .
- National Accounts reported earlier this month that B&W started a $2-off per carton
promotion on GPC in 7-11 stores (West Coast only) ; product was invoiced less the
$2 .00 . All other accounts on the West Coast, with some exceptions received $1 .50-
off per GPC carton .
- As stated in the February issue of the Competitor Review, B&W is making use of a
select group of distributors (e .g . Core-Mark, McLane to handle/pass through buy-
down activities at retail for their GPC brand . This a direct result of B&W's decision
to reduce the size of its sales force .
Market checks revealed the use of new POSM items by B&W . They include a
Kool/Viceroy window frieze (sticker which wraps around the edges of the store front
window panel) and a Kool logo sticker (affixed to carton rack security shields) . Photos
of these items were sent to George Moreo .
(Note : Leo Burnett recently developed large window stickers for Marlboro) .
-10- June 10, 1994
AMERICAN BRANDS, INC ./AMERICAN TOBACCO COMPANY
American Brands Sees Gain From Sale of American Tobacco
American Brands Inc .'s chief executive officer says the company expects a one-time
gain of approximately $500 million, or $2 .50 a share, from the sale of its American
Tobacco unit to B .A.T. Industries .
It is reported that American Brands will be indemnified against any current or future
health or fire-sale litigation damages or claims . The sale has apparently moved past a
second request for Hart-Scott-Rodino clearance (anti-trust) and is currently with the FTC
(according to Bernstein Research analyst Gary Black) .
Chairman and Chief Executive Officer William J . Alley said that if the sale of American
Tobacco to B .A .T . is not consummated, American will review all of their options, which
would include continuing to operate American Tobacco as a subsidiary of American
Brands or some other form of transaction .
Mr. Alley also stated that American Brands' diversification away from tobacco and into
liquor, hardware, home improvement, insurance, and golf products has been successful .
In 1993, more than half of the company's operating profits came from non-tobacco
businesses for the first time .
Looking forward, Chairman Alley said American Brands' focus is on boosting cash flow,
growing internally, and cutting costs through downsizing and tightening control on capital
Sale has American Tobacco Workers Worried about Jobs
On May 25th, the entire American Tobacco sales force (1,080) attended a one-day
corporate meeting in Dallas . The meeting was run by B&W management to answer any
questions related to the pending sale of ATC to B .A .T . Industries .
B&W advised American's Sales Reps that they will be offered voluntary separation
packages (1 1/2 weeks pay for each year of service plus 3 months bonus pay) . If
they elect to stay on, they must be willing to relocate and/or be reassigned to another
sales position, or face dismissal without severance pay .
It is believed that select ATC field sales personnel will be given bonus money by
agreeing to remain on the job until the actual transfer of ownership is completed .
Most of ATC President Don Johnston's direct reports were recently elevated to the
Senior VP level in order to sweeten anticipated employment contract buyouts by B .A.T.
American Tobacco filed a trademark for cigarettes called : SCORE .
-11- June 10, 1994
LOEWS/LORILLARD TOBACCO COMPANY
A customer heard that Lorillard and Liggett were preparing to take action to impede the
sale of American Tobacco to B .A.T . No other trade reports received to date confirm this .
U .S. Patent to Recover Tobacco from Cigarette Packs
Lorillard has patented a sortation system for separating tobacco from returned cigarette
BROOKE GROUP/LIGGETT TOBACCO
Brooke Group Ltd . Settles Lawsuit with Rights Holders
Brooke Group Ltd . has agreed to settle a rights-holders lawsuit for $4 million, along with
fees not to exceed $900,000 . The company says it has asked the Delaware Chancery
Court to have a suit filed by a group of contingent-rights holders changed into a class
action on behalf of all such holders and pay them $1 .28 for each right.
The dispute stems from an October 1993 spinoff of Brooke's SkyBox International
tradin -cards subsidiary . The rights holders were dissatisfied with the payout from the
spinof~and sought damages in excess of $16 for each right, according to Brooke, which
originally notified the holders that they would receive 360 per right .
Liggett Names New President
Liggett Group, Inc . announced that Rouben V . Chakalian, 58, has been named
President and CEO . Mr . Chakalian will succeed Edward A . Horrigan, Jr ., who will
continue as Chairman of the Board .
Mr. Chakalian has served as a consultant to Liggett for the past three years . He has
also been a consultant to and member of the Board of Directors since May 1993 .
Mr. Chakalian was employed by RJR Nabisco in various executive capacities from
1972 to 1987, including Executive Vice President of RJR Tobacco International (Horrigan
is a retired Chairman and CEO of RJR Tobacco Company) .
Liggett disclosed in its Form 10-K (amended 5/13/94) that it restructured its sales force in
January, 1994, by eliminating 150 permanent field sales positions and adding
approximately 300 part-time positions .
Federal Regulation on Foreign Tobacco will Hurt Liggett
According to the Brooke Group's recently amended 1993 10-K report, Liggett has
entered into tobacco purchase agreements under which Liggett's commitments amounted
to approximately $62,770,000 at December 31, 1993, of which approximately 79% is
foreign tobacco .
-12- June 10, 1994
The United States Congress, through the Omnibus Budget Reconciliation Act of 1993,
has required that domestic tobacco comprise of at least 75% of the content of cigarettes
manufactured in the United States effective January 1, 1994. While Liggett believes
that these minimum content requirements act to limit the import of tobacco in violation of
GATT, they are in effect and, accordingly, the Company has implemented changes in its
product composition and has modified its existing agreements with tobacco vendors in
an effort to comply with the legislation and minimize its effect on the Company's financial
(The domestic content law officially went on the books Jan . 1, but the U .S . Agriculture
DepaFtment refrained from enforcing it until final guidelines were approved . The law
actually took effect June 1, with the publication of the final regulations in the Federal
Dosal Tobacco Corporation
Dosal Tobacco Corporation employs 13 employees and manufactures in Florida low-
end cigarettes (90%) and little cigars (10'0) for Florida, New Mexico, New Jersey, New
York, Texas, and the Caribbean .
The DTC filter cigarette brand is retailing for 990/pack in selected outlets in Miami .
U .S . TOBACCO NEWS
Law Firms Bankroll Louisiana Tobacco Lawsuit
Fifty law firms have pledged $100,000 apiece to finance a class-action lawsuit against
the tobacco industry . Many more firms applied to join the suit brought against major
tobacco companies on behalf of anyone ever addicted to nicotine, but "only 50 were
selected," according to New Orleans attorney Peter Butler Sr . "Most of these are real
heavy hitters," he said, explaining they were chosen strictly on ability . Melvin Belli, a
flamboyant California personal-injury lawyer, and 25 other attorneys filed the suit in
March in the names of three Louisiana residents : two who say they are addicted to
nicotine, and one whose husband died of cancer . The suit says that tobacco
companies manipulate nicotine levels in their products to hook customers and keep them
Nonsmoker's Family Sue Tobacco Firms Over His Death
The family of Burl Butler, a 60 year-old non-smoking barber who died of lung cancer,
has filed a $650 million wrongful death suit against the tobacco industry, alleging that
Butler contracted the illness from inhaling secondhand smoke in his barbershop for 35
years . The suit, according to the family's attorneys, breaks new ground by alleging that
tobacco companies are liable for the wrongful death of a non-smoker . Documents filed
accused Philip Morris, RJR Nabisco, and four other tobacco companies with causing
Butler's death by selling tobacco products despite reports about the dangers of
secondhand smoke .
-13- June 10, 1994
New Law Reduced Tobacco Imports In January and February
According to the U .S . Department of Agriculture, tobacco imports declined sharply in the
first two months of this year as a result of a new law which took effect January 1st
requiring U .S . cigarette manufacturers to use at least 75% domestically grown tobacco in
their cigarettes . Flue-cured imports dropped -90% while burley imports were down
-84% from the first two months of 1993 . Rep Charlie Rose, D-N .C ., praised the import
drop, noting that cheap tobacco from Brazil and Zimbabwe has glutted the world market
and could have further eroded the domestic tobacco market .
CDC Reports More Young Adults Are Smoking
According to data from the Centers for Disease Control in Atlanta, smoking increased
among young adults in 1992, while cigarette consumption failed to faA in the general
population for the second year in a row . In 1992, 24 .4% of young adults reported
smoking, up +1 .5pp from a year earlier. It was the first year since 1983 that smoking
among 18- to 24-year olds increased . In the general population, 25 .6% of all adults
smoked in 1992, the same percentage as the year before . This plateau represents the
first year that incidence in adult smokers did not decline since 1965 .
Marlboro's Intended for Export Land in U .S .
PM reports that recent customer complaints indicate cigarettes intended for export are
being sold in the United States, resulting in two problems . First, the cigarettes may
have bypassed U .S . tax and customs laws by returning to the U .S . Second, the
cigarettes in question do not carry the proof-of-purchase seals for the Marlboro Country
Store sales promotion . The ATF says the migration could represent a breach of import
regulations, though one official says he "wouldn't characterize it as a large problem ."
Georgia Widow Sues RJR and American Tobacco
A Georgia widow suing the makers•of Pall Mall, Camel and Salem cigarettes claims they
hooked her husband on cigarettes and caused his death in 1992 . According to her
lawyer, Rachel Collins filed the lawsuit in South Carolina because her husband, John
Henry Collins, was a truck driver who bought most of his cigarettes in South Carolina,
where they were cheaper . Collins, a native of Decatur, Ga., died at 57 from
emphysema and chronic obstruction of the airways, Atlanta attorney William Wehunt
said . He was forced to quit his job in 1989 because of breathing problems, Wehunt
said . The lawsuit alleges that R .J . Reynolds, which sells Camel and Salem cigarettes,
and American Tobacco, which sells Pall Mall, did not adequately disclose the hazards of
smoking and enhanced the amount of nicotine in its cigarettes to keep smokers hooked .
The lawsuit also says Collins began smoking cigarettes and became addicted to them
when he was 13, years before the Food and Drug Administration required warning
labels on cigarettes saying they were a hazard . The lawsuit seeks $2 million in actual
damages, including funeral expenses, medical expenses and loss of work . The other
$15 million the lawsuit seeks is for punitive damages . A trial date has not yet been
-14- June 10, 1994
OTHER TOBACCO NEWS
West Virginia Also May Sue Tobacco Companies
West Virginia may follow the lead of Mississippi in seeking to force tobacco companies
to pay for the health care costs associated with smoking . State Attorney General Darrell
McGraw Jr . is preparing to file a complaint against tobacco companies which will be
modeled after Mississippi's suit.
EXCISE TAXES/LEGISLATIO N
Michigan Excise Tax Increas e
Michigan's 750 per pack cigarette tax took effect on May 1st . The hike gives the state
the steepest cigarette tax in the nation, followed by the District of Columbia's (650),
Hawaii (60¢) and New York (560) . Michigan voters approved the increase, along with a
+50% increase in the state sales tax, as part of a $10 billion school-finance program .
State police have warned residents that they will be arrested if they smuggle less-
expensive cigarettes in from Ohio, Indiana, or Wisconsin . Nevertheless, merchants in
border areas are expecting a surge in cigarette sales .
Michigan State Excise Tax Updat e
Premium and Discount prices have stabilized following full pass-through at retail during
the first week of May . The price gaps for both pack (550) and carton ($4 .18) outlets
widened as a result of the SET, but remained below the national average .
After two weeks with the increased SET in Michigan, initial volume and share results
were promising . Industry retail volume declined only -4% versus the base period
(weeks ending March 5th through March 26th) . PM's share (52 .7%) has increased
+2 .4pp since the base period, driven by Marlboro's increase of +2 .2pp to 23 .5% .
Basic has also increased, up +0 .8pp to 15 .8%, while the Discount Category has
remained relatively unchanged at 38 .3% . RJR's share has declined, -2 .3pp to 24 .5%,
despite having the strongest promotional incidence since the tax increase . Both
Winston and RJR Private Labels decreased -0 .6pp .
Ways and Means Chairman Announces Federal Excise Tax Proposa l
Ways and Means Committee Chairman Gibbons announced on June 6th a proposal to
raise cigarette excise taxes by +600 per pack over the next six years . The proposal
calls for +150 increases in 1995, 1997, 1998 and 2000 . The proposal next must go to
the whole committee, but according to reports, southern state democrats have still failed
to offer their support behind the proposal . There is also a chance for further reduction in
the excise tax during the discussion period .
-15- June 10, 1994
There are two other important committees to watch, however. According to Gary Black,
both the House Energy and Commerce and Senate Finance Committees are "likely to
stick with $0 .75/pack increase proposed by Clinton ." In addition, a Senate Labor and
Human Resources Committee bill, sponsored by Ted Kennedy (D-Mass .), will request
a $1 .50 per pack increase .
According to Black, a final compromise bill is not expected until mid-August at the earliest
and more likely not until September .
The Ways and Means proposal also recommends a proportionate increase in moist
snuff taxes, which would total +7¢ per tin over six years .
Tobacco Growers Plan Big Protest
Kentucky Farmers plan to imitate the Boston Tea Party by tossing stalks of tobacco into
the Kentucky River to protest proposed massive increases in federal tobacco taxes .
The June 9th rally is expected to attract about 3,000 tobacco farmers and their families
to Frankfort . The event will coincide with a special session of the General Assembly .
RELEVANT INTERNATIONAL NEWS
Chinese Cigarettes Introduced Into U .S .
It has been reported that the China National Tobacco Company (CNTC) has
introduced two American flavor (65% Virginia tobacco) cigarettes in the U .S . The
cigarettes are identical, but will be marketed in different packages . "Classics" will be
packaged in a flip top box, while "St . Louis" will use soft pack . The company handling
the U .S . distribution is offering the cigarette for a list price of $6 .40 per carton (Basic's
current list price is $8 .49 per carton) .
We have not seen either of these two brands yet to determine their competitive
ITC Limited to Enter U.S. Discount Segment
ITC Limited, a 31 .5% owned affiliate of B .A .T . and India's largest cigarette manufacturer,
is preparing to enter the discount segment of the U .S . market . ITC has entered into a
three-year contract worth US$90 million with an unidentified U .S . marketing company
owned by 140 distributors . Under the agreement, the U .S . company will distribute in
the United States a new brand, manufactured by ITC, priced at US$1 .10 per pack. ITC
has already launched its own brands in Russia and Kazakhistan .
It has been reported that ITC is selling two brands in the private label category : "India
Kings" and "FlighL" The report also states that the quality of the brands is terrible .
Also, it is believed that Shurfine Central, a large private label co-op in Northlake, IIi . is
currently stocking the brands .
-16- June 10, 1994
Philip Morris Cos . Warns Canada on Plain-Pack Law
Philip Morris Cos . has warned Canadian legislators that it may have to reconsider
further investment in the country if Parliament passes a law requiring that tobacco firms
sell cigarettes in plain packages . PM, a major investor in Canada, has huge interests in
the country's food, beer, and tobacco industries . Philip Morris International President
William Webb sent the House of Commons health committee a letter informing them that
a plain-packaging law would amount to an expropriation of Philip Morris' trademarks and
a threat to all its business in Canada . "If Canada adopts legislation in total disregard of
internationally recognized trademark rights, this would be a significant consideration in
any new investment decisions," the letter warned . Canadian Health Minister Diane
Marleau responded, "No U .S . multinational tobacco manufacturer or its lobbyists are
going to dictate health policy in this country ." The committee is scheduled to make a
recommendation to the government before July .
In a related report, two former U .S . trade negotiators, Carla Hills and Julius Katz,
representing PM and RJR, said the Canadian government's plan to require plain
cigarette packaging is expropriation and represents a clear violation of the North
American Free Trade Agreement (NAFTA), infringing on copyright law and requiring
millions of dollars in compensation . Canadian Trade Minister MacLaren disputed the
U .S . companies' claims, saying Canada wrote special exemptions into NAFTA which
would allow circumvention of international trademark laws for health reasons . He was,
however, unable to cite the relevant sections in the agreement .
White House Reviewing Tobacco Export Policy
A Clinton Administration task force has quietly begun reviewing U .S . policies on the
export of tobacco products . The task force put out a little-publicized call for information
to assist it in developing recommendations for U .S . trade policy on tobacco exports .
The recommendations will be forwarded to the Clinton Administration for consideration
and possible action . Former presidents have been dogged in their efforts to force open
overseas cigarette markets . Asian countries, for example, are generally uncomfortable
with the aggressiveness of U .S . marketing strategies . The Clinton Administration is
seeking a balance between its obligation to force open foreign markets for U .S .
industries and its concern over the health risks cigarettes pose to foreign trading
partners, according to Greg Schneider, director of consumer goods for the Office of the
U .S . Trade Representative .
Japan Tobacco to Expand UK Plant
Japan Tobacco will spend $71 million to convert an existing factory into a new cigarette
plant for its U .K . based Manchester Tobacco Co . The expansion will boost production
capacity 250% to 10 billion units annually . The increased output, expected to start
during the Spring of 1996, is reportedly slated for the European market as well as for
exports to Southeast Asia and the U .S .
in a separate report, Japan Tobacco announced a +10 .2% increase in tobacco profits
versus last year to 105 .9 billion yen . Sales increased +0 .7% to 2 .7 trillion yen .
Special Acknowledgements to Frank Alfieri, Marge Arwady, Brian Buckner, Joseph
Chaump, Susan Gorney, Gary Gray, Julie Greene, Wayne Gregory, Steve Hamons,
Barry Hopkins, Nicki Howerton, Rick King, Wade Lott, George Moreo, Jim Mortensen,
Mike Murphy, Robert Priddy, Jim Thomas, and Jim Tucker .
-17- June 10, 1994
Distribution : May 1994 Competitor Review
A. Alpen C . Lilly G . C. Bible
R. Anise R . Lively D . Dangoor
M . Arwady M. Mahan A. Daw
T . Beane L. Markham S. deGysser
D. Beran E. Merlo M . Goldberg
N . Brennan-Lund B. Mikulay M . Kenny
D . Bruno (E-Mail) D. Milby J . Kramer
R. Bucciarelli M. Moore J . Manfredi
W. I. Campbell J . Morgan M. Miles
J. Carboni J. Mortensen H . Millington
R. Carchman M. Murphy R. W . Murray
B . Case J. Myracle N. Rolli
J. Chaump D. Nelson R . Sarmento (E-mail)
J . Clary J . Nelson (E-Mail) W. Webb
S. Darrah T . Nelson
M . Debardeleben D. Oettinger
P . Dodd S. Parrish
G . Eastburn T. Pettibone
C . Finch B. Reuter
T. Garguilo T.C . Richards
E. Gawronski R. Roper
E. Gee M. Schroeder
M. Gordon B. Schuyler
J. Greene R. Simons
K. Houghton H. Steele
K. Hunkeler M . Szymanczyk
C. Johnson B. Taylor
J. Jones J . Thomas
D. Keane J. Vander Putten
R . King T. Walls
J . Lamb R. Webster
F. Laux L . Wexler (E-Mail)
S. Levan H . Willard
C . Levy
Distribution : June 1994 Competitor Review
A. Alpen C . Lilly G . C . Bible
R. Anise R . Lively D . Dangoor
M. Arwady M. Mahan A. Daw
T . Beane L . Markham S. deGysser
D. Beran E. Merlo M. Goldberg
N . Brennan-Lund B . Mikulay M. Kenny
R. Bucciarelli D . Milby (E-mail) J. Kramer
W. I . Campbell M . Moore J. Manfredi
J . Carboni W. Moore H . Millington
R. Carchman J . Morgan R . W . Murray
B. Case J . Mortensen N . Rolli
J. Chaump M . Murphy R . Sarmento (E-mail)
J . Clary J . Myracle W. Webb
S. Darrah D. Nelson
M. Debardeleben J . Nelson (E-Mail)
P. Dodd T. Nelson
G. Eastburn D. Oettinger
C. Finch S . Parrish
T. Garguilo T. Pettibone
E. Gawronski B . Reuter
E. Gee T.C . Richards
J. Gilbert R. Roper
M. Gordon M. Schroeder
J. Greene B . Schuyler
K. Houghton R. Simons
K. Hunkeler H. Steele
C .Johnson M. Szymanczyk
J. Jones B . Taylor
D . Keane J. Thomas
R. King J. Vander Putten
J. Lamb T. Walls
F. Laux R. Webster
S. Levan L. Weider (E-Mail)
C . Levy H . Willard