11 A-rl ic BAT INDUSrRas P.LC. MWIESOTA DEPOSITORY COPY PFAMUcED PURSUANT To VILD. OF coNsENT juDamEmT DATEo siVu iN STATE oF Altmwsom Er AL v. PmtjP Akgm& Er CASE NO. C1-944065 B.A.T INDUSTRIES P.LC. - MIMNESOTA DEmffoRy COPY - PRODUCED PURSUANT To I VILD. OF CONSENT JUDGMENT DATED SAM IN STArE OF Weasom, Er AL v. PHILP Afogge, Er CASE No. CI-94-MS The BATUS Group of Companies BAT " M B OPOWN SAKS WIPTh AVONUI APPLETON aWILLIAM TN A- PAPERS w4c TOW DOMEITZ MAPSKNLL FIELDS P.W LA" .O@X #A4y, 21 D.V@ S@j C- L@. ft Mffno, 4A IN3. =2 §;Aw PIC.'Aho G-- Am- C--s ft , PIEYS-CAROUNAS c" zo,$ 13 ow@ &m Aw-. WS INTERNATiONAL WVS-FLOMIDA C.O"w P@ ,(Ewr -=I LUICAIVAIME 0, 0.0@ S@ =Vftft AWA %AhAl BRELINERS cow" M::::;%AW = C4.w" vw. 42 - 1 EXPWT LUF ftwDpv. am" 7080=0 r,*ABLES Pon 64M w A@ www".6"M 0@ SWIA Ift- ft@@ A, AM" w Ab@, 4"A 0.0@ Soft ftw I Table of Contents howitcW H@jldkghb 1 Financial Revica, 34 Chict Exectattv Ofter's , Gmup O'Compirnics statemen. 4 Facultec., so Otd.qmes@ Rr.-". Tokicze 6 Rax C-N B.A.'T IMUSTRIES MLC4 MWKJWA OPOWCMV COPY PRODUcEo PumwAwTo VILO. OF coNsEmT JuDamEw OATED SWU IN STOITE OF ARNMESOTA, ET AL V. PHLIP MORRIL ET A CASE 140. CI-944=6 c: --If -,j -.,I B.A.T INDUSTRIN P.Lc. - MINNE90TA DomffoRy Copy - PwwcED PUFMANT To I VII.D. oF CoNsEN,rJuDowNTDATEoa/&WiNSrATEoFA&wiEsorA.ErALv.PmLipUanomErA CAMMO.Cl-94-MS ;Dolljr@ in 1984-1985 For the Year: 1981 1982 1983 19S4 1983 i7i, Change Sales from ContinLing Operations $3,750 54,447 $4,803 5-I.S76 5-5,067, +4% Operating Income from Continuing Operations S 366 S 327, S 6 222 5 676 5 +4% Income from Continuing Operations 5 163 S 193 5 232 5 299 5 329 + IV,( Net Income 5 180 S 214 S 2-59 5 314 5 164 - 487c Return on Sales Continuing Operations 101-( 12% 13% 14"c 141-c Return on Net Operating Ascets Contin--,;ng Operations 21 % 277C 29% 29% 2V, - C3pital E\penditure., 5 200 5 268 5 190 5 294 S 284 -3% At Year End: Working Capital S 693 5 678 S 841 5 944 5 923 -2% Total Assets S2,930 S3,745 S3,953 54.284 S4,517 +5% Capitalization SI,936 S2,493 S2,480 S2,748 52,636 -3% Net Operating Assets Continuing Operations $1,747 S2,249 S2,182 S2.346 52,463 +5% Sales frown Operating kwome from Continuing Opwatione Continuing operations by Wallaby 1110,11ment by lnduWy Segment rIQ C: rQ I- C:1 B.A.T INDUWMES P.LC. - Mweisou DEpowm COPY - PRODUCED Pumumr To VIA OF Comww JuDaum DATEo SAM im STATE OF Akmmaom ET AL v. Pwip UaRRM ET CAw No. C1444US Chief Executive Officer's Statement Since ou. for- and solid performance histories. mation in iinuarY Nineteen eight.%--five sale@ from continuing of 1980, BATUS operations of the BATUS Group of Companies has expenenced grew 417, to S5.1 billion. Operating income rose strong anz pront. 4", to $702 million. able grow:h and At Brown & Williamson Tobacco Corpora- has made substan- I tion. 1935 operating income grew 4@'c to S444 tial invest.-writ for million on sales of 5:3 billion. Elipecially the future. In 19S5, encouraging was the rise ot B&-1%-s market bothofou- man- share to 11.91t. Heavy trade loading at the end ' ufacturing @Usi- ation of a pnce increase of the yeat in anticir nesses ha.-' c3ins will have caused some d6tortion Wween the in marke-. snare voiume of shipments and consumption. and improved In domestic cigarette sales. KOOL. America's profitability. while fourth largest selling brand. continues to be our retailing gn of more ! supported by a strong campaii activities exveri- ' focused advertising. product improvement and enced mixe@ brand line extension. B&AV's share of the value- performance In a tor-money segment grew rapidiv. International i difficult vej:- for cigarette sales declined slightiv due to weak the retaii inz!us- local currencies and devaluations. try. Saks Fifth Avenue. Marshall Field's and Appleton Papers Inc., the national leader in 1-.,e% .'s had good results, while some of he tra- the manufacture of carbonless copy paper. also ditional department store businesses had a good year. and increased operating e%perienced losses. income 6% to S1121 million. Sales grew 1121% to Consolidated sales on a basis comparable to a S639 million and gross tonnage increased by year ago rose modestly, but operating income r/ %. These gains were largely due to more actual]v declined by some 41c. The poor per- favorable raw material prices: strong market t.ormance in the traditional department store conditions, and achievement of operating effi- businesses continued a trend from the previous ciencies at Appleton's diverse manufacturing year. caused by a difficult retailing environ- facilities. Appleton continues to outpace its men, 'hat reduced sales pins, lowered gross competitors in a Stowing market by offering margins and increased promotional expenses. higher quality products, unrivaled service, Following an ".austive evaluation of retail- and remaining a low cost producer. inS and the BATt:5 retailing companies. it was In our continuing retailing businesses, 1985 det."ined that six of our retailing businesses sales increased by 7re to S12 billion and oper- which lacked a strong marktt position or pre- ating income rose by 2% to S165 million. Saks dictable long-term, Frowth and profits should Fifth Avenue increased operating income by be solzi. An announcement of that decision was 7% and sales bs- 6% o%*r the previous year. made in Januarv and the restructuring of the Marshall Field'; increased its operating income retailing business is expected to result in a b% 617, and sales grew 8%. Ivey's-Carolinas had boclk less of S130 million, for which provision an increase in operating income of 23% and an has been made against 198-5 earnings. Financial increase in sales of 7%. Ivev's-Florida also in- data pertaining to 'he discontinued businesses creased sales and operating income. Breuners has oten segnkca;ed in the Consolidated Finan- achieved an increase in sales, but profits were cial S=tments included in this Annual Report. substantially lower due to depressed consumer The retailing businesses we shall retain- demand. mkl, F-t:h Avenue. Marshall Field's, Ive v 4-Carolinas and Florida, Breuners and Thiml-ies-are leaders in their markets, have 5:wnc consurrier recognition BAT INDLINITIRS P.LC. MWWWTA DE1ls0$ffM COPY PMMCED PURSUAW To VILD. OF comsemr juDwmrfr DATED &WW IN STArEOFUNNESOLA, ETAL V. PHLPMORM, ETA CASE No. C14M-6565 Management and the Board Outlook of Directors %%;::! :he re:.iil restructuring well undema.%. Vne:eer it:@cht% a%% a numoer tit we h..%e made @ubstjnual prt@:r"b in pv@mon- gemeni changes: sign:m:an: rnjnj@ ing "i, Comram for ruture growth and Jevel- Henry F. Fri5on was elected Presidentand ' ormcn:. %%v n.,%, hj%-t: a solid foundation t%ith %vc@;n% e Ctfiscer, succeeding Charles 1. Chie E our rviourz., @onctntratecl %in stron,@ N,%- WC;rn- i%`o renred at %var end. fullowing nes:@ which @hOtlld benefit from -he 2u % car@L tit ice %% ith BATUS Inc. and antw:--ned :rot,th in the U.S. rcontvm%. Our OAWn. & W;:!;amson Tobacco Corporation. fobjcz.- and paper businesses should continue L,..-njrJ 'A Arent.-en, a Senior Vice Pm!o- their @rowth in the near term. %, bile ,Ivr,-. Inc.. %%j@-elected Chief Firtancial the EA%'S all tvi whicri an.4 j -nember 4 the BATL:$ Board or Ckrr:ze. arv ir Me be-e7 deparrment store and bpe- and,.he BATUS Executive Committee. cijkN i:@-re should do weil even in Barry D Bjrnley was elected 4 Senjor Vice the :n@rea.ed ;ompelitive environment we Prei -4ent 4: Chier Administrative Officer or 3ritic:r-ne, Our goal to.- each of the@e busi- Inc - and a member of the BATUS ness-e@ 14 it'r -htm to outpericimri compe-a-lon Boa- @ o:* Diec:ors, and BATUS E%ecutive over nt nem ne vears. Committee He was previously a Director Be=se BAT@:S is committed to being a ;ejd- at linn3h-Arner-car. Tobacco Company. ing company in each it its business sq gmenti. Ra.% -non-' L Pritchard was elected Chairman j we e\pect to ir% em heavily in our businesses & Ch.*@ Ewzanvt Officer of brown & William- i to increase share or market. to improve produc- son obaicco Corporation and a Ehrector of tivitv. and the-etiv increase real growth and B.AT.:S Inc.. succeeding the late Dr. )vor profitatinlity. The strong cash flost- from opera- Waillacte Hughes. Mr. Pritchard was previ- tions and the receipt of substantial funds from r oush Deputy Chairman of British-American the redeploymen: of some of citir retailing Tob@zca Coripany- assets. places BATI:S in a very strong financial Thomas E. 5andefur, Jr. was elected Presi- position to reinvest in our present operations dent & Chief Operating Officer of brown & as well as other high-reurn businesses. Williamson Tobacco Corporation. He had been Whiie 1983 was a difficult vear, our results Exeiru-i've Vice President at Brown would not have been possibie without the hard Williamson. -work. loyalty and dedication of our employees, John W. Turneriivas elected Chairman & and the suppor: of our customers and vendors. Chier E.\ecunve Officer of Appleton Papers To all of these people we are truly grateful. Inc. :nd a Director of BATUS Inc. He suc- The BATUS camrmnies have developed an @ut- .1 Thomas W. Busch, who retired at vest ,,,d . standing group of highly mottivated and ernrc- end. tolkiwinc. 37 kearsoi setvicewith Appleton tive emptoveei. and the response to 1965 s I Papers i challenc" demonstrated their dedication znd Dale H. Schumaker was eleicted President creatit enoss in adapting to changing market- '1p.r.:u,, Officer cil'Appleto" Papers Chief C place conditions. Inc. He had been E%ftvh%-@ \ ice President Encouraged b,% our past achievements and at Appleton Papers. challenAzed bya commitment to provide our Allan R. 'khnson. iormerlv a Chairman customer- with ouality and value, we look ' Chir.'E%ecurivir Officer of 5@ks Fifth Avenue I iorwar4 to a iuni m committed to the pursuit and the BATUS Recall Group. rebred as a of exce9ence. Dmcwr of BATUS Inc. at year and we am grauful to Charles I. 11;&nty, Thvrnji@ W Susch and Allan R. Johnson for their miriv zzmmbuticins over the vears to the success of our family of companies. We thank Henry F. Fri8on their for their long and distinguished service, Prevident & Chici E\errutive Officer and wush thern the very best in retirement. 13AT NOJMIES F.LC, - U004CWA DEMITORY COPY - PRMCIED PURSUANT TO VIIA OF coNsEw itloGmewr DATIED 54M INSTATE OFAINKSOTA, ETAL V. PHLAPA11101111111M ETA CASENO.C11-94-81015 BATUS Inc. 1985 Business Review Tobacco & Brown & W31jam40). Tipiuxt, Tobacco stzle.-- npsc sligh,!tj to S-'.3 Kilion mid Corporatitin operalt .P.-,g t. 4@' te 4@'- i Gains ttia sharepo:,.: tv 12.@" or the Market hzrges" '9S5 ;vrCeWage PW:@ :!! file U.S. f.-;'.--'xo Share sales Irrelmes ill tire Lblitca' States rose loy 411. B&i%'gaiiied tilt, airdgrvzcm,@ 01 1@ . ra,pidl.: or- l1w " . . es mesa vi:he U.'@. mm-kc., thmigh :.::,, itttwdiictionoi RICHLA ly epiteriq irito.; licejjSL'11Sre0.'le?lt to mallwactilre.--nd distriblite "G?C-Aplinived' generic cigarctles. 11Q';:x its established prodita goup. KOOL. B&Ws fLigslii- vrapid, slimayd sipis of nNpotiding to air itits.-mitied ntarkethig campap@gri m.01 air improved prodtict. B&Ws ititcrizatiowl brapids showed some epicournSmictif. althoirgh export whimesapid pr@fits were lowe r. Prqrrss aws ituide with BARCLAY hr Eitro;v apid tirebrarida-m; exteitafed to theMiddle East. LUCKY STRIKE zms s.-iccesshilly hitradisced ipr tire Far East, isichidipig tire charcoal filter mrsicir Or kilari. arid confirmed fogv-w s(@iii 'ficawly Or Spahr. Si(pported top @ campaigms, KENT held its overalisliare PICTV admrtisir @ lot "IdAvi to thew asid mozvd hiro Hfird place irt fire Hopig Ming mark-el. Pri"mm; JWofc bm"do, and Ok. BWalso placed partivilar em;Vwsis oil strepiStheiihig its iriarkethig arid sales R&W Av m"s fimaimis: tv hi. nase tire effectizvites4 of brapid allmrtis6ig, BARCL4L SELVA. FALCON. KENT jymptiotimrs air.-,' proditcl distrihitiml. WOL. WCKY STRIMNEWPORT. P.4UMALL. RAMISH. ME 777 777?-! Vicritoll O.A.T INDUSTRIES P.LC- LOMMUMA DEPOSITOW COPY P11IONCED ftMAmr To I VILD. OF ONSENT jUDOMF CASE NO. C1 14 am$ .NT DATED S/OM IN EATE OF A#NWSOTA, ET AL v. PHXP AfORRM ET C .11) r\@ 4t. B.A.T INDUWMIES P.Lr. - MmumA ovoosiTaiw Copy - PRoouCEo PURWANT To I VILD. OF COMENT JUDGMENT DATED MM IN STATE OF MWWSOTA, ET AL v. PNLP Afogow, Er CAsE No. Cl4K4W5 r1i rv -Z@. B.A.T INDUMIES P.LC. - MW4WTA DEPOWORY COPY - PAMCED PURBUANT To I VII.D. OF CoNsENTJuDamENTOATEos/eMiNSrATEoFA*NNEsoTA,ETALv.PHLPAkoga.ErA CAsENo.Cl4M4M5 -Mueteeir eightti-fhv was a vear of progre4z :,it eslci: Maj.tir as@vct of 8 &W'Z; operations. By ixuzing 4pec-1;;17.11(y on clear, uyll-de'fitied priorities mid lt.v wzifidpk@ all the:iplincs lviiind those priorities. S&W a "oundation for the hiture. fi Domestic KOOL KOOL. thefoitrth largest selling 47 c(v, rv,,!c 'ratill' :n the United States. had a 6.Slc ?Frarket share in !@S5. A!though KOOO njarket -haredeewitsed 7; slight1v @ropn '-!S4, E&W was encouraged 11i its The moderation in flic J, chne trend resulted.f.-om -,?: intensified ad-mrtising campaign, itirprvztd spyrok.mg characteristics and.livused supMrt in geopaphica * areas where the brand enjoys a high degree of pvjlu@arity. lot addition, KOOL King Size 25@ and KOOL.Mildi 25s were introduced iii selected test marke!s. BARCLAY In I.M. JIM%. berm Wins an impmtw BARCLAYI; perforonance followed 9.4JtCL4YpwJwd Airk pwWes the that of the ultra-low 'far' segineitt of the onarket which wwt*z Majff tow , Ow Met ultro-lau. declined. Mu:e the segntent declined slightly-prionarily 'top- sambers preft. the rcsul., of 1-@vid prtiliferation in general- the ultro4ow -lar' . category continues to representa si@i7-:ificajit share of the overall 4 KOOL. A.WAX, O&W z4vuls ,,,kt-vd wm-n-,-, 1 BARCLA)'as highly innotatim pmduct. walt the Fitj7wr. wu- xA*t*e-i#K rv,- To strcu%@;,v: position, B&W began gvOl, low oil testbig an 'InProved product in 1985, rQ 9 G.A.,T IMXWMES p.Lr- - MINNESOTA DEPOWTOM COPY PF40CMD PURSUAw To VILD. OF CONSEI(r JUDG#AENr DATEI) SIM IN STATE OF MAINIESOTA, ET AL V- PHXIP ANOW, IT CAsE No. C14M4W "'OViding B-ARCLAY'a high level of promotional and support. I B&1,V behe.,es tire iniproved I --ARCLAY will provide consurners it smoother, indder :.:zte that inost ultra-loa, 'tar" sitrok-ers preter. B&W A :,:Wnds to citnKfe success 'fidly in every viable segnien: c.- :-:e induarv, and views BARCLAY as the vehicle ft'ir in tire ultra-low "tar" category. RICHLAND The tuitional introduc!ion of the VCHLAND brand inark-ed B&Ws entry into thegrv;L-.*?:S :-.-due-for-nionq; seginent of the tobacco industry in 19,65. 7,.ieriqg consumers tire superior twitie of 23 ciprettes to :.:e Pack Arild 20 packs to the carton at a standard price. :Z!CHLAND ivas B&M first new product introduction f @nce 1981 and one of the industry @ nrost successful in 7983. Although tire national introduction of RICHLAND did not begin until nearly mid-year, tire product achieved .? 0.3% share by the end of 1985, contributing to B&1V`s Anw=6 ivi: i - market share incivase. smem bmmi -W OM. GENERICS B&W success ,fully launched a full title ofSeneric cigarettes in 1934 and its share and' volume of this inarket continued to grort, steadily in 1985. B&W signed air agreement ill 19S3 to Piratrufacture the 'GPC-Approlvd" line of generic c(gamms. This agreentent gives B&IV lite kv. 30 FV' 4wer: use of Ainerica'I best known generic l1rand Prame ItICHL4ND :5'-s $1.17%waf and lyntrides tire opportunity for continued gain. in lite value-for-inomn! segntent. to -Q U191 B.&T IMXWMIES P.LC. - UNNESOTA DEPoeffoRy COPY - PRMCED PURSUAKr TO I VILD. OF CONSEW JUDWAW DATED NOW IN STATE OF MAINESOTAI, ET AL V. PHILP "Na, ET CAsE No. CI-944MS !NJ -4 -@j r@2 4-4 BAT INDUSTRIES P.LC. - MINNESOTA DEPOSITORY COPY - PRODUCED PURSUANT To I VILD. OF CONSENT JUDGMENT DATED 5/8M IN STATE OF AtAWSOTA, ET AL V. PHXP AkRRA ET CASE No. Cl-944W5 -Vh.- --4 B.A.T 1wDusmas P.LC. - MmumA DmmffoRy Copy - PRODUCED PUFtSUANT To I VILD. oF CoNsEw JuoamENT DATED SAM im SrATE oF AtmwsoTA, Er AL v. Pmap MoRgs, ET CASE NO. CI-944=5 Intemational B&Wcontipmed.1o expana" presc!.,4@c overseas in P55. The intcr?rah0?Il-'.'.0lhICL70 mar"C: :4 expan.-iinS and shoirs Ilokpitial.for Spvzc,';.- "), Years to come. B&W has tap-Scted h(gh-,Croa-th mar.k.- and seeks to strciq!hcpr its position. relYing opt of consistent high quali.@v suPpoirted' -,-.@echvc marketitig @fforts. KENT KEN'T rentainn-l' B&IN-S-fierrmost bacrizatioizal bram-17 in 2985. .4 tzro-veni-oid campaign to tury, around the brands Mitioij and to exPrInd its sa,es and share is shou,ing positive result;. In a redesigried package supIvrtcd F -7 by ne-a- advertising and promotions. ' ENT held its share in most markets and K i greLL- in Hong Kong, Makysia, Mexico, China, West Gennayru and Australia. Surponed N tim- ' adrm'.sf'@C& Ild pn@ BARCLAY werwji@. KEN741d BARCLAYhas been succcs;fullu Aawn Mo.: Mar- ke.14 iwigyar in Hopq introduced irito a number of Eurqvan markets, ackie'--n.@ K,..:; AIJUVS14. Oun. Ivest highly reqlectabIc shares. M Nortcav. fell- example, LW*"S.;-:.U and BARCL-Wheld a 6% slutre of the market and ipt HvEal;,' and Belgium, morr than 2.5%. In Sivifterland, BARCLAY represented approximately 4.4% share. BARCL4)'also is marketed in Firdand and West Gcnnany, and has s0oum pimpnise in these markets. 4 KENT mmined R&W.4 *Wfflft*t rutle4mi Ivalki in and nunvil into Ourd pace in dw HonS kon 13 B.A.T Immmms P.Lc. MmmwA Domffm Copy PRMCED PURWAKr To VU.D. oF CoNsEmTJuDGmEmr DATEoswwimsTATEoFmNNEsoTA, ETAL. V. PHXPAkRRM. ETA CASENO.C1444MS N., c: -If --,t N@ ll@ B.A.T INOtwmas P.Lc. - Main= DEposmom Copy - PRMCEO PURMANT To I VILD. OF COMENT JUDOWNT DAM SSW IN STATE OF MNWSOTA, ET AL V. PHXV UORR8, ET CAsE No. Cl-944MS Based on BARCL.-".--:-- success tit Eumpe, B&I-V introduced the brand into &mdi Arabia and theArabiair Gulf States in 1985 With ;kl-.-::-.'e early results. An increascif emj,h,?,:;s lv S&Won 4twn- advertising. pram"t"(111 ane. tit the infer- national@ market fins produ@ed.firzvrazlic resldt@. SARCLAYImsa,7h@eved a hish 7 degree of rucognition tit Ettrv;ie thrvu@,h spoit,:,rship of a Forinula I mcirig team ULM STRIKE &A RCL-11'ad-u-tW a B&W has air opigoin, g conrinitinent high de.@,m tr rrqni- to make LUCKY STRIKE a major hiternational brand. Iron in Eumm thnnigh V@ j Fo,. In 1985, B&Wintwduced LUCKY STRIKE ill Ppan as a charcoal filter product. Performance in the initial year ulas encouraging as LUCKY STRIKE achimd a 2.351 share of all U.S. cigarette:, sold in Japan, which is the second largest market in the fire uvirld. B&W also experienced tremendous growth.for LUCKY STRIKE irt Spain ditrilig 1985. Tire L brand'r- volume increased 35% compared to 1964 and achieved a 2.3% share of tire Sliairish markel. LUCKY STRIKE ranked as file nundw three U.S rand ill Spain. LUCKY STRIKE also continued to gain ill existing intermitional markets as the product, 1 enhanced by a new blend and new packap"Fig. performed well ill Italy, Indonesia, Iceland andMalausia. The 4 Introdured its Japan during 1983 as a elm'. brand a-as also successhd@v introduced in several West cival filler pn4uc:. Affican countries. WCKY STRIKE trill U.S@ C@vvrrm-! sold in kpan-Vir we"d ia" norke., in Me few ux-rhi. C- tv BAT INDUSTRIES P.LC. MemEsOTA DmmffoRy Copy - PmwcEo PuRSuANr To VILD. OF CONSENT JuDamEmr DATED SON iN SrArE oFAMNEsom ETAL. v. P#jxPMORm, ETA CAsEMo.C14M4M5 N: C: -11 -@j rl.: rll@ B.A.T lmusmms P.Lc. - MW*WTA DEPONTORY COPY - PRODUCED PURSUANT TO I VILD. OF CONSENTJUDGMENT DATED S/SMIN STATE oFA#mwsoTA, ETAL V. PMLIPMOROM ETA CASENO.Cl-944MS Macon Plant B&IN' is conutrated to an ojisow@ lynvrove4 program to assure that pniduct,lualft-vand capicituX :z Macon. Georgia, manulizcfuring facility rerptirin-: at Producl, cottipe!;tive Irvels. [it 19S5, Peters@urg. Virgim-.T, plaW operations into the hi,,@h;y- etficien! Nlacon plant. The transfer of operx"oni ,III ci@fzrette produc:oOn-,-fotnes:-.-- and exjxsr,'-.-!: AL-,?: S& W led the fluiustry with Me lei h technology. nex getteratiorifia tory witen ti:e A plant opened ipt 1977. Since that tbne. B&W has iniplemented a planned series of mod"ifications a?:J extialIS10115 to aSSI(re ongoing state-oi-the-art tei:.;!J-iolt,,,:- -&ntance. and high-quality manufacturing per . Macon i(tilit-es the latest high-4pee.-" cigarette ffibricating equipment and automation processe- and maintains theflexibility to grow with consuppier 4 nlem4me demand. B&Ws commitment to high quality ayui innomtire products through research and development has; been it cornerstone in its history tied remains a top cor;%)rate priority. To achiece its objectkys, B&W continues to invest in technelogy, the ca;vbilities of its human resources and equipment. lot 1983, O&W rellonited its forme- Ind !.-:!s I Louisville headquarters fixility to house a fedly-in tegrided center rier research. development and etighteering ;4111t torm% -e on. I puk., mile,-41c.ar. dt that site. BAT lNuffmas P.LC. - MINNESWA DEPOSffORY COPY - PROM= PURSUANT To VILD. OF ComENrJuoomEmTOATEoSMUiNSrATEoFA#mwsoTA.ETALv.Pi&pUoRnmErA CAsENo.Cl-94-MS Ic )c all Retail iBATUS Retail Operations Nineteen eighty-five retailsales Focus on growth'in tire United States slowed due to reduced Strong Market consunter confidenceand higir consurner debt levels. RetailI IPosition, nlaqins were hurt 1,Y price discounting and promotional IGrowth arid expense resulting front it "tore competitive marketplace. IProfitability These conditions affiected both sales arid operating income of tire BATUS traditional department stores which had a ubstantial decrease it- earnings. Marshall Field's arid Ivey's -werc not affecte@-.* by thes, conditions since they an: well positioned in higher value specialty segmenti of their market. The poor pcr@Orinance by fire traditional department stores con "nued a trend front tire previous dwas caused @v a difficult retailing tnvironinent year, all that lowered gross margin rates and increased promotional expmses. In 1985, BATUS finalized an Q evaluation of its retailing businesses to determine their individual viability and potential. The Company ?Oned its strategy to concentrate financial and management resources on businesses which have a strong market position arid are capable of above average growth and pmfitability. The result, announced in January of 1986, uws tire comprehensiEv mstructuring of the BATUS Retail operation.; and the intent to sell certain companies. Those businesses to be sold am: Gimbels Department Stoms-New York, Philadelphia, Pittsburgh and Milwaukee, Kohn Department Stores, Frederick-& Nelson arid The Crescent. The companies consIste"I UVth being retained-Saks Fifth Avenue, Marshall Field's, carefuliv planned lvey@-Crrrolinas, lveyk-Florida arid Breuners-am market expansion pmsrmm implemented am the leaders, have established reputations and a history of ;u5t deade, Sab Fifth @-Lzwiue has Snism to a achieving solid perforntance. Thimbles. in its natia"u-de of 47 stores. C: --I is Z. BAT INDUSMIES P.LC. - MINNESOTA DVOWORY COPY PMWCED PuRsumr To I VILD. OF CONSENT JUDGVANT DATED SAM INSTATE OFAIIAMBOTA, ETAL V. PHXV MORRB, ETA CANNO.Cl-94-Mg C: rQ -1-6 BAT INDurmas P.LC. MINNESOTA DuasffoRy Copy - PRoDum PURSUANT To VILD. oF CONSENT JUDGMENT DATED 5/&U IN STATE oF UNNEsom Er AL v. Pmxp Maggo, Er CAsE No. CI-94-MS :11@ c: @j r,-, I N: B.A.T INDusTRas P.LC. - Momisom DomoRy Copy - PRODUCED PuRsuANT To I VIIA OF Comm JuDemEmT Dan SISM im,SrATE oF&tmwsaTA, ETAL V. PHILP MORN& ETA CASENO.Cl-944MS dez,ei.,plnental 4:a :- . . se. o.67c61,Z ;comen' cla-w. carcer- oriemed g X moderatt, prices, is aW Consohdated sales, on a hi@is compirable to a 'vcvr aSo. nl:e 4lightlY. but opcrntm,@ incolne declincif ;-v 5opne &zles irom, the ct1pzt;)::i I'll', rctai!@!!g bicsiiici@e@ rose -"( to 52.2 Pillion. olpera.mg income increa.;cd* mo..'estly to S165 !ndlicln, ks Fifth Saks F.'.@Ih Amm(c is the venue ack-neu-tedged n.-moinvide leader in siqk'rior 4?shicm app,re: and ircccs:orics. Oostinpiished @Y its to fir.;:ion leadc7ship, merchandise assortmew. pleasm,,@ in-sto-e envirownepits and exceptional custellier scrznce, Saks :ontinued !o advapice its fnark-ct ptvsiticmz ;)x 1985. Sales increased 1-16% arid olyrating income rcue 7,7( 111 Aizo. 4.;@- !%hh .4;-e. 411 ili.-rMillgIV com;vf itive em-irountent. m"'. I knit, 42 Cali. Consistent with a carehilliv plimpled I :K. 4 and Wd nvr 400.000 exprnsion pmgrom implemented orer flic past decade, Saks cmsfftj@ irders imm has grown to a nationwide iietuvrk- of 41 its maillilp. stores. In 1983, SaLs opened threc stoms--a nea, one in San Aittonio, Texas. and replacement storrc.16r sinaller, older units in % i Southhampton, New York-, and Phlin Sprinp, California. Vic San Antonio store, which 1pened in Nozymber. willfurther increase Saks' pres, rice in the growiq 0 Sunbei! region of tire U.S. Construction also typit in 19S3 on stores in Boca Raton, Florid.;. arid Tuhu. Oklahoma. ' At Saks Fifth Amnue f here is art erk.s. 0 smis co Avwue pnme I;Icmsl)lg commitment to renomhon arid modernization ti@ merdwadue Ime mpkc desex. IY- 1 existinSfiacilitics. Tire Nim, lbrk Fifth Amnue Fk@ship appird. uw .oftilv 8"fR. I f 1-1 the spnr@gi i @ I : r k B.A.T INDUSMIES P.LC. MINNEWTA DEposffony Copy PmmcEo PUR9uANT To VILD. OF Comm JuDamENt DATED MW INSTATE OF AIIAMSOTA, ErAL V. PHILP AkRM& ETA CASENO.Cl-94-MS @:,,re :1.1:ny exranded Ln/ 70,00) sq. ft. to provide FanV.@-!he ;ele- J@ kwed Jxvoixe sellingand office space. R.-inodeling of the Irmts-:1aze rec..."V Geor a: Trvv Michigan: zad Palo Alto e"16enal:C et Me 4 w . , r qualliv :hat :@ :vf! 'N Cali%-::.z. stores aws also begun. and tire Yonkers, Ntml the8b,4wit Ficid' ' riame. 77w @jra u or@. .;:;.r@Vutiort center was en;.'.!-ged Int over 130,000 sq. Utch"T :" chX3,1, .%,.'Jullnodate Sreater merc.,'_;,.,dise Murtre and '.01111di .7 in ;ts distribu!:on Increased emphasis and 511.0,10 ;Vlaij.4 . Or Ollie? och was eviJenced by tire installation ?ear ."'Tie electmitic term: .flats in all Saks stores '?S5 :L .':4 r: - -- iprove existing -!!erchandising ;ti4tews. Marshall Field's Marshall F.Wd@ continited to post per;ortnance improvements as 1935 sales inc.-rased 317c and opeating income rose 6%. Known nationally to millions of consumers for its fine quality and service, Marshall Field's offeri; a wide range of high quality goods which include designer apparel, home fivnishings and primte label foods such as thefamous FPAN:GO* mints. Pbsitioned as the dominant, quality full-line retailer in the Greater C metropolitan market, Marshall Fichi'S, witit 21 stores, has a growinS presence in the Soutim-est as I: ::,:!inues its expansion in that region. Currently (w IMI, jl.j:::@ o;vra.:-:S thme stores in Te=, Nfarshall Field@ began cow.1n.z.1ion in 1935 of a fourth Texas store which is :.,:.W j"Ze of 4XV-4? 1 , vurive! I t%u @ I sche.L."J to q;vn in San Antonio in the Fail of 1986. Marshall Field's encouraging results saice.;_%iisition him-e demonstrated lite benefits of .:orw.-:.-7@?tinS oft improzoing, tire performance of existing C) B.A.T INDUSTRIES KLCL Mwm=TA DoMiTORY COPY - PPAMcED PURSUANT To VILD. OF CONSENT JUDGWNT DATED SAM IN SrATV OF 30TA, ET AL V. PMLV AkRRNL ET CASE No. CI-94-ONS BAT INDusmiEs P.LC. - MINNESOTA DvouTM COPY - PRODUCED PURSUANT To I WLID. OF CONSENT JUDGMENT DATED SAM IN STATE oF A*AmsoTA, Er AL v. PNLP AkRow, ET CASE No. CI-944M B.A.T lNummms P.LC. MWNESOTA DEF*SFTM COPY PROWJCED PuRsuANT To VILD. OF CONSENT JUDGMENT DATED SAM IN.SrArE OF Afimmsom Er AL v. PmLv Atom% Er CASE No. CI-944US Carolinas and area of the U.S., lvey':-.-Carolinas an.f are exjhml, Florida MS the BATUS Retail Iniz:%es; that inyortant region. lve.w'4-Carohnas sc!,Iiokv per.-ilrinance@ III both sales,w,-' dur;-- ';7ies incrca;cd 77( mid o.mrating ince-ne ro.4-- 23'-, 7.:. @avorable rc-;ult4 undo-lbie the sticce.:.: merchandi4sig concept-a moderatc %, ;y."cr Jcpartmvn,@ store posititined Mweer " r.1ment stores 111291, FlIE're line dena foclized z.1ycialty shires. I W "Tesel."T or 73 stores in North and I-A -olinas has strong 2.- Carolina, lzvv'.;-Cay polentia.!fiorfitfure growth and profitabilit*v. It undertook-further pynctration of the promising Carolinaz market Ini initiating construction of a new store in D11rhall'. North Carolina, during 19S5. III addition Ie expanding its better aplvrel, fashion accessiries and : honze himishings, a major thnist all R-t O-Carolipw@ am improz,F: and broaden individualized customer 5erz-o-C.- Ivey's-Florida. with 11 ztorvi thromZlivitt the State. also achieved tauvraHe resultz 1983. Stiles rose 41,"c and operating income iticreazeif 6 With chaqirig demographics and an inviting sca4lm.;.' climate. Florida is one of the,lastest-growinN! and impWan! retail mark-ets ih the U.S. Store .;'%f modernkatioms are ongeipig prior&e: ior Ire where con4truction is now in pw.@res4 kill d fica, :I: Gaiucs:-'Ile. Florida. schedieled te ope,., 11119,;6. c BAT INDUSTRIES P.LC. - MINNESOTA DEpowrm COPY - PRODUCED PURSUANT To VILD. OF CONSENT JUDGMENT DATED 5/8M IN VATE OF AfIMWSOrA, ErAL V. PMLV AfORNM ETA CASENO.C1-94-M5 Breuners Brcuner5 operatez .7 tot'll (if 39 ".10 42 rental-tltrou-@::ouf Avizoaa. Ca';w-wia Ne-nida. 0*rin it wide raiwe of furnhtre W."I acccz@ories for the gretmer4' -;uccessfid slratqy of proz-iding "one-stop sk'ppilig for Me Irolyle" Inade i., one 'It the nativin; laySest furn,.-un, cliains. .4 prot"tupe tore, in Plea4l'it, Hill, selliuS @vac.' WM@M I apu'.'api exvangfed IiPW 0*'.7..:es-z0?'jCS. A.- Breitner,:. ret,-,:. 41iles incre.-i4ed were "";;vr dile to deppiand. TIje renta; Nt5iriess It. told opened three new rental stcorec Thimbles Thip0les, althoug;: stnall in relation to other BATUS Retail busbiesses, provides a pro)nising concept in specialhi store retailing and offers uviptepts classic, career- oriented clothing at inoderate prices. lAitli 31 stores lowed in shopping pitalls throrqhout the easteror and inidwestern states. Thinibles opened 15 new stores g 19S creased -SoZ, durill 3 and sales ity Ali 4 these retailing conipanies :v-,,it,: -7tark-a ;vsitioti and are cap7ble of pTfitable SAT-5 plans to invest licerviky in these businesses Me:- share of rnarket and prodactivity, v; @drmmrv and fOr the. heve. egy Pi p%vidrpkq "opw- c:.-p @whjrrttfg for the line- hn@ "vide it mic cr the W.'w" " largo: 2t, B.A.T 1wtNMMS P.LC. MMUOTA DEPOWORY COPY PwWcEo Pw=AW To I VILD. OF Comm iuoowwr DATEo Son iN SrATE OF MmsOTA. ET AL v. PHIP "M- ET A CASE NO. C14M4=5 N 0 -4 -4 N -il. LN N BAT INDUWrR*S P.LC. - UMNESCYTA DEPOSFrORV COPY - PR=cEo PuRsuANr To I VILD. OF CoNsEw JuDommT DATEo SAM iN Sun oFAWAwsorA, ErAL v. PmxvUonm& ErA CAsEf4o.Cl-94-ases Paper I Appletoti CoWhizies to Appleton Papers, the world, la Lead the U. S producer of corbonless copy paper, led the U.S. carbonless 1 Carbonless copy paper inarket in 1983. This continues to reflect a Copy Paper steadw increase orer the past five years, Sales rose 12% to Alarket 5639 million and operating incorne increased 65,c to 5112 trillion. .4 itticipating fit F-ther gn)zi,tlr in this olecialized market segment, Appleton's objective is to its market share in the rapidlv growing business fibrins industry. Appleton will maintain its growth i-v providing a product of higher quality than that o.t' competitors and offering unrivaled service, while re7narning the lowest cost producer in the industry. 77je total business forms paper market has been growing at an annual rate of 8%. The carbonless paper portion of the market is expected to continue its rapid growth due to increirsing substitution @br carboy? interlcafpaper. To maintain its current leadership position and help assure its growth, Appleton, in addition to emphasizing quality of service, is expanding the breadth of its product line to produce multiple grades to meet the needs of diverse market segments. Appleton also manufactures three other categories of specialty paper products: Nonimpact printing paper, such as thermal paper, which is used for calculators, mini-computers and facsimile units; coated printing papers and nonpaper materials used in the A $31 milhon expow Sion A., the Harris- graphic arts industry: and, papers that are specialty-coatraf burg, Pe""surm"iff. I 1- .1 Zo for diverse applications by commercial converters. pid"t uvs o@mpkted ir 1985. mcrowns the -4 28 FXIM W46 B.A.T INDUSTRIES P.I-C. - MINNESOTA DEPOSffm Copy - PWOUCED PURSUANT To I VILD. OF CONSENT JUDGMENT DATED SAM IN STATE OF AWWWSOTA, ET AL V. PHI/P Akggj% ET CASE No. C14M4W5 KI c@ --,I 4 it.-I A.- \J4 -Ak B.A.T INDUSMIES P.LC. - MMMWA DVOSffM COPY - PWWCED PURSUMT To I VII.D. oF CoNsENT JuDowNT DATEo SAM iN STATE oF Afmwsom ET AL v. Pmaip Afoggm Er CAsE No. C14M4M5 N) c_- --j -4 rQ (--j U-1 B.A.T Immmms P.Lc. - MmumA Dposffm Copy - P"ooucEo PuRsumT To I VII.D. oF ComsEwr JuDwmmr DATEo Son iN SrATE gFUmasom ErAL v. PHxvAfogm, ErA CASENO.Cl-944M I 'Althoti%@h hesc three categories co??.,v?.-'4'- a ivlat:.v!u 5mail portion of'.1otal ppvduclion, Appicton the warke"'Place a ;;Yt -.1 acknocled ed en; th lc source o s ecialtv pa f . p S g p expertise. !ik- rum- Apple!oir had loday':: nwrket position and for hituiv @-cnvth :v;.-h the acaursittLin of two it.- 79S4-.: carlxmle@4 :'lating and finishing plant at Pe-Morm(gh, Canada. and a paper ?nill at West Cm-Lillton. Ohio. These tuv facilit;c-: :cerc successfukli a-ssimilated into Appleton durbig IPS5 as sulstantial resources -a-ere inz-e-:ted thew to expand their prodm:.ion cavacittl. To pmtect and improve its contpeti- vcR P;:Y- a trade- Plwrk "iNcx tive edge, Appleton trade capital expenditures in 1985 Cemrmen @.*feyjsed totalling SS3 million. A S31 million expansion at the Its; Harrisburg, Pennsylvania, plant was completed in 19S5, increasing the plant's capacity by 50%. A S23 million cipansion and modernization of the pulp and lw;vr mill at Combined Locks, Wisconsin. increased pmductim. levels till 101,'c. Since Appleton Fhpers was acq:dred in 797S. over S380"' million has been intestcd to support Applefon's planyied grmih and to improm cost e.*c1ivcncsz. In addition, ongoing capifid.funding for its other operations has further enhanced prchluction capability, ranging through rebuilt paper machines at Hic Spring Mill, Roaring Spring, Nnnsylvania: callular inapru'facturing improvenrents at the Rlrtagc, t,%*6cc1ns;?r. plant. and, a high-speed calender stack that mark-edly impmves thermal paper manufficture at the Appic'021 coating plant. C' B.A.T INDUSTRIES KLC@ - MWNESOTA 0E1XWOW COPY - PRODUCED PURSUANT To I VII.D. OF CONSENT JUDGMENT DATED 5/M im ILATE OF A*MWSOrA. ET AL V. PHLV UOROW. Er CASE NO. Cl-944=5 rlj -_4 r\-, --A B.A.T INOtwmas P.LC.- MumoTA, DEposffm COPY - PROOMED PuRsuANT To I VILD. OF CoNsEmT Juoomw DATED SAM iN STATE OF UNNEsom ET AL v. Pmxp AfoR#m rT CAsE No. CI-944=5 Appletoy: Papers snental requ.%wienti and is not @aced ivith ntawr Capital exvenditure.: of nit on-iropitnew.",' nature. Re@earch, and Detvlopment Engineering is also being rein,forced through, emianded.fa::!ities and -!rengthened resources. Tiat twrtion of the research sta.l. which hc devted exchiiiveiv '. carboyde.- vaper "; the indIustrv':-I taryest and most exPerienced. In *'Urthe- support, Appleton :i putting in:reascd technology otto the businecs by zVstepnatical@111 appiuing advanced computer hardware at-."' unin)'ue sofnalare to manufficturinS, process control, in' ventorv control, distribution and customer se-vice. An integral part of this effort is a new Computer Data Center on which construction began in Putting mcro3ed fEc.;:- W(Osly :rv its 1985. Occupancy will occur in 1986. buss"M* h ! tentat;= .. edvancc-' compuw As in years post, Appleton's Jwrd;rj-@.-.?nd 47:-ouc : . "ifuln-.10 alapluw performance in 1985 uvs much stronger than that of the t1fritiS. :-!:rnte-:.i paper industry. Its highly speciali:ed producfs generate distritu-.Opi and cuf- greater profitability than commodity grades and offer superior opportunity for growth. Carbonless paper, for example, is a very sophisticated product requiring Morc i complex production technology than that required ffir commodity grades. Appleton Papers is charting orderly, pl@vsical groza-th; strategic market thrusts; product streigthening: and, dezelopment of human resources. The resulting sales and profit should continue to mark since Ap;getm Patsm Live- squinvil! in Z9,78. Appleton Pape* as a healthy contribuf or to BATUS' over S386 wilhas has hv" invewd to performance. suppm AMkfm@ Ple""d 81=4 lit I Menim mt 33 19 B.A.T INDUMIES P.LC. - MINNESOTA DEposffM Copy pM=Xgo pURSUANtr To VILD. OF CONSENT JUDGMENT DATED 5/&I98IN SrATEOFAJI#MSOTA, ErAL V. PHXFAII0RR4, ErA CASEMO.CJ-944M BATUS Inc. Financial Review Financitil Revit. Management's Responsibility for Financial Reporting RVPUn m Cernard PublIC Accountants 35 The following consolidated financial statements of BATLIS Inc. were Consolidated Fman,:al Statements prepared by management which is responsible for their integrity and Statements or Income and objectivity. The financial statements have been prepared in coniormiq Retained Earnings 36 with generally accepted accounting principles and necessarily include Bawince show:6 311 amounts which represent the best estimates and judgments of Staternews oi Chanr ps in management. Fina,cai Pasmon 40 Management is further responsible for maintaining a system of internal ' Mana citment s Disz-'ssion 7 rance -hat assets accounting controls, designed to provide reasonable assu , Statements oi Income 3 0 are safeguarded, established policies and procedures are followed and BalanceSneels 3 5atements ol Changes in transactions are properly "ecuted and reported. The system is Finanoal Pvwrton 41 continually reviewed for its effectiveness and is augmented by written policies and guidelines, the careful selection and training of qualified Summarv 0i A@COVVZng 42 personnel, and a strong program of internal audit. Pailcirs d bl ic accountants, are engaged to Arthur Young & Company, certifie pu Notes to Con"idated Financial examine the consolidated financial statements of BATUS Inc. and issue a 43-49 report thereon. Their examination is conducted in accordance with generally accepted auditing standards and includes an objective review and evaluation of internal accounting controls to the extent deemed necessary tiv them. The Boart]i of Directors, through the Audit Committee of the Board, is responsible for: (1) assuring that management fulfills its responsibilities in the preparation of the financial statements; and (2) engaging the certified public accountants with whom the Committet reviews the scope of the audits and the accounting principles to be applied in financial reporting. The Audit Committee meets regularly (separately and jointly) with the certified public accountants. representatives of management, and the internal auditors to review the acthities of each and to ensure that each is properly discharging its nesponsibilities. To ensure complete indepen- dence. Jurthur Young & Company has full and free access to meet with the Audit Committee, without management repirtesentatives present, to dis- cuss the nesults of their examination and their opinions on the adequacy of internal accounting controls and the quality of finandal reporting. 4elli 4.1 Leonard W. Arentsen Senior Vice Presidmt & Chief Financial Cfficer 34 B.A.T Imumas P.LC. - MINNEWA DEPWITM COPY - PIWIMED PURNANT TO I VILD. OF CONSENT JUDOWNT DATED 5/8/98 INSTATE OFUNINSOTA, ETAL V. PHXP 111110111101111R. ETA CASEHO.C14441W5 Report of Certified Public Accountants The Board of Directors and Shareholder BATUS Inc. We have examined the accompanying consolidated balance sheets of BATLS Inc. at December 31, 1985 and 1984. and the related consolidated statements of income and retained earnings and changes in financial position for each of the three years in the period ended December 31, 198;. Out examinations uvre made in accordance with generally accepted auditing standards and. accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances. In our opinion, the statements mentioned above appearing herein on pap- 3c. 36. 40 and 4:49 present fairly the consolidated financial sition of BATLS Inc. at December 31, 1985 and 1984, and the 'Fonsolidated results of operations and changes in financial position for each of the three years in the period ended December 31. 1985, in conformity with generally accepted accounting principles applied on a consistent basis during the period. A-,u- @ @ e&-@ Louisville. Kentucky March 24, 1986 C: 35 B.A.T Imam P.Lr. MINNESOTA Dwourm Copy PRMCED PURSUANr To VO.D. OF CONSENT JUDWANT DATED 516M IN SrATE OF AftwsorA6 Er AL V. pHLIp MogM, ET CASE NO. Cl-944M" BATUS Inc. Consolidated Statements of Income and Retained Earnings 1@ars Eiided Decepnber 31. (In Thousands of Dollars) 1985 1984 1983 Net sales .................. I ................ I ...... _S5,086,902 S4,976,023 S4-802.94; Costs and expenses: Cost of sales ..................................... 2,692,671 2,576.394 2,541,163 Federal excise taxes ............................... 561,445 U2.361 540,329 Selling. general and administrative expenses ........ 1,117,605 1,067,900 1,142,883 Interest expense. net of interest income: 19S5-56.900; 1964-59,545:1983-54,16,Q ........ 147,666 149.619 154,926 Total costs and expenses ..................... 4,519,587 1336.2S3 4.3-79.303 Income from continuing operations before provision for income taxes .................. 567,315 539,740 423,63B Provision for income taxes .......................... 238,400 241,200 191,318 Income from continuing operations .................. 328,915 29SIqo 232,320 Income (loss) from discontinued operations, net of income taxes .................... (15,383) 14.963 26,240 Provision for retail restructuring, net of income taxes ............................... 25010W - - Net income ........................................ 163,532 313,523 258,560 Retained earninp, beginning of year ................ 2,323,634 1,140,111 981,551 Dividends declared ................................. 160,000 130.000 100,000 Retained earnings, end of year ...................... S1,327,11" $1.323.634 $1,140,111 See accompanying summary of accounting policies and notes to consolidated financial statements. Zz. 36 LA-T INDUSTRIES P.LC. - MINNESOTA DEPOSITORY COPY PMWCED PuRsuANT To VILD. OF CONSENT JUDOWNT DATED SON IN SrATEOFMMMSOrA, ErAL. V. PNLPAkRRIL ETA CASENO.Cl-944=5 Management's Discussion and Analysis-Statements of Income The accompam-in tat merits Of income reflect the volume growth (1.7%) due largely su the progress of the &mpeany during M5, in terms to generally unchanted portionless sellini prices, of inareised profits from continuing operations and hignor nozicarbonle6 sales and lower mi grade. by beginivinlVo restructure Retail ofersiftons. As a Fnces; due to generally 'soft' market conditions in inc result of the net. the statements o incomir se$te di oriiiiied operations from those that uill Cost of sales as a percentage of asks was constant 7' of @e ongoing business activities of the -vtr the 3 years pmented at 52.9%. Lower material Company costs in tofiacco and paper operations were partly Income from continuing operations increased by offset bymarket pressures on selling prim and V.. products as 10% in ?M. following mcreases of 29% in 1954 ancl changes in product mix to lower maigin 2D% in 1993. Net income. however, decreased by discussed above. Retail margins, indMifig bu,6ino 't 49% in 1985 due to the provision for Retail restrijc. and occupancy costs. clodi@id slightly. turing and the poor performance of those businesses Selling, general and administrative mpenses as a I Mtge ed for We. Net income buzessed by, 21% in percirritair of sal"were 2'110% in 1965. 21.9% in 1954 1 190 and 1993. and 23.8 in Z983. The slight buxom in 1985 was Not sales from continuing operations increased by the result of increased cigarette marketin di 4% durm 2995 001711 red with increases of 2% in tum in sogiort of the national launch 242M' .410, . a, 1964 and 1% in @983. Chi', Fd St.. W., which higher Re i expenses relative to sales and addi- were not classified as discontinued operations, are bonal Appleton expenditures to improve service included in 1983 asks. levels in response to competib d Brown & Williamson's (B&Wj sales Caffolfton ZiEty"fra Z year, were essen- T@e"imp;rvemumt in 7imse productivity in 1984 equal to 1984; however, both domestic sales &SO unst oruette volume increased by 4%. Domes- was due to the effec a S" million charge in 1993 tic cigarette shipments wen 70.7 billion units which relative to phasing out a i arette InanufsEturtrig 9% of the domestic market. up 0. 6 of buffitV and the absence 410=5 Food Stores sliant i t Over 1984 Heavy trade loading at the in 1994. * Compan segments end =yen in an;@@tion of a phot buxom Each of th will cause some distortim betweein the volume of improved its resuld ia%hVT=obsixxx operstins shtipments and consumption. Industry s1tipments income incressaid bv 4% or 6% in cle6eased 0.8% from 11184. Mw domestic vixiliamit 1984 asul 31% in 11963. C_*_11 til - occurred in Generics and an economy a 1% in 19ma 11?i1.%=3M4 in brand, RICMAND, while full-pricad estab- IM. VAth dw casiption of Brouneirs, all of the Retail fishod brand volume clectined. The increase in the businesses wtdch comprin condruting operaitions domestic bustrim was o1bot bv a decrease In Inter- increased or nutintsmid operating inamis, in M. nad" cigoretto ads$ and loy;er led tobacco Was. Viepressed consumer demand mind a substantial continuing opersitions, Increased dedine in _% Income. The pmf- 11101ell W11016 from i i Breunm opera* 7% in M followin Increases oi`3% in 1014 and 34% itabdity of the Czenjany's Piper operatio" con- in IM, the first 2year of operations for Marshall drusedto raw as -A over FaIdlis, IvWs and brouners as pan of the grmip. All 6%, which in L464 and IN13 of the Retall businesses which constitute continuing when proft gr@w by 31% 26%, respectively. Rod operations increased Was in IM. The contin- 'Return on klofl buixtrist as a pascoo at 14% in IM as an increase wow able to take ad of to and m end=vacialty at was t by W& dedirtes at Retall and mish seedling or have dwractesisilics wI&Iii dislin u Paper. them fibm unditional department stores which Financing cam were essentially equal to last you enabled tlwm to succeedin the difficult ratall as internal bitsh Bow was adequate to mod invest- enviroment it . IM New mom contributed to ment needs and most debt is @cxrriocl at hi" long- the? San kwm= ;jii;i@ 3 stores, 71himWas term intents ram. In W4 no into Own" open@iid 15 and ad 3 new furniture decreasid by $5 million at 3% due to low& averap view units. M=nW-Rdr. land Saks also benefited borrowings from major raincivations; at several stem. (down .1 - mmics, com. ya'eft hpar Was; Increased by, U%. This you's a" The weellitraftonfacomehom, auk= followed an excepticirw Ve" 0 1"4 pan tains docroosaid 2.7% to 4LO% in -dinuing With Pwah.6'swes firvirium Increased 23%. 6" in IM Imms zates, of 4L7% in IM and 45.2% - F Increased 13%. Overaill tormage growth for IM was in IM. reduction In the riate le due primarily to $3.1 LIPS with 426,00 tons eMpped. CArbortless &Wp. Iowa state and local am and higher investment tax Insists increased 14%, while noncartionlitiss mc3imsed by almost half due to a 6A year of operations for the alts;ntinuad Owed at a loss in MS. West Casrolition mill. Carbordess volumes increased The it= oc:cum7.8tMG131=wbim__ mull a a resub of continued potion don into the mubhk Now Yoft Gimbeis-fl"'u, arA Frederick & rt business form, carbon and bond paper markets- Nelsoin a FAIds Do"Mnv3=1 Gimbob-mid- W. growthi of 12% loss than West (Milwaukee) and The Cresomt were profitable. C7 37 rV B.A.T Immmas P.L.C. - MINNESOTA DEPOSITORY COPY - PWDUCED PURSUANT To VILD. OF CONSENT JUDGMENT DATED 5/8M INSTATE OF AINNES07A. ETAL V. PKILP "RM ETA CASENO.Cl-94-mg BATUS Inc. Consolidated Balance Sheets December 31. (In Thousands of Dollars) 1985 1984 ASSETS current assets: Cash ............................................................ $ 8,169 5 40,820 Short-term investments ........................................... 64,813 345 Accounts receivable, less allowance: 1983-S40,648; 1984-S38,324 ................................... 1,255M23 1,129,074 Inventories ...................................................... gn,353 950.851 Other ........................................................... 22,494 11 __=.250 Current assets ............................................... 2,323,549 2.141,340 Property, plant and equipment, net .................................. 1,630,7-23 1,324,153 Intangible assets ................................................... 256,318 316,799 Other assets ....................................................... 306,850 301.203 $4,517,448 $4.283.697 UABILITIES AND SHAREHOLDER'S EQUM Current liabilities: Short-term borrowings ........................................... 5 51000 S 104, Long-term debt due within one year ............................... 20,702 31, Accounts payable ................................................ 440,361 381, Accrued liabilities ................................................ $07,693 444, 3 Due to affiliated companies ....................................... 25,306 1 7 22,79 Income taxes payable ............................................. 101,092 212.602 Current liabilities ............................................ 1,400,144 1,198,019 Long-term debt Affiliated company, subordinated .................................. 773,706 78L277 0 Other ........................................................... 454,223 436,448 1,229,929 1,218,718 Other long-term liabilities .......................................... 486,956 4773,949 Shmeholder's equity: Common shares, Sl par value, 1,000 shares authorized, issued and outstanding .............................. I I Paid-in capital ................................................... 73,02 69X7 6 Retained earnings ................................................ 1,327.2" 1,323.634 1,400,419 1.393.011 54,517,448 S4.283.697 See-impanvirt summary of accounting policies . . 9 and notes to consolidated financial statements. 38 GAT ImusTRIEs P.Lc. - MMMOTA DEPOWORY COPY - PRODUCED PURWMT To VILD. OF CONBENT JuDGuENT DATED SON IN STATE OF Aftesom ET AL v. Pmxp Mongs. Er CASE NO. C14M4M5 J Nlanagement's Discussion and Analysis-Balance Sheets The accompanying N laricv Sheets illustrate accounts receivable and inventories which ivere the contiriue@ srong iinancial position of the financed. in part, by accounts payable and Cornparw. The 1985 @a@ance Sheet reflects the accrued liabilities. Accounts receivable required decisionai -,he Compan% to restructure its Retail SUS million of additional working capital in operations with a restn e for emimated losses 1983 due to higher unit ngarette sales in late included in accrued lial-ihties. December compared with 1984 and higher The Company utilizes "return on ne, assets" Retail credit sales including those businesses toperating income as a @ercentare of net targeted for sale. operating as5ew to evz;uate the overall Total debt as a percent of total capitalization periorm;nce a., its ind:-. iJuAl businesses. In decreased 2@c during 19SI; to 47,317, This fol- 19S;, the Com-anv's @,% erall -return on net lows a 1.9% reduction in !914 to 49.31- Total assets,,, as sho%,n in *@e financial highlights on debt was reduced b%, 717, or S99 million in 19S; page 3, was maintaine-4 at 291c . Higher returns due exclusivelv to tfie reduction in short-term at B, wn & Wiliiamsor. Were offset by slight borrowing discussed above. e nes in Twail and a: Appleton Papers due Subordinated debt (S77t, milliont from B.A.T ,her levels of inves-ment to provide for Industries is a significant element in the cap- tk _q- future growth. -Return on net assets' is one italization of the Company not only in absolute of the measures utilize,4 in the allocation of terms (29.2% of total cacital) but in terms of resources and was a ia,;-or in the dec-.sion financial flexibilitv. The aria of unsubordinated to redeploy assets by 7eitructuring Retail debt to total capii@l decreased to 16.1% from operations'. 20.6% in 1964. Current assets excee_4ed current liabilities As noted abow, the Company has continued by L7 to I at 'he end o.@ M5. This measure is to invest in major capital impro@-ement pro- down slightly from 1.4.'. -.a I at the end of 1984 grams. In 1985. capital expenditures exceeded due to the aiie-tax eiiezt of the Retail restruc- depreciation by 1.8 to I iollouing a 2.2 to I tuiring re"me. Working capital (S923 million) ratio in 1984. Cuffent vear expenditures were remained near the 19:-@level as a result of the funded exclusively %dith internal)%- generated restructuring reserve. On a basis comparable funds (see also stitements of chai%ges in finan- with last vear. working capital would have cial position discussion). increased 5166 million or 195%; SI-V million of During 1985. the Com any improved the increase occurred in the cash and net short- its Nuidity and finandaFposition and. can- term investment/borro%%ing position of the sequenth-, its overall financial flexibilitv. To Company. This was '--e to increased cash flow supplernint the flexibility provided by'its from operations SuPFiernented by net proceeds financial position and significant casK flow on the sale oi investments, principally the from operations, the Company has S141 million Water Tower Place rea: estate joint venture of unused lines of credit wlith banks, a SM mil- (--e also statements ochanges in financial lion revolving credit agreement with an affiliate tion discussioni. and an informal agreement with B.A.T Indus- -The remaining components of working cap- tries under which an additional S330 mflWn ital, excludinc the res-ucturing reserve (net of may be borrowed from an affiliate to provide tax), increased S23 ir.-_-.ion due to higher for short-term financing needs. The financial resources of the Company, as discussed above. are adequate to meet iti obli- gations into the foreseeable future. f"i B.A.T INDtaTM3 p.LC. L%MEMA DV,0@ Copy CONSEMT JUDQUENr DATED 518M p4 SrATE OF PM CED ftMANT TO VILD, OF MAMSOL& ET AL V. PNX JP MORRIS, ET AL. C ASE NO. C I 4M4M5 BATUS Inc. Consolidated Statements of Changes in Financial Position Ibirs F-ider _-l-.-:-e?rj1v- 31. 4 In 71roummis of Dollar:rt 1983 191q 1983 Cash provided by operations: Income r . cant.inuing operations ........... ............ $313,915 5 Z9S.;,o 5 Items not affectml; working capital: Deprec:anon of property. plant and equipmen . ........... IZ3,444 107,374 Amorttzanon of intanl;3@le assets ......................... Z-1,135 24,07 27,174 DeferreJ :ncome taxes .................................. 123,381 97.9o, 66,380 O-her .................... .. ......................... 19,"6 3.70@ 80.396 Wor@:ng capital provided by continuing operations ...... 617,321 ;31=4 510.357 Income ;Iossl from discontinued operations. includ:nz provision for retail restructuring ............ (163,383) 14,05-- 26.24o Items no. a.-feciinc working capital: DeDrecianon at .properh . plant and equiprrient ............ 31,492 2S. 5"1- Deferre-4 income taxes ... ............................. (9261 2.1el 2,763 Other .. ............................................. (30,0671 - Retail res-..:cturinC reserve. ne'. of income *axes .......... .. 18518M - - -3,916 4;.71C 54.356 Changes in components of operating working capital tewludinc retail restructuring;; Accounts receivable .................................... (227,634) j97,16:, (92.50p) Inven-cones on itrst-in, first-out basis ..................... (18,538) (69'12zol (7.:, Last-in. first-out inventory reserve ..... I................ 1 (2,964) 40.6Z,? (20,9441 Other current assets .................................... (11234) 4,631 1,119 Accounts payable, accrued liabilities and due to affiliated companies . . . . . @ ............................ $7,662 (11,36Z) 104.382 Incorne taxes payable ................................... 3919" (7,233) 46,53.4 (22.748) (139,631) 31.161 Cash provided by operations .......................... 990,489 43S.2SI 5%.274 Cash used for investment: a property plant and equipment ................ Additions I (284,215) (210.4"1 (189,884) Acquisition of tax transfer and leveraged leases, net .......... (34,905) 4-1., (33. ';) (721,542) Other ................................................... 153,782) 41,11-5 22,540 Investment in Imasco Limited ............................. - (I 19,030i - Acquisition of paper mill .................................. - (63,9491 (374,902) r4l)7.7031 (239,686) Cash provided by sales of investments ....................... 90,724 Cash used for dividends .................................... (260,0001 (130,00M (100.000) Cash provided (used) by financing activities: Additions to long-term debt ............................... 34,784 216.675 23,160 Payment of long-term debt ... I .... I ....................... (39,6001 (154, (91,986) Pavment afobligations under trademark and trade name acquishon agreements ................................. (281M) (19,406) (25,192) Increase tdecrease) in short-term borro-Arints ................ 1",797) 21.3,9 (102.717) 1122,6921 64.471 (196.-27t) Increase (decrease) in cash and short-term investments ........ S 31,619 S (34.9531 S 59,001-1 See accompanying summary of accounting policies and notes to consolidated f;mncial statements. C.- 40 BAT INDUMES P.LC. - U110680TA DEPOSITORY COPY - PRMCED PuRSUANT To VII.D. oF ComsENrJuoowwDAliEDS/eMiNSrATEoFAfiNNEsorA.ETALv.PHxpAfoRgmErA CANNO.C1946 5 aAL Management's Discussion and Analysis-Statements of Changes in Financial Position The accompanying statements se@gregate offset by a reduction in cash flows- from discon- work-i7g capital provided by continuing opera- tinued operations due to unprofitable tions trom that of discontinued operanons, operations in 1985. including the effects of the Retail restructuring. Additions to property, plant and equipment Working capital provided by continuing in 19S5. which were funiied interrialiv. increased operations increased b%- 161, in 198_5 following by 351, to 52S4 million. The majori6v of the * an increase of 41, in 1464. The growth in work- spending occurred in th4e Retail ope rations (5149 v continuing operations ing cavi:al generated b million i to build new stores and renovate exist- ' in 1"51 exceeded the growth in income from ing locations. Paper expenditures totaled S83 continu:ng operations due to depreciation and million as e-