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Two analysts and top management from three sector firms examine the Tobacco sector in this special 22-page issue from The Wall Street Transcript, available at (212/952-7433) or http://www.twst.com/info/info408.htm.

TWST: What should investors make of the $100 million punitive damage award in the Boeken case? Does this raise the bar for future claims?

Mr. Adelman: I think probably the most important thing that occurred last week when the punitive damage judgment was reduced from $3 billion to $100 million was that Boeken has now become just a component of the broader California legal issue, whereas prior to the reduction, on an independent basis Boeken could have been a substantial issue. The key point in the reduction to $100 million is that Boeken is no longer potentially a singularly catastrophic event, but the initial verdict is clearly consistent with a continuing broader legal issue in California.

TWST: Are there any other cases that are likely to be heard in the second half of 2001 or the first half of 2002?

Mr. Adelman: There will probably be some cases, but it is always difficult to know with precision which cases will actually go to trial. In all likelihood, there will be at least one individual smoker case litigated in the second half of this year in California (Lucier; December 10). And then there will be two class action claims for medical monitoring — one in Louisiana, the Scott case, and one in West Virginia, the Blankenship case.

TWST: What’s medical monitoring?

Mr. Adelman: Medical monitoring is a generally novel legal theory that has been rejected by most courts, including the US Supreme Court in Metro North. It stands for the proposition that plaintiffs, who have not yet expressed an injury at all, can bring legal claims requesting that the defendant pay their medical bills for ongoing testing, so that as soon as they express an illness, they can be treated immediately. It is a novel legal claim, and is counter to 250 years of American legal jurisprudence, which stands for the proposition that to bring a claim you at least have to be able to allege an injury, and the plaintiffs in these cases have not alleged any injuries. I am quite confident that if the manufacturers do not prevail in the two class action cases, that ultimately the claims will be either overturned because they should not be class actions, or they will be overturned because medical monitoring is not a valid cause of action. I also believe that medical monitoring is particularly inappropriate in tobacco claims where individual choice is such a key issue.

TWST: What did the spinoff of Kraft bring to the party?

Mr. Adelman: I think what it brought, practically speaking, was the ability to buy Nabisco and to maintain the company’s significant dividend growth, its share repurchase program, and its credit rating. Remember that the company took onboard approximately $19 billion in debt and retained its credit rating, something very few companies in the world could do. And again as a practical matter, it would have been difficult to achieve all of those goals in the absence of an equity offering. Second, the IPO made the explicit value of the company’s Kraft (NYSE:KFT) stake very obvious and transparent. The third thing achieved was that it has finally put the company in the position that if they choose to spin off their remaining stake in Kraft they can do so on short notice. Prior to the IPO this was not the case, because it would have been necessary to have an independent board of directors, independent publicly traded debt, etc. Today, they have those things. So the company has positioned itself, should they choose to do so at the appropriate time, to proceed with a spinoff of the remaining Kraft stake. That was not the case previously.

This special issue includes:

1) Tobacco Stocks - In an in-depth (4,400 words) Analyst Interview, David Adelman, Principal at Morgan Stanley Dean Witter, examines the outlook for the sector and shares specific stock recommendations.

2) Outlook for the Tobacco Industry - In an in-depth (3,800 words) Analyst Interview, Bonnie Herzog, Vice President at Credit Suisse First Boston, examines the outlook for the sector and shares specific stock recommendations.

3) CEO interviews (average 2,500 words). Top management of three sector firms examine the outlook for their firm and the sector.