TOBACCO COMPANIES SAY DEAL IS UP IN SMOKE

WASHINGTON -- The nation's major cigarette makers sounded a death
knell yesterday for last summer's historic tobacco settlement, saying
Congress has twisted their offer to help cut teen smoking into a harsh
attack on their industry and sharp tax increases for American smokers.

Led by Steven Goldstone, head of No. 2 tobacco maker RJR Nabisco, the
companies vowed to fight efforts by President Clinton and Congress to
increase prices and fashion tougher restrictions on
advertising.

"Those price increases will destroy the domestic tobacco business, and
I don't just mean my company," Goldstone told the National Press Club.

But Clinton and congressional leaders insisted they will press forward
with efforts to pass a comprehensive law meant to curb teen smoking
and compensate states for treating sick smokers -- with or without the
industry's cooperation.

"They can be part of it or they can fight it," an angry Clinton said
on his return from a trip to Chicago. "I think they ought to rethink
their position because we're going to get this done one way or the
other."

The companies had warned for weeks they would walk away. But
yesterday, Goldstone said the process was "broken beyond repair."

"We have failed in our effort to achieve a comprehensive resolution of
the contentious issues surrounding tobacco in our country," he told
the National Press Club.

The leading proposals in Congress would raise cigarette prices too
much, he said, without regard for adult smokers and businesses that
depend on tobacco sales.

"Washington has rushed to collect more tobacco revenues while playing
the politics of punishment," said Goldstone, whose company, R.J.
Reynolds Tobacco Co., makes Winston and Camel brands.

White House spokesman Mike McCurry said Goldstone's remarks show how
worried the tobacco industry is that Congress will pass tough
legislation.

"It's a mark of how serious the effort is in Congress," he
said.

The leading Senate bill, sponsored by Sen. John McCain, R-Ariz., would
cost the industry $506 billion and force tobacco companies to curb
advertising that critics say helps lure teens to smoke. It
overwhelmingly passed a Senate committee last week.

It is tougher than the settlement tobacco companies negotiated with
states and public health advocates last June. That deal -- had
Congress approved it -- would have given the industry significantly
more legal protection from product liability suits and would have cost
companies $368 billion.

McCain agreed with Clinton that the effort will continue with or
without industry support. "In the most charitable terms that I can
describe it, the tobacco companies do have an enormous credibility
problem."

"Tobacco companies are not in a position to dictate to Congress," said
Rep. Henry Waxman, D-Calif., a longtime tobacco foe. "We don't need
their permission." But Congress might need the industry's cooperation
to ensure that advertising restrictions are implemented. Tobacco
companies have fought these restrictions in court before, saying the
Constitution protects their right to free speech.

Goldstone said his comments yesterday were not coordinated with other
tobacco companies, but other companies immediately endorsed them.

"It would be irresponsible -- to our customers and our company -- to
agree to the kind of proposals now before Congress," said Lorillard
Tobacco Co. Philip Morris, maker of No. 1-selling Marlboro cigarettes,
said a solution is "no longer possible" and promised to fight McCain's
bill. "We regret that a historic opportunity to resolve decades-old
controversies surrounding tobacco has been lost," the company said in
a statement.

The industry continues to face a host of lawsuits from states looking
to recover the costs of treating smoking-related illnesses.
Legislation would have settled those suits, but state attorneys
general said that if no national deal is reached, they will move
forward in the courts. A handful of states have already settled
individually with the companies, collecting money but failing to
impose the broad national restrictions possible under a congressional
deal. Goldstone said he hasn't decided whether to try to settle those
cases out of court but said his instinct is to continue fighting.

Tobacco stocks, which had fallen about 15 percent in recent weeks as
tough legislation gathered support in Congress, were up for the day.
RJR Nabisco held on to a $1.06 increase, and Philip Morris was up
$2.25 a share.

Goldstone accused the administration, Congress and public health
advocates of undercutting the deal by demanding more than the industry
agreed to in June.

"The administration, while publicly praising the concept, privately
dismantled it piece by piece," he said. "This resolution cried out for
strong, bold political leadership. Precious little was
forthcoming."

But he said the industry also shouldered some of the blame for
misunderstanding public anger about past industry practices such as
targeting young people.

"(We) did not fully appreciate the depth of the mistrust and anger
that existed," he said. "We did underestimate ... how angry people
have been over this issue."

Associated Press writer SOME QUESTIONS AND ANSWERS ABOUT THE TOBACCO
DEAL AND TOBACCO LEGISLATION:

Q: What was last summer's historic tobacco agreement?

A: To settle lawsuits brought by 40 states, the tobacco companies
signed a deal in June with state attorneys general, offering to pay
$368 billion over 25 years, most of it for anti-smoking campaigns, and
to repay state Medicaid money spent treating sick smokers. In
exchange, the tobacco companies would get sharp reductions in their
future legal liability, and thus a measure of financial certainty.

Q: Why wasn't that agreement implemented?

A: Congress had to approve it first. But lawmakers instead decided to
write their own agreement -- one that was tougher on the industry. The
leading bill, approved by a key Senate committee last week, would
require the industry to pay $506 billion over 25 years and curb
advertising. It also calls for fining companies billions of dollars if
teen smoking rates do not drop significantly. And to the companies'
anger, it would not provide the protections from smokers' lawsuits
that they had gotten in last June's agreement with the states.

Q: What did the cigarette makers say yesterday?

A: Led by RJR Nabisco, corporate parent of R.J. Reynolds Tobacco, the
cigarette manufacturers said they would stand behind last summer's
deal, but would fight congressional efforts to enact legislation that
would be more costly and restrictive to the companies. They said they
believe last summer's deal, because it lacks support in Congress, is
now dead.

Q: Why should Congress care if the tobacco companies cooperate and
back the tobacco bill?

A: Many lawmakers and President Clinton say they don't care if the
tobacco companies are on board. However, the tobacco companies have
threatened to sue if the resulting bill overly restricted their
advertising, saying that would violate their First Amendment right of
free speech. Many analysts believe that could tie the issue up in
courts for years.

Q: How does yesterday's announcement by the tobacco companies affect
the agreement negotiated last summer by the state attorneys general?

A: Those state lawsuits are still pending, and many states will press
forward with them while the debate in Congress continues. Mississippi,
Texas and Florida have already signed individual deals with the
tobacco companies, collecting millions of dollars in compensation for
sick smokers, and the tobacco companies' new position will not affect
those.