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August/Sept.
2001

TRENDS AND TRENDSETTERS IN SPECIALTY TOBACCO RETAILING
New York's Direct Marketing Cigarette Sales Ban is Overturned
NEW YORK - A federal judge in New York City ruled that New York's law banning the sale of cigarettes over the Internet, through the mail, and by phone, is unconstitutional.

A U.S. District Judge ruled that the law adopted in August 2000 interferes with interstate trade and violates the commerce clause of the U.S. Constitution. Brown & Williamson Tobacco Corp. and Santa Fe Natural Tobacco Co. Inc. had challenged the law, which was designed to prevent minors from obtaining cigarettes and to stop the sale of tax-free cigarettes by Native American nations on the Internet and by telephone order.

The state imposed the ban after raising the cigarette excise tax from 56 cents to $1.11 a pack, the highest in the nation. Afterward, New York merchants reported plummeting cigarette sales.

Santa Fe Natural Tobacco Company said in a statement that it brought the constitutional challenge to the bill because "it would have had the effect of prohibiting us, and other out-of-state sellers, from engaging in direct delivery to consumers. As a small manufacturer, we depend on consumer-direct orders as an important means of reaching adult smokers who otherwise would be unaware of, or unable to obtain, our product."

Santa Fe said the ban would impact only legitimate companies who ensure that minors do not purchase their cigarettes, and who collect and pay taxes on every sale.

Brown & Williamson formed a subsidiary, BWT Direct, LLC, last year to sell some of its less-widely distributed brands directly to consumers from a catalogue by mail, fax, telephone and, later this year, the Internet.

The judge lauded the company's program to prevent sales to minors and found that there is not a significant level of sales to minors over the Internet currently.

Jim Calvin, president of the New York Association of Convenience Stores, was exasperated by the decision.

"What is it that a law-abiding retailer is supposed to do when his customers desert his store for tax-free, unregulated Internet and mail-order outlets with the blessing of the courts?"

The ruling reiterated statements made in the judge's earlier restraining order that the state had other options available to keep cigarettes out of the hands of children and collect taxes that would place less of a burden on interstate commerce.

The ruling was also a major victory for the Seneca Nation of Indians and other tribes in the state that have built a multimillion-dollar business selling tax-free cigarettes by mail order, telephone and the Internet.


APPROVED LEGISLATION
Rhode Island has raised the age of minority from 16 to 18 years of age under the youth Tobacco Laws regarding tobacco possession.

New Hampshire has banned the sale of rolling papers to minors, with possession or use by minors also prohibited.

Maine has raised the cigarette excise tax by a combined 26, for a new tax rate of $1 per pack; the state now requires cigarette distributors to determine MSA compliance of manufacturers,

Colorado now prohibits the sale of individual cigarettes and packs containing fewer than 20 cigarettes, and mandates a minimum RYO tobacco sale of .6 ounces.

Connecticut has authorized tobacco retailers to use transaction scan devices to check the validity of indentification cards presented as proof of age for tobacco purchases.

Texas now prohibits the storage of tobacco products for commercial business in a residence or public storage facility.

A budget bill passed by the Rhode Island legislature and approved by the governor has imposed a tax increase on other tobacco products (OTP) of 10%, raising the state's tax from 20% previously to 30% of the wholesale cost of smokeless tobacco, cigars, and pipe tobaccos. The bill also imposed an excise tax increase on cigarettes of $.29, raising the total tax to $1.00 per pack, as well as floor stock tax on cigarettes. The bill became effective on July 1, 2001.

In a move that will greatly reduce the excise tax on the most costly premium cigars, the Oregon legislature has passed a bill capping the state's hefty OTP tax, calculated at 65% of the wholesale sales price, at a maximum of $.50 for cigars. Backers of the bill argued that cigar stores have lost sales to mail-order companies and Internet retailers by consumer seeking to avoid Oregon's high tobacco taxes, which were approved by voters in 1996.


Bigger Site for Knoxville Cigar

KNOXVILLE - The five-year-old Knoxville Cigar Co. has moved to a large location across the street from its previous site. The tobacco shop's comfy chairs and relaxed atmosphere now occupy more than 3,100 square feet of space in the Old City section of Knoxville - enough room for the 500 different brands of cigars, 1,500 pipes and more than 300 brands of tinned tobaccos it sells.

"We've outgrown (the former) building," general manager Kevin Phillips told the Knoxville News-Sentinel, "and we have picked up a lot of accessories, so we needed another spot."

The hardwood cabinets were well stocked with fresh tobacco when the store celebrated its move in July with cigar and pipe tobacco tastings and a demonstration of the art of cigar rolling. Serious cigar aficionados will have a private lounge area with televisions, pool tables, and lockers in which to store their tobacco, Phillips said.

The store's been attracting both casual and serious smokers since it opened in 1995 at the butt-end of the cigar craze. After more than five years, business is still growing steadily. A typical night at the store finds pipes and cigarettes blazing alongside the cigars - and all different types of people smoking them, Phillips said. "We get anyone from bikers (to) lawyers and doctors, and some women," he said, laughing. "It's funny to see all the big, tough bikers smoking flavored cigars."

Owner Pete Zaring says online business is thriving at www.knoxcigar.com and www. pipesforless.com.

"We started by trying to unload a bunch of pipes on e-Bay," Zaring said. "When that became successful, we started our own site."


Last Smoker's Gallery Store Closes in Florida
BOCA RATON - Windsor Capital Corp. of Boca Raton, Fla., ceased operation of its retail tobacconist business at the end of the fiscal year January 31, 2001. The company estimated a net loss for the year of approximately $630,000 compared to a net loss of $675, 000 for the year-earlier period.

Windsor had operated chain a Smoker's Gallery tobacco shops in upscale, regional malls in South Florida. The tobacconist stores carried a full line of tobacco products and accessories, including cigars, pipes and pipe tobacco, and upscale, non-tobacco gifts.

Until April 2000, the company had operated six such stores, five of which were closed in rapid succession last year. In April 2000, one location was closed as a result of its lease termination. The company ceased operations at four other unprofitable stores on May 28, July 4, October 22, and October 28, 2000, abandoning its property and equipment at those locations to the respective landlords. The last store was closed in January 2001.

In the late 1990s, the company had also owned and operated 14 cigar kiosks under the name Simply Cigars in malls located in Connecticut, Illinois, Maryland, Massachusetts, Michigan, and Ohio. Most of the kiosks proved unprofitable, according to the company; three kiosks were sold in 1998, and two other closed. A failed agreement to sell the nine remaining kiosks resulted in surrendering eight locations to their respective landlords, while the remaining kiosk was subsequently sold.

The Smoker's Gallery chain, which merged into Windsor Capital in January 1998, was founded in 1985 by Joel Wolk, who remained the company's chief operating officer until 1999.


Cyco.net Stock Trades on OTCBB
The common stock of Cyco.net Inc. will be quoted and traded on the Over the Counter Bulletin Board under the symbol CYKE, says company president Richard Urrea. Cyco.net Inc. is an Internet cigarette and tobacco retailer that operates the sites www.cycocigs.com and www.aabakismokes.com. Cyco.net sites offer most premium brands, discount brands, and value brands. The company targets cost-conscious consumers and those looking for low-cost alternatives to brands offered at regular retail outlets.

The company experienced 1,000 percent revenue growth in the first quarter of this same period last year. This growth is due mainly to repeat customers and word-of-mouth marketing, says Urrea. The company feels that if this rate of growth continues with the assistance of some additional marketing it will achieve its goal of capturing 1 percent of the Internet cigarette market. Some accounts forecast the Internet cigarette market will reach 20 percent of the $50 billion in annual U.S. cigarette sales.


Atlanta Tinder Box Franchise Available
ATLANTA - Tinder Box is searching for a franchise buyer for one of its top Atlanta locations. Wayne Best, vice president of operations for The Tinder Box, said the company is seeking a franchisees for its Lenox Square location in Atlanta, Ga. "We took it back from a franchisee, and we've been running it [since]," Best said. Philadelphia-based Tinder Box oversees franchise shops across the country. There are six shops in Atlanta, including at Lenox, North Point Mall and Gwinnett Place mall. Best said the Lenox store has among the highest gross sales in the chain. "We're a little different from days past. We're totally franchised now," Best said.

SMOKESHOP - August/September 2001