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PROTECTED BY MINNESOTA TOBACCO LITIGATION PROTECTIVE ORDER Since April 1957 we have been acquiring the shares owned by the minority stockholders and finally completed acquiring them in January 1959. The American Tobacco Company now owns 100% of the capital stock of this company and, as indicated elsewhere in this report, the financial results of this company are now consolidated with that of the parent Company, CONTINUING IMPROVEMENT IN MANUFACTURING EFFICIENCY While the production of tobacco products of top quality must start with the best tobacco available, the manufacturing methods used in producing the finished product contribute importantly to quality and to the consumer acceptance of our products. Since the end of World War II, substantial advancement has been made in the manufacturing facilities and methods used in the handling of leaf tobacco, its preparation for use in the finished product and for assuring that the finished product measures up to the standards of quality set by the Company. These improvements, both in methods and in equipment, have also contributed to economy of manufacture with resultant beneficial effect upon profit margins. Your Company continues to explore the possibility of improving manu- facturing methods that will not only safeguard the standards of quality of its products but will also produce greater profits from operations. Q ADVERTISING AI~D SALES PROMOTION With the number of competitive cigarette brands continuing to in- crease, your Company's advertising and sales promotion programs are under constant scrutiny with the object of improved efficiency and maxi- mum economy. It is the policy of The American Tobacco Company to keep its brand promotion in good taste to match the good taste of its products. Virtually all major advertising media, including television, radio, news- papers, magazines and billboards, are utilized to inform the smoking public of the superior quality of our tobacco products. The efforts of our Sales Organization supplement, and are coordinated with, product advertising. Throughout the nation, members of the Sales Organization strive to secure the widest possible distribution for our brands. They reinforce the national advertising effort by placing point of sale dis- plays in retail outlets and by direct sampling of consumers. They also sup- ply service and assistance at the wholesale and retail levels. MNAT 00028957 p/t GI~ TEN

PROTECTED BY MINNESOTA TOBACCO LITIGATION PROTECTIVE ORDER $ SI~IOKING AIND HEALTH Despite repeated publicizing of certain statistical studies by anti- tobacco theorists, no reliable evidence has been produced in the experimental or pathological fields to support the theory that cigarette smoking causes lung cancer. After five ),ears of studies, for example, the British Empire Cancer Campaign reported "striking negative results" from animal experi- ments involving inhalation of tobacco smoke. The anti-cigarette stetisties themselves have increasingly come under attack. Last year, for example, the British Medical Journal published a study involving the heaviest cigarette smokers in the world, native white males in South Africa. This group was found to have a relatively low lung cancer death rate compared with that of immigrants to South Africa from Great Britain and other European countries who smoke less. The cause of cancer remains unknown and many reputable SCientists and scientific bodies continue to refuse to accept the anti-cigarette theory of lung cancer. In December 1959, commenting on a review article of the United States Public Health Service, the Journal of the American Medical Association stated that an "all-or-none authoritative position" in this mat- ter is not warranted by the evidence to date. STOCKttOLDERS' ANNUAL MEETING The Annual Meeting of Stockholders will be held on Wednesday, April 6, 1960. Formal notice of this meeting, together with the proxy and proxy statement, is enclosed with this report. Before closing this letter I should like to acknowledge the many com- munications we have received from our stockholders during the year. Especially gratifying have been the stockholders' continued loyalty to the Company's products and their efforts to promote our brands. On behalf of the Board of Directors, I am pleased to express our appre- cialion for the cooperation of our customers and the loyal service rendered by our employees. PAUL M. HAHN President MNAT 0G0299S9 pACE EI.E~'E N

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PROTECTED BY MINNESOTA TOBACCO LITIGATION PROTECTIVE ORDER H[RB[RTTAREYION CIGARETTES MODERN SIZE k

PRO1 ECTED BY MINNESOTA TOBACCO LITIGATION PROTECTIVE ORDER 1959 OPERATIONS AT A GLANCE d d The Company received for goods it sold and from dividends, interest and miscellaneous.. $1,1§1,88B,000 This is how it was used or set aside 52,9% Taxes (excise, income, socia I security, etc.) $614,219,000 23.3% Tobacco (including applicable expenses) $ 271,052,000 17.8% Wages, Goods, Services, etc. $207.463.000 ,5% Bond and Bank Interesl $ 5,906,000 33% DividendstoStockholders $ 35330,000 2,~.% Earnings Retained to Meet Future Needs $ 97,518,000 MNAT 00028961 p~GE FOURTEEN

PROTECTED BY MINNESOTA TOBACCO LITIGATION PP-OTECTiVEEORDER Consolidated Statements of INCOME AND RETAINED EARNINGS e o For ]'ears E~zded December 3;: Net Sales ............... Cost of sales, selling, general and administrative expenses .............. Operating Profit ............. Other income ............. Interest and related charges ........ Other deductions from income ....... Total deductions ....... Incorn~, before taxes on income ........ Federal and other taxes on irlcome ...... Net income .............. Retained earnings, beginning of year [includes December 31, 1957, retained earnings of a previously unconsolldated subsidiary) ..... Cash Dividends: Common stock, $5 per share ....... Preferred stock, $6 per share ....... Total dividends ........ Retained earnlngs, end of year (Note R) ...... De ptecillt ion provided ~nd charged to COSTS and expenses amounted to $5,215,154 in 1959 and $4,g49,930 in 195B, 19B9 $1,161,376,858 1,019,129,251 195~ S1,105,176,334 971,131,896 142,247,607 134,044,43B S11~15 479,879 142,759,022 134,524,317 5,906,001 761,751 8,005,598 1,524,477 6,B87,752 9,530,075 136,071,270 124,994,242 72,823,000 66,138,000 63,248,2"/0 55,856,242 22"/,589,'/O? 204,263,061 290,637,977 263,119,303 32,562,610 32,562,610 3,166,986 3,166,986 35,729,596 35,729,596 _$ 254,508,381 $ 227,389,707 MNAT 00028962 pA(;l£ FIF'FEE %

PROTECTED BY MINNESOTA TOBACCO LITIGATION PROTECTIV_E ORDER CONSOLIDATED BALANCE SHEETS ASSETS December 31, Cash ............... ACCounts receivable, customers ........ Leaf tobacco, manufactured stock, operating supplies, etc., at average cost ........... Miscellaneous accounts receivable ...... Total current assets ...... Investment in and advances to an unconsolidated sub- sidiary, at amounts not in excess of cost (Note S) Insurance deposits and miscellaneous investments, Land, buildings, machinery, etc., at cost, )ess allow* ance for depreciation, 1959, $55,844,776; 1958, $52,767,525 ............. Prepaid expenses and deferred charges ..... Brands, trade-marks, patents, good will, etc ..... lglI $ 17,740,414 51,910,968 G56,680,134 1,696,788 728,028,304 5,955,069 1,113,692 67,776,385 3,652,437 1 $806,525,888 IIIsl 41 $ 20,696,311 46,942,630 648,310,916 1,318,225 717~268,082 7,985,750 1,286,764 ~ 64,894,849 5,096,257 1 $796,531,703 MNAT 0002896~ P~GE SIXTEE*'~ - i

PROT EC FED BY MINNESOTA TOBACCO LITIGATION PROTECTIVE ORDER O Q LIABILITIES Deeeml~¢r 31, Notes payable ............. Loan payable by British subsidiary ....... Accrued taxes ............. Accounts payable and accrued expenses ..... Dividend on preferred stock for quarter ended December 51 ............. Debentures to be redeemed through sinking fund opera- tions (Note 4) ............ Total current liabilities ..... Debentures (Note 4) ........... STOCKHOLDERS' EQUITY Capital stock {Note 5): Preferred, six per cent cumulative, par value $100 per share ............. Common, par value $25 per share ...... Excess of net proceeds from capital stocks issued over par values ............. Retained earnings (Note 2/ ......... Total ........... io6o $ 56,000,000 4,410,546 53,817,206 15,760,433 791,746 9,624,000 140,403,931 150,653p000 291,056,931 52,783,100 162,813,050 44,964,426 260,560,576 254,908,381 515,468,957 $806,525,888 ID68 $66,000,000 50,655,309 15,211,365 791,746 10,521,000 143,179,420 165,402,000 308,581,420 52,783,100 162,813,050 44,964,426 260,560,576 227,389,707 487,950,283 $796,531,705 MNAT 00028964 PAGE SEYENTEE~

PROTECTED BY MINNESOTA TOBACCO LITIGATION PROTECTIVEQRDER iNotes Accompanying Financial Statements The accompanying consolidated financial ~tatements include all wholly-o~ned subMdiariea. The Company acquired the minority interest in Golden Belt Manufacturing Company in January, 1959. Accordingly, this subsidiary, not previously consolidated, is included for 1950, and the financial statements for 1958 have been adjusted In reflect this acquisition as of January 1, 1958. 2. Under the provisions of the indenture relating to the Twenty Year 3% Debentures, due January 1, 1968, cash dividends declal"ed on common stock and payments made in purchasing shares of any cla~ of the Company's ~tock subsequent to December 31, 1947, may not exceed the aggregate of $15,000,000 and consolidated net income earned subsequent to December 81, 1947, less dividends paid on preferred stock, At December 31, 1959. approximately $220.600.000 of retained earnings was free of this restriction. The net tangible assets applicable to the investment in and advances to an unconsolidated subsid- iary at December 31, 1059 and 1958, amounted to $10,069,546 and $11,548.284, respectively. Interest received from this subsidiary ~.'as: 1959, $254.1601 1958. $305,966; the equity in earning6 amounted to: 1959, $658,958; 1958, $077,163. 4. Debentures Dutstanding at December 31, 1059, comprise: 5, 6~ 7. Principal Amounts Redeemable Redeemable After Within One Year* Dec, 31,1969 Twenty year 3ff¢, due April 15. 1962 ...... $3,074,000 $ 81,048,000 Twenty year 3%, due January 1, 1968 ..... 3,fi00,fi00 39,000,000 Twenty-five year 3~, due October 15, 1909 .... 2,160,000 " 43,372,000 Twenty-five ),ear 3~:~, due February 1, 1977 . . 1,390.000 37,238,000 $9.624,000 $1 fi0.653,000 *Estimated principal amounts to be redeemed through sinking fund operati~n~ at prices as provided by the indentuTe$. Capital stock at December 31, 1959, comprises: Shares Sharel Authorized Issued Preferred ....... 540.1fi6 527,881 Common ........ 10,000.000 6.519,529 The stockholders will be asked to vote a'~ the 1060 annual meetlng on a proposal to change each share of common ~tock of the par value of $25.00 per share into two shares of common stock of the pat" value of 312.50 per share. This would increase the common "Shares Authorized" to 20,000.000 and "Shares Issued" to 13.025.044. A noncon r butory Retirement Plan providing unfunded (pay-as-you-go) benefits for empnyees has been in effect since J~nuary 1, 1049. Unde" the P an he Compan'*. ha.~ he , ght to amend. rood fy or erminate the Plan in whole or in part at any time. Payments made under the Plan and charged to income amounted to $1.128,823 in 1950 and SL0fi7,074 in 1958. Substantially larger annual expenditures will be required if the proposed revisions referred to in Note 7 are adopted. The stockholders will be asked to vote at the 1960 annual meeting on revisions of the Company's Retirement Plan includlng a provision for funding, a deferred Profit-Sharing Plan extending benefits to regular ful]-~ime empb~yees of the Compan~ and des gna ed ~ ibsidiarles as well as an amendment of the Incentive Compensation Plan under Article xn of the By-Laws, as set forth in the Proxy Statement. to become effective in 1060. p~*nF EIGHTEEN MNAT (~028965

PROTECTED BY MINNESOTA TOBACCO LITIGATION PROTECTIJ/E ORDER SUPPLEMENTARY FINANCIAL INFORMATION IiIVelll oi'ies Leaf tobacco ................. Manufactured stock ............. Supplies .................. Revenue stamps ................ TOTAL ................. Dece.'aberJ1 1959 1958 $5~6.605,133 $578,305.788 51.065,978 49,517.829 19,009.023 18,829.248 -- 1,658,051 $656.680,134 $648,810,916 ]nventcries used in the computation of cost of sales are priced at costs xvhieh result from the avera gill~ monthly Of transaetiol~s reflected in the ilwenLory accounts except that revenue st~mp inventorie~ were priced at actual ee~t. In 1959 the TreaSlll'y Department instituted the return system for paymeIlt cf exei~o taxes On ci[rarette~ ~l~d tobacco. This method ol tax ]~a~'mellt elimil~ated the t~se of revellue sta/~p$. Land. Buildings. ,Machinery, ctc. GROSS Land and buildings .......... $ 53,708.587 Machinery and equipment ........ 50,135,283 Office furniture and equipment ..... 3,211,647 Automobile~ and trucks ........ 4,0S0,698 Construction in process ........ 2,484,946 TOTAL ............ $128.621.J 61 .Decembcr$I,1959 ALLOWANCE FOR DEPRECIATION $27,480,959 24,426,250 1,993,073 1,944,454 $55.~44,776 NET $26,227,598 35,709,033 1,218,574 2,136,234 2,484,046 $67,776,385 MNAT 00028966 pAGF ~I~ETEEN