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The American Tobacco Company 1964 Annual Report Tareyton 0926714-010 .

Annual Meeting The Annual Meeting ol Slockl]otd~t$ wit~ take pf~ce On Wednesday*, Aprtl 7, ?~16S, in RariIan Township adja~enl to l:lcrni~ton, New ]ertey A tormaJ Notice OJ MeeUng~ proxy Statement and proxy accompatly tJli~ repoR.

Company office: ¢50 East q2n~ Street New ¥0Fk, New YOrk 10017 PROFI T-SHARING PLAN F[f'st National City Bank, Trustee 39'9 Park Avenue New York, New York 10022 March l, 1965 To All Profit-Sharing Plaa Members As you know, Profit-Sharing Plan funds are partly invested in American Tobacco Common Stock. This stuck is owned by the Plan Trustee, which does the actual voting at meetings of stockholders. However, you have an interest in this stock as a Plan Member and therefore the Company has worked out arrange- ments with the Trustee whereby each Member is able to indicate confidentially to the Trustee his deskes as to the voting of the shares of such stock in whirl1 he has aa interest and the Trustee has agreed that in exercising its voting powers it will be bound thereby. You can indicate to the Trustee your desires as to voting of the stock in which you have an interest at the 1965 Annual Meeting of Stockholders of the Company by completing and returning to the Trustee die enclosed "Vote Specification" card. To help you understand the matters that are to be acted on, we are enclosing material that all American Tobacco stockholders receive~ Notice of Meeting, a Proxy State~ ment and the Company's Annual Report for 1964. Study these enclosures carefully. Then fill in and sign the enclosed "Vote Specification" card and return it promptly to the Trustee--First National City Bank--in the postage-pald return envelope, Your wishes will be treated in confidence by the Trustee. To receive consideration the card must reach the Trustee by noon April 6, 1965. Each year you ate a Plan Member you will receive an individual statement showing just where you stand in the Profit-Sharlng Plan. Your 1964 statement is now being prepared and will be mailed to you in the ileal" futllf'e. Enclosures PROFIT-SHAKING PLAN COMMITTEE

NOTICE OF MEETING Flemlngton, New Jersey March 1, 1965 The Amaual Meeting of stockholders of The American T~bacco Company wilI be held at the Hunterdon Central High School, in Raritan Township adjacent to Flemlngton, New Jersey, on Route 69 between the New Jersey Avenue and the East -~fain Street intersections, at one-lhlrty o'clock in the afternoon (Eastern Standard Time) on Wednesday, April 7, ]965, for the gollowlng pin,poses: (1) To elect Directors; {2) To consider and vote on a proposal (designated Proposal d and set forth in the following proxy statement) to elect Lybrand, Ross Bros. & Montgomery independent auditm's for the Company for tile year 1965; (3) To consider and vote on a proposal (designated Proposal 2 and set forth i11 the following proxy statement) to approve the Profit-Sharing Plan of The American Tobacco Company, which will be resubmitted to the Annual Meeting pursuant to the Plan; (4) To consider and vote oil a proposal (desigoated Proposal 3 and set forth in the following proxy statement), declared advisable by the Board of Directors, to approve and adopt the amendments described therein to the Retirement Plan for Employees a~ld Former Employees of The American Tobacco Company and Designated Affiliated Corporations, to be effective as of January 1, 1965; and (5) To transact such other business as may properly come before the meeting. The stock transfer hooks will not be closed but holders of Preferred Stock and Common Smock, to he entitled to vote, must he holders of record at the close of lmslness on March 8, 1965. JOHN W. H.~d~LON, Secretary

PROXY STATEMENT Ths aeeompanyinR proxy is selicRed by the MamugemenL The proxy may be revoked by notice in writing given *o the Secretary at any tinae before balug voted. Proxies in the acevmp~mying form~ properly executed, duly returned to the Management and not revoked, will be voted and, where a speeificatibn is made on the hailer proxided therein, will be voted in accordance with such speclheatlon. The Management is not awsre at the date hereof of any matter Io be presented at this meeting other than [he election of directors and Proposals 1, 2 and 3. If any other matter is properly presented, it is l~ended that the persons named in the proxies will vote thereon according to their best juilgme~. Attendance at the meePm g does not serve to revoke the proxy. The number of shares o[ each class of voting securities of the Company outstanding is: Preferred, 527,831 share.*; Common, 25,999,116 shares. The Preferred Stock ($100 par valee) is entitled to sixteen votes per share. The Common Stock ($6.25 par value) is entitled to one vote per share. The record date for ibc determination of stockholders entitled to vote at the m~etthg is the close of business March 8, 1965. ELECTION OF DIRECTORS The Board o~ Directors consis~ of e/ghteen me~elaers who are elected to held ofi%~ until the next Annual Meeting or antiI their ~uceer~ors are duly d~cted and qualified. It is intended that proxies in the ~c¢ompanying term will be voted for the nominees named below or, in the event any such novgmec is not a candidafe or is tmable to ~erve as a director atthe time of the election ( whish is not now expected), ~or any nominee who shall be d~slgnated by the presem Board of Directors to fill such vacancy. The nominees named below are members of the present Board and have gervcd as directors of the Company for the periods eomraeneing with the dat~ set after their respective names. There are set ibrth ledow opposite the name of each nmnine~ (1) under the heading "Common" the d~ares of Common Stock o1 the Company beneficially owned dire~dy or indirecdy by the nominee on February l, 1965, plus the shares (if any) of Common Stosh, hsht by the Trustee mailer the Company's Profit-Sheribg Plvn and attributable to deposits made by him through voluntary payrall dedavhen~, in whleh the nomibev had a b~¢fmlal interest as of l)eeemb~r 31, 1964, and (2) ~/er the heading "Common attributable to profit sharing" the shmtes (if any) of Cerumen Stosh o1 the Company, held by the Tm~stee under the proilt-Sharing Plan and attrthutshle to profit sharing, in which the nomibe0 had a beneficial idterest as of December 31, ]964. Tile id~ormatlon as to security holdings is based on information reeeivcd by the Company ~om the nomleees, lkom the Pr oilt-Sharing Plan Committee and [mm the Truste~ under th~ ProfiVSharing Plan. ~Bme Orpheus D. Baxalys Alfred F. Bowden James J. Cunniugham A. Gordon Findiby John G, Hager, Jr. Virgil D. ]'lager Robert K. Heimann Cyril F. Hetsko A. LeRoy Jan~n Alvin R. Jennings Eugene F. Mooney 1chn B. Sparrow Silas E. $tricklend George L. Turner Robert B. Walker Joseph R. Waterhouse (2) year first Co~a~on Positions and o~ce$ whh Company elected ( 1 ) attri[I umhle t¢, orotherprlncipaloeeup~tion(a) dlr¢ctor Common(b) profit sharing (e} Vie~Preside~lt and Managing Director, The Amesh 1940 11,780 204 can Tchacce Company of th~ Orient, Inc. Vice.President; Presldent~ Cigar Division, and 1951 2,952 428 Pre~iden% Amebean Cigar Corporation Director of Parshases 196,3 1,940 t91 Vice-Pr~ident, Advertising and Sule% Cigar Divi- 1953 8,020 294 slen~ and. Vlee-Presiile~t, American Cigar Cor- poration Vice.Presldent, Cigarette and Toheeco MauuJaeture 1956 1,620 289 E~ecntlve Vice-President 1955 1,624 557 Vice-Presid~nt for Markedug and Pu~ilc Relations 1963 1,237 241 Vice.President and General Counsel 1965 500 -- Executive Vice-Preslde~t 1948 2:670 579 Retired (formerly Executive Partner, L)brand, 1965 100 Ross Brot. & Montgomery) Director of Sales 1963 2,0~7 312 Vice-President, American Supplfers Division 1958 2,422 245 Vice-President, American Suppliers Division 1957 524 276 President, American Suppliers Di~dsinn 1958 2,462 334 Prealdent 1955 2,740 722 Vic~Preeident and Treasurer 1962 1,079 300

(2) Year first Common Positions and ¢Jfflc es with Company elected (1) attrlbatable to Name or other principal occupation (a) director Common(b) profit sharS~gie) George H. Woodard President, Welling & Woodard, Inc., Management 1964 100 -- Consultants William B. Young V~ce-President, Manufacture, and Vice-Presidvnt, 1956 4,445 i93 Manufacture and Leaf, Cigar Division (a) The positions and offmes listed opposite the name of a nominee are with tire Con~panv unless otherwise noted and ere his ptln¢ipal tmcupatlsm The Amorlcan Tobacco ComFany of the Orient Inc. is an al~llated company engaged in pttrclmze ~nd hand[lag el leaf tobacco. American C~gar Corporation, also an affiliated company, produces higher pricec[ ciga~ brands, (b~ T~ numbers of shax~e, held 6y the PIaa Truste~ as of Decem~r 3L 1966, attributaLle to voluntary de[msit~ made J3y nom/nee~ and in which nomanees had a hene~eial interezt, iueludvd in the numbers shown in CMumn (1) opposite lhe names of nominees ~r~ as ~ol]ows. the nttmbor (with fractions omitted~ he~iu set ~orth after the uan/e o{ a nomit~ee heing oqu~valeul as o~ that date to h~s undivided proportionate ittteresl in all th~ ehare~ of C.omta~n Stc.ek then held by the plan Trustee ~ttrlha~able to deposit~ through voIuntaryp.,ayroll deduetior~: ~ram¢~ J. Cunning&am, 360; J~hn G. Hater, Jr.. 420; Virgil D. Hater, 582; Robert K. Heimann, 137~ A. LoRe7 Jansen, 470; Eugene F. Mooney, 3~1; John B. Sparrow, 422; Sila~ E. Striekland. 124; George L. Turner. 4,62; Joseph K Waterhouse, 77; ~d Willianl B. Yomlg, 865. (c) Tke ~amher of shares aboaa itt Coluraa (2} oFeosite the ~am~. 0£ a nominee is ~he number (with fraetloos emiItedi eq~i~aletzI as of December 31. 1964 to Ms ~mdivid¢d proportionate interest in all the shares of C~nmmon Stock of the Company ~en held by the Pie, Trt~ste~ attributabtv t~ profit sh~zing. The Company is also informed that none of the nominees was the beneficial owner on February I, 1965 of outstanding equity seouritie~ of subsidiaries of the Company or (except Mr. ltmxalys, who owned 62 shares) of Prcfcrred Stock of the Compan>. Cyril F. Hetsko entered the employ of the Company as its Gen~ra~ Counsel on November 6. i964, following his resignation from Chadbourne, Parke~ Whiteside & WolfL As an associate and {rein 1955 as a member of that /trm, he had worked on the Company's legal affairs for '24 yearn, the fast five as the Company's Chief Couns¢b He became a Vice-President and a director on January 1, 1965. Alvfa 1{. Jennfags, a certified public accountant, wa~ for many years preceding hf~ rvth-emeat at the end of i964 a member of d~e firm of Lybrand, Ross Bro~. & Montgomery, having served as its Managing Pmxner and Chairman of its Executive Committee ~Oln 1934 to 1962 a~d thereafter as Executive Partner. He became a director of the Comp,mv on ffanuary 1, 1965. George H. Woodard. a registered engineer, has had more dian 35 years' experience in management consulting, corporate executls'¢ and staff {unctions and d:vdopluent engineering. Hc is, and has been since its incorporailoa in 1959. President and principal stocldedder of Walling & Woodard, Inc., management consuhants. He became a director of the Company on October 1, 1964. RFmMUNERATIOrq There is set ~orth in Coinran (1) of the fallowing tabulation, on an accrual basis, aU direct remuneration paid by the Company and its subsidiaries to the following persons for services in all capacities while directors or officers of the Company dmfag its last fiscal year: each director, and each of the three highest paid o~teers, of the Company whose direct aggregate remunerafion exceeded $30,000; and all directors and oflgcers of the Company m~ a group. The 1964 profit sh~re~ of these indixidual~ payable to the Trustee under tim Company's Profit-Sharlng Plan are stated in Column (2). Estimated annual retirement benefits- to the same individuals at normal retirement date under existing retirement pIan~ are stated ia Cofamn (3). (2) {3) (1) Profit share Estimated annual Agg~egat e ~r 1~64 nnir omen t bene~ Name el individual Capacit ie~ in which r ernalxer ation payable v~ at normal orider~tits*ol~'oup remanerationwaszeceived(xi tbl (c) (di Truste~ (el (all to) retirementdat~ (f) Orplmus D. Ba~xalys(g) Vice-President and Mzmagi~g Diree- $ 67,090 $ -- $16.836 Alfred F. Bowden(h) James L Cunnfaghara A. Gordon Findlay(h) John G. tinter, Jr. tot, The American Tobacco Corn party of the Orient, Inc. Vice-President; President, Cigar Dls~alo~ Director of Purchases Vice-president, Advertising and Sales, Cigar Division Viee.Prealdent, Cigarette and Tobacco Manufacture 3 89,936 10,965 16,224 48,770 5,855 7,919 57,026 6,880 13,434 66,106 8,007 tl,761

NanLe ot individual ur identity of group Virgil D. Hag~r(h) Hiram R. Hanraer (g) (i) Robert K. Heimann(j) A. LeRoy Jansen(h) Eugene F. Mooney John FJ, Sparrow Silos E. Strickland George L. Turner(k) Robert B. Walker Joseph R. Waterhotme(h) (1) George A. Wilkinson(g) (m) Wigiam B. Young(g) (h) Directors and og~cers as a group(n) Capaeitlea in whlc}l xemttrleratiott wa~ reeelV~ll (~J Executive Vice-President Vice-Preddent, Departmel~t of Re- search and Dove~opmelit Assistant to tho President; Vie~- president for Marketing and Public Ralzt/ons Executive Vice-Pr~sidcnt 146,253 17,956 Director of Sales 71,135 g,631 Vice~Presideng American Suppliers 55~276 6,663 Division Vice-President, American Suppliers 57,135 6,894 Division Prezid~nt~ American Suppliers 82,260 4,689 Division President 233,255 28,756 Treasurer; Vice-President and 78fi98 9,533 Treasui'er Dire~gor, Tax Department; Special 61.667 -- Assistant Vice-President, 5$annfacture 79,231 -- Directors and Officers as a group 1,546,069 151,537 (2) (3) (1) Profit share Estimated manual Aggregate for 196~ r etir etc~ent beile~i rer~tll~eranon paTable ~o at tlom~l (ill (ci Cd~ Trustee (el (d) /ei rettrera~ntdate if~ $ 146,253 $ 17,956 $19,807 4g~159 70,369 8,536 10,765 17,737 12,550 I0,063 1] ,209 12,449 24,247 12,865 12,120 9,629 a) Capacities referred to were -~ith Ti~e ?~alerican Tobacco Ceml~aoy, unless otherwise indicated. The Amerioma "l'o]~acco Company ~t e O~eu * Inc. i8 an a~I[a ed coltlpanv engaged ~ p~rch~se lind hattdlJ~g of leaf tohaueo. 16) Includes undefer~d noncontlng~nt portio~ ~t i~eutivc compensation for 1~'~ utLder Article XII of lhe By-Law~. te "fh~ de~crred, eontingellt portion o~ incentive oompcusation under Article XI[ of the gy.La'&s aecrtl~d fo~ all years o~ Ipartleip~Lioll prior to 19(~ {1~57 being lhe firlt 3'e,lr for vlhleh it 'w~ pro~Jdr:d it I~0.~ablo to e,leh pattic[l~ant i~ ~qual ~nrtual installm~nts during th~ ten y~ar~ ~ollowing the ~losa of the year i~ which his ~mployment by the Compan)" terrafn~te~. Commencing with da~ year ]96~, Artlcle XD has provided /or Ihe rec/~ction of the data'red purlieu ~f i~.'¢ntr~ o~tpensattorl of eaoh ~a~¢/clpaz:t fo~ any year by the amoun~ el hls profit ~are for Slleh year u~dcr the Profit-Sharlng Plan. T~e respective amount~ ei d~'Ierred ~n~et~fi,~c c¢31ttpell~tti~tl accrued ior 196~ for the ir t dlvid rut Is named in the ab~v~ table, tho~ reduced by pro6t sharing except i~ t he, so ins~talnees where no p~fit share i~ sh~wll, ¢t~, ir~ parenth~!~, the r~speetlv~ ~tunua] installments l~ayah]e to them a~I~r tcrtuiu~tlon of empl~mcnt in r¢~pect of deferred incentive compensatio~ accrued for a[[ years of parlieipatlon including 1964, are as fol]ow~: Orpheus D. Baxaly~, $9,090, /$4.550) ; Alfred f. Bowden, $8,971, ($7,277) ; J~ro¢~ J. C~maingham. ~3,2~, ($478) ; A. Gordon Find/ay, $146, i$2,789) ; John G. linger, Jr. $3 724. /$2,~65) Virgil D. Hager, $2~,297 ($11,795) Hiram R. H~amer $2,909 ($5,302) Robert K. H~imann, $10,166, ($1.536) : A, LcRov Jansen, $28,297, /$12.~9) ; E~gene F. Moane~, $~ 670, ($3,185) ; John B. Sparrow, $2,~63, ($1,3211 ; Silos E. Strieklaad, $3,491, ($3~206) ; C.~rge L. Turner, $10,071, !Sg557i ; Robert B. Walker, $56,500, ($16,721) ; Joseph R, Waterhous¢, $9,69~, ($3,051~ ; George A. wgklason, $~,667, ~,243); ~V~ll~am B. Yoang, $~9~281, ($7,~3); and Director* ~d Off~ccrs ~s ,~ group, $213,394. ($94,344) • (dl As of Deeeraber ~1, 1~66, the Profit-Sharing PIan balances /other IliOn balances attribmahle t~ deposits through voluntary payroll deductions) re resemcd hy the Piaa "Unlts~' standing to he elcdit ot the individuals named in the abow table, i~cluding the market la]ue on that ~arro of tile lamuber ot share~ of Comlilort ~tuck ~[ ~e Company h~]d by th~ Plan "l~lustee equivalertt On t~lat date to lllct~ uncl~vid~d 'proport]ollate int~rc~ls ~n th~ tot~l ntlmb~r o[ s~teh share~ then h~ld b~z the Tlu~Lee alt~ibutab]e to profit sharing, but excluding their profit ah~res for 1964 !payable to the Trustee in 2965), were as folIows: Orpheus D. Baxalys, $28,265; Alfred IL Bowden, $~-/1,982 ; James J, Cunnlngham, $19,0~3; A. Gordon Findlay, $31,778; John G. Hagen, Jr., $29~684; Virgil I). Hager, $54,427; Hirar~ R. H~nm~r, $0 Robert K. Heiroann, $2~¢806; A. LeRoy Jansen, $57,~8; Eugewe F. Mooney, $32,036; John g. Sparrow ~25,858; 5i ¢s E. Strieklaad, $29,289; Georg~ L, Turner, $39,2~1 ; Robecl 1L '~¢al/cer, ~8,746; 2oseph IL ~'~teehou~e, $~,342~ Ge~rg~ A. Wilkinson, $28,324; Willlam B. young, $36,575; and Director~ and Offtcers ~s ~ group, $302,41~ (e) Th~ figures in ~lumn (2) ar~ the dolla~ ~alues as n~ Deecraber 31, 1964 of the plan ~Units" e~onstguiing the profit sharc~ of tR~ named indlvlduals for 1964. (D Estlm~ted ulson basi~ ,s~ aet~l or assamed ele~fh~n b~ ~alp]~e o[ ~int a~ ~m~er a~n~tRy. (g) I% profit share /or 1964, ha~ing ~ttained hi~ Ne~mal Reti~emem Date before January 1, I~t~4. (h) Also ~cer ~f a~021ated company or companies. /i) /~tired September 30, 1964. Amount in C~lumn (1) is for I964 through that dale. (j) Assistant to the Prcsldcnt through January 3I, [ggi~; Viee-F¢~sldem for Marketing and Pu~lio Rel~llons from Fel~ruary ], lg6~. (k) Amount in (~alumn /2) is based on his earnings, i~eiudlble f~r profit ~haring, through July, 31, 1964, his Normal Retirement Date. (1) Treasurer thtvugkout 1964 ~nd VieePr~sident [r~m Pehraary 1, 1964~ (r~) Director, Tax Department, through November 30, 1964; Speclal Assistant from D~e~mber b 1964. Retired January 31, 1965. in) Th~ uggrega~e remuneration for ll~e fiscal year 196~, from Ihe Compatty and its ~ubsidiarle~, on an accrual basis, of Director~ and Of~eers as a grou~ shown in Column (1), ~¢as approxlmat~y thlrteen on~-h~adredths of 1% of the Cor~panE~ consalidatcti net sa~es Tile Company paid Wailing & Woodard, Iuc. (of which George H. Woodard, a director of the Company, is President and prlnclpal stock6older J ~76,11g £or services rendered by li~at corporation during the last quarter of 1964, 4

Proposal 1 ELECTION OF INDEPENDENT AUDITORS The ~fanagoment r~ommends tile c[~t~on by trio stockholders o~ Lyheand, Ross Bro~. ~ Montgun~ry as indepeIIdent auditors for the Company ~or the year 196g. In liue with this recolnmendat[on the _Management inlend~ to ifilroduee at the ~orifieoming Am~ual ~vleetlng the following res01ution (designated hereifi as Propos~ t) : R~SOLI?ED, that Lybrand, Ross Bros. & ~VIDn~om©ry be and thvy har~by are elected independent auditors fo~ the Comp~ly ~or tbe year I965. This firm of oertified peblle ac~untant~ has been for over 30 year~ the indcpendent auditors for the Company. In accordance with the Company's practice a member o~ ifie firm will attcnd the Annval Mee~thg and respond to qnestlons ~.hi~ may be a~ked by stockhold~s. The Management recommends that you vo~e FOR Proposal I. Propostd~ RESUBMISSION OF PROFIT-Sf{AI~EWG PLAN The Pro~t-$harlng Plan el The American Tobacco Company was adopted by the stockholders at the Annual Meelifi~ in 1960. The Board of Directors has since made a number of minor changes, in inrge part dealguad to facilibate admini~ratlon. The Board, in further exercise of itn amendatory authority, also added a provision (Section 7 of Article XI) that the plan be restlbmittad to the ~tockheldors within five year~ after the last ~tockhalder approval and anoifie, provision preeludifig a member ~ part+c'pation in profiI~ a~ter his normal ~'etirement da~e. As fi~o years will have elapsed since the stogbholder approval in ]960, the Plan~ a~ araeo dad, is r e~ubmitted to th~ stockheldcrs at tbi~ Annual Meeling. Summary el P/an A brief de~erlption of the material tealures of the Plan as currently in ef[ect appears bvluw. A copy of the Plan will be sent to arty ~tockholder upon request to tl~e Secretary at ~lte Company's o~ce at 150 £a~t 42nd Street, New York, N. Y. 10027, and copies will be a~tilable at the meeting. Stockholders ar~ referred to the text of the Plan, ~md the follow, trig summary is qualified by such reference. Employees Covered, All ~egular iull-thne employees of the pertioipating empl~yerc~--~he Company mid t~'o of its ~ubsidiaries, The Hatheway-Steane Corporation mad American Cigar Corporatlon---he~ome members of the Plan on the JaIluary l ~allowlng eompletlon of one calendar year of eo~tinuot~s ~ervice. Approximately 12~5130 employees participated ia profit ~harthg for 1964. Employer Contribtttions. Each year the participating empleyer~ contribute a sum equal to ifie |ollowhg percentages o~ eozts~]idated net income before ta~es ~as defined in the Plan): 3~/~ of the first $1D0,O00~O00, plu~ 5% of the next $50,000,000, plus 6% of any excess. No con t but on w be made, however, for s~y year (a) fc~r which net income before taxes do~ not equal or exceed 12% of net worth, (b) in which a cash dividend ~s not paid on the Common S ock of the Company, or c) n exees~ of the amoulr deduc blc for that year by the pert~cipoting employers for Federal income tax perpose~. The Board of Direr.tots may in its discretion diseonlifiue, suspend or reduce eontrifiutions. Investment by Trustee. Employer contributions are pald Io Fi~st Nati0nal Cit> Bank as Trustee o~ The Americar~ Tobacc~ Profit-Sharing Plan Tt~ast to be credited by it ono-tidrd to the American Stock Fund for inve~t~nent ~olely in Common Stock of the Company and two.thlr~ls to the Diversified Fund ~or inve~maent in such sectrrifie~ and other property as the Trustee in its discretion may select. dpporllonmettt o/Contrlbttt~ons to Members. Corttrthutio~s are apportioned to Plan members on the ha~is of each m~raheFs adjusted earnings for the year in relation to the atl}t~tted earnings of all member~. "Adjusted earnings" for any year m~an~ earnings for that ye~tr plus 50~ ~f such earning~ in excess ot $4,800. Distribttth~tt and FC/ithdrawals. A meraher'~ balances in Ihe Profit-Sharing Plan Trust arising fro~a ¢rap1c>yer eontrlhulions become thBtribntable upon termination of employment. In eases of ternaiuatlon by death or rellremcnt the full amount is distributable. In the ca-*e ot any other lermJnatlon a pctcentage varying with the member's length

of service and reaching I00% upon completion of thirteen years' continuous service is distributable, except that upon termination ot employment for serious misconduct (discharge for cause, as defined in the Plan) the entire amount of such balances is subject to forfeiture. Distribution is made by such method of settlement--a sing|e distribution in cash or partly in cash and partlg in Common Stock of the Company, periodic eaab instalhnents, purchase of annuity, or other~dec---as the Profit-Sharing Plan Committee appointed by the Board of Directors to administer the Plan determines. A member may withdraw a portion of his profit-sharing balances during employment, subject to certain restrlction~ and subject also to the penalty of a 10% forfeiture. Theze and all other fodeitures are reapportioned among Plan members annually. Voluntary Deposlt~. In addition to receiving contributions from the Company the Plan Trustee is authorized to accept voluntary deposits from members. Any eligible member may became a depositor by electing to make deposits of h~s own funds by payroll deduction in amounts not less than $2 pe~ week and not more than 10% of his base pay. Each depositor has the option of directing that his deposits be allocated for investment entirely in tim American Stock Fund or one-third in that fund and two-thirds in the Diversified Fund. DepositPd ltmds nmy be withdrawn during employment, subject to limitations provided in the Plan. Deposit helanees become distributable in full upon termination of the member's participation ~ a depoaltnr. Approximately 2,250 mouthers were participating as depositors oa D¢ceruber 31, 1964. 1964 Employer Contributions under Plan and 1964 Incentive Compensation under Article XII The contributions of the participating employers to the Fe~fi~Sharing Plan accrued for the year 1964 amount to $6,211.856 (equibsient to $2,998,00.5 a~r Federal and state taxes based on income), of "~ffiieb $151,537 is apportionable to the aeeounls of fifl~en directors and officers and $6,g6~319 to other employees. For the same year incentiw compensation under Article X[I of the By-Laws was accrued in the following amounts for the employees participating therein: The under.fred nnncontingent portion (constltutlng one-hal~ of s~ch compensation) egv~Tegatmi $460.518, of which $362,027 wa~ accrued for eighteen directors a~d officers. The deferred contingent portion (constituting the otber half of such compensation), aftez reduction by profit sharing in the case of persons participating in the Prnfi~Sherlng Plan ~or that year, aggregated $231,320, of which $213,394 was aecrtted for such directors and offi~rs. RESOLUTION CONSTITUTING PROPOSAL 2 The resolution constituting Proposal 2 ls as defiowe: RE~OLVEtg that the Frofit.fiharfeg Plan of Tha American Tabaccu Company, as resubmitted to this Annual Meeting pursuant to Section 7 of Article XI thereof, be attd it hereby is approved. The vote in favor of Proposal 2 of a majority in interest of the Preferred Stock and et a majority in interest of the Coramon Stock present at the meeting and voting (each voting as a ela~s) is necessary for the adoption tllereof. The Management recommends that you vote FOR Proposal 2, PROPOSED AMENDMENTS OF REVISED RETIREMENT PLAN The Retirement Plan for EmpLoyees and Former Employees of The Ainerican Tobacco Company and DesigxLated Affiliated Corporatini,~, known as the Revised Retlrement plan, was adopted by the stockholders at the Annual Meeting in 1960 and has since been amended in various particulars by the Board of Directors. Approximately 15,250 employees of the Company, The Hatheway-Steann Corporation and American Cigar Corporation are covered by the Plan; of this number, eightoen are directors or officers of the Company. Tbe Board o~ Dire<tars has recently declared advisable and adopted certain additional amendments to become effective as of Jauuary l, 1965 subject to the favorable vute of the stockholders. The action was also subject to a ruling of the luternsi Revenue Service as to thc continued qualification vf the Plan as so amended, so that the Company's con- t~ib~t[ut~s would eonthme to be deductible for incom~ tax purposes. This ruling has been received.

Summary o[ Proposed Amer~nts The proposed amendments to the Plan make changes with resI~Ct to "past service" benefits and early retirement. A brief description of the material features of the amendmen~ appeoxs hdow. A copy ~ the Revised Retiremen~ Plan as currendy in e~ect and ~ the proposed amendments will be sent to a~ stockholder upon written request to the Secretary at ~he Company's o~c~ at 150 East 4,2mi Street, New york, N. Y. 10017, a~ copies will be avaitab~e ~4 the meetln~ Stockholders arc rcferled to Lhe text of the Plan and such amendments and the following summary is qualified by such re~rence. Change with Resp~ to "Past Settee'~ Benefit Present Plan. Under the Plan as now in effect, normal retiremet~t, ~verance and disability benefits are payable at an annual rate equal to the sum el: (i) a "pa~t service" benefit based on years el continuous employment before 1960 muk~- plied by ~ of i% of 1955-1950 awrago ammal earnings up to $4,800 and l~,z% (~ of 1% in th~ ease el alL, ability ben¢~s) of such earnings in exce~s of $4,800, plus (ii) a "future service" benefit equal to 1% of ~arni~gs after 1959. No credit is given ~or more then 35 years of service in the case of normal retirement or disability benefits, or ~or service before the employee's 30th blrt~ay in the ease of ~verance henefit~, or in any case for ~rvlce alter age 65, and the maximum benefit under the Plan is $37.500 per annum. Proposed C~ge. The amendments (which apply ~nly to persons in ~erv~ce on or after January 1, 1965) would change the ba~e period for calendaring "past service" benefits from the years 1955.1959 to tlle years 1960-1954 and abe increase the ~ of 1% multipliers to % of i%. This chan~ is intended to bring Plan benefits more in line with current pay levels, which were 8e~erally ]figher in the more rece~ 5-year peried. There are, however, certain seasonal and other emp~yees wl~oae earnings were less in the later l~riod ~han in the earlier period, and tSere~ore the proposed amend- ments also provide that henefits under the Pla~ as a~w in effect shall not be reduced for any ~mpl~y~ as a result ~f the amendments. Change ~th Respe~ to Early Retirement Presem P~an. Early retlrem~nt is permitted emplo~.es with 12 years of continuous service on or after reaching age 55. If payment o~ benefits begins before a~ 65, the amount is reduced t~ the actuarial equlvalent of the accrued benefit payabl~ at age 65. Propo~ Change. The amendments (which do not chauge the 12-year service requirement) would permit early retire- ment at or after a~ 62 without reduction and early retlrem~t at and Mter age 55 with a reduction of 6% per year for each year before age 62. This change would rc~uk in a larger benefit in all c~s of early retirement. It is con- sidered desirable to facilita~ esr]y ~et~rement in this manner since it could result in reduction of employment l~vcls, especiafy where Company olmratio~ are undergoing ieereascd auWmatlon, Cost o] Pla~ and Proposed Amendments It is the present i~tenfion of the Company to continue to fund the unfunded past service cost of the plan as now in effect over a period oI yea~s, o~ whlch there ~main (as of January I, 1965) 41 y~ars in the c~ of the Company and 42 y~rs i~ the case of the participating a~liates. This cost as o~ that date was e~timated hy the Company's ~nd~. pend~nt actuary at $57,660,0O0. The actaary Ires ~tlmated that the amendments will increase the u~{unded cost of benefits for ~rvice prior to 1965 by approximately $17,050,008, c~]cn~a[c~ on thv a~umption that. if the amendments are approved, one-third of ~l digible employees will retire at age 62 m~d the balance at age 65. Th~ present annual cost of funding to the Company and its parfeipafing a~liates, and the additional cost by reason of the amendm~nt~ on th~ ~Ule ]~asls and under curr~nt col~ditlo~s~ are ae~oxdin~ly estlnla~d a~ fo~]ows: Plan as Cutx¢lltly Add$tioua] Cost of in Effcot Amendments Aftex Deducting After Deducting A ¢~tlat y's Taxos (at CUlr~r~t A~t noxy'~ Taxos (at Current Estimate Bates) asEstim~ted Eslima~ ll.atos) asI~stimated Befo~ Taxes by Company Before TO:.~ by Company Annual payment with respect to past service $1,885,000 $ 946,000 $ 850,000 $427,000 Annual payment with respect to ¢~rrent service ............................ $3,285,0O0 $1,648,000 $ 295,000 $148,000 Totals ....................... $5,170,000 -$2,594,000 $1,145,000 $575,00O

Estimat~ Retirement Benefits Under tbe Plan as proposed to be amended, the annaal retirement benefits at normal retirement (estlmated upon the basis of actual or a~umed eIeetion of a joint and ~urviwr annuity by each named person) of the persons ~amed in the table u~der "Remuneration" on pages 3 and 4 who did not retire in 1964 would be as follows: Orpheus D. Baxal~, $1~564~; Alfred F. Bnwden, $2~]4f; James J. Cu~nin~am, ~10,379; A. Gordon Find]ay, $14,801; John G. Ha~r, Jr., $16,358; Virgil D. Hager, $26,30] ; Roher~ K. Heim~n, $]1,715; A. LeRoy Janson, $23,54] ; Et:gene F. Mooney, $15,422; John B. Sparrow, $14,935; Silas E. Str~kl~d, $12,915; Geo~e L. Turaer, $20,19g~; Robert B. Walker, $24,720; J~eph Ft. Wa~rhoase, $15153¢; George A. Wi]kin~n, $15,370"; and William B. Yoan~ $14~759~. (Ead~ individual whose benefit is marked with an asterisk has agreed with the Company, in order to hcl]itate ~suanee ~d the :~ove-mentioned ruling of the Internal Revenue Service, to waiw the increase ia benefit attributable to file pr~p~ed amendments and the Company ha~ a~reed to pay outslde the ])]an ~ amou~ equivalent to such increase.) RESOLUTION CONSTITUTING PROPOSAL 3 The resolution constituting Proposal 3 is as follows: RESOLWV, as declared advisable hy the Board of Directors, that the amendments to the Retiremvnt Plan for Employe~ al~d Fvrmer Employees of The American T~hacen Company and Designated Affiliated C~rporations described ia the proxy statement accompanying the notice of tlfi~ Annual Meeting he mid they hereby are approwd and adopted, to be effective a~ of January I, 1965. The vote in favor of Proposal 3 of holders of a majority in interest of the Preferred Stock and af a majority in interest of the Common Stock present at the mccth~ll and voting (each voting as a class) is ~teecssaxy for the adoption thereof. The Management recommends tl~at yo~ vote FOR Proposal 3. MISCELLANEOUS Prompdy a~ter the Annual Meeting ~ockbelders will be mailed a return postcard on which they will be able to indicate their de~ire to receine a copy o~ the summary af th~ meeting. The Company will provide transportation from New York to H~teMon Central High ll~hoo]~ a~d retard, by chartered buse~ at Company expense ]or stockholders of record wbe notify 1ohn W. tI~n~on, Sscrelary, TAe Amerie~ Tobacco Company, 150 Eas~ 42nd Street, New York, N. Y. 10027, in wrying not later th~ March 26, 1965 ttmt they desire suc~ transportation. The chartered buses will leave |rein PIat[orm 172 on the upper level of the Port Authority Bu~ TerminaI, gth Avenue and 41~ Street, New York, New York. between 9:30 A.M. and 10 A~. on April 7, I965 and will return to this ~erminal ~rom Hunlerdon Centred High School after the Jneetin~ Stockholders intending to driee to the meeting should also notif~ Mr. Haxdon in ~Titing at the abeve address so th~tt arx'angement~ ea~ be made to ~tccommo~te theist. Expense of Solicitation. The expense of the solicitation of proxies for this meeting, inc]ucLLng the cost of maillng, will be borne by the Company. In addition to mailing copies of this material to stockholders, the Company wiI~ request persons who ho]d ztock in their names or custody or in the names of nomlnee~ for otbers~ to forward c~pies of such material ~a those pexsons ~or wbem they hold stock of the Company and to request authority ~or the executinn of th~ proxies. To the ext~t n~e~ary in order to a~ure su~cinnt representation at the meetin~ o~eers and some regu~ox employees of the Company will request the return of proxie* by td~houe, telegram or in person. The amount of the ~e~et~beb~rnebytheC~m~anywillde~endu~nthev~ame~fsharesrePresentedbytbepr~x~esreceived rein tl in response to the Notice of Meeting. If proxies ar~ not received promptly, it may be necessary :~or the Company send telegraphic solicitation to those s~ekholder~ who have not re,ended. Stockholders who do not intend to be present at the meeting arc arged to ~nd in their proxies without dean.& Prompt response is be~p~u], ~md your cooperation will be appreeinted. February 9, 1965.

The American Tobacco Company 1964 Annual Report Contents On the Covet: Amerlcan's malor Ciga- rette bza~d, ale created toe £he valied ta~e5 o~ IQday~ di$ctirlin~li~ srnoke~ They are depicted here ~th tile Arncri use cJl ~oh~co long belr~re the ~covery ot {h~ rqew W~rld Hi6hlight~ ...................................... 2 }~resident~ Me55a~ .......... , ................... 3 ~evlcw ~]f lhe Yea1 .............................. 5 Financial Review ............................... 15 St=/temen Is o~ Income and Retai~led Earning~ ............................. 17 ~al~nce Sheets .................................. 18 SIater~n[s LJf 5oul~ ~]~d Application of £und~ .......................... 20 Ni)t~Js [o Financial Statem~rlt~ ..................... 20 Supplemenlary Fir~anc~ar [n~ormation ............... 21 Au(Jilo~s' Cer tificalo ............................ 21 ~n-Year Financ[ar R~view ........................ 22 Dir E-~lor f and O f]ricer~ ............................ 24

The American Tobacco Company A,~D SUBSIDIARI~8 High/ights Per Common Share Net income (based on 25,999,116 shares for 1964 and 26,099,116 shares (or 1963) ............. Dividends paid ................................... 1964 $2.69 1,60 Net sales ............................................ $1,203,428,958 Income, before taxes on income ....................... 148,659,190 Net inct)me ......................................... 73,195,438 Dividends paid (common and preferred) ................. 44,886,292 Portion of net income invested in assets used in the business and to provide for debenture slnkin~ fund requirements ............... 28,309,146 Current assets, December 31 .......................... 723,079,672 Current liabilities, December 31 ........................ 114,383,650 Net working capital, December 31 ...................... 608,696,022 Number of stockholders, December 31 : Common ....................................... 118,935 Preferred ........................................ 5,993 1963 $2.51 1.50 $1,192,3~8:771 146,083,217 68,762,980 42,297,375 26,465,605 734,310,646 128,809,606 605,501,040 112,161 6,476

To Our Shareho/der~ Robert B. Walker, Pte~,dent On behalf of the Board of Directors, [ am pleased to submit the "[964 Annual Report to the shareholders¸ I am grad~ed to repor~ to you ~bat for the year 1964, my first fult year as President, both dollar sale~ arid net income se~ new reco~d~ for The American Tobacco Company and its present/,/ consolidated subsidiaries. We have improved our cornpetltlve positiorl arid we hdv~ won a larger Share @t the domestic cigarette market. This, I believe, is due in part to the {a~.t [h~t we [3ave reor[~anlzed c~ur rrlar- ketirlg group to stimulate a keener marketin[~ orietltation i~1 all del~rtment~ and to achieve greater advertising and selling effidency We have broadened our cigarette ]ine and brought it up to date with a number ot limeiy product chan~es and irLnovations. Included are no {ewer than five ne,,~ ¢rg~aretteg ir~t rod uce~ in 1964: CARLTON, HALF AND t~ALF, a new MONTCLAIR, LUCKY STRIKE Filters, and Filter Tipped Luxury Len[~th PALL MALL¸ Each of these ernbodiecJ t~ew ~r~duct "'firsts" ~ The AmerJ c~n Tobacco Company the ffltF, r ti~, With air vent~ fu~ CARI'ION and MONTCLAIR; the fa- mous HALF AND HALF pipe tobacco offered in cigarette form; [he FlavorTip for LUCKY STRIKE Fil~rs; and the 100 millimeter I.uxu~ Length for PALL MALUs new entry ~n ~he premium- priced market. Last year [ was aisle to report t[l~t ~lter brands had Increased to 12% of our cigarette s~les as against 9.5% in ~962. In 1964 ou~ prod- u~t mix was improved still further, apprc~xl rnately 17% of our cigarelte sales being a~counted for by filter brands. T~ese percent age changes take on added significance when measured a,~ailist our dollar volume of Ciga- rette business alone, whlcll i~ more than $1,125,000,000 anguaIly, representing 9~% of our total sal~ At t~l~ saree ~i;~¢,~ ~e }J.~,e m~tair~ed o~r veery ~trong position in the nonf[It~r cigarette ~eld where our brands--PALL MALLr LUCKY STRIKE and HERBERT TAREY ION-~account for mt2t'e th~t~ b~l~ (2~ ~t~du~try ~a~ it~ thi~ c~eg~3r~, in this country. Our Manufacturing [~partme~l ~ont~nue~ to build with an eye to present ~nd Iuture effi- c/~nef es and ec~r]on~i~, Our ~l~w le~t ~ngcess ing plant on the J~mes River near Richmond re~ched operating e~iiciency I~ yea~ At ~he ~rne sit~ w~ b~ar~ coNstrIJction of a new I~b- oratory to [~ouse t~e ~¢,w Proc~ucts D~vision [t ~S expected to serve ~ two fold purpose: Io expedite the Company's diversdication aims,

and to provide consumers with further innova- tions in cigarette and other tobacco products. The new tacilily wig provide more than twice the working area of our gesearch Laboratory buildlng in Richmond. During the year we announced Ihe election of two outside D~reetors to the Board; the first outside Directors to join the Board in 34 years. This constitutes a significant step forward for us, and I believe that ~t wlJl add outside peF spective and increased objectivity to the delib* orations of your Board of Directors. Since early 1963 we have been studying dl- versiBcabon intensively and on several occa- sions [ have stated to you that we would not hesitate to pursue fruitful opportunities for sound diversification. On February 3, 1965, your Company and Consolidated Foods Cor~ potation announced that the two companies had been having talks about combining the two busJrlesses on a mutually advantageous basis. On that date the Boards of Directors of your Company and of Consolidated Foods ap proved a plan for such combination subiecl to the results of detailed examination of the af- fairs of the respective companies and to ap- proval by their stockholders. The substance of this p{an is outBned on page 7 of this report under "Diversification" Your Management beIieves tbis action [s a constructive step for- ward far The American Tobacco Company and its stockholders Consolidated Foods wc)uJd add to our strlgnB earning power a broad ]inn of fast growing and profitable brand name prnducts in the consumer food tielth By their letters and inquiries, our growing body of slockholder~ bare shown keen interest in the Company's progress on many fronts, and we are gratetul for this. We appreciate, also, the dedication and hard work oiour employees and the ~riendly cooperation ot our customers in the tobacco trade. Detailed accounts of our progress ]n the areas I Bare mentioned above appear in the pages that follow. I believe they wilt inthcate to you that OUr efforts to strengthen our Mall- agement, our c{Jmpe[iBve position, our gnan- cia[ position, and our tulure potenLiaJ have already met with considerable success. january 2% 1965, tvas the Seventy-Fifth Anni- versa~y of the founding of The American Tobacco Company¸ Since 1890 your Company has been a leader in the manufacture nf ciga roues and has a[so been a leadJn~ manufacturer Of smoking tobacco, cigars andr at one ~ime, of chewing tobacco. We mark this anniversary year, not by the slaging ~l celebrations or the issuance of statements, but by e×~rting maxi mum effort to mak~ our record ot progress a continuing One. Robert B. Walker preii(le~t February5,1965

Review of the Year Artfst's concept of the new produ¢I devefopmenl research tacflily, which is in eonstruat{or~ on Ihe Jaraes R{ver tlear Richmc~nd, Virginia. It ~ de~ fgned for ~he devel~pmer~i ot new tobacc.r~ pror/uc~ ~$ w~ll a5 ~lon to.coo product~ Io expedite Ihe Company's dtvetslfication airn~ Sales Dollar sales increased to $%203,428,958, a new record for The American Tobacco Company and ~ts presently consolidated subsidiaries. DO- rz~estic unit cigarette sales were virtually the same as in 1963. Cigarettes: PALL MALL nonfilter kln8 size cigarettes remain the Jargest-seJJing c~gar~t~rTM in the United Stales accordirlg to independent ~st[mates. Despite unfavorable markel ¢ondi- lions for c~garettes generaJly during 1964, part~culady in the fSrst quarler, and despite the foifox of tlew competltive brands, PALL MALL unit sales in 1964 were very close to the 1963 level TAREYTON which pioneered tbe LJse of charcoal in its filter tip in 1954, accelerated iLs r~t~. ot #~ct'e~e ill t~ face of FtEtmE'rou$ ¢o~,~- petlt~ve charcoal brand introductions. Based on independeht analyses, TAREYTON's rate of gain wa~ ~he greatest among all eslablished qigarette bran~Js I~eg~ Jar sr~, non hirer cig,lrettes as a class de- clined again in 1964, and unit sales of LUC~'Y STRIKE Cigarettes were lower in keeping with tills trend. Durin8 the [after half of q964 a new brand, LUCKY STRIKE Filters, met a favorable ceactio~ in tesl areas and ztationa/ int r0clucti0n nf LUCKY STRIKE Filters was begun in lanua~y of this year. Early results are most encouraglng National distribution for HALF AND HALF Filter Cigarettes was achieved in September of last year, following an enth(~siastio reception ~n te~t markets, This unique new product pii3e t~bacco in a filter cigarette--achieved an u nus ually high sales volume for a new brand, Independent surveys indicate that HALF AND H~[.ff's market performance was far and away th~ best of any rl~w cigarette brand intr~dueed in 1964. C~,RLTON Cigarettes, made especially for smokers who s~ek exceptional mildnes~ in a fi[ter cigarette, tirade a s~gnlf~¢ant con[ribution to corporate cigaretl~ sa[es. MONTCLAIR Menthol Cigarettes were changed in 1964 5o as 1o offer to menthol smokers a mi[dr~es~ comparable to lbat of CARLTON. MONTCLAIR also contributed sig nificant[y to the Company's cigarette volume in 1964¸ Another first For your Company ~s our new PALL MALL ~ltel ~pped LuxuryTM Leng~ C~a rette for ~he premlum priced market which was inlr(~duced in the New York Cily area ~11 November of last year, Tbis new cigarette, pack aged in gold, is 100 millimeters in iength. In vle~, of i~s fine ~eceg~t~on in lhe intvoductov/ market, distribution ot PAtL MALL Filter T~pped C~gareLtes is beinS widened¸

Export cigarette sales were lower in 1964 than in 1963 due mainly to reduced require- ments from military inslalJatiuns abroad Cigars: Unitsa]es of ROI-TAN Cigars increased substantially in 1964 and reached a new record high. ROI-TAN continues to be the nation's largest selhng ciga~ in [he 10¢ price class, the only brand to offer seven different shapes at this prlee ROI-TAN also offers Tips, Cigarillos and Trumps in the 5¢ field, and Golfers in the 4¢ field. During most of the year, demand for ROI-TAN small sizes exceeded our production cadacity~ ROI-TAN Premium Choice Cigars, dis- dncbvely boxed to sell in the i~vo for a quarter price class and ROI-TAN Little Cigars, the firsl cigarette size cigar to be marketed by a major cigar producer under one of its principal brand names, were introduced in 1964. In the higher price dassiflcations, LA CORONA, ANTONIO y CLEOPATRA, CABANAS and BOCK y CA continue as the largest-selllng line irt the fine cigar field. Com- bined unit sales of these brands again rose to a new record. Smoking Tobacco: gales of HALF AND HALF Smoking Tobacco, the Company's principal pipe tobacco brand, increased suhstanda[ly during 1964, the rate of increase being greater than Lhat for smoking [obaccos in genera[. This was the fourth successive year in which HALF AND HAI.F's volume has increased. A new packing for I {ALF AND HALF Smoking Tobacco, the polyelhylene Luxury Pouch, was intloduced in mid-1964 and met a fine reception among pipE, smokers; distribution of HALF AND HALF in this new packing is being widened as pro- duction permits HALF AND HALF is the first popu[ar-pbced pipe tobacco to offer this new and modem packing. The Company's principal cigarette, cigar and smoking tobacco brands are listed on page 14, While these brands are made to appeal to many different tastes and preferences, ag are charac- terized by the quality tohaccn and precision manufacture that are traditional with The American Tobacco Company. Ill your own in- terest as stockholders, and for greater smokfng enjoyment throughout the year, your Company urges you to buy these fine products, use them as gifts, and recommend them to your friends who smoke Leaf and Manufacture "Quality of product is essential to continuing success," your Company's guiding policy, be- glns with the purchase ot tobacco leaf. LEFT: Making rnachi~e catcher" monitorl the flow ol finished cigarettes a~ tfiey emerge from the rn~chine, T,5'00 or more perlecl tubes of smoking plea~[/re per r~hlute. BELOW: C~se~ ot PALL MALL C~galenes behl8 loaded i~to a #eight car beside lh~ Reidsville North Cazotina, tactory.

Production Of ~u~-cur~ ~obacco last year totaIed ],382 million pounds, slightly above 1963 production of ],371 mflllon pounds Aver- age market prices were 58.3 cents per pound, about fhe same as ir~ 1963. The U g Govern- ment support price was 57.2 cents per pound compared with 56.6 cents in 1963. Production of Burlpy lnbaceo as of Decem- ber was estimated to total some 631 million pounds as compared with 755 miihon pounds ~n 1963 Through December 22r when markets closed for the HolJdays~ the average price per pound was 6t0 cents compared with a 59.6 cents average for pro Christmas sales in 1963. The government supp()rl price was 58.9 cents per pound compared wilb 58 3 cents per pound in 1963. with an eye to futur~ corporate expanslon~ plans tot two new major facilities were an- nounced ~n fg'o4, First, a new products research facility, to cost between $5 and $6 mi]linn, is being built on a 200 ac re site on the James River near Rich- mond, Virginia The 130,000 square foot labo- ratory wig expedite the Company's dlversif]ca- tion aims and provide consumers with further innovations in cigarette and other tobacco products. Construction started November 23, with eomp[etlon and occupancy scheduled for the fall ot 1965. The new facili~ wH] be in addS- Dan to, and wig not neplace, the Company's major research center in Richmond. Second. a new mulfimillion dollar cigar mare ufacturing plant will be built adiacent to WiJkes-Bar;e, Penns)dvanJa. Const~uctlon i~ scheduled to begin this spring and completion is expected Jn February 1966. When fu]ly opera- tional, the new plant will produce weekly, ROI-TAN~ to meet irlcreasing demand, In 1964 the Company made substantial Drog ~ess in the automation ot its manufacturing facilides Modi~calions were made on e×is~ing machinery to ~ncrease their operalional speed and new, more sophisticated quality control devices ~,ere added, In the Cigar Division, manufacturing effiden- ties were improved and a program is now unde~vay designed to achieve substantial sav- ings in cigar manufacturing costs in 1965. Diversification On February 3, 1965, the Company issued the followirlg statement: "Robert 8 Walker, P resident of The A meri can Tobacco Company, and Nathan Cure ruing% Chairman of the Board of Consoli- dated Foods Corporation, announced thai the companies had been having talks for the purpose ot arriving at terms upon which the two businesses would be com- bined on a mutually advantageous 5asis. "They also announced that the Board of Directors of each com#any had today approved a plan, subject to the results of detailed examination of the affair5 of the respective companies and to approval by their stockholders American would offer to buy up to 25% of Con~lidated's out- standlng Common shares for cash at g53 a share, the approximate equivalent value in shares of American as detailed below Each romamlng sba~e of Consohdated Common stock would be acquired by Amedcan in exchange for ,925 of a share of American Common which at last night's The Hanm~r Division leaf processing pl~#t comhlenced opet#~ions durin~ £t~e Das~ year on ~e same 2gO.acre ~ract of/and where the Company's new product development

close on the New York Stock Exchange IS the equivalent of about $33 a share, plus 1/.~ of a share of new 47§% Preferred stock of American, convertible into American Common at $45 a share, and redeemable after 5 years at 104 wiLh declining prices to 100 in the 10th year. "The plan a~so contemplates that each share of the outstanding 6% Preferred stock of Amedcan would be exchanged for $150 principal amount of a new sub- ordinated debenture. "It is anticipated that Robed B. Walker, President of American, would continue as President and Chief Executive Officer, and that Nathan Cummings, Chairman of Con- solidated, would become Chairman of the ExecuPve Committee." Stockholders will be kept informed of further developments. Smoking and Health During 1964, anti-cigarette activdy was intensi- fied. Some of this activity took on a prohibi- tionist and evangelical character, as distinct from scientific inquiry. Scientific publications disclose many cogent reasons for doubting the valJdlty of the anti- cigarette theory: 1 Despdeyearsofeffortnoonehasinduced tung canoe/ in experimental animals through the use of lobacco or tobacco smoke, although this disease has been ;nduced experimentally through the use of other substances. 2. Despite decades of physical and chemical analysis, no substance or substances haw" been tound in cigarette smoke which can account for Ihe ailmenls sometimes as- cribed to tobacco use, 3. Humau ailments which have been statis- tically associated with cigarette u~e have also been statistically associated w~th ur- ban residence, divorce, sleeping habits, socio-economic level, national orig~n and certain psychological characteristics, Whether smoking habits may reflect in dividuals who are more susceptible to human ailments rather than being a cause ~at such ailments cannot be determined from statistical surveys. 4. A number of popuIaPons distinguished by high rates of cigarette consumption show relatively low mortality rates One such population is the cigarelte [acLory em- ployees of The American Tobacco Corn pany, whose rate of cigarette consump- tion is approximately double the U. S. average and whose mortality rates from all causes, from cancer, from lung cancer and from heart disease have been con s~stently lower than the U, S, average for a period of more than 14 years. The ori8i- hal study of our employees' mortality rates was made by scientists of the U. S. Public HeaJth Service at their requeSl, and the methodology established by them has been followed in ennfi rmatory studies, 5, The vast majori~ of cigarette smokers do not get lung cancer. However~ nonsmok- ers do contract th~s ailment 6. The causes oi lung cancer and of other diseases linked by some with tobacco use, are not known. For many years your Company has supporled objective scientific research intended, in the public interest, to shed 1~8ht on [he subject uf smoking and health. Since 1954 The Council forTobacco Research U.S A (formerJyTobacco Industry Research Committee) has approprlated more than $7,500,000 for independent research at more than 1 O0 medical and scientific institu tions throughout the United States. You~ Com- pany is a major cont/ibutor to C.T.R, ]n 1963 your Company and five other cigarette manu facturers predged $10,000,000 to the American Medical Association for further independent research in this field, Wffhin the Company, our Research Laboratory is continuing its scientific analysis of tobacco and tobacco smoke, begun in 1921, and the results of this and other basic research activity are pubJished in accepted sci- entific journals. Durin8 the 470 years in which Western man has used tobacco and prized it for the pleasure and relaxation it affords, violent anti-tobacco attacks have been made periodicagy and have subsided as the advance of scientific knowledge has disclosed their invalidity. Constant testing in t~ur teseatlch Jaboratories at Richtoot~d, Virginia, ~[lec~s ers~ha~i5 oct n~w p~duc/deve~oprnen~

Current advertisemenls of the Corn~al~y's principal ¢Jg~te({e bran~s are befng brot~fl~t lo ~he at~entfon ot millions ot A~er;cans daffy through new~paper~ and ma~azine~. Personnel In 1964 significant chanoes took place in the Compally's Board of Directors. Tbe Cotrlpany's (irst outside Director Jn 34 years, George H, Woodardt was f.lccled to the Board, Beture year~s end, a second outside DirectorI Alvin R Jennings, was elected and the Compa~ty's Gen oral Counsel, Cyril F, Helsko, was also ~amed a ~irector and a Vice President, The Board was expanded to ]8 members; since 196], the Corn pany has had a 17 mar Board. Tile three new D~re~to[s brln~ to the Con]- party's Board broad experience i~ hnancJa[ con [rol, m&nagef~lent COn$Llit~tion and corporate law. 1~4r. Woodard, President of Well[n~ and Woodard, Inc, has had more than 35 year~ e×- per~ence ]n management consulting, corporate stall functions alrd development e~neering~ Mr JenIlings, formerly Executive Partner of tile ~Ecou ntirlg firm oF Lyb~aad, Ross 8ros & Mont- gonlery, is an accredited CPA ill 13 states and a recipient of the Medal for Distinguished Servi~e Irom tlqe American Institute ot Certified Public Accountants, Mr ~4etsko, ~)rOV]OLls]y a partner in the NewYozk law firm of Chadbourne, Parke, Whiteside & Wolff, has worked on America.n's regal a~aJrs tor the past 24 years and durln~ the past five years has been the Company's Chief CounseJ Mr Hetsko resigned his partnership in the Cbadbou~ne firm on November 5, 1964, {o become the Company's CeneraJ Counsel. Retirees from tile [}r)ar d durin8 the year were D~. Hiram R. Hanmer, tormer Wee Pros[dent, Department o( f~esearch al]d Development, wbo had been a scientist with the Company far 43 years, and George A. wilkinson, Direc- tor, Tax Deparlment, %~ho had served the Com- pany for more tban 28 yea~s. Your Management acknowledges the many contributions made by Messrs. Hanmer and Wilkinson to the prooress of the Company, and ~ishes them happiness in retirement. Marketing During 1964 the Company's Marketing Depart- ment was strengthened and reorganized. A[I ma[ketin6 tunctions ate now directed by a Vice President [n eharge o f mar ketin~. These include sales, advertising, markct research, and new product development. Largely as a result of this reorganization, we were able to take positive and aggressive action ~n broadening our prod- uct fine wilh Ihe introduction of five new c~ga rette brands, and after significant packaging and plOduct innovations on e×istin8 brands. Within the markeb~8 group die establish ment of a separate media department to con tra[ize the purchase of network television lime and national magazine space bas effected im portan[ economies ~n our advertisin~ proorarn. 9

In the )n~f~rest of efficiency ~nd belier marke~ planning, market [sers~nnel have be~n dMded into three groLips re~pon$ibl~ f~r (1) crealive development, ~1 media m~na~ement and p[an- ~]~fj~ a~cl 13) r~rke~ research Jl~ ~he irl~eres~ of developing depth of marketing managemerlt tot the preseat and [uture, product marlag~s afl~ assi~t~rlt product I~an~gers ~la~e be~n ~ signed to e~ch major branlJ A~d J~ lhe ]nte~esl ~f maximizLng the efficiency of field salesmen, i/ew irl~ent[ve ~l~ns atld persor~rl~[ r~titl~ $ys~ ~em~ ~'ere ~dop~d b~¸ out" Sale~ C~rgar~zal~on. Effective January 1,196S~ the Company and two of [Ls advertising z*gencies h~e agreed On a new meLhod Qf agency ¢ornp~ns~t[O~l. Ager~cy profits up t~ an ~greed I~ercen~e ~ gross biqlin~s wi[I be guaranteed by ~he adver- tiser, arlrJ agency profits in excess of an agreed percen t~ge will be shared by the adverf~r and a~ency. This sy~teJ~ wiJ] e/~b~fJ¥ prollt J~c~r~ Live and cost control ince~lt~v~ fo~ bath adver- Iiser and agency. It is estimated that this new ~,~e~l, in ~965, ~rill ~es~lt in ~ saving ~o t~e Company of about $1,400,000. Yo~J~ COT~pany's products are ~dveltised Oll Ihe basis of th~ pleasure they affard. During 1964 ya~r Carnl~a~y a~8 e~g!ll other c~e~e ~lankl f~Cttlr~rs ast~b[~shed Lh~ Cigarette Adver tisin~ Code which former Govem~r of New ler~ey, F~o~et t B. Meyner, was LflOs~n to adm hl- islet. Th~ Cigarett~ Advertising Cod~ is now oper~Live, and ~ number ot chatlg~s [rl Ei~arette pac[~glng and a~Jver~isln~ have been made. Your Company wbc,~c=~h~artedly ~b~crlb¢~ this effart of industry self-regulation and b~ lieves that slrict adher~nc~ to an impartialI¥ ~Gminlslered Co, de by all clgarett~ producers i~ d~r,2bl~ ]n tact, your Con~par~); w¢2~ Jlle lirst to aT~r~o~Jn C(~ acLion i~rornp~d by t]~e ~od~, ie, the removal of "'tar" ~nd ~licoti~e test re- ~lts irom g*~ckages of CARLTON and ~4ONT- (:LAIR C]~arette~. This acL~on was Laken i~ ihe [[~ht of the dictates of ~he Code as cc*r~ce~ved hy the Administral~r. CARLTON and MONT- CLAI~ Cigarette's ~r~r~lln~e to be ~o~ ~n "tar" and nicotine co,tent. it i~ and h~s been our position that smok~n~ is a ?orm of enioyment for adurls and "your Compan~ has ]~k~ ~ev~raJ 5t~f~s 1o en0~sJ/~ Lhis, ~o[lowil~g our deci~io rl i~ Jurl~ o~ 1963 to discontinue advertls]ng in college publications, tional activities, your Company t~uk Lhe lead in 19~4 in eliminating sports persorlalities from ils adve~tiSiTlg ~d sails I~tomol~On act~v~Lie~ and aJ~o terminated sf:~rl$orsbif~ o[ atbJeli¢ broadcasts, l'hes~ m~asLJres were t~ken ~o that o~r posit~on wilh respect to youth smoking ~J~cJ ii~ be misulqderstooc~ by ~he gerle~l 7~

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Financial Review Earnings Net income in 1964 advanced by 6% to a record high of $73,195,438 cam pared with $68,762,980 in 1963, in spite of a 5% incr(*ase in advertising and promotion costs. Reduced federal income t a)*es, lower ir~- ler~l expense, increased irlcome from short term investments and improved plant effic!ency all cont~Jbuted to ~he gain in nel income. Net income 13er Common share, based on ~e number o( sllar~5 ou ~5~andln ~ a[ the end (~ each period, is shown below for each quarter and the tull year 1964, t:orllpared with 1963 results: Quarter ~964 1963 March 31 $ .48 $ .50 June 3C) 72 64 Selllctmber 30 ,73 .67 December 31 76 .70 Total $2.69 $2 5~ The reduction in the federar income tax rate from 52% to 50% conlrthuted 11¢ per share to 796a, net income. Di'JJcle.ds D~vidends w~re paid by the Com- pany an its Comm(~r] sl~ck for the sixtieth con- Secut~ve year ~n ~964, with toil] payments amounting to $1.G0 per Common ~hare caml~ared with $1.50 in 1963. fhe quarterly rate was raised to 40¢ per share from 37~¢ early in 1964, the fourth dividend Encrease Jn the past five years Four quartedy dividends of 51¸5(3 per share were ~1~(, paid on the Preferred stock Aggregat~ dividends on the Common and Preferred stock paid in 1964 amounted to $44,886,292. The remainder oi ne~ income or $28,309,146 was retained for use in the business compared w~th $26,4~5,605 retained in 1963. Divlctend$ paid on the Common ~t(,~k iiI ~964 represented 60% of net income available far lhe Comrnot] ~tt3~k. Debt Position The contJnu~n~ i~vorable trend irt th~ C~am]~any'5 flnarlc~5 produced a further reductlon ~n combined [~l~g and sffort-term debt from $121,565,000 at December 31,1963, to $101,193,000 a~ the end ~f 1964, Dur~n~ the last ten years, the Company's over all deb~ has been reduced by $209,349~0g0. /~t tJ~e end of ~ 964, ~ote~ ~a~bJe w~re down Io $25dX30~000 compared with $35,000,0~0 a yea~ earlier. The highest level for notes payable d~ring the y~ar was $42,000,00g ~n M~rch, ~on siderably lower than the pe~k of $77,600,0C0 in 1963. The pdn~ipaJ amount of deberlture~ out standir~g was rethlced further by $10,372,000 in 19~.4. D~bentures with a fa£e v~lu~ of $5,543,000 wer~ purchased in the o~en market during the y~r at a cast ~f $5,28~,933 to meet SJr~kin~ F~nd requir~ment~ At the erld of the ~s NBtlnc0.1e (i~ mill~ii per Common ~hare $30Q ],005 i915 56 57 i~ 5~ ~0 ~L 6~ %3 54 ~955 15 bl ~ 5] ~ 51 ,~l 6~ ~* Nel Wer~ Compsred with Leag Term Oe~l [i~ roll Je .i) " $70B m L~,I T~I~I D~b[

year, the total amount of debentures outstand- ing amounted to $76,193,0~0 which compared with net worth of $638,471,102. Due to the Sower level of combJned long and shorl ~erm debt outstanding during 1964, interest and related charges declJned to $2,710,334 from $3,706,888 in 1993. Short-Term Investments During 1964, ex- cess funds were invested in U. S. Government securities, c~mmerciai paper and negotiable bank Certificates of Deposll The peak [or lhese short-term investments, which were all liqui- dated at the beginning of lhe Burley auction market season, occurred ~n August when they totaled $71,500,000 compared with a high oi $40,000,000 in August of 1963 Because of the greater amount of excess cash available for investment for longer periods of time, income from short-term investments rose Io $714,716 in 1964 from $125,409 in the previ- ous year. Taxes Federal and other taxes on ~ncome in 1964 totaled $75,463,752 or $290 per Common share¸ This compares with net income of $2,69 per Common share¸ The Coml)any's total tan bili for 1964 includ- ing excise taxes of $514,73g~000, income taxes, sociai security and other taxes amounted to 5602,377,000. Capital Expenditures Capital expenditures continued at tile relatively high level of $I 6,019,000 in 1964 compared wEth $18,768,000 in 1963. The amount of depreciation charged to costs and expenses in 1964 was $6~230,895. Mafor items included in last year's capital outlays were the completion o~ the leaf- processing plant called the Hanmer Division located n~ar Richmond, Virginla, add the pur- chase of more efficient cigarette-making equipment¸ Book Value per Comweiz Share $25 15- ]0- 1~55 5B .51 ~ 's~ ,~ 6] '62 y~3 64 How Our 1964 Sales Dollar Was Used 16

The Amer[cafl Tobacco conl]3any ArtD ~UB~,IOIARIE~, Consolidated Statements of Income and Retained Earnings Net Sales ....................................... Cost of sales ...................................... Gross Profit ..................................... Advertising, selling and administrative expenses ....... Operating Income ............................... For ¥¢~rs Ended December 3f 1964- 1963 $1,203,428,958 $3,192,318,771 949,q 23,886 945,049,582 254,305,072 247,269,189 104,581,768 98,271,920 149,723,304 Other income (Note 1) ..... 2 132,083 _ 151,855~385 Interest and related charges ..................... 2~710~534 OLher deductions from income ......... 485~661 Total deductions ........... 3~i96,195 Income~ before taxes on ~ncome .................... 148~659~190 Federal and other ta×es on income .... 75~463~752 Net Income ..................................... 73,195~4313 Retained earnings, heginning of year ................. 352,859,998 426~055,436 Cash D]vidends: Common stock, 1964, $1.60 per share; 1963, $130 per share ......................... 41,719,306 Preferred sloc~, $6 per share .................... 3,166,98~ Tola[ dividends ........................ 44,886,292 Retained earnings, end of year ....................... $ 381,169,144 148,997,269 1,798,546 150,795,815 3,706,888 1,003,710 4,712,598 146,083,217 77,320,237 68,762,980 326,394,393 -- 395,157,373 39,130,389 3,'[66,986 42297,375 $ 352,859,998 Dept¢cla~ion provided and cha ,~ed to cc~$~¢ and expense~ amounted to $6,230895 in 1964 and $5,623,105 ?r~ ? 963 17

The American Tobacco Company AND SUBSIOIARIES Consolidated Balance Sheets Assets 1964 Cash ............................................... $ 16,139,209 Accounts receivable customers ......................... 52,323,164 Leaf tobacco, manufactured slock, operating stlppl[es, etc, at average cost ...................... 653,261,903 Miscellaneous accounts receivable ...................... 1,355,396 Total current assets ....................... 723,079,672 December31 1963 $ 16 690,619 53,176 074 663~265 761 1,178,192 734,310,646 Investment fn Gal[aher Limited (Note 1} ................. Insurance defJosit$ and miscellaneous ~nvestments ........ Land, buildings, machinery, etc at oust* less accumulated depreciation, 1964, $72 622 238; 1953, $68 226~986 ................................ Prepaid expenses and deferred charges .................. grands, trade-marks, patents, good wig, etc ............... 5,450,994 5,450 994 912,588 873,828 89,164,39g 78,107,701 3,382,104 3,357,435 1 1 $821,989,752 $822,100,605 18

Liabilities oe0~mb~ 31 1964 1963 Notes payable ....................................... $ 25,000,000 $ 35,C~J,000 Accrued taxes ........................................ Accounts payable and accrued expenses ................. Dividend oil preferred stock for quarter ended December 31 .................................... Debentures to be redeemed within one year (Note 2) ..... Total current liabilities .................... Debentur{=s (Nolo 2) .................................. Stockholders' Equity Capital stock (Note 3): Preferred, six per cent cumulative, par value $100 per 5hare ........................ Common, par value $[*.25 per share ................ Excess of rlet proceeds from capltal stocks issued over par va[IJe$ ............................ Retained earnings .................................... Less, Common stock in treasury (Note 3) ............ Total stockholders' equity ................. 56,423,137 62,212,901 25,110,767 23,803,959 791,746 791,746 7,058,000 7,001,00Q 114,363,650 128,809~606 69,135,000 79,564100(3 183,518,650 208,373~6C~ 52,783,100 52,783~I O0 164,938,050 164,938~050 44,964,426 44,964~426 381,169,144 352,859~998 643,854,720 615,545,574 5,383,618 1,818,37~ 638,471;I 02 613,726,999 $821,989,752 $822,100,605 19

The American Tobacco Company AND SUFIS]blARJES Consolidated Statements of Source and Application of Funds Sourc~ of Funds: Net ~ncome ............................. Charges to incorle not requiring currenl cas~] o~ttlay: D~p reciation ....................... Net book value ot fixed assets retired or sold .................... Miscellaneous, net ....................... Appt i~at~on Of FUndS: Dividends to stockholders ................. Acqu[sklon of fixed assets ................. Red ucti~n o[ noncurrent portion of debentures Acq~isltion of treasury stock .............. Increase in working capital ................ FotYelt~Ende~Dccem~e~ 31 1963 573,195,438 566,762,98(~ 6,230,895 5,623,105 731,135 g61,292 (63,429} 1 2S3~156 $80,094,039 $7616g0,533 $44,886,292 $42,297,375 18,0"63,722 ~6,~,~86 10,429,000 1 [),30¢,00t~ ~,565,C43 3,194,982 5,230,972 $60,094,03g $76,690,533 Notes Accompanying Financial Statements 7 Tile ComI~azt! <]~,rts app#o~mal~,l~ T~% of Ih~ ~Jut- ~alldin~ ordinary stock oi Gall~h¢[ L~rnEted, a cl~a reltc arid tobacco m~lnui~clu~cr Of th~ Uniled Kingdom The vahJe Of tb~ iqv~ln~enL b~secJ ~p~ a lo~rton 51c~ck F×chan~u q~lotatio~, wa~ appr0x~mat~ly $33,3g0,~JUII at ~ec~mber 31, 1964 Oihe[ ill ~) m e includes dividend5 receivo~t from Ga][ahet Limilgd in Ihe am~unt~ ~f $1 294~59 in 1964 and $1,357,~304 in 19£'3 2 De~en~s o~l~D~in~ al DccP~ber 31, ]96~, principa] Am~tln~ ltoOeemabl~, Rcdeemsbfe Withitt Aiter Olle Year" r?ec ~1,196~ T/~ enty year 3~, ~:fuc Janu,~ 1j lg68 $3 g00 00[I $24,1]g0(?(10 ~went~five y~r 3%, due Oct o[~el 15, lg69 ~,373,(J0(? 18,ff]4 ~)0 TwcrlIy.five y~ar 3~, due Febr~larg 1, 1~'77 685,000 26,~6~ ,¢s0~ $7,0s~,~g $~9,135,0gl] *~s(~m~d principal am~n~ to be tt.ffeemed ~htou~h ~,~m~ ~d ope~n~ ~( ptlces ~ pr~vlded by ~e it~den~ur~. 3 C~pital ~t~ck at Of'cecflb~r 31, 79~, Comprf~cs: preferred Comrnon ~6a r~,~ aul~orlz~ 5~Ojl~5 40,OOG,OO0 Shares issued $27,831 26,390,088 Less, $harel held lr~ tr~a~ul% carried af: Par ~alue ~ Zg0,g72 Colt ~ 1013,000 -- 393,972 Sh~re~ outllandln~ 527,831 ~,116 At Oecembel 31, 1963. 29097~ shares of t~e Corn pany% Co=ninon stock were held in the t~easury. 2O

The Ameria~n Tobacco CO mpany AND SUBGIOJARIE~ Supplementary Financial Information InveRtor/e~ Leaf tobacco .~ ..................................... Manu[actuTed stock ................................. Supplies ........................................... TOTAL .................................... Decot~bet~1 1964 f983 $589,164,457 $002,99%455 43,987,086 41,115,830 20,110,360 19,158,476 $653,261,903 $663,265,761 Inventories used in thc computation of cost of sales are priced at costs which result from the aver&girl8 monthly of transactions refTected in the inventory accounts except theft excise taxes in rna~J ~ctu rerJ stock Jl)ve~ torJe~ ar~ priced at actu,IJ cDsl. Land, Buildings, Machinaly, EtQ, Land and buildings ................... Machinery and equipment ............. Office furniture and equipment ........ Automobiles and (tucks ............... Constructicln in process ............... TOTAL ..................... ~ecember aT, 19~# Accumulated Gross [3epreci~t[rm Net $ 63,735,361 $33,835,925 $29,899,436 81,973,032 33,955,228 48,037,804 3,563,841 2,496~37B 1,067,463 4,523,845 2,334,707 2~189 ]3tl 7,990,552 -- 7,99G552 $~61,786,631 572,622,238 $89d64,.~93 RepOrt of Independent Certified Public Accountants The aoatd oi Directors and SIockholelers of The American Tobacco Company: We have exam]tied the consolidated baIanc~ ~heet of THE AMERrCAN TOBACCO COMPANY and SUgSID[A~IES as of December 31, 1964 and the re[a Ied contoIidat ed ~tatement ~f incom~ and r~[ained ~amtnss for the y~ar then ended Our examination was made in accordance with 8enerall¥ accepted auditing ~t~ndardB, and aecordirlgl¥ inclucJed ~uch test~ of the accountin~ r~cords arid such Olher auditing procedu~e~ a~ we ec~nsider ed r~ecessa W in the circuvasta~ces. ~a~e p reviou~ly examined and reported upon the ~o~/sol~ated financial statemer~t5 of the Company fOr the veal eqded December 3% 1963¸ In our upinion, the ac¢om pa~vin ~ balar]~.e sheels and related sI~te ments of income a~d retai.ed earnings pre~ent faJrlv Ihe con~olid&ted financial position o~ The Americarl Tobacc~ Cc~mpany and SLiblidiarie~ at December 31,1964 and 1963 ~nd the consolida[erl [lls~lt~ of theil ol~er alions for the year- then ended¸ i~ coniormily with ~,en~JIy .lccepfed accounting pri~lcillle~ applied ~ln a corllistent ba~i~ ~ve hav~ made a similar eXal/llnatio~ of the accompanyiug con~uri d~ed s~e~e~)t~ of ~Jrce ~nd *~pplJcatJor~ of fur~ds ~,h~#~ Jn our opinion, when ¢or~sidered in cesarian to the basic f~l:ancial Slateme~ts, present fairly tke sources and application of fund~ of the Companv and J~ ~ubsidJ~r~¢~ for ~e ,dears ~ded l)~ember 3~, 19~ ~nd 1~63 LYBRAND ROSS BROS & MONTGOMERY New York, February 1,1965. 21

The AmeticaA TObaCCO Oompl~ny AND ~BSyD]~J~ Ten-Year Financial Review in thousands (e,~cem p~r h~re m~ountSl Seles,]neorne, Dividends 1964 Netsales .............................................. $1~203~429 Income, before taxes on income ........................... 148~559 Taxes on income ....................................... 7~,464 Net incorl3e: Amount ........................................... 73/19S Available per common share (Note 1) .................. 2,69 Dividends: Co177t~]o/w Amount ......................................... 41~719 Per share (Note 1) ................................ 1.60 Preferred ($6 per share) .............................. 3,167 Added to retaff~ed earnings ............................... 28,309 Assets, Liabilities, Net Worth Inventories ............................................. 653,262 Current ,~ssets ......................................... 723~08d Working capital ....................................... 608~696 Plant and equipmerz~net ................................ 89,164 TolaJ assets ............................................ 82~t~B Long-term debt ......................................... 691135 Short term debt (Note 2) ................................. 32,058 Net ~Jrffl ............................................ 658~47~ Book value per common share (Note 1) ..................... 22.53 1963 $1,192,319 146,083 77,320 6&763 2,51 39,130 150 3,167 26,466 663,266 734,311 605501 78,108 822fl01 79,564 42¸001 6[3,727 21.49 1962 $1fl79,590 q41,647 72,515 69,132 2.53 39,075 1.50 3,167 26,890 702,68~ 76G290 600,270 65,924 843,149 89,868 87¢243 58~261 20.4~ 1961 $1,163,058 142,674 7G933 65,741 2.40 36,470 140 3,167 2G104 723,713 791639 583,463 65,832 856,427 99,879 130,657 560,372 ~945 NOTES: 1 Based on 25,'399,116 shares for 1964 and 26,099,115 sha~e$ for prior years 2 Comprises notes payable and debenlu rest edeeraabre within one year, 22

1960 $1,127,475 125,808 68,493 57,315 2.07 35,493 136 3,167 18,655 680,349 751,110 593,409 66,457 827,710 135,740 88,556 534,268 18.45 1959 $1,108,754 135,632 71~896 63,736 2,32 32,563 1,25 3,167 28,006 653,867 719,067 586,888 68,894 798,445 150,653 66,744 515,613 17.73 1958 $1,875,492 124,486 66,099 58,387 2,12 32,563 1.25 3,167 22,657 648,384 714,578 574,002 66,674 793,586 165,402 76,521 487,607 1666 lg57 $1,076,289 119,238 62,070 57,168 2.07 32,563 125 3,167 21,438 670,994 738,724 569,652 60,111 813,266 179,330 103,950 464,865 1579 10~6 $1,095,828 113,078 60,369 52,709 1.90 32,563 1.25 3,q67 16,979 656,497 725,615 567,531 54,144 794,698 193,188 91,555 443,426 1497 1955 $1,104~686 114,145 61,808 52,237 188 28,655 1.10 3,167 20,415 664,197 737,936 565,434 51,766 805,277 206,328 101,387 426,447 14.32

The American Tobacco Company AND SUBS/OZARIE~ Directors Robert B, Wa[ker president Joseph R. Waterhouse VJce Pres~dentasld Treasurer Virgil D Hager E~ecu~v~ Vice pie~iden~ Robert K, Heimann Vi¢cPresldent Marke~JnsandPubl~cR~la~lon~ A. LeRoyJ~nson £xecu~l~e Vice ~teside~ Alfred F. Bowden V~e p~eslden~ ptclidenl, Cigar Div~Jon b' foh~8, Sparrow Dorn~s#cLeatTobacc~ E~s~er~ Activities George H, Woodatd pmsldent, We~in~ & Woodard, me, Eusene F Mooney Di[ector ol ~Me~ lamesjCunningham Di;ecm~ofPurch~es 24 printed ~n DSA

William B. Young VJce ~e~den~, M,~ttu~c~te Cyril F Hels~:o V(ce president and Genet~ Counsel G~orge k TurnEr Domcstic Le~t To~,lce~ Officers Rnbert B. Walker prPsident Virgil D. Hager Executive x/ice pre~ide~I A LeROy lanscm Executive V~e presiclent Alfred F. Bowden Vic.e f're~ide~i~ Robert IC Heimann ~ce President Cyril F. Helsko Vice pre~idenl and Ceneral Coansel loseph R. Waterborne Vice President and Treasurer Willlam B, youn~ Vice pre~denl x.valter A. Kennedy Comptrntlel J o[i11 W. Idanlon Sc~tetary Frederick W. Kenny Assistant ~ecretary Charles A. Meho~ As~tan~ Treasurer Edwin J. P6ol /~istant Cott~ptroI~r George I. S~hramm A~L~tll Compt ro~/er E×ecu~ive (~ti~ce IS0 E~st 42nd Streel New y~rk, N ¥ Ififl17 Corporate Otflce 117 Main £[rect Flamington, N ] 08822 Transfer Agora[ Morgan Guaranlv Trus~ Company e{ New York Nowyork, N Y ]0015 New YC~r k, N. Y ~001S Ttllsloe for Debe~l[o res M,~ rgan Guaranty I rus~ CO mpan,, OF '4ew York Ncwyork ~'~ 3170!5

The American Tobacco Company New York, N.Y. 10017