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~ball be contingently payable to him in annual installments after his employ~nent by the Company terminates. Since 1960. when the Company's Profit-Sharing Plan was adopted, Article XII has peovided that the deferred portion 0£ a participant's incentive compensation for any year be reduced by the mount credited to him under the Profit-flharing Plan for the same year. Frona time to thne ~¢ianagexnent has considered various snggestiol~s for iaerea~thg the attractiveness of the islcenffve compeu*afion program under Article XII to participants and prospective participator and enhancing its value to the Company wlthoul, however, changing the basic formula fixing the amount to become available for allotment each year. Since the Annual Meeting of stockholdera in 1969 at which certain proposals of that nature were approved, the Tax fleform Act of 1969 has become law, with significant impaet on deferred compensation in general. That evenb together will1 the effect of continuing inflasion, has impaired the desirability of the deferred portion of Article XII incentive compen~atioln In order to maintain the value of the incentive program of the Company, the Board therefore believes that Section 4 of Article XII (the text of which is included in Exhibit A to this proxy statement) should now he amended to provlde that the d~ferred portion of allotments for years afteJr 1969 he made eoi,tinsentiy payabis on December 15 of the year in which the allotment is made~ instead of in annual installments beginning after retirement or other termination of empinyment~ The 1960 amendment providing lbat the deferred per tioi~ of ~a allotment for any year be reduced by the participant's t~rofit.sharlng credit for the same year b~.s proved inequitabla in operation. For some participants it has meant reducing the incentive compensation otherwise payable to them by 50% because the profit-sharing offset bar equaled or exceeded the deferred portion of their allotments. For others, it luas meant reducing their incentive compensation by a profit hare they would not in fact receive because their employment termthated before their profit-sharlng credil~ became fultv "v~ted." For all eBgible pealiclpants, the peoth-sharing offset has diluted discretionary awards under Artiale Xll arallo that extent diminished the value of the Company's incentive eompensaBon program. Tbe Board believes that this d~ficiency should be overcome by amending Article XII to eliminate the offset provJsinn hy deletin5 fieesiou fi (the lext of which is incthded in Exhibit A to this proxy statement). If that provision had not been in effect in 1969, the deferred contingent portion of incentive compensation accrued for a]i employees participating under Article XII ~,,~uld have been increased by gg89,g24, ol which $202,288 would have been for directors and ol/~cers. In accordance with the amendatory provisions of the Article, other amendments to Article XII mar be made by ihe board o~ Directur~ atrnm time to llme without stockholder aetlon~ provided that no amendment may be made by the [h~ard cbenglng the basic formula so as to increase the amount made available for aIlotment under the Article each year. RESOLUTION CONSTITUTING PROPOSAL 4 Tbe proposed resolution oonslisuting Proposal 4 is as inflows: R£SOLVED, that Article XI[ of the By-Laws as now in effect he amended (1) with rezp~t to paragraph (B) ot Section 4 thereof by: (a) inserting therein a new subdivision (i) reading as follows: '~(i) With re~pect to abutments for any year after 1969~ on the fil~eenth day of December next follow- ing the close of the year for which the allotment was made. suhiect Io llte condition that prior to such fifteenth day of December the participant shall not, without the express approval o{ the Board of Director a, have accepted employment with. or rendered personal service to, a competitor as definell in subdivision (iv) of this para~aph (B).:' (b) renmnberthg the remainin5 subdivisinns thereof as subdivisions (il), (iil) and (iv) and nmking appropriate changes in cross-references thereto; and (e) flntitlng the applicability of the r~nurnbered subdivisions (if} thereof and (iii) I~ allotment* made for 1969 and prior years. and (2) by deleting Section g in its eatlrety~ deisting all references to Seetiun 8 in othPr Sections of Article XIl and renumheling tile present Section 9 as fleetion g. The affirmative vote of a ma]orlty of the voles cast by the holders o~ Common Stuck voting thereon is necessary f ,r tb~adeption of ProposaI 4. Tde Management recornmendz tha~ you vote FOR Proposal 4. 9

Proposal 5 RESOLUTION" ON STOCK OPTIONS PROPOSED BY FOUR STOCKHOLDERS The Corapany i5 informed that Lewis I). GiLbert, a record holder of 820 shares of Common Stock~ wht~ address is 1165 Park Avenue, ~N¢~ York, N. Y. 10028, and/or John J. Gilbert, a record helder of 830 shares of CQmmon Stock. of the sam~ address, and representing an addltlonal family interes~ of 971 shares, aa~i,/or John Carapbeil ~lenr!, record holder ot 1.600 sheres of Co~lmon Stock, whose address is 5 East 93rd S~reet, _N~w York. N. Y 10028, and/or David Brown, a record holder Qf 6 shares of Comrao~ Sto~k, whose address is 1901 8¢th ~tr¢~t, Brooklyn, ,'~. y,, inten~l to ~troduce at the Annual Meeting the following resolution (designated hereln as Propc~al 5)! "R~SOLVED: That the stockhelders of American Brands~ Inc., a~emll~,ad in annual meeting in person and b~' proxy, hereby request that any ~ew stock option plans be made subject to the fo]/~ing ~ovisior~: (a) That share~ to b~ optlonad ~ill be optio~ad in ye~[y installments as nearly equal a~ p~ible, and tha~ th~ rigl~t to purchase shares in each instalment will not be sumulati~e a~ will expire to the extent not ex~rci*ed during the a oplicak]e installment period! (b) Tha~ the ag~eg~te purchase price of the shares cowrad by an option may not exceed in the aggre~,ale ].50% of art ind~vldual'~ ann~a~ cash compensation: (el No options will he ~ranted in any year to exo~utives who are within 18 m~ntl~ ot their automatic retire. ment da~e on ,Ma ~'ch 31 of such yea~: (dl It shall be a negative factor in ~e~anting new c~ptions if an optionee has sold optio~lad stock to pay oil ~t ]o0~, e~ak]Jn~ Ih~ opiionee to p~ck up new opfi~a.~." The p~oposers of the res~lutlon here furnished ~he ~ollolring state~en~ ~ettin~, forth the rea~on~ ad~cad by thera in supp~rl of their proposal: "Las~ year 10,500 owners of 1,52~4~7 sheres voted i~l favor of our similar resolution. Please r~member, ~ a~ executive car~ be lu~ed 1"O a company ~rith ~toak-optio~xs, he c~ be lured AWAY ~'it}~ blg~,er opti~ elsewhere. if you agree~ please ~a~rkyour p~oxy FOR this resolution; otherwise it is automatically cast against it." Some o[ th~ ma~te~s referl'ecl to i~ the p~opo~ed re~olutien have~ in fa~l~ been taken into co~ideralion by the ~oard of Directol.~ L~ its grantir~g of opt~on~ under the presell St~ck Option P an~ and undou]~ edly wil be fa~to~ that ~ill ~r on th~ B~ard'~ con~der~io~ ~ the f~tu~. Ho~'~e~, ~ ~he Bo~ad's ~i~on ~t is ~ot ~se t~ ~poso ~xad ~trictions on the me~hed of operation of a stock optlon plan such as those proposed by thi~ resolution. In some ~a~, the limitation set forth ralght de~ract from the incentive value o~ the option and hinder the Management in it~ ~i~orts to ~e~ure a~d retain key ~mpl~ye~ of outstandln~ a~ility. Compethion for expcrlencad per~ous has in~rea~ed rapidly and the ~oard helleves that the granting of opti~n~ u~lder the Plan ~trengthen~ the Comp~y'a abili~y to hold ~ presen t key Fersonr~ a~d ~ttr~ct .~ ~'~.o~yees o~ ~ts~nd~ng ttb~/ty. The Compa~,~s stock optlott pr%o~am has heert carefuI~y designed so as ~o benefit the C~mpa~y by encoar~gln~ key erapIoyee~ ~ acquire a proprie~a~ interest in the Com.oany's future~ wi~h provlsion~ ~ the p~eser~t Stock OptlOrl Plan that ade~ate~y safeguard ~toakholder interests. Additional restrictions such as those proposed, ¢ou[d~ ~a ind~vlc~ual ca~es~ work ag~i~ that purpose. The ~oard c~f Directors, through its knowledge o~ Management per~0rraance, i~ ~n the best pos~llon to alIocat~ stock options so as t~ obtain the greatest a~lvanta~e to lhe Company and it~ subsidiaries, and it should not be hindcrad by any ~ch rigid limltations. Acc~rdL~,ly, the re~olutlo~ ~hould be ~ajeclcd as not in the be~t ~nteres~s of ~h~ Company and it~ stockhelders~ A similar resQlu~ion was ~,ve~whelmlngly ~ejectad by th~ stockholders at the 1~8 A~nll~l ?,~eetin~ ~he~ mor~ tha~ 92~ of he vo es ~'e~e ea~ ag~ ~ t~ au~l ~ n 19~9 whe~ ~ppr~matel~ 921 ~ of the wtes wer~ cast again~ it. The a~rma~i~re vote o~ a ~aiorit~' of the votes cast by the holders ~f Common Steak votln~ th~re~n WO~lld he nece~ary for the adoption of Proposal 5. The Manager~ent re¢o~m~n~ ~hal yo~ v~le ~GAINST Proposa~ 5. 10

Proposal 6 RESOLUTIO.NT FOR CI.~fULAT'IVE VOTING PROPOSED BY FOUR STOCKttOLDERS The Company is ~ormed that the fou~ s~ockhelders who~ name~ addresses and r~ord heldi~ are set for~ above with respect to Proposal S, intend fo introduce al the Atmual Meetin~ the fo|lowing re~0]utfon (designated he~e~ as Proposal 6) : "RESOLVEV~ ~i~at t~ stoclcholders o~ American Brands~ Inc, assembled i~ anJlual meeting ~n person and by proxy, heral~y request that the Board o[ I)irectors take the steps necessary to provide for e]ect~0ns of di~'ector~ ~y curaulatlv~ votln~, which mean~ each ~to~khelder shall be entitled to a~ ma~y vote~ a~ shatl e~al the number ot v~e~ whlcl~ h~ would he enlitled to ¢a~t for the ~lectfon o~ di~e~tor~ with re~pect to hi~ ~here~ of ~to~k r~ult~plle~ by the number ~ dlrectors 1o he elected, an~ he may ~a~t all of such vote~ fo~ a aln~le ~andldatc ~r any two o~ more o~ thera a~ he may ~ee fit." T~ ~ropo~r~ of the re~olutio~t have furnished the ~l[o~vi~ statem~:xt ~ettin~ forth the ~eason~ advanced by tivem in 5~pp~rt o~ thalr proposal: ~C~mulati~'~ votin~ perralt~ rai~orlty ~herehel~er~ to have representation on th~ ~oa~d of Directors. V/i~en cumulative votin~ ~s r~ot permitted, the ho]ders o:~ a majority o~ the shares may elect al[ of the directo~, in which event the remoJnlz~ ~harehe]d~r~ may ~o~ eject any dJrec~or~. T~e a~e~dn~ent l~o~Jd pernlit a person o~¸ a ~roup o~ pe~on~ ~o~ing a ejgnifica~t block o~ she~es to hav~ represe~tatfon on the ~oard o~ ]blrector~. Witheu~ curnu[at~v~ votln~ such a block might ~c u~a~le to ha~e any repre~ent~i~n on the Bo~rd~ ~al~ich is the poli~y nl~.kiug body o~ th~ Company--Ga:nbl~s mana~raent 1968 proxy ~tat~ment." In the vlew o~ the Mana~emeaI, the function o~ a board o~ directors is to a~mlnister the al~alrs o~ a co~po~atfon ~or the ~ene~t o~ al[ ~t~ ~t0ckholders. The ~a~a~emezt he]~eve~ that a dlrec~r ele¢Ied by a minority through cumu~a- tlve votfo~ migi~t real ~ound to act in what he conej~[er~ the iItt~rests of the minority even rhenish ~uch action might not he in the he~t intere~ of the corporation and the stockholders a~ a whole. It bej~eves that ~he pre~n~ method of e[ectfo~ directors, which i~ t]qe corpora~ equlvai~alt of majority ~ule~ he~ worked ~ucces~ulLy a~ld ~hould not he 9~.8% o~ the "/ores were ~a~t a~afo~t ~t on e~ch occaslcn. The al~rmative vote ~f a majority o~ ~he votes ca~t by t~ hoI~er~ o~ Common Sto¢~ vot~n~ thereon wou[J, be necessary for t~ ado~ifo~ of Proposal 6. MISCELL,LNEOUS Promptly a~ter lhe ~nua[ Mcetfo~ ~tock~olders wiU be ~aailcd a return po~card on which they will he able to fodlcate their d~ir~ t~ receive a cvpy o~ the ~umrnary o£ the ~e~ejn~. The e~pen~ o~ the solicitation o~ proxle~ ~or t~s meeejn~1 inaludi~ th~ cost of n1~il~n~, will he he~nc by th~ Colnpany, In addltlon to n~aili~ ~o~ie~ o~ thi~ material to s~ckholder~, the Coropa~y ~[ rc~e~t ~er~o~ ~ho hol~ ~tock ~ ~te~r r~am~ or c~tody or in the name~ o~ r~om~nve~ ~or ot~er~, to ~orward copies o~ ~uch ir~aterial to t]~o~ persons for whera they ho1~ stock ~ the Company and to ~equ~ au~ority ~or the execushm o~ the proxle~ To t~e ext~nt r~ecessary ~i o~'der to a~sur~ ~clcnt r~]~re~tatfon at the meeting, o~ce~ and ~ome re~lal" ~rnp1oy~e~ o~ t]~ Compm~y wil[ r~quest the r~tur~ ol p~o~i~ by talephon~, tal~ram or i~ person. The amount ~f th~ e~pe~se to he b~rne by the Coropany ~ill depend upon th~ volume ol sh~re~ repre~nted by the prox~e~ ~¢~ve~ ~ t~ re~pons~ to the ~ol~ce v~ Mevtln~. ]~ pr~xie~ are not ~elved promptly, it may be necessary for the Company to send te]egraphlc ~ohe~tation to thes~ ~tock~h/er~ whe heve not ~e~ponded. S~ockhe~der~ who do no~ ~tend to he pre~en~ at the m~tfo~ a~ urged to s~n~l fo thclr proxies ~i~hout dalai'. Prompt re~po~se is helpfoL and your ~oop~ratfon will he opprealated. ~ar~It 2, 1970. tl

EXHIBIT A ARTICLE XII OF THE BY-LAWS Sections 4 and 8 as now in effect SECTION 4. (A) Payment to the Chairman of the Board and Chief Executive Officer and the President and Chief Operating O~cer of the amounts payable to them under SecTion lIBt hereof, and to each of the alfott~es ~[ the _Management Group of the amount of his totaI allotment under Sections 2i B I, 21C ~ and 21 D J hereof, with respect to any year shall be made one.halt in cash as ~on as practicable and tde balance (~ubiecl to Scction 8 hercot~ on a deferred hasis as herelnaft~r ]provided. (B) All deferred amounts payable ~o alI persons hereunder, s~ch per~on~ being hereinaiter referred to a~ L'parti~ pants," shall be payable (subje~ to the conditions set forth ht this paragraph iB! and to paragraph (CI oi thi~ Section) in cash as foIlows: /~) With ~pect to albltment~ made to any participant who on January ]. 1970 was bl the en~ph~ td the Company, in three equal annual deferrcd installments, one such insLlllment 1o be paid ~n the nexl io[lowing ~fdl husine~5 day of the January which i~ at least n~nety days after the da~ whelL the participant's elnph~ynlellt by the Company terr~inates, and annually thereafter and subject Io the condition that prior to the fifteenth day ~f December. 1970 the participant .~hall nc~t, without the express approval of the Board of B~rcctor~. have accepted employment with, or rendered ~ervlce to, a eorapetit~,r as defined in ~uhdivislon (ii~) of this paragraph !B). qii~ With re~pe~t t~ a]lotrr~en~s made to any participant who on January 1. 1970 was ilo~ ~n the c~ttploy cd the Company, in ten equa~ annt~a] deferred th~allrnents, one ~u~h ill~tallment to he paid on the tilth buslnes3 dev i~ January in each ¢i the ten yc~rs following the close ~i the ~ar il~ which the part~pant's c~pieyrncnt by the Company terminates, each such instaihnent being subject to the condition that, prior to the expiration o~ f~ur full calendar years after the participant's employment by the Cempany tern~inatcs~ the participant shah not. wilh~ut the ~Xllress approval ~f the. Board o[ Director~, havre aceeptad employment wlth~ or rendered p~r~onal s~vi~c to~ a competitor as defined in sttbdivi~fon (Jill of this paragraph (B). Idil As used here~n, a %ompedtor" shall mean a~ty corporation or other entity engaged i~ a~y a~Bvi~ w~i,~l~ at the tin/c the applicable aUohnent was made, was compcBBve with lhe business of ~he Company and "the husin~ of the Company" at the time of allotment shall mean the types of business carried on by the Company and its sub~dlsrlc~ wbl¢it are deemed by th~ Board of Director~ t~ have been the principal types at tha~ time. (C~ Suhie~t t~ Section 3 hel~oi, no such instal]men~ may be transferred by any participant in any nlanner what_~oever, ineludin~ transfer by operation oi law. If any participant is, in the opinion o~ the Board of Directors, ineapahl~ of handlln~ hi~ a~airs~ or makt~ ,3r sufblrs any attempted transfer, whether ~-uluntary o~" invo~nta~'y, of any ~ueh in~tallm~t~t, thett ~Tt the di~cretlen of the Board of ])ireetor~ payment thereof t~ ~ucB participant shall cease and paymenls ma) Be made ~lr applled 1~ or for the benefi~ of ~:ch participant or his spouse, children, or othe3" de]pendents, or any of them. ~n such manner and in ~ublt proportion a~ the Board of Directors shaB from time to time c]¢e~t p~oper, subject, howe~cr, to the other ]provi~ion~ hereoi. (D) Any portion of a~¸ allotment which terminates by reaso~ of no~compliance with its conditbl~s shall revert to the Company. SECTI03 8. Afler the amounts alloltable under Sections I(B), 2(B), 2{C) and 2(D) hereof with respect to al~y year have })eer~ determined ior all ilarticipant~ wlth~at reference t~ this Section, the amoun~ that, hut for this Section, would be payable pursuant t~ subparagraph ~2i of Section 4(A) hereof to each partlcipa~t for ~,~ch ye~tr ~all he r~ducec] hy a ~uln equal to the am~a~t app~rhioned to such participant for ~x~h year under lee Profi~harlng PIan of American Bra~ds, Inc. 12

American Brands, Inc., Annual Report 1969 Financial highlights <,o.,o..~.,,o,,o,, ....... ~,,,,. ....... ,,~ 1999 1968 Per common share Net income Without dilution ............... $3.55 $3.33 Fully diluted ................ 3.56 3,32 Dividends ................. 2.00 1.675 Net sales .................. $2,661,478 income beforetaxes onincome end minority interest . . 235,926 Net income ................. 98,501 Dividends , I .............. 64,040 Current assets, December 31 ........... 1,109,237 Current liabilities, December 31 .......... 306,178 ' Working capital, December 31 .......... 803,059 $1,897,852 205,612 92,911 50,931 1,131,059 342,523 786,536 Number of Common stockholders, December 31 ..... 136,798 145,392 Average number of shares outstanding during the year . 27,003,367 27,513,986 Operating results by product line c,. m,r.on~) Net sales 1969 1968 Amount % Amount % Operating income'`' 1969 1968 Amount % Amount % Tobacco products Domestic $1,066.9 40.1 $1,115.7 International 1,069.0 40.2 358.8 Distilled beverages 136.4 6.1 126.5 Food products 354.6 13.6 289.1 Other 50.3 1.9 22.9 Deduct intracompany sales (16.7) (.6) (15.1) $172.8 66.2 $167.1 74.6 50.7 19.1 27.7 12.4 19.0 7.2 16.6 7.4 16.7 6.3 9.8 4.4 5.7 2.2 2.9 1.2 68.6 18,9 6.7 15.2 1.2 (.s) ', Total $2,661.5 100.0 $1,897.9 100.0 $264.9 100.0 $224.1 109.0 1 ") Earnings before interest, other income and expense ilia T/3 Sr taxes 3lid minority inlerest.

Robert B, Walker Chairman of the Board and Chief Executive Officer To our stockholders On behalf of the Board of Directors, we are pleased to report that American Brands, Inc., achieved record sales of $2,661,478,000 and record income of $98,501,000. Each of our six subsidiaries and divisions showed a profit increase in 1969, with operating profits of American Tobac6o, Beam, American Cigar and Dutfy-Mott reaching all-time peaks. Sales and operating profits by product line are shown on page 1. Nontobacco sales for the year increased to $525,599,000 and represented 20% of 1he Company's business. Of the Company's domestic sales, 32% is nontobaeco. Net income per Common share advanced to $3.68, up 8% from f968. The quarterly Common stock dividend was increased in January 1969 from 47.5 to 50 cents, a yearly rate of $2.00 per Common share. In January 1970, the dividend was raised to 52.5 cents quarterly, an annual rate of $2.10 per share. The dividend to Common stockholders has been increased six times or 40% since 1963. While consumer demand for nonfilter cigarettes continued to slacken in 1969, American Tobacco increased its volume of filter cigarette business. The market for 100 millimeter brands, pioneered by Pail Mall Gold in 1964, was identified by one independent report as the "fastest-growing area of the industry, representing armost 16% of the total

market, against 13% in 1988." Ame#ean Tobacco has six 100 ram. brands in this field. Gallaher Limited, second largest tobacco company in the United Kingdom, which is 67% owned by American Brands, Inc., increased its filter volume and enlarged its share of the cigarette market. James B. Beam Disgfling CO. manufac- tures and markets Jim Beam Kentucky Straight Bourbon Whiskey, the world's top-selling Bogrbon. Beam sales and profits continued to ir~crease. Sunshine Biscuits, Inc. increased sales and profits, introduced a variety of new products, and redesigned many of RS packages. American Cigar, the nation's third largest cigar manufacturer, markets a broad range of cigars including Roi-Tan,:the largest-setling cigar in the 10 cent price class. While dollar sales of cigars were about even with 1968, profits increased 14%. Duffy-Mott Company, Inc. increased operating income 31% on a sales increase of 11%. Lord Mott's Clamato cocktail in its first year of national distribution sold well. Several executive changes were announced in 1969: Robert B. Walker was elected Chairman and Chief Executive Officer of American Brands, Inc., and of The American Tobacco Company. Robert K. Helmann became President and Chief Operating Officer of American Brands and of American Tobacco. Cyril F. Hetsko became Senior Vice President and General Counsel of American Brands. George J. Schramm became Vice President and Control;er of American Brands, and Charles A. Mehos, Vice President and Treasurer of American Brands. Horst G. Den k became President of Sunshine Biscuits and a Director of American Brands. Mark R. Norman, a well-known business and financial executive in the United Kingdom, and also Chairman of Gallaher Limited, was elected a Director of American Brands. We are dedicated to enhancing the stockholders' investment through internally generated growth and through further diversification. The pages that follow present the operations of our six principal divisions and subsidiaries, and our Financial Review. Robert B. Walker Chairman of the Board and Chief B×eeutlve Officer Robert K HeFmann President and Chief Opecating Officer February 17, 1970

Robert K. Heimann President and Chief Operallng Officer The American Tobacco Company American Tobacco's operating income reached a record high of $175,392,000 in 1969. This figure includes income from cigarettes and smoking tobacco, domestic and export. Operating income has increased by $31,166,000 in the last five years, American TobaCco's major cigarette brands are Pall Mail, Tareyton, Lucky Strike, Silva Thins and Carlton. These brand names include a variety of styles, including regular, king size, filter king and 100 millimeter filter. American's filter volume increased in 1969. Tolai sales of its filter cigarettes on the domestic market were $370,882,000, a new high, and $21,744,000 over 1968. Pall Mall, Tareyton and Lucky Strike were among the top ten cigarette brands for 1969, Pall Mall Gold 100"s achieved a sales increase of more than 11%. Ta[eyton, with the activated charcoal filter, is the largest-selling of all charcoal filter cigarettes. Silva Thins, our newest 100 ram. brand, nearly doubled its volume in 1969. Carlton, the first cigarette to print "tar" and n~cotine results on the label, posted a substantial gain, The Division's nonfilter cigarette volume continued down in line with the industry-wide trend. In the interest of greater manufacturing efficiency, American Tobacco's 60-year-old Louisville. Kentucky, cigarette factory and fear stemmery were phased out early in 1970.

Ifyeu ~ pet~ ~ hmte a ~t~er ciga~lle. Leaf tobacco prices and manufacturing costs continue to rise. In 1989 the average market price per pound for flue-cured tobacco was 72.2 cents, compared to 66.6 cents per pound in 1968. The average price per pound of Bu rley leaf for the current crop through 1969 was 89.7 cents, compared to 74.1 cents in 1968. Average prices do not reflect the Division's actual leaf costs since most of our purchases ' areinhigh-quaety, higherpricecategories. In 1969, prices of our cigarettes were increased 35 cents per thousand. Export sales of cigarettes declined in 1969 for the industry and for American Tobacco, largely as a result of decreased requirements for armed services personnel overseas. Again in 1969 American Tobacco's advertising agencies operated on the incentive fee system. In the last five years savings from this system have totaled $10,407,000. American Tobacco's national sales force was strengthened in number and coverage of retail outlets in 1969. These men played a vital part in achieving increased sales for the filter cigarette line. In addition to the federal excise tax of 8 cents per pack, the states levy cigarette taxes ranging from 2 to 18 cents per package, The average state tax per package is 10 cents. In February 1970 Congress was still deliber- ating legislation that would make changes in cigarette labeling and advertising. Legisla- tion may result in a change in the caution notice on each cigarette package and cigarette advertising on television and radio may be prohibited beginning January 1, 1971. Many reputable scientists dispute the widely- propagandized anticigarette theory, American Tobacco will continue to support objective scientific research in the field of smoking and health through The Council for Tobacco Research-U.S.A., which spent $16,000,000 on such research from 1954 through 1969. An even greater sum has been spent by the industry in direct grants for independent studies in the health field. Operating profit from pipe tobaccos was about equal to the 1968 figure. Half and Haft, the Division's leading smoking tobacco, remains one of the largest-selling brands in the United States; dollar sales were about the same as in 1968, Paladin Blackcherry continued to gain. The Division is testing other pipe tobaccos as possible candidates for national distribution. American Tobacco's primary sales objective in 1970 is to continue to increase its filter cigarette volume, in recent years this has been accomplished by new product innovation, aggressive marketing and adherence to our traditional policy, "Quality of product is essential to continuing success."

MarkR. Norman Chairman Gallaher Limited In September 1986 American Brands increased its holdings to 67% of Ganaher's Ordinary stock. Galiaher, second largest tobacco manufacturer in the United Kingdom, increased both sales and income in 1969. Sales were $1,073,826,060, up 10% ; net income was u p 6% to $24,220,090. Of this figure, $15,663,009.is reflected in American Brands' results and the remainder, or "minority interest" of other stockholders, is not. For 1969 Galraher Common dividends were declared equal to 18% of the stated value of Ordinary shares, an increase over the 16% paid out of 1999 earnings. Cigarette sales in the United Kingdom were estimated to be up 2% for 1969 over 1968. During the same period, Galraher's U.K. cigarette sales increased by more than 3%. While the industry's filter tipped sales increased 9%, Gallaher's filter sales grew by 16%. Plain or nonfilter cigarettes continued to decline in the British market. In 1969 Gallaher successfully introduced three new filter cigarette brands--Albany, Sovereign and Gold Bond. Albany was introduced nationally in February and by the end of the year had won more than 1% of the total cigarette market In April Sovereign, a couponed entry, followed and by year-end represented more than 4% of the total market.