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SALES ,~ The Company's total dollar and unit sales in 1951 were the largest in its history and in the industry. Dollar volume increased $70,930,904 to $942,552,034. Sales of the Company's cigarette> in units as well as in dollars increased sub- stantially, reaching a new sales peak for tile Cmnpany and continuing by an increased margin to be the largest in the nidnstry. Most of Jhe increase in dollar volume resulted from the increase in unit sales. The Company's increase in output of eigarenes is believed to be equal to two- thirds of the combined increase of all the other companies in the industry. During the year significant progress was made toward reversing the sales curve of LUCKY STRIKE Cigarettes. The downward trend of the past several years was checked materially. Sales of LUCKY STRIKE Cigarettes in 1951 were' approximately twice as large as in prewar 1940. Sales of PALL MALL and HERBERT TAREYTON Cigarettes continued to increase at rates far above the industry average. PALL MALL is, by a wide margin, the largest-selling king-size cigarette in America, while HERBERT TAREYTON is the second largest-selling king-slze cigarette. ~' The Company currenlly enjoys the advantageous position of having three cigarette brands- LUCKY STRIKE, PALL MALL and HERBERT TAREYTON- among the large-selling brands of the industry, enntrihutlng to its position of leadership in the cigarette fieId. Sales of our cigar bram]s including LA CORONA, ANTONIO y CLEOPATRA and ROI TAN- also increased substantially. Each of these brands is the leader in its respective class. Sales of the Company's smoking tobacco brands decreased moderately in ]951, at about the same rate as that indleated for the industry as a whole. EARNINGS AND TAXES Consolidated net income for ]951 was $8,623,047 lower titan in ]950. While this result was in part due to increases in the cost of leaf tobacco, wages and other materials and services, the increase in Federal taxes on the Company's inctmm was the principal cause of the reduction i*~ net earnings. Taxes on income totaled $47,738,008, a new all-tlme high, and were equivalent to $8.88 per common share compared with earnings of $5.57 per share after taxes. In 1951, taxes on income and excise taxes on our products accounted for 52% of the total receipts from sales. Taxes exceeded the combined total for leaf tobacco, wages, other costs and dividends to stockholders.

O 0 DtTIDEND$ During 1951, dividends of $4..00 per share were paid on the common stock, consisting of four regular quarterly dividends of seventy-five cents each and an extra dividend of $1.00. The 186th consecutive connnon dividend, consisting of a regular dividend of seventy-five cents and an extra dividend of $1.00 per share, will be mailed to stockholders on March 3, 1952. CIGARETTE PBICES The trend in the manufacturer's price of cigarettes since 1940 represents a marked exception to the extensive price inflation that has taken place in our national econmny. The mannfacturer's price of cigarettes after discounts and excise taxes is only 42% higher today than in prewar 1940. while the general price level* has more than doubled in the same period. In other words, the increase in the manufacturer's prb:e of cigarettes is less than half the increase in the general price level. Prices of leaf tobacco have also increased at a far greater rate than the manufacturer's price of elgarettes. During the current buying season (through January 31, 1952), the average prices paid for the Company's cigarette grades of Flue-cured and Burley tobacco were 155~ and 150~, respectively, more than the prices paid for these grades in 1940. Except for a slight increase to cover a corresponding rise in excise taxes in 1942, no other increase in cigarette prices was permitted by the Government during the war years. The inevitable result of wartime price control, together with higher leaf tobacco costs and increased taxes, was a severe reduction in tile manufacturer's rnargln of prufit. In the five-year period immediately preceding World War lI, the average net profit of the Company was about 10~. of sales while durieg /he five war years, 1941 through 1945, this ratio was about 4.5% --a drop of more than 50~-. Although the manufacturer's price of cigarettes has been increased on sex,era1 occasions since the end of World War II, these increases only partially offset the continued rise in the e~st of leaf tobacco, taxes and other operating costs. Price controls have again been imposed, with the result that for over a year your Company has been unable to increase tim price of its cigarettes to offset its higher costs, notwithstanding the fact that your Company's net profits in relation to sales are considerably below normal. Your Management is making every effort to obtain permission from the Office of Price Stabilization to increase the price of cigarettes. INVENTORIES The Company's investment in leaf tobacco, manu factu red stock, operating supplies, etc., at December 31, 1951, was higher by $61,864,328 than at the end of 1950. An increase in the physical quantity of our inventories of leaf tobacco and in manu- Bureau of Labor Statistics Wholesale Price Index. 5

faelnred stock accounted for most of this increase, although the higher prices paid for tohaweo contributed, to s.me extent, to the larger dollar value of this inventory. The increase hi the quantity of Jeaf tobacco inventories was occasioned by the necessity for maintaining adequate quantities of properly-aged tobacco conslstent with the increased volume of the Company's business. Bank loans increased from $7g,000,0~ at December 31, 1950, to $140.000,000 at the e~d of 1951. Cash in banks and on band increased approximately $10,O00,000. It is estimated that there will be some additional increase in bank loans before March gl, after whidx date our hank loans ~ould decrease until the beginning of the next leaf tobacco purchasing season. During 1951, funded debt was reduced $11,439,250 through the operation of Sinking Funds and the retit'emeat of $831,250 of Four Per Cent Pnnds which matured and were paid on August 1, 195l. In addition to the effect that ~axes have upon net earnings, the Company must provide the necessary working eapltal to pay substantially larger portions of its Federal income and excess profits taxes earlier in the year t]mit was formerly required. This acceleration in the payment of taxes naturally affects the peaks in the amount of funds the CompaJ~y mu$1 borrow calJa'enl]y aero/n hacks. Tbe Comp~aly also must provide working capita] for the Federal excise tax stamps which are affaxed to its products. It is estimated that the Company has an average of at least $50,000,000 invested in such stamps at all times. This amourtt represents the value of Federal axclse tax stamps on hand, attached to finished products or inch:deal in l~f~aJd billings to our customers. Because of the lined for increased wo,zkJng capital occasioned by the expanding volume of the C, ompany's business, higher taxes and larger leaf tobacco inventories, your sManag~ment has eonsldered it advisable to convert seine of its short-term bank loans into longer-term obligations, and has :aegotlated for the sale to the publ~e of $50,000,000 of long-term debentures. It is planned to have such an issue under~ written by a group of investment bankers. The net proceeds of such sale ¢f deben- tures will be used to reduce the Company's bank loans. Your Mmaagemeat is of the opinion that a substantial portion of the additional working capital now re(fuired in the business will be needed permanently and, there. fore, plates to obtain ~n additional amount of permanent capital through the og~ring of common shares to the holders of common stock, INCENTIVF. CO]IpE~SATIOIq At the Annual Meeting held on April 4~ 1951, the stockholders approved die proposal initiated by your Management for a subst,lntia] reduction in the rate of t. 6

® 0 officers' incentive compensation under Article XII of the By-Laws. Incentive compen- sation for the year 1950 was thus reduced by approximately $500,000. Total incentive eompensalion paid fur the year 1951 was $131,290 less than for the year 1950. ]~ERSONNEL In the dealfi of James E. Lipscomb, Jr., on May 15, 1951, the Company lost a valued friend and Director. Mr. Lipscomb, who had been with the Company since 1902 and who had been a Director slnee 1918, was for many years President of American Suppliers, Incorporated, the Company's domestic leaf tobacco buying organization, and was an outstanding figure in the industry. Mr. James F. Striekland and Mr. John S. Dowd, hoth of whom had been elosely associated with Mr. Lipseomb for many ),ears, were elected President and Executive Vice President, respectively, of American SuppBers, Incorporated. Both Mr. Str~ekland and Mr. Dowd have been members of the Company's Board of Directors sfilee 1946. Mr. John R. Hutchings, Jr., Vice President of American Suppliers, Incorporated, was elected to the Board of Directors on May 29, ]951, to fill the vacancy created by the death of Mr. Lipseomb. STOCKItlOLDEI[I5~ ANNIJ~.L )IEF, TING The Annual Meeting of stockholders will be held on Wednesday, April 2, 1952. Formal notice of this [Vleeting, together with a proxy and proxy s atemen , is entdosed with this report. On behalf of the Board of Directors, I should like to express our apprceJaBon for the cooperation of our customers and employees and for the continued interest of the Company's stockholders th the affairs of our Company as evidenced by the numerous letters 1 have received during file past year. 1 am always glad to hear from the stockholders and to dis~:uss with them the affairs of our Company in which we are all interested. PAUL M. HAHN President 7

1951 OPERATIONS AT A GLANCE THIS IS HOW IT WAS USED OR SET ASIDE: 52% FOR 28% FOp b 1% FOR BOND AND BANK INTBREST 3% FOR DIVIDENDS TO STOCKHOLDERS 1 o/~ FOR $8,434,000

~" '~¢ Company and all wholly owlted domestle snhsidlarles except The American Fro" years ended December 31 ~ Tobacco Company of the Orlent~ ]n¢, @ 1951 ...... $042,552,034 195o NET SALES $871,621,130 Cost of sale~, ~ellil~g, general and administrative expenses . 853,399.472 785,004,416 OPERATING PROFIT ..... 89,152,562 86,616,714 Dividsnds and ittterest from unconsolidated subsldiartes (Note 1) ............. 594,392 763,731 Other income ................ 265,732 $ 90,012686 278.087 $ 87.658.532 Interest and related charges ......... 8.984,249 8.796,848 P~'~vision for reservea against investments in seeuritle~ ........................... 1,484,3~)4 Portion of net income of Amerlaan Cigarette and Cigar Corapany applicable to minor- ity interest ................... 191i656 2~0,054 Other expenses and losses ........... 426,276 9,602,181 422,98? 10,934,193 Income, before taxes en ~neome ........... 80,410,505 76,?24,339 Federal and slate taxcs on inconae (Note 2) 47.738,~0D 37,454.000 32,672,505 39,270,339 Refund and adjnslment of prior years' fed. eral and slate taxe~ ~nciudlng interest./ess related expensce ..................... 437,164 2.462,377 NET INCOME ................ 33,109,669 41,732,716 Retained earnings, beginning of year ....... 104,320,087 141,362,483 37 429.756 183,~95,199 Write.off of brands, trademarks, patents, good will, etc ............. 54,099.430 Cash dividends: Common stock, $4 per share .... 21,513,700 21,513~700 Preferred stock, $6 per share 3,161,982 24.675,682 3,161,982 78,775.112 Retair~ed earnings, end of year (Note 3) $112,754,074 $104,320,087 Depreciation provided and charged to casts and expenses amnuttted to $2,996,883 in 1951 and $2,901,844 in 1950. St

Ineludlng Amerie~tl Clgaret~e and Ciga¢ Company and all whony owned domestic subsldlarie~ except ThQ Anler~¢an Tobacco Coil[pan) of the Ori~I~ ]tic. As of December 31 ASSETS Demand deposits in banks and cash on hand ...... Accounts receivable, customers ..................... Miscellaneous accounts receivable • ............. Lea obacco manufa¢ u ed sock opera ng supp cs: etc. at averag~ cost Cash on deposit with ~inking fund tr~L~es fox redemption of debentures ~ec~ivablcs from unc0nsoI/dated stlb~idlarles ...... Total ~urrenf a~ct$ ................. Receivables from mlconsolidatcd subsidiaries ( 1950 in¢l~de~ $581.214 from F ench sub~ d ary vhlch subs diary ~a~ ~old in 1951 ) ......... Investments in sect~'ities of uncoI~olidatcd subs~diarles, at araount~ not in excess of co~t (includes $5,400,000 n who y o~ ed Br s~ sub d art (Xole 4) .............................. Insu¥~tnc~ deposi~ an¢~ mis~]lall~OR5 ~rtve~ent8 Real estate, roach nery, fixtures, e c, a cost~ less alh~wanc¢ lot dcpr eciati~n, 1951, $3~,732,657; 1950, $28.515,92:~ ................ Prepaid expense~ and d¢~rred ¢h~rge~ .......... Brands. trade-marks, pat~n~, good will, etc .......... $ 31,992,252 $ 22.156,721 40,571.157 36,783.55C 868,949 762,946 59~,543,551 532,679,223 1,000 560,073 256,962 83,794 658,233,871 593,026,307 4,400,000 2,881,214 11,704,285 12,848,011 2,320,259 1,9/9,786 dA~257~672 43,746,795 3,573,877 2,983,342 1 1 $734,479,975 $657,405~457 fD

LIABILITIES 195~ Notes payable to banks ............ $149,000,000 Acco n slayabe ......... Dixidend on prefelred ~to~k for quarter ended December 31 Accrued taxes .... Other accrued expenses ..................................... Debentures to be redeemed through sinkin2 fund operations /Note 5) Four per eenl bund~ tnaturin2 August 1, ~9dI Pa) ables to uneonselidat ed subsidiaries ..... Total current liabilities ....................... Ihree per cent debentures (Note 5) Minority interest in American Cigarette and Cigar Company Ds._~o $ 73,200,000 7,255,590 5,803,456 790,496 79~),496 50,797,675 39,941,975 3,6~8,650 2.8C~8,964 9,~3 6,[}121 9,891,~00 -- 83L250 269,519 301,822 212,177~930 133,373,663 205.430~000 215.653,000 417,607,930 349,026,663 1,046.290 987,026 't CAPITAL Capital stock (Note 6) : Preferred, six per cent cumulative, par value $100 per share .... Common, par value 325 per share ............ Excess ul net proceeds lronl sale ni common stock over par value Retashed earnings (Note 3) Less. Tr~sury stock, aL cost (93,713 shares of common stock) Total capital and retained earning~, less treasury stock 52,699,700 52.699,700 136~803,450 136,803,450 20~275,591 20,575,591 210~078,741. 210,078,741 112,754,074 204,320,087 322,832,812 314,398,328 7.(107,050 7,007,060 315.825,755 307,391,768 $734,479,975 $657,402,427 |1

_ " " _)K,'tffflfc ,fll ;Ji, r2 ,ll, cJ D / , / I . • J -j//f"/ETd, ff;/lyf" 4~ 1. The equity in the earnings oI uneonsolldated '~ubsitharie~ amounted in 81,938,804 and $ .711,406 for 1951 and 1956, respectivdy. 2. Federal and stat~ taxel on income comprise: ]951 lgSO Federal income ................. $40,008,600 $31,769,600 FeJeral wxce~s profits .............. 5,650,000 2,7~3,fi06 State income ............. 2,686,006 2,982,00~ $47,738,060 $37,454,660 3. Under the provisions nt the indenture relating to the Twenty Ytar 3~,~ D¢bentures, due January 1, 1968, ~ash divld~ds declared on common stock and payments made. in purehaslng shares of any claus ot the Company's stock subaeqncnt to December 31, 1947, may not exceed the aggregate of $15,OfKI,000 and eonsalldate~ net income earned subsequent to December 31, 1947, lesB dividends pald on preferred ~tack. At Deecmber 31, 1951, apProxlmatek" $82,006,009 of retained earnings was fr~e of this restriction. 4. Tfie net tangible a~ats allplieablu to the investinent iII nnconsolldated sub~fidiarles at De~ember 31, 1951, amounted to $~5,971,259, indudlng $8,477,°~!7 net assets of the British subsidiary translated int~ dollarl at appropriate rate* of exchange. 5. Three per cct~t debentures ou~standiag El December 31, 1951, comprlse: Prluulpal Amount Redeemable Redeemable Within After One Year* Dec. 3L 1952 Twenty ),eRr, due April l~ 1962 ................ $$,390,01~1 $ 66,6Z9. ~06 Twenty year, due January 1, 1968 .................. 8,000,006 63,000,006 Twenty-five year, due October 15, 1969 ............... 8,058,000 75,8()8,600 $0,45~,000 $205,4~0.000 Eslllnatcd p/i~ipal amount to be redeemed dltough sinking Iund operallon~ at prltles as provided b~ lhe inde~lar~, 6. Capita[ stoefi at Deceraber $1,1951, compri~ea: Shaxes l~ Cg, mp~y~ Aathorl~d l~ucd Treasuly Preferred ...................................... 540,106 596,997 Nnn~ Common ................................. 10,600,000 5,47-9,138 93,713 12

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