Tobacco Documents Online

AMERICAN BRANDS, INC. 1976 ANNUAL REPORT II

---

Financial highlights/=. ~.o=sa~d, o~ dollars except por ahare arnounls} 1976 Per Common share Net income Without dilution~ ......................................... $4.54 Fully diluted~'~ ............................................ 4.37 Dividends ................................................. 2.80 Net sales .................................................. $4,125,837 Income before provision for taxes on income and extraordinary gain 286,069 Net incomel~) ............................................... 121,992 Dividends Common ................................................ $71,668 Preferred ............................................... 6,611 Number of Common stockholders, December 31 ................ 126,466 Average number 01 Common shares outstanding during the year... 25,634,664 1975 $5.63 5.38 2.68 $4,055,313 302,514 148,527 $68,623 4,424 128,473 25,612,015 I1 ) Net income in 1975 includes extraordinary gain of $8,501,900, equivalent to $ 33 per share without dilution and $.31 per share tully diluted. Operating results by product line <,,, m,r~o°,/ Net sales Operating income('~ 1976 1975 1976 1975 At~ount ,% AttlOUnt % Amount % Amount % Tobacco products Domestic .............. $1,069.0 25.9 $1,051.5 International ............ 1,531.7 37.1 1,563.3 Hardware ................ 175.9 4.3 160.6 Food products ............ 455.4 11.0 457.6 Distilled beverages ........ 151.4 3.7 146.5 Office services and supplies. 111.7 2.7 98.7 Optical goods and services<2) 49.7 1.2 52.3 Toiletries ................ 71.2 1.7 65.5 Engineering(z> ............. 80.9 2.0 97.8 Golf products ............. 40.8 1.0 RetailingC2> ............... 146.5 3.6 150.1 Wholesaling~~; ............ 176.6 4.3 183.5 Other .................... 85.6 2.1 49.8 Deduct intracompany sales.. (20.6) (.6) (21.4) Total .................... $4,125.8 25.9 $206.1 54.7 $195.9 52.5 38,6 46.1 12.2 64.8 17.3 4.0 34.7 9.2 33.2 8.9 11.3 22.3 5,9 18.2 4.9 3.6 17.0 4.5 16,0 4.3 2.4 14.3 3.8 10.8 2.6 1.3 8,6 2.3 9.1 2.4 1.6 5,0 1.3 3.5 .9 2.4 4.8 1.3 11.8 3.1 3.9 1.1 3.7 2.5 .7 2.8 ,8 4.5 .9 .2 f .8 .5 1,2 10.6 2.6 5.7 1.5 (.6) lOOJ $4,055.3 100.0 $376.7 100.0 $373.6 100.0 (1) Earnings befole inte~st, uther incor le, other deductions, ~ncome taxes ~nd e×t ra, ordi~ary gain (2JForeig~

Operating income No[ttobacco products 135 72 ~0 45 30 ~5 $270 1965 1966 1967 19~B Tobaccoprodue~ 19G9 1970 1971 1972 ~973 1~74 1975 1~7G 225 195 16o 165 19~5 19~ 1967 1968 19~9 1970 1971 1972 1973 1974 1975 1976

To our stockholders Robert K. Hermann Chairman of the Board and Chief ExeCutive Officer All three o1 our management groups--domestic tobacco, nontobacco and international tobacco did thelr jobs well in 1976: 1. Operating income of the American Tobacco Division was $205,204,000, a gain o1 $10,632,000 over 1975. This is the first time American Tobacco profits exceeded the $200,090,000 mark. American Cigar's operating income o1 $6,352,000 was close to its record high. 2. Operating income of our domestic nontobacco business exceeded $10O,OO0,00O for the first time. The final figure was $104,090,000, a gain of $19,959,000. These operations include Master LOC k, Beam Distilling, Sunshine Biscuits, Swingline, Wilson Jones, Acushnet, Jergens, Acme Visible Records and Duffy-Mott. Total nontobacco operating income, including that of Gallaher Limited abroad, was $124,521,000, up 10%. 3. Our large British subsidiary, Gallaher Limited, increased tobacco operating income to a record high of £36,834,000, a gain of £5,131 ,GO0, or 16%. Despite these new highs, foreign currency translation adjustments due mainly to the decline of the British pound reduced American Brands' reported net income by $44,623,000. Net income for the year after these adjustments was $t 21,992,900, or $4.54 per Common share, compared with $148,527,000, or $5,63 per share in 1975. Excluding foreign currency adjustments, net income for 1976 was $168,6t 5,000, or $6.28 per share, compared with $154,485,000, or $8.86 per share in 1975. Domestic tobacco sales (American Tobacco and American Cigar) were $1,068,992,000, a gain of 2%. For domestic nontobacco operations the sales total was $1,040,526,000, a gain of 12%. Sales for Ga[laher Limited were £1,1 t 1,613,000, a gain of 20%. Consolidated sales after transla6ng Gallaher's results into dorlars were $4,125,837,000, compared with $4,055,313,000 in 1975.

As illustrated by the chart on page 2, the heavy foreign currency adjustments which reduced net income did nor prevent total operating income from setting a new record at $376,692,009. Furthermore, cash flow continued strong and resulted in a $91,609,000 reduction of total debt by the end of 1976 compared with the December 31, t 975 level. The Board of Directors therefore again increased your cash dividend on the Common stock at the January 1977 meeting. The new rate of $2.92 per year, or 73¢ per quarter, takes effect with the March 1977 pay- ment. That compares with $2.80 per year, or 70¢ per quarter, paid in 1976. This year's i nc rease was the 13th In the last 13 years. Domestic tobacco operating ]ncome, as the chart on page 2 shows, has shown steady progress over the last three years. Both American Tobacco and American Cigar contributed to fhe 1976 improvement. The upper por6on of the chart also shows steady profit progress over fhe years for our nontobacco diversification effort, starting in 1966. Progress continued in 1976: Master Lock operating income exceeded $20,600,009 for the first time on higher sales volume. Master Lock has increased operating income by over 100% in the six years since it was acquired in 1970. Beam Distilling rebounded from the 1975 recession year with higher case sales of Bourbon and a 4% increase in operating income. Sunshine Biscuits operating income reached an all-time high at $18,402,000, a 22% gain over 1975. Swingline operating income was down 3% to $16,483,000 owing to the cost of reorganizing and resfaffing its newest subsidiary, Man/el Lighting Corporation.The other principal Swingline divisions showed excellent gains. Operating profits from Swing][no staplers increased $1,288,000, or 20% ; from Case Cutlery $1,188,000, or 68% ; from Marson automotive and fastener products $253,000, or 16% ; and from Spotnai]s $1,142,000, or 181%. Wilson Jones in its first fug year as a first-tier subsidiary showed the most dramatic increase, with operating income up 58%, or $4,191,00O, to a record $11,43t ,0O0. Acush net increased operating income by 8% to a record $10,408,000 for calendar 1976. Of this total $7,729,000 was consoli- dated in American Brands" results since the acquisition of Acushnet took place in the second quarter of 1976. The Andrew Jergens Company turned in its highest operating income since its acquisition in 1979, $5,896,000. Acme Visibte Records showed a dip of 18% in operating income to $2,899,000. This traced to a loss year for its business forms opera- tion. However, Acme's principal business, record retrieval and storage, which accounts for fwo-thirds of the company's sales, showed a profit increase of more than 11%, to $3,254,000. Duffy-Mott rebounded from a depressed 1975 with a 63% operating income increase to $2,546,009. At the same time, Duffy-Mott achieved near nabonal distribution for its own Super Mott's Prune

Juice and discontinued sell[ng and marketfng prune product brands owned by others. The third major phase of our operations, Gallaher Limited, had a successful year in terms of pounds sterling, with operating income up 7% on a sales gain of 20%. Gallaher increased its share of the cigarette market in the U.K., in the Irish Republic and in The Nether- lands. It reduced its debt in pounds sterling by 28% and furnished a cash dividend to the Parent Company which translated into $20,108,00(3. However, the decline of the British pound from $2.02 to $t .70 during 1976 gave rise to charges of $42,922,g00 which reduced American Brands' net income. Part of this, $20,575,000, was charged against Gallaher's operating income in dollars as reflected on the chart, page 2 (International Tobacco 1976). These heavy foreign currency translation adjustments should not obscure Gallaher's excellent performance in reducing its debt, contributing to American Brands' cash flow and increasing its share of market in cigarettes, cigars and smoking tobacco and in its optics and retailing operations. Detailed discussion of subsidiary results appears on the pages that follow, while operating results by product line for 1976 and 1975 are shown on page 1. Effective January 1, 1977, the Board of Directors elected Mr. John F. Walrath President and Chief Operating Officer and changed the title of the undersigned to Chairman and Chief Executive Officer. In August, Richard B. Young, President of Aoushnet, was elected to American's Board. Effective March 1,1977, two new Directors join the Board: Edward J. Jennings, Jr., President of Sunshine Biscuits, Inc., and Edward W. Whittemore, President of Swingline inc. They assume seats vacated by the retirement of Julien B. McCarthy, Executive Vice President of American Tobacco, and Daniel F. Cahalane, Director of Corporate Insurance and Real Estate of American Brands. The Board thanks Messrs. McCarthy and Cahalane for their contributions during careers of 44 years and 50 years, respectively, and wishBs them well in their retirement. We describe our Company as a diversified manufacturer of consumer products. In this relatively new role we still hold to American Tobacco's old credo: "Quality of Product Is Essential to Continuing Success." We believe it is the combinat{on of outstanding people and quality products that produces quality profits. We appreciate the loyalty and support of the stockholders and welcome your inquiries about our business. Submitted on behalf of the Board of Directors, Robert K. Heimann Chairman of the Board and Chief Executive Officer February 22, 1977

The American Tobacco Company For the first time American Tobacco's operating income exceeded $200,000,000. The 1976 figure was $205,204,000, up 6% from 1975's $194,572,000. Sales were $1.053,230,000, compared with St ,098,848,000 in 1975. Sales include $14,675,000 from smoking tobacco and $16,555,090 for the outside business of Golden Belt, American's printing and foil-laminating subsTdiary. Sales of the division's cigarette brands were $1,021,556,000. During the last three years American Tobacco's operating income has increased from $172,581,000 to $205,204,000. a gain of 19%. During the same period advertising expenditures have doubled and selJing expenditures have increased by more than a third. This is in keeping with the company's objective of increasing its filter cigarette business to compensate for the decline in nonfilter cigarette sales, a decline which has continued for many years and which is expected to continue. Over the last three years unit filter sales have increased from 43% of the total to 50% at present. The fastest-growing segment of today's cigarette market is the low-tar category, which now accounts for an estimated 16% of industry sales. Sales of Carlton cigarettes, the pioneer low-tar brand, and the first to carry tar and nicotine numbers on the pack, showed a sub- stantial increase last year on top ot a sharp gain in 1975. Car/ten offers a filter king and rnenthol king lower in tar than any competitive brand (less than 1 rag. per cigarette). In addition, the company's line includes Lucky lO9's and Iceberg lOg's, which deJiver less tar than any competitive 100's or menthol lO0's (4 rag. per cigarette). In 1976 the swing to low-tar cigarettes came at the expense of con- ventional filter brands, including the company's ]argest filter brand, Tareyton. In unit sales Pall Mail's85 and 100 mm fi]ter cigarettes were about even with 1975, while Carlton's unit increase roughly corn- 6 i .........

pensated for the dip in Tareyton. During the second haIf of 1976, added promotional weight was placed behind Pall Mall Extra Mild which, at 7 rag. of tar, is lower than all the advertised "lights." The brand responded to the increased promotion, which is being con- tinued. In addition, Tareyton lights were developed and will be introduced nationally during the first quarter of 1977. Tareyton lights offer in addition to a low-tar level of 8 rag. per cigarette the well- known "Tareyton plus" in the form of Tareyton's activated charcoal filter, which the brand pioneered in 1954. Pall Mall and Lucky Strike nonf]lters are still substantial in size, reflecting American Tobacco's long-time dorn]nance of this segment of the market. However, these brands have been declining since 1964 and 1949, respectively. In 1976 they again declined, reflecting the industrywide downtrend for nonfi[ter products. Nevertheless, inde- pendent analysts estimate American Tobacco has nearly 60% of all U.S. nonfilter cigarette sales, with Pall Mall King far and away the leader in the nonfi]ter category. American Tobacco's advertising agencies are compensated on an incentive fee system instead of the conventional 15% commission on billings. Savings to the company from this system were $2,493,000 for 1976, bringing total savings since 1965 to $20,172,000. Industry sales of smoking tobaccos again declined. American Tobacco's total poundage sales were down in line with the trend. Our principal brands--Half and Half, Paladin Blackcherry and Bourbon Blen~he[d their share of market. Average market prices for Feat tobacco increased sharply in 1976. Flue-cu red tobacco sold at an average of $1.11 per pound, compared with $1.0g in 1975. Burley leaf increased from $1.05 last year to $1.15. Higher leaf costs and cost increases for labor and packaging materials led to a cigarette price increase of 75¢ per thousand in October.

Gallaher Limited 20/2o0 L, F. G. Pritchard MaNaging D]r@ctor Gallaher's operating income in 1976 reached a new high of £46,427,000, an increase of £2,908,000 over 1975. Sales reached a record high of £1,111,613,090, up 20% over the prior year. About 24% of the company's sales is derived from its nontobacco busF nesses: engineering, optical, who[esaling and retailing. The remainder represents tobacco products. Operating income from tobacco in pounds sterling was up 16% as a result of an increase in home trade and overseas business. In the U.K. the company increased its share of market, with its Silk Cut low-tar brands and Benson and Hedges Special Filter gaining. AS the United Kingdom shifts from a duty levied on tobacco weight to an end product tax (to be completed by January 1978), price dif- ferences between king-size cigarettes and smaller cigarettes will lessen. The reduced price differential is expected to shift sales to king-size brands at the expense of shorter cigarettes. Benson and Hedges Special Filter is the leading brand in the klng-size market and increased in volume during 1976 despite severe price cutting by new competitive brands. Silk Cut increased unit vo]ume and is now Gallaher's largest-serling cigarette. Silk Cut is recognized as Britain's leading low-tar brand. Hamlet remains the leading cigar in the U.K. and posted a unit increase in 1976, whi]e the industry declined 1%. Gallaher's cigar sales were up slightly and the Cigar Division enlarged its market share from 33% to 34%. Old Holborn made gains in the roll-your-own market and Gallaher's two major pipe tobacco brands, Condor and Meflow Virginia, increased their volume. Gallaher's Niemeyer operations in The Netherlands contributed £3,075,000 to operating income, more than double the 1975 figure. In the growing low-tar category, Roxy Duel Filter more than doubled ils

1975 sales, increasing its market share from 5% to 10%. Niemeyer's roll-your-own tobacco and pipe tobacco account for 26% and 38%, respectiveJy, of the market inThe Netherlands, Export sales of these products make up 39% of NJemeyer's total. Combined sales of Gallaher's nontobac¢o operations were £2.69,005,000, compared with £230,076,000 in 1975, while combined operating income was £9,593,000, against £f 1,816,000 in 1975. Engineering operations, comprising Saunders Valve, Mono Pumps and F.I.P. in Italy, declined. New product developments are expected to lead to improvement in 1977 profits. ]n the optical goods and services sector Dollond & Aitchison reported operating income of £4,816,000, against £4,165,000 in 1975, with sales of £27,611,0O0, up 16%, Doliond International has expanded its continental operations to 63 branches, 9 Dutch and 59 Italian. GaHaher's wholesaling business declined 36% in operating income to £510,000. This reflected down-trading by customers as a result of inflationary pressures. While profits were hard hit in the first half, an improving trend was noted in the last half of 1976, Retailing operations, principally Forbuoys, reported operating income of £1,356,000, compared with £1,223,000 in 1975. Sales increased 19%. Forbuoys J n 1976 added 12 additional shops, bringing the total to 387. On January 4, 1977, Gallaher instituted pdce increases on most tobacco products to help absorb the impact of excise tax increases. In 1976 the British pound stetting declined in dollar value from $2.02 to St .70, or t6%. Under current accounting rules this gave rise to charges of $49,922,000 as Gallaher's results were translated into dollars. Thus what would have been a $35,439,000 contribution to American Brands' net income became, in consolidation, a net loss of $6,483,000. (GaJlaher's ! 975 contribution to net was $37,556,000.) Stuart G. Cart'~ fOl~ Managing Director, Tobacco

Master Lock Company Hyland J. Barnes Presldentsnd Chref E×ecutrve Officer 10 Master Lock's operating income of $20,023,000, up 13% from $17,748,000 Jn 1975, set a record for the eleventh consecutive year. Record sales were $53,452,090, compared with $49,307,000 in 1975. Strong sales momentum continued in the company's line of high- security pin tumbler padlocks, which contributed significantly to 1976's results. Armorlock (above, thfrd from left), made "tamper- proof" by a shrouded shack]e and revolving shackle guard, was introduced in 1975 and had excellent consumer acceptance in 1976. This product quickly became one of the better-selling products in Master's padlock line. Recognizing the demand for better protection, a new ultra-high-security padlock was introduced in June. This lock offers 6-gin-tumbler security, has a 3-inch-wide laminated case and weighs 2~/2 pounds; sales doubled anticipated volume. Combination and built-in locker locks showed improvement despite restricted school budgets and a low level of new school construction. This category was aided by a new dead-bolt built-in combination locker look. Steady growth is anticipated for this new product. Safes of Master Lock's burglar and smoke alarms continued to increase in 1976, with combined sales more than double 1975. The Ultrason-X burglar alarm plugs into a standard electrical outlet, providing an instant security device for homes and offices. Master's newly designed smoke alarms did well despite a proliferation of new brands and severe price competition. Export sales posted increases and sales in Canada, aided by a second warehouse, were strong. With warehouses now in Vancouver and Montreal, service to customers was improved. Master Lock maintains an aggressive markeSng and advertlslng program and in 1977 network TV coverage will be expanded, with commercials appearing on nine sports spectaculars. These include the Super Bowl, the Indianapolis 500, the Aft-Star baseball game and the British Open Golf Tournament,

James B. Beam Distilling Co. Beam's operating income was $18,681,000 In 1976, up 4% from the prior year's $17,939,000. Sales were $165,031 ,o00, up 4% over 1975. Although overall consumptTon of Bourbon declined 2% last year according to independent analysts, Beam Bourbon increased its unit sates and thereby further enlarged its share of the market. Jim Beam continues as the largest-selling straight whiskey in domestic and world markets. Beam's Chofce, 6-year-old premium Bourbon, also contributed to the company's volume increase, as did Beam's Bicen- tennial bottles introduced in January 1976. Beam made a further move to compete in the higher-priced category by introducing Beam's Choice black label, a 9g-proof whiskey aged for 100 months. Bourbon accounts for 82% of Beam's profits. Industry sales of scotch whisky held even with 1975 and the same was true 1or Bell's and Spey Royal, Beam's line o1 vodkas and cordials had higher case sales, with Dark Eyes vodka posting ~ 12% gain. Sales of Beameister imported German wines, packaged in colorful ceramic crocks, continued to increase. During the latter months o1 1976, Beam introduced a line of Italian wines under the Trave label. Combined sales of non-Bourbon beverages were $27,620,000, an increase of 5% over 1975. To meet demand for Mr, and Mrs. "T'" Bloody Mary Mix and other Taylor Food mixes, additional bottling facilities were brought on stream in Clermont, Kentucky, to supplement West Coast production. Taylor sales again increased, to $9,076,000. Regal China, which manu- factures Beam trophy bottles and other ceramic products, increased its sales to outsiders by 38%, to $4,633,000. Demand for used cooperage continued slow, and the market price continued to be low for dried grain, a by-product of the distiging process. Profits from these secondary sources were minimal Jn 1976. Martin Lewln President and Chief Opera~ing Officer 11

Sunshine Biscuits, Inc. Suns z I Edward J, dennlrlgs, Jr, President and Chief Executive Of freer Sunshine's operating income for 1976 reached an all-time high of $18,402,000, up 22% from the previous year. All three divisions-- Biscuits, U.S. Snacks and Canadian Snacks--showed profit increases. Cheez-lt and Krispy Crackers paced the increase in the cracker segment, with Hydrox, Sugar Wafers and Vienna Fingers leading the cookies. Sales for the Biscuit Division were $207,880,060, up $1,762,000 over 1975. Operating income was up 16% to $13,397,000. U.S. Snacks posted sales of $60,924,000, down 17% from the pre- vious year. The sales decline reflected the disposal of five regional snack operations (Baltimore, Raleigh, Louisville, Washington and St. Louis). The two U.S. operations being retained, Bell Brands in Los Angeles and Blue Bell in Portland, Oregon, had combined 1975 sales of $39,823,000 versus $38,890,000 in 1975. Their combined operating income was up more than 400%, enabling the U.S. Snack Division as a whole to show operating income of $1,567,009 as against $433,000 the year before. Apart from the discontinuance of the smaller marginal operations, the divislon benefited from reduced cooking oil costs. A new natural-style potato chip and corn chip, first introduced by Be9 Brands in Southern Californ]a= scored an immediate success with consumers. The Canadian Snack Division showed sales of $51,407,000, up 18%, with operating income reaching a new high of $9,439,000, up 13%. Distribution was extended for both Canadian labels, Humpty Dumpty and Maple Leaf. Combined sales for all three divisions, including partial-year sales for discontinued operations, were $390,211 ,O00, down 1% from 1975. Excluding the discontinued snack operations, sales were $299,110,000, up $10,571 ,O00 or 4% over the comparable 1975 fig ure. While advertis- ing and selling expenditures increased in a keenly competitive market, gross profit margins increased in each of the three divisions. 12

Wilson Jones Company Wilson Jones' operating income in 1976 was $11,481 ,go0, highest in its history. The 1976 profit figure was 58% above 1975 (a depressed year) and 19% above the previous high in 1974. SaTes were $60,718,000, compared w~th $50,728,000 in 1975 and $51,881,00g in 1974. A new merchandising program, the Modular Merchandlsing System, helped to achieve the strong results. MMS includes fixtures, pre- selected and prearranged merchandise, signs, product identification and inventory confrol--a complete system to help retail dealers move Wilson Jones products. MMS has given sales upward momentum that is carrying over into t 977. It has created additional outlets for Wilson Jones products among retailers who have not previously carried office supplies. The Wilson Jones Division, accounting for hag the company's sales, makes a broad line of loose-teat and other binders with related fillers and accessories, This basic line of office supplies showed a 17% sales increase and a 61% operating income increase in 1976, The DataSystems Division, specializing in products to retain and retrieve data processing printouts, showed a sales increase of 21% and operating income up 39%. DataSystems accounts for about a quarter of the company's sales. Substantia[ profit increases were also posted by the GrayLine Division, which prints standard business forms; the Perma Products Division, which makes corrugated storage boxes; and the Standard Diary Divlsion, which makes desk journals, appointment books and other dated goods. The Cooke & Cobb DNis[on, which manufactures expanding files and wallets, showed a satisfactory sales increase but encountered problems in high manufactu ring costs and availability of raw materials, which bnpaired profitability until late in the year. John P. Clark PresTdeNtand Chief Executive Officer 13

Swing]ine Inc, Edward W. Whittemore President and Chief Operating Officer Swingline's sales fo r 1976 were a record $136,060,000, up 11% over 1975. However, operating income declined to $16,483,000, from the record $17,033,009 posted in 1976. The drop in overall operating income resulted primarily from the cost of restafflng and reorganizing Marvel Lighting Corporation, manu- facturers of long-life incandescent lamps, acquired in December 1974. MarvePs operating income for 1976 was $2,060,000, down from 1975's $6,374,000. Sales declined 7% to $37,148,000 in a year of intense competition. To strengthen its position and offset competition, Marve[ introduced a new line of office lighting products in late 1976 to be sold through office product distributors and dealers. The impact of this move will be felt in 1977. The Swingline Division, responding to a recovery in demand for office and consumer products, attained record results in 1976. Operating income was $7,664,000 on sales of $36,159,000, represent- ing gains of 20% and 14%, respectively. New paperwork processing products added to 1976's results. These included new fastening devices, restyled manual and electric staplers, a pneumatic stap6ng work station for high-production use, new do-it-yourself products, and a line of glue guns. Case Cutlery, manufacturer of quality knives, shears and scissors, achieved record saJes of $17,622,000, up from $12,687,000 in 1975. Record operating income of $2,927,000 was up 68%. Furl operation of the new plant in Bradford, Pennsylvania, allowed Case to step up production for its aggressive market e×pans[on program. This resulted in the addition of a substantial number of new retail accounts and greater sales, tn four years as a Swingline profit center, Case has increased sales by 127% and operating income by 263%. 14

The Marson Gorporation reported record sales of $13,638,000, up 18% over 1975 and record operating inoome of $1,832,000, up 16%. Both fastener and automotive products have contributed to Marson's steady and uninterrupted growth. Several new professional products were introduced in 1976, including Mar-Gfass for auto-body repair and Contour, a material for repairing rusted vehicle areas. Spotnails, manufacturer of industrial fasteners, continued to benefit from new marketing emphasis. Operating income was a record $1,773,000, compared with $631,000 in 1975 and $118,000 in 1974, when the company was heavily dependent on new home construction. A new line of air tools for packaging and home remode]ing spear- headed the sales improvement. Ace Fastener, manufacturer of stapling machines and staples, reported sales of $8,050,000, up 3% over 1975. Increased costs for tabor and raw materials, however, continued to exert pressure on operating profits, which declined from $835,000 to $532,000. Two new products introduced successfully in 1976 were Air Bind Center, used to bind thick reports into book term and Prong Fastener System, for binding varlous-sized documents. Swingllne of Canada posted sales of $7,987,000, up 12% over 1975. Products contributing to the increase were Marson's auto-body fillers, rivets and tools, Swingline staplers and staples and office supplies~ Price controls in Canada, however, kept pressure on profits, which decreased 10%, 15

Acushnet Company Richard B. Young Ptesidentand Chief Execvtive Officer American Brands' consolidated figures for 1976 include the resuIts of Acushnet Company from April 4, 1976. Aeushnet contributed $7,729,000 to 1976 operating income and $68,550,006 to sales. For the full year, operating income was a record $10,403,009, on a new high in sales of $90,203,600, up 8% and 15%, respectively, over 1975. in addition to the famous Titleist golf bali, the Golf Division markets a line of quality golf products through pro shops. This includes golf clubs, bags, putters, cads, gloves and headeovers. Golf bags are also sold under the Finalist and Club Special brand names. For calendar 1976, the Golf Division posted operating income of $5,770,000 on sales of $55,117,0OO, compared with $6,936,000 and $50,717,000, respectively, in the prior year. Although gains in sales were recorded for golf bails and bags, excessive industry wide inventories eradicated the division's golf club profits, Acushnet's Rubber Division had record results in calendar 1976, with operating income of $4,663,000 and sales of $35,066,090, gains of 73% and 25%, respectively, over the previous record results of 1975. The division specializes in the manufacture of molded natura] and synthetic rubber products for a wide variety of industries, with approximately 40% of sales to the automotive industry. Acushnet Limited, a wholly owned subsidiary, attained greater distribution of the company's golf products in the United Kingdom and Europe. 16

American Cigar ® American Cigar's 1976 operating income was $6,352,000, compared with $6,226,000 in 1975. Thls gain was achieved despite a sales dip to $49,901 ,gog from $51,219,000 in 1975. Profit margins in 1976 benefited from the addition o1 highly automated cigar-making equipment which reduced costs and increased productlv[ly. The domestic cigar industry in 1976 experienced its sixth consecutive year of decline in unit sales Overall divisional unit sales declined, but at a lesser rate than the industry, resulting in an increased market share for American Cigar. Antonio y Cleopatra sales continued to run counter to the industry trend for large cigars and recorded the brand's fifteenth consecutive year of increased unit volume. In 1976 Antonio y Cleopatra was the divislon's leading sales and profit producer, accounting for more than half the division's dollar sales. Major marketing emphasis continues to be placed on this brand, with advertising featuring Grenadiers, Panetelas, Sabers and Saber Tips. La Corona Imported Cigars, handmade in Nicaragua, were introduced in the New York area at the start of 1976. This high-prlced product, comparable in quality to fine Havanas of the pre-Castro era, was well received and distribution was achieved by year-end in all major markets. To meet consumer preference two new shapes are being added to the line. Unit sales of Roi-Tan, Beck y C~. and Cabafias all declined in 1976. Little cigars also declined in line with the industry trend; American Cigar's brands in this segment include A&C, Roi-Tan and Deringer High-grade smoking tobaccos marketed by the division include Blue Boar, a domestic mixture, and Skallorna, an imported premium price Danish mixture. Starting in March 1977 the division will also handle the importation and sale in the U.S, of the Dutch pipe tobacco brands, Sail, Flying Dutchman and Clan. Alvin Bemstein President 17

The Andrew Jergens Company Kenneth C. Schuster Ptesidentand Chief Executive Officer Jergens' operating income for 1979 was $5,896,000, an increase of 47% over 1975. AII divisions of the company--domestic cosmetics, domestic soap, subsidiaries and international--contributed to the gain, Sales were $74,073,000, an increase of $6,594,000 over the previous year. Domestic cosmetics, including hand-care products, accounted for about half of Jergens' dollar sales and showed a 23% increase. Jergens' Canadian subsidiary increased sales 6% to $5,334,090. Sugar Beet Products Co. and its Canadian subsidiary, Chemical By- Products, Ltd., showed sales of $5,889,900, up 18%; these companies make and seJl industrial skin cleansers. Albert Verley & Company and its French subsidiary, Arornesee'nce, creators of fragrance and flavor compounds, posted sales of $3,311,990, a gain of 38%. As a group, Jergens' subsidiaries and international division showed a 37% gain in operating income on sales of $16,993,000, up 17%. New products introduced in the last three years, including Gee, Your Hair Srnefls Terrifio Shampoo and Conditioner, Nature Scents Soaps and Bath Beads, Barbie Toiletries and Jergens Pre-Heat Hair Conditioner, accounted for 27% of 1976 domestic sales, or $15,571 ,O0O. The most successful of these new products is Gee, Your Hair Smells Terrific, which achieved sales of nearly $5,000,000 in its second fuFI year on the market. The research and development program is continuing with a variety of new products being market tested. Hand care products, Jergens' original specialty, registered a sales increase of 9% ; these include Jergens Lotion, Jergens Extra Dry Skin Formula and Jergens Direct Aid. Soap sales were down, reacting to competdive new brand introductions. Gross profit as a percentage of sales increased as a result of productivity improvements, and distrib~tion of Jergens products in the marketplace was improved through the addition of brokers and the reorganization of the Sales and Sales Promotion Departments. 18

Acme Visible Records, Inc. Acme's operatlng income in 1976 declined 18% to $2,899,000. Sales were $50,993,000, compared with $47,990,000 in 1975. Lower profit margins in 1976 were primarily the result of pressure on prices, particu- larry for business forms. U.S, sales of record storage and retrieval systems were $90,979,600, a gain of 7%. The increase in volume enabled operating income for those lines to show an increase of 15% over 1975. Both the basic lines of visible systems and the newer vertical filing products con- tributed to the increases. KromaKode color-coded filing systems and the Astromattc line of power files showed good improvement. Acquisition of the "Magic Aisle" hlgh-density compact file rounded out Acme's line of vertical products. Establishment of a combined printing and warehouse facildy in Santa Ana, California, improved the company's ability to service western markets. Several new products were added to the Datavue dealer line, including machine and typing stands, work station furniture, tub files, locking letter trays and micro- fiche and aperture card trays. Datafold Forms, Inc, Acme's business forms subsidiary, had sales of $16,690,000, up 7%, but sustained an operating loss of $355,000, compared with a profit of $608,000 in 1975. This loss resulted from the poor prfce structure that has existed for business forms since early 1975. However, in 1976's fourth quarter demand improved and prices showed signs of firming up. Acme Seeley Limited in Canada posted sales of $3,324,000 and oper- ating income of $t25,000, compared with $3,452,000 and $207,000 in 1975. These results largely reflect a continued reduction in purchases by the Canadian government and its agencies. Sales to commercial businesses rose despite an unsettled Canadian economy. John B, Hinch Presidentand Chief Executive Officer 19

Duffy-Mott Company, Inc. Raymond M. Anrig presidetlt and Chief Executive Officer Duffy-Mott's operating income was $2,546,000, an increase of 65% over a depressed 1975. The gain was achieved despite costs to establish Super Mott's Prune Juice, which is now available in about 75% of the U.S. market. At year's end Super Mott's Prune Juice was the nation's NO. 2 prune juice brand. The company maintained its share of the apple sauce and apple juice markets, with unit shipments of both higher than in 1975. Abnor- mally high apple prices in the 1974-1975 pack gave way to lower costs in 1975-1976. This had two beneficial effects on Duffy-Mott: (1) Consumer demand strengthened, resulting in operating profits from apple product sales versus losses reported in 1975, and (2) Duffy-Mott's inventories and debt were reduced and interest pay- ments were halved. In 1975 operating income did not cover high interest costs and a net loss resulted; in 1975, higher operating income and lower interest costs yielded a net income o1 $567,900. Sales and profits from Grandma's Molasses were about the same as in 1975. Surveys indicate that Grandma's share of the molasses market increased s]ighfly. Clamato and Beefamato sales showed substantial increases and these unique products contributed con- sistently to profits during the year. In 1976 Duffy-Mott terminated its agreement with Sunsweet growers to make, market and sell that organization's prune brands. The com- pany packed prune products for Sunsweet during the last three quarters of 1976 on a toll basis, and this transitional arrangement will be ended in 1977. This will enable Duffy-Mott to concentrate all its efforts on the making and selling of its own brands. Total sales were $95,157,000, down 7%, reflecting the termination of the Sunsweet arrangement. To improve profitability in 1976 and in the future, Duffy-Mott greatly increased manufacturing productivity in its basic lines. 2O

Financial review $~2 Cashdividendsoaidoncommonshares--3Oyeathislory 64 @ 4g 32 ~.i , 24 16 0 47 4B ¢9 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 E5 66 57 68 69 70 71 72 73 74 75 76 Earnings Conso[idated net income declined to $121,992,000 in 1976 as a result of adverse forelgn currency translation adjustments, but net income attributable to domestic divisions and subsidiaries increased from $110,971,000 to $128,475,000, a gain of $17,604,000, or 16%. Gallaher's income before foreign currency translation adjustments was £19,603,000 in 1976 against £16,669,000 (before an extraordinary gain of £4,336,000) in 1975, an increase of t 8% ; after translation into U.S. dollars at lower exchange rates for the pound sterling, Gallaher shewed a net loss of $6,483,000 in 1976. Dividends Dividends on Common stock in 1976 amounted to $71,668,000. Together with dividends paid on conver6ble preferred stock, total dividends were $77,179,000, compared with $73,047,000 in 1975. The remainder of net income, $44,813,000, was retained for general corporate pu r- poses. In the last 30 years the Company has paid over $1.3 billion in dividends on its Common stock• The 1976 Common stock dividend of $2.80 provided a yield o1 6.8% on the average market price of our Common stock during the year. Effective with the March 1,1977 payment, the quarterly dividend on Common stock was increased from 70¢ per share to 73¢ per share, raising the annual rate to $2.92 per share. Over the last ten years the Company's Common dividend increased by 56%, while dividends paid by the 30 companies included in the Dow Jones Industrial Average gained 30% and dividends on the Standard & Poor's 500 stocks gained 41%. Taxes Taxes o n income in 1975 were $164,077,000, comprised of deferred taxes of $22,538,000 and amounts currently payable of $93,371,000 21

$1 250 Inventories Gornpared with Iotal debt $ r 26a Long-lerm debt compared with stockholders' equity {in ~,bll on~] (Fn m~ ~i<~,1,1 980 84O 7OO 140 0 67 68 69 70 71 72 73 74 75 federal, $31,765,000 foreign and $16,403,600 other. By comparison, income available to stockholders amounted to $121,992,000. In addi- tion, the Corn party paid U.S. federal excise taxes of $400,822,080, or 33% of distilled beverage and tobacco sales and foreign excise taxes equivalent 1o $1,063,456,000, o r 70% of Gallaher's tobacco sales. Social security and other taxes brought the total to $1,679,524,g00, Acquisitions Acushnet was acquired last year for $6,576,000 in cash and $f .70 Convertible Preferred stock with a stated value of $31,233,060. This brought the total outlay involved in the Company's acquisitions, since 1965, to $1,148,000,000 including the market value of Common shares used and the stated value of convertible preferred stock issued. Dur- ing the period of ownership, these companies have contributed $1,144,398,000 to American Brands' operating income, and cash flow (net income plus depreciation) from operations of acquired companies has amounted to $759,252,000 of which $260,000,000 has been paid to American Brands. Payments in 1976 amounted 1o $49,000,000. Domestic acquisitions representing an investment of $759,000,000 have contributed $572,872,000 in operating income and $449,071,000 in cash flow. American Brands has received total payments of $168,500,000 from these domestic subsidiaries, including $28,900,000 in 1976. Since majorityownership was achieved in 1968, total operating income of Gallaher has been $571,528,000, compared with an investment of $389,000,066 which includes $97,000,000 for acquisitions made by Gallaher. Cash flow from Gallaher's operations has amounted to $310,181,0O0. During 1976 the Company received $20,100,000 in divi- dends from Ga[laher, higher than in any previous year; total dividends received since 1968 have amounted to $91,500,000. 22

How the 1976 sales dollar was used/American Brands, Inc. sales totaled $4,125,837,C(3G r Excise I~es 35.2% M~nu factuling costs 42.1% Acquired companies contributed $3,022,706,000 to sales and $165,136,000 to operating income in 1976. income before taxes of acquired domestic subsidiaries increased by 27% in 1976 and repre- sented a return on tangible net worth of 23%, up from 21% in 1975. In sterling, Gallaher's pretax return on tangible net worth was 27%, compared with 28% in 1975. Capital expenditures Capital expenditures for property, plant and equipment amounted to $61,176,000, compared with $64,994,000 for 1975. Expansion and modernization programs in the Company's manufacturing facilities, both domestic and foreign, represented a significant portion of these outlays. The investment tax credit for 1976 was $2,287,000, compared with $1,731,000 for 1975 and was accounted for as a reduction of income tax expense. The amount of depreciation and amortization charged to costs and expenses in 1976 was $57,761,000, compared with $53,606,000 in 1975. Because American's business is not capital intensive and does not require heavy investment in plant and equipment, cash flow from operations (less dividends) has exceeded capital expenditures by approximately $474,843,000 during the last ten years. Financial position Favorable cash flow trends during 1976 permitted a reduction of $91,609,000 in the Company's total debt from $850,672,000 to $759,063,000 at the end of the year. Gallaher accounted to r $48,988,000 of this reduction as its debt declined from $124,277,000 to $75,289,000. 23

$4b BOOk value per common share Quarlerly dividend payments 1976 1975 4O 35 3O 0 67 68 69 70 71 72 73 7,4 75 76 Payment Amourd Payment Amount Date Per Share Dale per Share 3/1/76 $ .70 3/1/75 $ .67 6/1/76 ,70 6/~/75 37 911176 .70 9[2/75 67 12/1/76 .70 12/1/75 .67 Total $2.80 Total $2,65 Common stock pdcee {N.~ S,E.) 1976 1975 Quarter High LOW High LOW Fi~t ......... 4,3~ 38½ 40 30~ Second ......... 42:~ 38½ 41 36% Third ............. 43~ 39¼ 43~ 34¾ Found ......... 46 39% 39 331/2 The combination of a significant decrease in total borrowings with an increase in stockholders' equity resulted in a reduction in the percent- age of total debt to stockholders' equity from 77% to 65% at the end of 1976. The percentage of long-term debt to stockholders' equity was 43% at year-end 1976, down from 49% for 1975, and the lowest since 1967. Underscoring the Company's strong financial position is the fact that total current assets, which amounted to $1,536,597,600 at the end of 1976, exceeded total liabilities by $251,940,00g, or nearly 20%. Inventories alone of $1,185,660,00g were greater than total long and short-term debt outstanding at year-end. The ratio o1 current assets to current liabilities was 2.2 to 1. Interest expense during 1976 amounted to $65,442,000, representing a decline of $11,764,000, or 15% from the 1975 level, primarily the result of lower interest rates. Stockholders' equity Stockholders' equity increased from $1,106,146,000 at the start of 1976 to $1,171,584,000 at year-end, a gain of $63,439,000, and amounted to 70% of total capitalization, compared with 67% at the end of the previous year. During the year, 991,719 Common shares were issued upon conversion of 51/4 % Convertible Guaranteed debentures and $6.00 Convertible Preferred stock, and the exercise of stock options. The Company pur- chased 380,100 shares of its Common stock for the treasury during 1976 at an average cost of $41.77 per share. Book value per Common share increased from $40.47 to $42.26 during 1976. 24

Consolidated balance sheet ~mori~ ~,~o~ h~. ~o~ ~.bs;~;~ri~ December 31 1976 1975 Assets Cash ................................................... Accounts receivable, customers, less agowances for discounts, doubtful accounts, retu rns, 1976, $9,593,000; 1975, $11,925,000 Inventories Leaf tobacco .......................................... Bulk whiskey .......................................... Other raw materials, supplies and work in process ......... Finished products ..................................... Other current assets ..................................... Total current assets ...................................... Property, plant and equipment, at cost Land, improvements to land and leaseholds ................. Buildings .............................................. Machinery and equipment ............................... Construction in process ................................. Less accumulated depreciation and amortization ........... Intangibles resulting from business acquisitions .............. Other assets ............................................ Total assets ............................................. Liabililies Notes payable to banks .................................... Commercial paper ........................................ Short-term borrowings by foreign subsidiaries ................ Accounts payable and accrued expenses ..................... Accrued taxes, including current portion of deferred income taxes Current portion of long-term debt ........................... Total current liabilities .................................... Long-term debt .......................................... Deferred income taxes .................................... (In thousands) $ 29,786 $ 20,596 290,318 304,642 686,543 661,221 66,598 66,788 163,460 151,630 268,959 259,57t 1,185,660 1,133,210 30,833 36,674 1,536,597 -1,501,122 31,462 29,943 243,133 234,875 560,490 517,370 12,828 9,798 847,913 791,986 431,771 337,344 416,142 404,642 460,575 472,522 33,927 31,107 $2,456,241 $2,409,393 $ 93,500 $ 92,110 109,500 89,320 38,155 63,754 276,402 299,466 158,195 69,664 15,686 62,291 691,438 676,605 502,222 543,197 90,997 81,446 1,301,248 Total liabilities ........................................... 1,284,657 Stockholders' equity Capital stock $6.00 Convertible Preferred stock, without par value, stated value $100 per share ............................ $1.70 Convertible Preferred stock, without par value, stated value $20 per share ............................. Common stock, par value $5.25 per share .................. Paid-in surplus ........................................... Retained earnings ........................................ 973,841 1,274,181 Less treasury stock, at COSt ................................. 102,6J Total stockholders' equity .................................. 1,171,584 Total liabilities and stockholders' equity ..................... $2,456,241 See Summary of significant accounting policies and accomp~tlyitlg notes 38,761 73,388 30,728 176,352 179,352 46,499 42,612 934,590 1,229,942 121,797 1,108,145 $2,409,393 25

Consolidated statement of income Am~,ic~° ~od~. q~o ..... ~,idi~r~ For years ended December 31 1976 1975 (In t~ous~ndB) Netsafes .................................................. $4,125,637 $4,065,313 Cost of sales ............................................... Gross profil ................................................ Advertising, selling and administrative expenses ................. Operaling income ........................................... Other income .............................................. Interest and related charges ................................. Other deductions ........................................... income before provision for taxes on income and extraordinary gain Provision for taxes on income Currently payable Federal ............................................... Foreign ............................................... Other ................................................. Deferred Federal end other ....................................... Foreign .............................................. income before extraordinary gain ............................ Extraordinary gain from early extinguishment of debt ............ Net income ................................................ Net income per Common share Without dilution Itlcome before extraordinary gait] ......................... Extraordinary gain ...................................... Net income ............................................ Fully diluted Income before extraordinary gain ......................... Extraordinary gain ...................................... Net income ............................................ 3,190,618 3,185,048 935,219 890,265 558,527 518,663 376,692 373,602 9,084 14,685 385,776 388,287 65,442 77,196 34,285 8,577 99,707 85,773 286,069 862,514 93,371 95,896 31,765 31,782 16,403 14,825 16,247 7,945 6,291 12,040 184,077 132,486 121,992 140,026 -- 8,501 $ 12f,§92 $ 148,527 $4.64 $5~30 .33 $4,54 $5.63 $4.37 $5.07 .31 84.37 $5.38 Consolidated statement of retained earnings For years ended December 31 1976 1975 Balance at beginning of year ................................. Net income ................................................ Cash dividends Common stock: 1876, $2.80 per share; 1975, $2.68 per share ..... $6.00 Convertible Preferred stock ........................... $1.70 Convertible Preferred stock ........................... Excess of cost over stated value of 329,163 shares of $1.70 Convertible Preferred stock reacquired ................. Retained earnings at end of year .............................. See ~mm~ry of sigrliticant accounting poll~ies and accompanying notes¸ (Ih thousands} $934,590 $859,110 121,992 148,527 71,668 68,623 4,194 4,424 1,317 562 $978,841 $934,590 26

Consolidated statement of changes in financial position Amcric~ 8farads, inc. anti Ilub~idialies For years ended December 31 1976 1975 (In t housilt]ds) Source el working capital Income before extraordinary gain ............................. $121,992 $140,026 Charges (credits) to income not requiring (providing) working capital Depreciation and amortization ............................ 57,781 53,606 Translalion (gain) loss on long-term debt payable in foreign currencies ...................... 194 (18,975) N$t provision for noncurrent deferred income taxes .......... 8,861 15,802 Working capital provided from operations ...................... 188,795 198,559 Extraordinary gain from early extinguishment of debt ............. -- 8,501 $1.70 Convertible Preferred stock issued in connection with acquisition of Acushnet Company ....................... 87,310 Issuance of additional long-term debt .......................... 1,777 183,061 Transfer of liability for 1974 foreign income taxes to deferred income taxes ........ ............................. -- 15,661 Conversion of $6.00 Prefarred stock and debentures and proceeds from stock options exercised ....................... 4,335 1,898 Disposition of property, plant and equipment .................... 10,632 f 0,595 Tax effect of exchange losses on foreign debt redeemed in 1976 .... -- 15,805 Investment in 1974 in a subsidiary which was not consolidated until 1975 ................................................. 16,100 Use of working capital Additions to property, plant and equipment ..................... Net assets relating to acquisition of additional ownership in GaHaher Limited ....................................... Net noncurrent assets of businesses acquired .................. Cost in excess of net assets of businesses acquired .............. Decreaae in long-term debt (including transfer to current) ......... Dividends to stockho[dars .................................... Purchases of Common stock for treasury ....................... $1.70 Convertible Preferred stock reacquired ................... Other, net ................................................. Increase in working capital .................................. 24~852 445,090 61,176 64,994 -- 77,017 5,642 1,805 1,112 (6,819) 53,251 130,353 77,179 73,047 15,875 3,263 ~144 831 4,475 222,210 048,135 $ 20,642 ~9-8,955 Components increasing (decreasing) working capital Cash .................................................... Receivables, customers .................................... Inventories .............................................. Other current assets ...................................... Notes payable to banks .................................... Commercial paper ......................................... Short-term borrowings by foreign subsidiaries ................. Accounts payable and accrued expenses ...................... Current portion of long-term debt ............................ Increase in working capital ................................. See Summ Jt~ of ~gJlJlEca/]t accou~lin9 p~licies ~nd acoDmpan~ t~otes. $ 9,190 $ (1,637) (14,324) (12,950) 46,450 13,471 (5,841) (4,677) (1,390) (10,023) (20,180) 17,933 25,599 6,280 (65,467) 30,502 46,605 58,056 $ 20,642 $ 9-'9~-,955 27

Summary of significant accounting policies Principles of consolidation The consolidated financial statements include the accounts of the Company and all subsidiaries. Fiscal year-ends of certain subsidiaries af Gallaher Limited range from September 39 to November 30 to facilitate Gagaher's year-end closing. Inventories Inventories are priced at the lower of cost leverage; fi~'st-in, first-out; and minor amounts at last-in, first-out) or market In accordance with generally recognized trade practice the leaf tobacco and bu(k whiskey inventories are classified as current assets, aIt hough part of such inventories, due to the dlJration of aging processes, ordinarily will not be sold within one year. The last-in, first-out inventory included in the consolidated balance sheet is $1,690,000 in excess of the valuation reported by a subsidiary for federal income tax purposes, resulting from a revaluation of this asset to tair value at the date the subsidiary was purchased, Property, plant and equipment Depreciation and amortization are provided, principally on a straight-line basis, ever the estimated useful lives of the assets. Profits or losses resulting from dispositions are, with minor exceptions, included in the statement of income. Betterments and renewals which improve and extend the life of an asset are capi- tstized; maintenance and repairs are charged to cost or expense, Amortization of intangibles Intangibles resulting from business acquisitions, comprised of brands and trademarks and cost in excess of net assets of businesses acquired, are considered to have a continuing value over an indefinite period and are not being amortized, except for intangibles acquired after 1970, which are being amortized ($2,012,000 in 7976 and $7,980,000 In 1975) on a straight-line basis over a period of 40 years, intangibles resulting from acquisitions are adjusted to reflect differences between book and tax accounting attrib- utable to such acquisitions. Income taxes Prevision is made for deferred income taxes rstating to differences in the timing of recognition for book and tax purposes of cedain items. Deferred income taxes are not provided on undistributed earnings of foreign subsidiaries and domes- tic international sales corporations included in consolidated retained earnings (aggregating approximately $112,989,000 at December 31, 1976) as such earnings are expected to be permanently reinvested in these companies. The investment tax credit is accounted for as a reduction of taxes on income currently payable. Pension plans Pension expense, which is being funded, is determined by independent actuaries and includes amortiza- tion of unfunded prior service costs principally over 30 years. 28

Notes accompanying financial statements Acquisition In June 1976, shareholders of Acushnef Company approved an Agreement and Plan of Merger entered into in April 1976, whereby Acushnet Company was merged into a newly organized subsidiary of the Company. The aggregate cost of the investment, which amounted to $37,809,900, exceeded the value of the net assets acquired by $1,112,000. Operations of Acushnet Company, which were included in con- solidation from Apb] 4, 1976, did not materially affect the consolidated results for 1976. Foreign subsidiaries The consolidated financial statements include the following amounts related to operations of Gadaher Limited and its subsidiaries: 1976 1975 tin thousands} Total assets ..................................................... $745,182 $780,242 Total liabilities ................................................... 392,933 420,642 Operating income (a) ............................................. 61,046 88,671 Extraordinary gain from early extinguishment of debt .................. -- 9,147 Net Income (~6ss) (a) ............................................. (6,483) 37,556 (a) Operating income reflects charges, included in cost of sales, related to foreign exchange translation of $20,575,000 in 1976 and $6,632,000 in 1975; net income reflects additional charges related to foreign ex- change tans atlon o $22,347,000 n 1976 and $2,265,000 in 1975. See note below on Foreign excha go. Foreign exchange The consolidated statement of income includes charges (credits) related to translation of and transactions in foreign currencies as follows: 1976 1975 (In thousands) Translation of foreign financial statements: Gedaher Limited 8nd its subsidiaries ................................ $42,922 $8,897 Other .......................................................... (159 244 42,768 9,141 Foreign currency transactions: Losses (gains), net ............................................... 2,391 (7,533) Related income taxes ............ : ..... (536) 4,150 1~859 (3,183) Total ........................................................... $44,623 $5,958 These amounts are included in the following captions in the consolidated statement of income: 1976 1975 (in thousands) Cost of sales .................................................... $20,979 $6,632 Other (income) deductions ........................................ 24,584 (4,824) Provision for taxes on income ...................................... (536) 4,150 $44,623 $5,958 The translation of British pound sterling financial statements of Oallaher Limited into U.S, dollars reflects a decline in the exchange rate of the British pound from $2.02 at December 31, 1975, to $1,70 at December 31, 1976, Cost of sales reflects translation of inventory usage and depreciation expense at the historical exchange rates applicable to the related assets in the balance sheet and, accordingly, includes the amounts shown above representing the difference (due principally to the duration of the aging process for leaf tobacco) between such historical rates and the current average rates used in trans- 29

]ating tde other income statement accounts. Foreign currency transactions in 1975 included an $5,136,006 pretax exchange gain on translation of German mark and Swiss franc borrowings. Compensating balances and shod-term borrowings Pursuant to informat agreements with banks in connection with domestic bank lines of credit aggregating $254,000,000 at December 31, 1976, the Company maJntains average compensating balances equal to the greater of 10% of the line or 20% of the average borrowings during the year. There are no minimum bal- ance requirements or restrictions on the use of cash balances. Compensating balances averaged approxi- mately $6,700,000 during 1976. At December 31, 1976 a foreign subsidiary of the Company had $122,713,000 of unused bank lines of credit. The average interest rate at December 31, 1976, was 6.1% on short-term bank loans, 5% on commer- cial paper and t 2.4% on short-term borrowings by foreign subsidiaries. The maximum aggregate amount of short-term borrowings outstanding at any month-end during the year amounted to $299,867,000. Aver- age aggregate short-term borrowings outstanding and the average interest rate thereon during the year were $251,650,600 and 7%. The average interest rate at December 31, 1975, was 7.2% on short-term bank loans, 5.6% on com- mercial paper and 10.5% on short-term borrowings by foreign subsidiaries. The maximum aggregate amount of short-term borrowings outstanding at any month-end during the year amounted to $246,184,000. Average aggregate short-term borrowings outstanding and the average interest rate thereon during the year were $192,772,000 and 8.7%. Long-termdebt Pdncipalamounts at December31,1976 (In thousands} 57/8% debentures, due 1992 (a) ........................................... $ 42,612 8% debentures, due 1981 (a) ............................................. 18,000 5~,~4% convertibledeben ures, due 988(b) ................................. 9,938 4-%% debentures, due 1990 (a) ........................................... 4,621 8~/8% notes, due 1985 ................................................... 150,000 9-%% notes, due 1979 ................................................... 150,000 Eurocurrency revolving credit notes, 5 '/,, % to 5Fe % (c) ....................... 50,000 7V2 % Eurodollar borrowings, due 1980 ..................................... 25,000 Dutch florin borrowings, 9`%% to 12V2%, due 1077 through 1989 .............. 21,996 6%% Swiss franc borrowings, due 1977 through 1983 ........................ 12,761 Other foreign borrowings ................................................ 17,278 Miscellaneous notes and mortgages ....................................... 15,700 517,908 Less current portion ................................................... 15,686 Total ................................................................. $502,222 (a) Amounts shown are net of debentures acquired by the Company through open market purchases 1o cover sinking fund requirements. (b) These debentures, sold by a subsidiary, are guaranteed by the Company and are convertible into the Company's Common stock at $36 per share. At December 31, 1976 a total of 276,368 shares of Common stock costing $8,631,600 was held in the treasury and reserved for such conversions. (c) These notes are issued under lines o1 credit, aggregating $180.000,000, which expire as to $50,e60,000 on December 31, 1977 and as to $50,060,060 on July 31, 1979; the interest rate is fixed at the time o! each borrowing. A commitment fee of ~/2 % per annum is paid on the average unused credit. A foreign subsidiary of the Company has available Sterling acceptance revolving credits, which expire in 1979, in the amount of $34,600,080. 30

Estimated payments for maturing debt and sinking fund requirements during the next five years are as follows: 1977. $15,686,000; 1978, $8,848.000; 1979, $200,548,000; 1980, $38,658,009; 1981, $14,497,609. Stockholders' equity The Company has 15,6g0,000 shares of Preferred stock authorized. At December 31, 1976 and 1975, respectively, 387,610 and 733,881 shares of $6.60 Conver0ble Preferred stock were issued and outstand- ing and at December 31, 1976, 1,536,336 shares of $1.70 Convertible Preferred stock were issued and outstanding. The holders of the $6.00 Convertible Preferred stock are entitled to cumulative dividends, to one vote per share (in certain events, to the exclusion of the Common shares), to preference in liquidation over holders of Common stock of $100 per share plus accrued dividends and to convert each share of such stock into two and two-ninths shares of Common stock. At December 31, 1976, a total of 861,385 shares of Common stock costing $34,937,000 was held in the treasury and reserved for such conversions. The Com- pany may redeem such Preferred stock on or after December 15, 1977 at prices beginning at $102 and declining to $100 per share on or after December 15,1979, plus accrued dividends. In connection with the acquisition of Acushnet Company, the Board of Directors created a second series of Preferred stock designated as $1.70 Convertible Preferred stock. The holders of this sleek are entitled to cumulative dividends, to one-fifth of a vote per share, to preference in liquidation over holders of Common stock o1 $20 per share plus accrued dividends and to convert each share of such stock into 0.48 share of Common stock. Authorized but unissued Common shares are reserved for issuance upon such conversions but treasury shares, to the extent available, may be substituted. The Company may redeem such Preferred stock on or after May 1,1981, at prices beginning at $21.50 per share and declining to $20 per share on or after May t, 1984 plus accrued dividends. The Corn party has 60,000,000 Common shares authorized, At Dace tuber 31,1976 and 1975, there were 28,696,253 shares issued, of which, respectively, 26,081,788 shares and 25,570,169 shares were outstand- ing and 2,614,465 sh ares and 3,126,084 shares were held in the treas u ry, During 1976 the treasury shares of Common stock increased through purchases of 360,100 shares at a cost of $15,375,000 and decreased by 891,719 shares costing $35,075,000 as the result of shares deliv- ered upon conversion of $6.00 Preferred stock and debentures and exercise of stock options. During t 976 consoridated paid-in surplus increased by a net amount of $3,887,000 in connection with the conversion of $6.00 Preferred stock and debentures and exercise of stock options. Sleek options Under the Company's qualified stock option plan, options were granted to key employees to purchase shares of the Company's Common stock at fair market values al dates of grant. Options extend for a term of five years and may not be exercised until one year from date of grant. Changes during 1976 in shares under option were as follows: Shares Under option, December 31, 1975 ................................................. 406,125 Options granted ............................................................... 113,525 Options exercised (at prices ranging from $35.375 to $40.575 per share) .................... (5,650) Options lapsed ................................................................... (92,150) Under option, December 31, 1976 (at prices ranging from $30.125 to $43.06 per share) ........ 421,850 At December 31, 1976, options for 308,675 shares were exercisable. No options were granted since December 31,1976 and, under the plan, none may be granted after January 28, 1977. Treasury shares are delivered on exercise of options. Pension plans The Company and its subsidiaries have a number of pension plans covering substantially all employees. Total pension expense was $37,989,006 in 1976 and $33,065,000 in 1975, including provision for prior service costs. Approximately $3,800,000 of the increase was attributable to changes in certain plans. The actuadaHy eon,puted value of vested benefits as of the latest vaIuation dates exceeded the total of the pension fund investments, valued principally at market, at such dates by approximately $134,900,000. 31

income taxes The consolidated effective income tax rate varied from the f~eral statutory income tax rate as a result of the following: Provision computed at 48% of pretax earnings ........ Other income taxes, net of federal tax benefit ......... Foreign exchange charges not deductible for income taxes ......................................... Adjustment of prior year's prevision resulting from change in foreign tax statute ..................... Foreign income taxed at rate other than 48% .......... Other ........................................... As reported ..................................... 1976 1975 Amount % " Amount % {In thousarldsi (In thousands) $137,313 48.0 $145,207 48,9 8,530 3.0 7,709 25 21,198 7.4 4,775 1.6 (3,750) (t .9) -- -- 2,157 .8 3,267 1.1 (1,371) (.5) 1,530 .5 $164,077 57.4 $162,488 53.7 The provision for deferred income taxes resulted from timing differences related to the following: 1976 1975 (In thousands) Foreign exchange adjustments related to long-term debt payable in foreign currencies ...................... $18,370 $ 6,670 Depreciation .................................................... 3,582 5,353 Foreign inventories (see below) .................................... 3.457 5,516 Other .......................................................... (2,881) 2,431 Total ........................................................... $22,538 $19,985 Pursuant to special provisions in the United Kingdom tax statutes which grant "stock relief" related to !noreases in inventory values, portions of Gallaher Limited's tax liabilities for the years 1973 through 1976 have been deferred. The investment tax credit amounted to $2,287,000 in 1976 an d $1,731 ,OOO in 1975. ExIraordinary gain from early extinguishment of debt During 1975 GalJaher Limited purchased in the market for cancel]a~on $38,168,000 principal amount of its 6% British sterling notes at a cost of $24,659,000, including $600,000 of income taxes, which resulted in a consolidat ed ext raordina ry gain o f $8,501,000. Lease commitments Tolal rental expense (reduced by a minor amount of rentals from subleases) amounted to $20,349,000 in 1978 and $18,836,900 in 1875. Minimum rental commitments, principagy for land and buildings, under terms of all noncancelable leases for periods ending December 31, are as follows: (Jnthous~d~ 1977 ............................................................................ $15,494 1978 ............................................................................ 13,273 1979 ............................................................................ 12,019 1580 ............................................................................ 11,268 1981 ............................................................................ 10,423 1982-1986 ....................................................................... 43,420 1987-1991 ....................................................................... 33,219 1992-1996 ...................................................................... 9,823 Remainder(relates principallyto aleaseholdinthe United Kingdom expiring inthe year2065) 34.937 32

Supplementary profit and loss information Net sales and cost of sales include federal and foreign excise taxes in the amounts of $1,454,979,000 in 1976 and $1,485,608,000 in 1975. Research and development expense was $15,207,000 in 1976 and $15,223,000 in 1975, Earnings per share Net income per share without dilution is based on the weighted average number of shares of Common sleek outstanding in each year, and after Preferred stock dividend requirements. Fully diluted net itlcome per share assumes that convertible debentures and $6.90 Convertible Pre- ferred shares outstanding at the begil~ning of each year were converted at those dates and $1.79 Convertible Preferred shares were converted at their time of issuance in June 1979, with related interest (net of tax effect), Fraferred stock dividend requirements and outstanding Common shares adjusted accordingly. It also assumes that outstanding Common shares were increased by shares issuable upon exercise of those options as to which market price exceeds exercise price, less shares which could have been purchased with related proceeds. Pending Iftigation In two civil actions commenced in July 1974, and a third commenced in May 1975, the Company was. named as a co-defendant with a number of other tobacco companies (including, in two cases, Gallaher Limited). The actions were brought by leaf growers for themselves and purportedly for classes of others similarly situated, and allege violations of fhe antitrust laws commencing in 1979. The actions all claim treble damages against the defendants, two of them originally aggregating approximately $2,509,000,000 and the third in an unspecified amount. The Company has filed answers to the complaints in all the actions, denying the material allegations thereof and raising several affirmative defenses, including defenses to the class action allegations, in April 1979, plaintiffs in one of the acfions filed an amended complaint, the result o1 which is to reduce the aggregate damages demanded in the two cases in which damages are specified to approximately $400,000,006. In one of these actions, the trial court denied plaintiffs' motion to certify the suit as a class acfion. In July 1976, the Fourth Circuit Court of Appeals reversed that denial, holding that the District Court had abused its discretion in not allowing the case to proceed as a class action. Rehearing en bans has been granted by the Fourth Cfrcuit Court of Appeals. While counsel for the Company are unable to predict the outcome of this litigation, it is their opinion, based on their investi- gation to date, that the Company's defenses have a substantial basis in fact and in law. The actions continue to be vigorously defended. The Company is a defendant in five civil actions involving claims of race and sex discrimination at various of the Company's tobacco manufacturing and leaf handling facilities. Most of the actions are purportedly brought on behalf of classes of employees or former employees of the Company and all of them seek Fnjunctive relief as well as back pay awards in amounts not presently determinable. In two of the cases, trials were held resulting in judgments adverse to the Company. Both judgments were appealed, the appeal in one case being partially successful. Proceedings to effectuate the District Courts' orders, including a determination of the amount of the Company's liability, are in process. In the opinion of the Company and its independent auditors, any amounts payable by the Company to satisfy adverse judg- ments in these cases would, under presenl generagy accepted accounting principles, be accounted for as prior pedod adjustments. Whi[e counsel for the Company are unable to predict the outcome of these cases, based on facts given to them by the Company, it is their opinion that amounts payable to satisfy adverse iudgments could, in the aggregate, be material if applied to any single year. However, it is their further opinion that, based on fhe assumption that such amounts would be accounfed for as adjustments in each of the years in which the damages are alleged fo have occurred, fhe amount chargeable in any given year would not materially affect the reported results of operations for any such year. Contrary to the view of the Company and its independent auditors, the position presently being taken by the accounting staff of the Securities and Exchange Commission might require charging aggregate 33

amounts payable 1o satisfy any settlements of the titigation described in the two preceding paragraphs against net income in the years in which the litigation is settled. Quarterly financial data (unaudited) Summarized quarterly financial data (in migions except per share amounts) for 1976 are as follows: /st Qtr. 2nd Qtr, 3rd Qtr. 4th Qtr. Net sales ................................. Gross profit ............................... Net income ................................. Net income per Common share Without dilution ............................ Fully diluted ............................... $1,021.0 $1,025.1 $1,039.6 $1,040.1 229.3 237.0 933.5 284.9 36.6 32.4 32.5 20.5 1.39 1,21 1.20 .74 1.33 1,17 1.15 .72 Supplemental information on current replacement cost (unaudited) Pursuant to a rule of the Securities and Exchange Commission adopted in 1976, the Company's Form 10-K for 1976 will contain information with respect to current replacement cost values of inventories and plant and equipment as of December 31, 1976, and the appro×im ate effect which such current replace- ment cost values would have had on cost of sales and depreciation expense for tde year then ended. The current replacement cost of the Company's inventories and plant and equipment and the amount of the associated cost of sales and depreciation expense calculated using replacement costs are signifi- cantly higher than the comparable historical cost amounts shown in the financial statements. The Company supports the Securities and Exchange Commission's caution against simplistic use of current replacement cost data in the determination, of "true income," since these data are limited to selected categories of assets and expenses and disregard other elements of the financial statements. Report of independent certified public accountants To the Board of Directors and Stockholders of American Brands, Inc.: We have examined the consolidated balance sheet of American Brands, Inc. and Subsidiaries as of December 31, 1973, and the relate0 statements of income, retained earnings and changes in financial position for the year then ended. Our examination was made in accordance with genera[ly accepted auditing standards and, accordingly, included such tests of the accounting records and such other audit- ing procedures as we considered necessary in the circumstances. We have previously examined and reported upon the consolidated financial statements of the Company for the year ended December 31, 1975. The Company has been named as a co-defendant in three civil antitrust actions, as discussed in the first paragraph of Pending litigation in Notes accompanying financial statements. In our opinion, subject to the outcome of the litigation referred to in the preceding paragraph, the aforementioned financial statements present faidy the consolidated financiat position of American Brands, Inc. and Subsidiaries at December 31, 1976 and 1975, and the consolidated results o1 their operations and changes in their financial position for lhe years then ended, in conformity with generally accepted ~.coounting principles applied on a consistent basis. Coopers & Lybrand t 251 Avenue ot the Americas, New York, N.Y. 10020 February 1,1977 34

Management's discussion and analysis of consolidated summary of operations 1976 Compared to 1975 Net sales increased 2%. Sales of domestic operations increased 6% whereas sales of overseas opera- tions, achieved principally in the United Kingdom b,/ Galiaher Limited. declined 3%. Domestic tobacco lines rose slightly as higher prices offset quantity declines, principally in nonfilter cigarettes and cigars. Domestic nontol0acco !ines gained 12% on increased volume, higher prices and consolidation of a newly acquired subsidiary beginning in the second quarter of 1976, in British pounds, Gallaher's tobacco and nontobacco sales were up 20% and 17%, respectively, most of which was attributed to price increases and in the case of tobacco, higher excise taxes. However, after translating Gallaher's sales at the rower average exchange rate for the British pound, sales in U.S dollars were down 3%. Gross profit rase 5%. Gross margin on domestic operations increased on higher prices and nontobacco volume gains. Gross margin on overseas operations, measured in U.S. dollars, declined principally due to charges of $20,575,000 in 1976 as compared to $6,632.000 in 1975 from translating foreign leaf tobacco inventories and depreciation at historical exchange rates. Operaling income itlcreased 1% as operating expenses rose 6% due mainly to higher marketing and general and administrative CO~t s. Increased expenses r~lect expanded marketing eflort in major product lines, inflation and ongoing expenses of new businesses. Income before taxes and extraordinaP/ gain was down 5% because of unfavorable changes in Other income and Other deductions. In 1976 Other deductions includes foreign currency translation losses of $24,584,000 due primarity to the decline of the British pound. In 1975 ether income includes net transla- tion gain of $4,824,000 which related principally to German mark and Swi~s franc debt, the principal portion of which was repaid early in 1976. Interest COSTS declined 15% primarily due to lower rates. Taxes on income increased 1% despite lower pretax income. The effective tax rate was 57% in | 976 compared with 54% in 1975, The comparability of these provisions, in relation to pretax income, is distorted by foreign currency exchange charges, the greater part of which does not enter into the determination of taxable income. Nel income of $121,992,000 or $4.54 per Common share in 1976 compared with $149,527,000 or $5.63 per Common share last yea~ 1975 results incrude an extraordinary gain from early extinguishment of debt of $8,501,000 or 33 cents per Common sh~re. Foreign exchange charges, including amounts charged to cost el sales, reduced net income by $44,623,000, or $1.74 per Common share in 1976 and $5,956,009 or 23 cents per Common share in 1975 (see "Foreign exchange" in Notes accompanying financial statements). 1975 Compared 1o 1974 Net ~afos increased 14%. Virtu~tlly all of this can be attributed to price increases, a large portion of which foltowe(J tobacco duty increases in the United Kingdom. Some products e×perlenced unit volume declines. Except for domestic nonfiltor cigarettes, it is b~lieved that declines generally reflected depressed business conditions and consumer reaction to higher prices, particularly as to cigarettes ir~ the Lfnited Kingdom. Gross profit rose 14%, Gross margin remained constant as slightly higher margin on domestic operations was almost offset by a decline on overseas operations. The smaller gross margin on overseas operations; measured in H.S. dollars, reflects charges of $6,632,000 compared to $2.341.000 in 1974 from translating foreign leaf tobacco inventories and depreciation at historical exchange rates. Operattog [ncome rose only 6% as operatJn9 experlses increased 22% due mainly to a 21% rise in marketing expenses and 23% Increase in general and administrative costs. Increased expenses reflect e×panded marketing effort in certain lines, inflation, ongoing expenses of businesses acquired and expansion of Gallaher Limitod's non- tobacco product lines, focome before taxes (minority interest in 1974) and extraordinary 9atn was up 16%, This reflects f~reign currency exchange credits of $4,924,000 in 1975 (related principally to debt p~yable ir~ toreigrt currencies) compared to corresponding charges of $34,246,900 in 1974 as the U.S. dollar strengthened against major European currencies during 1975. Ownership of Gallaher Limited was increased to 100% in 1975 from 60% in 1974, Also~ 1974 reflects a tax free gain of $9,227.000 from sale of an office b~Jilding in Great Britail~. Taxes on focome increased 19% On higher re×able income, See above reference to 1974 tax free gain. Extraordinary gain in 1975 of $8,501,000, or 33 cents per Commo~ share, resulted from early e×tinguishmerg of debt, Net income was $148,527,900, or $5,63 per Common share fn 1976 compared to $117,199,090, or $4.40 per Common share in 1974. In 1975 foreign e×change charges. including amoLmts charged to COSt of sales, reduced net income by $6,958,000~ or 23 cents per Common share compared to $23,477,009, or 92 cents per Common share in 1974. 35

Eleven-year consolidated summary of operations and other financial data~1) (tn t~ou~and~ except per ~are amounts) 1976 1975 1974 197; Consolidated summary of operationsc=) Net sales ..............................$4,125,837 $4,055,313 83,570,426 $3,096,36! Gross profit ........................... 935,219 890,265 780,194 696,14; Operating income131 ..................... 876,892 373,602 356,163 329,99( Interest and related charges ............. 65,442 77,196 71,475 46,75~ Income before taxes and extraordinary gain(4j 286,069 302,514 261,153 268,94! Taxes on income ....................... 164,077 162,488 136,845 128,78" income before extraordinary gain. ........ 121,992 140,026 117,199 127,28; Extraordinary gain ...................... -- 8,501 -- - Net income ............................ 121,982 148,527 117,199 127,28; Per Common share Without dilution Income before extraordinary gain ..... 4.54 5.30 4.40 4.7.' Extraordinary gain .................. - -- .33 -- Net income ........................ 4.84 5.63 4.40 4.7.= Fully diluted Income before extraordinary gain ..... 4.37 5.07 4.24 4.5~ Extraordinary gain .................. -- .31 -- - Net income ........................ 4.37 5.36 4.24 4.5~ Average Common shares outstanding during year .......................... 25,635 25,812 25,619 25,86~= Dividends Common Amount ........................... $71,668 $68,623 $65,586 $61,598 Per share ......................... 2.88 2.68 2.56 2.37£ Preferred ........................... 5,811 4,424 4,497 4,500 Added to retained earnings .............. 44,813 75,480 47,116 61,196 Other financial data Inventories ............................ $1,185,660 $1,139,210 $1,125,739 $ 937,833 Current assets ......................... 11536,897 1,501,122 1,506,915 1,259,884 Working capital ........................ 849,159 824,517 727,562 676,837 Property, plant and equipment--net ....... 418,142 404,642 397,346 385,086 Total assets ........................... 2,456,241 2,409,393 2,435,379 2,162,921 Long-term debt ........................ 502,222 543,197 508,689 580,271 Short-term debt ........................ 256,941 907,475 379,721 213,928 Stockholders' equity .................... 1,171,594 1,108,145 1,034,120 988,722 Seek value per Common share ........... 42.26 40.47 37.50 35,65 - Capital expenditures .................... 81,178 64,994 68,151 67,888 NumbeLof Common stockholders ......... 126 128 129 129 (1) Amounts for subsidiaries acquired by purchase have been incruded from dates of acquisition; amounts for Sunshine Biscuits, Inc., acquired in May 1966 in a pooling of interest, are included for all years. Dividends per Common share are based on amounts paid by American B ra.nds, Inc. {2) For Managernent's discussion and analysis of COnSOlidated summary of operation8 see page 35. (3) Earnings before interest, other income, other deductions, income taxes, minority interest and extraordinary gain. (4) Also before minority interest from 1966 through 1974. 36

1972 1971 1970 1969 1968 American Brands, In¢ and subsidiaries 1967 1966 $2,998,869 $2,827,771 $2,674,461 $2,661,478 $1,897,852 $1,493,535 $1,427,572 664,805 651,387 580,131 552,601 463,230 384,589 351,141 311,696 306,266 277,986 264,945 224,097 183,086 165,339 39,241 48,806 37,889 28,703 18,185 11,920 6,529 272,508 254,096 240,224 234,333 205,612 173,769 161,192 132,716 123,727 122,440 127,994 108,817 84,542 75,173 124,198 117,386 108,005 97,773 92,911 89,227 86,019 124,198 117,386 108,005 97,773 92,911 89,227 86,019 4.56 4.23 4.02 3.62 3.38 3.15 3.01 4.56 4.23 4.02 3.62 3.38 3.15 3.01 4.40 4.08 8.91 3.54 3.32 -- -- 4.40 4.08 3.91 3.54 3.32 -- -- 26,269 26, 713 26,755 27,003 27,514 28,320 28,603 $60,127 $58,837 $56,230 $54,040 $50,931 $50,996 $51,287 2.288 2.20 2.10 2.00 1.875 1.80 1.80 4,500 4,500 ..... 59,571 54,049 51,775 43,733 41,980 38,231 34,732 $ 847,498 $ 819,480 $ 878,126 $ 855,396 $ 878,750 $ 695,751 $ 718,877 1,143,065 1,101,330 1,171,930 1,109,237 1,131,059 808,289 824,994 889,429 648,965 618,029 803,059 788,536 576,952 544,040 351,871 386,816 329,964 277,562 270,806 205,957 193,830 1,973,082 1,913,576 1,976,805 1,500,249 1,506,439 1,073,848 1,076,349 453,609 451,702 448,192 351,218 352,421 127,700 108,350 176,616 183,901 300,165 100,103 153,090 108,544 158,044 946,698 901,868 870,848 743,568 712,100 706,294 679,312 33.37 31.28 29.83 27.72 26.22 25.13 23.88 62,396 43,482 50,395 41,152 31,348 30,820 50,100 130 133 134 187 145 145 141 37

Directors The Executive Committee These six executives comprise the Executive Committee of AmeriGan Brands, Inc. They ~re appoirlted by and respon- $i~te to Ihe Boar~ ol Directors and meet ~t Weekly interval~ between monthly meeting~ of the Board. Robert K, Heimann, Chairman and Chiet E×eculive OIl~c er o? ~mer}can Brands, Inc. 8iRce Jarluary 1977, Chairman of the E~,ecutivo Committee ~lnd President of The American TODaCCO Company Division. He ioiued the C,om~n'J Ln ~ ~54 ~t~r set vir,.~ ,~s ~ r~¢u r~t~/ arl~ly~t a~d financiaJ editor, b~came Assi$~tnt Io the President¸ was elected a Director in 1~3, Vice Pr~id ent, Marketing and Public Relations in 1964, Executive Vice President in 1~66 ~xecu live Vice President--Op~ration~ i~ 1967, President in 1969 and Ch~rm~n and pres]d ~nt in 1973 John F. Waltath, President and Chief O~eratin~ Officer since Jan ~ary 1977. He was VTce Presi- dent and Treasurer of The Andrew Jergen$ Company ~ofere joinlng American in 197% Elected a Director and Executive Vrce president }n 1 ~73 and Chiel OpeIallng OIticor ir~ 1~?~ Robert K. Hei~*l John ~ Walralh Ofrll ~ Hetlko Jul~en ~, M cCa~'tny, Executive Vice F~e~ideht, The Ameriearl Tobacco Company Division, He joined ~he Company in 1933, wa~ named Manu- facturing Director in 1963. elected a Director in t965, Vi~e ~re~ide~M~n~I~cture a~d L~a{ i~ 1966 and to hi~ present position in 1973. Fr~nci~ X. Whelan, Exeeutiw Vice president, The American Tobacco Corn pa~y DFv~sion ~Ince 971. He ioi~ed th~ Company' {~ I g40~ became Executive Sales Manager in 1963, Presicfent of the American C~gar ~ivision i~ 1970 when elected a Direcior of American ~r~nds. R~sell F', Truitt, VICe pre~id~nt--M~faetLlre and L~al, The American Tobacco Company Division sinc~ July I ~75. He h~s ~erved il~ various tnanufaeturir~g po~t~ons since j oiling the Company in 1957 and w~ ManufacturiNg DirE~lor and £)iTector of M~nufacture arld Leaf prior to hi~ present position. Elected a Dir~otor in 1974. William R. Dege~hatdt, American Brands' Cont roller since I g71 w~s elected a Director In 973 He Dined the Gompany in 1937, wa~ ap pointed Assistant Tax Director in 1964, Tax Director rn 1967 and elected Assistant Conlrotler in I~70. Wi[llam SwOrd was eEected an outside Director in January !976 Fn 1975 he retired as a Manag- ing Director of Morgan Stanley & CO {ncorpo° rale~. ~e is now Iv~anaging Dir eet~r ol Wm Svtor d & Co. Inter pcrat~d, inv~8~mer~t b~nke~. O~her drr echo r~hip$ are G~F Gel per a~iorl, MEtthematic~ lilt, U~ited Petal Carpor~iotl, tJ~t~¢~ p~n~ B~k, H~a~ Br(J~easting Co,, ~wold Jrwirl & CO InCorporated arid Keptter Tregoe, rne, Daniel F. C~halane, ~ireetor of Corporate In¢ He joined lhe Cempnny in 1926, se~ed ir~ Sale~ Risk Mertagerr]en~ and Piacurement, becsme Director of ~roctJrem~nl rn 1967, was elect ed a Dir ecIor irt I~71 Julian ~. McCarthy Boone ~rogs Fta~¢l~ X. Wh~lan Ricltard H. ~l~nnelte • RmelI P. T~ulIt JOhn H. B~hr 38

win~am 5word t~lex~nder ~ H, $1ewa~t*Moor~ Everett K(~vlt*r Daniel F* Ca hale tie Cyril F. Het sko. Senior Vice Presidenl and General Counsel He was elected General Cout~sel In 1964, a Vice President and Director in 1965 aJqd Senior Vice President in 1969. He is a member of the New York, Pennsylvania and Federal Bare, including the United ~tate~ Supreme Court, GeoTge J. Schramm. Executive VICe President and Chief Adminis~rat Jve Officer since 1974, arso Chairman of the Arnerlca~ Cigar DJvisinn. He j alned t~le Company in 1941, was e]ecte(~ Assistant Oontr Direr in 1961r Director and Controller in 1868, Vice President in 1969, a~d Executive Vine President in ~971 Charles A. Meho$. Vice Plesident--Fi~l~ncs, and chEel finc~nial executive ~ince 1 £73. He joined th e Company in 1950. wa~ elected Assistant Treasurer ~ 196~. Director end TreBCU r~r In ~967. and Vice J=r~sident ~nd Treasurer i~ 1~69 G~rge H, Woodard~ Chairman ~f the manage ment ooncuffing firm of Welling & Wood~rd, Inn. An outside Direofor sinoe 1964, he is Chalrma~ of American Brands' Capital Appropriations Committee¸ atld a D~r enter of ~line 8ubsidiariE~s, Boone GrOlg ha~ been ~n OLliSide Director since 1965, following retirement as Presid ant of The Gillette Company. He IS Chairman of American Brands' Audlt Committee. Richard H. Stinnette, Assistant to the Chairrn ~n, Arnerica~ 8rends. ~ne He joined the Company as Execulive Assis~an~ in 1965. wa~ elected Assistant to the President i~ 1960, to his pre~ent office in 1 £69. He was elected a Director in 1972. John H. Behr. Chairman and Chief Exec~Jtive Offiee~ o~ £wingrine Inn. was elected a Direoter of American Brands i~ M~y 1975. He was elected Presiden~ of Swi~glir~e in 1970 ~nd advanced to hi~ present posilion in 1975 He wa~ prevlousEy E×ecutlve Vice President of Wilson JeaeB Company, whic~ he Joined in 1934, Alexander W. H. 8tewar t-Moore~ C~l~lrman of GallBher Limffed, American'~ subSidiary in the Unffed Kingdom. He has serVed in various managerial positions since joining Gallaher in 1B34 and assume~ his present post in April 1I]75. He was elected a Director of American Bran~s in February 1975. Everelt Kovler, Chairman Of the Board of Jamee B. Been Distilling Co., held production, 8ales and marketing positions before attaining his present office He was e~ected a Director in ~967. Director% shown with Snb$idiaries, ~e; HylantI J, Barnes, President and C hiaf Execu- tive Officer of Master Lock Company. He io[n ed Master Lock in 1940 bec~me Export Manager /n 1941, Assistant to the Presidenl in ~964 Vice President Marketrng in 1965, and Presi- dent in 1973, He was e!ect ed a Director in 1974. (see page I0} Richard B, Young, President and Chief Execu- tive Officer of Acushnet Company which he ieJned in 1938, He was elected a Olreatnr of AmerJca~ Brands in August 1976. Other direc- torships: TPe Shawmut Corporation, Shawmut Ba~k of Beaten, NA. and Augat Inc. (see page 16) 39

Six-year operating results by product line ~,~ m,,~o.~ E,tl ~%r'l H" Ir~ LIILI Q'%,~ ..... Net sales{~) 1976 1975 1974 1973 1972 1971 Tobacco products Domestic .............. $1,099.0 $1,051.5 $ 995.8 $ 964.4 $ 972.7 $ 997.9 International ........... 1,531.7 1,563.3 1,384.8 1,185.7 1,165.9 1,046.5 Hardware ................ 175.9 180.6 125.1 108.2 85.8 76.0 Food products ............ 455.4 457.6 420.0 345.6 351.7 349.3 Distilled beverages ........ 151.4 146.5 150.0 145.6 143.0 135.5 Office services and supplies 111.7 98.7 109.6 84.7 75.5 69.6 Optical goods and servlces~ 49.7 52.3 39.4 26.4 20.1 "~6.4 Toiletries ................ 71.2 65.5 56.6 52.8 53.0 56.2 Engineering~21 ............. 80.9 97.8 83.5 66.7 50.4 26.9 Golf products ............. 40.8 ..... Retailing(~) ............... 146.5 150.1 79.0 14.0 -- -- WholesalingI~l ............ 176.6 183.5 106.5 79.4 63.6 66.8 Other .................... 85.6 49.3 45.9 37.8 32.7 29.4 Deduct intracomp~ny sa~es.. (2g.6) (21.4) (20.2) (16.9) (15.6) (14.6) Total .................... $4,125.8 $4.066.3 $3,570.4 $3.096.4 $2,998.9 $2.827.8 Operating incomeol (41 1976 1975 1974 1973 1972 1971 Tobacco products Domestic .............. $206.1 $195.9 $182.2 $169.9 $177.7 $187.4 International ........... 46.1 64.8 69.6 75.8 65.8 52.1 Hardware ................ 34.7 33.2 26.8 26.2 21 .O 20.3 Food products ............ 22.3 18.2 13.8 7.1 1.0 6.4 Distilled beverages ........ 17.0 16.0 18.3 18.8 19.8 17.6 Office services and supplies t 4.3 10.8 16.5 9.6 8.0 6.3 Optica[ goods and services~2) 8.5 9.1 6.3 6.1 4.2 4.1 Toiletries ................ 5.0 33 1.3 2.9 4.9 5.1 Engineeringl2! ............. 4.8 11.8 t 1.9 8.6 5.3 3.5 Golf products ............. 3.9 ..... Retaifing~ ............... 2.5 2.8 2.3 .1 -- -- Wholesa]ing(2~ ............. 9 1.8 1.6 1.2 .8 .1 Other .................... 10.5 5.7 5.6 8.7 4.2 3,4 Toter .................... $376.7 $373.6 $356.2 $330.0 $311.7 $306.3 (11 ~rncutl~s Ior ~ubsidJ/~ries acquJted by purchase have been included from dates of acquisition (2) Foieig~ (31 Earnings before inte feet, olhet income, othe r d~ductionsr inc~rde taxes, mlnorit y Jntete~t and extcactdin~W gait1. 4O

---

The American Tobacco Company Gallaher Limited Master Lock Company James B. Beam Dist}lring Co. Sunshine Biscuits, Inc. SwJngline Inc. Wilson Jones Company Acusbnet Company American Cigar The And rew Jergens Company Acme Visible Records, Inc. Duffy-Mott Company, Inc, KRISPY

P R O X Y Proxy Solicited by the Management for Anuual Meeting of Stockholders The Waldor|-Astoria, NPw York City, 10:00 A.M. Wednesday, May 6, 1970 The uader~igned hereby appo~nL~ ROBERT B. WALKER, ROBERT K. ~'~EIMANN al~d CYRIL F. ]IETSKO proxies, with power of subbtlmtion, to vote at the Annual Meeting (iadudlng adjournments) off stockholders of American Brands, Inc., to he held May 6, 1970, for the eIectlon of directors (unless the "-quare immediately following is marked, which wig indicate the ~ithbolding of such authority [] ), on Proposals 1, 2, 3, 4, 5 nd 6 refelred to herein and de~erlhed ill the Proxy Statement. and on arty other business before the meeting, with a[] powers the Imder~igned would possess if personally presrnr A majority or. if only Otl¢. then that one of the proxic~ or their suhslitutes acting at the meeting may exercise all powem hereby conferred If rto cottlrary ~ndlcatlon is mad~ th~ proxies are to ~ote [or_ the election o/ the mol~gomenl nominees and Proposals 1 through 4~ and against Proposals g and 6 i] they are presentpd to Ihe meet/rtg. (Continued. and TO BE SIGNED. on other sldf',

P R 0 X Y 2. Re.approve Profit-Sharln~ Plan ~ 3 ~mend RetiJerflent Plan ~ 4. Amend incentive byAaw ~ Mama[emem| r~CitlDm~m([$ ¥o|B$ AGAr,M~Jr Prg~Q6al$ bY faur stockholders te.-- 5. Include cedain provisions in any new stOCk option plum ~ 6, Frovide cumulative voting in election of directors ~ SIGHATU~E Ptnse date. sip and retdtn this prezy ie Ihe eaclose(I pestpaid T97~ ~e~ ~ig~i~g as attor,ey, e~utor, admmtstrator, trustee. ~Jst~an or ~r~ta~. pl~as~ ~1 your title as s~ch.l

NOTICE OF MEETING March 19, 1970 The Anmml Meeting of stockholders of American Brands, Inc. will be held in the Grand Ballroom of The Waldorf-Astoria, Park Avenue at 50th Street, New York City, at 10 o'clock in the forenoon (Eastern Daylight Saving TBne) an Wednesday. M~y (~ 1970, for the following purposes: (1) To elect directors; (2) To consider and vote on a proposal (designated Proposal 1 and set forth in the {onowing proxy statement), approved by the Board of Directors, to elect Lybrand, Ross Bros. & Montgomery independent auditors for the Company for the year 1970; (3) To consider and vote on a proposal (designated Proposal 2 and set forth in the following proxy statement), approved by the Board of Directors, to approve the existing Profit.Sharing Plan of American Brands, Inc., which wiIl be resubmitted at the Annual }~eeting pursuant to the Plan; (~) To consider and vote on a proposal (designated Proposal 3 and set forth in the following proxy statement), approved by the Board o~ Directors, to approve and adopt the amendments described therein to the Retirement Plan for Employees and Former Employees of American Brands, Inc. and Designated Affiliated Corporations, to be effecdve as of January 1, 1970; (5) Tn consider and vote on a proposal (designated Proposal 4 and set forth in the following proxy statement), approved by the Board of Directors, to amend Article XII of the Company's By-Laws, constituting an incentive compensation plan, in the manner stated in Proposal 4; (6) To consider and vote on a proposal relating to any new stock option plan (designated Proposal 5 and set fot~b in the following proxy statemerlt), expected to be made by four st<~c/<hx~lders; (7) To consider and vote on a proposal relating to cumulati~'e voting (designated Proposal 6 and set forth in the follo~ving proxy statement), expected to be made by four stockholders; and (8) To tra,~sact such other business as may properly come before the meeting. The stock transfer books will not be closed but holders of Common Stock, to be entitled to vote, must be holders of record at the dose of business on March 9, 1970. JOHt~ V¢'. ~ANLON1 ~ecresary

PROXY STATEMENT The accompanying proxy is soliclted by the ~.I~nagement. It may he revoked by written nogee given to the secretary Of the meetthg at any lime helerc being ~oted. Proxie~ in thi form, properly exeeu ed~ du y re arned o he Manageme~at and not revoked, will be voted for the election of directors (unle~ authority therefor is withheld) and on the numhered Proposals described in 01is proxy statement (provided that, as to Proposal~ 5 and 6, they are introdvced at the meeting) and in aecv~dmlee ~.'ith any speeifiealJa~a made as provided in tim proxy. The Managemenl s no aware a he da e hereof ta~ anv ,ant er to be presented at this meetJr~g other than the ele¢lion of directors and Proposals l through 6. If any other realtor is properly presented, it is intended that the person~ named in the proxies will vote thereon a~zording to their be~t judgment. Preoetlcv at tfie meeting does not of itself revoke the proxy. Th~ oni/" ~eeurlBes o~ the Compa~l" entitled to vote are shares of Commo~ Stock ($6.25 p~r value), ~¢ith one vote per share, There a'e 26,73~fi45 shares uutstandi~tg at the date of this proxy statement. ELECTION OF DIRECTORS Tfie ~ard of Di~-eetor~ consists of ~e'zen~eex rnember~ ,~;'bo al-e ejected to bold oJfiee UnlJ] the ~ext Ar~nutt] Meetlng or undl thelr successors ara duly elected and qualified, h Ss intended that proxies in the accompanying fo~m will he voted for the nominees named belo~" or. in the event any such nominee is not a candidate or is unable to serve a~ a director at the time of the election (which is not now e~pected), for any nomi~aee who shall he designated by tfie present Board of Directors l:o gll ~ueh vat.toy. Tire nominees nnmed hel~¢, ~-ith the exoeptlon of Ff~tn¢~ X. Wfieian who has been elated a director e~tee ve March 31, 1970, are members of due pre~en~ Board and have served as directors of the Company for the periods eomrnencing with the dates set alter ~eir x~peetlve names. There are sot forth below opposlta the name of each nominee (1) under the heading "Common." the shares of Common Stock of the Company heneficlally o~ned d/recdy or indirectly hy the ~ominee on February 1. I970, ptu~ the mtmfier ( ~ tmv) cf ~hares o~ such Common Stock held on December 31~ 1969 by the Truste~ of the Proft-Sharin~ Plans o~ the Company and a subs d ary a r bu ab e o vo un ary depos s made hrough pevro deductions that is eq?aivale~t as of that date to hi~ uadLvided proporSonate beneficial interest in all such shares, and (2) under the heading "Common attrlbutahle to profit sharing," the m~mher (if any) of shares of such Common S~ock held o~t December 33, 1969 hy the Trustee of the Plans attributab[~ to profit sharhag that is equivalent as o~ that date to his undivided proportlv~ate fienefieial interest in all such shares, Ti~e information as to security holdings is based on informatlon received by the Company from the nominee~, lronl the Profit-Sharing Plain Commlt~ee and :[ram th~ Trustee. t2) Year first ( 1 ~ Common Positions and offices with Compan} elected Common atlrihnta~]e to Ns~/e orother]3rinci3aloceupatiola (a) director ~r) {dl prr~fit sharing Philip H. Cohen Director of Advertislng(h) 1967 1,d37 370 ~orst G. Dank ~resldent and Chle6 ~xozutive O~eet'. Sun~h~n~ i970 100 -- Biscuits, Inc. Henry G. French ¥ice-Prcsident Manufacturefb) 1966 1,033 546 Boone Gro~s Re rcd ( mar y Pros dent, The Gillette Company) 1965 206 -- Robert K. Heimann~ Pres~de.~t and Chief Operating Officer 3963 6,714 1.286 Cy~l F. Hetsko¢ Senior Vice-President and General Coun~l 1965 998 633 Donald M. Kloek Pre~dent and Chief E×eeutive Off~cer, Du~y-Mott 1963 1,000 -- Company, inc. Everett Kovler President. James B. Beam Distilling Co. 1967 8,000 413 2~ ~en B. McCarthy Vice-Pr~ide~t Ma~ufaeture and Leaf~ hi 1965 175 861 Charles A. Mehes~ V~ce President and Treasurer 1967 1.7(30 490 Eugene F. Mooney Vice President Sales(b) 1963 7,138 1.063 Mark R N~rman A Managang Director, Lazard Brothers & Co., Ltd. 1970 250 -- George J. Sehramm" Vice-President and Controller 1968 1327 530 John B. Sparrow Director of Leaf Purchases--Cigarette and Smakin9 1958 3,040 828 Tobaceos~ h) Robert B. Walker~ Chairman of the Board and Chief Executive Officer 1955 13,1,10 2.755 Fra~els X Whelan Executive Viee-Pres~dent and President-elect, 1970 2,266 fi86 American Cigar Division George ffi. Woodard~ Cha~n~an. Welling & Woodard. Inc., 1964 700 -- Management Consultants • Merrier ol F~xecative Comm~uee of the C~mpanFs Board r,{ D~r ec iOl s. (a) The ~5¢e.s llsted ~pposlte the [faille at a noln~r~ee are his pr~t,e~pal oecttpation and are ~0~por,ne o~c~ at t[~e Company unless other. w~se indicated ubow or in note (hi ~elow (b) F~*itiorm in The Amerlcan Tobacco Company, a di~islon of American Brand~. Inc. 2

is) The numb~s at akar~ attribatahle to voIuntaty deposits inehded in the numbers shown in Column (1) are as tolIows: Philip H. Cohen, 1~'7; Bent7 G. French, 283; Robert K, l-lelmann, 474; Eugene I~ Moos~ey, 1,038; George J. Sehramm, 73; John B. Sparrow, 840; and FIrtaeis X. Wbel~m. 266. Id) The numbers ~hown in Column (l) do noL include shares owned b~' the wives or minor children o6 or other relatives sharing the ame home ~ the o OWing nomirle~ in the amotmts sol after there name~: Bootie C-robs, 800; Everett Ko~ler, ,~85; J,tlien B. McCarthy, 26; and Reheat 11. Wa k~r, 14 In each c~t~e the nominee dlseIaimz that he i~ the beneficial own~'r of ~uch ~hare~. Horst G. Denk has been employed by Sunshine Biscuits, Inc. since November 1967, sueeeadvely as Vice Presiden~ Operations, Exeentlve Vice President and. since July 1969, President and Chief Executive Officer. From 1965 to 1967 he was a Vies President of Ward Foods, Inc. He became a dlreotor of American Brands, Inc. on January i, 1970. Mark R. Norman has been a Managing Director of Lazard Brothers & Co., Ltd., hankers, since April 1960. He is a director o~ other United Kingdom corporations, including tile Company's subsidiary, Gallaher Limited, of which he has also been Chairman Bnee May 1963. He became a director of American Brands, Inc. on January 1, 1970. Francis X. Whelan has been employed by the Company since 1940. After six years as Executive Sale5 Manager o1 the Company's cigarette operations, ha 1969 he became Executive Vice President of the Kmeriean Cigar Division. He has been elected President of that division and a director of the Company, effective March 31, 1970. REMUNERATION There is set forth in Column (1) of the fogn~'ing tabulation, on an accrual basis, all direct remuneration paid by the Company and its suhsidlaries to the following persons ~or ~rvice~ in all capa~itle~ while directors or u~[ieers of the Company dining its last fiscal year: each director o1 the Company whose aggregate direct remuneration exceeded $30,000, and each of the three highest paid olfieers of the Company whose aggregate direct remuneration exceeded that amount; and all directors and off~cers of the Company as a group. The 1969 profit shares of these individuals payable to the Trustee under the Profit.Sharing Plans of the Company or a subsidiary are stated in Column (2). Estimated annual retirement beneKts to the same individuals at normal retirement date under existing retirement pitons are stated in Column (3). (2) Profit share (3) (lt for 1969 Eetimated aunual Aggregate payable to retir,'m,'nt benefit Name of individual Capaelt Jes in which remuneration Trustee at normaI oridentltyof groul~ remuneration wasreeeived (~) (d) (e) (f) (e) (D (g) retirementdate (h) JamesL. Bauchat(i) (j) Viee-Presidenh and President and Chief $ 45,383(1) Executive OKieer, Sunshine Biseuit~, Inc.; President and Chief Executive O~heer, Sunshine Biscuits, Inc.(e) AlfredF. Bowden Vice-Presldent. and President, Cigar 112~435 $ 16,897 $31,571 ($25,711) Division; President, American Cigar Divislbn (e) Phihp H. Cohen Director of Advertising (b) 77,524 11,526 7,~10 (5.182) Henry G. French D~rector of Manufacturing; Vice- 73,077 10,842 13,633 (9,899) President--Mann lecture ( b ) (c) Virgil D. Hager (i) (k) Executive Vice-President 84,282 12,566 Robert K. Heimann(i) Executive Vice President; President and 175,420 26,587 26,834 (20,~44) Chief Operating Officer (c) CyritF, Hetsko(1) Vice-PresldenL and B~nsral Counsel; 128,365 19,348 25,067 (18,452) 5enit~r Vice President and General Counsel(c) Donald M. Klock(i) President and Chief Exe~ufi~eOfficer, 100,015 -- 22,032 (17,817) Du[fy Mott Company, Inc. Everett Key]or(i) President, James B. Beana Distilling Co. 173,983 32,365 37,500 (26,213) Julien B. MeCaithy(i) Vice-President Manufacture 92,983 13,9(}6 19,951 (14,089) and Leaf(b) Charles A. Mehos(i) Treasurer 67,647 lOd107 15,439 (9,776) Eug~neF. Mooney Vice-Presldent Sales(b) 1~6,418 15,972 24.813 (10,048) George J. Schramm(i) Controller; Vice-President and 78,977 11,611 1S,755 (10,974) Controller is) John B. Sparrow Director ~i l.eaf Purchase~ 76,458 11.362 19,374 (15,393f Cigarette and Smoking Tobaccos (b) Robert B. Walker(~) President and Chairman of the Board 273,414 41,663 37,500 (2~,720) of Directors; Chairman of the Board and Chief Executive 031cer (c) $1,727,986 $238,483 [B Directors and Officers a~ a group(m)

(a) Capacities referred to were vvhh ~he Company unle*s otherwlse iitdleated abo~e or in note Ib) heEow /h) P~lsitlon in Company utah June 30, 1969, and thereafter in The Amerlean T.a?0aecc, Company Division (c) I~kJn~e effet d~e Jub¸ 1. 1969. (di tachld~s u~dcferred .oacoating~t pnrtlnn ~'t incentlve cetnpensadon for I969 under Arlicle X [ of the By-Laws excepl as Io [~[essrs Krnck and Kovler, who did not parttc~0aLe thereto. Includes as to each of ~[essr~ Kloek and Ko~ler his portion oi ~ncendve compensation for 1969 under the Executive Incenli~e Plan el the aubsldi~" of which he is the principal ~xecutive o/fleer. (e) The deferc~d contingent pgrtlon of incentive eompensatlon trader Article XI o he y- ,~ ace ned ,, a 1¢ n pnr c pa on 119~7 being Ihe fiI~t ~ear tot whleh it wa.~ prov[dedl is p~ able to each pattie pan a er ki emp oyme~ hy he Co~pany ernl na 1~1 m~la]lments a~ ~pe~i~ed ill Seetio~ 4 !the text of ,*hich is incduded in Exhibit A to ibis proxy stateme*nt } Commencing vdth the ~ear 1960. Articl~ Xl[ has provided for the reductlun o~ the deferred portion of inoemhe compensation of eaek participant tot any ~'e~r b~ the amount oi hi~ profit share for such year under ihe Compaay'~ Profit.Sharing Plan. The re~peotiw amotta s n de er ed lnce~tlve colnpensatz~n accrued for 1969 for th~ participants natant in the above table, thus r~dueed ]~y profit hating exccp who e no prcofit sha~'e is sh~wru and, 111 parenthe~ Ihe ~espectlVe annual ln~talInlenls ]payable after t~rminadoc* of employment (over 10-ye~q~ perlod~ ~o *~le~r~. ~avchat and Hager and over 3-~ear periods to the other partlc~pants) in respect o~ deferred ineentlve coln~ns~tion accrued I,,r all yeua-s n{ isart~eil)s.tinn including 1969, are a~ ~ollo~: James [. Bauchat, $3,774 I$L859/; Alfred ~ F/owden, $15.538 t$42.~05); ph~llp H, Cohen, ~ 747 $6,469 ; Henry G French, $7,234 ($6.078l ; Virgil D. llager, $2t,716 ~$26.739) ; Roher~ K lleimann, $18,833 ($57,236) ; CyriI F. Hetsko, $19,017 /~2.709) ; Juliet* B. McCarthy. $10,333 l$16,8~0~ ; Charles A Mehos. $'LI:4~I 136,908i : Eugene F. Mooney, $1669fi t$24,333) ~ George J. Schramm, $11,465 ($7,8~/ ; Jcobm B. Sparro,s¸, 14,679 q~10,q99) ; Rnberl B ~ a ker, $81,752 ($16L973~ ; and Direetor~ and effects a~ a grou!a, $250,424 t$366.728 ?~eing the annual installments paynb e o ,e 3year periods and $28,598 being th~ annual installmen~ payable over 10-tear periods). If) As L~f December 31, 1969, prefit.Sharin ]Plan balances (other than BaIunces aArib~table lo ~olunt~re deposits made thrcou~h ~ayr~ll deduetlons) represented By t]~c plan '~Units" atandln~ to the eredi~ of lhe particapants named in the abo~e ~ahle in¢~dlng the market ~aine on that dat~ of the numbers of ~har~$ Of ~mmon Stock of tile Company held by the Trustee of the Plans ~ u[valent con t~at date to their undivided plOporLionate interests in the tot~] number of ~xch share~ then head ~oy the Trnste~ attrilmlal~ e to profit sharing, but excluding their ~rofit shares fcor 1969 /payable Io the Trustee in 1970), were as fnllov~: James L. BauehaL $ 0 ; Alfred F, Dowden, $130,997; Philip II. Cohen, $30,717; 1Ieatv G. French, $51,691 ; Virgil D. Hager $ O Robert K. He mann $120,356; Cy i F tI ko 852,856; Eve e Key e, $ 8.095; Jtd en /b ~ *:Car by, ~h258; Charles A. Mehns. $46,I5~; Eugene F. ~,iounel, $105,308; George J. ~chramm, $49,]89; John B. Sparrow, $83,077; Robert B, WaIker, $270,919; and Directors and effects as a group, $1,079,136. (g) The figures in Column (2) are the dollar values as o~ December 31, 1~9 of the Plan "Units" cnnslilatlng the ~rofit share~ of the named individuals for 1969. (hi ]~Jrst [~gt~re is mmoua~t b~ore eleeti~ ~ ~ptlon~ ~ of benefit. Fi~lr¢ it1 p.xrenthese~ is reduced amount refleoting actual or assmued etectiun by ~mplolee nl opdunal joint and sur~vo~ ~,unuJty, (i) Also of~eer of alS[iated company o~" eompames, (j) R~igned Ju/r 29, 1969. Amonnt in Cedumn (1) is for 1969 throuo~h that date. (k) Retired June 80, 1969. Amounts in Column~ /1) and 12) are for 1969 through that date. (]t Lae/udes dizeetor's ~ee~ from Suashta~ Biscuh~ tCaa.xdal Ltd. (m) T~e aggregate remuneration for the fi~a2 year 1969, from lh~ Coral:any ~nd its subsidiJries, on an accrual basis, of Dire¢I~rs and O~¢e~ as a grottp shown in Column /1), s¢a~ ~pproximately six on~.huJ~dredths of ~% ot the Compmay'~ consolidated net sale~. At the Annual Meeting in 1967, the stockholders adopted a Stock Option Plan under which options may be granled to key employees of the Company and it* subzidfarles for not more than 600,000 shares of Common Sto~'k of the Company. The following tabulation shows as to the directors and o~eers of the Compauy named above~ and as to all directors and ol/icers of the Company a~ a group, (l) for the i:eriod from inception of the plan to the date hereof (a) the number of ~hares called for b~ options ~ranted, (b) the average option price per share, (c) the nttmber of shares purchased by exercise of optlons, (d) the aggregate purchase price of such sha~es and (e) the aggregate market value of such shares on the date~ of purchase and (2) the number and average prit~ per share of shar~ subject to unexereized options held as of February 1, 1970. Options exerclsed Op~nnskold OprJona granted Avnr~ge Aggregate priee Name of ]ndlv~duaI or Average price Aggregate market per idendty of gTnu~ Sha~ per share Shar¢~ prlee value Shares ~hare James L. Bancfial 4,000 $33.0s23 4,000 $ 132,(394 $ 143,125 -- -- Alfred F+ Enwdcn 4,000 a2~5 -- __ __ 4,000 932 2~ phtlip IL Cohen ~ ,S,~ D 32.2S 1,000 32,25 ~ 35,000 1,5(~0 32.25 Henry G. French 4,000 ~,094 600 19+350 21,563 3,~10 33.243 Virgil D. Hager 5,000 32.25 3000 96,750 102d25 2,000 32.25 ReBel t IC Heimann 1O,000 38.375 5,030 ]61,250 168,750 5.000 34.50 Cvrll F. HeIsko 5,@30 32.70 -- -- 5.0~0 ~270 Donald 3[. KX0ck 6,000 36.625 - • 5000 36.625 Everett Kco',ler 6.000 32625 4,000 129,000 152,500 2,@30 33.375 Jul~en B. McCar th! 4,0@3 32,~ -- 4,000 3225 Charles A. 3Iehos ~0(O 33.891 1,5@3 4B.375 51,563 2.5U) 34875 Eugene F. "qunne~ 4,000 32.25 4,000 ]29.000 136.50q -- -- George J. Sckraun. 4,000 33.609 1.500 48,375 51,75~ 2.500 34.125 John B Sparrow 2,500 32.25 -- -- 2~-,Ofl 32.25 Robert B. V~ alkea i5,000 33.00 10.000 8~2,50~ 3q8,750 5,000 34,50 A!I Directors and 0 ffit ,:~ = az ~ Grou9 90,500 ~33.043 36,900 $1,193.119 $L299,0~6 47,100 $33.707 4

During the period employees other than officers and direeturs were granted options for 89,500 shares at an average nption price per ~are of $33.795. Subsequent to the respective terminations of thole association with the Company, Mr. Bauehat sohl 4,000 shares and Mr. W. Elliot Brownise (who received an option for 4,000 shares white a directori sold 800 shares of Common Stock of the Company. The Company is not informed of any other sale of its Common Stock. during the parted by any optienee who was a director or af~cer at the Brae he was granted an optlcn or at the tlme of sale. Proposal 1 ELECTION OF I]NDEPFaNDENT AUDITORS The Management recommends the alection by the stockholders of Lybrand, Ross Bros. & Mon~goraer y as independent auditors for the Company for the year 1970. In llne with Bale recorranendation the ivlanagement intends to introduce at the forthcoming Annual Meeting the following resolution (desio~nated herein as Proposal 1) : RESOLVErJ, that Lybrand, Ross Pros. & IViontgomery be and they hereby arc elected independent auditors for the Company for tile year 1970. This firm of certified public accountants has been for 30 years the independent auditors for the Company. In accordance with the Company's praetlee a member of the firm will attend the Annual Meeting and respond to qttestions that may he a.~ked by sl~ckhalders. The affirmatlvc vote of a maiority of the votes east by the haldcrs of Common Stock voting thereon is necessary for the adoption of Proposal I. Tire Management recommends that you vote FOR Proposal 1. Proposal 2 RESUBMISSION OF PROFIT.SHARInG pLAN The Peel.t-Sharing Plan of Araeriean Brands, Inc. was adopted by the stockholders at the Annual Meeting in 1960 and approved by them in amended form upon resubmisalon at the Annual Meeting in 1965. From time to tlrae since the last stockholder approval the Board of Directors) in the exercise of its amendatury authority, has made a number of changes. The principal ¢hang~ are: (1) reintegraffon of the Plan with Social Security henefit~ successively at the levels of $6,600 and $7,800; (2) amendment of the Plan definition of "Net Income Before Taxes" (the measure for determining the amount of the Company's annual contribution to the Plan) to permit exelualon from income of the operating results of any subsldiary wha~ employees are not eligible for Plan membership; (3) modification of the v~ting provisio~ so that ~ the event of partial teradnation of the Plan the accounts of any member whose employment is thereby terminated become fully vested; (d) recognition of employment with an a~tliated corporation in determining eligibility for Plan membership and vesting; (5) extenalon of the Plan to seasonal employees meeting certain condltiolm, and (6) providing for placing investment authority over the Diversified Fund of the Plan Trust in the hands of an outside Investment Manager in lieu of the Plan Trustee. The Plan is res~milte~ at this Annual Meeting in accordance with a provision calling for resuhmission to the stockholders within five years after the Iast stockholder approval. Summary o~ Plan A brief description of the material features of the Plan as currently in effect appears below. A copy of the Plan will be sent to any stockholder upon request to the Secretary at the Company's ofl~ce at 245 Park Avenue, N~ York, N.Y. 10017, and copies wiil he available at the meeting. Stockholders are referred to the text of the Plan, and the fallowing summary is qualified by such r~erenee. Employees Covered. All regular fu]Lt~me employees ef the Company and one of its subsidiaries, The Hatheway. Steane Corporation, become members of the Plan on the January 1 following completion of one calendar year of continuous service. Membership also extends to seo-s.nal employees of the Company who meet certain conditions. Approximately 1(J,900 employees participated in profit sharing for 1969. Employer Contributions. Each 3~ar the participating employers contribute a sum equal to fi~ following percentages of consolidated Net income Before Taxes (as defined in the Plan) : 31/_,% of the first $106,000,000, plus 5% of the next Sg0,000,000, plus 6% of any excess. No contribution will be made, however, for an}. year {a) for which Net Income Before Taxez does not equal or exceed 12% of nel worth, (hi in which a cash dlvldcnd is not paid on the Conmlon Stock of the Company, or (e) th exce~ of the amount deductible for that year by the participating employers for Federal income tax purposes. The Board of Directors may in its discretion discontinue, suspend or reduce contributions. 5

Investment by Truste~. Employer contributions are paid to the Trustee of th.e Profit-$hariDg Plan Trust to be credti.ed by i~. one thisd to the. Amealcan Stock Fund fu, investment so~ely in Common Stock of the Company and two- thirds to the Diversified Fund f~r investment in such seeurltles and other property as the Trustee, or a dealgmated lnve~ment ~[anager, in its discretthn may select. Effective at the elo~¢ of business on February 28~ 1970~ the Board of Direct**rs designated Irving Trust Company as successor Trustee of the Trust and appointed Loomis, Sayles & Company, Incorporated, as lnvestmer/t Mana~ger of tho Diversified Fund, with sole investment authority for that ~und. ~pportionment of Contribulions to M~rabers. Contributions are apportioned to Plan members on the baals of each member's Adjusted Earnin~ for the year in relatio~ to Ihe Adjusted Earnln~ of all members. *~Adjusted Earnings" for any year mean~ earniu~ for that year plus gg% of ~uch e~rnlggs in e~cess of $'/,800. Distributian and W~hdrawals. A member's I~atance~ in the Profit-Slaaring Plan Trus~ arising from employer contributions become dlstributable upon te~lninafion of employment, In eases of termlnation by death or retirement (or upon partia/or cutup[ere termination of the Plan) the full amount ls distributable. In the c~,;e of any other termin~ tlon a percentgge varying with thc member's length of service an~I reaching lO0~ upon completion of thirteen years' continuous ~ervioe is ~stri]sutab]e, except that upon termination o~ employment for serlou~ misconduct (dlschar~ ~or c~use~ as delqned i~ the ]Pla~) the entire amount o~ SUCh balance~ is subject to ~orfelkure. Distribution i~ made by such method of settlement--a single distribution in cash or partly in cash and partly in Corrtmon Stock of the Company, periodic cash instalhecnts, purchase of a~nuity, or otherwlse~a~ the Pro~t-Shering Plan Commiltee appointed by the Board of Directors to administer the Plan determines~ A member may wit]adeaw a portion o~ hi~ pot~fil-sharlng balances durlng empIoyment~ slthjeet to eertaln restrictions artd ~u~jeet also tt~ the penalty o~ a 10% iorfelture. T~e attd all ~ther forfeltures ar~ reapl~rtloned among Plan mem~oers annual[y. l~oluntury Deposits. In addition tu rece2al~lg contrihations from the Company, the Plan Trustee is authorized to accept voth~tary deposits from members in regular f/tiLtin~e employmer~t. Any e]igl/sl~ member may become a depositor by electing to make deposits of his own funde by payroll deduction in amonat~ not more than 10% of his has~ pay. Each depositor has fl~ option of directing that his deposits be allocated for investment entirely in the American Stock Fxmtl or one-t'a~rd ~n ~hal ~/urtdt a~d t~vo-tbds~ in the Efi,~erslfted F~ndt. Deposi'ced funds may be withdrawn ~u~ing employmaent~ subject to limitations provided in the Plan. Deposit balances become distributable in ft~l upon terminatlon of the member'~ par tisipatlon as a dupo~itor, Ap~ox~mately 1~600 merahers had deposit balance~ on December 3l, 1969. 1969 Empioyor Contributions under Plan and 1969 Incentive Compensation under Articl~ XII The eo~trl/~uti~ns o~ the partielpati~g employers t~ the Company's Profit-Sharlng Pla~ accrued for the year 1969 amotmt to $7,518,764 iequioa]e~t to $3,381,705 after Federal and state ta~e~ based on income), of wla~eh $206,118 is apportthnable to the aeeouzats of 13 directors and ogqcers a~d $7,312,646 to other employeez. For th~ ~ame year ineentlve e~mpensation ~ander Article Xll of ~{~e By-Laws was accrued i~ the ~ol]0rtiltg araounts fo~ the employe~s partisipadn~ thcraln: The undeterred r~oncontinger~t portion {eonstltutlng one-half of s~c~t compo~l~ation) aggregated $685,16~, ~ which $452,712 was accrued far 13 di~eetor~ and ot~c~r~. The dderred contlng~nt portio~ /constituting the other hail of ~tzch compensat~on/~ after reduction by profit-~hering in th~ ease of persart~ part~dpoti~g ia the Com~2~ay's Profit-S~arit~g Pla~ for that year, a~rgg#ted $302~gg6~ ~£ w~eh $~fi0~24 ~-as accrued for sueb directors and ofiq~er~. RESOLUTION CONSTITUTING pBOPOSAL 2 The resolution constltut thg Proposal 2 is as follows: R~SOLVED~ that the Pr~ftt.Sharlng Plan of American Brands~ Inc., as resubmitted to t}~is Annual Meeting pursuant ~ $ectlun 7 of Article XI thereof, be and it hereby is approved. The aitirmatlve vote of a majority of the votes cast by the holder~ of Common Stock voting thereon is neee~,s~ry for the ade?tion of Proposal 2. The Management recommends that you vote FOR Proposal 2. 6

Proposal 3 PROPOSED AMENDMENTS TO REVISED RETIREMENT PLAN The Retirement Plan for Employees and Former Employees of American Brands, Inc. mad Designated Affiliated Corporations, know~ as the Revised Retirement Plan, was adopted by the stockholders at the Annual Meeting in 1960. It has -~inee been amended trom time to time by the Board of Directors and at the Annual Meeting in 1965 by the stockholders. Approximately 11,400 employees of the Compa.y and The Hatheway Steaae Corporation are covered by the Plan. Of this number, 12 are directurs or o~cvrs of the Company. The Board of Directors recently adopted certain addltlonal amendments, to become effective as of January 1, 1970. subject to the receipt of a favorable ruling of the internal Revenue Ser,Ace and subject also to approval by the stock- holders of the Company. The Revenue ruling h~ been received. Summary of Proposed Amendments The proposed amendments to the Plan change the formula by which the araeunt ef retire~lent benefits is calculated, introduce a ralnimum benefit and increase the present maximum benefit, and broaden eI~ibi[ity ~r severance bene- fits. A brae[ dcserlp~i~n of the material features of the amendments appears below. The text of lhe amendments wi][ be sent to any s~oekho|der upon wrkten request to the Secretary a~ the Company's ofi~ee, 245 Park Avenue, New York, N. Y. 10017, and evples wig be available at the meeting. Stoekholder~ are referred to the text and the following sm~ar y is qualified by such reference. Benefit Formula. Under the Plan as now in effect, retirement, spouse's, severance and disability bene£~s are based on the employee's earnth~s throughout the per~d of his employment and aze payable at ~m annaaI rate equal ~o the sum (or its actuarial ec~ivalent) o[ (i) a "past ~rviec" benefit based on years at contlnuous employment before 1960 multiplied by 4/5 of 1% o{ 1960.]964 average ann~al e~rnings up to $4,800 ancl 1½% of such earnings in excess o~ $4~80~ plu~ (ii) a "futme service" benefit equal to 1% of earnings after 1959. The amendments (which apply only to pe~on~ in serene on or ahe~ January 1, 1970) would ~ubstitute a "final p~y" ~or t~i~ "career pay" ~ormth~ and base benefits on the average earnlng~ of the five highest consecutive years in the final ten year~ of employment, with the amount of benefit equal to the sum (or ~s actuarial eq~va~ent) of 1~ of such "final ~verage" earnlng.~ multiplled by the number of years of continuous ~ervlce up to 35, plus ~ of 1% of final average earnings in excess oI ~4,g00 maltiplled by the number of years of continuous ~erv~ce before 19~0 within the applicable period. /I~ the case of severance benefits, only service ~om nee ~0 is taken into account, and in the case of disability benefits a portion of the benefit is paid from the general funds of the Company.) When an employee becomes enfitIed to benefits after more than 35 years of eonelnuo~us s~rvice, the amendments would base his benefits on the l~st ~5 years o~ such service, rather than on the first or last 35, wblchever prodae~ the higher benefit, as provided in the Plan ~s ~ow in e~ect. The proposed new formula is intended to provide ~arger benefits mere in keeping wlth current and anticipated iutu~e pay levv~s. There are, howewr, certain employees ~or whom the new formula would produce sma]er benefit~ than the present formula and therefore the proposed amendmeat~ al~o provide that be~e~t~ un~e~ the Plan .s n~w i~ effect shall net be reduced for any employee as a re~uIt of the araenc~nent~. M~timum and Maximum Benefits. Under the Plan as now in effect there is no minlmum benefit prescrlbed. The proposed amendment~ would provide a minimum benefit ~r employees retiring at or after age 62 and for 811 retir~ment~ ~r disability, regardless of any smaller amount produced by the benefit formula, in an annual amount equal to $36 multiplied by the recognized number of years of servis~ in regular full t~me employment al~d $18 muI~?lied by the r ecognised num]~er of years ~f service in seasonal employment. The amendments would also change the maximum aomml benefit from $37~500 to $75,00{). Severance Benefits. Under the Plan as now in effect severance beneflt~, ~.e. pensions payable by reason of termL~ation of service otherwise than by r~irem~nt, death or disability, are payable only to regular full ~ime em~oyees wko are a~ least 50 years of age (but not yet 55) and who have at least 20 years of service inm~edlateIy prior to ~erminafien of service. The proposed amendments w~uld broaden the eligibility for severance benefits ~o as to include any reguisr ~ll-tim~ employee ha~ng at ]east 20 years ef 5ervlc¢ whose age and years of service total 70 or more. 7

Cost o] Plan and Proposed Amertdments It is the present intention ~| the Company to fund the unfunded past service cost of the Pisn over the 31-year period cemmencffig on January 1. 1070. According to dic latest report of the Conlpaity's independent acttlary, this cost for the Plan as now in effect is approxitnateIy $1~,530~000. The actuary ha~ estlmated (usffiy, for the first time with this Plan, a level fending method of valuatLan, an assumed interest rata ot 5% and a~uarisl as~umptlons for anticipated Plan wiffidrawels and future waye focrease~) that the ameadmenls will produce a net Lacreas¢ in unfondud past service co~l of approximately $14,602,000. The present annual cost of ful,dizly to the Company and its participating affiliate, and the net additlonal east by reasons of lhe amendments, arc accordingly estimated as follows: plan a~ Now Additional Cost of in Effect Antt.ndments A~ter Deductlag After Deducting Actuaries Taxes (at C~ent Actuary's Taxes (at Current Estimate Rate~) a~ Estimated Estimztte Rates) as E~timated • Be lure Taxes by Company Before Taxe~. hy Company Annual payment with respect to pa~t service $2,603,000 $1~260~000 $1,265,000 $612,000 Annual pasteur with respect to current service .............................. $4,279,000 $2,071,000 $ 25,000 $ 12,000 Totals ...................... $6,882,0O0 $8,331,000 $1,200,000 $~24,000 Estimated Retirement Benefits Under t~e Plan as pro~o~ed to I3e amended, almuol retirement benefits at normal retiremen~ of the fel]owlng persons atoned ~n the table under "Remuneration" on page 3 who are currently in the employ of the Company would be as fol[ows (th~ fi~res in parendie~es showing the reduction upor~ the actual or a~sumed eicctfon by t~ employee of an optiona~ joint and survivor annuity) : Alfred F. Bowd~n, $35,135 ($28,614) ; Philip H. Cohen, $8,100 ($5,642) ; Henry G. F~ench, $26,313 ($19,1U6) ; Robert K. He,mann, $40,639 ($31,569) ; Cyril F. Hetsko, $30,342 ($22,334) ; Julian B. McCarthy, $30,876 ($21,804) ; Charles A. Mehos, $83,530 ($14,899) ; Eugene F. Moonvy, $35,240 ($23,551) ; George J. Scheamm, $27,857 ($i9,403) ; John B. Sparrow, $27,291 ($21,686) and 1robert B. Walker, $75,000 ($49,440). RESOLUTION CONSTITUTING PROPOSAL 3 Thv resolution eonslituting Proposal 3 is as ~ollows: R~SOLVED, as conditionally adopted by die Board of Director~, t~at th~ amendments to the Retirement PLan ~or Employee~ and Former EmpLaye~ of American Brands, In¢, and Designated Affiliated C~rporations described in the proxy statement accompanying the notice of this Annaal Meeti~ be and they h~reby are approved, to be effective ~ of January 1,1970. The a~Llnatlve vote of ~ majority of the votes cast by the hffiders of Common St~ck voting thereon is necessary for the adoption of Proposal 3. The Marmgem~n~ recommends that yo= vote FOR Proposal d. Proposal 4 PROPOSED AMENDMENTS TO ARTICLE XII OF THE BY-LAWS Attire XII of the ~y-La~s of the Company in its or~g~r~ol form was adopted by the stockholder~ in 1912. It has had the same purpose of :[urnithLag incentive compensation to key ~mployees for more than 55 years. A~ now in effect, Arllcle XI[ proffides th~ of the amoun~ available as incentive compen~allon for any year 18% shall be a0otted to the Glaalrmar~ of the Board al,d Chief Ex~.eutive Officer and 12~ to the Freeldent and Cffief Operating Officer (who together constitute the Incentive Compensatlon Commlttee), with tim balance of 70% belng available for aUolnaent to other key employees constituting the Management Group. O] the 70% thus a~'a~isble for elffitment to the Managemen~ Group, 24% is aiistted b); Arti¢ffi XII to participants ffi that group in proportion to ffielr fixed salaries and the balance (46%, plus arty amounls not ollotted 1o the two officer~ referrec[ to above as a result ol vacancies in those offices) is ollottable by the llmentlve Compensation Commitlee within the Manageraent Group, entirely at it~ discretion as to amotlnts and individuals. Article XII also proffides thet one.hell of the amount allotted to each participant shall be paid to hlm ~n cash as soon a~ praetica}/le alter allotment and that the other onediall~ a~ter reductlon as ~tated in the next sentence.

*hall be contingently payable to him in annual installments after his emp]o)nwnt by the Company terminates. Sine~ 1960, when the Company's Profit Sharing Plan was adopted, Article XII has provided that the deferred portion of a participant's in~entive compensation for gray year be reduced by the amount credited to him ander the Profit~haring Plan for the came year. From time to time Management ha~ coosldered various suggestions for increasing l),e attracBver~ess el the incentive eompensatlen program under ArtleIe XII to participants and prospecti~ parficipmats and enhancing its value tu the Company without, however, changing the basic formula fixing the amount to become avaiIable for allotment each year. Since the Annual Meetlng of stockholders in 1969 at which certain proposals of that nature were approved, the Tax Reform Act of 1969 has become law, with slgniheant impact on deferred compensation in general. That event, together with the effect of condnulng inflation, has impaired the desirabihig of the deferred portion of Article XII incentive compensation. In order to maintain the vaine of the incentive program of the CompaJly, the Board therefore believes that Seedon 4 of Article Xll (the text of which is included in Exhibit A to this proxy statement) dwuld now he amended to provide that the deferred portion of allotments for years after 1969 be made contingentty payable on December 15 of the year in winch the allotment is made, instead of in annual installments be~nning after retirement or other termination of employment. The 1960 amendment providing that the deferred portion of an allotment for any )'ear be reduced by the participant's profit-sharing credit for the stone year has proved inequitable in operation. For some participants it has meant reducing the incentive compensation otherwise payable to them by 509; because the profit-sharing offset has equaled or exceeded the deferred portion of their allotments. For others, it has meant reducing their incentive compensation by a profit share they would not in fact receive because their employment terminated heIore their profit-sharing credita became fully "neared." For all eligible participants, the profit-almring offset has diluted discretionary awards under Article XII and to that extent diminished the value of the Company's incentive compensation program. The Board bdleves that this deficiency should be overcome by amending Article XI[ to eliminate the offset provision by deleting Section 8 (the text of which is included 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 all employees participating under Arfiele XII would have been increased by $389,824, ot which $202,288 would have been fur directors and o~cers. In accordance with the amendatory provisions of the Article, other amendments to Artfofe XIf amy be made by tim Board of Directors from time to time withnut stockholder action, provided that no amendment haay be made by the Board changing the basic formula so a~ to increase the amount made available for allotment tm&r the Article each year. RE$OLUTION CONSTITUTING PROPOSAL 4 The proposed resoluffen constitntlng Proposal 4 is as foBows: RESOnVXD, that Arfiefe XH of the By-Laws as now in effc~ct be amended (1) with respect to paragraph (B) of Section 4 thereof by: (a) inserting therein a new subdivision (i) reading a~ foffow~: "(i) ~'ith respect to allomaent.q for any year after 1969, on tiw fifteenth day of December next follow- big tlm close of the year for wfiJch the aBotlnPnt was made, subject to the condition ~lat prior to such flfteenlll day of December the participant shall not~ without/he exp re ~.~ approval of the Board of Directors, have accepted employment with, or rendered personal service to, a colnpedtor as defined in subdivision (iv) of this paragraph (]~}," (b) renumber[ng the remaining subdivisions thereof as subdNi~ions (it), /iill and (iv) and making appropriate, chan~ea ill eross-refelence$ therelo; am] (e) limiting the applicability of the renumbered suhdlvisions lii) thereof and ,iii~ to allotments made for 1969 and prior )'ears. and (2l hy dclcfing Section 8 in ks entirety, deleting all references to S,'ctinn ~ in t,flier Sections of Article Xll and renumbering the present Section 9 as Section 8. The afifirmative vote of a majority of the ~otes cast by fire Imlders of Common Stock voting thereon is nece~ary for the adoptlen of Prop~sytL4, The Management recommends that yon vote FOR Proposal 4. 9

Proposal $ RESOLUTION ON STOCK OPTIONS PROPOSED BY FOUR STOCKHOLDERS The Company is intarmed that Lewis D. Gilbert, a record holder of 820 shares of Common Stock, whose address is l lli5 Park A~enue New York~ N. "g. 10028, and/or John J. Gilbert, a record holder of 830 shares of Common Stock, of the san~e addre~, and represe:lting an additional inmliy interest of 971 shares, and/or John Campbell Henry, a record holder of 1,600 shares of Common Stock, whose address is 5 East 93rd Street, New York, N. Y. 10028, and/or David Brown, a record holder of 6 shares of Common Stock, whose address is 1901 8~th Strceh Brooklyn, N. Y., intend to introduce at the Annual Meeting the totiowing resolutloa (designated heroin a~ Propc~ai 5) : "IL~SOLVEV: That the stocld]olders of American Brands~ Inc. assembled in amatlal meeting in person and by proxy, hereby request that any new stock option plans be made subject to the fol]owlng provisions: (a) That shares to be optinned will be optinned in yearly installments as nearly equal as possible, and that the right tn purchase shares ~n each installment will not he cumulative and will ec~plre to the extent not exercised during the applicable installment period: (b) That tile aggregate purchase price of the shares covered by an option may not excee~ in the aggregate 150% of an h~divldual'~ annual cash compensation: (e) No options will he granted in any year to executives who are within 18 months of their automatic retire- ment dale on Maxch 3I of such year: (d) It shall be a negative factor in granting new option~ if an optionee has sold oplloned stock to pay o1~ a loan, enabling the opllonee to pick up new options." The proposers of the resolution have ~l~alshed the following statement seRmg forth the reasons advanced by them in support oI their proposal: "Last year lil,g0~ owners of 1,528,417 shares voted in favor of ova" similar resolution. Please remen~er, i~ an executive can be lured TO a company with stock-options~ he can be inrcd AWAY with bigger options el~wbere. If ),on a~. please maxk-yovx proxy FOR this resolution; otherwise it is automatically cast against it." Some of the matters rvferreil to in the prope~d rc~olutinn have, in fact, been lakcn into consideration by the Board of Dixeetors ha its granthlg o| options under the present Stock Option Plan, and undoubtedly will be factors that will hear on the Board's consideration in the future. However, in the Board's opinion it is not wise to impose fixed restvietion~ on the method of operation of a stock option plan such as those proposed by this resolution. In some cases, the timhation set forth might detract ~rom the theenBw value of the option and hiniler the Ma~mgement in i~ ef[orl~ to secure and retain key employees of outstanding ability. Competition for experienced persons has invreased rapldIy and the Board believes that the granting of options under the Plan strengthens the Company's ability to hold its present key personnel and attract key employees ot outstanding ability. The Company's stock option program has been carefully designed so as to benellt the Company by eneonraffing key employees to acquil"e a proprietary interest in the Company's future, with provisions in the pre~ent Stock Option Plan that adequately safeguard stockholder interests. Additional restrictions such as those proposed could, in individual eases, work against that purpose. "13ae Board of Directors, through its knowledge of Management performance, is in the best position to allocate stock options so as to obtain the ~eatest advantage to the Company and its subsidiaries, and it should nnt be h~ndered by any such rigid limitations. Accordingly, the resolution shonld be rejected as not in the best ~nterests of the Company and its stockholders. A similar resolution ~as overwhdmingly rejected by the stockholders at the 1968 Annual Meeting when more than 92.4% of the votes were cast against it, and again in 1969 chen approx ma e y 92 7% of the votes were east against it. The affirmative vote of a maiortiy of the vote~ ca~t by /he holders of Common S/,ek voting thereon would be necessary for the adoption of Proposal 5. The Management recommet~s tl;at yo~ vote AGAINST Proposal 5. 10

PrDposat 6 RESOLUTION FOR CUMULATIVE VOTING PROPOSED BY FOUR STOCKHOLDERS The Company is informed that tile four stockholders whose names, addresses and record holdings are set forth above with respect to Proposal 5, intend to introduce at the Annual Meethag the followlag resolution (designated herein as Propotal 6) : "IREsoLvE~: That the stockholders of Amerlean Brands, Inc., assembled In annual meeting in person and by proxy, hereby request that the Board of Direotors take the steps necessary to provide for elections of directors by cumulative voting, whleh means each stoekbelder shall be entitled to as many votes as shall equal the number of votes whleh he would be entitled to east for the alectinn of ddrectora with re~peet to his shares of stock multiplied by the number of direetor~ to be eleeted~ and he may cast all of such voles for a single candidate or any two or more of theft as be may see fit." The proposers of the resolution have furnished the following statement setling forth the reasons advanced by them in lapport of their proposal: "Cumulative voting permits minority shareholders to have ~presentatlon on the Board of Directors. When cumulative voting is not permitted, the holder~ of a majority of the shares may elect all of the directors, in wMeh ewnt the re~zaining shargbofdcrs may not elect any directors. The amendment would permit a person or a group of persons holding a ~*gnifieant block of shares to ha~e representation on the Board of Directors. Without cumulative voting such a block might be unable to have any representation on the Board~ which is the policy making body of the Cordpany~ambles management 1968 proxy statement." In the view of the Management, the faneBon of a board of directors is to administer the affairs of a corporation for the benefit o~ all its aoekholders. The Management believes that a dizector de~trd by a minority through cumula- tive voting might feel bound to act in what he considers the interests of tee minority even though such action might not he in the best interests of the corporation and the slockbelders as a whole. It believes that the present method of aleellng dlrerltors~ which i~ the eorpora~ equivalent of majority rule, has worked successfully and should not be chnnged. Cux~dat~ ,¢~ti~g "xa~ ~¢rwheinfmgly rejected at the h964 anti 1969 Annual Meetings, ~hen approximately 94.8% of the votes were east against it on each oeeasin~. The af~rmatlve vote of a maiorlty o~ the votes cazt by the holder~ of Common Stock votln8 thereon would be necessary for the adoption of Proposal 6. The Management recommends that yo~ vote dGAhVST Proposal g. MISCELLANEOUS Promptly a~ter the Annual Meeting stockholders will he mailed a ~eturn postcard on whJcil they will he ahle to indicate their desire to reeelv¢ a copy of the sllmmary of the meeting. The expense of the solicitation of proxies for this meeting, inaluding the cost of mailing, will be borne by the Company. [n addition to maiting copies of this raateriul tu stoekho]ders~ the Company will request persons who hold stock in their ~ltm~ or ctt~t~dy ~r in the na~ of ttnraiaees fo~ uthurs, tjj forward coplea of s~h rctaterLul t~ thos~ persons for whom they hold stock of the Company and to request authority for the execution of the proxles. To the extent necessary in order to assure stt~eicnt representation at the meeting, o~ccrs and some regular employees of the Company will request the remr~t of proxies by telephone, telegram or in person. The amoux~t of the expense to be borne by the Company will depend upon the volume of ~hares represented by the proxies received ~ in respon~ to the ,'%tic~ ot ~1eeling. If proxies are not reeefvad promptly, it may be necessary for the Company to send telegraphic sofickatio~t to those stockholders who have not responded. gtockhoMets who do not Latend In he ~oresent at the meetin~ 8re urged to send ill their proxie~ without delay. Prompt response ~s he[pthl, and your cooperation wgl be appreciated. March 2, 1970. 11

EXHIBIT A ARTICLE XII OF TIIE BY-LAWS S*)cliotts 4 and 8 as now in effect SECT£ON 4. /A) Payment to the Chairman ~)f the Baard and Chief Executive Onfeer and the President and Chief Operating Officer of the amounts payable t. them ueder Section lIBi hereof, and to each of the allottees of the Managerqent Group of the amount ~( his tolal all~ltment under Sections 24 [31. 21C I and 2! DI hereoL with respect to any year shell be made one-half in cash as soon as practloabl¢ and the balance Isnbjcct to Section 8 hereof) air a deferred basis a~ hereinafter provided. (B) All deferred amonots payalde ~ all persons hereunder, such p~rsol)s being her~fealter referl"ed to as 'ipartloi- pattt~," shall hc payable (subject to the c~nditfeus ~et furth in this paragraph (13) and to [3arahraph (C) of this Section) in cash as follows: (i/ W~th resl~ct to ,alLotments made t~ an~ participant who (~n Januar? 1. 1970 wa~ in the empfev of the Company. hi three equnl annual deferred festa[hlleats~ one such installment to he paid on the next fo][owlng fifth bu.~iness day of the January whleh i~ al least ninety days after the date when th~ participant's employment by the Company termlnales~ and annuaIly ihereafter and subject to the ¢c~nditfen that prior to the fifteenth day of Deccnthcr~ [970 the participant shall iiQt, without the ¢×llress approval of the Board of Director's, have accepted er~plo~T~ent with) or rendered ~ervloe tQ, a competitor as defined in subdiv~slon (iii) of this para~raph (B). lii) With respect to allotments made to any participant who on Jat3uar~ 1. 19~0 was not fe the empfey of the Compa~ffi in ten equal annttal deferred in~aUments~ ene such installment to be paid on the [3~th business day in January in each of the ten years following tile dose of the year in whlok the participant's employment by the Company terrnhiates, cash such insta[3mem heing subject to the c~ndition that, prior to the explral~on of four fu[3 calendar years after the parLi~ipant'$ enlplo~meltt by the Company terminates, the participant shall not, without the expres~ approval of the 13oard of Directors, have aecapted cmpfeym~nt wlth) or rendered personal ser'zloe to, a compe~itur as defined in subdlalsiotl ~iJil of this paragraph IB). ([3i) As used herein, a "comI~thor" shall mean any ¢orp¢>ratlon or other entity engaged in any activity which, at the time the applicable all~tanent was made. was c~ixIpetidve with the bus~ness of the Company and "the business of the Company" at the linte o~ allotment sha~l mean the type~ ~f bus~ess carried on by the Company and its subsidiaries which are deemed by the Board of Directors to have been the principal ~pes at that time. (C) Subject to $ectinn 5 hereof, no such ~nstallment may he transferred by any participant in any manner whatsoever, including transfer by op~ration o| law. If any participant i~, fe the opinion of the Board of Directors, iaeapabfe of handling his nffalrs, or mak~ or suffers any attempted tran~er, whether voluntary (3r involuntary, of any s~eh ~nstalth~nt, then ~n the dL~vreth)u of the Board of D~r~etors payment thereof to such participant sh~df cease ar~[ payr~ents may be made or applied to or for the benefit of ~uch participant or hls spouse, children, or other dependents~ or ar~y ~f them, in such manner and in such proportion a~ the Board o~ Di~ecLors shall from time to time deem proper, su~oject, however, to the other provisions hereof. (D) Any portthn of any allotment which terminates by reason o{ noncompliance with its eonditfens shall revert to* the Company. SECTIOn,r 8. After the amounts a[3ottahle under Sectfeas I(B), 2(B), 2(C) and 2(Di hereof with respect to ar~y year have been determined f~r all IJarLloil~,lnt~ wlthou~ reference to tins Section, the amount that, but for thi~ Section, would he payable purst~anl lu subparagraph ~2~ of Section 4(A) hereof to caeh participant f~r zuch year shell be reduced by a ~um equal to she amount apportioned to such participant for such year trader the Prof~t-Sherlnh Plart of Arae~ican Brande, ~n¢. 12