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Growth in Dollar Sales Since I940 I t~4o = to~l While sales of fiker-tip cigarettes in. creased substantially during 1953, they still represent only a mnall percentage of the indu~try's total sale~. Your Management has been watchful of developments and sales potentialities of this type ef cigarette and has engaged in extensive researsh on filte~tips and in preparation for eventu- aUties, hut haa felt, up to this time, that it would not he advantageous to your Company to enter this field. E/dlNINGS ~ T~S Consolidated la~ome in 1953~ both he- fore and after taxes, was higher than in 1952. The increase resuked from the higher price~ of dgarett~ whleh were in effect for approxlmalely ten months of the year. However, increased cos~ and Mgher tax liabillty than in 1952 largely offset the increased revenue resulting from the higher prices. Taxes on 1953 income were equivalent to $9.26 per Common share compared with earnings of $5.90 per share after taxes. D,z~']DE~nOS Dividends at the same rate per share as in the past several years wore paid on the Common stock in 1953, consisting of four regular quarterly dividends of 75 cents each and an ex~'a dividend of $1.00. On January 26, 1954, your Board of Directors declared a regular quaxterly divi. dend on the Common stock at the increased rate of 85 cents per share, and an extra dividend of $1.00 per share. Aeeordlngly, a dividend of $1.85 per share is payable March 2, 1954, to Common stockholders of record February 10, 1954. 1954 marks the tlftieth consecutive year in which dividends have hecn paid on the Common stock. 4

Sales, Not Be[oreTaxes and Net I~zcom~ CIGARETT~ ~K~CES In the Annual Report for 1952 your Zvlanagoment expressed the hope that the terminailon of cigarette prioe controls would soon be forthcoming, to permit a long over- duo increase in prices to offset the increases in costs affecting the Company's operations. A few days after our 1952 report went to pro~s, the 0fl~ee of Prleo Stabilization decontrolled cigarette prices. Accordingly, at the end of February 1958, the Company Increased cigarette prices about 5 pox cent, or 38 cents net per thousand for LUCKY STRIKE and 43 cents net per the.sand for PALL MALL and HERBERT TAREYTON. However, still higher costs since then have offset somewhat the beneficinI effect of the foregoing price increases. EXCISE TAX On November l, 1951, the Federal ex- cise tax on cigarettes was increased from $3.50 to $4.00 per thousand, or to 8 cents per package of twenty. This tax will revert to $3.50 per thousand on April 1, 1954, unless Congress deeldes otherwise. [I~TENTOIIIE$ At the close of 1953, inventorles of leaf tobeceo, mannfacttxrcd ~toek, operating sup- plies, etc., were higher thaa at the end of 1952 by approximately $10,000,000. This increase was due to the larger qaantities of leaf tobacco required in the production of PALL MALL and HERBERT TAREY- TON king-s/ze cigarettes, which form an increasing proportion of your Company's sales, and higher prices paid for tobacco dttring the 1953 auction season. The growth o£ the Company's sales and the commensnrLttt~ rise ill inve~ory vahms from 1940 through 1953 are set £orth in the chart on the next page.

./ l~e~lories and Sales LYIAF TOBACCO Acreage restriction at the farm and Gov- ernment price support at the auction mar- kets were again in effect in 1953 for both flue-cured and Bnrley leaf tobaccos, the principal types used in making cigarettes. The acreage allotted for ~ue-cured to- bacco for 1953 was somewhat below that for 1952. This factor, together with the hot, dry- weather which lowered the yield in North Carolina a~d Virginia, reduced praduetlon of flue-cured tobacco last year by about 8 per cent. As a result the prices wbleh prevailcd in the fine-cured area were higher than in 1952. In 1953 the Bm-ley crop was about one- eighth smaller than in the previous year. Burley prizes in the auction markets to the end of the year were klgher than for the previOll$ Se~soll. Prices of the 1954 crop~ of flue.cured and Burley will z~galn be suppot'~ed by the Government, F]~AIqCES Bank loans at the end of 1953 were $94,000,000 compared with $92,000,000 at the end of 1952, an increase of $2,000,000. Cash in banks and on hand at the end of 1953 was $29,454,408, compared with 826,409,726 at the end of 1952, an increase of $3,044,682. During the year, $12,147,000 prln- eipal amount of debentures were redeemed through sinking fund operations. This amount ineladeB 81,411,000 of 31~ per cent debentures due in I977 and repro- serifs the first redemption of these bonds since their issuance in March 1952. Your Management does aot presently contemplate any new fiamneing. During the year your Company has made propo~Ms to the Ways and Means Committee of the Congress and to the Treasury for legislative relief from the

neeesslly of tying up large amomats, es- timated at fifty to sixty million dollars, in prepayraent of Federal exeise tax stamps. Our proposal provided for deferred pay- ment of the taxes in st~stantially the form that practically all other commodity ex- cise taxes are paid. Favorable aetio~ on these proposals would free large sums for productive use by the Company, ~IERGER The stockholders of The American To- bacco Company and American Cigarette and Cigar Company, on December 2 and 4 respectively, adopted an Agreement of Merger of the latter company into The American Tobacco Company. The merger became effective at the close of business on December 31, 1953. ~MOKING ~ ~EALTH At one tlme or another within the past 350 years practically every known disease of the human body has heen ascribed to the use of tobacco. One by one these charges have been abandoned ~dih the realization that they were not tenable. Because tobacco gives pleasure to so many millions of people, ~t is only natural that attaek~ made against its use create publi¢ interest and controversy. During the past year some statements ' were widely publicized claiming a rela- tionship between elgarette smoking and lung cancer. As your President, I under- took to respond to these claims by cuff lug attention to the fact that examination of recent sela~titlc reports and pubIieations reveals that no persuasive or definitive eonclusion respecting the cause of this disease, or the alleged relation of smok- ing thereto, has been established. Your Company individually has for years worked at and supported scientific research of a fundamental nature on tobacco and its relation to health, within its own laboratory and in independent in- stitutinns. A Tobacco Industry Research Committee to aid and assist research and furnish pub- lie lafot~nation on the relationship of smoking and heaDh was orga~dzed at the year end. Announcement of its forraatlon was published on January 4, 1954. Your Company, with numerous other dements in the industt3~, joined in sponsoring this Committee and its objectives. Messrs. A. Gordon Findlay and Charles Ganshow, both of Whom had lseen Vice Pmsldents and Directors of American Cig- arette and Cigar Company prior to its merger into The Amerlean Tobacco Com- pany, became Directors of the latter Com- pany at ~he time of the merger. The Board of Directors has therefure been increased from seventeen to nineteen 121~llqhers, On behalf of the Board of Directors I am pleased to acknowledge the interest evi- denced by you, the stock/aolders, in the affairs of our Company, and I should also like to express our appreciation and thai~ks for the continued cooperation of our cus- tomers and employees. PALm M. HAa~ Pres~dem i! : q, g. J~

i i ..... 1953 OPERATIONS AT A GLANCE THE COMPANY RECEIVED FOR GOODS IT SOLD AND FROM DtVtDH4DS. ~'ED.EST AND MISCELLANEOUS $11089,719,000 THIS IS SET ASIDEs 53~/2 % roz REVENUE STAMPS AND TAXES $582,844,000 27% F~ TOBACCO (including applicub[e expenses) $289,583,000 15% TOR WAGES, GOODS, SERVICES; ETC, $164,943,000 1% FOR RONO AND $11,124,000 BANK INTEREST 21/2% FOR DIVIDENDS $28,978,000 TO STOCKNOLD~.S 1% FOR EARNINGS RETAINED -~12t247:000 10 MEET FUTURE NEEDS

• HI NET SALES .............................................................. Co~t of sales, selling, general and admhdetmtlve expenses OPERATLNG PROFIT ............................................. Other income ............................................................... 1~53 19S2 $1,088,380,427 $1,065,738:654 978,673,071 978,021,712 109,907,356 87,716,742 1,338,567 1,472,029 111,245,023 89,188,771 11,124;367 9,899,263 889,59'3 937,345 12,013,960 10,836,808 Interest and related charges ........................................ Ogmr deductions ~om income ................................ Total deductions ...................................... [ncerae, b~f~e taxes O~ income ....................................... 99,231,963 78,85].963 Federal and other t~.xes on income (Note 1).f ........... 59,795,000 44,283,008 $9,436,963 34,068,963 Refund and adjustment of prior years' £ccleral and state taxes including interest ................................... ,.:. 1,738~958 -- I~ET INEOS~tE ............................................................... 41,225,921 .8¢,06B,963 Retained earnings, hegilming of year .............................. I19,727,06~ 112,754,074 160,952,985 146,823,037 Cash dividends: Common stock, $4 per share .................................... 25,816,640 23,933,991 Preferred stack, $6 per share ............................... 3,161,982 3,161,982 Total dividends .......................................... 28,978,422 27,095,973 Re ained earnings, end of year (Note 2) ................. $ 131,974,563 $ 119,727,064 Depreciation provided and ~harged to costs and expens~ amotmted to $3,220,054 in 1953 and $3,100,517 in 1952. ,v i" :!

a~ of Deee~uber 31, 1953) and all WhoBy owned domestic ~.5~idlar~ee exeept The Amorle~ Tobaeeo C~Ip4mT 0f the Orlent~ ]n~ A~ of December ~1 ASSETS 1953 Demand deposits in banks and cash on hand ....................... $ 29,454,408 $ 26,409,726 Accounts receivable, customers ....................................... 44,140,325 44,509,603 Leaf toi~ac~, manu~¢taxre4 ~tcw.k, ~geratlng, sapi~lie~, etc., ~t average cost ................................................................. 651,043,509 640,753,119 Miscellaneous accounts receivable ............................... 939,080 981,557 Total 0mcrent assets ......................................725,577,322 712,658,905 Investment~ in and advances to unconsolidated subsidiaries, at amctmt~ not in excess o~ cost (Note 5) ............................ Insurance dept)sits and miscellaneous inves~ents ................ :._ 19,624,749 19,3461133 1,873,413 2,375,356 B.ea[ e.~te~ mzehh~ery, f~xtures, etc., at cost, le~ a~[o~ran~e {~r depreciation, 1953, $55,505,283; 1952, $32,856,525 ........... 46,570,492 44,479,535 Prepaid expezlses and deferred charges ........................ 5,224,207 4,299,419 Brands, ~rade-marks, patents, good will, etc. (Note 4) ........ 2,198,147 1 $801,068,350 $783,154,349 10

,..m LIABILITIES 19|2 Noms payaMe to banks ......................................................$ 94,000,000 $ 92,~,000 Accrued taxes ......................... ~ ........................................ 61,631,819 48,032,415 Accounts payable and accrued e~pense~ ................................... 9,743,176 9,626,874 Divideald on preferre~l stock for quarter ended December 31, 790,496 790,496 Debentures t~ be reAeemed tkrott~h sinking fund operations 11,107,000 (Note 5) ............................................................................... 10,960,000 Total eurroat habili~es .................................... 177,272,491 161,g99,7~5 Debemams (Note 5) .............................................................. 231,266,000 243,570,000 408,538,491 404,959,785 Mino~ity intcr~t in Amexican Cigarottc and Cigar Company (merged late the Company as of December 31, 1953) ......... -- 1,110,609 STOCKHOLDERS' EQUITY Capltal stock (1h:ota 6): Preferred, six per cent eumu|stive, par value $100 per abate 52,783,100 CommotI, par value $25 per share ......................................... 162,307,750 Excesa of ~/et proceeds t'mal :ap~tal stoek~ issued ov¢~ par valu~ (Note 4) ............................................................................ 52,699,700 I61,352,750 44,964,426 43,294,441 260,555,275 257,346,801 /:[etalned earnlng~ (Note 2) ............................................. 131,974,563 119,727,064 Total ............................................................ 392,529,839 377,073,955 $801,068,330 $783,154,349 ii ,( ,! :! kL I1

L 2. 3. d. Includes federal excess profits taxe6 of $5,700,000 for 1953 and $2,065,000 (after deducting ~azrydia& czedit of the Company of $1,220,000) for 1952. Under the provisions of the indentttre relating m the Twenty Year 3~o Debentures, duo j'~nuary 1, 1968, ca~ dividends declared on common stock and payments made ia pur- cha~Lng shares of any class of the Company's stock .,ubsequent to December 31, 1947, may not exceed the aggregate of $15,000,000 and ccmsolidated net income earned st15soquent to December 31, 1947, less dividends paid on preferred stock. At December 31, 1953, approximately $101,200,000 of retained earnlngs was free of this restrlction. The net tangible assets applleable to the investmertts in and advances to tmoonsoIidated subsidlaries at December 31, 1955, amounted to $25,6~1,164. Divldends and illterest of $2,029,280 were received from these mubsidlarles in 1953; the equity in earnings applicable thereto amounted to $2,057,103. Brands~ trade.marks, patents~ good wilI~ etc. and excess o1 net proceeds from capita/ crocks iss~ted over pint values were increased as a result of the ¸merger of American CJgarett~ and Cigar Company, a former consolidated subsidlary, into the Company as of December 31, 1953. 5. Debentures outstanding at December 31, 1953, comprise: Princlpal Amounts Re~aMe After Dee. 3L 1954 Redeemable Within One year* Twenty year 3%, doe April 15, 1962 ...................................... $ 3,533,0fl0 $ 58,537,000 Twenty ysar 3~, due January 1, 1968 ................................. 3,000,000 57,000,000 Twenty.five year 3%, ~ue October 15, 1969 ........................ 5,16I~000 68,553,000 Twenty.five year 3~4%, due February 1, 1977 ...................... 1~43.3,000 47,I76,000 ~I1,107,N?0 $231,266,000 * Estimated pri~elpel amounts to be redeemed ttl~'~ u~ ~inldng ~n5 operations at prices as provided by the ~denture~. Capital stock at Decemhex 31, 1953, comprises: Shar~s Issued Shat~ Authorized Before ~,[erger ~t~r MC~Z Preferred .................................... 540,106 525,997 527,851 Common ....................................................... I0,000,000 6,454,110 5,512,310 12

/ • The Board of Directors and Stoeltfinldera o[ TI~E AMERICA~ TOBACCO COI~IpAlgg. We have examined the consolidated J0alance sheet of THE AMEIIICAN TOBACCO COlgpANy as of Deceml~er 31, 1953, and the re]~ted eonsolldated statement of income and retained earnings for the year then ended. The financial statements of American Cigs~ette and Cigar Company, ~ £ormer consolidated subsidiary which was raerged into the Company as o£ December 31, 1953, were e×am[ned Jay other indepe~adent eertitied puJal~c accountants. Our examination was made in accor~lance with ge~ereily accepted auditing standards, and accord ngly ncluded such te~ ~ of the accotmting records of the companies (except American Cigarette and Cigar Company) and saeh other auditing procedt~res as we considered necessary in the clrcumstances. We made a slmilar examination £or the year 1952. In our opinion, Jaased upo~a ottr exam[natlons and upon the zepelt~ of other independent certified puJa]ic aceountant~, the ~¢company[ng balance slleets and related statements of income, and retained earnings present £ei~ly the eonsolldated financial position of The AmericanTobacco Company and ~¢ subsidiaries included there[n as of Decemfinr 31, 1953 and 1952, and the consolidated results of their operafiens for the year~ then ended, in cvn£ormity with generally acccp~ed Rccount[ng pr[nciples applied on a consistent basis. ¢ LYBRAND, ROSS BROS. & MONTGOMERY New York, Fshruary 2, I954.