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PROTECTED BY MINNESOTA TOBACCO LITIGATION PROTECTIVE ORDER MNAT00415041

PROTECTED BY MINNESOTA TOBACCO LITIGATION PROTECTIVE ORDER More than 800 stockholders arrive at the Hunterdon Central High School near Flemington, N. d., to attend the Company's annual meeting. Buses zoere used lot those coming [rom New Yorl: City. MNAT00415042

PROTECTED BY MINNESOTA TOBACCO LITIGATION PROTECTIVE ORDER ~1!1. ROBERT B. WALKER, President, acted as Chairman of the meeting and Mr. John W. Hanlon, Secretary, acted as Secretary of the meeting. The following directors who were present were intro- duced by the Chairman: Virgil D. Hager, Executive Vice President; A. LeRoy Jan- son, Executive Vice President; Alfred F. Bowden, Vice President, and President, Cigar Division; Robert K. Heimann, Vice President; Joseph R. Waterhouse, Vice President and Treasurer; William B. Young, Vice President; James J. Cun- ningham, Director of Purchases; A. Gor- don Findlay, Vice President, Cigar Divi- sion; John G. Hager, Jr., Vice President, Cigarette and Tobacco Manufacture; Eugene F. Mooney, Director of Sales; John B. Sparrow, Vice President, Ameri- can Suppliers Division; Silas E. Strlck- land, Vice President, American Suppliers Division; George L. Turner, Pre~ident, American Suppliers Division; and George A. Wilkinson, Director, Tax Department. The Chairman also introduced Cyril F. Hetsko, Chief Counsel; and R. Kirk Batzer and Walter R. Staub of the firm of Lybrand, Ross Bros. & Montgom- ery, the C~mpany's independent public auditors. Approximately 85% of the total eligible vote.u were represented at the meeting. The Chairman reported to the meeting on the Company's recent prog- ress and its plans for the future: Pre~ident'~ Rvpor! Last year in my first report to you as President, I began with three statements. President Robert B. Walker reports on future plans and 12 major twtions taken by management during his first year in office. ! said that competition in our busine~ is constant and demanding; that our market is always changing; and that we cannot afford to stand still even for a moment. As to my first statement-the introduc- tion of new cigarette brands by our com- petitors in the last year, with more to come, makes it clear that competition in our industry is as demanding as ever. MNAT00415043

PROTECTED BY MINNESOTA TOBACCO LITIGATION PROTECTIVE ORDER As to my second point-the fact of change in the cigarette market is self-evident to all of us. Your management views this change not as a handicap but as an op- portunity to win new sales. And with reference to my third statement of last year, I can assure you that since my first report to you we have not been standing still nor have we any intention o! do- ing so. Since last April your management has done these things among others: I We have achieved national distribu- tion for MOSVCL~IR Modern Cigarettes and made this new brand a factor to be reckoned with in the menthol market. Last month I informed you, via the An- nual Report, that MONTCLaIR's unit sales have been well in excess of expectations for a new brand, 2 We have brought to market a com- pletely new and different ty[~ of filter cigarette, CaRLV0S, with "tar" and nico- tine content so low that we print test results on all packs and cartons. CaRL~ON is another historical "first" for The American Tobacco Company not only in respect to its low tar and nicotine deliv- ery, but also in its use of the unique fla- vor-filter to enrich the taste. 3 We have spurred TAREYTON sales to another substantial increase, an increase gmator in percentage terms than the in- crease for filter cigarettes as a group. TAREYTON now has a new advertising agency, a humorous and effective cam- paign-which I think is a real "eye- catcher"-and a new look altogether. 4 I Last year I pledged to you our best efforts to strengthen the Company's competitlvc position in the filter and menthol filter markets While I do not have final figures Ior March, we estimate that filter cigarette sales represented approximately 167; of our total last month. In March 1963 the percentage was 11%, So we are moving toward a better product mix. 5 While broadening our filter cigarette line we are keeping our strong position in the nonfilter field. PaLL MaLL is ranked by independent analysts as the largest- selling cigarette in the country. LUCKY STRIKE aCCOUntS for about a third of all standard size cigarette sale.~. P^I.L MALL and LUCKY STRIKE, together with the nonfilter HERBZR'f TaREYTON, give us more than half of all nonfilter cigarette sales in the United States. 6 Meanwhile we have not neglected our other tobacco products. Last August we appointed a new advertising agency for all our cigar brands, a move taken to coordinate and strengthen our cigar pro- motion activity. More recently we have created a new Cigar Division, bringing the manufacture, sales and administra- tion of our cigar business under a single head. You will find in your sampler box today our new Ro~-TaN Little Cigar which we announced only a week ago. This is the first little cigar to be o~lered by a major cigar manufacturer using an established brand name, and I am glad this is an American Tobacco first. The objective of | MNAT00415044

PROTECTED BY MINNESOTA TOBACCO LITIGATION PROTECTIVE ORDER Be[ore commencing the meeting's business, stockholders rise and bow their heads in a silent moment o[ tribute to the late Paul zM. Hahn, President el the Company, 1950 to 1963. this management is to be first in every tobacco department, and I can announce to you today that we will very shortly offer a series of other product firsts, to be announced in the next few weeks, It is not generally realized that we are one of the nation's largest cigar manu- lacturers, with a sales volume of more lhan $50 million a year in this field. In a sense, our cigar business is a kind of built-in diversification, and I might add that we are the only large cigarette maker with a substantial stake in cigars. 7 In HaLF A~a HALF we have one of the nation's most important smoking to. bacco brands. H^Lv ^Na HALF has shown healthy increases for the last three con- secutive years and is continuing to climb in volume, Our efforts in the pipe tobacco field include not only sales promotion but also the introduction of new and bet- ter packaging, and in some cases the re- designing of labels for greater consumer appeal. We have recently offered new and redesigned packages for BLUE BOAR and Tux~-~, and we are studying other ways to increase our share of the smok- ing tobacco market. This too is a form of MNAT00415045

PROTECTED BY MINNESOTA TOBACCO LITIGATION PROTECTIVE ORDER built-in diversification which we are not neglecting, even though it represents a small percentage of our total dollar volume. 8 Sala~ success does not just happen. It is the end result of many things, be- ginning with dedicated research and product development, continuing through precision manufacture and qual- ity control, and culminating in effective marketing. In the last twelve months we have strengthened our organization in all three of these important departments. Our research activities have increased so much that we will shortly break ground for a new laboratory building at Rich- mond, although, as many of you will recall, we doubled the working area of research only nine years ago. Our manu- facturing and leaf department, is phasing in a new six-million-dollar stemmery at Reidsville, and a new eight-million-dollar leaf processing plant at Richmond. Each of our three filter brands offers a multiple or compound filter with activated char- coal; our manufacturing department pio- neered this difficult departure in cigarette design and we have a greater production capacity for this most advanced typo of cigarette than any other company. Our marketing operations have been strengthened by the infusion of new blood, not only within the Company but among our advertising agencies. Some of this activity will not bear full fruit for some time, but we are sowing the seeds of progress. 9 I have mentioned the built.in diversi- fication represented by our various to- bacco lines, and in view of our strong financial position I know many of you are wondering about another kind of diversification-acquisition of new enter- prg~s compatible with but supplemen- tary to our tobacco business. Last year we engaged in a rigorous study of diversi. fication po~ibilities. This was conducted with great care and great intensity. Participating in this study were the President and Vice President.s of the Company, assisted by management com- mittees, a firm of outside consultant.~, and our investment banking advisers from the financial community. We are not going to rush headlong into the area of acquisitions merely for the sake of re- porting that we have diversified. We want our diversification, when it comes, to represent financial progress and not a drag on earnings, and we think that is what most of our stockholders want. ] emphasize this becau~ profitable acqui- sition requires proper timing as well as careful preparation and careful negotia- tion. The industrial scene in recent years provides many examples of ill-timed and ill-considered acquisitions which have re- sulted in troublesome divestment rather than profitable investment. On the other hand, I am sure that you realize Proposal Two, on which we will vote today, is tan- gible evidence of the further steps being taken by your management in this direc- tion. One of the imporiant purposes of Proposal "rwo, as pointed out in the proxy statement, is to enable the Com- pany to buy into its treasury its own MNAT00415046

PROTECTED BY MINNESOTA TOBACCO LITIGATION PROTECTIVE ORDER Belore meeting, stockholders view Company displays of advertising and products. Shown here, Shareholders Grace Weinberg of Kew Gardens and lrvine Friedman o! the Bronx. common stock and thereby facilitate pos- sible diversification moves. Here, as in the field of management, some of the actions we are taking may not bear im- mediate fruit. But the absence of dra. matic announcements does not mean we are standing still. 10 A good example of profitable invest. ment is our important stake in the Brit- ish cigarette market, where your Com- pany owns 13~. ot the ordinary stock of Gallaher Limited, a large tobacco manu- facturer which has an estimated 40% of that market. Gallahcr last year contrib- uted $1,357,000 to our earnings. This represents a handsome return on investment since our Gallaher holdings are carried on our books at less than $5,500,000. This was the amount o! our original investment in our formcr British subsidiary, J. Wix, which we built up over a period of years and which was exchanged two years ago for Gallaher stock. We are now engaged in negotiations looking toward a foreign acquisition in MNAT00415047

PROTECTED BY MINNESOTA TOBACCO LITIGATION PROTECTIVE ORDER one of the European Common Market countrie~ Hopefully we may be in a po- sition to announce such an acquisition in Europe before next year's stockhold- ers' meeting-perhaps even before the year is out. When and if the European Common Market opens up for interna- tional commerce in tobacco products, we hope to be ready with a base of operations on the Continent. Meanwhile we will be acquiring manufacturing and marketing know.how in Europe. I I I have been attending stockhold- ers' meetings of The American Tobacco Company for many years and I realize that no such meeting can be considered complete without some mention of out- side directors. It has long been our con- viction that a tobacco busine~s is best run by men who know tobacco best. We still hold that conviction and our stock- holders have demonstrated on many oc- casions that they hold it too. At the same time, may I recall to you my promise of last year that we would certainly propose for election to our Board outside people qualified to make a real contribution to its deliberations, provided we could find such people. Of course we have the benefit of outside per- spective supplied by our consultanLq and agencies in many areas-finance, ac- counting, legal, marketing, public rela- tions, and so forth. Nevertheless your present management is alert to the pos- sible value of broad outside perspective at the Board level, and we have made a diligent search for qualified outsiders to sit on our Board. I am pleased to an- nounce to you today that we have made progress in this direction, and ] believe our search has been fruitful. We have two likely candidates under considera. tion at this time. Two of the pre~nt members of the Board will retire a few months hence, and it is our intention to replace these retirees with outside direc- tors whom I will nominate at the proper time. Accordingly, barring any unforeseen events or difficulties, I can tell you at this time that the composition of our ]7-man Board before our next stock- holders' meeting will include two outside directors. Let me make it clear that we do not have in mind figurehead directors who will serve as window dressing but working directors with demonstrated capability of contributing to our business decisions. This accords with our view that the func- tion of the Board of Directors is to ad- minister corporate affairs for the benefit of all the stockholders. We do not believe that any director, whether an operating executive or a qualified ouL~ider, should be elected by a minority through cumu- lative voting. A director so elected might feel bound to act in what he considers the interests of a minority, even though such action might not be in the best in- terests of the corporation and the stock- holders as a whole. We believe factionalism, on the Board or anywhere else, is not good for the Company or the stockholders. We be- | MNAT00415048

PROTECTED BY MINNESOTA TOBACCO LITIGATION PROTECTIVE ORDER lieve the present method of election, by the majority, is the best way to avoid this and therefore we do not agree with the proponents of cumulative voting. 12 ] will complete this list of major ac- tions taken by noting that we increased the dividend. Last year, in the course of my report to you, I pointed out that tobacco has a long and honorable history as a creature comfort, stretching back many centuries before Columbus discovered it in this hemisphere. In fact, the growth of the tobacco custom has closely paralleled the rise of civilization itself. If tobacco's history is long and honor- able, it has also been marked by periodic storms, and we are living through such a storm at present. I believe that the cm'- rent anti-tobacco storm, like most waves of hysteria, is motivated in large part by frustrations of one kind or another. There is first of all the frustration of those who are unable to explain certain With the Company's cigar volume exceeding $50 million per year, Mr. and Mrs. F. T. Foy o[ Hatboro, Pa., ~'hou' interest in Roi-Tan, La Corona, Antonio y Cleopatra ond Bocl¢ y Ca. MNAT00415049

PRO'rECTED BY MINNESOTA TOBACCO LITIGATION PROTECTIVE ORDER Sherman M. Ancier Philip Appelbaum Thomas V. Brosnahan ailments which have accompanied our lengthening span of life on earth, and who see in tobacco a Convenient scape- goat. Now, as in generations past, there are those who see in the anti-cigarette crusade a chance to gain public atten- tion, or political advantage, or quick sci- entific notoriety. I cannot tell you that anti-tobacco propaganda will cease. In our 1963 Annual Report, which was sent to you last month, I quoted the re- cent statements of the Board of Trustees of the American Medical Association on the subject of smoking and health. That body proposed, and the A.M.A. accepted, a long-term research project because- and I quote-"Large gaps in knowledge will remain after the Public Health Serv- ice Committee reports on the appraisal of the literature and makes its recom- mendations." Despite dogmatic charges about tobacco from some quarters, the A.M.A. recognized the need to "probe beyond statistical evidence." Early this year The American Tobacco Company and other large tobacco corn- panics pledged a total of ten million dol- lars, with no strings attached, to help finance the A.M.A. study. We have also pledged to the A.M.A. the full coopera- tion of our research department, which is the industry's oldest, dating back to 1911, and which has boon continuously studying the composition of tobacco and tobacco smoke for more than 43 years. As businessmen we might be acctl.e, od of partiality if we challenged those who cloak their attacks in the guise of do- goodism. So let me quote to you a few statements and excerpts from neutral sources which will, I hope, put the exaggerated charges of the anti-tobacco crusaders in ~me kind of perspective: 10 MNAT00415050