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including excise taxes of $491,250,000, income taxes, social security and other taxes, amounted to $648,301,324. Although the Company is not involved inJf~coi!~fio~ko_f_Sta_~t and local tobacco taxes, they represent a substantial levy on sales of its products with commensu- rate higher prices to the consumer. At the end of 1960, 47 of the 50 States (all except Colorado, North Carolina and Ore- gon) had a tax on cigarettes and more than 200 local taxing units (cities and counties) also levied taxes on tobacco products. Capital Expenditures Capital expenditures in 1960 were mainly for machinery and other equipment to im- prove the efficiency of handling and proc- essing in our cigarette factories and for additions to and improvements in build- ings. Additional manufacturing facili- ties were also acquired during the year by our English subsidiary in order to handle its increased volume of cigarette sales. Total capital expenditures in 1960 were $7,838,000 compared with $9,121,- 000 in the previous year. Depreciation charged to cost and expense in 1960 amounted to $5,480,419. Leaf Tobacco As it has for many years, the Government continues to control the growing and marketing of flue-cured and Burley leaf tobacco, the principal types used in mak- ing cigarettes. This control takes the form of acreage restriction at the farm and price support at the auction markets. Average ma'rket prices for flue-cured ~nd Burley tobacco are now nearly four times as high as in 1940. The flue-cured crop in 1960 totaled about 1,250 million pounds, nearly 16% above 1959, and the average selling price for the crop on the auction markets was 59.9¢ per poundmabout 2¢ above a year earlier and a record high. The Govern- ment price support level for the 1960 crop was 55.5¢ per pound. The harvest of Burley tobacco in 1960 was about 496 million pounds, or roughly 1% below the previous year. Prices on the auction markets through the end of 1960 averaged 65.3¢ per pound, which is 4.3¢ higher than in the comparable period of 1959. The Government price support T!54210532

level for the 1960 crop was 57.2¢ per pound. Approximately 75% of the 1960 crop had been sold through the end of the year compared with 907~ at the same ~m.e-in 1059~ The Company's constant effort to im- prove the quality of its tobacco products is, of course, dependent in the first in- stance upon the purchase of the better grades of leaf tobacco. In line with this policy, your Company's purchases on the auction markets were concentrated on the finest grades of leaf tobacco available. The Cuban Situation Your Company owns 84.5% of Cuban Tobacco Company Inc. Common stock. The operating results of Cuban Tobacco Company Inc. have never been consoli- dated with those of The American To- bacco Company. Furthermore, the sum total of its operations in Cuba is not sig- nificant in terms of either sales or earn- ings when compared with total opera- tions of The American Tobacco Company. The American Tobacco Company's in- vestment in and advances to Cuban To- bacco Company Inc. are carried on the balance sheet at $5,555,069, represent- ing less than 17~ of the Company's total assets. The Company's 1960 income in- cluded $207,270 representing interest on Cuban Tobacco Company Inc. loan and nn~.e.~ ; t.hi.~ vcasJessAhan ~./,~ of :1% of The American Tobacco Company's operating income before taxes. Cuban Tobacco Company Inc. has paid no dividends on its Common stock for many years. Through its investment in Cuban To- bacco Company Inc. the Company had an equity in two small subsidiaries which operated in Cuba. One was intervened and the other nationalized. Information regarding the financial aspects of these expropriations are set forth in the notes on page 18. Provision was made against possible loss of leaf tobacco inventories in Cuba owned by The American Tobacco Com- pany which we were unable to have shipped to the United States. This amount was $797,292 after deducting applicable Federal income tax. Cuban Tobacco Company Inc. contin- ues to manufacture cigars in the United States at its Trenton, N. J., factory. Sales of these cigars amounted to $8,716,501 in 1960. Dollar sales of cigars and ciga- T|54210533

rettes manufactured in Cuba are not available for 1960. However, in the past they have represented less than one-half of Cuban Tobacco Company's consoli- dated sales of manufactured products. Advertising and Sales Prornotion Your Company is one of the nation's larg- est advertisers. Virtually all major me- dia, including newspapers, magazines, television, radio and billboards, are used to sustain and widen the demand for our tobacco products by the smoking public. As is the case with most manufac- Supe,'ma,.kct Display turers of branded consumer products, considerable time, effort and expense are devoted to this aspect of operations. Na- tional advertising to sustain and increase the large sales volume of our brands makes ~blg-~or the Company to maintain and improve their high quality standards and still produce a profit. Be- ginning about one hundred years ago, national advertising made possible the emergence of national tobacco brands and the volume production, high quality standards and relatively low prices on which the Company's business is based. Our Sales Organization, which is also nationwide, reinforces the work of our brand advertising and services the dis- tribution of our products. Its members strive to maximize distribution, extend merchandising and display aid to retail- ers, insure that our products are properly eared for at both wholesale and retail levels, and also sample consumers di- rectly. The work of the Advertising and Sales Departments is constantly reviewed so as to get full value for each dollar spent on promotion and so as to strengthen our important lines of communication with the trade and the consuming public. T154210534

']hreyton delivers the flavor... Tobacco Institute The Tobacco Institute, Inc. represents your Company and other tobacco manu- facturers in creuting better knowledge and understanding of tobacco among the general public. On December 1, 1960, Mr. George V. Allen assumed the Presi- dency of The Tobacco Institute. Mr. Allen resigned last year from government serv- ice after a distinguished thirty-year ca- reer as Ambassador to various countries, as Assistant Secretary of State for Public Affairs, and as Director of the United States Information Agency. A native of Durham, North Carolina, Mr. Allen was reared in the tobacco country and has had first-hand experience in our industry. Representatire Adrerti.~eme~ts GOOD GOOD GOOD 1! T!54210535

Smoking and Health As was true in previous years, 1960 pro- duced no laboratory or pathological evi- dence to support the highly propagan- di~-d~garette theory. Th~-lacl~ of substantiation for this theory has been the subject of comment by a number of outstanding scientists. Your Company continues to support the scientific program of the Tobacco In- dustry Research Committee, now in its eighth year. Since its inception, the T.I.R.C. has appropriatgd about $4 mil- lion for objective research in the area of smoking and health, this research being performed by independent scientists with no obligation to the industry other than to pursue the facts and publish them. The research program is administered by a Scientific Advisory Board whose mem- bers are not connected with the tobacco industry. Last year in a joint report to the T.I.R.C., the Scientific Advisory Board stated in part: .... "... perhaps the most significant de- velopment has been the general recog- nition that we do not yet have the an- i960 Stockholders' Mectb~g T154210536

swers: that an association between the extent of tobacco use and the incidence of lung cancer does not prove a causal relationship .... " Personnel Mr. John A. Crowe retired from his du- ties as a Director and Senior Vice Presi- dent, Manufacture and Leaf, on Decem- ber 31, 1960, after more than 50 years of service to the Company. It is-with pro- found regret and a deep sense of loss that the Directors report his death on Febru- ary 18, 1961. During his notable career Mr. Crowe did much to maintain and strengthen the tradition of quality upon which rests the success of the Company and of the industry as well. Mr. Charles Ganshow, formerly a Di- rector and Deputy Comptroller of The American Tobacco Company, and Vice President of the ACC Division, retired from these duties on December 31, 1960, after 50 years of service to the Company and its subsidiaries. His many contribu- tions to the Company's operations will be remembered by those who follow him. The Directors gratefully acknowledge the long and exemplary careers of Messrs. Crowe and Ganshow and their wise counsel as members of the Board. Stockholders' Annual Meeting ' The-knn~al-M~e ti~~kh~de r ,~r~311- be held on W4dnesday, April 5, 1961. For- real notice of this meeting, together with the proxy and proxy statement, accom- panies this report. During the past year I have again re- ceived many letters from our stockhold- ers evidencing an active interest in the affairs of the Company. A substantial number of these communications have shown great interest in the promotion of the Company's products. On behalf of the Board of Directors, I should like to express our appreciation for this cooperation from the stockhold- ers, for the cooperation of our customers and for the faithful service rendered by our employees. PAUL l~I. HAHN Presiden~ T!54210537

1960 OPERATIONS AT A GLANCE The Company received far goods it sold and from interest and miscellaneous ....... • $1,216,015,000 T-l-~s-is-h-ow-i-t-was-used-or-se~-~sid~- $ 648,301,000 $ 276,097,000 $ 222,628,000 $ 6,467,000 $ 38,660,000 $ 28,86~.000 Taxes (excise, income, social security, etc.:) Tobacco (including applicable expenses) Wages, Goods, Services, etc. Bond and Bank Interest Dividends to Stockholders Earnings Retained to Meet Future Needs 3.2% 2.0% I I 14 T!54210538

Consolidated Statements of INCOME AND RETAINED EARNINBS AND WHOLLY-OWNED SUBSIDIARIES For Years Ended December 3I Net Sales ............... Cost of sales, selling, general and administrative expenses .............. Operating Profit ............. Other income ............. Interest and related charges ........ Other deductions from income Total deductions ....... Operating income, before taxes on income .... Federal and other taxes on income ...... Net Operating Income ........... Provision for possible loss of leaf inventory in Cuba, less applicable federal income tax of $863,733 Net Income .............. Retained earnings, beginning of year ...... Cash Dividends: Common stock, 1960, $2.72~'2p share; 1959, $2.50 per share (Note 1)er ..... Preferred stock, $6 per share ....... Total dividends ........ Retained earnings, end of year ........ Depreciation provided and charged to costs and expenses amounted to $5,480,419 in 1960 and $5,215,154 in 1959. 1960 $1,215,342,819 1,072,572,440 142,770,379 671,868 143,442,247 6,467,008 1,132,073 7,599,081 135,843,166 72,523,561 63,319,605 797,292 62,522,313 254,908,381 317,430,694 35,493,258 3,166,986 38,660,244 278,770,450 1959 $1,161,376,858 1,019,129,251 142,247,607 511,415 142,759,022 5,906,001 781,751 6,687,752 136,071,270 72,823,000 63,248,270 63,248,270 227,389,707 290,637,977 32,562,610 3,166,986 35,729,596 $ 254,908,381 TI54210539

CONSOLIDATED BALANCE SHEETS Assets December 81 Cash ................ Accounts receivable,customers ........ Leaf tobacco, manufactured stock, operating supplies, etc., at average cost ........... Miscellaneous accounts receivable ....... Total current assets ...... Investment in and advances to Cuban Tobacco Com- pany Inc., a majority-owned subsidiary, at amounts not in excess of cost (Note 2) ....... Insurance deposits and miscellaneous investments Land, buildings, machinery, etc., at cost, less accu- mulated depreciation, 1960, $58,752,744; 1959, $55,844,776 ............. Prepaid expenses and deferred charges ..... Brands, trade-marks, patents, good will, etc ..... 1960 $ 20,400,242 56,576,888 693,389,538 1,451,845 771,818,513 5,555,069 1,123,080 68,699,311 3,704,528 1 $850,900,502 19~9 $ 17,740,414 51,910,968 656,680,134 1,696,788 728,028,304 5,955,069 1,113,692 67,776,385 3,652,437 1 $806,525,888 16 T154210540

AND WHOLLY-OWNED SUBSIDIARIES Liabilities December 31 Notes payable ............. Loans payable by British subsidiary ....... Accrued taxes ............. Accounts payable and accrued expenses ..... Dividend on preferred stock for quarter ended December 31 ............. Debentures to be redeemed through sinking fund opera- tions (Note 3) ............. Total current liabilities ...... Debentures (Note 3) ........... Stockholders' Equity Capital stock (Note 1): Preferred, six per cent cumulative, par value $100 per share ............. Common, par value $12.50 per share ..... Excess of net proceeds from capital stocks issued over par values .............. Retained earnings ............ Total ........... $ 78,000,000 8,665,417 53,751,821 24,064,492 791,746 10,556,000 175,829,476 135,740,000 311,569,476 52,783,1 O0 162,813,050 44,964,426 260,560,576 278,770,450 539,331,026 $850,900,502 1959 $ 56,000,000 4,410,546 53,817,206 15,760,433 791,746 9,624,000 140,403,931 150,653,000 291,056,931 52,783,100 162,813,050 44,964,426 260,560,576 254,908,381 515,468,957 $806,525,888 T154210541