Tobacco Documents Online

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Contents I Financial Highlights 2 Message from the President and Chairman of the Board 4 Tobacco Products 16 Food Products 20 Distilled Beverages 22 Financial Review 25 Financial Statements 31 Auditors' Certificate 32 Ten Year Financial Review 33 Directors and Officers Annual Meeting The Annual Meeting of Stockholders will take place on Wednesday, May" 7, 1969, at 10:00 a.m. inthe Grand Ballroom of The Waldorf-Astoria in New York City. A formal Notice of Meeting, Proxy Statement and Proxy accompany this report. T!54210750

The American Tobacco Company 1968 Annual Report Financial Highlights (In thousands of dollars except per share amounts) 1968 1967 Per Common Share Net income Primary (based on average number of shares outstanding during each year) Pro forma (adjusted to give effect to possible conversion of convertible securities and exercise o~ options) . Dividends ........... $3.38 $3.15 $3.32 -- $1.875 $1.80 Income, before taxes on income and minority interest ........ Net income ........... Dividends ........... Current assets, December 31 ..... Current liabilities, December 31 .... Working capital, December 31 ..... $~,897,852 $1,493,535 205,612 173,769 92,911 89,227 50,931 50,996 1,131,059 808,289 342,523 231,337 788,536 576,952 Number of Common stockholders, December 31 ......... Average number of shares outstanding during the year ......... 145,392 144,967 27,513,986 28,320,398 Operating Results By Product Line NET SALES 1968 1967 Amount % Amount % Tobacco Products Domestic $1,115.7 58.8 International 358.8 18.9 Distilled Beverages 126.5 6.7 Food Products 289.1 15.2 Other 22.9 1.2 Deduct Intracompany Sales (15.1) (.8) Total $1,897.9 100.0 OPERATING I~COM~E(1) 1968 1967 Amount % Amount % $1,123.8 75.3 $167.1 74.6 $151.6 82.8 32,9 '2.2 27.7 12.4 8.4 4.6 113.8 7.6 16.6 7,4 13.2 7.2 219.9 14.7 9.8 4.4 7.4 4,0 14.4 1.0 2.9 1.2 2.5 1.4 (i 1.3) (.8) .... $1,493.5 lOO.O $224.1 1oo.o $183.1 lOO.O Earnings before interest, other income and expense items, taxes and minority interest. T154210751

To Our Stockholders: Roberl B. Walker On behalf of the Board of Directors of The American Tobacco Company, I am pleased to submit this Annual Report for 1968-to the Company's stockholders. In doing so, it is my privilege to report that 1968 represented a year of vigorous growth as sales increased to a record high of $1,897,852,000. Net income for the year, despite a much larger tax burden, attained a new high of $92,911,000. Innovation in the filter cigarette field and sound diversification into nontobacco areas are two major accomplishments of the past five years-each has substantially aided American Tobacco's progress. Specifically, in the last five years, sales have increased by 36 %, income before taxes and minority interest has increased by 28 %, and net income, despite the 1968 Federal surtax, has increased by 21%. Net income per Common share during this period has risen from $2.49 in 1963 to $3.38 in 1968. Managcmcnt's constant objective is to improve sales and profits and thereby enhance the value of your investment. As an expression of confidence in the growth of the Company, the Board of Directors increased the annual dividend by ten cents per Common share in April 1968. In view of record results for 1968, the annual dividend rate was again increased by ten cents at the January 28, 1969, Board of Directors meeting. This action raised the annual dividend rate to $2.00 per Common share. Since 1963 the dividend to Common stockholders has been increased five times, or by 33 %. The year 1969 has opened on a strong note and in the months ahead we anticipate continued growth of our subsidiary operations, a larger share of the filter cigarette market, and increased international tobacco sales. In 1962 the Company acquired a 13 % interest in Gallaher Limited, the second largest tobacco manufacturer in the United Kingdom. Faced with a challenge to our investment whert a competitor bid for control of Gallaher last summer, we made a successful counter offer which was endorsed by the Gallaher Board and resulted in American Tobacco's present ownership of 67% of Gallaher's Ordinary Stock. The inclusion of Gallaher in our financial results, beginning September 1, 1968, contributed to the Company's record income for the year. Last July we acquired a controlling interest in Duffy-Mott Company, Inc., which adds depth and variety to our line of food products. American now has a 78% interest in the company and financial results are included from July 1, 1968. The company is well known for its quality fruits, vegetables, juices. controlled-calorie meals and seafoods. Donald M. Klock, President of this subsidiary, and well known in the food industry, was elected to American Tobacco's Board of Directors in July. The Company's largest domestic subsidiary, Sunshine Biscuits, Inc., increased its volume in 1968 and has entered 1969 with several promising new biscuit and snack products. Two of these, Mint Hydrox and Cheez- Pleez, are already in national distribution. In 1968 Bourbon was again the largest-selling distilled beverage in the United States. American's subsidiary, the James B. Beam Distilling Co., registered substantial gains with its Jim Beam Kentucky Straight Bourbon, the largest-selling of all strai,,ht Bourbons, according to industry analysts. 28% of the Company's domestic business. This is an important component of our business and accounted for $429,800,000 in sales. We have made good progress in developing our filter cigarette business which at year end represented more~than 35% ot Our totalcigarette business. The Company now has twelve filter products nationally distributed compared with two five years ago. Our present combination of filter products in the popular 85 millimeter length and in the newer 100 millimeter length gives the Company a broad filter cigarette line-one that is designed to appeal to every consumer preference. The market for 100 millimeter cigarettes, first introduced by PALL MALL Gold in late 1964, grew from 10% in 1967 to 13% in 1968 according to industry analysts. American Tobacco has a large share of this market segment, with six 100 millimeter cigarette products distributed nationally. It appears that this segment of the market will continue to gain in 1969. PALL MALL, LUCKY STRIKE and TAREYTON are among the top ten cigarette brands sold in the United States. In 1968 PALLMALL maintained its position of second place among all cigarettes sold in the country even though demand for nonfilter cigarettes is not increasing. TAREYTON increased in unit sales and is the largest-selling activated charcoal filter brand; according to T154210752

industry analysts it accounts for 64% of that particular market segment. _ The industry's success story in 1968 was SILVA THINS 100's and the favorable sales trend for this brand is continuing. Additionally, SILVA THINS Menthol 100's were introduced nationally in September. Our new thin cigarette was quick to spark competitive imitations. Last October the Federal Tra_d~ Commission Laboratory released a report rating I22 cigarette products by "tar" and nicotine content. CARLTONs were lowest in"tar" of all cigarettes tested and SILVA THINS were the lowest in "tar" of all 100 millimeter cigarettes tested and lower than most kings. The Company's Cigar Division, one of the nation's largest cigar manufacturers, had record sales in 1968. ROI-TAN, which again contributed to the Division's sales increase, continues to be the largest-selling cigar in the I0¢ price category. In the higher price classifications, combined sales of ANTONIO y CLEOPATRA, LA CORONA, CABA~AS and BOCK again reached a new record. Since 1953 the tobacco industry has appropriated more than $35,000,000 for a wide range of research studies related to smoking and health. Those receiving research grants are given complete freedom to pursue their work and publish the results objectively and independently. It is regrettable that so many anti-tobacco proponents choose to invest their dollars in propaganda largely based on statistics rather than in constructive scientific research. The pressures of inflation continue unabated in the form ol~higher taxes, higher interest rates, increased cost of tobacco leaf, and increased wages. Increasing taxes at the state and local level continue to penalize our cigarette products. Federal and state excise taxes on the industry's cigarette products alone amount to more than four billion dollars a year. Products of The American Tobacco Company and subsidiaries are manufactured in twenty-two states and the Company employs more than 25,000 Americans. For many years The American Tobacco Company has provided equal employment opportunity and merit a dv a nc.e~jlt3~thoxtt_regardao_race,- color, creed or national origin. Recently the National Alliance of Businessmen, an organization to foster iob opportunities in the business sector for the hard-core unemployed, commended The American Tobacco Company "for advancing the cause_with v~igor and determination and providing an exemplary service to the nation." Again this year you will note that the FinancialHighlights, on page 1, present a report of sales and operating income by product line. Detailed accounts of our business and financial operations appear in the pages that follow, which I believe present a clear picture of our progress in broadening the scope of our operations. To reflect the enlarged character of our business, your Board of Directors has recommended that the Company's name be changed to American Brands, Inc. In recommending favorable action to our stockholders, we are mindful of our important domestic tobacco business with sales of over a billion dollars annually and of The American Tobacco Company name associated with that business. Your Board of Directors intends to conduct the cigarette and smoking tobacco business as a Division to be known as "The American Tobacco Company, a Division of American Brands, Inc." The cigar business will continue under the name "American Cigar, a Division of American Brands, Inc." These operating Divisions of your Company will function with srparateManagements in effect like separate subsidiaries, but without formal incorporation. Though the Board of Directors has approved steps to restructure the organization and Management of the Company, your present Board will remain but under the new American Brands, Inc., name. Your Directors will continue to devote their_gff~ts_ to increasing the growth of the highly profitable tobacco divisions as well as of our more recently added product lines. Our record results for 1968 reflect the combined contributions of many people. We commend our employees _for their good work and are grateful to our stockholders for their continued support of Management. We also thank our suppliers and distributors who help us make and market quality American Brands. ROBERT B. WALKER President and Chairman ol the Board February 27, 1969 T!54210753

Tobacco Products: Domestic Virgil D. Hager Executive Vice President Robert K, Heimann Executive Vice President Sales Cigarettes: American Tobacco's filter cigarette business continues to increase and in 1968 accounted for a gain of $21,400,000 over 1967. Corresponding to the industry trend, there was a decrease in the Company's volume of non filter cigarette business. Since 1963 the Company has led the industry in bringing to market new and improved cigarette products: CARLTON was the first brand to identify "tar" and nicotine data on the package; PALL MALL Gold was the first brand to be offered in the now-popular 100 millimeter length; SILVA THINS 100's was the first new thin cigarette. As a result of the Comp~.ny's intensive new product development program, at year end filters accounted for 35 % of our cigarette business as compared with about 16% five years ago. TAR.EYTON, with the activated charcoal filter, according to industry reports commands 64% of that market category and has moved upward from tenth to ninth place among all brands sold in the United States. TAREYTON continues to enlarge its share of market. PALL MALL retained its position of second place among all cigarettes sold in this country. PALL MALL Kings, PALL MALL Gold 100's and PALL MALL Menthol 100's are all sold under the PALL MALL label. The results of United States Government tests showed PALL MALL Gold 100's to be lower in "tar" than the largest-selling filter king. SILVA THINS 100's gained national distribution in the second quarter of 1968 and, during the latter part o1~ the year, SILVA THINS Menthol was introduced nationally. One industry analyst in ranking 41 cigarette brands reported SILVA THINS as being twenty-third, which is indicative of the strong consumer response to this new brand. In the Federal Trade Commission's October I6, 1968, report listing "tar" and nicotine content of 122 cigarette products, SILVA THINS was reported lowest in "tar" of all 100 millimeter cigarettes tested and lower than most kings. The same report listed CARLTON Cigarettes as lowest in "tar" of all brands; ~SFOS~ffl~ mcreased during 1968. Other filter brands marketed by the Company are LUCKY FILTERS, with a filter that combines charcoal with rolled tobacco; MONTCLAIR, a menthol cigarette with a charcoal filter; BULL DURHAM Extra Size, a-cigarette that smokes slower because of its extra thickness, and HALF and HALF Cigarettes, the first to feature pipe tobacco in a filter cigarette. These cigarette products are representative of the Company's efforts to cover the entire range of filter preferences in a changing market. Other promising cigarette innovations are continually being developed and tested. The Company's program for shipping tax-free cigarettes and cigars to the Armed Forces overseas continues to receive favorable response. Recognition of this program has been most gratifying and many cartons of our fine brands were shipped in 1968 with "thank you" cards for the serviceman to return to the sender. TI54210754

Pall Mall Gold lO0's now lower in"tar" filterl ng! Who says so ? The latest U.S. Government figures. tastier~ .~. milder You mdke out better at both ends! T154210755

Alfred F. Bowden Vice President, President, Cigar Division Cyril F. Helsko Vice Presiden! and General Counsel Cigars: American's Cigar Division posted record sales in 1968 even . :... though-the industry's totalSales were lower than in the previous year. Our Cigar Division again increased its share of market. ROI-TAN again contributed to the Division's sales increase and remains the largest-selling cigar in the 10~ price category. In the higher price classifications, combined sales of A~O~/_O_y_CLEOPATRA, LA CORONA, CABA~IAS and BOCK again reached a new record. During the year, the Division designed and introduced a series of packaging innovations for its large cigars. Also, recognizing the increas- ing popularity of little cigars, the Divisionbrough~to market ANTONIO y CLEOPATRA Filter Tipped Little Cigars in an attractive package. It is anticipated that this new product will enhance the already strong position the Company has in this field with ROI-TAN Little Cigars. ~'~':': American Tobacco's Cigar Division is the country's third largest cigar manufacturer. Smoking Tobaccos: HALF AND HALF, the Company's leading smoking tobacco, remains one of the largest-selling brands in the country and 1968 sales exceeded the 1967 level. In lanuary 1968 PALADIN BLACKCHERR¥, a distinctive and highly aromatic blend of quality tobacco, was given national distribution and contributed to the increase in our total pipe tobacco business. The development and testing of new smoking tobacco blends and flavors continue to be an active part of our new product program. The Company's cigarette, cigar and smoking tobacco products are the finest that money can buy. In recommending these brands to your friends, you can be confident of their high quality. For many years our stockholders have shown great interest in promoting the Company's products and this has resulted in added sales. dulien B. McCarthy Vice President--Manufacture and Leaf T154210756

Ta Ifyou could put,. reyton~s charcoal f, lter on your cigarette, you~! have a heifer cigarette. "That~ wl~ us Tareyton smokers would rather Fight than switch !" But not as good as a Tareyton. 100~ or kings/ze. TI54210757

Henry G. French Director of Manufactu ring John B. Sparrow Director of Leaf Purchases Manufacturing and Leaf On January 1, 1968, we encountered a strike at all our cigarette factories which was settled on $anuary 9.5. New contracts with the Tobacco Workers International Uniotl were successfully negotiated for a three- year period. As part of a continuing program to -i.ncreasee.fficiency-th ro u ghout~all-- areas of manufacturing operations, the Manufacturing and Leaf Departments have instituted a concept often referred to as "task force planning." As a direct result of this effort, the Company has reduced its costs for leaf processing and handling; the Company is also _ becoming more self-sufficient and is fabricating materials that were previously purchased from outside sources. Consolidation of all divisions of the Department of Research and Development at Bermuda Hundred, near Richmond, Virginia, was completed in early 1968 and has resulted in a substantial reduction in overhead. The Company is engaged in both fundamental and applied research, since it is clear that innovation is dependent upon advances in scientific knowledge. The pace of technology accelerates and, to keep abreast of technical advances, research has increased its use of computerized data processing and is developing an information selection, storage and retrieval system. During the year the Company initiated a $6,575,000 expansion program at the Bermuda Hundred complex. The project includes additional processing and storage facilities and a new office building scheduled for completion in early 1969. The Company's program for tighter manufacturing controls represents a continuing effort to compensate for the steady rise in the cost of leaf tobacco and other manufacturing costs. In the ten years ending in December 1968, the average market price per pound for flue-cured tobacco increased from 58.3 cents to 66.5 cents or 14% ; over the same period, the average price per pound for Burley leaf increased from 60.6 cents to 74. I cents or 22%. Last-yea rLs-fl ue-cu r~d-tobaccaero p was about 989 million pounds versus 1,263 million pounds in 1967. The government support price increased from 59.9 cents per pound to 6 | .6 cents per pound. The Burley crop was estimated at year end to be about 557 million poundscompared with-541 million pounds in 1967. The government support price increased from 61.8 cents per pound in 1967 to 63.5 cents in 1968. Average prices reflect all grades of tobacco placed on the market. This situation tends to underestimate our leaf costs, since our requirements are for tobacco of a quality which usually sells at prices higher than average. Among the Company's operating results by product line on page 1 is a heading, "Other," which includes among other smaller subsidiaries the operations of the Golden Belt Manufacturing Company located in Durham and Reidsville, North Carolina. Golden Belt Manufacturing Company is American Tobacco's oldest subsidiary and its production includes laminating foils, printing, textiles and plastics. While 76% of its sales are intracompany, Golden Belt experienced outside growth in 1968. As announced in 1967, its manufacturing capabilities for plastic injection moldings were increased by more than 50% to meet greater demand for a variety of plastic products. T154210758

It's better when you do it together That's why Lucky has put charcoal and rolled tobacco together in a filter for the first time. You know about charcoal. It's the great mildness maker. Some cigarettes settle for charcoal alone. But Lucky rolled tobacco, a great natural filter. Together they give you -- real real mild. KING SIZE OR Charcoal and rolled tobacco in the tip. Only Lucky gives you both. Ti54210759

Eugene F, Mooney V=ce President-- Sales Philip H. Cohen Director of Advertising Boone Gross Relired (Formerly President. The Gdler.te Cempany) Marketing Five years ago the Company's entire Marketing Department was reorganized as a corporate function and all operations associated with creating and delivering a product were grouped under one Vice President. The operations include Sales. Advertising, Market Research, Corporate Media, New Pr'oduct Development and Public Relations. At that time the Company's most critical probtem stemmed from the fact that filter volume represented about 16% of our cigarette sales. The Company has substantially strengthened its position in the filter cigarette market since then and now has a total of twelve filter products nationally distributed compared with two five years ago. In terms of percentages, the Company's filter volume has increased by more than 150% since 1964, which, translated into dollars, represents $223,000,000 in added sales. Filter volume in J'anuary 1969 represented 36 % of total cigarette volume and the Company's marketing efforts are dedicated to further increasing this percentage. In late 1964 American Tobacco first introduced PALL MALL Gold in the new 100 millimeter size and the concept for the luxury length cigarette in the gold packing swept the market with a flood of imitators. In 1968 the 100 millimeter cigarette was the fastest growing segment of the overall filter business, representing approximately 21% of the total liltcr market according to a recognized independent report. American Tobacco has the largest number of products in the ! 00's market with six products distributed notionally. Though TAREYTON Filters have been inthe Company's product line since 1954, it was not until 1963, when a new advertising and marketing plan was developed for the product, that it began to show dramatic growth. Since that time, unit sales of TAR.EYTON have increased 56%. TAREYTON 100's were introduced [8 months ago and in 1968 the two products accounted for 64% of the activated charc_oaJ cigarette market. The intensive new product development program, begun with the introduction ot~ CARLTON in January 1964, had but one purpose and that was to create new filter cigarette products which would enable American -Tobacco to increase its filter volume. That objective has been pursued diligently and the Company's success in increasing its share of the filter market has been the direct result of our continuing program. American's newest filter introduction, SILVA THINS 100's, exemplifies the new cigarette with a new and meaningful product difference. In 1968 the Company invested most of its advertising dollars in network and spot television. In addition, leading mass magazines, news weeklies, newspapers and major men's" magazines were used t~or print advertising. Although the dollar amounts spent on cigarette advertising are large, they represent a small percentage of the total dollars spent for cigarettes in this country. Many other industries in the consumer goods field spend proportionately more for advertising than cigarette manufacturers. T!54210760

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I2 Advertising for our cigarette products is handled by six advertising agencies and all are compensated by an incentive fee method which was introduced in 1965. This system enables the Company to achieve greater mileage from every dollar spent. Over the last four years savings from this system have totaled $8,157,000. For many years it has been the Company's position that smoking is Our nationwide Sales Force works to get distribution and display for our major cigarette products. Theirs is a demanding and never-ending task since the number of retail outlets for cigarettes in the United States is estimated at 1,500,000. a form of enjoyment for adults. In George H. Woodard President, Welling & Woodard. Inc. 1963 the Company discontinued cigarette advertising in college publications and halted campus promotional activities to underscore lhis position. All cigarette advertising is carefully studied to avoid situations that might be misconstrued as appealing to the youthful market. Until now, Antonio y Cleopatra offered a great deal of pleasure. Now we offer ~~/ a L__ittle pleasure, too. New, mild AE.-C Little Cigars. They're flavorful and mild enough to satisfy the taste of any smoker. They're slim, extra long, and fil ter tipped. The elegant pack holds 20. Have a Little.You'll want a little more. T154210762

Cigarette Products Filter Cigarettes PALL MALL Gold 100's-lower in "tar" than the best-selling filter king! Longer. Milder. In the distinctive gold package. PALL MALL Menthol 100's--extra cool.., extra mild and forest fresh. Combines the outstanding taste of PALL MALL's fine tobaccos with menthol TAREYTON -- if you could: put "l'AKt~¥'rON'~h~lt-e-r-o~ your cigarette, you'd have a better cigarette. But not as good as a TAREYTON. 100's or king-size. LUCKY FILTERS -- put charcoal and real tobacco together in the LUCKY Filter and what have you got? Real tobacco taste made real mild. King-size or 100's. SILVA THINS 100's--lowest in "tar" of any 100's-- lower than most kings. Yet better taste. SILVA THINS has the Skyline Filter. SILVA THINS Menthol 100's- the same mild taste as SILVA THINS 100's but with a fresh menthol flavor. MONTCLAIR--where does a menthol smoker go to get a charcoal filter? MONTCLAIR-that's where... CARLTON--U.S. Government tests show two packs of CARLTON have less "tar" than one pack of any leading-brand-, BULL DURHAM ]Extra Size-- smokes slower for a better taste because it's thicker than other cigarettes. The slower the smoke the better the taste. HALF AND HALF Filter Cigarettes --pipe tobacco in a filter cigarette. The same fragrant HALF AND HALF blend pipe smokers have enjoyed for years. Cigar and Smoking Tobacco Products Cigars ROI-TAN--America's largest-selling cigar in the 10¢ price class, ROI-TAN offers more shapes than any other cigar at its price. Also ROI-TAlq Tips, Cigarillos and Trumps in the 5¢ class, and Golfers in the 4¢ class. ANTONIO y CLEOPATRA--the mildest top-quality cigar, available in 12 distinctive shapes. Selected shapes are available in both light and dark wrappers. BOCK-the original panetela, created in 1888. Also BOCK Pan-A-Tips, the panetela-shaped cigar with a plastic tip, and the new graceful, mild-tasting BOCK Chancellor. LA CORONA --"Supreme the World Over"-available in a wide variety of shapes in either light or dark wrappers. TIPTON --a slender cigar with the new "Lock-On" plastic tip and the extra light taste. Customarily sold at the popular price of 5 for 20¢. CABA~AS -"The Aristocrat of Fine Cigars-since 1795." Little Cigars ROI-TAN --the popular-priced little cigar in the traditionalsoft pack. ANTONIO y CLEOPATRA--the milder, longer little cigar of distinction, elegantly packaged in a crush-proof box. Nonfilter Cigarettes PALL MALL--King-Size--its famous length of fine tobaccos makes PALL MALL the long cigarette that's long on flavor. "Outstanding-- and they are mild!V LUCKY STRIKE--Regular Size. LUCKY STRIKE Means Fine Tobacco. A blend of the finest domestic and Turkish tobaccos. HERBERT TAREYTON--King Size With The Tailo~_d_Tip~J.avoy.j~¢ for more than fifty years because of its distinctive mild taste. Smoking Tobaccos HALF AND HALF--the Company's leading smoking tobacco, Burley and Bright, with a wonderful fragrance and aroma. BLUE BOAR-- American Tobacco's leader among high-grade pipe tobacco blends, now in pouch-in-box packing. GENUINE "BULL" DURHAM_ far and away the No. 1 "roll-your- own" tobacco. PALADIN BLACKCHERRY -- quality pipe tobacco, custom blended for a full-bodied flavor and rich aroma. 13 T!54210763

14 Smoking and Health The program of The Council for Tobacco Research--U.S.A., supported by the Company and others in the industry, is now in its sixteenth year. Since its inception more than $19,000,000 has been appropriated by the industry for a wide range of research studies through the Council. Research grants are recommended by eminent m en-of~eien ce~ompri " ~sing-the- Scientific Advisory Board of the Council, and grantees are given complete freedom to pursue their work and publish the results objectively and independently. Since 1963 your Company and five other cigarette manufacturers have pledged $18,000,000 to the American Medical Association for further independent research in the field of smoking and health. Research continues under grants made by the American Medical Association. The tobacco industry continues to endure unfair and unjustified harassment from government and private sources that has been unequalled since the Volstead Act. The use of antismoking commercials by TV and radio stations in response to the Federal Communications Commission requirement under its "Fairness Doctrine" that broad- casters devote "significant" time to antismoking messages typifies the pressures exerted against the tobacco industry. Despite the volume and virulence of anti-tobacco propaganda, the cold fact remains that no clinical or biological evidence has been produced which demonstrates how cigarettes relate to cancer or other disease in human beings. T154210764

Gallaher Limited 15 Gallaher reported increased sales for 1968. Converted to U.S. dollars, sales were $979,I40,000 compared with $940,457,000 in 1967. In view of these results the Directors of Gallaher will recommend at their General Meeting on April 23 a higher final dividend payment to Ordinary shareholders for 1968. Gallaher's principal cigarette brands in the United Kingdom are Senior ~rvJcc,.P~r~Drive_, Kensitas and Benson & Hedges. The company's quality cigarette products account for approximately 25 % of the United Kingdom's cigarette market. In 1968, following the successful introduction of Senior Service Extra - a cigarette in the lower price category-Gallaher placedthtee new cigarette products in test markets. One of the three, Albany cigarettes, offering the consumer a savings over popular priced coupon brands, became the third largest seller in Scotland and is now being introduced nationally. Gallaher's major cigar products are Manikin and Hamlet which are the two largest-selling brands in the country. Other important cigar brands are Senator, Harlequin and John Cotton cigarillos. Gallaher's cigar business represents more than 50 % of the cigar market in the United Kingdom. Gallaher's smoking tobacco products are Condor, Old Holborn, Holland House and John Cotton. Gallaher sales and income were higher than in 1967, partly as a result of a price increase that was instituted in July. However, this increase was needed to offset the devaluation of the British pound and the cost to United Kingdom manufacturers of replacing Rhodesian tobacco with more costly American tobacco. Results for 1969 will reflect the full effects of devaluation and exclusion of leaf purchases from the Rhodesian tobacco market. The company maintains its Head Office and service departments in . London; however, because of its Irish origin the Registered Office of the company is in Belfast. Of its 15,000 employees, 6,000 work in Northern Ireland. T-he-Gallaher_f.a~:torla~ :~r~. lncated in Belfast and Lisnafillan, Northern Ireland; at Hyde and Middleton near Manchester, and in Cardiff and Port Talbot, Wales. A new factory near Dublin to service the Irish Republic started production early irt 1968. The company's large Central Research Laboratory in Belfast is engaged in evaluation of leaf tobacco, smoking properties and projects relative to the manufacture of tobacco. It also conducts work for the Tobacco Research Council. On January 1, 1969, the following American Tobacco executives became Directors of the Galtaher Group of Companies: Robert B. Walker, President and Chairman of the Board of Directors; Robert K. Heimann, Executive Vice President; Cyril E Hetsko, Vice President and General Counsel and John H. Hager, Marketing Coordinator. Mark R. Norman, O.B.E. Chairman, Gallaher Limited A. W. H. Stewart-Moore Managing Director, Gallaher Limited Ti54210765

Food Products 16 James L, Bauchat President, Sunshine Biscuits, Inc. The sales of Food Products accounted for $289,089,000 in 1968 compared with $219,918,000 in 1967. The substantial sales increase reflects, in addition ~0$unshine growth, the operations of Duffy-Mott Company, Inc. Sunshine Biscuits, Inc. Sunshine's record sales in 1968 are attributable primarily to the rapid growth of the snack division. During the year a number of programs progressed from the planning stage to the stage of implementation. Specifically, they are (1) Manufacturing facilities now in the process of realignment and modernization, (2) A product line pruned of unprofitable items, (3) Sales territories restructured for more effective coverage of major outlets and (4) Advertising which has been give.n a new competitive punch. These programs have one single objective and that is to sharpen Sunshine's competitive thrust. Sunshine's most successful new products in national distribution are Mint Hydrox, tangy Cheez-Pleez and the new sugar dusted cookies-- Lemon Coolers. One of the most interesting new items being handled in the snack line is Nibb-lts, a puffed potato-base snack. The new Stay-Crisp plastic bag liner was introduced with a redesigned carton for Krispy Crackers in the last quarter of 1968. Early results indicate a substantial sales gain for these popular salted crackers. Primary Sunshine Products SUNSHINE KRISPY CRACKERS. Flaky-thin, flavorful saltine crackers which "out-taste 'era all." SUNSHINE HYDROX COOKIES. The original creme-filled chocolate sandwich cookie. Also available with a mint filling. SUNSHINE HI HO CRACKERS. The all-around, round cracker that About 40% of Sunshine's volume is in snacks-principally potato chips- as distinct from the biscuit and cracker business. The snack division also markets corn chips and, in California, refrigerated potato products are marketed for restaurants and institutions. This year a program to achieve package design uniformity and introduce the Sunshine logotype on all snack packages was phased in to achieve nationwide identification for Sunshine snack products. Sunshine now markets snack products, including potato chips, corn chips, corn snacks, nuts and popcorn, in 36 states and Canada. Sunshine snack products are marketed under the following regional names: Bell Brand, Blue Bell, Dickey, Drenk's, Gordon's, Ihrie, Klein's, Krun-Chee, Mann's, Old Vienna, Humpty Dumpty and Schuler's. The Executive team was reinforced with the election of Horst G. Denk to the position of Executive Vice President and Director. Cyril C. Nigg was elected to the Board of Directors and named Assistant to the President. At year end, W. Elliot Brownlee retired as Chairman after nearly 40 years of loyal and devoted service. Sunshine acknowledges the many contributions made by Mr. Brownlee during his varied career in the field of milling and production techniques, processing and quality control, product improvement and the establishment of raw material standards. goes with anything. SUNSHINE CHEEZ-IT CRACKERS. Delicious, inch square cheese crackers which are "Good Any Old Time!" SUNSHINE FIG BARS. Filled with a generous quantity of luscious figjam. SUNSHINE ORBIT CREME SANDWICH. Two crunchy toasted coconut cookies with a delicious, vanilla filling. SUNSHINE SHREDDED WHEAT. Ready-to-serve cereal made from the whole kernel of wheat. SIYNSHTNE CHEEZ-PIX. A new snack, finger shaped with a tangy cheese flavor. SUNSHINE GOLDEN FRUIT. The fruit sandwich biscuit filled with choice raisins. SUNSHINE GRAHAM CRACKERS. Nutritious graham crackers, good for.young and old alike. SUNSHINE VIENNA FINGERS. Pastry flavored sandwich cookies with creamy vanilla filling. SUNSHINE SUGAR WAFERS. Sugar-crisp waffled cookies failed with frosty icing. SUNSHINE CHEEZ-PLEEZ. Tangy, cheese snack crackers in four party shapes. Perfect for spreads and dips. TI54210766

17 Sunshine doesdt believe in fat saltines. 20 Sunshine Krispys 20 of the other leading saltine The best saltine is a thin, crisp saltine. As the picture shows, Su~shiue Krispy saltines are achmlly thimxer than the saltine which claims to be slim- style. Thim~er, crispier, better tasting. And because Sunshine bakes 'era this way, you get up to 8 ~xtra Krispys in every box. ~Vill the Sutmhine baker~ ever bring out fat salt~ ~ F~t chalice. ~n~e ~t~ ~tten And ~u ~n prove i~ T154210767

Food Products I8 Donald M, Klock President, Dully-Mot! Company, Inc. Duffy-Mott Company, Inc. Duffy-Mott is best-known for its Mott's Apple Sauce and other apple products, despite the diversity of its broad family of quality foods. In 1968 Duffy-Mott retained its leadership in the apple products field and by expanding distribution to previously uutouched markets in the South, Midwest and West Coast, achieved national distribution for this popular line. Another household word in the Mott's line is Sunsweet Prune Juice, a leading Duffy-Mott product since 1933 when the company became the first to process prune juice. Sunsweet has consistently outsold all other brands of prune juice combined. Other products marketed under the Sunsweet label are Apricot Nectar, Apricot-Apple-Prune Juice and Ready-to-Serve Prunes. A highlight of the company's year was its successful introduction to the New York market of a wide line of specialty vegetables packed in glass under the Lord Mort label. This packaging innovation in the vegetable field includes, for example, Cut Green Beans, Carrots, Beets, Peas and Tomatoes. The glass jar containing these premium products instantly identifies their color and quality, and on the basis of demonstrated consumer acceptance in the test region, Duffy-Mott plans to expand distribution into new markets. The company has.developed a promising new product called Clamato, a deliciously seasoned clam and tomato flavored cocktail. Following successful introductions --in-Omaha,, A-I b any-and-N ew-Yo rk, the company immediately sought distribution on a national basis. Clamato has proved popular not only as a breakfast drink, an appetizer and a drink mix, but as a base for soup and other dishes. Also new from the company's research laboratory are Lord Mott Rice Pudding and Lord Mott Tapioca Pudding, both packaged in glass. Market tests have been successful and broader distribution is planned. A totally new effort during the year was the company's entry into the institutional food field. In this area, Duffy-Mott has been successful with its frozen "Surf Cakes," prepared in the company's plant on Maryland's Tilghman Island. The company's nutritionists are developing additional frozen seafoods beamed at the institutional market. Additionally, Duffy-Mott has acquired the equipment and facilities of Cherry Growers, Inc., a quality fruit-growing cooperative head- quartered in Traverse City, Michigan and has arranged to market and produce its products. The major products include cherries, apples, plums, blueberries and rhubarb. This expansion not only adds other lines of fine foods to the growing Mott's family, but also provides the company with three midwestern plants to increase production of existing Duffy-Mott products. Duffy-Mott Products MO'I~r'S Apple Sauce--five kinds of apples make Mott's apple sauce never too sweet, never too tart, always just right. MOTT'S Apple Juice--fresh apple flavor so delicious and crisp it almost crackles. SUNSWEET Prune Juice-- the Relaxati~ze~-Only~Su ns~eet offers-the same laxative strength in every glass. SUNSWEET Ready-to-Serve Prunes --plump, luscious prunes packed in a sugar syrup. MOTT'S Puddings-ready-to-serve Creamy Rice Pudding and Tapioca Pudding. MOT'US Fruit Treats-chunky apples and other fruits made tastefully and especially for kids- and their parents. MOT'US Figure Control Meals- control your figure, not your appetite, with 3-course meals under 300 calories. MOTT'S A.M. and P.M.-fruit juices blended the Mott way for round-the- clock enjoyment. LORD Mo'vr's Clamato-- the light, bright anytime taste of clam broth and tomato. LORD MOT'E'S Vegetables-- more than 10 of the tastiest, tenderest vegetables ever. LORD MOTI"S Steamed Clams--a clambake in a can. Tender softshell clams, still in their shells. LORD MOT1"S Frozen Seafood Products- a brand new line of delectable seafood products from Chesapeake Bay--deviled crabs, fried dams, crab cakes and stuffed flounder. T!54210768

We make, of course, a great apple juice. And 5 great fruit-flavored apple sauces called Motrs Fruit Treats. We're also proud to market Sunsweet Prune Juice and Sunsweet Cooked Prunes. Then there's our newest best-seller: I.ord Mott's Clamato® Juice, the delightful blend of clam and tomato thars setting all kinds oi: sales records. But ~£.~, r~_c~L..T her-eL,~L-o r~LM o lt~ vegetables, in bolh, cans and jars, and Lord Motrs frozen seafood and more and more. Motrs--we do a lot more than jusl make )le SQUCe, T154210769

Distilled Beverages 20 Everett Kovler President. James B. Beam Distilling Co. For the twentieth consecutive year, the ~Iames B. Beam Distilling Co. attained record sales results. Sales of_distilled beverages were $126,507,000 compared with $113,811,000 in 1967. The consumption of all distilled beverages, according to industry sources, was up approximately 6% over 1967. Industry sales of Bourbon for the year exceeded the previous year by several million gallons. Beam's liquor operations increased 12% during the same period. All BEAM special packaging for the holiday season and year-round, trophy and commemorative bottles was received most enthusiastically not only in all levels of the trade but by consumers and collectors in every market. This past holiday season BEAM'S CHOICE. 8-year-old (charcoal ftltered--after aging) 86 proof Bourbon introduced its Collectors Edition III, again featuring full-color illustrations of world-famous paintings. Sales exceeded previous Editions I and II marketed in 1966 and 1967. In the past ten years, industry sales of Bourbon have grown annually from 25 million cases to 32.2 million cases to make it the largest-selling distilled spirit in the United States. Again in 1968, the Jim Beambrand was the largest-sellingKentucky Straight Bourbon in the country. The international popularity of Jim Beam Kentucky Straight Bourbon is recognized by the fact that it is marketed in over 100 foreign lands. American consumers, according to The Bourbon Institute, are currently buying more than twice as many --gallons-of-B ourbonzvlaiskeyas-they are of either of the two major imports, Scotch and Canadian. The James B. Beam Import Corp., organized three years ago, made substantial progress during the year in expanding its line of products. Two German wines were added to the company'sBeameister line and a very fine champagne--President Brut -was added to the Riccadonna line of Italian wines. Mr. and Mrs. "T" Bloody Mary Mix is now served exclusively on 14 major airlines in the United States and on four intercontinental airlines. The popularity of this mix has increased to the stage that new product facilities are scheduled for completion in 1969. In November, Martin Lewin was elected Executive Vice President; Keith Munroe was elected Senior Vice President, and Barry M. Berish, Sydney S. Waller and Robert Y. Bartholomew were elected Vice Presidents. In the last quarter of 1968 Beam moved its headquarters operation to a new Chicago building, located at 500 North M.ichigan Avenue. Beam Products JIM BEAM-- Kentucky Straight Bourbon Whiskey, 86 proof-- enjoyed throughout America and in over 100 foreign lands as the world's finest Bourbon. BEAM'S CHOICE-- Kentucky Straight Bourbon Whiskey, charcoal filtered after eight years of aging, 86 proof-unique in origin and distinctive in taste. BEAM'S PIN BOTTLE--outstanding mellowness in Beam's premium Kentucky Straight Bourbon Whiskey, achieved in eight and ten years of aging, 86.8 proof. BONDED]tEAM--bottled in bond especially for those who enjoy the finestin 8-year-old 100 proof Kentucky Straight Bourbon Whiskey. RICCADONNA-- an honored name in fine quality Italian Vermouths and Sparkling Wines enjoyed on five continents. GILBEY'S SPEY ROYAL SCOTCH -- a distinctive 8-year-old premium light Scotch- a choice whisky since 1865. BRONTE YORKSHIRE LIQUEUR -- an exotic honey liqueur with a French brandy base--imported from England. CHATEAUX-- cordials and liqueurs in 28 distinctive flavors. MUNDUS-- a semi-dry sparkling ros6 produced in Portugal from Arinto grapes and packaged in a replica of an antique Portuguese porcelain bottle. T!54210770

21 us first ~use we were; Jim Beam. World's T154210771

Financial Review Charles A. Mehoa Treasurer Operating Results Net sales of the Company and subsidiaries were $1,897,852,000 in 1968 compared with $1,493,535,000 in 1967. The sharp increase reflects the inclusion of the operations of Duffy-Mott Company, Inc. beginning July 1, 1968, and Gallaher Limited beginning September 1, 1968. The majority ownership of the shares of each corn ap.~' was acquired for cash. Consolidated income before taxes on income and minority interest in 1968 inc[eased by 18% to $205,612,000. After income taxes (including the 10% Federal income tax surcharge which was not in effect during 1967), and after deducting income applicable to minority interest, consolidated net income reached an all-time high of $92,911,000 compared with $89,227,000 in 1967. Each product line showed an increase in operating income during 1968. Operating results by product line appear on page l of this report. Based on the awragc number of shares outstanding during each year, net income per Common share was $3.38 in 1968, as against $3.15 in 1967, an increase of 7 %, Sales Dollar Chart How Our 1968 Sales Dollar Was Used The American Tobacco Company's Sales totaled $].,897,852,000 Excise Taxes 41.1% Manufacturing Costs 34,5% Advertising. Seil~ng. Administrative. Interest and Other Expenses 13.5% Income Taxes 5.8% Dividends to Stockholders 2.7% Earnings Retained to Meet Future Needs 2.4% (Includes Minorit3/ Interest 0.2.%) Earnings per share are shown below on a quarterly basis for 1968 and for 1967: Quarter 1968 1967 March31 $ .64 $ .60 June 30 .83 .83 September 30 .95 .89 December 31 .96 .83 $'3.38 S3.15 Dividends The quarterly dividend rate on the Company's Common stock was increased from 47V2 ¢ to 50~ per share on January 28, 1969, effective with the March 1, 1969, payment, bringing the annual dividend rate to $2.00per share. Since 1963,the year in which the present management took office, the Common dividend has been increased five times. The quarterly dividend rate was increased from 45¢' to 47½ ¢ effective with the ]'une 1, 1968, pa~'ment. Accordingly, the total dividend paid during 1968 amounted to $1.87½. Cash dividends paid in 1968 amounted to $50,931,000 and represented 55 % of net income. The remainder of net income, $41,980,000, was retained for future use. Acquisitions In .lune 1968, the Company invited tenders of all the Common stock of Duffy-Mott Company, Inc. for $40 cash per share. The offer was approved by the Board of Directors of Duffy-Mott whose management tendered all of their stock as a group. By year end more than 78 % of the outstanding stock of Duffy-Mott had been purcha~scd at a cost of $27,371,000. In July 1968, the Company, through a financing subsidiary, American Tobacco International Corporation, purchased in the market in London TI54210772

23 Sales (in millions) $2000 1800 1600 1200 1000 80O 59 60 61 62 63 64 65 66 67 • 68 Income Before Taxes and Minority Interest (in millions) Taxes • Net Income • Minority $225 200 175 ]50 t25 ]00 50 25 O 59 60 61 62 63 64 65 66 67 68 Net Income Per Common Share Retained Earnings • Dividends $3.50 3.00 2.50 2.00 1.50 1 .O0 .50 0 II 59 60 61 62 63 64 65 66 67 68 ! 2,207,764 Ordinary shares of Gallaher Limited at prices up to 35 shillings per share and announced that a tender offer of 35 shillings per share would bc made for at least -27,325,000 Ordinary shares of Gallaher Limited. This offer, intended to increase the Company's ownership in Gallaher to more than 50%, was recommended by Gallaher's Board and was made in August 1968. American previously owned 13% of GaIlaher Limited Ordinary sha~es received in January 1962 in exchange for the assets of/. Wix & Sons Limited, a wholly-owned British subsidiary. A totalof 27,377,360 Ordinary - shares were delivered by year-end through the tender offer. This combined with the original holdings of 9,504,000 shares and 12,207,764 shares purchased on the open market brought total holdings of American Tobacco International Corporation to more than 49,000,000 Ordinary shares. These holdings represent 67-%-o f-t-he-ou t~ t-a n dingo r4 inary- Stock of Gallaher Limited. The total price of the Gallaher shares acquired in 1968 was $167,558,000. Debt Position To temporarily finance the ittcreased investment in GallaherLimited,the Company entered into Eurodollar revolving credit arrangements aggregating $150,000,000 with a group of banks. This amount was reduced to $100,000,000 by December 31, 1968, and will decline further to $50,000,000 on September 2, 1969, which amount will remain available to the Company until December 3 I, 1973. In August 1968, the Company issued through American Tobacco International Corporation, $50,000,000 principal amount of 5¼ % Convertible Guaranteed Debentures due 1988. The deben- tures are convertible from May 15, 1969, into the Company's Common stock at $36 a share. These Euro- dollar debentures were sold abroad by an international group of underwriters. Additional long-term foreign financing was arranged during 1968 in the form of private placements involving 200,000,000 German marks (about $50,000,000) and 90,000,000 Swiss francs (about $21,000,000). Of these loans, 80,000,000 German marks and 50,000,000 Swiss francs were borrowed in 1968, and the remainder will be borrowed during 1969. T154210773

24 Stockholders' Equity Compared with Long-Term Debt (in mHliorts) Preferred Stock [] Common Stock Surplus • Long.Term Debt $B00 700 600 500 400 300 200 ~o0 I [] _ ,- I 59 60 61 62 63 64 65" 66 67 68 *Preferred Stock retired in 1965 Stockholders (in thousands) [] Preferred Stockholders II Common Stockholders Fiduciaries. Nominees and Others Joint Tenants Men Women 33 38 43 45" 53 5B 63 68** *Common B changed into Common in 1948 *°Preferred stock retired in ]965 The proceeds of these long-term foreign financings were used to reduce short-term loans undertaken under the terms of the Eurodollar revolving credit arrangements. This foreign financing was arranged to comply with the United States Government's mandatory program of restraints on direct foreign investments. Domestically, the Company issued in January 1968. $9,850,000 principal amount of 57/s % Sinking Fund Debentures due 1992. representing delayed-delivery contracts resulting from the sale of $100,000,000 of debentures in 1967. During 1968 the final principal payment of $18,000,000 was made on the 20-year, 3% debentures due 1968 and the Company also retired the remaining $7,042,000 principal amount of 25-year, 3% debentures due October 15, 1969. Additional reductions in outstanding debentures through the operation of the sinking funds were made in the amount of $2,002,000, and other long-term debt was reduced by $46,522,000 during 1968. The Company's total long-term debt was $368,499,000 at the end of 1968, which compares with total stockholders" equity of $712,100,000. This debt includes - $7,013,000 of debt issued by Duffy- Mott, and $43,200,000 of debt issued by Gallaher, both appearing for the first time this year in the Company's consolidated balance sheet. Treasury Stock The Company continued the purchase of its own Common stock during 1968 an~d a total of 1,292,200 shares at an average cost of $30.82 per share. Of the 1,538,250 shares in the treasury at December 3 I, 1968, 1,388,888 shares are held for the conversion og $50,000,000 American Tobacco International Corporation 5 ¼ % Convertible Guaranteed Debentures due 1988. Taxes Federal, foreign and other taxes on income in 1968 totaled $108,817,000 or $3.95 per Common share. This compared with net income of $3.38 per Common share. Were it not for the 10% federal income tax surcharge imposed in 1968, net income would have amounted to $3.70 per Common share. The Company's total tax bill for 1968, including federal excise taxes and United Kingdom tobacco duty of $780,433,000, income taxes, social security and other taxes amounted to $908,693,000. Capital Expenditures Capital ~utlays for 1968 amounted to $31,348,000 compared with $30,820,000 for 1967. Most of these expenditures were for the modernization and improvement of m:mufacturing facilities. Depreciation charged to costs and expenses w~s $23,361,000, compared with $16,801,000 in the previous year. Ti54210774

The American Tobacco Company AND SUBSIDIARIES 25 Consolidated Statement of Income For Years Ended December 31 1968 1967 (In thousands) NET SALES .............. Cost of sales ............. $1,897,852 $1,493,535 1,434,622 1,108,946 GROSS PROFIT ............. 463,230 384,589 Advertising, selling and administrative expenses 239,133 201,503 OPERATING INCOME ........... 224,097 183,086 Oflaer-ineome ............. 3~b'2 3,387 Interest and related charges ......... Other deductions ............ 227,949 186,473 18,185 11,920 4,152 784 22,337 12,704 205,612 1-73,769 Income, before provision for taxes on income and minority_ interest ........... Federal, foreign and other taxes on income, including deferred income taxes, 1968, $981,000, 1967, $1,499,000 ........... 108,817 84,542 INCOME BEFORE MINORITY INTEREST ...... 96,795 89,227 Minority interest in earnings of subsidiaries .... 3,884 -- NZT INCOME ............. $ 92,911 $ 89,227 Net income per share of Common stock: Primary .............. Pro forma ............. $3.38 $3.15 $3.32 -- Consolidated Statement of Retained Earnings For Years Ended December 31 1968 1967 (In thousands) BALANCE BEGINNING OF YEAR The American Tobacco Company and subsidiaries Bell Brand Foods, Ltd ........... $ 498,517 $ 460,286 2,748 -- NET INCOME Cash dividends paid on Common stock, 1968, $1.875 per share; 1967, $1.80 per share ....... Excess of cost over par value of Treasury shares deliv- ered in connection with the acquisition of Bell Brand Foods, Ltd., less $94,000 apportioned to paid-in surplus .............. 501,265 460,286 92,911 89,227 594,176 549,513 50,931 50,996 1,568 BALANCE END OF YEAR .......... $ 541,677 S 498,517 financial information on pages 27 through 30 ix an integral part of the~e statements. T154210775

The American Tobacco Company 26 Consolidated Balance Sheet December 31 1968 1967 (In thousands) ASSETS Cash and temporary cash investments ...... Accounts receivable, customers, less allowances for dis- counts and doubtful accounts, 1968, $4,210,000; 1967, $1,908,000 ........... Inventories .............. Other current assets ........... $ 40,748 $ 23,028 190,086 83,809 878,750 695,751 21,475 5_,.Z0_701 Total current assets .......... Investments, at cost ........... Property, plant and equipment, at cost, less accumulated depreciation and amortization, 1968, $189,661,000; 1967, $129,921,000 ..... Cost in excess of net assets of businesses acquired . Brands and trademarks .......... Other assets ....... : ..... 1,131,059 808,289 8,644 7,079 276,428 205,957 53,666 9,084 27,057 27,057 "15~207 16,382 Total Assets ........... $1,512,061 $1,073,848 LIABILITIES Notes payable ............. Accounts payable and accrued expenses ..... Accrued taxes, including current portion of deferred income taxes ............ Current portion of long-term debt ....... $ 136,948 97,956 91,541 16,078 $ 40,250 51,492 71,301 68,294 Total current liabilities ......... Long-term debt ............ Deferred income taxes and other deferred credits Minority interest in.consolidated subsidiaries 342,523 352,421 231,337 127,700 694,944 14,359 90,658 359,037 8,517 STOCKHOLDERS' EQUITY Common stock, par value $6.25 per share .... Paid-in surplus ............. Retained earnings ............ 179,352 39,205 541,677 177,789 41,237 498,517 760,234 717,543 Less, Treasury stock, at cost ........ 48,134 11,249 Total stockholders' equity ........ 712,100 706,294 Total Liabilities and Stockholders' Equity $1,512,061 $1,073,848 The financial information on pages 2"/through. 30 is an integral part of this statement. T154210776

The American Tobacco Company AND SUBSIDIARIES 27 Supplementary Financial Information December 31 1968 1967 (In thousands) INVENTORIES Leaf tobacco ................ Bulk whiskeys ............... O t her a'a v~rrrat~ i~Ig-ffff~li~e s .......... Finished products ....... ' ....... $626,906 $541,391 56,786 54,558 ~031 32,742 143,027 67,060 Total ................. $878,750 $695,751 Inventories are priced at the lower of cost (on various "average," "first-in, first-out" or "specific identification" bases) or market. It is a generally recognized trade practice to classify the total amount of leaf tobacco and bulk whiskey inventories as a current asset, although part of such inventories, due to duration of aging processes, ordinarily would not be realized within one year. December 31, 1968 Accumulated Depreciation Assets and Amortization Net (In thousands) PROPERTY, PLANT AND EQUIPMENT Land ............. $ 8,752 $ - $ 8,752 Buildings ........... 137,992 56,034 81,958 Improvements to land and leaseholds. 13,195 1,920 11,275 Machinery and equipment ...... 252,051 112,167 139,884 Office furniture and equipment ..... 20,811 9,178 11,633 Automobiles and trucks ....... 24,589 10,362 14,227 Construction in process ....... 8,699 - 8,699 Total ............ $466,089 $189,661 $276,428 Depreciation and amortization, which with minor exception is computed using the straight line method, amounted to $23,361,000 in 1968 and $16,801,000 in 1967. TI54210777

The American Tobacco Company AND SUBSIDIARIES 28 Supplementary Financial Information (Cont'd) PdncipalAmounts at December 31, 1968 Due Within Due After One Year Dec. 31, 1969 (In thousands) LONG-TERM DEBT Payable in U.S. currency: Debentures: Twenty-five year 31/4 %, due February 1, 1977 $ 1,189 $ 15 433 -- 7,848 -- 100,000 -- 50,000 11,628 86,672 3,26I 17;624 Twe-nty-fi-~4 ~o, su or lnate , due July 1, 1990 (sinking fund requirements begin in 1971) .... Twenty-five year 57/~ %, due July 1, 1992 (sinking fund requirements begin in 1973) ........ Twenty year 5¼ %, convertible, guaranteed, due August 1, 1988 (a) .............. Eurodollar notes under revolving credit arrangements, interest ranging from 7% % to 8 V8 % (b) ..... Miscellaneous mortgages and notes : ....... Payable irt foreign currencies: 7% German mark notes, due December 31, 1979 (sinking fund requirements begin in 1975) (c) ...... 6~A % Swiss franc notes, due December 31, 1973 (d) 6% British sterling notes, due 1976 through 1985 :20,016 11,628 43,200 Total .................. $16,078 $352,421 (a) The debentures, sold by a subsidiary in August 1968, are guaranteed by the Company and are convertible from May 15, 1969, into the Company's Common stock at $36 a share, At December 31, 1968, a total of 1,388,888 shares of Common stock held in treasury had been reserved for such conversions. (b) At December 31, 1968, the Company had Eurodollar revolving credit arrangements with certain banks aggregating $100,000,000; of the available funds, $98,300,000 had been borrowed. The maturity of the notes may range from 30 to 180 days and the interest rate is fixed at the time of each borrowing. These lines of credit terminate $50,000,000 on Septem- ber 2, 1969, and $50,000,000 on December 31, 1973. That portion tetmlnating September 2, 1969, will be repaid from proceeds of long-term foreign loans described in (c) and (d) below. (c) The Company has entered into an agreement for a German mark loan aggregating approximately $50,000,000 (DM 200,000,000). Of these funds, $20,016,000 (DM 80,000,000) were borrowed in December 1968; the remainder is available through October 31, 1969. (d) The Company and a wholly-owned foreign subsidiary have entered into agreements for Swiss franc loans aggregating approximately $20,892,000 (s.]. 90,000,000) at interest rates ranging from 6~/~ % to 6~A %. Of these funds $11,628,000 (s.]. 50,000,000) were borrowed prior to December 31, 1968; $5,795,000 (s.f. 25,000,000) in January 1969; and $3,469,000 (s./. 15,000,000) in February 1969. TI54210778

The American Tobacco Company AND SUBSIDIARIES 29 Nofes Accompanying Financial Slatemenls Principles of cop.solidation: The consolidated financial statements include the accounts of the Company and all domestic and foreign subsidiaries. Accounts of foreign .~ubsidiaries have been translated at _~a_p_pxap~xchan gc._At_ December 31, 1968, the consolidated linaneial statements include the following amounts related to operations of consolidated subsidiaries outside the Western Hemisphere: Total assets . $373,822,000 Total liabilities (exc~ludingminority interes0 145,879,000 Minority interest 85,038,000 Net income . 6,850,000 Dividends received from Gallaher Limited prior to acquisition of majority interest (September 1, 1968) and included in net income amounted to $963,000 in 1968 and $1,577,000 in 1967, net of British taxes. Principal acquisitions: At December 31, 1967, the Company • owned 13 % of the outstanding Ordinary Stock of Gallaher Limited, a cigarette and tobacco manufacturer in the United Kingdom. In August 1968, In November 1968, Sunshine Biscuits, Inc., a wholly-owned subsidiary, acquired substantially all the assets and liabilities of Bell Brand Foods, Ltd., irt exchange for 315,000 shares of The American Tobacco Company's the-Comp any-contributed4hese-shares------~ommon-stock-(~nctuding65~ 00 to the capital of American Tobacco , International Corporation, a wholly-owned subsidiary. As of September 1, 1968, American Tobacco International Corporation had purchased for $167,558,000 an additional 54% of the Ordinary Stock of Gallaher Limited tobring its aggregate ownership to 67 %. In Suly 1968, the Company, through Numott Corporation, a wholly-owned subsidiary, purchased 76% of the outstanding Common stock of Duffy-Mott Company, Inc. By year end the Company had increased its.holdings to 78 % at a total cost of $27,371,000. The aggregate cost of the aforementioned acquisitions exceeded the Company's share of the book value of the underlying net assets by $42,482,000. Detailed studies are to be conducted to determine the portions of this excess to be allocated to tangible assets. The operations of the above companies purchased during 1968 have been included in the consolidated financial statements since dates of acquisition of a majority interest, with provision for minority interest. treasury shares). For accounting purposes, this exchange has been treated as a pooling of interests and accordingly the consolidated financial statements for 1968 include the accounts of Bell Brand Foods, Ltd. Financial statements for 1967 have not beenrestated as the amounts are not significant. Cost in excess of the net assets of businesses acquired and brands and trademarks are not being amortized since, in the opinion of the Company, there has been no dimi~utlon in value since acquisition. TI54210779

The American Tobacco Company AND SUBSIDIARIES 30 Notes Accompanying Financial Statements (Cont'd) Stockholders' equity: The Company has 40,000,000 Common shares authorized, of which 27,158,003 and 28,107,153 shares were issued and outstanding and 1,538,250 and 339,100 shares were held in the treasury at December 3 I, 1968, and 1967, respectively, Shares Under option, Decem- ber 31, 1967 106,000 Options granted . 27,500 Options exercised (at $32.25 per share). (27,050) Options lapsed(17,000) Under option, Decem- Consolidated paid-in surplus for the year ended December 31,1968, increased by $26,000, representing the excess of proceeds over cost of treasury shares delivered upon exercise of stock options and decreased by $2,058,000 in connection with the acquisition of Bell Brand Foods, Ltd. Stock options: Under a 1967 stock option plan, options may be granted to key employees to purchase shares of the Company's Common stock at fair market values at 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 1968 in shares under option were as follows: bet 3 I, 1968 (at prices ranging from $32.25 to $38.25 per share) 89,450 At December 31, 1968, options for 62,450 shares were exercisable and 483,500 shares were available for future options. Treasury shares were~ issued for options exercised in 1968. Pension plans: The Company and its consolidated subsidiaries have a number of funded pension plans covering substantially all employees. The total pension expense for the years 1968 and 1967 was $10,395,000 and $9,452,000, respectively, including provision for past service costs. Past service costs are being amortized over periods ranging from 11 to 38 years. The actuarially computed value of vested benefits for all plans as o1~ the latest valuation date exceeded the total of the pension funds at that date by approximately $37,000,000. Earnings per share: Primary net income per share is based on the average number of shares of Common stock outstanding in each year. Pro forma net income per share gives effect to the reduction in income per share which would result from ~r-~-i-O-~0~hc 4 o convertt e debentures issued August 1, 1968, and the exercise of stock options, assuming that funds received were used to reduce current bank loans. T!54210780

The American Tobacco Company AND SUBSIDIARIES 31 Consolidated Statement of Source and Application of Funds For Years Ended December 31 1968 1967 (Inthousands) SOURCE OF FUNDS Net income .............. Minority interest in earnings o[ subsidiaries .... Charges to income not requiring current cash outlay: Depreciation and amortization ...... Net book value of fixed assets retired or sold. Net provision for noncurrent deferred income taxes and other de~erred credits ..... Issuance of additional long-term debt'. ..... Minority interest in subsidiaries at dates of acquisition . Proceeds from Treasury stock issued under stock option plan ......... $ 92,911 $ 89,227 3,884 -- 23,361 16,801 3,140 1,892 (1,857) 784 185,341 90,150 88,313 -- 872 $395,965 $198,854 APPLICATION OF FUNDS Dividends to stockholders . . . - ...... Dividends to minority interest ........ Additions to property, plant and equipment .... Net noncurrent assets of businesses acquired Cost in excess of net asset value of businesses acquired Purchases of Treasury stock ......... Increase in working capital ......... Decrease in noncurrent portion of long-term debt, exclusive of additional debt issued ...... Other, net .............. $ 50,931 $ 50,996 1,553 -- 31,348 30,820 10,608 - 42,482 99 39,831 11,249 211,584 32,912 9,206 70,800 (1,578) 1,978 $395,965 $198,854 The financial information on pages 27 through 30 is an integral part of this statement. Report of Independent Certified Public Accountants The Board of Directors and Stockholders of The American Tobacco Company: We have examined the consolidated balance sheet of The American Tobacco Company and Subsidiaries as of December 3 i, 1958, and the related statements of income, retained earnings and source and application of funds for the year then ended. Our examination was made in accordance with generally accepted auditing standards, and accordingly included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances. We previously examined and reported upon the consolidated financial statements of the Company for the year ended December 31, 1967. In our opinion, the aforementioned financial statements present fairly the consolidated finan- cial position of The American Tobacco Company and Subsidiaries at December 31, 1968, and 1967, and the consolidated results of their operations and source and application of funds for the years then ended, in conformity with generally accepted accounting principles applied on a consistent basis. LYBRAND, ROSS BROS. & MONTGOMERY 2 Broadway, New York, N.Y. February 26, 1969 TI54210781

The American Tobacco Company AND SUBSIDIARIES 32 Ten-Year Financial Review In thousands except per share amounts 1968 1967 1966 1965 SALES) INCOME, DIVIDENDS Net sales .......... Income, before taxes on income and minority interest ...... Taxes on income ........ Income applicable to minority interest $1,897,852 $1,493,535 $1,427,572 $1,432,637 205,612 173,769 161,192 167,729 108,817 84,542 75,173 81,724 3)884 -- -- -- ~Ne~ome Amount .......... Available per Common share Primary ......... Pro forma ........ Dividends Common Amount ......... -Per share ........ Preferred (retired as of June 30, 1965) Added to retained earnings ..... 92,911 89,227 86,019 86,005 3.38 3.15 3.01 2.88 3.32 -- -- -- 50,931 50,996 51,287 48,321 1.875 1.80 1.80 1.65 -- -- -- 1,583 41,980 38,23I 34,732 36,101 ASSETS, LIABILITIES, STOCKHOLDERS' EQUITY Inventories ......... Current assets ........ Working capital ........ Property, plant and equipment-net. Total assets ......... Long-term debt ........ Short-term debt ........ Stockholders' equity ....... Book value per Common share 878,750 695,751 718,877 687,549 1,131,059 808,289 824,994 781,755 788,536 576,952 544,040 583,377 276,428 205,957 193,830 156,729 1)512,061 1,073,848 1,076,349 955,975 352,421 127,700 108,350 76,507 153,026 108,544 158,044 97,966 712,100 706,294 679,312 674,396 26.22 25.13 23.88 23.04 MISCELLANEOUS Capital expenditures ....... Number of stockholders ..... Average shares outstanding during year 31,348 30,820 50,100 23,631 145 145 141 119 27,514 28,320 28,603 29,325 NolE Per share amounts reflect the twoofor-one stock splits in 1962 and 1960. Dividends per Common share are based on amounts paid by The Ame, ican Tobacco Company." T154210782

1964 1963 1962 1961 1960 1959 $1,404,225 $1,391,869 $1,379,526 $1,356,236 $1,320,070 $1,293,240 161,679 160,483 157,470 158,797 143,229 152,703 ~17220~83Z, 8-8-1~0v5t4~85,48 ~60__~____~/.,076 80,459 76,602 76,959 73,315 65,369 71,627 2.63 2.49 2.51 2.38 2.11 2.32 47,152 44,516 44,315 41,724 40,768 37,778 1.60 1.50 1.50 1.40 1.36 1.25 3,167 3,167 3,167 3,167 3,167 3,167 30,140 28,919 29,477 28,424 21,434 30,682 669,106 680,664 718,276 741,030 696,718 669,556 758,209 772,931 811,155 834,368 792,605 762,766 634,726 634,984 634,049 614,951 623,121 619,464 144,914 126,764 107,317 105,702 105,897 105,964 920,467 916,630 937,208 959,581 917,658 881,306 70,902 79,748 90,067 100,199 135,740 150,653 32,250 42,001 87,243 131,057 88,556 66,744 719,861 693,286 664,367 634,626 607,272 585,952 22.74 21.76 20.78 19.77 18.82 18.10 28,969 30,682 12,173 11,274 15,396 15,366 125 119 107 97 97 95 29,403 29,435 29,435 29,428 29,456 29,459 Directors ROBERT B. WALKER Chairman of the Board JAMES L BAUCHAT ALFRED E BOWDEN PHILIP H. COHEN HENRY G. FRENCH BOONE GROSS VIRGIL D. HAGER ROBERT K. HEIMANN CYRIL E HETSKO DONALD M. KLOCK EVER ETI" KOVLER JULIEN Bo McCARTHY CHARLES A. MEHOS EUGENE E MOONEY GEORGE J, SCHRAMM JOHN B. SPARROW 33 GEORGE H. WOODARD Officers RQBERT e. WALKER President and Chairman of the Board of Diiestors VIRGIL D. HAGER Executive Vice President • ROBERT K. HEIMANN Executive Vice President JAMES[, BAUCHAT Vice President ALFRED E BOWDEN Vice President CYRIL E HETSKO Vice President and General Counsel JULIEN B. McCARTHY Vice President EUGENE E MOONEY Vice President CHARLES A. MEHOS Treasurer GEORGE J. SCHRAMM Controller RICHARD H: S~'INNETTE Ass!.stan.t to the President JOHNW. HANLON Secretary JACK E POOL Assistant Controller ZENQ B, TEEL, JR. Assistant Controller FREDERICK W, KENNY Assistant Secretary KENNETH L. BECK~ Assistant Treasurer WILLIAM. H. BURKE AssiStant ~l'reasurer Executive Office 245 Park Avenue New York, New York 10017 Corporate Office 1i7 Main Street Remlnston, New Jersey 0882?_ Transfer Agent Morgan Guaranty Trust CgmPany of New York New York, New York 10015 Registrar First National City Bank New York. New York 10015 TI54210783

EXECUTIVE OFFICES:245 PARKAVENUE,NEW YORK,N.Y.10017 T154210784