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resentatives of tobacco manufacturers ( including this Companv ), growers, and warehousemen to support research by independent scientists into questions of tobacco use and health. Known originally as the Tobacco4ndustry Research Com- mittee, the organization last year was redesignated The Council for Tobacco Research - U.S.A., to clarifythe fact that it is devoted to~ health research rather than to commercial or technologicall study. Research is supported by the Council through grants-in-aid, which are admin- istered by a Scientific Advisorv Board of ten independent scientists and doc- tors who maintain their institutionall af- filiations. Research grants totaling over $7,000;000 have been made to some 230 scientists in more than 100 hospitals, uni'- versities, and research institutions across the countrv. The research is in fields , selected by the scientists and approved by the Scientific Advisory Board. The Company is~continuing its support of the Council's far-reacliing program. In April, 1964, the nine leading ciga- rette manufacturing companies~ in the United States announced the adoption of the Cigarett~e Advertising Code. This Code,wliich became effective Januarv 1, 1965, applies to all advertising of ciga- rettes by the member companies iiii the United States, Puerto Rico, any territory or possession of the United S tates, or any militarv instalhation of the United States: Former \ ewJersev Governor Robert B. Mevner is the Administrator of the Code. No advertising for ciJarettes may be used unless ithas first been~subnnitted, to the Administrator and foundlto comply with the Code st'andards. If a Company should violate the Code, it can be re- quired to pay up to $100,000. The announcement of the Code was front-page news in many of the nation's newspapers. It was praised~ in numerous editorials as a serious effort by the indus- try for self-regulation of advertising. Following a series of hearings begun in 'March, 1964, the Federali Trade Com- mission in June issued a trade regulation rule requiring that all cigarette labels in- clude a health warning after January 1, 1965, and that all cigarette advertising carry such a warning after July 1, 1965. The announcement of this rule was made by the Chairman of the: Commission while testifying before the House: Com- mittee on Interstate and Foreign Com- merce which was then holding hearings with respect to a number of bills relating to the labeling and~ advertising of ciga- rettes and health problems associated with smoking. Subsequently at the re- quest of the House Committee the Fed- eral Trade Commission postponed~ the effective date of its:rule until July 1, 1965, to give Congress an opportunity to con- sider the matter more fully. At the hearing before the House Com- mittee your Chairman appeared as~ a spokesman for the manufacturers of vir- tually-~~ all cigarettes produced in the country and presented their views with respect to the pending bills. His testi- monv incllided the following statement of the industry's position as to the Federal Trade Comrnission's rule: Our attorneys have advised us that the Commission does not have author- ity to issue this Trade Regulation Rule. We opposed the issuance of this rule during the~ course of the Commission proceedings. We shall oppose it in the courts if necessary. We oppose it be- cause we believe the:Commission acted unlanvfully. We oppose it because we believe this matter shoultl! be resolved 2

by the Congress and not by a Federal agency. We oppose it because we be- lieve, as Chairman Dixon acknowl- edged, the Commission's rule would not have preemptive effectS and the in- dustry would be exposed to the possi- bility of diverse state and municipal laws. We oppose it because we believe the Commission's warning requirement is unwise, unwarranted and is not a fair factual statement of the present state of scientific knowledge. A number of prominent doctors, ap- pearing as witnesses during the Com- merce Committee hearings, questioned the conclusions of the Surgeon General's Advisory Committee Report. The essence oftheir testimony was that even though there may be a statistical association be- tween smoking and various diseases, this does not, prove cause and effect. Experi- mental and laboratory proof to supporti the statistics is lacking, they said, and other explanations for the statistics exist - and many factors, in addit'ion to smok- ing, need investigation. : : . In 11964 farm leaders and all other seg- ments of the industrv continued to be confronted with the problem of the mounting surplus of flue-cured leaf to- bacco. Despite the fact that acreage allot- ments under the Federali government's production and price stabilization pro- grams had been reduced 40 per cent since 1954, the 11964! crop of flue-cured tobacco was larger than the crop produced in 1954. The explanation, of course, is that agricultural practices used by most grow- ers have continued to produce larger per- acre yields. This, however, has resulted in the production of much tobacco of quality not desis•ed~ by domestic manufac- turers. In November the Secretary of Agriculture announced a reduction for 1965 of about 19~:5 per cent in acreage al- lotments for flue-cured tobacco. In the opinion of many farm leaders, eventually some form of poundage as well as acreage control is ahnost inevitable if leaf sur- pluses, particularly of undesirable qual- ities, are to be curbed and the govern- ment's price support system for tobacco is to be preserved. s s s For many years we have closed this letter with a few remarks about your em- ployees with whom it is our pleasure to work; and in reporting to you on the year just closed this paragraph has~ special significance and meaning. By careful and successful planning, despite the drop in sales, we have been able to work the plants almost the total number of hours that we had in previous years. Through the weeks of shorter work schedules the employees were cooperative and under= standing. A rededication of effort to produce quality prodhcts was evident throughout the entire organization. The administ!rative and sales groups renewed their efforts to serve our customers and gain new ones for our brands. The pro- ductionofTEMPO involved a uniq;ue manufacturing process requiring the com- bined efforts of research, leaf„ manufac- turing, engineering and service depart- ments. For all these things and for the count!less acts of lbvaltv and extra effort on the part of the emplovees, we express the gratitude of the Board~ of Directors. Respectf ullysuUmitted fortJie Board of Directors, Chairman, Board of Directors February 4, 1965 3

Comparative Summary CONSOLIDATED SALES, EARNINGS AND DIVIDENDS 1963 Net~ Sales . . . . . . . . . . . . . . . . . . $1,613,802,495 $1,672,444,707 Net Earnings . . . . . . . . . . . . . . . . . 124,005,490 129,065,759 Net Earnings as a: percentage of Net Sales . . 7.68% 7.72°jo Earnings per share om Common Stock before taxes on income* . . . . . . . . . . . . . $ 6.14 $ 6.75 Taxes on income per share of Common Stock* . . . . . . . . 3.12 - 3.62 Net Earnings per share of Common Stock- . 3.02 3.13 Dividends per share on Common Stock . . . . . . . . . . 1.80 1.65 Dividends on Preferred Stock . . . . . . . . . . . . 768;352 857,898 Dividends on Common Stock . . . . . . . . . . . . 73;734,383 67,602,086 *Based on shares outstanding at year end' . FINANCIAL POSITION AND EQUITIES AT YEAR END Total Assets . . . . . . . . . Current Assets . . . . . . . .. Current Liabilities . . . . . . . Net Current Assets-Working Capital . . Real Estate, hiachinery and Equipment-Net Funded Debt, . . . . . . . . . Equity of holders of Preferred Stock Equity of holders of Common Stock . Number of stockholders at year end . . . Nhmher of regular employees at year end . 4 40;868;647 40,970,423 $11,019,201,700$1,037,639,534 865;360;515 878,115,844 202,160,282 257,995,847 663, 200, 233 620,119,997 144,360,897 150,023,031 62,000,000 68,000,000 20,271,500 22,459,000 734,769,918 689,184,687 114,010 103,282 14,353 14,932

Financial Review Sales in 1964 were $1,613,802,495, down 3:5 per cent from record sales in 1963 of $1,672;444,707. Net earnings for 1964 of $124,005,490 were 3.9 per cent less than the all-time high of $129,065, 7 59 attained in 1963: Net earnings on the Common Stock, after payment of dividends on the Pre- ferred Stock, amounted to $3.02 per share on the basis of 40;868;647 shares~ out- standing at year end. This compares with $3.13 per share earned in 1963. Dividends on~the Common Stock amounted to $1.80 per share for the year compared to $1.65 during 1963. Dividend payments amounted to $ 73,73-1,883 on the Common~ Stock and $768;352' on the Preferred! Stock for a total of $74,502,735, the larg- est for any year in the Companv's]iistorv. During the year, a number of factors contributed to the decline in earnings. The: majpr factors were lower sales vol- ume, higher advertising costs and in- creased leaf tobacco costs. Partially off- setting factors~ included lower interest and debt expense, resulting from smaller average borrowings, and the reduction ofl the Federal'. corporate income tax rate in 1964. Another Federali income tax change fa- vorably affecting net earnings for the year related to the investment credit. Prior to 1964, the amount of the investment credit, whichi relates to the purchase of new ma- chinery, had to be deducted from the cost basis of the machinery in calculating de- preciation. This requirement in the law was reversed in 1964. Accordingly,, the provision for taxes on income for the year was reduced by $2,818,593, equivalent to DISTRIBUTION OF THE 1964 SALES DOLLAR 7.4ie 4.6e TAXESON SELLING, DIVIDENDS INCOME ADVERTISING, ADMINISTRATIVE, INTEREST AND OTHER EXPENSES 5 35.1 t LEAF TOBACCO; OTHER MANU- FACTURING COSTS AND FREIGHT 3.1 e EARNINGS RETAINED N ~ ~

TWENTY YEAR SALES Millions o! Dollars 1600 1400 1200 1000 800 600 400 200 1945 '46 '47 '48 '49 '50 '51 '52 '53 '54 '55 '56 '57 '58 '59 '60 '61 '62 '63 '64 the prior years' investment credits. A sim- ilar amount was restored to the machin- ery accounts. Short-term borro«•ings at vear-end 1964 were $67,000,000, or 847,500,000 less than at the close of the previous year. For six weeks during late summer, the Company was completely free of this type of debt. The low point in~ 1963 was $26,500,000, and in 1962 it was $75,000,000. In 1964 funded debt was reduced by $6,000,000. In October, 1964, the Com- pany started purchasing on the New York Stock Exchange shares of its Common Stock to be available for possible future acquisitions. At: year end there were 102,886 shares in the treasury at an av- erage cost of $41 per share. Additionally, 21,875 shares of Preferred Stock were purchased during the year at an average cost of $88 per share, bringing to 287,285 the total number of such shares in the treasury at year end. Sales of the: HAWAIIAN PUNCH line - manufactured~ and sold by the Company's wholly-owned subsidiary, Pacific Hawai- ian Products Company-increased over the previous year, and net earnings on this line were up 30 per cent. Sales and~ profits of the Archer Aluminum division: of theCompanv increased significantlyduring the year. The CompanVincreased to 60 per cent its interest in Zigarettenfabrik Haus 1'euerburg, K. G., the Company's West German affiliate, by purchasing an addi- tional 9 per cent dkuing the year. There was charged to general expense in 1964 the amount of $650,000 to reflect in the 6

Company's accounts its share of the loss from operations of foreign affiliates for the year. Capital expenditures during the year amounted to $11,084,506, principallh, in connection with continuing moderniza- tion of cigarette and~ processing plants and equipment and! expansion of facilities for the Archer Aluminum Division. Siini- lar expenditures in 1965 are presentl~-~~ estimated at $20;000,000.. DISPOSITION OF NET EARNINGS for the year ended December 31,1964. Dividends paid' . . . . . . . . . $ 74,502,735 Purchase ofiPreferred Stock . . . . . 1,938,301 Purchase ofCommon Stock . . . . . . 4,166,723 Reduction in funded debt ...... 6;000,000. Net reduction in real estate, machineryand equipment: Capitalexpenditures ($11,084,506) less net asset disposals . $10,102,724 Restoration of prior years`, investment credits . . . . 2,818,593 Depreciation forthe year (18,583,451) (5,662,134) Increase in working capitaf' ...... 43;080,236 Decrease in other, assets . . . . . . . (20,371) Net earnings . . . . . . . . . $124,005,490 COMPUTATION' OF INCREASE IN WORKING CAPITAL Decrease in current liabilities .....$ 55;835,565 Less decrease in current assets ... 12;755,329 Increasein working oapital . . . . . . $ 43,080,236 45,000 40,000 35,000 30,000 ( 25,000 20,000 15,000 10,000 5,000 0 MEN WOMEN JOINT FIDUCIARIES ACCOUNTS INCLUDING' Insurance Companies Banks and Brokers Foundations Hospitals Churches Colleges *:{ Charities Custodians OTHERS tnvestmentFunds 7 Estates and Trusts Pension Funds

Marketing During 1964 the Company continued its leadership in the United States aslhe largest manufacturer of cigarettes in the domestic and export markets. Three of the Company's brands - WINSTON, CAMEL and SALENn - were among the top four best sellingcigarettes and each was the leader in its own cate- gory. WiNsroa, the Companv's largest-sell- ingbrand, led all other filter cigarettes by a«-ide margin. It was second in sales of all cigarettes. CANIEL improved its share of the non- filter, regular-size cigarette market and had a larger percentage of this market than ever before. It was third ini sales of all cigarettes. SALEM, the best-selling menthol eiga- retitle, was second in sales of filter ciba- rette brands~and!fourth amongall brands. SALE-u had over 5011 of the totalimenthol cigarette business. TEMPO, the Companv's new charcoal- tip cigarette, was introduced~ in March in New England and by the end! of June was in distribution nationally. TENiPO s filter construction was an innovation ini that it was the first to use granules of charcoal bound together. The brand was extensively promoted throughout the year in media and point-of-sale advertis- ing. TEMPO has ah-eady become the: fa- vorite brand of many smokers preferring filter cigarettes with charcoal. PRINCE ALBERT, the nation's largest- sellzng smoking tobacco, showed a good increase in sales. To provide the smoker wit17i PRtNcEALBERT in either thefamiliar pocket tin or the new foil pouch, national distribution of the pouch was achieved in 1964. CARTER HALL, our second=largest-sell- ing smoking tobacco, hadi a substantial increase in sales. 8

/ "- ~~ \:_~,~ While the Company's chewing tobacco sales were slightly lower, our DAYS «'oR: brand continued to hold its leadership among chewing tobaccos. ADVERTISING PROGRAM Intensive advertising support for the Company's major cigarette and! smoking tobacco brands played! an important role in maintaining sales leadership in the in- dustry during 1964. Advertising messages were placed on a wide selection of network television programs in order to reach adult smokers with varying tastes in entertainment. Comedy shows included "The Beverly Hillbillies," "NicHale's Navy," and "The Cara Williams Show." In the categprv of musical variety were "The Andy Wil- liams/Jonathan Winters Show," "Holly- wood at the Palace;" "The Jimmy Dean Show," and "The Garry\loore Show." Viewers interested~ in news and infor- mation saw commercials for the Com- pany's brands on "The Huntlev-Brinklev Report" and "The Today Show." Sports fans were reached by "Wide World of Sports," "AFL Football Games," a num- ber of golf tournaments, and telecasts of majpr league baseball games in some of the nation's largest markets. "To Tell the Truth" and "Password" provided entertainment for those who enjpvpanel shows. Also included in the Company's line-up were "Saturday Night at the 'Alovies" and "Sunday Night Niovie." Television spot! announcements were scheduled in many markets in order to give ad'ditionall support for individual 9

brands. An important advantage of TV spots is the flexibility offered in terms of markets, frequencv, brand allocation, and length of commitment. Use of this ad- vertising medium was substantially in- creased last year. 10 Other media were also used extensively to round out the Company's advertising program. Radio coverage was provided by announcements on network shows and local stations. A wide list of popular mag- azines was used to feature the Company's

brands~ in attractive, full colbr. Several campaigns were run in daily newspapers throughout the country. Strong prorno- tional support at the point of sale was given by the Company's large and effec- tive field sales force. INTERNATIONAL MARKETS The Company maintained its position as the leading exporter of cigarettes from I OTHER PRODUCTS RTF.R FI0 G~R~~~~ tlru° I ~ 1 SMOKING TOBACCOS Prince Alberti Carter Hall George Washington Top PRINCIPAL BRANDS OF CHEWING TOBACCOS (not illustrated) Days Work Brown's Mule Apple Sun Cured Reynolds' Natural Leaf ARCHER ALUMINUM DIVISION Foil Products / Packaging Materials PACIFIC HAWAIIAN PRODUCTS COMPANY Hawaiian Punchi King of the lslands Exotic Drinks 11