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Sates 1949 1950 1951 1952 1953 1954 1955 1956' 195)' 1958' •includes ell wAolqowned suDsidi.ries 0 Havana line. activated charcoal, which has been scientifically proved to make cigarette smoke exceptionally mild. This unique filter tip enables DuAL FILTER TAREYTON to offer the smoker not only high filtration of smoke solids 'but high filtration of smoke vapors as well, thus delivering a-mild and truly "balanced" smoke. The Company's filter cigarette volume during the last half of 1958 was substantially higher. than in the first half. Additional measures to increase our filter cigarette volume are now in preparation. Export (tax-free) cigarette sales were lower in 1958 than in 1957, the major factor being reduced requirements for tobacco products by , Armed Forces installations overseas. Unit sales of cigarettes manufactured by J. Wix & Sons Limited, the Company's English subsidiary, were higher in 1958 than in 1957. Unit sales of the Company's cigars increased during 1958. In the domestic cigar field, EL Roi-TAN increased in volume and strengthened its position as America's largest-selling 10¢ cigar. A new Rol-TAN Cigarillo retailing at 5y was introduced early in 1958 and is now av,ailable nationally; during its first year the Roi-TAN Cigarillo -showed very satisfactory unit sales volume. Combined unit sales of your Company's clear Havana cigars increased. These brands, which include LA CORONA, ANTONIO y CLEOPATRA and BOCK y CA, continue to comprise the largest-selling Bonded Clear 4 11

4 Your Company's smoking tobacco brands-including HALF AND HALF and "BULL" DURHAM-increased their sales volume during 1958. • In view of the fact that industry and Company sales of plug -chewing tobacco have been declining steadily for a number of years, your Manage- ment in March 1958 sold the eleven plug tobacco brands formerly manu- factured in Louisville. In 1957 these brands had accounted for less than one-fiftieth of 1% of the Company's total sales revenue, this volume being too small to yield a profit. The plant facility at Louisville formerly used for plug manufacture will be available for use in our cigarette operations. A thorough study of the Company's cigarette, cigar and smoking tobacco packaging has been undertaken. Improvements made in 1958 in- clude a pouch-in-box packing for HALF AND HALF Smoking Tobacco, a com- pletely new package design for DUAL FiLTLR TAREYTON Cigarettes and new packirigs for LA CORONA Cigars. This packaging review is continuing. EARNINGS Another new record for earnings-the fourth in a row-was estab- lished by your Company in 1958, as net income increased to $58,845,844 compared with $57,094,650 in 1957.* The extent of the gain in earnings was diminished by the heavy promo- tional costs incident to the introduction of a new and highly effective filter on our HIT PARADE brand and by the marketing of the new DUAL FILTER TAREYTON Cigarette. Net income per Common share in 1958 amounted to $8.55 compared with $8.28 in 1957. DISPOSITION OF EARNINGS . For the 54th consecutive year, 'dividends were paid on the Common stock. The total during 1958 amounted to $5.00 per share, consisting of four regular quarterly dividends of $1.00 each and an extra dividend of $1.00. The 214th dividend on the Common stock was declared on January 27, 1959, and is payable on March 2, 1959, to stockholders of record February 10, 1959. This payment includes a regular dividend of $1.00 per share and an extra dividend of $1.00 per share, making a total dividend of $2.00 per share to be paid on the Common stock on March 2, 1959. The total amount of dividends paid in 1958 on both. Common and Preferred stock was $35,729,596, the same as in 1957. Earnings retained for use in the business totaled $23,116,248 as against $21,365,054 in 1957. 5 -6

FINANCES • Includes all whollyowned subsidia,ief Cash on hand and in banks at December 31, 1958, was $20,284,075 compared with $22,971,526 at the end of 1957. Notes Payable at Decem- ber 31, 1958, were $66,000,000 compared with $92,350,000 at the end of 1957: Average Notes Payable during 1958 was $70,800,000, considerably below the figure of $105,600,000 for 1957. The combination of lower Notes Payable and more favorable interest rates than in 1957 resulted in a significant reduction in the Company's interest costs. Total interest on Notes Payable in 1958 was about $2,000,000 lower than in 1957. Long-term debt was $13,928,000 lower at the end of 1958 compared with the previous year, as a result of retirement of debentures through oper- ation of the Sinking Funds. This reduction, together with the addition of $23,116,248 of retained earnings to net worth, produced a further improve- ment in the ratio of funded debt to net worth. Thus, funded debt was 34% of net worth at the end of 1958 compared with 88% ten years ago. In the absence of unusual developments, your Management does not anticipate any need for new financing in the foreseeable future. TAXES Federal and other taxes on income amounted to $65,762,000 in 1958 compared with $61,510,000 in 1957. Taxes on income in 1958 amounted 6

~ .s.a . . S to $10.10 per Common share compared with net income of $8.55 per share. Excise taxes on your Company's products totaled $465,779,000 in 1958. As previously reported to stockholders, the method of liayment of these excise taxes imposes an unfair financial burden on the industry, and it had been hoped that the return and deferred payment system authorized by the Revenue Code of 1954 would provide partial relief. However, neither the Treasury Department nor Congress has taken any further action to put into effect this more equitable system of payment for cigarette and 4 smoking tobacco excise taxes. . In addition to the income taxes and excise taxes mentioned above, social security and other taxes amounted to $42,389,000. Including these amounts, your Company's total tax bill amounted to $573,930,000 for the year 1958. . CAPITAL EXPENDITURES The program of maintaining plant and equipment at maximum effi- ciency was continued during the year 1958. Capital expenditures were about the same as in the previous year, totaling $10,413,000, compared with $10,829,000 in 1957. Major expenditures were made for the purchase of modern machinery and equipment in both cigarette and cigar plants in order to achieve maximum production efficiency and greater control of quality. Net Inco me, Divlde ds an d Income Reinvest ~ Millions oi Dollars -- 60 - -- -- -- - I I ~ ~ ~ ~ ~ 50 NET INCOME .. i i J - 45 --- ~ I ~ ~ INCOME 40 , I + REINVESTED r•- ed 1 1 ~_ -- 1 ~-~~ --- -- , PREFERRED AND ~ COMMON. DIVIDENDS ~- - ~ ~-, ! ~ 5949 1950 1951 1952• 1953 1954 1955 1956• 1957• 1958• N- - •ledudes atl whotlypwned subsld:a.ks . . 7

~ j Net Worth Compared with Long-Term Debt MdLon.Of OWI.r. I q 500 l © NET WORTH LONG-TERM DEBT 400 '300 200 100 0 -Inctudes all wAolly.owned suDsld7.ries Net land, buildings, machinery, etc., increased from $58,154,475 at the end of 1957 to $62,639,794 at the end of 1958. Depreciation charged to cost and expense in 1958 amounted to $4,737,116. ' 1 1949 1950 1951 1952 1953 1954 1955 1956' 1957e 1958' LEAF TOBACCO Production of leaf tobacco in the U. S. last year was 5% above the previous year's level. As usual, your Company's purchases on the auction markets were confined to the better grades, in line with our long-established policy of manufacturing products of the highest quality. The 1958 crop of flue-cured tobacco was about 10% greater than that produced in 1957. With the sale of- flue-cured tobacco on all markets having been completed before the end of the year, the average selling price for the entire 1958 crop was 57.7~ per pound, which represents a 5% increase over the previous year and establishes a new record. The price support level for the 1958 crop was 54.6¢ per pound. The 1958 Burley crop production was a little smaller than the previous year. Approximately 80% of the 1958 crop of Burley tobacco had been sold on the auction markets by the end of 1958. Average market prices through the end of the year for the crop were 8% higher than the com- parable period in 1957, averaging 66.5¢ per: pound compared with a price support level of 55.4¢ per pound. For many years the buying, storing and processing of the Company's do- 8 LA 0 0 w N co

mestic leaf tobacco requirements have been handled by a wholly-owned sub- sidiary known as American Suppliers, Incorporated. This organization has been responsible for maintaining the high standards in leaf tobacco which have made your Company's products famous and a byword for quality. ~ In order to eliminate certain duplications inherent in a separate cor- porate structure and to effect greater convenience and efficiency in opera- tion, this subsidiary was merged with The American Tobacco Company as of December 31, 1958. However, the American Suppliers organization will be kept intact as a separate operating Division of The American Tobacco Company, thus insuring a continuation of the capable work performed by this group. Since the operating results of American Suppliers, Incorporated, have always been consolidated in the report of the Company, the merger will not have any significant effect upon the operating results of The American Tobacco Company. ADVERTISING AND SALES PROMOTION Maximum competitive effectiveness at minimum cost is the object of the Company's advertising on behalf of its major brands. Similarly, our Sales Organization concentrates its efforts in the more heavily populated areas and in the larger-volume outlets where sales potential is greatest. During 1958, two of our newspaper advertising campaigns were awa•rded citations for effectiveness: the PALL MALL campaign, "Get Satis- fying Flavor-So Friendly to Your Taste," and the LucKY STtiiKE cam- paign, "Get the_Honest Taste of a LvcxY STRIKE." Advertising is conducted via magazines, newspapers, radio, television, car cards, billboards and other media. Sales messages in national media are supplemented• by local advertising in key markets. Our Sales Organization reinforces the advertising effort at the point of sale by supplying mer- chandising aids to retail outlets, by direct sampling of consumers in-the field, and by securing wide distribution for our brands. SMOKING AND HEALTH Although public pronouncements by anti-c.igarette theorists continued, the theory itself has not been substantiated. On the contrary, recent research •has yielded negative evidence with respect to anti-cigarette charges. In his 1958 Report, Dr. Clarence Cook Little, Scientific Director of the Tobacco Industry Research Committee, notes in substance that: 1. All animal experiments involving direct inhalation 'of tobacco smoke have failed to produce bronchogenic cancer, and even tobacco 9 i

smoke condensates in heavy dosages introduced into animals' res- piratory systems have failed to do so. 2. Evidence of the importance of factors of a different nature as possibly relevant to the study of causation of constitutional disease has greatly increased. 3. An examination of the reported statistical association between cigarette smoking and lung cancer reveals two facts clearly. First: Non-smokers develop the ailment. Second: The overwhelming majority of smokers do not. Your Company, along with other manufacturers, leaf growers, dealers, warehQusemen and cooperatives, continues to support the research program of the Tobacco Industry Research Committee, now in its sixth year. All- grants are made upon recommendation of an Advisory Board of independent scientists, doctors and educators; recipients of grants are assured complete scientific freedom in conducting their investigations and reporting their results. The Company's own research on the composition of tobacco and tobacco smoke, now in its thirty-eighth year, continuess in our Richmond Laboratory. In 1958 our Research Laboratory became the first industrial research lab- oratory to receive the Distinguished Service Award of the Virginia Academy of Science, and was cited as "International Leader in Tobacco Research, Befriender of Science in Community Affairs, and Outstanding Contributor to the Advancement of Science in America." Last year your Company and thirteen other tobacco manufacturers , formed The Tobacco Institute, Inc., with headquarters in Washington, D. C. The Tobacco Institute works to create a better public knowledge and under- standing of tobacco and the tobacco industry. PERSONNEL The Directors record their deep sense of loss at the passing, on June 21, 1958, of Mr. John Richard Hutchings, Jr. As President of the Company's domestic leaf-buying organization, Mr. Hutchings bore a major share of the responsibility for maintaining the high quality of leaf used in the Com- pany's products. Even more important than his personal devotion to this task was his great capacity for communicating to those under him his . . 10

feeling for tobacco quality and his loyalty to the Company and its opera- tions. Mr. Hutchings had served the Company for 42 years. .STOCKHOLDERS' ANNUAL MEE7ING . The Annual Meeting of Stockholders will be held • on Wednesday, April 1, 1959. Formal notice of this meeting, together with the proxy and .~ proxy statement, is enclosed with this report. In keeping with the trend in modern corporate procedure the new form of punch-card proxy, which is enclosed, has been adopted. Before closing this letter I should like to acknowledge the many letters relating to the Company's affairs which I have received from stockholders during the past year. Particularly gratifying are those which express a sincere loyalty to the Company's products and an active interest in the promotion of the Company's various brands. I should like to express the appreciation of your Board of Directors for the cooperation of our customers and the loyal service of our employees which have helped to make the year's results possible. PAUL M. HAHN President

The Comp(my received for goods it sold and fi•om dividerrds, interest (IJ2d ))21SCelI(I1Zeolls .. . . .

Consolidated Statements of Income and, Retained Earnings FOR YEARS ENDED DECEMBER 31 Net Sales . . . . . . . . . . .. . . . Cost of sales, selling, general and administrative expenses . . . . . . . . . . . , Operating Profit . Other income . . . 1958 $1,103,023,397 969,662,731 133,360,666 769,918 134,130,584 Interest and related charges . . . . . . . ' . Other deductions from income . . . . . . . Tota l deductions . . . . . . . Income, before taxes on income . . . . . ..'. . Federal and other taxes on income ...... Net Income . . Retained earnings, beginning of year_ ...... 8,005,598 1,517,142 9,522,740 124,607,844 65,762,000 58,845,844 204,178,185 263,024,029 Cash Dividends: Common stock, $5 per share . Preferred stock, $6 per share . Total dividends . . . . Retained earnings, end of year (Note 2) . 32,562,610 " 3,166,986 35,729,596 $ 227,294,433 1957 $1,098,092,746 969,805,141 128,287,605 897,225 129,184,830 9,980,877 599,303 10, 580,180 118,604,650 61,510,000 57,094,650 182,813,131 239,907,781 1 1/ 32,562,610 ~ 3,166,986 35,729,596 $ 204,178,185 Depreciation provided and charged to costs and expenses amounted to $4,737,116 in 1958 and $4,194,785 in 1957.