Tobacco Documents Online

Otn• Rcscarch Laboratorl/ in Richm otrd is tTrc 1tttL of q+talify c•on tral. ' :.iai:.i.~-1 ~1,,ill .I-- - .I-- • -- J- - --- r i~ .. -w;~, .^9k, The"nial:irtymachine"printstheLtartcl7iame, rolls tlt c7w pet• i iGLon aroun cl a m c a s i trccl strca?n of Llc•tided tobacco, scals ili c papc•r and slrcars off 1,000 or more cigarettes eacTt iuinzcte. Arra7tying forretail displays of Conipany prodiccts is one of sereral f unctions performed by tlie Sales Otya>iizalion1 50032 5633

I7' ,V Excise taxes of $50G,4£5,000, Social Security and other taxes Nvere also included in the Company's tax bill for 1961, raising the total figure to $700,895,000. Taxes on the Company's products are levied by 47 of the 50 States and by more than 200 cities and counties. While the Com- pany is not required to collect such taxes, they do increase the prices paid for our products by the consumer. Cupital Expen(litures Capital expenditures Nvere $6,467,000 in 1961 compared with $7,838,000 in 1960. The liulk of these expenditures was for new machinery and equipment to improve quality control and operating efficiency in our manufacturing plants. The amount charged to cost and expense for depreciation last year Nvas $5,682,559 as against $5,480,419 in 1960. ILeaf ToLacco The Company's lnn•chases of leaf tobacco in 1961 Nvere in accord- ance «•ith its long-standing policy of "Quality of Product." Production of flue-cured tobacco last year totaled approxi- mately 1,250 million pounds. The average selling price on the auction markets was G3.7~ per pound, about G ;~ above the 1960 level of 59.9~. The Government price support level for the 1961 crop was 55.5~per pound. The harvest of Burley tobacco in 1961 is estimated at close to 600 million pounds. Prices on the auction markets through the end of 1961 averaged GG.S{r per pound compared with G5.2~ in the corresponding period of 1960, an increase of 2.5%,. Approximately 85 j~of the croh had been sold before Christmas. The Government hric•e support level for the 1961 crop was 57.2~, per pound. J. )f'ia• & So»s Limited On January 2, 1962, eeffective as of the beginning of this year, the Company concluded a transaction with Gallaher Limited, a lead- ing cigarette and tobacco manufacturer of the United Kingdom, by which the capital stock of our wholly-owned British subsidiary J. Wix & Sons Limited was exchanged for 7,200,000 ten-shilling units (equivalent to shares) of Gallaher's Ordinary Stock. The shares so acquired represent about 13 /, of Gallaher's Ordinary Stock. 9

... Representative Advertisements Remember how yr ciyarettes usec taste? Luckies still .:_1L: llllfF' f10f$ 1.1 :' Ir . nr a l l ll.l r.lr 7!/I l'j'lUI l Change 1n L"cklcs and yvl somc lastc lor a c.. The net tangible asset value of Wix as of December 31, 1961, amounted to $15,543,272. The value of the Gallaher shares re- ceived by the Company in exchange for its Wix shares, based on the closing price on the London Stock Exchange on the date the transaction was concluded, was approximately $42,000,000. Gallaher Limited ranks second in sales of tobacco products in the United Kingdom. Its leading brands are "Senior Service" (a close challenger for the No. I position among "medium price" ciga- rett.e brands in the United Kingdom), "Nelson" (Tipped), "Park Drive" (Plain and Tipped), "du ll7aurier" (Filter Tip), "Olivier" (Tipped) Cigarettes; "Old Holborn" and "Condor" Toliaccos and "A7anikin" and "King Six" Cigars. Gallaher's sales volume in 1960 (the last year reported )was approximately $896,000,000 and its net profit approximately $16,300,000. Wix is considerably smaller in total volume, with only one important brand, "Kensitas" (Filter Tip and Extra Size). 10

1 i In the past 32 years Gallaher has been the only United Kingdom cigarette manufacturer to expand its share of a growing market consistently over the entire period. Wix has expanded its sales ma- terially in the past few years. Wix sales and profits in recent years have been consolidated with those of The American Tobacco Company and other wholly- owned subsidiaries. In 1960 the contribution of Wix to the consoli- ~ dated sales volume and net profits of the Company was $96,584,441 in sales and $2,363,790 in profits; in 1961 it was 34,448,8~ in sales and $3,171,989 in profits. Beginning with Januar,y 1-,T 92, Wix sales and profits will no longer be reflected in the Company's reports, and sales and earnings figures for past years will be ad- justed on a comparable basis. Gallaher's current annual dividend rate is 20 7o on par value, or 28 cents on each unit, subject, of course, to British and United States income taxes. The Gallaher dividend expected to be paid in ~ May 1962, being a final dividend for 1961, will not be payable on the shares acquired by the Company, whose interest in Gallaher earnings begins in 1962. It is the considered opinion of your Management that this ex- change of shares has broadened the base and improved the quality and potential of your Company's investment in the United Kingdom market. A(Irertising ailr1 Sales Pronnotion Your Company continually strives to increase the sales of its brands, since it is large volume which makes possible the high quality stand- ards at relatively low prices on which our business and our profits are based. National advertising campaigns and the activities of our nationwide Sales Organization are the major means used to strengthen demand for our brands by the smoking public. In advertising its cigarette brands, your Company uses virtu- ally all major media, including newspapers, magazines, television, radio and billboards. Since cigarette smokers in this country have been estimated to number 65,000,000, a balanced program empha- sizing general circulation media is employed. Advertising media usec] for our other tobacco products are more specialized. In all its advertising, the Company places prime emphasis on the enjoyment and relaxation afforded by fine tobacco, and endeavors to match the good taste of its products by good taste in their promotion. The members of our Sales Organization supplement the impact 11

of national advertising by securing the Nvidest possible distribution of our brands, by arranging for their display, for the.placement of point-of-sale material and for other forms of promotion at the retail level, and by direct consumer sampling. In addition, they maintain a constant watch on the storage and stock rotation of our products at both wholesale and retail levels so as to insure that our brands reach the ultimate consumer with freshness and flavor unimpaired. The efforts of both Advertising and Sales I)epartments are under continual detailed review with the object of achieving maxi- mum effectiveness from every dollar spent in these fields. SmoLing and Health Your Company continues to support objective and independent re- All but wte of the Compang's sci•cntcen Directors were premit at tlre 1961 Annual 111eeting of Stockholders. 12

search in this field through the Tobacco Industry Research Com- mittee. Since its formation in 1954, T.I.R.C. has appropriated $5,450,000 for research grants in hospitals, medical schools and re- search institutions throughout the country. Recently the Chairman of the Tobacco Industry Research Com- mittee stated that: "In the last eight years, the cigarette hypotheses have been sub- jected to clinical and laboratory tests throughout the world. Today, while the hypotheses are still alive, they rest almost wholly on associations derived from statistical studies that did not give comparable consideration to other factors. These other factors have been the subject of a growing number of studies in recent years and good progress is being reported. Tobacco use is still under study, by T.I.R.C. and others, but the chemical and laboratory experiments have failed to explain the statistical associations." I ; Personnel On November 25, 1961, Mr. J. Wesley Dale, formerly Auditor, died after 45 years in the service of the Company. Mr. Dale made many contributions to the administration of the Company during his long career, and his passing is reported with a deep sense of loss. Stockholders' Annual 111eeting The Annual Meeting of Stockholders Nvill be held on Wednesday, April 4, 1962. Formal notice of this meeting, together with the proxy and proxy statement, accompanies this report. f > -f It has been a source of great satisfaction to me to receive so many communications from our shareholders during the past year. These letters indicate an active interest in the affairs of the Com- pany on the part of our shareholders. On behalf of the Board of I)irec.tors I should like to express our appreciation for the cooperation of our customers and the loyal service rendered by our employees, both of which have contributed to the achievement of the record results in 1961. PAUL 1\2. HAHN Presi.den t 13

1961 Operations a.t a Glance The Co,nl,any received for goods it sold and froiii interest ancl misccllanc>uus $1,289,068,000 This is how it was used or set aside . 11f $700,895,000 $287;2] l ,000 $225,753,000 .„~ 6,475,000 $ 39,637,000 $ 29,097,000 Taxes (excise, income, social security, etc.) Tobacco (inclucling applicaLle expcnses) lf'ages, Goods, Services, etc. I Interest on Rurro~recl Funds ~ ~ c ~ Diridcncls to Stockholders Earnings Rctnincd to Mcct Future Needs

('O\tiOLII)ATEI) STATF.N1F.\TS OF Income arid Retaiq.d. Earnings X~Jlnt~/t i r~in c/~ul accc ( c n~a n~i AND WHOL LY-OWNED SUBSIDIARIES For Years E?zdcd December 31 1961 1960 Net Sales . . . . . . . . . . . . . . • selling, general and administrative Cost of sales $1,288,39 V,7 ~5 iis3s~98`~`~ $1,215,342,819 , expenses . . . . . . . . . . . . . • 1,134,096,901 1,072,572,440- Operating Profit . 154,301,834 142,770,379 Other income . 669,131 671,868 154,970,965 143,442,247 Interest and related charges . 6,475,381 6,467,008 Other deductions from income 425,269 1,132,073 Total deductions 6,900,650 7,599,081 Operating income, before taxes on income 148,070,315 135,843,166 Federal and other taxes on income .. 79,573,891 72,523,561 Net Operating Income . . Provision for possible loss in 1960 (credit adjustment in 1961 for partial recovery) of leaf inventory in 68,496,424 63,319,605 Cuba, less applicable federal income tax ... 237,622 797,292 Net Income . 68,734,046 62,522,313 Retained earnings, beginning of year . 278,770,450 254,908,381 Cash Dividends: $2.80 per share; 1961 Common stock 347,504,496 317,430,694 , , 1960, $2.721h per share . . . . . . . 36,470,123 35,493,258 Preferred stock, $6 per share . . . . . . . 3,166,986 3,166,986 Tota I d ividends . . . . . . . . 39,637,109 38,660,244 Retained earnings, end of year . . . . . . . . $ 307,867,387 $ 278,770,450 Depreciation provided and charged to costs and expenses amounted to $5,682,559 in 1961 and $5,480,419 in 1960. 15 0 O, ~,

Cori.soli{.lafca Asseirs Deceuiber 31 1961 1960 Cash . . . . . . . . . . . . . . . . $ 18,257,482 $ 20,400,242 Accounts receivable, customers . . . . . . . . 60,720,896 56,576,888 Leaf tobacco, manufactured stock, operating supplies, etc., at average cost . . . . . . . . . . . 747,166,517 693,389,538 Miscellaneous accounts receivable . 1,757,383 1,451,845 Total current assets . 827,902,278 771,818,513 Investment in and advances to Cuban Tobacco Com- pany Inc., a majority-owned subsidiary, at amounts not in excess of cost (Note 1) . . . . . . . . 3,889,727 5,555,069 Insurance deposits and miscellaneous investments . 979,206 1,123,080 Land, buildings, machinery, etc., at cost, less accu- mulated depreciation, 1961, $62,805,560; 1960, $58,752,744 . . . . . . . . . . . . . 68,635,280 68,699,311 Prepaid expenses and deferred charges . 4,805,689 3,704,528 Brands, trade-marks, patents, good will, etc. . 1 1 $906,212,181 $850,900,502 16

C nC/-J/»u,?tcavi- c/o~iccc 7 AND WHDLLY•DWNED SUBSIDIARIES alcrnce Sheets Liabilities necembci• 31 1961 1960 Notes payable . . . . . . . . . . . . • $ 98,000,000 $ 78,000,000 Loans payable by British subsidiary . . . . . . . 15,830,723 8,665,417 Accrued taxes . . . . . . . . . . . . . 62,638,872 53,751,821 Accounts payable and accrued expenses . 27,986,877 24,064,492 Dividend on preferred stock for quarter ended December 31 . . . . . . . . . . . . . 791,746 791,746 Debentures to be redeemed within one year (Note 2) . 32,657,000 10,556,000 Total current liabilities . . . . . 237,905,218 175,829,476 Debentures (Note 2) . . . . . . . . . . . 99,879,000 135,740,000 337,784,218 311,569,476 Stockholders' Equity Capital stock (Note 3): Preferred, six per cent cumulative, par value $100 per sha re . . . . . . . . . . . . . 2,783,100 2,783,100 Common, par value $12.50 per share .. 162,813,050 162,813,050 Excess of net proceeds from capital stocks issued over par values . . . . . . . . . . . . . . 44,964,426 44,964,426 260,560,576 260,560,576 Retained earnings . . 307,867,387 278,770,450 Tota I . 568,427,963 539,331,026 $906,212,181 $850,900,502 1/ 'J