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1 . The American Tobacco Compan~ fxecutive Ol(ice,150 East 42nd Street, Ne +• York, N. Y. 10017 i

The American Tobacco Compan~ Cxecutive Office, 150 East 42nd Street, New York, N. Y. 10017

Annual Report for the Year Ended December 31, 1963 Contents Nighlights . . . . . . . . . . 2 President's l etter . . . . . . . 3 R",iew of the Year . . . . . . . 5 1963 Operations at a Glance . . . 14 Cun'olidatecl Statements of (nconre ancl Retainecl Farnings . . . . . . 15 Concolidatecl 8a/ance Sheets . . . 16 n'otes to statements . . . . . . 18 Auditors' Certificate . . . . . . 18 Supplementary Financial In/ormation . 79 Suurce aritl Alrplication of Funtl; . 79 7en-1'ear Financial Re view . . 20 Directors and Officers . . . . . . 23 Your Company's Principal Products . 24

(/hL• ~/IIl.C•7tC~QilL ClU7~UCC0-C.C77~JQ77I AND SUBSIDIAhIES Highlights Per Common Share 1963 1962 Net operating income . . . . . . . . . . Refunds and adjustments of prior years' federal and $2.47 $2.38 state taxes including interest . . . . . . . .04 .15 Net income . . 2.51 2.53 Dividends paid . 1.50 1.50 Net sales . . . . . . . . . . . . . . $1,192,318,771 $1,179,589,974 Net operating income . . Refunds and adjustments of prior years' federal and 67,676,412 65,215,590 state taxes including interest . . . . . . . 1,086,568 3,916,125 Net income . . . . . . . . . . . 68,762,980 69,131,715 Dividends paid (common and preferred) . . Portion of net income invested in assets used in the business and to provide for debenture sinking 42,297,375 42,242,146 fund requirements . . . . . . . . . . 26,465,605 26,889,569 Current assets, December 31 . . . 734,310,646 766,290,064 Current liabilities, December 31 . 128,809,606 166,019,996 Net working capital, December 31 . Number of stockholders, December 31: 605,501,040 600, 2 70,068 Common . . . . . . . . . . . . . 112,161 100,337 Preferred . . . . . . . . . . . . . 6,476 6,944 2

To Our Shareholders: In my annual reports to you as President, I hope to convey more than financial results, important as these are. Beginning with this report, my first, our reports will describe to you the progress we have rnade and also give you some idea of the direction in which we hope to move. In 1963 dollar sales and net operating income for the Company and its presently consolidated suhsidiaries reached record highs. It is your management's objective to lay the groundwork for more record highs in the years to come. My own business background is in the marketing field, and much of my time since taking office last April has been given to expanding our marketing organization and stimulating a keener mar- keting orientation in all departments of the Company. In May 1963 we made MONTCLAIR Modern Cigarettes avail- able nationally, following more than a year of market testing. Unit sales since that time have been well in excess of expectations for a new brand. In the latter half of 1963 we made several changes in our adver- tising agencies and in our advertising departments. One result of these changes is the humorous but effective "Unswitchables" cam- paign for DUAL FIL1 ER TAREYTON. This vvas supplemented by spe- cial messages emphasizing TAREYTON as the cigarette that made activated charcoal famous, the first activated charcoal filter cigarette, and the largest-selling cigarette with activated charcoal. A new Cigar Division has been formed to bring all our cigar operations under a single operating head, and a new advertising agency was appointed for all cigar brands- -ROI-TAN, ANTONIO y CLEOPATRA, LA CORONA, BOCK y CA. and others. 3

, Last month, culminating a long period of effort by our manufacturing, research and marketing people, we brought to market CARLTON Cigarettes -so low in "tar" and nicotine that test results are printed on all packs and cartons. CARLTON is the first cigarette to carry such information on the pack- age. Making this possible is the Flavor-Filter which enriches the smoke as it passes through the tip. We believe our cigarette line is now well suited to the broad range of the present market. In MONTCLAIR we have the only filter cigarette with the menthol in the tip, filtering in fresh menthol with every puff. In CARLTON we have very low nicotine and a lower average of "tar" in delivered smoke than has ever been published for an American cigarette. Our TAREYTON brand pio- neered the use of activated charcoal in cigarette filters in 1954, and in 1958 pioneered the multiple or compound filter. Last year at least five competitive brands followed our lead with compound filters, and at least three with activated charcoal. At the 1963 Annual Meeting I set as a prime goal the improvement of our position in the filter cigarette market. Filter brands accounted for about 12 0/0 of our cigarette sales in 1963, as against 9.5 °/o in 1962. Introduction of CARLTON Flavor-Filter Cigarettes on January 6, 1964, should accelerate this improvement in our product mix. Our nonfilter brands-PALL MALL, LUCKY STRIKE and HERBERT TAREY- TON-account for more than half of all nonfilter cigarette sales in this country. This simple fact testifies, I think, to our success in maintaining the high standards of leaf quality and precision manufacture for which The American Tobacco Com- pany has always been noted. As in past years we are most grateful for the continuing interest and encour- agement shown by our stockholders, for the cooperation given by our customers in the trade, and for the hard work and dedication of our employees. The pages that follow will give you fuller details about our cigarette, cigar and smoking tobacco operations; about our progress in new plant construction, in studies of possible diversification, in the strengthening of our financial struc- ture, in cash dividends paid to the stockholders, and in the general revitalization of the corporate body. I pledge to you our best efforts to continue thjs progress. ROBERT B. WALKER President February 5, 1964 4

Review of the Year The Hanmer Divi~ion leaf I roe- essinc; rilant %chich "ill cummencc or>i•rations in thc• early sunimer of 1964 stands on a 200 acre tract of land fronting on the historic James River near Richmond, Virginia. It is e•asily ac(e•ssible to rail, %+ater and highway transportation facili- ties and is ideally located for pos- sible future espansion. Consolidated dollar sales increased to $1,192,318,771 from $1,179,589,974 , in 1962. I X Cigarettes: Unit sales of PALLMALL n--onfilter king size cigarettes again increased -- - in 1963. According to independent analysts, PALL MALL remains-t4ie4argest- selling cigarette brand in the United States. DUAL FILTER TAREYTON sales continued to increase. For the fifth suc- cessive year DUAL FILTER TAREYION's rate of increase was greater than the percentage of gain for the filter cigarette market as a whole. Demand for standard size cigarettes as a group continued to decline, and unit sales of LUCKY STRIKE Cigarettes reflected this trend. Nevertheless, this market continues to account for well over 100,000,000,000 cigarettes annually and LUCKY STRIKE, with approximately a third of standard size cigarette volume, continues as one of the largest-selling cigarette brands in this country. MONTCLAIR Modern Cigarettes, which offer menthol in the tip---not in the tobacco-- achieved national distribution in mid-1963. Unit sales of MONT- CLAIR during the latter half of the),ear-were well above the normal expectation TIP for a new brand. t Announcement of our newest product, CARLTON Flavor-Filter Cigarettes, was made on January 6 of this year. The distinctive features of CARLTON are described on page 13 of this report. Export cigarette sales-clecreased in 19_63._ Contributing factors_included the decline in the number of armed forces personnel and their dehendents abroad, nev;, restrictions on sea stores purchases, and higher import duties levied_on American cigarettes by n imporfant European country. Cigars: Unit sales of ROI-TAN Cigars in 1963 were t ie highest on record. ROI- TAN continues to be the country's largest-selling cigar in the 10~ price class. In addition to seven 10t` sizes, ROI-TAN also offers Tips, Cigarillos and Trumps in the 5¢ field and Golfers in the 4t` field. Plans are under way to broaden ROI-TAN's appeal during 1964 with new shapes in new price classifications. For many years our higher priced brands -LA CORONA, ANTONIO y 5

CLEOPATRA and BOCK y CA.-have constituted the largest-selling line in the fine cigar field. Combined unit sales of these brands again increased in 1963, reaching a new record high. Smoking Tobacco: Industry sales of smoking tobaccos have been in a declining trend. However, combined sales of the Company's smoking tobacco brands in 1963 were virtually equal to the previous year's total, duplicating the strong performance of our brands in 1962. Sales of our most im oP rtant brand, HALF ANC) HALF, sho_wed a healthy increase in 1963, the third successiveyear in which HALF AND HALF_j5aIe~hav_Uained,._ Our principal brands of cigarettes, cigars and smoking tobacco are listed on page 24. In the interest of greater smoking enjoyment and in the interest of your Company's business, stockholders are urged to buy these quality prod= ucts, to use them as gifts, and to call them to the attention of their friends. Your promotion of our brands can be most helpful to the Company's sales progress. Pac{:a:;ing In January 1964, DUAL FILTER TAREYTON Cigarettes were made available na- tionally in a new and improved pop-open pack. This new feature improves the appearance of the pack, permits a quicker and neater opening and better re- closure. In markets where this new packing was tested during 1963, it received a warm welcome from consumers. MONTCLAIR Modern Cigarettes are also being distributed nationally in \ the new_pop-open pack. Box packings of ROI-TAN, America's No. 1 seller in the 10S` cigar field, were ~~ Y redesigned and made available nationally during 1963. Following the success of the HALF AND HALF poush-in_k2ox package, BLUE BOAR, our largest-selling high-grade smoking tobacco, is being offered in this packing with a new design. TUXEDO Smoking Tobacco pocket size is`) also being offered in the pouch-in-box package. Our review of product packaging is a continuing one and is directed toward better design as well as improved protection for our quality products. FinailCtaI i'.eview Earnings: Net operating income in 1963 rose to $67,676,412 froni $65,215,590 in 1962, despite sharply increased advertising and promotion expenditures, which were the highest in the history of the Company. Refunds and adjustments of prior years' taxes amounting to $1,086,568 in 1963 and $3,916,125 in 1962 raised the net income figures to $68,762,980 for 1963 and $69,131,715 for 1962. The Company owns about 13 °/o of the Ordinary Stock of Gallaher Limited, a large British tobacco manufacturer, acquired in 1962 in exchange for the stock of a wholly-owned British subsidiary. Earnings for 1963 include dividends received from Gallaher amounting to $1,357,804 as compared with $308,855 received in 1962. Wholesale price increases of 10¢ per thousand on our nonfilter king size brands, PALL MALL and HERBERT TAREYTON, on April 8, 1963, and of 35{ per thousand on our regular size nonfilter brand, LUCKY STRIKE, on May 13, 1963, 6

r Sales (in millions) S 1,200 ' 1,100 1,000 r t r ! i ~ ' f I ~ j 1 900 800 ( 700 . ; i . . , : : . $150 125 : 1 100 75 50 25 . . 0 1954 55 56 57 58 59 60 61 62 1963 Stockholders 1928-1963 (in thousands) 1928 1933 1938 1943 1948' 19531958 1963 • Commun B ch-ged inio Comman in 1948 Income Before Taxes, Taxes and Net Income (in mi)iions) TAXES 1954 55 56 57 58 59 60 61 62 1963 Net Worth Compared with Long Term Debt (in millions) 1954 55 56 57 58 59 60 61 62 1963 7 ~