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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 ~

y0 contributed to the improvement in net operating income last year. Income figures for both 1963 and 1962 include results of operations of Cuban Tobacco Company Inc., which were not previously consolidated with those of the Company, as well as those of its successor, American Cigar Corpo- ration, a new wholly-owned subsidiary which acquired the net assets of Cuban Tobacco Company Inc. on April 11, 1963. Accordingly, operating results for years prior to 1962 have also been restated. Net operating income per Common share, based on 26,099,116 shares out- standing at the end of 1963, is shown below for each quarter and the full year 1963, compared with 1962 results: Quarter 1963 1962 March 31 . . . . . . . $ .50 $ .55 June 30 . . . . . . . . .64 .59 September 30 . . . . . . .67 .64 December 31 . . . . . . .66 .60 Total . . . . . . . $2.47 $2.38 Refunds and adjustments of prior years' taxes amounting to 4f` per share in 1963 and 150 per share in 1962 increased net income to $2.51 per share in 1963 and $2.53 per share in 1962. Dividends: Last year marked the 59th consecutive year in which Common divi- dends were paid by your Company. Total payments in 1963 amounted to $1.50 per Common share, consisting of four quarterly dividends of 37'/2¢ each. Four quarterly dividends of $1.50 per share were also paid on the Preferred stock. The regular quarterly dividend on the Common stock payable on March 2, 1964, has been increased from 37'/20 to 40e` per share, which is equivalent to $1.60 per share on an annual basis. Since 1953 the Common stock dividend rate (adjusted for stock splits) has increased 60 0/o. Total dividends in 1963 on both Common and Preferred stock amounted to $42,297,375. The remainder of net income or $26,465,605 was retained for use in the business. Dividends paid on the Common stock in 1963 represented 60 0/o of net income available for the Common stock. Finances: The favorable trend in the Company's financial condition was again evident in 1963. For most of 1963, notes payable were lower than in 1962 and were com- pletely eliminated at several times during the summer and autumn months, reflecting the continued improvement in our over-all working capital position. At the end of 1963, notes payable were down to $35,000,000 compared with $79,000,000 a year earlier. Excess funds were invested in U. S. government securities from time to time during the summer and fall. These short-term investments reached a peak of $40,000,000 in August, hut were invested for relatively short periods of time. The principal amount of debentures outstanding was reduced further by 8

,_^ G7 . ~ ~. , -7 Ec~ K~..~~-...- LE'df and MbatlUf,1CIttre ing amounted to $86,565,000 which compared with net worth of $613,726,999. ~.~ Leaf inventories were lower by $36,655,391 at the end of 1963 compared with a year earlier. Part of this reduction was accounted for by the fact that the Burley auction markets closed earlier than usual in December, thus postponing some of the purchases originally scheduled for 1963 into the current year. Federal and other taxes on income in 1963 totaled $78,430,317 or $3.01 per Common share. This compares v6th net income of $2.51 per Common share. The Company's total tax bill for 1963, including excise taxes of $514,270,000, income taxes, Social Security and other taxes amounted to $605,908,000. $11,546,000 in 1963. Debentures with a face value ot $6,865,000 ~~'ere I~urchased (:.'`~ ~•~- in the open market during the year at a cost of $6,550,578 to meet Sinking Fund r-~--~?~~ ~1^tit requirements. At the end of the year, the total amount of debentures outstand 1- Capital Expenditures: Capital expenditures in 1963 rose to $18,768,000 compared with $6,342,000 in 1962. The major portion of the 1963 outlays was accounted for by construction of a new stemmery at Reidsville, North Carolina, and a leaf processing plant near Richmond, Virginia. Other capital expenditures were for new machinery and other equipment required in connection with the program of constantly improving the operating efficiency of our manufacturing plants. Your Company's production operations are based on (1) quality tobacco and (2) precision manufacture. Efficiencies and economies both in our factories and in our leaf buying operations ~vere effected in 1963. On the leaf markets, the 1963 flue-cured crop totaled 1,459 million pounds, slightly lower than in 1962. About one-fifth of this crop %,vas placed under gov- ernment loan. The U. S. government support level for flue-cured tobacco was 56.60 per pound, one-half cent higher than in 1962. Average market prices were 57.70 per pound, which was 2.10 below 1962. Through December about three-fifths of the 1963 Burley crop had been sold; this crop was expected to exceed the 1962 crop by about 5°/o. The U. S. government suphort level was 58.30 per pound, one-half cent higher than in 1962. Through December about one-fourth of Burley sales had been placed under government loan. Market price avera,-es do not reflect our leaf tobacco costs, since the buyers of our American Suppliers Division are trained to seek the finer grades of tobacco which usually command higher prices. A new stemmery is being placed in operation at Reidsville, North Carolina. This stemmery is designed for greater efficiency in stripping and processing leaf tobacco, and is located in our leaf storage area outside Reidsville. Completion of a new leaf processing plant at Bermuda Hundred, near Rich- mond, is expected later this year. This installation will be known as the Hanmer Division, in recognition of the many contributions of Hiram R. Hanmer, Vice President, Research and Development and a Director of the Company, who is the acknowledged dean of cigarette research and has made many vital contribu- tions to the Company's progress and that of the industry. Our Richmond Research Laboratory, which was doubled in size in 1955, 9 v+

(Upper PhcHnl;ratih) lhe new stemmery at Reickville, North Carolina, adjacent to Ihe leaf tohacco storage facihlies. (fower Phoio};raph) The Company's Research Laboralory in Richmond, Virginia, where the new fil- ter used on MONTCLAIR and CARLTON Cigarettes was developed. will be greatly expanded again to keep pace with the increasing complexity of the cigarette market and the consequent emphasis on new product develop- ment. Plans for added working space are well advanced and it is anticipated that construction will be under way within the next few months. Marketing For many years, it has been your Company's policy to match the good taste of its products with good taste in their promotion. Our brands are advertised on the basis of the pleasure they give. Special efforts are made to keep our advertising effort consistent with our long-term position that smoking is a form of enjoy- ment for adults. So that this policy could not be misunderstood, the Company decided early in June 1963 to discontinue advertising in college publications. To reach the estimated 70 million adult smokers in the United States with its sales messages, the Company uses general circulation media, mainly television, radio, newspapers and magazines. Our advertising programs are being continu- ally studied with the objectives of improving our sales messages, bringing these sales messages to the maximum number of adult smokers, and doing this with the minimum dollar expenditure consistent with effective promotion. In view of the increasing cost of television advertising, the Company diver- sifies its sponsorship among a number of television programs which appeal to a wide range of tastes. Sales messages for our principal brands are rotated among these programs. During the 1963-1964 season, your Company is partici- pating in nine network television programs ranging from musical variety shows to dramatic, western and news programs. In order to achieve greater effectiveness in the marketing of our cigar brands, advertising for these brands was assigned to a single advertising agency in August 1963. Our national Sales Organization works to insure that our merchandise re- mains in prime condition as it travels from manufacturer to wholesaler and then to the 1,500,000 retail outlets for tobacco products. The Sales Organization is also active in placing point-of-sale promotional material for our brands and in conducting consumer sampling. Among the most important functions of the Sales Organization is attaining and maintaining the widest possible distribution for our brands. This is a keenly competitive activity, especially in the introduc- tion of new brands. Naturally, the bulk of our Sales Organization's time and effort is directed to our principal cigarette brands, although the Sales Organiza- tion also concerns itself with distribution of our smoking tobaccos, with particu- lar emphasis on HALF AND HALF. A separate sales group specializes in main- taining distribution for our cigar brands and promoting their sale. 10

Uit~r~ilicali() n At the 1963 stockholders meeting the President discussed diversification. He indicated management's belief that the Company and its stockholders would benefit from a well-conceived diversification and acquisitions program, if this could be carried out without unduly adverse effects on earnings and without undue distraction of the management from its primary responsibility, which is the maintenance and growth of our billion dollar tobacco business. During 1963 an intensive study of diversification possibilities was under- taken with the help of outside consultants, and special management committees were formed to give this matter thorough consideration. This investigation is continuing. Should this investigation disclose fruitful opportunities for diversi- fication, the Company will not hesitate to pursue them. Snlo{,ing and In January 1964 the U. S. Public Health Service published a report of the Surgeon fiealth General's Advisory Committee on smoking and health. This report reviewed existing literature on the subject. In its report the Committee summarized a large body of material, mostly statistical, and accepted the theory associating smok- ing with a number of human diseases. There are, however, other eminent scientists who continue to come to different conclusions and this indicates that the final ansvers are not yet known. Indeed, the Surgeon General, at the press conference when the report was released, stated that there is a great deal still to be known on the subject. The President of the Tobacco Institute, com- menting on the Surgeon General's statement, stated that the tobacco industry, which is already supporting research in this field, stands ready to increase that support and to cooperate on projects to fill the gaps in knowledge in this field. As a member of the Tobacco Institute, your Company endorses this position. In December 1963 the House of Delegates of the American Medical Asso- ciation voted to undertake a comprehensive program of research on tobacco and health. In proposing this program, the AMA Board of Trustees stated that "fundamental long-term research needs to be conducted because it is certain that large gaps in knowledge will remain after the Public Health Service com- mittee reports on its appraisal of the literature and makes its recommendations." The Board added: "Since smoking may produce a tranquilizing effect as well as other favorable psychic reactions not so well identified, these factors need fur- ther study in evaluating the whole matter ..." Pe t it;tr~:~ The Directors record with deep sorrow the death on August 9, 1963, of Mr. Paul M. Hahn, who retired as President on March 31, 1963, after 32 years in the service of the Company. Mr. Thomas P. Connors retired as an executive of the Company on July 31, 1963, following a distinguished career of 45 years during which fie rose to be- conie Director of Traffic. During his years with the Company, Mr. Connors made many contributions toward the improvement of our shipping procedures, which benefited not only this Company but the entire cigarette industry. On January 28, 1964, Messrs. Robert K. Heimann and Joseph R. Waterhouse were elected Vice Presidents. Mr. Heimann, who will serve as Vice President for Marketing and Public Relations, was previously Assistant to the President. Mr. Waterhouse was previously Treasurer and will continue in that position in his new capacity as Vice President. uti 0 0 12 ~ J J ~y

Car/ton-the first cigarette with "tar" and nicotine data printed on the pack Low "tar" and nicotine with real smoking pleasure made possible by new Flavor-Filter C ~ ~ Carion g ~ ~tIIfOFi9Ef~DSEKf~141tiMC~TOYpW~' = fFl¢S AK AADE f[•uWCu.. " .11N IIIGEIErD-'~ ~ :. ".FMr MSFAtpI UWRnTJN7-Au1ifSE{ OUtl11G i/R : 4;~ lYl0o Ti71[ WlYOFAt-:: ~,iY[ Oi 7iEffAIIET'ID /M ryR f'IMGL ORIARD: ~. _e-;Yilifil On January 6, 1964, the Company introduced Carlton Flavor-Filter Cigarettes in the New York, Chicago and Los Angeles areas. The announcement brought an instantaneous reaction from the press, the trade and the public. News of Carlton appeared on radio, on television and on the front pages of newspapers throughout the country before retail distribution or advertising had begun. Our first Carlton advertisements, headlined "Soon," explained to the public that we are speeding up distribution to satisfy the demand just as soon as possible. Everything about Carlton Cigarettes is specially designed and crafted to achieve this one result: Low "tar" ar d nicotine, with real smoking pleasure Carlton achieves this with four features---a distinctive blend, high porosity paper, special precision air vents, and the new Flavor-Filter using specially treated activated charcoal. Average "tar" in the smoke of sample Carlton Cigarettes tested by an independ- ent research laboratory is far lower than has been reported for any other ciga- rette being sold in the United States. In addition, Carlton offers a very low level of nicotine in the smoke. These test results were reported by the same inde- pendent laboratory which tested cigarettes for a national magazine. Tests will continue to be made periodically by the independent laboratory. If changes occur, the legend on packages and cartons will be changed accord- ingly. She__mpany makes no health claims for Carlton cigarettes. However, for the first time, Carllon gives the filter smoker who wants low "taT an~pow nicotine a chance to "see for himself." 13

1963 Operations at a Glance The Company received for goods it sold and from other income ...$1J 9-1,1 17,U0U This is how it was used or set aside: •-~ Taxes (excise, income, social security, etc.) 50/ O 23.407o Tobacco (including applicable expenses) / I"l , ,~ O.~% Wages, Goods, Services, Interest, etc. G o 3 .~o DividencJs to Stockholders _ ,, ir)-(,i i 2.2 o Earnings Retained to Meet Futrn-e Needs AND SUBSIDIARIES 14 Ln J N ~

l c. The American Tobacco ComPan)/ AND suBsium%iEF.;~ t Consolidated Statements of Income and Retained Earnings (Notei) li -77j "' I~c.cf ~ 7S~ ~ tzrle-)1C ~ ~ t j)JAII. 14 t4 j~- vw„,* _ ~- ~~~,.~ O 4 t For Years Ended December 37 1963 1962 Net Sales . . . . . . . . . . $1,192,318,771 ~ $1,179,589,974 Cost of sales, selling, general and administrative expenses . . 1,043,215,104 1,032,582,978 Operating Profit 149,103,667 006,996 147006996 Other income . . . . . . . . . . . . . . . . 1,798,546 832,877 150,902,213 14 7,839,873 Interest and related charges . . . . . . . . . . 3,789,774 5,415,046 Other deductions from income . . . . . . . . . 1,005,710 777,549 Total deductions . . . . . . . . . . . 4,795,484 6,192,595 Operating income, before taxes on income ....... 146,106,729 141,647,278 federal and other taxes on income ......... 78,430,317 76,431,688 Net Operating Income __ . . . . . . . . . . . 67,6~,412_ 65,215,590 Refunds and adjustments of prior years' federal and state taxes including interest . . 1,086,568 3,916,125 Net Income . 68,762,980 69,131,715 Retained earnings, beginning of year . 326,394,393 299,504,824 395,157,373 368,636,539 Cash Dividends: Comnlon stock, $1.50 per share . . . . . . . . . . 39,130,389 39,075,160 Preferred stock, $6 per share . . . . . . . . . . 3,166,986 3,166,986 Total dividends 42,297,375 42,242,146 Retained earnings, end of year . $ 352,859,998 $ 326,394,393 _ ~. .,_... a....... ~ .,~-.... Depreciation provided and charged to costs and expenses amounted to $5,023,105 in 1963 and $5,497,191 in 1962. 2~31y ~ I,1GVlloc/ lu, 1,oY7 P 7t' ~. 15

The American Tobacco Company AND SUBSIDIARIES Consolidated Balance Sheets (Notel) Assets December 31 T'CC .~~~ C ,Y tr~ c`-, Cash . . . . . . . . . . . . . . . . . . . . $ 16,690,619 "" $ 16,832,626 Accounts receivable, customers . . . . . . . . . . . 53,176,074 `~ . c,.i h,1~ i 45,492,147 .~ leaf tobacco, manufactured stock, operating supplies, etc., at ave ra ge cost . . . . . . . . . . . . . . . . . 663,265,761" 702,679,635 Miscellaneous accounts receivable . . . . . . . . . . 1,178,192 - 1,285,656 Total current assets . . . . . . . . . . 734,310,646 766,290,064 Investment in Gallaher Limited (Note 2) . . . . . . . . 5,450,994 5,450,994 Insurance deposits and miscellaneous investments ..... 873,828 1,089,889 Land, buildings, machinery, etc., at cost, less accumulated de- preciation, 1963, $68,226,986; 1962, $64,734,377 . . . . 78,107,701 65,923,912 Prepaid expenses and deferred charges . . . . . . . . . 3,357,435 4,394,530 Brands, trade-marks, patents, good will, etc. ....... 1 1 $822,100,605 $843,149,390 ..m..........~».~.,...~,....,. ~:.....,. ~.y,y ...~.~e..> -,..~._3~. . ., .>„ x 2 _,...,,.z 6 ,_~... ~z. t-n 0 0 w N Ln -4 N w

Liabilities December 31 1963 1962 Notes payable . . . . . . . . . . . . . . . . . $ 35,000,000 $ 79,000,000 Accrued taxes . . . . . . . . . . . . . . . . . 62,212,901 57,693,203 Accounts payable and accrued expenses ........ 23,803,959 20,292,047 Dividend on preferred stock for quarter ended December 31 . 791,746 791,746 Debentures to be redeemed within one year (Note 3) .... 7,001,000 8,243,000 Total current liabilities . . . . . . . . . 128,809,606 166,019,996 Debentures (Note 3) . . . . . . . . . . . . . . . 79,564,000 89,868,000 - -------- - -- - 208,373,606 255,887,996 Stockholders' Equity Capital stock (Note 4): Preferred, six per cent cumulative, par value $100 per share 52,783,100 52,783,100 Common, par value $6.25 per share . . . . . . . . . 164,938,050 164,938,050 Excess of net proceeds from capital stocks issued over par values 44,964,426 44,964,426 Retained earnings . . . . . . . . . . . . . . . . 352,859,998 326,394,393 615,545,574 589,079,969 Less, Common stock in treasury, at par value (Note 4) ... 1,818,575 1,818,575 Total stockholders' equity . . . . . . . . 613,726,999 587,261,394 $822,100,605 $843,149,390 _-_ -. , -.__- _- .r_Y. a..- :.....- ..,.,.".. 17

Notes Accompanying Financial Statements 1 In April, 1963, the Company's newly organi7ed, wholly- owned subsidiary, American Cigar Corporation, acquired the net assets of Cuban Tobacco Company Inc. in exchange for 340,000 shares of the Company's common stock. The Company previously owned 85.58°/0 of the outstanding capi- tal stock of Cuban Tobacco. Of the 340,000 shares issued, 290,972 shares were reacquired by the Company as a result of the liquidation of Cuban Tobacco, such shares presently being held as treasury stock. For accounting_purposessthe_acguisition _of .th~.-minority inTerest in the net assets of Cuban Tobacco was-treated as a pooling of.interests:"1'he Company has restate_ _d its finan- cial-statenientc-fc,r~ritzt~~inds tn~ive retroactrve effect to this transaction and,_,accordingly, the accompanying finan- clai statements include the accounts of Cuban Tobacco, which were not previously consolidated with those of the Company, as well as the accounts of its successor, American Cigar. As a result of this change, consolidated retained earn- ings at December 31,1961 have been increased by $1,780,709, representing the excess of the Company's equity in the net assets of Cuban Tobacco over the amount of the investment therein after giving effect to consolidating adjustments. The Company owns approximately 13°/0 of the outstand- ing ordinary stock of Gallaher Limited, a cigarette and to- bacco manufacturer of the United Kingdonl. The value of this investment, based upon a London Stock Exchange quo- tation, was approximately $30,400,000 at December 31, 1963. Other income includes $1,357,804 in 1963 and $308,855 in 1962 representing dividends received from Gallaher Limited. Debentures outstanding at December 31, 1963, comprise: PRINCIPAL AMOUNTS T~venty year 30/0, due January 1, 1968 . . . T",enty-five year 30/0, due October 15, 1969 . . Tvventy-five year 3'/40/0, due February 1, 1977 . . . RecL rmable Within OneYear' Redeernable A(ter Dec.31,1964 . $ 3,000,000 $27,000,000 . 3,599,000 23,744,000 . 402,000 28,820,000 $ 7,001,000 $79,564,000 'Fctimaied principal arnormts to he redeemed through sinking fund uperation; at trricrs as provided by the indrntures. Capital stock at December 31, 1963, ccrntprises: Preferred Common Shares authorized . . . . 540,106 40,000,000 Shares issued . -. . . • 527,831 26,390,088 Less, Shares held in treasury (Note 1) . . . - 290,972 Shares outstanding . 527,831 26,099,116 Report of Independent Certified Public Accountants The Board of Directors and Stockhofders of The Amc•rican Tobacco Company: We have examined the consolidated balance sheet of THE AMERICAN TOBACCO CO,'s1f ANY and SUBSIDIARIES as of December 31, 1963 and the related consolidated statement of income and retained earnings 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 circum- stances. We previouslv examined and reported upon the consolidated financial statements of the Company for the year ended December 31, 1962. As explained in Note 1 to the accompanying statements, the consolidated financial statements for 1962 have bec•n restated to give retroactive effect to the acquisition by a wholly-owned subsidiary of the net assets of Cuban Tobacco Company Inc. In our opinion, the accompanying balance sheets and related statements of income and retained earnings present fairly the consolidated financial position of The American Tobacco Company and Subsidiaries as of December 31, 1963 and 1962, and the consolidated results of their operations for the years then ended, in conformity with generally accepted accounting principles applied on a ccrnsistent basis. LYBRAND, ROSS BROS. & MONTGO,\1ERY New York, February 3, 1964. 18

~~- ;ir 1~~ ~ -/ ej SdI~t/ ~ wo - ~1 c Supplementary Financial In ormation Inventories DECEMBER 31 1963 Leaf tobacco . . . . . . . . . . . . . . . . . . . . . $602,991,455 Manufactured stock . . . . . . . . . . . . . . . . . . 41,115,830 Supplies . . . . . . . . . . . . . . . . . . . . . . 19,158,476 18,907,846 TOTAL . . . . . . . . . . . . . . . . . . . . $663,265,761 $702,679,635 Inventories used in the computation of cost of sales are priced at costs which result from the averaging monthly of transactions reflected in the inventory accounts except that excise taxes in manufactured stock inventories are priced at actual cost. Land, Buildings, Machinery, etc. DECEMBER 31, 1963 ACCUMULATED GROSS DEPRECIATION NET Land and buildings . . . . . . . . . . . . . $ 60,363,999 $32,163,448 $28,200,551 Machinery and equipment . . . . . . . . . . 66,887,428 31,357,870 35,529,558 Office furniture and equipment ........ 3,350,671 2,397,908 952,763 Automobiles and trucks . . . . . . . . . . . 4,451,318 2,307,760 2,143,558 Construction in process . . . . . . . . . . . 11,281,271 - 11,281,271 TOTAL . . . . . . . . . . . . . . $146,334,687 $68,226,986 $78,107,701 .~..,......-.,,..._..,.~....~..~...,.~.. ~..~.... Source and Application of Funds Funds Provided By 1963 Operations (Note) . . . . . . . . . . . . . . . . . . . . . . . . . . $ 75,347,377 Decrease in: Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,413,874 Miscellaneous assets . . . . . . . . . . . . . . . . . . . . . . . . 1,502,627 Increase in: Accrued taxes and other liabilities . . . . . . . . . . . . . . . . . . . . 8,031,610 Funds Applied To 7„~~.-eg- ~ 1 *N, V r ~ cJJ 1962 o $639,646,846 44 1 - , ~ $124,295,488 Pay dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 42,297,375 Reduce notes payable . . . . . . . . . . . . . . . . . . . . . . . . . 44,000,000 Retire debentures . . . . . . . . . . . . . . . . . . . . . . . . . . 11,546,000 Acquire fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . 18,768,186 Increase accounts receivable, customers . . . . . . . . . . . . . . . . . . . 7,683,927 $124,295,488 Note: Represents Net Income plus revenue charges not requiring current expenditures, namely; (a) depreciation arld (b) undepreciated value of fixed assets retired and sold. - - ,.a.....-.a.,..,.,:;_.,-,...-R..-,,......-.Y.-.- z-... _.----.<- 19 ...~...,,~...~,.~.~.....

r.A I The American Tobacco Conlpany AND SUBSIDIARIES Ten-Year Financial Review in thousands (except per share amounts) 1963 1962 1961 Sales, Income, Dividends - - Net sales . . . . . . . . . . . . . . . . $1,192,319 $1,179,590 - $1,163,05t' Income, before taxes on income ........ 146,107 141,647 142,67, , Taxes on income . . . . . . . . . . . . . 77,344 72,515 76,93: Net income: Amount . . . . . . . . . . . . . . 68,763 69,132 65,74' Available per common share (Note 2) ..., 2.51 2.53 2.4( Dividends: Common: Amount . . . . . . . . . . . . . 39,130 39,075 36,47( Per share (Note 2) . . . . . . . . . . 1.50 1.50 1.4( Preferred ($6 per share) . . . . . . , . , 3,167 3,167 3,16: Added to retained earnings . . . . . . . . . 26,466 26,890 26,10• Assets, Liabilities, Net Worth . Inventories . . . . . . . . . . . . . . . 663,266 702,680 Current assets . . . . . . . . . . . . . . 734,311 766,290 Working capital . . . . . . . . . . . . . 605,501 600,270 Plant and equipment- -net . . . . . . . . . . 78,108 65,924 Tota l a ssets . . . . . . . . . . . . . . . 822,101 843,149 Long-term debt . . . . . . . . . . . . . 79,564 89,868 Short-term debt (Note 3) . . . . . . . . . . 42,001 87,243 Net worth . . . . . . . . . . . . . . . 613,727 587,261 Book value per common share (Note 2) ..... 21.49 20.48 F:-,-. ,.. 723,71: 791,63! 583,46: 65,83: £i68,4 2: 99,87! 130,05; 560,37: 19.4 `. NOTES: 1. This summary inclucles the accounts of all subsidiaries except J. \'<'ix 8 Sons Limited, a subsidiary which stias disposed of at the becinnins c 1962. Arnounts preViously reported for 1962 and prior years have been restated to give retroactive effect to the "pooling of inlerests" o. - scribed in Note 1 to the accompanying financial statrments (see page 18). 2. Basecf on 26,099,116 shares, such shares having been adjusted to reflecl the "pooling of inlerests" referred to in Note 1 above, and the tw . for-one stock splits in 1960 and 1962. 3. Comprises noles payable and debentures redeemable within one year. 20 50032 5727

1960 1959 1958 1957 1956 1955 1954 $1,127,475 $1,108,754 $1,075,492 $1,076,289 $1,095,828 $1,104,686 $1,081,783 125,808 135,632 124,486 119,238 113,078 114,145 89,587 68,493 71,896 66,099 62,070 60,369 61,908 48,314 57,315 63,736 58,387 57,168 52,709 52,237 41,273 2.07 2.32 2.12 2.07 1.90 1.88 1.46 35,493 32,563 32,563 32,563 32,563 28,655 28,654 1.36 1.25 1.25 1.25 1.25 1.10 1.10 3,167 3,167 3,167 3,167 3,167 3,167 3,167 18,655 28,006 22,657 21,438 16,979 20,415 9,452 680,349 653,867 648,384 670,994 656,497 664,197 ..,. . _~~ -.a,. 640,731 751,110 719,067 714,578 738,724 725,615 737,936 713,803 593,409 586,888 574,002 569,652 567,531 565,434 560,165 66,457 68,894 66,674 60,111 54,144 51,766 49,778 827,710 798,445 793,586 813,266 794,698 805,277 778,637 135,740 150,653 165,402 179,330 193,188 206,328 218,967 88,556 66,744 76,521 103,950 91,555 101,387 91,575 534,268 515,613 487,607 464,865 443,426 426,447 406,032 18.45 17.73 16.66 15.79 14.97 14.32 13.53 21

Robert B. Walker, President, and other members of the Board of Directors of The American Tobacco Company. Seated, left to right: Silas E. Strickland, Robert K. Fieimann, George A. Wilkinson, A. Le.Roy Janson, Virgil D. Hager, Mr. Walker. Standing, left to right: John G. Hager, Jr., William B. Young, George L. Turner, Hiram R. Hanmer, John B. Sparrow, Joseph R. Waterhouse, A. Gordon Findlay, Alfred F. Bowden, James J. Cunningham, Eugene F. Mooney. Not present: Orpheus D. Baxalys, who was directing our leaf buying activities abroad. 22

The American Tobacro Company Directors and Officers ORPHEUS D. BAXALYS ALFRED F. BOWDEN JAMES J. CUNNINGHAM A. GORDON FINDLAY JOHN G. HAGER, JR. VIRGIL D. HAGER HIRAM R. HANMER ROBERT K. HEIMANN A. LEROY JANSON EUGENE F. MOONEY JOHN B. SPARROW SILAS E. STRICKLAND GEORGE L. TURNER ROBERT B. WALKER JOSEPH R. \b'ATERHOUSE GEORGE A. WILKINSON WILLIAM B. YOUNG Officers - .. ROBERT B. WALKER, Presiclent VIRGIL D. HAGER, Executive 1'ice President A. LEROY JANSON, Executive 1'ice President ALFRED F. BO\'VDEN, Vice President ROBERT K. HEIMANN, Vice President JOSEPH R. A1'A1 ERHOUSE, Vice Pre~ident and Treasurer WILLIAM B. YOUNG, Vice President \%'At.TER A. KENNEDY, Comptroller JOHN W. FiANLON, Secretary FREDERICK W. KENNY, Assistant Secretary CHARLES A. M[HOS, Assistant Treasurer ED\1'IN J. PRIOR, Assistant Comptroller GEORGE J. SCfiRAMM, Assistant Comptroller Executive Office: 150 East 42nd Street, New York, N. Y. 10017 Corporate Office: 117 Main Street, Fleminbton, N. J. 08522 Transfer Agent: Morgan Guaranty Trust Company of New York, New York, N. 1'. 10015 Registrar: First National City Bank, New York, N. Y. 10015 Trustee for Debentures: t.lorgan Guaranty Trust Company of Nesv York, New York, N. Y. 10015 23

Your Company's Principal Products Which make your dividends possible ..... Cigarettes . Pall Mall-the nonfilter king size cigarette that changed the dimensions of smoking enjoyment. America's largest-selling brand, according to independent analysts Lucky Strike -- a blend of the finest Turkish and domestic tobaccos. The Lucky Strike process "It's Toasted" enhances the taste of these fine tobaccos. A leader among regular size brands Dual Filter Tareyton --- the cigarette that made Activated Charcoal famous. The white filter gives you the clean taste - the charcoal filter gives you the smooth taste - together they give you a great taste Herbert Tareyton - - Full king size . . . the nonfilter cigarette with the tailored tip. A favorite for 50 years because of its distinctive, mild taste Montclair - Only Montclair has the menthol in the filter where it belongs -- not in the tobacco. As a result "every puff tastes as fresh as the first puff." Montclair's unique tip filters in freshness, filters in flavor--adds to your smoking pleasure instead of taking it away! Carlton- Everything about Carlton is selected and crafted to produce this one result: low "tar" and nicotine, with real smoking pleasure. Four features--a distinctive blend, high porosity paper, special airvents, and a new "Flavor-Filter" with activated charcoal which actually enriches the taste Cigars Roi-Tan -- America's largest selling cigar in the 100 price class, Roi-Tan offers more shapes -- seven - than any other cigar at its price. Also Roi-Tan Tips, Cigarillos and Trumps in the 50 class and Golfers in the 4 class Antonio y Cleopatra - - the mildest top quality cigar La Corona - - "Supreme the World Over" Boek y Ca. - the original panetela, created in 1888 Smoking Tobaccos Half and Half--the Company's leading smoking tobacco, Burley and Bright. In pouch-in-box packing for double protection, longer-lasting freshness 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-ostim" tobacco 24 (lfic J%neiicav:c/~c C~a t>»~~an~ PFINTED IN U S.A.

r La Corona Antonio y Cleopatra Bock y Ca. , ; Roi -Tan I 1 k All of these fine cigar brands are available in customary boxes and easy-to-carry packs. Remaining true to the tradition of product excellence, each brand continues as a leader in its field.

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