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Annual Report 1956

NOTICE OF MEETING Flemlngton, N. d., March 1, t957 The Annual Meeting of stockholders of Tg~ AMEP, ICAN TOBACCO COZ~PA~y will be held at the ttunterdon Theatre, corner of Route 69 and Church Street, Flemi~lgt~l, ~Ne~ Jersey, at one~hirty o'clock in the afternoon (Eastern Standard Time) oft Wednesday, April 3, 1957, for the following purposes: (1) to elect Directors; (2) to consider and vole upon a proposal (designated Proposal A and set forth in the following proxy statement) to amend tho By-Laws by repealing Article XII as now in effect and substituting therefor a new ArticTe XII and to take implementing action, which proposal has been recommended by the Board of Directors; (3) to consider and vote upon a proposgl (designated Proposal B and set fol~h ia the folIo~dng proxy statement) to elect independent auditors thr the Company for the >'ear 1957, which proposal has been recommended by the Bt~ard of Direc[ors; (4) to consider and vote upon a proposal (designated Pro- posal C and set forth in the following proxy statement) made hy three stockholders; and (5) to transact such other b~siness as may properly come before the meeting. The stock transfer books will not be closed, but holders of Preferred Stock and Common Stock, to be entided to vote, must be holde~'s of record at the dose of business on March 4, 1957. JOHN W. fqJ~NLON, Secretar?

PROXY STATEMENT The enclosed proxy is solicited by the Management. The pro=cy may be revoked by notice in writing given to the Secretary at any tinm before being voted. Proxies in the form enclosed, properly executed by stockholders and duly returned to the Management and not rBvoked, will be voted and, where a specifi- cation is made on the h',dlot provided therein, wlil be voted in accordance with such specification. Attendance at the meeting does not serve to revoke the proxy. The outstmldlng number of each class of voting securities of the Company is: Preferred, 527~831 shares; Common, 6,512,522 shares (of whleh ],360 shares will become entitled to vote only if certificates whinh prior to the merger with American Cigarette and Cigar Company on December 31, 1953, repre- sented Common Stock o~ Ametlcan Cigarette and Cigar Company, are surrendered in exchange for Common Stock certificates of the Company by the close of hnsiness on the record date). The Profel~ed Stock is entitled to four votes per share. The Common Stock is entitled to one vote per share. The recm'd dale for the determination of stockholders entitled to vote at the meeting is the close of business March 4, 1957. ELECTION OF DIRECTORS The Board of Directors consists of nineteen members who are eleeted to hold oi~ce mafil the next . AnnnaI IVleeting or until their successors are duly eIected and quaIified. It is intended that proxies in the accompanying form will be voted for the nominees named below. These norMnees, with the exception of Silas E. Strlckland who has been elected a director effec ve March 1~ 1957, are members of the present Board and have served as directors of the Compm~y ~or the periods commencing with the dates set after their respective names. The Company is informed that these nominees were dlreetly or indirectly the beneficiaI owsers of outstandlsg securities of the Company at the close of business on February 1, 1957, as set forth Mter their respective names. Other positions and Office~ with Company Nara~ and Fdncipal Occupation (a) Orpheus D. Baxalys Wee.Presldent and Mansglng Director, The American Tobacco Company o~ Alfred F. Bowden Thomas P. Cormors John A. Crowe John S. Dowd A. Eo~d~n Findlay Chnrlcs Gansbow Iohn G Hager, Jr. yesx First Electsd Dizeotor Common preferred 1940 2,005 62 the Orient, Inc. Cb) Assistan~ to the President, The A~a~r lean1951 700 Tobacco Company Director of Tratgc, Tile Arautican 1946 800 Tobacco Company yice-PrcsldenL an4 C~llof of bianufac- 1931 800 105 ture, The Amerlc~ Tobacco Gem party gxeeutlve Yiee-President, American 1966 400 Suppliers, Incorporated (b) Vice-President, American Cigarette and 1953 2,005 C~gar DivG[on of The A~nerlcma Tobacco Company Deputy Comptroller, The American To- 1953 1,000 bae,~o Comtpany, and Viee-Presid~nt, Americ~xt ~igar~t~ alad CJ~gr Divi- sion of 'I]le Americall Tobacoo CoDn~- party 1Viauager o~ Louisville, Ky., Cigarett~ 1956 115 P]anl, The Amerlcrm Tobacco Com- pany 2

Name Virg~ D. Hager Paul M. Hahn Hiram R. Eanmer Harry L. HHyar& 1elm R. Hutdfingb, J~ A. LeRoy Jansen Ferdlnand MaHgraf Silas E. Stricklemd Otk~r poli[iolJa ~id Oi[iee~ with Gelilpany and Prlncipal O¢¢tlpatlon (a) Assistant to the V~ce-Presidellt in charge of raauufactur¢, The .hmerican To. bacc~ Company President, The American Tobacco Com- pany Director J Research, The American Tobacco Company Treasurer, The American Tobacco Con> puny Vice-President~ Aaneri~an Suppllcrs, In- corporated (h) Colapttol]e±, Th~ Ritmrlean Tobacco Company Director o~ Pu~cba,e~ The Araeriean Tobacco Company ¥ice-PresiSem, American Suppliers, In- corporated; General M'allager of Stem. merles, The Amelic~m Tobacco Com- pany and American Suppliers, Incor- porated (h) Robert B. Walker Dire=tot of Sales~ The Areal-lean To, 1955 410 baeco Company George A. WiIklnsoRDirecl~r~ Tax Department. ']bm Amerh 1957 200 can Tobacco Company William B. YoungAssistant to the Vic~.President h~ charge 1956 600 of mantffactt~re, Tile American To- bacco Coirlpa/ly year F'l=t E]e¢~d Dilator Common Pref~ed 1955 190 1931 4,784 1938 800 1944 550 1951 50D 1948 418 1957 IOD 1957 130 (at In each hlst~ra~, the posltinns and a~ces with the Company and its sub~idlarle~ Ii~ted re'tar the name of a nominee a~o also hi~ p~incipal 0¢eupation, (b) Aifiliated company engaged in purchase ~d hand/i~g of loaf tobacco. The Company is also informed that none of flJe nominees was dlreefly or indirectly the beneficial owner on February 1, 1957, o~ outstanding securitbes of subsidiaries of the Company, other than directors' qualifying shares. Jehrt G. Hager, Jr., was elected a director on August 28, 1956. Ms. Hager has been employed ~y the Company for more than 32 years and for 25 years has bccn manager of its cigarette plant at Louisvi72e, Kentucky. Ferdinand Mallgra£ was elected a director effective JanuatT I, 1957. lX@. Mallgraf has been employed by tim CompaW for more than 46 ye~s and for the las~ 10 years has been Assistant Director of Purchases. George A. Wilkinson was eIected a direc/or eKective January 1, I957. Mr. Wilklnson has been employed by the Com!0any for more than 20 years, and has beea Manager of the Tax Department during that time. Silas E. Sh-ickland was elected a director effective March 1, 1957. Mr. Stricldand has been em- ployed b~ the C~mapnny ~or more than 26 years. He has bee~ General Manager of Stemmerles for over 2 years and had been Manager of the stemmery at Richmond, Virginia, for the prior 16 3'ears. In the event any nominee is not a candidate or is unable to smwe as a dh'ector at the time of the elec~on, xdfich is not now expected, it is hatcndcd .that the proxies will be voted for any nominee who shah be designated by the present Board of Dkectors to fill such vacancy. 3

Proposal ~ : PROPOSED AI~IEIN'DSIENT OF ARTICLE XII OF THE BY-LAWS Artlde XII o£ the ByPaths of the Company was acluptccl b~ the stoshlaolde~ a~l ~c,h I3, 1912. IE has, as amended from time to tlme, hewn carrying o~tt ~ts tr~tdi~onaI purpose of ftLrnishlng ~ncentlee compensation to key employee~ for almost for~-~ve years. I~ will be n~te¢l tha~ Ar~cTe XII was an~ended on th~ recommendation o~ the Manage*ltent in 1949 an¢l again in 1951, the effect o£ eash suc~a ,~rn~nclment b~ing a ~ubstar~tia] reduc~ian h~ the ~mt~lnt ~f ~ncent~ve corap~n~atlon payahl~ uncle~ the l:ly-Iaws. Up to lhe ~r~sent tlm~ the employees sharlng in inceativ~ c~nrpel~satlon uncIcr ArEicle XII have, by the terms o~ tha~ Artic2c~ been/imite~l to tile President and the fiw Vice P~'esldents of the C~mparly. I:Iowever, the rap~ growtll of tile Company Jn ~ecent yea~s and the shaa~ing condi[ions unticr which ~ now operates ~ade it see~ ad~saBI~ ~o the ~nage~lcnt to ma~:e~ a thor~o~gh stttcly o£ Article XII ~ order to clct ea~Tzine whether it l~algh~ ~e advisaSl~ t~ ~la~e shangcs therein so as ~o spread the money paya]~I~ thereuader among a larger n~mb~r of key ~mpIoyees. A th<~rough stndy ant1 analy~i~ not ~nly o~ Art~el~ X][I bu~ ~lso of the present pr~ctlce~ of a ntrt~]~r of o[her corporation~ w~th respect ~ ~ncensh,e compcrt~ sation d key emplo~e~ w~s made ~c~ulting in the thrmulatlon o£ the prop~d anl~ndm~nL o{ Ar tic~ XII ~t~ ~et ~orth he~inbe~ow. The Prcslden~ and Board ~{ :D~rector~ h~vo t~n~nimott~ly approved and rcc~nmae~d to the stoshhold~r~ an amendm~ o~ Artic/e XII of the By-h~-s (Proposal 3,) w~ish w~II ex~ncl th~ ~n~ts of ince~tive compensation, her~to{or~ prt~vld~d t~nly for the Pr~sldent and Vice Prcsh dents, to a/~r~a~er Management Gr~up, will provi~[e more resl~stlc incentives ~azl tho~e presently off.red /~y A~tlcle XII, aed ~iI1 ~v~ tmchan~-ed the £ormulz~ for d~te~ainlng the a~r~ amount o£ ~aee~Jv~ ~ornpensaii~n no~" prtndded in Article XI~ and thus w~[~ ~ot r~sult in ~ddi~ruzl ~os~ ~ ~he C, or~p~,zy. The propo~d ar~enc/m~nt wilI pxovld~ ir~ effect a~ fcIlews: 1. Th~ aggregate ana~uzlts he~oming avai]ethle ~or ia~entlve col~pensat[on under ~v.sh ~nula (pay- a~!e under pres~llt Arti~e XII, 20% to the P~esiden~ ~t~d 16% to each o£ fi~'~ Vie,~ President~/ shall, ~0eglnning wSth the ~mou~s bccomsh~ ava~Iable whh r~pe~rt to the year 1957, ~e allottcd~ 20~ ~o the President and 16% to each of ~t more th~n ~o S~ni~r Vic~ Presldents a~d the l"em~ining 48% shall be a~,a~able, ~r alIotrrle~t ~o the membe~'~ of a M~nagernent Group ~]~d each_ y~ar by an Ince*lt~vc C~ml~ell~at~on Commiltee from key e,~pleyees (other than the P~'~ic[eat and Senior Vice P~'cs~dents). A key ~mpley~ to be ~igible for inclusion in the Manageme~t Group must be i~a receipt o~ a s~ary at o~ ahev~ ~ saisey ra~e deterrxllned eash year by such Cotr~nli~te.e hut in no event less than $3(3,000 per s~num. The Incent~e (]ol~tpe*±satinn C.o~rlm~t~ee will CO~L~St of the p~e~idcnt and ti~e ~enlor Vic~ Presld~nts o~ t]lc Senler Vif~ Pres~tlent if there be only ot~e Senlc)r Vic~ President at the ti~le. 2. With rerpect to eac]~ sush y~ar: A. O~ae.]~al~ o~ ~ush 48% aw~]~b~ {or allotm~n~ to the ~ana~e~aen~ Group shall ~e allo~teti to the ~le*~th~r~ of ~sh ]~,~a~*a~nlsn~ C~up ~ro r~ta in pruport~ort to th~ ~alary ~c~tes o~ tile re,~pee~i~c me~z~be~s o~ such ~,~anagement Group ~n ~ttsh ye~r~ ~nd B. So much o{ the r~maining ]~edancc availaSIe ~or alI~,~t ~o the ]VJ[anagenle~tt Group as the Incenti~.,~ Col~pensatlon Comm~Lte~ sh~]| ~]~tel~le~ shall 13e ~tI]~t~cl amon~ tho rn~raSer~ o~ th~ Management Group to such intI~itiua]s anc~ in ~uc~ amounts a~ to ~ndlvld~tals a~ the Ii~nt~v~ Compensation Co*~mittec shall ~c~ermshe. 4

AII employees to whom allotments are made, inofading the President, the Senior Vice Presidents and members of the Management Group, are ~ometimes referred to in the proposed ~meadment and herein as '~Etrtlcipants". 3. Payments to participants of amotmts allotted to them sha~l I~e made as f~llows: A. One-half of file ~lmount aIlotted to each partieipa~ ~helI be pMd to him in cash as ~on as praetiea~e ~ter allo~caent. B. The bM~nee, being one-half of the amo~mt allotted to each participant, ~all ha eomthgently payable to him in ten equal aimu~l iostMlm~nts during the ten years followil~g the close o~ the year in -,~-blch the ~mployment of such participant by the Comi3~ny terminates, such ~ayments to ha stthject to the following eondltions: (a) A laroportthnate reduction in the amotmt of the allotment ~all ha made with respect to any participant who ceases to be eraploved by the Company wititin five yea~s from the dose the year ~or ~hloh ~n ~Ilo~nent is made to him but ltti~ condition sh~til not ap!oly to any termination of employment (a) by death o~ (b) ~ader such oircumstanees that the parfioipant is ollgibIe for retirement bbenetlts, severance beliefit~ or di~abillty benefits trader tile Company's Retirement Plan or (c) for other reasons deemed by the Board o; Directors not detrimental to the Comlaany's in~r~s[. (b) Payment to a participant of ~1! unpaid installments ~halI Jae contingent upon his not bbaviog, slnee the termination of his eml31nymen~ with the Company, aeecpted employment with or rendered person,9.1 services to any competitor of the Company or engaged in any aeti~ty in competition with tile Company, except a~ e-x13ressIy approved Jay the Company. (c) Payment of each installment shah be, conditioned upon the partleipanCs bb~ving during the ye~lr preceding s~ch payment been gtv~tilaJale to the B~ard of I)irectors or its representative ~or ecn~ulta~ion at 8ucbb ~ime8 ~tnd places as the ~oard raay reason~Jaly reqzm~t. (ti) Except as ~o papments falling due a;te~ the death of a p~rtlcipant, no in~taIIment may be ~ansfarr~d in any manner w~atsoever ineludth~ ~ansfer by operation of in~. I; any particioa~ is, in the opinion of the Board o~ Directors, ioeupaJale o~ handling his affairs, or makes or s~ers ~ny ~l~tempted lrans~er, ~elhar voluntary or involnn~ary, u~ any eontkngent iostallment, then, in tha dlscr~i~n of th~ Board of Di~eetors~ paymen~ ~f io~t~tlments to s~eb participant shall cease and payments may be made ~r applied to or fa~ the benefit of su~ participant or his ~use, ehi~deer*~ ox ¢~the'e ~e~3~nti~% ear ~lri~r ~5~ them, in ~e,~}x m~me~ tul~[ iri ~i~h ]3~Im~ki~n a~ th~ Bo~rd of D~reetor~ ~halI faom time to time deem pruper~ ~tthjeet, however, ~o the other p~ov~ ~ion~ of ArtioIe XII as prupo~ed to be amended. ~e) Anfr ~ th~ ~ald a~n~al e~*A~gent laayment~ th~ nm~ f~I1 d~e ~e~ the d~ath oi a participant ~holl lae paid in such instM~ments~ either t~ st~ch person as sheI1 furnish evidence ~adefaetory ~o the Cempany their uncler tlle last will and testament of the parlicipmxt or for other reason such ~erson is a~tthecizeti in law to reeeive such ~aymcnt, or in th~ discretion of the Compan1#~ to stIe~ lae~on as slmll fornlsh the Cempginy with evidence I~f appointment as rei)resent~live ~f the a~tlz~ of th~ p~rticlpant, provltied, hevrever~ that the Incentive C~mpensation Committee mny~ in its sole dlsc~tion, accelera~ ~3ne or more of such payments. 4. While Artlale XII may be relaealed only Jay aetlon of the stochheIders of the Company, it m~y as praposed to Jae amended Jae f~r ther amended or modifi~ti by the Boa~ of Directors upon the unanlmo~

recommendation of the Incentive Compensation Committee, provided that no amendment or modifieallon made by the Board ul Directors shall, without the approval of the stockholders of the Company, increase the aggregate amount payable trader ArlieIe XII or aher the amount thereof payable to the President and Senior Vice Presidents. The foregning summary of the proposed amended Azticle XII and the comments contained herein ate ~ubject in their entirety to the provisions of Proposal A itself which is set forth in full herelnbelow. As above stated, the persons (other than the PresldenL and two Senior Vice .Presidents) who are to participate in incmltlve compensation under Article XII as proposed to be amended, are to be the mem- bexs of a Management Group to be designated by the Iacemive Compensatloa CommitLee each year, wIfich Group shall consist of salaried mnployees (the ~rm "employees" including both employees who are officers or directors and other employees) of the Company whose salaries dating all or any pare of such year were at or above a salary rate determined by such Commhtee but in no event ffizs than ~30,000 per ammm. "The Company" in this conneclior~ means The 2Lrnerfcan ~ch~t¢¢o Compapp and its suh- sltharles included in the consolidated ~anclal statements set forth in file annual reports ~or each year to the st.ckhohlers of that corporation, together with such other s~bsithanes or affiliates as the fnee~iv¢ Compensation Committee shalI expressly designate for any such year. If Article XII as proposed to be amended had been in effect for 1955, the last fiscal year of the Compan~ and if the Incentive Compensation Committee had determined that the Managcm~t Group inr that year was to include all employees Whose salary rates were not less than $30,000 per annum: (a) Each director and each of the three higbest-paid officers of the Company whose direct aggregate remuneration exceeded $30,000, who will participate in incentive compensation under ArtiCe XII as proposed ~ he amended, with dm exception of tht~ Prcsidcnt, Paul M. Hahn, and the Vice President, John A. Crowe, would have ~een entitled to have aIlotted to hhn the amount of such incentive eompensatlon set after his name in the table below, with the possthlllty of receiving an additional amount in the dJseretlo~ of the Incentive Ct)mpe~sa~io~ Committee. The amomlts which would have been allotted to the President, Paul M. Hahn, and the Vice Presldem, John A. Crowe, ou the additional assumption as to ~r. Crowe that he held the o~ce of Senior Vice President during all of 1956, axe the same amounts as they acmelly received as incemivc compensation under Article XII in its present form, and which are reported herein under the caption "Remuneration", as the proposed amendment pro~des no increase in incentive eompensalion for these officers. Nm~e Orpheus D. Baxaiys Alfred F. Borden Thomas P, Conners John S. Do.~d A, Gorgon Findlay Charles Ganshow John G. Hager, Jr. Yirgil D. Hagex PosJtien vAzb Company Amot~nt Director $ 7,803 Director and Assistant to the Presigcnt 7,023 Director o~ Traifle 5,306 Dkector 9~364 Director ang Vice President. American Cigare*Ae and Cigar Division 6,242 Dh'eetor and Deputy Comptroller ang Vice Presfdeng American Cigarette alld Cigar Division 6,242 Director and Manager of Loulsvige, Ky., Cigarette Plant ffi994 Director and Assistant to Vice President in Charge of Mann factlire g,ogg

Name posJ~on with Company ~mmmI Hiram R. Haznner Director of Research $ 7,023 Harry L Hilyard Director mid Treasurer 7,803 John R. Hutchlags, Jr. Director 7,023 A. LeRoy Jmason Director and Comptroller 7,803 Jazaes F. Strickland Director 11,704 Silos E. Strlcldand Director (elect) and General Manager of Stennneries 5,77~- Robert B. Walker Director el SaIss 7,335 George A, "~71lkineon D~rcctor~ Tar: Depar'mmnt 5~805 William B. Young Director and Assistant to Vi~e President in Charge of Manu~sct~re 5~150 (b) $405,244 would have bees allotted with respect to 1956 under Alticle XII as proposed to be amended to those who were offsets and direclors in 1956, and $55,245 to employees not directors or offcers. (If there had been a second Senior Vice President during 1956, the arn0tults would hove been $525,597 and 857,689, respectively.) An additional $184,195 would have boon available for aIIotmeat to the Management Group as file Incentive Compensation Committee might have detem~ined. (c) The approximate number of persons who would have participated in incentive compensation for 1956 under Article XII, as proposed to be amended, would have been 3], of whom 21 would have been officers or directors. No provisinns are in effect with respect to any bonus, profit-sharing or other remtmeration or incentive plans other than Article XII either wiff respect to directors or ofi%ers or employees who are not directors As stated hereinabove, Article XII as proposed herein to be amended, provides that i£ the proposed amendment is adopted by the stockholders, the dlsttibution of incentive compensation with respect to the present year 1957 will be made under the provisions of the amended Article XII. As the Annual Stock- holders' Meeting for 1957 will not take place until April 3, three months after the beginning of the year 1957, some further steps were and are necessary in order m implement this provision: First: Paul M. Hahn, the President, and John A. Crowe, who was on January I, 1957 and now is the only person holding the office o£ Vine-Presidenh have entered into an agreement with the Company which in effect provides that if the proposed amended Article XII is adopted at the 3957 Stockimlders' Meeting, their eompensatth~b other than regular salary, for the entire year be~rming Janna~- 1, 1957, as well as thereulter, shall he ptursuant to the provisions of the new Article XII and that they waive any right in such event to receive any part of their compensation for their sea, ices after Janaary 1, 1957 under Article XII hs its present form. Second: Under the provisions of the present Article XII John A. Crows would, as Vice Presi- dent. be entitled to 3_6% of 1957 AlticIe XII incentive compensation with respect to that portion o{ 1957 during wiHcb ha holds that office. However, in order to facilitate the transition to the changed provisions now proposed, he has, as stared above, agreed wiffi tbe Company that i~ Artiole XLI is amended as proposed, his 1957 Aztiele XII incentive compensatinn shall be governed by the terms ef that Article as so amended. Article X[I as proposed to be ammuled provides ~or the payment of 16% of Article XII incentive compensation lo each [ff not more than two Senior Vice Presidents. Theretore, an additlonal resolution has been included in Proposal A providing that with re~pect to 7

so much of thaL porlinn of 1957 beginning de,mary 1, I957 and ending on the date of the 1957 organlzatlon meeting of the Board of Directors at whl~dl officers are elected after the ~nnuul meeting of stocld~ulders, dsxthg which Mr. Crowe holds the ofiice of Vice Presldent, he shall be entitled to the amount of Article X~I incentlve compensation which under the amended Article XII would he allotted to a Senlor Vice President holdlng office during such person of 1957. The Board o~ Directors has approved the ~nsertion of such additional resolution in Proposal A. Third: As already pointed out, incentive compensation under Article XII as pl"oposed to he amended wili he pald to each of not more than two fienlor Yice Presldents, or, at times when only one Senior Vice Presldent holds that o~ce, to that Senior Vice President. As the Company's By-laws had not provided for the edqce ni Senior Vice Presldont iL was necessary for upproprlate changes to be made in the By-Iaw~ to pr~vlde for two Senior ~ice Presidents to be elected by the directors from their own number if the prupo~nd amendment~ to _4rtleIe XII are adopted. It seems advisable that such tunenthl~ents to the B:~laws chould take effect kemedlaLeIy upon the amendment of Ardole XII if th~ s~ockhalders act favorably thereon. Tile B~ard of Directors has thrly adopted what in its c~pininn constitute apprupriate amendments to the ]]~lews (other than Artlcle XII) to accomplish [he foregoing puiposes but has provhled that ~ch amendments will hake effecL only in the event and inxmediately upon the adoption of Proposal A by the stockhulders. Such amend- mcnt~ to the ]B~]aws also provide fo~ an indefinite number of Vice Presidents. These Vice I?residents (as distinguished ~rom Senior Vice Prealdents) win not chare in incentive compensation under Arti~e XII as proposed to be amended except to the extent tha~ the incmnbents are included in the Management Group selected by th~ Inter{re Co*upensatlon Committee. The proposed rcsolufions consSLuthlg Proposal A are as follows: RESOL'~ED, as recommended by resolution of th~ Board of Directors of The American Tobacco Company, that Anlcle XII of its By-laws be and it hereby is amended by s~rikthg it o~ in its entirety and subslimtlng in place of it th~ fonowing~ so that, as mnended, Article XII will read as fullows, to wit: ARTICLE XlI S~CTION 1. (A) As soon as practicable after the end of the year 1957 ned of each year thereafter, if the net profits earned by the Company during such year, as hereinafter defined, exceed file sum of $15,500,000, there shall he made svaileble for olleLment, as hel-einofter pro- •tided: an amount equal in the aggregate to 5% of the first $6,000,000 o1 such excess, 4% of the next 82,700,000 thereof, 8% ~f the next $2,700,000 thereof, 2% of the next $2,700,000 thereof, and 1% of the balance thercofi (B) Of such aggregate amouat, 20% shall be allotted to the person or persons who du~i~g such year held the o6qce of the President and 36% shall be alleItsd t~ each of the persons who du~ing such year held the o~ce of one of the two Senior Vice Prcsldents, as incentive compensa- tion, in addition to the fixed salary of each of such persons fo~ such year. If any such ofiqce shall have been vacant at shy time during the year, tim amount to be allotted to the h*cumbens or incumbents of such office ~or such year chall be reduced propo~fionately. If an}" such o~ee shall have had more than one incumbent during [he year, the amount to be ulle~ted in ~espect 8

o¢ such office shall be divided among the different Lacumhents in the proportion of their respective periods of incuntheney during the )'ear. Noflfing herein contathed shall give any incumbent of any o~ce any right to elalm to eonLhme the~e[ri, o1" ally ether right except as herein speei~caliy expressed. (C) The balance of 4~% of such aggregate amount shall be available for aIlo~nent to offier key cmplnyees, as provided in Section 2 hereof, in addition to the fixed salary of each of such empleyees for such year. SECTION 2. (A) As soon ns practicable after the end ef the year 1957 and of each year thereafter, a Committee, to he known as the Incentive Compensation Committee, consisting of the President and th~ Senior Vice Presldellts or Senior Vice President then in office, shall designate a Management G~oup to participate in such a]lotm~ll~ ~hich group shall consist of all salaried employees o~ the Company whose salarles thrring aI1 or any part of such year were ~t or ahove a salary rate deteTTained by such Cornmltlee, but which rate shall in no event he less than $30,000 per annum. (B) Within dO days after receipt from the independent pu~io accountants o~ the ccxtificate to be ~urnithed pursua~ to Section 7 hereo~ showing the aggregate amount avbilable ~or allot- ment, said balance of 48% ef snch aggregate amount ~aI1 then he allotted among the memhe~ of such Management Group as follows: (1) One-half of sush l~alance, or 24% of such aggreg~e amounl, shall be allotted to all members of such Group pr~ rata accerding to the proportion which the h~ghest tkxed salary rate thtrlng each such year of each member of said Group hears to the total of the highest fixed salary rates for such year of all the memhers of said Group. In the case of any members of such Management Group who were employed by the Company during ~ss hhan all of any such year, the pro rata cx~mtn~talinn hereunder shall he adjusted proportionately to includ~ such toembe~s only fo~ their full calendar toonths of employment during such year. (2) So much of the remaining balance of 24% of such aggregate amount as the Incentive Compensation Cemmlttee determines, in its sole di~cretlon, shall he allotted among the members of snch Management Group to su~ individuals in ~ald Group, and in such amowats as to individuals as the Incentive Compensation Committee, in its scale discretion, shall determine. S~CTmN 3. (A) No part of ~lch aggregate amount available for allomLcnt ag shall not have been allotted, under Sectiorm 1 and 2 hercof, w~thin such 60-day perlod, for any year may he carried fol~vard for ~ubsequent allotment. (B) As used in Sections 2 to 5, inclusive, of Ibis Article the. word "C~mpany" means The American Tobacco Company and its subsidiaries included in the cons~ida~ecl financi~ state~nen~s set forth in the annual reports for each year to the st~chholders of The Atoerican Tobacco Coln- pany, together ~Jth such other subsidiaries or affiliates as the Incentive C~mpelmation Cemmhtee shall expressly des~gna~ g~r any such year. (C) All decisthns of the Committee pur~ua~ to the provisions of this ArllcIe shall he binding and conclusive on all interested parties. 9