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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

SECTION 4. (A) Payment to each President and Senior Vice Pxesldent, of the amotmts payable to them under Sec~on l(B) hereof, and to each of the aJgottees of the Management Group of the amount of his total allotment~ under Section 2(I]) hereof, with respect to any year ahaU he made as follows: (I) One-haLf thereof shall be payable in cash as soon as pracHcchle. (2) The balance, being one-haLf thereof, shall be eontingenrly payable as hereinafter provided. (I3) All amounts conBngentiy payable to all persons hereunder, such persons being here- after referred to as "participants," shall be psyuble in cash in ten eciatal annual contingent install- ments, one s~sh instalhneut to be paid on the last bushiess day in January, or as soon as practicable lhersaLfcr, in each of the ten years following the dose of the year in which the participant's employment by the Company terminates; but all such payments shall be subject to the following conditions: (i) If any participant ceases to he employed by the Company within a period of five years f~om the close ~ff any year for which an allotment is made to him hereunder, the part of his allotment with respect to such year which is e~ntingently payable in instalhnems as aforesaid shad be reduced to the proportion thereof which the number of oomplsted calendar quarter-years from the beginning of such five year period to the termination of employment bears to twenty; provided, however, that the provisions of this subdivision (i) shall have no application to any termination of employment (a) by death or (b) under such circumstances that the participant is eligible for retirement benefits (inelRding early retirement), severance benefits or disability benefits mtdex the Company's Retirement Plan, or (e) for other reasons deemed by the Board of Directors not deafmental te the Company's interests. (ii) Payment of all unpaid installments shall be eontlngent upon the participant's not having, shace the tcnninatlon of his employment with tim Compzily~ accepted employment with, or rendered personal service to, any competitor ef the Compsa~y or engaged ha any activity in competition with the Company, except as expressly approved by the Company. (iii) Payment of each such installment chad be conditioned upon the participant's having during the year preceding such payment been svailchle to the Board of Directors, or any repre- sentative deslgnaled by the Board of DLfeetors, for eonsuhation, at such times and places, upon prior wriltcn notice, as the Board or such representative may reasonchly request, having due regard to the age, health and convenience of the participant; provided, however, that the partici- pant is to be reimbursed for all expenses in connection therewith, and if said participant is more than 100 miles from the Company's prJnclpaI o~ices, such consultation may at his option be at the place where he then is located and may he, at the Company's option, either by personal visit to him by the representative of the Company for such purpose, or by written communication. (iv) Stthjcct to Section 5 hergof, no suds histallment may he t~ansfcrrcd by any partici- pant in any maimer whatsoever, including transfer by operation of law. If any partieipant is, in the opinion of the Board of Directors, incapable of handling his affairs, or makes or suffers any attempted transfer, whether vokmtary or invohmtary, of any contingent hastallment, then in the discretion of the Board of Directors payment thereof to such participant shall cease and paynmnts may be made or applied tt~ or for the benefit of such participant or his spouse, I0

children, or other dependents, or any of them, in such ma~mar and in such proportion as the ]Board of Directors shall from time to time deem proper, subject, however, to the other pro- visions hereof. (C) Any portion of any allotment which terminates by reason of noncompliance with its eondltions shah re}~rt to the Company. SECTIOn- 5. Any of the said ~nnual contingent payments that may fail due after death of p~u-tithpant shall he pald in ~t'h installments as herein p~ovided, either to rush pc,~on as sha~ funaish evidence satisinetoD" to the Company tha~ under the last will and testament of the par- tic~paut or for other ~eason such person i~ authorized in law to ~eceive such paym~nh or~ in the discretion of the Company, to such pe~on as shall ~ur~ish the Company with evidence o~ appoint- ment as representative of di~ estate of the participant; provided, however, thaL the Incentive Compensa~iort Colnmit~e may, in its sdie ~iscretion, aeee~rate ~nc or more of such payments. The Company may ~ely ~pon ~ny oplni~ln of e~JunBcl in determining [he person en~itIed to receive such payments and the receipt o~ any s~ch person ~or ~ch payments shall release the Compatty ~rom any ~urther chligatlon in respect thereof. Th6 word "person" as used in shis Section may ~nclude one or rnoz-~ individuals, ~rms, trusts or ~orporatlot/s. SECTION 6. For file purpose of this Article, the term "net profits earned by the Company" in any year is defir~ed to raeaia the net Lrteome stetted by the independent publio accountants who have audited th~ Conlpany~s boo]cs as fnieiy reflecting the consoBdated resalts o~ the operations for such year of th~ Company and its subsidiaries included hi the eo~xzo]Bdated financial statemeats set forth in the ~nnual report for s~ch year of the Company to the sto~khclders. SKc'floN 7. At the time of ~endexing their report with re~p~et t~ the ~gnclal ~ta~ments of the Company a~d its consolidated s~beidlarie~s~ such public account~nt~ shall also furnish to the Company their written certi~c~te statiag the a~gregate amount avalIabI~ ~r allotme~lt Inr such year, and the amotmls thereof to he allotted to the President and to each Senior Vice Presidcnh and the amount avaiXuble fo~ allotment to the M~tnageme~t Group~ pursuant ~o this Article, which certiiqcate as to the amoants available and payable hereusder shall he binding and eo~tcIuslve on all haterested pa~ies, and no nne claiming hereunder shall have a right to qtr~titJn the sarae, or to al~ e.xara~qt~on ~ the books or acec~u~ of the C~n~pany or ~hsi~iar~c~. SEC'~'~ON 8. Tl~is Article may he repealed only by the actioit of the stovJdmlders of the Company, and not by the Directors. Upon the nnanboous recoiJJmendation of the Incentive Com- pensation Committee, this Article nmy be amended or modified by the Dh-eetors in accordance with Article XI, exsept that, without the approval of die s~oeld~alth~rs of the Company, no such anaendment or modification shall he made which increases the aggregate amount payable here- under or alters the araoultt thereof payable herev-nder to the President ~nd Sc~fio~ ~rice Presidents. and ]B~rther RF.SOLV:~D, as also recommended hy resolutlo~ ~f the Board of D~zectors ~{ The. hmcrlean Tobacco C~mpany, that with respect to so m~tch of that portion o~ the year 1957 beginning Jant~ary 1, 1957 and ending on the date o~ the 1957 organization meeting of the Board of D~rector~ at which 1I

officers are eIected, after the annual meeting of stockholders, d~rlng whinh John A. Crowe holds ~he omee of Vice-President, he shaB be entitled to the araou~t of Article XII ineentivv compensa- tion which under the amended _article XH would be allotted to a Senior ¥ice President holding e~ce du~ing such portion of 1957. A majority of the votes east in person or by proxy on Proposal A wilI be required for its adoption. The Management recommends ffi~t you, vote FOR Proposal A. Proposal B ELECTION OF I~DEPENDENT AUDITORS The Managen~e~t proposes and reeemmendr the election by the stcckhnlders at the Annual Meeting of ]b[essrs. Lyhrand, RoBs Bros. & Montgorae~ as independent authtor~ for the Company thr the year 1957. fax H~e with thi~ recomraendr tinn the/VLn~tgemertt inteadr kn introd~ at the £ortheotalag Ant~aI Meeting the fo~lowlng resolution (designated herein as Proposal B) : REsonwrh that Messrs, Lyhrand, Ross Bzo~. & Montgomery be and they hereby are elected as independent auditors for the Company for th~ year 1957. This firm of cet-Yitled ptthlle accountants have been tot 25 yeas'~ the independent ~ditors for the Company. In accordance with the Cornpar~y's customary practice a mei~JJer of the firm wiI1 attextd the Annual Mee~ng and respond to c~esti~ns "~hleh m~y he asked by stoekholders. The Management recommends that you vote FOR Proposal B. Proposal C I~SOLUTION PROPOSED BY TEPEE STOCYd/OLDERS Tim Company is in:ffirmed thet Lexvhs D. Gilbex% a record holder of g0 s~ares of Common Stoek~ whose address is 1165 Park Avenue, New York 28, N. Y., and/or John J. Gilbert, a ~eeord holder of 80 shares of Co*amen Stock, whose address is 1165 Park Avenue, New York 28, N. Y., and/or John Campbell Itenl% a record holder of 400 shares of Common Stock, whose address is 5 East 93rd Street, New York 28, N. g., intend to introduce at the forthcoming Ammal Meeting the following resohttinn (designated herein as P~oposal C) : "RESOLVED: ~]~nt file stockhnlders of The American Tobacco Compaay, assembled ia am~nal meeting in person and by proxy, hereby request that the Board of Directors bring before a sub- sequent swekhalde~s' meeting a formal proposal for ~hn a~tendment of Article XII of the By-Laws, which amendment would provide that any non-recurring profit, s~ch as that resulting from the sale of buildings, be excluded irora the basis on whloh payment~ ul incentive compensalloa to ~f~cer~ are caleulat~d?' The proposers of rbls resolution, Messrs. Gilbert, Gilbert and Hera% haw furnished the following statement setting forth the reasons advanced by them in support of their proposal: "Incentive eompen- satio~t p~yments shn~ld hn n~atie on a basis ol s~le~, to ff,~ e~alu~t~n o~ n~n-reeu~ing profit~ which have nothing to do with executive sales initiative. From tlm¢ to time the Corporation has non-recurring pro£ts, such as ffiose resulfieg ~rom sale oI pxoperty no longer needed. There is no reason why exee~tffie~ should be rewaeded for transactions ~nreinted to the regular h~slness of the Corporation. Increasing sales of American Tohnceo products should be the early foundation for such compensation. If yott agree, pJease mark your prox7 FOR this resolution, ntherwise it is automatically east against it." The Management, after ea~alully evnsldering Proposal C and obtaBgmg the advi~e ~f the Company's indep¢ndent atalitors, Messrs. Lybrand, Ross Bros. & Mon~gomezy, share the view of the independent 12

auditors that the method now provided in Article XII for computing incentive compensation (~hich method will not be changed by the amendment of Article XlI contained in Proposal A) is a practical and objective method, fair to participants and stot:khelders alike. Incentive compensation is based upon net income reported to stoctdlolders and is determined by the thdependent auditors. In the opinion o2 the independent auditors net income as reported to stockholders is determined in conformity with generally accepted aecounthlg principles applied on a consistent basis. Proposal C, on the other hand, would reTaire that incentive compensation be based not on actual net income as reported to the stockholders hut on an ammmt which would he axrlver/M by e~rcluding certain actual transactions of the Company thLring the year, namely "non-recurring profits, s~eh a~ those resulting ~rom sale of property no longer needed". These transactions are not ha any sense "unrelated m the regular business" hut on the contrary are an essenthd part o£ it requiring managerial experience and judgment. Usually book profits on sales o2 capital assets arise because of over-Iiberal pxovlsions for depreciation in prior years. The apparent profit under such eheltmstances is in effect an adjustment of excess charges to income for the prior years. Moreover, according to the Company's b~depemtent auditors, while profits or losses on disposal o£ capital assets and certain other items which may represent non-operatlng cherges or credits would nor- really he reflected in income attempt, if they were so material as to distort nor income for the year they would he reflected in the sm~lus account and he excluded from the determination of net income as repotted to stoeltholdors and on which Article XII incentive compensation is hm~ed. A majority of the votes o~t in person or by proxy on Proposal C will be required for its adoption. The Management recommends that yo~ vote AGAINST P;oposal C. The Management is not aware at the dale hereof of any matter that is intended to be presented at this meeting other than tile election of directors and Proposals A, B and C. If any matter not lumm~ at the date hereof is properly presented for action at the meeting, it is intended that the persons named in the proxies will vote thereon according to thalr best judgment. REMUNERATION Remuneration of Directors and Officers. There is set ~orik in the following tabulation, on an accrual hurls, all direct remuneration paid by the Company and its subsidiaries to the thllo~ng persons ~or services in alI capacities wbile dlaectors er officers of the Company during its last fiscal year: each dikector, and each of the three highest paid o~ce~, of the Company whose direct aggregate renmneration exceeded ~30,000; and ull directors and officers o~ the Cott~pally as a gc~up. Estimated mmuaI retirement benefits to the same individuals at aorraal retirement date under the Retirement Plan ~or employees adop~ted by the stockholders at the 1949 Azmaal Meeting are stated in Column (4). (4} Estimated mm~ual (2) (2) (~) retirement benefit Nzme o£ ]ndlvldua~ Capacltie~ ia M~ieh .~eg~e ~t normal or iden~D, o£ g~oup remuneration wm~ r~-~ved ~mnnsrati~n r~i~ment d~e Orpheus D. Baxalys Vice-Preside~ and Man~gdng Dh'ector, The $ 50,000 $17,000 Amerlean Tobacco Company of the O~e~, In~./a) Assistant to the President, The A~nerlcan 45,000 Tobacco Company Vice-Presldent and Director o~ Parchasc~ 172,797(e) The Am~rlcan Toba~'o Company 13. Alfred F. Box~en 15,500 Biehard J. Boylan(b) 17,000

(1) Name ~f indivxd~al Thoma~ F. Connors James R. Coon(b)(e) Jotm A. @owe(e) John S. Dowd A. Gordon Fin~ay (e) Preston L. Fowler (e) (~) Charles C-~bow(e) J'ohn G, IIagsr, Jr, ~¢irg~l D. ~ager Paul M. Hahn(c) Hir~tm R. Hanmer Harry L. Hilyard (e) John R. Hutchings~ Jr. A. LeRoy Jansen Jsm~s F. Strlekland (i) Robert B. Walker Wi01am B. Young(e) (4) F.~t~ ated a~nua] (2) (~) retirement benefit Ca/~aeit Jes ~a ~hldl Agg~to at normal ~m.t~r~tlmt ~-~s r~.e~etl ~mun~ratlon xetlr eln~ll~ date D~rcctor of Traffic, The American Tobacco 8 34,000 $I1,434 C~mprmy Vicc.Presldent and CompWo]ler, The Am~rlcan ~72,797(c) ~ 17,000 Tc~h~.~c~ C~ra~~~" ~ce President, Ass~s~mlt Chi~ of M~mtfaemre ~72,797(~) 17,000 and Cklef of Manufacture. 2~ae _A~neriean Tobacco Company Executive Vke-President, Az~acxlcan Suppliers, 60,000 18,308 Inco~orat~d(a) V~ce-President, American Cigarette ~nd C~gar 4~000 14,000 D~vision oi II~e American Tobacco Eompaay Vicc.P~sMen~ and Chief of Manu~cture, 44,999(d) 14,811 The ]'.merh~an Tobacco ComI~any Vice-Prcsldent, 4merican Cigarette and Cigar 40,000 11.1¢3 D~i~i~n of The American Tobacco Compar~y Manager of Louls~ille, Ky., C~garette plant, 10,846(g) 11~161 Tk~ Am~zlc~r~ '~oba~ Company R~slstant to the Vice-preslde~lts in charge of 35,657 13,400 Ma~t~factule~ The American Tob~oco Com puny President, The Amebean Tobacco Corapa~y 273,496(h) 2.5,000 Director of ~esea~ch, The A~0erica~ Tobacco 45.000 14,378 Company Treasurer. The A~aerican Tobacco Compaw 50,000 12,152 Vice.Presldenb A~mrlcan Suppllem~ Income- 45,000 I1.237 rated(a) Auditor, Th~ ~neriean Tobacco Company 50,000 15,528 Prcsldont, American Supplier% Incorporated(a} 75,000 16,395 Director of Salea, The American Tobacco 47,000 16,100 Company As.~stant to the Vice presidents ha charge o1 23,054(j) 8,583 Manatacmrc, The Amexleaa Tobacco Com- pany Di~ector~ aug O~ccrs Directors m~g O~ce~s as a g~oup b,5~5,6~.9 aS a ~roup (Bt A~]iated company" engaged in ~lxroha~e ~ud handling ~ leaf tob~oc~ (~/ Retired D~ccmher 31, 1956. (c) Inclode~ ~122,797 Articl~ Xl~ blocnt~v~ ~omp~d~satiou, (d) Includes $~1,874 Artic2e XII incentiw compensation earnect pr~or t~ ~t~cmenh /¢) Also o~ce~ ~f a~ate~ ©om~'f ~ eo~p:x~i~. (~) Retired April 4, I955. (g) Remuneral]0n sho~ is for period !n~eq~en~ [o e]ecdo~ tls a dir~ctor ~n AugUSL 28~ 1956, (~) Includes $153,495 Articl~ Xll i~ce~tiw compensation. (1) Retiring, February 2fl, ~57. The amounts refel"red to in the notes to the above ta]~le as Arlicl~ XlI incetafivo compensation were accrued as incentive compensation (based en amount of Company profits), under ArtieIe XII oI tile By-Laws, as amended by vote of tile stockholders at the 1951 Ammal 3~'ccting. 14

No amount was set aside or accrued during the Conapany's last fseal year for pension or retirement benefits prc~posed to he paid unde~ any eaistidg plan by the Company or any of its subsidiaries to any ¢~thc~r ox director ~{ the C~mp,".txy. The Retirement PLan for employees adopted by vote of the stockholders at the I949 Annual Meeting covers approaim~ely 18,100 regular fulLtin,e employees of the Company and its subsltharies. The aggregate amount of remuneration for the fiscal year 1956, received from the Compa~ty and its • subsidiaries, directly er indlreedy, oh an accrual basis, by all the directors and officm's ~f the Company as a group~ was approximately fourteen one-hundredths" o£ 1% of the Company's consolidated net ~ales. M1S CELLANEOUS Any stockholder makhig written reqxtest therefor to the Secretary of the Company will he fuxl~ished a smnm~'y of t/Je Annual ~{eefing which wiiI be prepared after the meeting has been held. Comments or suggestions by stockholders with regard to the Annual Report are welcomed, as they are w~th regard to all otixer matters affecting the C?mpany's interests. bIemidgton, N. J. is reached By the Lehigh Valley Ridlr(~ad. The present train schedule, which is subject to change and should be confirmed, is as foI]ows: Leave Pennsylvania Station (33rd Street and Seventh Avenue~ New York, N. Y.) 10:55 A. M. Arrive Flemlngton Junction 12:03 P. M. Leave FLamlngton Junction 5:24 P. M. Arrive Pennsylvania Station 6:40 P. IVL The Company wilI procure tran~portatidn from }Iew York to Flemlngton by railroad and return by railroad or, @ expressly requested, return by bus, at Company expense for any stockholder of record desirous of at~endidg thc meeting, on his notifying the Secretary in wri6ng at 150 East 42rid Street: New York 17, New York, not Later than March 28, 1957, that he wishes such transportation obtained. If you do not plan to attend, you are urgently requested to execute the enclosed proxy and marl it to the C~mpany promptly. Expense o[ Solicitation. The expense of the solidltadon of proxies for this meeting, including the cost o~ mailing, wii1 be berne by the Company. In addition to mailing copies ef this material to stockholders, the Company will x-equest persons who hold stock in their names or custody or in the names of nominees far others, to f~rward copies of sudl material to these persons for whom they hold stock of the Company and tu request authority fo~ the execution of the proxies. To the extent necessary in order to assure su~iaient representation at the meeting, othcers and some regular employees of the Compat~y and approxinlately 6 employee~ of Philip G. Cameron Company will request ~ke return of prnxids by telephone, telegram or id person, at an estlmatcd cost of about $13,000. The amount of the expense to he borne by the Company will depend upon the volume of shares represented by the proxies ~ecelved~ in response to the Notice of Meeting. If proxies are not received promptly, it may he necessary for the Compgny to send tslegrapblc solicitation to those stockh~l~lers who have not gespondeth Stoekhelders who do not inteod to be present at the Vieetidgare urged to send in their Proxies ~dthout delay. Prompt response is helpful, and your coeperatlo= wilt t~e appreciated. February 11, 1957. 15