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THE .AMERICAN TOBACCO COMPANY INCORPORATED PROOF H No. 75 Montgomery Street, Jersey City, N. J. March 1, 1940. Notice is hereby given that the Annual Meeting of the Preferred and Common Stockholders of 3'he American Tobacco Company will be held at the office of the Company, No. 75 Montgomery Street, Jersey City, N. J., at eleven o'clock in the forenoon on Wednesday, April 3rd, 1940, to elect directors and to transact such other business as may properly come before said meeting. The Preferred and Common Stock transfer books will not close, but holders of Preferred Stock and of Common Stock to entitle them to vote must be of record at least thirty days prior to the meeting, that is, not later than March 4th, 1940. RICHARD J. BOYLAN, Secretary. PROXY STATEMENT The enclosed Proxy is solicited by and on behalf of the Management and is revocable. The Board of Directors consists of seventeen members who are elected to hold office until the next Annual Meeting or until their successors are duly elected and qualified. It is the intention of the Proxy Committee to vote at this Annual Meeting for the following nominees whose designation originated with the Board of Directors of the Company, who together constitute the present Board, and who have served as Direc- tors of the Company for the approximate periods stated after their respective names: Richard J. Boy- lan, 101,6 years; James R. Coon, 3~ years; John A. Crowe, 8½ years; C. Huntley Gibson, 10 years; Patrick H. Gorman, 9 years; Paul M. Hahn, 9 years; Hiram R. Hanmer, 2 years; Tullis T. Harkrader, 20 years; Edmund A. Harvey, 8 years; George W. Hill, 28 years; George W. Hill, Jr., 3½ years; James E. Lipscomb, Jr., 22 years; Charles F. Neiley, 22 years; William H. Ogsbury, 10 years; Fred B. Reuter, 8~2 years; Vincent Riggio, 123/~ years; and Orpheus D. Baxalys, recently elected to the Board, who is Vice President and Managing Director of The American Tobacco Company of the Orient, Inc. and who has been employed in the Company's business over 17 years. Of the outstanding securities of the Company at the close of business on 1940, these nominees were directly or indirectly the beneficial owners of securities as follows: Richard J. Boylan, shares of Common Stock; James R. Coon, shares of Common Stock; John A. Crowe, shares of Common Stock B and shares of Preferred Stock; C. Huntley Gibson, shares of Common Stock; Patrick H. Gorman, shares of Common Stock and shares of Common Stock B; Paul M. Hahn, shares of Common Stock; Hiram R. Hanmer, shares of Common Stock; Tullis T. Harkrader, shares of Common Stock and share(s) of Preferred Stock; Edmund A. Harvey, shares of Common Stock B and shares of Preferred Stock; George W. Hill, shares of Common Stock, shares of Common Stock B and shares of Preferred Stock; George W. Hill, Jr., shares of Common Stock B and shares of Preferred Stock; James E. Lipscomb, Jr., shares of Common Stock, shares of Common Stock B and shares of Preferred Stock; Charles F. Neiley, shares of Common Stock, shares of Common Stock B and shares of Preferred Stock; William H. Ogsbury, shares of Com- mon Stock B and shares of Preferred Stock; Fred B. Reuter, shares of Common Stock and shares of Common Stock B; Vincent Riggio, shares of Common Stock, shares of Com- mon Stock B and shares of Preferred Stock; and Orpheus D. Baxalys, 140 shares of Common Stock, 130 shares of Common Stock B and 32 shares of Preferred Stock.

The total amount of all remuneration paid by the Con,t, any and its subsidiaries (directly or indirectly, through any affiliate of the Company or otherwise) for the year ended December 31, 1939, to all the officers and directors of the Company, for services in all capacities, was the equivalent of seven-tenths of 1% of the Company's net sales. Remuneration of the President and Vice Presi- dents includes Incentive Compensation earned under Article XII of the Company's Bylaws, which depends upon the amount of tile Company's earnings for the year. As the Company's earnings in- crease, the amounts earned as Incentive Compensation under Article XII increase; when the Com- pany's earnings are smaller, the amounts earned under Article XII are smaller. The aggregate amount of all remuneration paid by the Company and its subsidiaries (directly or indirectly, through any affiliate of the Company or otherwise) for the year ended December 31, 1939, to George W. Hill, President, was $420,299.58; to Paul M. Hahn, Vice President, $230,179.75; to Vincent Riggio, Vice President, $230,179.75. These figures include Incentive Compensation earned under Article XII of the Bylaws amounting in the case of the President to $300,299.58, and in the case of each of said Vice Presidents to $180,179.75. Included in remuneration of the two otller Vice Presidents is Incentive Compensation earned under Article XII of the Bylaws, in the amount of $180,179.74 each. All of such payments, in- cluding the above amounts of Incentive Compensation earned under Article XII of the Bylaws totalling $1,021,018.56, are included in the total of $1,837,533.53, which is the aggregate amount of all remuneration paid by the Company and its subsidiaries (directly or indirectly, through any affiliate of the Company or otherwise) for the year ended December 31, 1939, to all the officers and directors of the Company considered as a group, for services in all capacities. Article XII of the Bylaws of the Company was adopted by the Stockholders on March 13, 1912, receiving in its favor the vote of 621,047 shares of stock, with 35 shares of stock voting against it. It provides as follows: Section 1. As soon as praoticable after the end of the year 1912 and of each year of the Com- pany's operations thereafter, the Treasurer of the Company shall ascertain the net profits, as herein. after defined, earned by the Company during such year, and if such net profits exceed the sum of $8,222,245.82, which is the estimated amount of such net profits earned during the year 1910 by the business that now belong to the Company, the Treasurer shall pay an amount equal in the aggregate to ten per cent. of such excess to the President and five Vice-Presidents of the Company in the follow- ing proportions, to wit: One-fourth thereof, or 2½ per cent. of such amount, to the President; one- fifth of the remainder thereof, or 11/~ per cent. of such amount, to each of the five Vice-Presidents as salary for the year, in addition to the fixed salary of each of said officers. Section 2. If any such office be vacant for a time amounting in the aggregate to one month in any year, so nmch of the amount provided by this resolution to be paid to the incumbent of such office as is proportionate to the time of such vacancy shall be returned into the general profit of the Com- pany. If there shall be a change during the year in the incumbent of any office, the amount herein- before provided to be paid shall be divided among the different incumbents of such office in the proportion of their respective periods of incumbency during the year, subject to the above provision in relation to vacancies. Section 3. For the purpose of this By-law the net profits earned by the Company in any year shall consist of the net earnings made by the Company in its business as a manufacturer and seller of tobacco and its products after deducting all expenses and losses, such provisions as shall be determined by the Board of Directors of the Company for depreciation and for all outstanding trade obligations, and an additional amount equal to 6 per cent. dividends on $52,459,400 of its 6 per cent. preferred stock, to which profits shall be added, or from which profits shall be deducted, as the case may be, the Com- pany's proportion (based on its stock holdings) of the net profits or losses for the year of its subsidiary companies engaged in the manufacture and sale of smoking tobacco, chewing tobacco, cigarettes, or little cigars, except earnings on preference shares of British-American Tobacco Company, Limited, and shares of Imperial Tobacco Company (of Great Britain and Ireland), Limited. Section 4. The declaration of the Treasurer as to the amount of net profits for the year and the sum due anyone hereunder shall be binding and conclusive on all parties, and no one claiming hereunder shall have a right to question the said declaration, or to any examination of the books or b 9 It

accounts of the Company, and nothing.,.erein contained shall give any incumbent o~ dny office any right to claim to continue therein, or any other right except as herein specifically expressed. Section 5. This By-law may be modified or repealed only by the action of the stockholders of the Company and not by the directors. In 1933, the President and Vice Presidents entered into agreements with the Company whereby tile point at which their Bylaw compensation commences--the base point--has now become $15,500,000, and, starting at profits of $32,500,000, the percentage was graded down by blocks of $2,500,000 each to an eventual 5%. The $15,500,000 present base point includes net earnings equal to 6 per cent. dividends on the preferred stock referred to in Section 3 of the Bylaw. These agreements have resulted in diminishing the compensation of your Management since 1934. The Management's view as to how this Bylaw has operated to the continuing benefit of both Preferred and Common stockholders is clearly expressed in the accompanying letter of the President. The Company is informed that Lewis D. Gilbert, a record owner of 80 shares of Common Stock of the Company, intends to introduce at the forthcoming Annual Meeting the following reso- lution (referred to as Resolution 1). The wording is Mr. Gilbert's. 1 Resolved that article XII, Section 1 of the by laws be amended as follows: Section One. As soon as practical after the end of the year 1940 and of each year of the company's operations there- after, independent public auditors shall ascertain the net profit as hereinafter defined, earned by the company during such year and if such net profits exceed the sum of $23.719.332.50 or the equivalent of $5.00 per share on the basis of the number of shares presently outstanding, the treasurer shall pay an amount equal in the aggregate to 107o of such excess to the president and five vice-presidents of the company in the following proportions, to wit: One fourth thereof, or 2½% of such amount, to the president; one fifth of the remainder thereof, or 1½% of such amount, to each of the five vice presidents as salary for the year, in addition to the fixed salary of each of said officers, provided, however, that the amount paid to the president under this section 1 shall in no event exceed $100.000 in any given year, in addition to his fixed salary and that the amount paid to each of the vice presidents under this section shall in no event exceed $50.000 in any given year, in addition to their fixed salary and provided further that in the case of any officer or employee of the company or any of its subsidiary companies, whose aggregate compensation exceeds $50.000 a year, the same shall not be paid unless ratified by the stockholders at an annual or special meeting of the stockholders called for that purpose. The Management does not intend to sponsor this resolution and is opposed to it as being against the best interests of the Company and its stockholders. Stockholders are urged to read the accom- panying letter of tile President, wherein the reasons why the Management believes this proposal is definitely against the interests of the stockholders (both Preferred and Common) are clearly set forth. I 2-_

The Con,, .ny is also informed that Lewis D. Gilbert, ,. ,'eeord owner of 80 shares of Common Stock of the Company, intends to introduce at the forthcoming Annual Meeting the following reso- lution (referred to as Resolution 2). The wording is Mr. Gilbert's. 2 Resolved that at each annual meeting of the stockholders of the company beginning with the annual meeting to be held in 1941, a firm of independent public accountants shall be elected annually by the stockholders to audit the accounts of the company and its subsidiary companies for the calendar year in which such meeting is held and that a partner in the accounting firm thus selected shall attend the annual meeting of the stockholders in the succeeding year. The Management does not intend to sponsor this resolution and is opposed to it as being against the best interests of the Company and its stockholders. Stockholders are urged to read the accom- panying letter of the President, wherein the reasons why the Management believes this proposal is definitely against the interests of the stockholders (both Preferred and Common) are clearly set forth. It is estimated that the expense of the solicitation of proxies for this Meeting which will be borne by the Company, will amount to approximately $ . To the extent necessary, some employees of the Company will devote time to the solicitation of attendance at the meeting or proxies. The amount of the expense incident to these efforts, to be borne by the Company, will depend upon the volume of shares represented by the proxies received promptly in response to this Notice of Meeting. The stockholders are urged to send in their proxies without delay so as to mini- mize this additional expense5 If any stockholder desires to specify the action to be taken pursuant to his proxy on Resolutions 1 and 2 set out above, he may so specify in the form provided below for Instructions to Proxies, tear off the form along the perforated lines, sign, and send in the form with his signed proxy. If the stock- holder does not desire to specify such action, this form has no value and may be disregarded, in which case the proxy will be voted against both the Resolutions. • THE AMERICAN TOBACCO COMPANY *' |NCORPORATrD The undersigned stockholder specifies the following action which such stockholder desires to be taken pursuant to his proxy on Resolutions 1 and 2 described in the Proxy Statement, by indicating in the places provided below whether he desires his votes cast for or against the proposed Resolu. tions. For the reasons stated in the accompanying letter of the President, the Management urges you, in your own interest as a stockholder, to vote against both these Resolutions. 1. For [] Against [] the adoption of Resolution 1. 2. For [] Against [] the adoption of Resolution 2. Stockholder J