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Annual Report 1956 T154210422

Annual Report For the Year Ended December . HIGHLIGHTS ........... 2 PRESIDENTTS LETTER ......... 3 OPERATIONS AT A GLANCE ....... 12 CONSOLIDATED STATEI~IENTS OF INCOME AND RETAIi~ED EARNINGS ...... 13 "CONSOLIDATED BALANCE SHEETS ..... 14 NOTES TO STATEMENTS ........ AUDITOI~S~ CERTIFICATE ........ 17 TEN-YEAR FINANCIAL REVIE~Y ...... 18 DIRECTOI~S AND OFFICEP, S ....... 20 Executive office. 1so Eest 42nd Street, . New York 17 T!54210423

HIGHLIGHTS PER COMMON SHARE Net income ......... • . Dividends paid ......... Net sales ........... Income, before taxes on income Net income .......... Dividends paid (common and preferred) Portion of net income invested in assets used in the business and to provide for debenture sinking fund requirements . Current assets, December 3i .... Current liabilities, December 31 Net working capital, December 3I. Number of stockholders at December 3i: Common .......... Preferred ........... 1956 $1;~2i$22;61"/ • tl 1,s82~0~8 52,048;078 :35,'/.29,59.6 16,31~,482 715;431,521 157,317,016 ' 55e,1i4,5o5 84,250 7,140 1955 $7.45 4.40 $1,090,844,818 113,060,990 51,661,990 31,822,083 19,839,907 727,647,931 171,792,203 555,855,728 80,881 7,357 T154210424

THE PRESIDENT'S LETTER February 4, 1957 To Our Stockholders THIS report covers operations of The American Tobacco Company, in- cluding consolidated subsidiaries, for 1956. Net income in 1956 was the highest in the history of the Company, $52,048,078 as compared with $51,661,990 in 1955. -D~ll~r sales were $-1~,68-2~22,617, less than 1% below the all-time high of $1,090,844,818 recorded in 1955. Unit cigarette sales in 1956 were slightly lower than in 1955, although unit cigarette sales for the fourth quarter were higher than those for the comparable period in 1955. Fourth quarter dollar sales, the first to reflect materially sales of P~ADE Filter Tip Cigarettes, were $278,745,984. This was the highest fourth quarter dollar sales figure in the history of the Company. Again in 1956 your Company's two largest-selling cigarette brands, LUCKY STRIKE and PALL MALL, improved their positions in their respective mar- kets. In LUCKY STRIKE and PALL MALL your Company has two of the three largest-selling cigarette brands in the United States, according to inde- pendent surveys. Although the domestic standard-size market as a whole continued to decline, unit sales of LUCKY STRIKE Cigarettes again showed a compara- tively small decrease. LUCKY STRIKE'S share of the standard-size market thus increased in 1956, as it did in 1955, 1954 and 1953. PALL MALL continues as the nation's leading king-size cigarette. Ac- cording to ii~dependent surveys, P~L MALL accounts for more than half of all sales in the non-filter-tip king-size market. Although the non-filter-tip king-size market in the United States declined during 1956, unit sales of PALL MALL Cigarettes increased. Combined unit sales of PALL MALL and H~.RBERT T~EYTON cork-tip king-size continue to represent more than 60 % of all domestic non-filter-tip king-size sales, according to independent surveys. The filter-tip market in 1956 was marked by continued growth and by the introduction of new competitive brands. Your Company added to its representation in this market in the fall of 1956 with the introduction T!54210425

OJ~ HIT PARADE Filter Tip Cigarettes, a unique new blend which is the result of a study of modern American preferences in tobacco taste. HIT l~ARADE Cigarettes full king-size with a pure white filter-tip developed exclusively for The American Tobacco Company--achieved distribution throughout most of the domestic market by the end of 1956. Although the new brand is still in the introductory stage, with national advertising just begun, the response of the trade and of consumers has been gratifyingly enthusiastic and the outlook for HIT :PARADE Cigarettes at this early stage is excellent. Your Company's earlier entry in the fil~er field, TILTER TAREYTON, held its volume during 1956 against the added weight of new competitive brands. Export (tax-free) sales were lower in 1956 than in 1955, the major factor being reduced requirements for tobacco products by the Armed Forces installations overseas. Your Company's unit sales of cigars again increased during 1956. In the domestic cigar field, the 10¢ EL Ro~-TAN continues to be the largest- selling brand in its price class. The Company's clear Havana cigars, includ- ing LA CORONA, ANTONIO Y CLEOPATRA, and BOCK Y CA, remain the largest- selling Bonded Clear Havana line. The competitive position of the Com- pany's cigar brands was strengthened in 1956 by the introduction of new shapes and by packaging improvements; additional activity along these lines is planned for 1957. 4 T154210426

Your Company's sales of smoking and chewing tobaccos, which account for less than 2% of total dollar sales, continued to decline in line with the industry sales trend for these products. Earnings Net income in 1956 rose to a new record high of $52,048,0"/8 compared with the previous record of $51,661,990 in 1955. After deducting dividends on the Preferred stock, net income per Common share in 1956 amounted to $7.51 compared with $7.45 in 1955. Taxes on income amounted to $9.20 per Common share compared with ea-r-n4ngs-o~ .-5-1-per~hare~a~s. Bivirlends During 1956 a total of $5.00 per share was paid on the Common stock, consisting of four regular quarterly dividends of $1.00 each and an extra of $1.00. This compares with $4.40 per share paid in 1955. The annual dividend on the Common stock has been increased five times since the end of World War II, and the present $5.00 level compares with $3.25 per share paid in 1946. Since that time the number of Common shares on which dividends are paid has increased by over 2,.000,000 shares, so that TI54210427

the total dividends on Common stock in 1956 represent an increase of 124'~; over the 1946 dividends. On January 29, 1957, your Board of Directors declared a regular quarterly dividend on the Common stock of $1.00 per share and an extra dividend of $1.00 per share, payable March 1, 1957, to stockholders of record February 8, 1957. I:innr~es Bank loans at December 31, 1956, were $10 million lower than at the end of 1955, while cash on hand and in banks was about the same. As a result of retiring $12,972,000 _principal amount of debentures through operation of the Sinking Funds, combined long-term and short-term debt at the year end was $22,972,000 lower than at the end of 1955. Of the $325 million original amount of debentures issued since early 1942, approximately $120 million has been retired while net worth has increased over $280 million during the same period. In the present period of higher interest rates it is noteworthy that over $200 million of the amounts originally borrowed through the sale of de- bentures is currently being utilized in our business at an average interest cost slightly in excess of 3%, while the current rate ~or similar ~unds is considerably higher. 6 Ti542"10428

A significant development during 1956 was the continued rise in the cost of borrowing money. As was true in 1955, the prime commercial rate (which is the rate extended to the borrowers with top credit ratings) was twice increased by ¼7~, thus raising the rate from 3½% to the present 4%. In the absence of unusual developments, your hIanagement does not anticipate any need for new financing in the foreseeable future. L~f To In the manufacture of cigarettes the most important single factor is leaf tobacc~,~ch_com~~s n~' clgarettemaanufactu~int~ costs exclusive of revenue stamps. Inventories of leaf tobacco constitute about three-fourths of the Company's total assets. The Government continues to control the growing and marketing of flue-cured and Burley leaf tobaccos, the principal types used in making cigarettes. In the past two decades the yields per acre for these types of tobaccos have risen strikingly. Because of a large supply of flue-cured ~obacco, acreage allotments for 1957 have been reduced by 20% from the 1956 level. In addition, the Department of Agriculture has announced that price supports for the 1957 flue-cured crop will be adjusted to reflect demands for certain varieties and grades. Government support prices oa the 1956 flue-cured leaf crop averaged 48.9¢ per pound, about the same as in the previous year. Auction market prices for flue-cured leaf averaged 51.2¢ per pound, about 1¢ lower than in 1955. Government support prices on the 1956 Burley leaf crop averaged 48.1¢ per pound, nearly 2¢ higher than for the 1955 crop. Auction market prices for Burley leaf up to the end of the year, as reported by the Depart- ment of Agriculture, averaged 63.3¢ per pound, about 5¢ higher than the average for the comparable 1955 period. At the leaf tobacco auctions in 1956 your Company continued its practice o2 buying the better grades of tobacco, firm in the belief that "quality of product" is the best assurance for continued and increased acceptance of its produc~. This well-established policy is being followed in the procurement o2 tobaccos for the Company's newest product, H~T PARADE Filter Tip Cigarettes. Excise T~x ~ ~educ~on i~ the ~e~e~=~ exc~se t=x ~=te ~om eigh~ to seven cedis per p~c~ o~ twenL~ cigarettes w=s scheduled ~o~ ~p~fi I, 195~, 1955 ~nd 195~, but T!54210429

in each instance Congress continued the higher rate for an additional year. Indications are that, as recommended by the Treasury Department, the tax will be extended again for another year. As previously reported to stockholders, the return and deferred pay- ment system for tobacco excise taxes authorized by the Revenue Code of 1954 cannot become effective until the Secretary of the Treasury fixes the date of changeover. Beyond approving a daily return and payment system in connection with the manufacture of cigars, the Treasury Department has continued to defer action on this matter, claiming that the changeover would involve too great a revenue loss. In an effort to end this delay, your Company's representatives, and those of the other p_rineipal cigarette manu- facturers, last December submitted a Memorandum to the Excise Tax Subcommittee of the Committee on Ways and Means in support of a sug- gested form of bill to make the return and deferred payment system manda- tory. Recently the Subcommittee has recommended to the Ways and Means Committee that a return and deferred payment system be adopted for taxes on tobacco products on a semimonthly basis from August 1, 1958, to July 31, 1959, and on a monthly basis thereafter.. In its report, the-Su.beommittee expressed the view that its recommendations would meet the necessary fiscal requirements of the Government, further stating its belief that the tobacco industry is "entitled to definite assurance that a changeover to a return T!5421043O

system will occur at some specific time in the future." Up to the date of this letter no action has been taken on this recommendation. Capital Expenditures During the year expenditures totaling $6,356,000 were made for real estate, machinery, fixtures and equipment. A large portion of this expendi- ture was for improving and modernizing our cigarette-making equipment, including the addition of filter-tip attachments for the increased production of this type of cigarette and the installation of modern quality control devices used in the manufacture of cigarettes. A~ter considering additions and disposals during the~h~_y~a_r_~lLas changes in depreciation reserves, net real estate, machinery, fixtures, etc., increased from $49,057,512 at the end of 1955 to $51,398,692 at the end of 1956. Depreciation charged to cost and expense amounted to $3,677,569. Advertisin!7 ond Soles Promotion Your Company's advertising and sales promotion programs are being ex- panded along with the increase in the number of its major brands. All techniques are constantly being re-examined for possible improvements and economies. Advertising messages via television, radio, newspapers, magazines, billboards and other media emphasize the superior quality of the Company's products, while our Sales Organization maintains maximum distribution and reinforces the impact of advertising by direct sampling of consumers and by point-of-sale displays in retail outlets. In September, 1956, the Chief of Tobacco Tax Branch, Internal Revenue Service, announced that "It appears that the consumption of tobacco prod- ucts, particularly cigarettes, is no longer materially affected by the cancer reports of a year ago. Our collections for 1956 indicate a prosperous out- look for the tobucco industry as well as continued increases in Federal and State tobacco revenues, for the future." Although the publication of anti-cigarette reports continued, other statements issued by scientists reiterated the view that theories attempting to link smoking with lung cancer are speculative. Some of these statements pointed out the wide variation of lung cancer death rates between groups having similar rates of tobacco consumption. Others called attention to environmental factors other than cigarette smoking which appear likely to account for increased incidence. T154210431