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filtez~' market as, a whole; as indicated byindependent estimates. This per- formancewas encouraging in view of the introduction of additional com- petitive filter brands. Your llianagement recognizes the, desirability of increasing our per- centage ofthegrowing filter cigarette market; a number of ways and means to this end~ are now in progress. Last year your Company's cigar brands showed a small'i decrease from their 1956 unit volume. In the d'ornestic field, EL Roi-TAN continued as America's largest-selling 10~ cigar. In the clear Havana field, LA CoRo;vA, ANTONIO 1CLroPATRA and BocK continued to comprise the largest-selling Bonded~ ClearHiavana~line.YourCompany:continued! to add new shapes and new packings t& its cigar linesini 1957; further improvements in these directions, as«-.e12 as improvements in, manufacturing, techniques„ are an- ticipated in 1955. The latest U. S. Government figures, available for 1957indicate that industry sales of smoking and chewing tobaccos, continued to decline as theyhaveforsevera1 years. However, your Company's principal smoking tobaccobrands-H ALF' AND HALF and "BULL"DuRxAmi-showed increases, inunit volume during 1057. Price increases on your Company's smoking tobaccos permitted realization of a more nearly normal profit margin in the face of rising costs. 700 0 1948~ 1949 1950 1951 1952 1953~ 1954 1955 1956' 199'

Earnings In 1957, for the third consecutive year, net income rose to a new record: level, being, $57,094,650 compared; with S51I,688,800 in 19-06. This repre- sents an increase of 10.46;c over 1956. Net imcome per Common share in 1957 amounted to 58.28 compared with S7.45 in 1950. Taxes on income amounted to 59.44 per Common share. Dividends During 1957 dividlends,of j5.00pershare«-.ere paid on the Common stock, consisting of four regular quarterly dividendsof $1.00~ each and an extra dividend of $1.00. On January 28, 190-8, your Directors votedl the 210th dividend on the Common stock of your Comhany, consisting of theregulai• dividend of Sl!.00 per shareand, in ad~dition, an extra dividend of $1.001 per share. This maikes a total, dividend of $2.00 per share payable on 1'Iarch, 1, 11958, to stockholders of record February 10, 1i958'. Dividends have been haidoni the Common stock every year since 11904. MILUaNS OF DOLLARS 120 110 100 90 80 70 60 50 40 30 20 lo 0 1948 1949 1950 1951 • I klu d h 01 ii w ho lyvwn ed s u bs I d 1 a n ee 1952 1953~ 1954 1955 1956' 195T INCOME BEFORE TAXES, a TAXES AND NET INCOME 11

Consolidation of Subsidiaries The Company has adopted thepoliicyof including all wholly-owned sutb- sidiailries in i~tsfinancial statements, and theref.©rethefhnanciiail statements for J. Wix ~,~ S'onsLimited~ and The American Tobacco Company of theOriient„ Inc., both, «hoi1y-o«-nedl subsi~diaries, have beeni consolidated with those of the parent compan5. The financial statements for. 1956, wherever they appear in this relaort,, have,been revised for cornparativepurposes. J. Wix &Sons, Limited is, an English cigarette manufacturer, its principal brands being KENSITAS Extra Size and hEtisITAs Filter Tip Cigarettes, Thisnewl.y-consolidated subsidiary accounted for alapi-otiimately 1r-ofnet incomefor1957. The, American Tobacco Cbmpany of the Orient, Inc., is a leaf-buyingsubsidiar5=whicli purchases tobacco for the Comhanyin Turkey and other Middle Eastern markets. Finances Cashi on hand and ini banks at the year end was S22,07 1,526 compared! with $23,418,021 at the end of 1956. Notes payable to banks at December 31., 1957, were $92,350;0000 compared «-ith, S80„000,000 at the end of 1956. The increase in notes payable to banks, was accompamied by an increase ini MILLIONS OF DOLLARS NET INCOME, DIVIDENDS AND INCOME REINVESTED •10cIAK altw~o!y-,owned ~subveibna. III

leaf tobacco, manufacturedl stockl, operating supplies, etc., of$1(i,`?G4,950. Funded debt was reduced~ by $13,813,000, representing debentures retired through theoperaition of the Sinking Funds~ Such retirement of debentures and the retention of earnings against future needs have con- tinued to irnprove the relationship betweeni funded debt and net worth. This improvement is evidenced by the fact that at the year end fund'ed debt was on1y3V' of net «-orth,, «liilea~tDecember 31, 1948, funded debt was 88';-'c of net worth. On August 7, 1957, an increase of 211 in the prime commercia1', in- terest rate occurred, thus raising theratefrom 41/-'c to, 4 i~;; ;'o, which latter ratewas, reduced again to 4 ~~ during the last half of January 1958. Theprimecomrnercialrateis the rate extended to: borrowers with the best credit ratings. It is ahpropriatetopoint out here that approsimatel,y $1190: millhoni of the funds originally obtained through the saleofdebenturesiscurrentlly~ -beingused in our business at an a~.erageinterest cost slightly in excess of 3~ ,,. This isparticularlyworthyof note in view of the higher prime commercial rates mentioned above. Ini the absence of unusuall developments, youri1Tanagement does not anticipate any need fornewf7nancingin the foreseeable future. Leaf Tobacco Your Management belien-estha.~t, in~ the long run, quality determines the success of any product„ and cigarettes are no exception to this rule. Accord- ingly, your Company continues to, follow its, long-establlished policyrofpur- chasing, the better grades, of tobacco in the firm belief that "Quality of prodtct is,essential to continuing success." Government acreage restrictions and price supports, for flue-cured and Burleytobaccos, were again in effect during 1957. The production offlue- cured tobacco, partlybecauseofa`?0 ;"r reduction in acreage allotments and unfavorable weather conditions; was approximately 31 r(less than in 1I956', and the lowest since 1943.HoWever, carry-oti-er of Iprevious years' crops was at ane«-. peak, so that total supplies «-ereadequate, although down 5"',~from 11156. Acreage,allotments for 1958 are practically the same as for 1957. The auction prices for all types of flue-cured tobacco during; the 1957 season averaged 55~herpound, about 71~ higherthan~ in 1956 and a new lril,h for this type of leaf. The averaigeGovernment support price for the1957 flue-cured cropiwas5©_8(cornpared with 48.9~ini 1956. As of the end of the year neariyall, of the Burley crop had been sold at auction. Production, of this typeof tobacc& was about 31' below 1956. 7

Support prices for the 1957 Burley crop averaged 51.7~ compared with48.1~ in 1956. However, the average of auction market prices through the end of theyear forth2s type of'lleaf was 61.5y; about 26' lower than the average for the comparable period' in 1956. During the pre-auction season your Company took advantage of the opportunity to buy additional quantities ofhigh-qualit'y leaf tobacco~ at advantageous prices. Theseadditionall purchases are reflected in slightly higher leaf tobacco inventories at the end of the year. Excise Tax On June 20, 1957, the House of Representatives passed a comprehensive eticise, tasbi11 (I H. R. 7125)l incorporating as urged bvthe cigarette manu- facturers, a mandatory deferred payment and return system for tobacco; exciseta_Yes. The billl provides for a return system of tax payment on tobacco products with a prescribed periiod~ of not less than seven days, be- ginning not later than August 4, 1958, and is, awaiting considera~tion by the Senate Finance Committee. Capital Expenditures Capital expenditures during1957 were somewhat higher than they have been for the past several years, totaling$10,3'?9;000. The largest single 11, NET WORTH COMPARED WITH LONG-TERM DEBT 1948 1949 1950, 1951 1951 1953 1954 1955 1936' 1951' 9rldudesall hollyawned suCisidaneS 8

expenditure was forquality--control equipment of the most modern type, designed to maintain utn2formityand consistent high qualituin the: produc- tion of our cigarette brands. Net real estate, machinery, filtures, etc., increased fromi $52;216,2811 at the end of 19561toS5S;154,1i75 at the end of 19:57. Depreciation charged tolcost and expense amounted to $4,194, 785. Advertising and Sales Promotion As the! number of actively promoted~ cigarett'e brands has increased, our advertising and sales, promotioni efforts have also, increased in order to help the Cbmlpany's brands to compete effectively. Advertising campaigns vial magazines, newspapers, radi'o and television, car cards, billboards and other media are under continuail study and review, with the! object of reaching the smoking public with our sales messag~es as effectively and ecconomicall~~-~ as possible. Our Sales Organization supplements these media schedules by supply- ing, merchandising aids to retail outlets, by direct sa7npling of consumers in the field, and by securing wide distribution for our brands. Your Com- pany's Sales Organization h~als:been st'rengthened in recent years not only in; number but in the variety of techniques, and materials used for sales promotion at the retail level. Smoking and Health Siince, my last report, anti-cigarette charges and publicity attending them have continued, chieflY under the same kinds of auspices and liargelY repeti- tive. However, during the past year the views, of reputable scientists who hold that these charges are unsubstantiated'i have attained wider public notice. TJie statistics on wliich cv)•?•erzt a0i-eidarette, cltarges are based Izare been, challeaged on many droeoids by bndepe)ide?it scientists. Stzch possible~~. factors in lhzng cancer as, constilttntional predisposition, previous, medical hietory and various influences characteristic of today's urban environment seem to have been ignored. For example, a British statistical study showed a lung, cancer rate nine times as gr eat in cities as in rural areas among men who did not smoke. An internationiallti- known Cambridge University scientist recently stated! that the evidence against smoking~ is inconclusive, and that associa- tion is not causation. A University of Southern California hrofe~sor of 9

surgery ;who is als& a member of the American Cancer Society's National Board of Directors, testified at a Congressional committee heari~ng that a review of the total evidence fails to establish a cause:and effect relationship, that the urban-rural difference in lung cancer incidence, is not consistent with: the cigarette theory, and that there is considerable doubt whether the incidence of lung cancer is actually increasing. It seems significant that in 1955 (latest report available) lung cancer accounted for less than three per cent of all deaths among U. S. adult males, although the Census Bureau estimates, that half of all U. S. adult males are cigarette smokers. •~ Direct evideazee~ r~efztit~ing mzti-cigarette clzarges is 8egin~iixag~ to come to l iglzt. Such evidence was reported last November to the Southern MedicaI Association by H. B. Haag, M.U., Professor of Pharmacolbgy, lledicali College of Virginia, and H. R'. Hianmer, Research Director of The American Tobacco Company. Their findings were based on independent scientific studies covering the smoking, habits and mortality rates of permanent employees in nine of The American, Tobacco Company's plants. The mor- tality figures represent more than 115,000 person-years over a period of 10',4 years. These emplby-ees, smoke far more cigarettes than the general U. S. population, alhnost twice the average rate; d'efinitely live longer than aver- age; andl show average or lower-than-average death! rates for cancer or lung, cancer, for cardiovascular and coronary disease. The basic findings as to mortality rates of these employees for 1946- 19~52 were made by Drs. Hi. F. Dorn and W. S. Baum of the Ul. S. Public Health Service, which, through the Nationall Cancer Institute, hadl asked the Company's cooperation in~ permitting themi to do the research. The Dorn-Baum mor talit'y findings were supplemented and confirmed! by Haag and Hanmer for 1903-1956. Smoking habits were measured by the Institute of Statistics of the University of North Carolina. As Ha~ag and Hanmer pointed out, these studies involved no estimates or sampling errors and result in a finding, at variance «ith; previous statistical studies such a~s those of Hammond, and Horn used in the current anti-cigarette carnpaign. The authors concl'ude :"The existence of such ai population makes it evident that cigairette smoking per se is not necessarilly or invariably asso- ciated with a higher risk of lung cancer or cardiovascular diseases or with diminished longevity-." 10

Personnel Mr. John S. Dowd retired' on January 31„ 1958 from his duties asa Director of The American Tobacco Company and Executive Vice President of our principal leaf-buying subsidiary, American Suppliers, Incorporated. Mr. Dowd! served! the Company faithfully and well formore than half a century, and for the last twenty-five years was directly responsible for the main- tenance of our highi standards of leaf purchasing, in the western tobacco: regions. TheDirectors, gratefully acknowledge his, long and loyal service to our organization. Amendments to Article XII of the By-Laws effective January 1, 1957,. made by theBoardof Directors pr ovidefor the exclusion from net profits earned by the Company on which incentive compensation is based under Article XII of all gain in excess of loss (net of Federal tax applicable thereto ) resulting from sales or otherdispositiions, of land, buildings, good will, brands, trade-marks and investrnentsinsubsidiaries or othez~~corn- panies, and also provide for J. W'i1&-; Sons Limited (which is now a con- solidated~ subsidiaryll to be treated as if it had continued to be an un- consolidated subsidiary for the purpose of det'erminingsuch net profits. Stockholders' Annual Meeting The Annual Meeting of Stockholders will be held on Wednesday, April 2, 1958. Formal notice of this meeting„ together with~ the proxy and proxy statement, is enclosed with this, report. Before closing thislet'ter I shouldl like to acknowledge the manycom- munications we have received from our stockholders durimg the year. Weare especially grateful for the st'ockholders'cont'inued loyalty to theCom- pany'spi-oducts and for their efforts to promote our brands. On behalf of the Board of Directors, I am, pleased to express our appreciation for thecooheration of our customers and the loyal service rendered by ourempioyees. PAUL 'Ml. HAHN; Preside?tt 11

1957 OPERATIONS AT A GLANCE The Company received for goods it sold and' from dividends, interest and miscellaneous $1,098,990,000 Ax 6_~5 52.5% 23.9% 17.5% Taxes (excise, income, social security, ett.) $576,355,000 ~-. -, Tobacco (including applicable expenses) $262,870,000 .9% 1.9% 3.3% F 5 6 7 a IJ 14 Earnings Retained to Meet Future Needs $21,365,000 ;~- --- t~ Dividends to Stockholders $35,730,000 Bond~and Bank Interest Wages, Goods, Services, etc. 12 $9,981,000 $192,689,000

... s ~.. ...a~ ...+. a . ? w For Years Ended December 31 NET SALES . . . . . . . . . . . Cost of sales, selling, general and administrative expenses . . . . . . . . . . . . OPERATING PROFIT . . . Other income . . . . . Interest and related charges Other deductions fromi income Total deductions Income, before taxes on income . . . Fedbral and other taxes on income . NET INCOME . . . . . . . . . . . . . Retained earnings, beginning of year (includes De- cember 31,, 1955, retaiined earnings of previously unconsolidated subsidiaries, $3,809,529) . . . Cash dividendt:: Common stock, $5 per share Preferred stock, $6 per share Totall dividends . Retained earnings, end of year (Note 2) Depreciation provided and charged to costs and expenses amounted to,$a,194,785 in 11957 and $3i807,255 ini 1956. (J~~t['i. ci~iLC2ceXL7L C/UT-'~Q~G~'m,p.lL U. 1957 $1,098,092,746 969,805,141 128,287,605 897,225 129,184,830 9,980;877 599,303 10,580,180 118,604,6501 61,510,000 57,094,650 182,813,131 239,907,781! 32,562,6101 3,166,986 - - 35,729,596 $ 204,178,185 1956 $1,09'1,206,3!58 971,167.607 120,038,7511 93'5.056 120;973,807 9,134,971 487,036 9,622,007 111,351,800 59,663,000 51,688,800 166,853,9272'18! 542,727 32,562,610 3,166,9861 35,729,596 $ 182,813,131 13