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Financial Review / 1964 Sales Net sales in 1964 totaled $502,666,055, compared with sales of $507,164,059 in 1963. Net sales by consolidated subsidiaries have been included in total 1963 and 1964 net sales. December sales by Allen Products Company, Inc., are included in 1964 net sales. Earnings Consolidated net earnings were approximately 6.2 per cent higher than in the previous year, amount- ing to $26,236,453 ($6.37 per share of common stock), as compared with $24,703,469 ($5.96 per share) for 1963. Earnings before income and fran- chise taxes were approximately equal for both years even though sales decreased slightly in 1964. The increase in net earnings can be attributed princi- pally to a reduction in Federal income taxes. Dividend Record Common stock dividends have been paid for fifty- three consecutive years, ever since the Company was incorporated in 1911. Common stock dividends in 1964 consisted of four quarterly payments of $1.25 each, a total of $5.00. Four quarterly dividends of $1.75 were distributed on preferred stock. There were approximately 47,000 stockholders at the end of the year. Total common and preferred dividends paid in 1964 amounted to $20,847,112. The balance of earn- ings retained for use in the business amounted to $5,389,341, compared with the $3,798,189 retained in 1963. A regular quarterly dividend of $1.25 per com- mon share was paid March 1, 1965. Financial Condition The Company's over-all financial condition con- tinues to be strong. Even though $23,750,000 of the 25/s per cent debentures become due in 1965 and are therefore included in current liabilities, the ratio of current assets to current liabilities is nevertheless 6.6 to 1. These maturities will probably be met from cash reserves. The remaining $37,500,000 of the 2'/s per cent debentures become due in 1966, and con- sideration is being given to the refinancing of these obligations. Further long-term financing may be utilized for cash acquisitions of businesses in con- nection with our expansion and diversification program. The Company reacquired 8,200 shares of noncall- able 7 per cent preferred stock during 1964, bringing the total number of preferred shares held in treas- ury to 71,050. It also purchased and holds in its treasury at December 31, 1964, 6,800 shares of com- mon stock. - -- , ~ ~~ o uce plicaticin arf Funds ~ =__ ~.~ °~ ear ended I2ecember 31, 1964, ~ ~S()~ TItCp QF FttNDS ~ $26,236,453 ~--=--- _`_ - ~ Capital Expenditures Capital expenditures during 1964 consisted chiefly of disbursements for machinery and equip- ment to modernize further the Company's factory operations and of amounts paid for manufacturing facilities of the Allen Products Company, Inc. These expenditures totaled $4,500,000, compared to $3,500,000 in 1963. Depreciation charges in 1964 aggregated $3,960,684, compared to $4,291,505 in 1963. No major capital expenditures are anticipated in the near future. ecx8tzutit= 3,960,684 r _ ' !ds from saTe of co mmon is_ued under stock op- 524 52U $6Q , , x m debt . .- 23,657,5oU ° easn~ssvsi anrl preferred GM* purchased and heItj in . - 288,421 ~-_--- - ..-- =~`. working capital _. 30,040,962 _ 1,821,9,~8 . -vestzrie Uapts,gau 9 TIlVIN 446076

Liggett & Myers Tobacco Company and Subsidiary Companies Highlights of Operations 1964 1963* Net sales . . . . . . . . . . . . $502,666,055 $507,164,059 Earnings before taxes . . . . . . . 52,131,616 51,969,983 Income and franchise taxes . . . . . 25,895,163 27,266,514 Net earnings . . . . . . . . . . 26,236,453 24,703,469 Percentage of net sales . . . . . . . 5.22% 4.87% Net earnings applicable to common stock $ 25,149,993 $ 23,560,642 Net earnings per share of common stock 6.37 5.96 Dividends per share of common stock . 5.00 5.00 Current as s ets . . . . . . . . . . 356,099,839 361,164,754 Current liabilities . . . . . . . . . 53,697,187 28,721,140 Ratio . . . . . . . . . . . . . 6.6 to 1 12.6 to 1 Long-term debt . . . . . . . . . $ 37,592,500 $ 61,250,000 Stockholders' equity Preferred stock . . . . . . . . 15,409,100 16,229,100 Common stock . . . . . . . . 294,824,928 290,151,092 Per share of common stock ... 74.62 73.39 Approximate number of stockholders . 47,000 50,000 mi//ions 600 *Amounts for 1963 have been restated as explained in Note 1 to Financial Statements. 10 500 400 300 200 100 Net Sales TIMN 446077

Disposition of Total Earnings for 1964 The Company received for goods sold to customers and from dividends and interest a total of $504,216,000. This is how it was used or set aside. 34.6% Leaf tobacco, wages, other manufacturing costs, and freight $174,395,000 41.6% Federal and other excise taxes $209,502,000 5.1% Federal and state income and franchise taxes $25,895,000 13.5% Selling, advertising, administrative, interest, and other expenses $68,188,000 Net Worth Compared With Long-Term Debt '58 '59 '60 '61 '62 '63 '64 millions 70- 60 50 40 30 20 10 Taxes Federal and state income ~ and tranchise taxes Net income after taxes '58 '59 '60 '61 '62 '63' '64 11

Consolidated ASSETS 1964 1963 (Note 1) CURRENT ASSETS Cash (including negotiable time certificates of de- posit: 1964, $9,499,440; 1963, $6,500,000) . . $ 16,087,806 $ 16,144,231 Marketable securities, at cost which approxi- mates market value . . . . . . . . . . 13,778,619 6,591,875 Accounts receivable, customers 26,565,170 23,444,580 Accounts receivable, others . . 1,301,858 1,132,640 Leaf tobacco, at average cost . 264,643,678 282,625,370 Manufactured stock, operating supplies, etc., gen- erally at average cost . . . . . . . . . 33,722,708 31,226,058 TOTAL CURRENT ASSETS ...... 356,099,839 361,164,754 PROPERTY, PLANT, AND EQUIPMENT-AT COST Land and buildings . . . . . . . . . . . 22,723,618 21,553,302 Machinery and equipment . . . . . . . . 68,094,767 65,435,276 Total . . . . . . . . . . . . . 90,818,385 86,988,578 Less accumulated depreciation . . . . 56,722,615 53,244,343 NET PROPERTY, PLANT, AND EQUIPMENT 34,095,770 33,744,235 OTHER ASSETS Goodwill, brands, and trademarks (Note 2) .. 9,168,429 1 Investments in foreign tobacco r;ompanies, at cost 1,005,801 1,005,801 Prepaid expenses and deferred c.h,ir.;es .. . 1,270,677 1,073,043 TOTAL OTHER ASSETS. 11,444,907 2,078,845 TOTAL. . $401,640,516 $396,987,834 See Notes to Financial Statements. 12 TIMN 446079

Liggett & Myers Tobacco Company and Subsidiary Companies Balance Sheet as o f December 31 LIABILITIES 1964 1963 CURRENT LIABILITIES Accounts payable . . . . . . . . $ 6,394,958 (Note 1) $ 4,068,740 Dividends payable on preferred stock 269,659 284,009 Accrued interest on long-term debt . 489,453 535,938 Portion of long-term debt due within one year . 23,769,000 5,750,000 Taxes payable and accrued (less, for 1963, U.S. Government tax notes, $4,960,344) . . . . . 22,774,117 18,082,453 TOTAL CURRENT LIABILITIES . . . . 53,697,187 28,721,140 OTHER LIABILITIES Long-term debt 25/s% sinking fund debentures, payable in 1966 . . . . . . . . . . . . . 7,500,000 1,250,000 Other . . . . . . . . . . . . . . 92,500 - Deferred compensation (net of estimated future income tax reductions) . . . . . . . . 116,801 225,561 TOTAL OTHER LIABILITIES . . . . . 37,709,301 61,475,561 MINORITY STOCKHOLDERS' INTEREST IN A SUBSIDIARY COMPANY (Note 2) . . . . . . . - 410,941 STOCKHOLDERS' EQUITY Preferred stock 7% cumulative, par value $100 - authorized, 341,938 shares; issued, 225,141 shares; in treasury, 1964, 71,050 shares, and 1963, 62,850 shares . . . . . . . . . . 5,409,100 6,229,100 Common stock, par value $25 - authorized, 5,000,000 shares; issued, 1964, 3,957,813 shares, and 1963, 3,953,593 shares (Note 3) .... 98,945,325 98,839,825 Paid-in capital in excess of par values of capital stocks (Note 4) . . . . . . . . . . . 21,346,621 21,165,700 Retained earnings (Note 5) . . . . . . . . 175,101,527 170,145,567 Total . . . . . . . . . . . . . 310,802,573 306,380,192 Less cost of 6,800 shares of common stock in treasury . . . 568,545 TOTAL STOCKHOLDERS' EQUITY . . . 310,234,028 306,380,192 TOTAL . . $401,640,516 $396,987,834 See Notes to Financial Statements. 13

Liggett & Myers Tobacco Company and Subsidiary Companies t i Statement of Consolidated Earnings and Retained Earnings for years ended December 31 1964 1963 (Note 1) NET SALES . . . . . . . . . . . . . . . . . . $502,666,055 $507,164,059 OTHER EARNINGS Interest and dividends . . . . . . . . . . . , 1,293,345 899,366 Other . . . . . . . . . . . . . . . . . . 256,343 46,529 TOTAL EARNINGS . . . . . . . . . . , 504,215,743 508,109,954 COSTS AND EXPENSES Cost of goods sold . . . . . . . . . . . . . . 383,896,796 385,092,969 Selling, administrative, and general expenses .... 66,344,404 69,058,590 Interest on long-term debt . . . . . . . . . . . 1,729,002 1,881,660 Equity of minority stockholders in net earnings of a sub- sidiary . . . . . . . . . . . . . . . . . 102,193 73,709 Other . . . . . . . . . . . . . . . . . . 11,732 33,043 Provision for Federal income tax . 23,632,071 25,016,514 Provision for state income and franchise taxes .... 2,263,092 2,250,000 TOTAL COSTS AND EXPENSES ....... 477,979,290 483,406,485 NET EARNINGS FOR THE YEAR . . . . . . . . . . . 26,236,453 24,703,469 RETAINED EARNINGS AT BEGINNING OF YEAR ..... 170,145,567 166,460,589 TOTAL . . . . . . . . . . . . . . . 196,382,020 191,164,058 DEDUCT Cash dividends of $7 per share on preferred stock ... 1,086,460 1,142,827 Cash dividends of $5 per share on common stock ... 19,760,652 19, 762,453 Total dividends . . . . . . . . . . . . 20,847,112 20,905,280 Excess of cost over par value of preferred stock reac- quired . . . . . . . . . . . . . . . . 433,381 113,211 TOTAL . . . . . . . . . . . . . . . 21,280,493 21,018,491 RETAINED EARNINGS AT END OF YEAR (Note 5) . . . . $175,101,527 $170,145,567 Depreciation provided and charged to costs and expenses amounted to $3,960,684 in 1964 and $4,291,505 in 1963. See Notes to Financial Statements. 14 TIMN 446081

NOTES TO FINANCIAL STATEMENTS December 31, 1964 1. Effective as of January 1, 1964, the Company adopted the policy of including all subsidiary com- panies in the consolidated financial statements. Since the Company previously followed the practice of re- flecting in earnings the Company's equity in the net earnings of unconsolidated subsidiaries, the change in consolidation policy had no effect upon consoli- dated net earnings for 1964 or consolidated retained earnings as of December_ 31, 1964. For comparative purposes, the consolidated financial statements for 1963 have been restated to include therein the two previously unconsolidated subsidiaries. 2. In November, 1964, the Company purchased all of the outstanding capital stock of Allen Products Com- pany, Inc., and the accounts of that company and its wholly-owned subsidiaries have been included in the consolidated financial statements since December 1, 1964. In December, 1964, the Company also acquired the minority stockholders' interest in a subsidiary company. The excess of the purchase price of the securities acquired over the underlying net book value has been included in "Goodwill, brands, and trademarks." 3. At January 1, 1964, there were outstanding options granted under the Incentive Stock Option Plan to offi- cers and key employees to purchase, subject to certain limitations, 29,928 shares of the Company's common stock. During 1964, options for 4,220 shares were exercised for an aggregate option price of $286,- 421, and options for 1,450 shares were canceled. At December 31, 1964, options were outstanding with respect to 24,258 shares having an aggregate option price of $1,858,135. In accordance with the Plan, op- tion prices represent closing quoted market values of the shares on the dates the options were granted. 4. Paid-in capital in excess of par values of capital stocks increased in 1964 by $180,921, representing the excess of sales price over par value of common stock sold to officers and key employees under the Incentive Stock Option Plan. 5. Under the terms of the Indenture covering the 25/s% sinking fund debentures, $68,037,846 of re- tained earnings is restricted as to payment of cash dividends on common stock. This limitation does not apply to stock dividends on common stock, nor does it restrict payment of dividends on preferred stock. 6. A deferred Profit Sharing Plan, and amendments to the Employees' Retirement Plan, as approved by the stockholders at the annual meeting on March 31, 1964, became effective as of January 1, 1964. Con- tributions under the Profit Sharing Plan, which are based upon annual earnings, are made to a trust fund for the benefit of all regular full-time employees of the Company who have completed thirty-six months of continuous service. The amendments to the re- tirement plan provided principally for reductions in benefits as a result of increases in Social Security benefits since the retirement plan was originally adopted. Amounts provided by charges to earnings in 1964 for the Profit Sharing and Employees' Retire- ment plans were $1,879,832 and $1,577,818, respec- tively, or a total of $3,457,650. The provision for the Employees' Retirement Plan charged to earnings in 1963 amounted to $2,888,105. Opinion of Certified Public Accountants HASKINS & SELLS CERTIFIED PUBLIC ACCOUNTANTS TWO BROADWAY NEW YORK 10004 To the Directors and Stockholders o f Liggett & Myers Tobacco Company: We have examined the consolidated balance sheet of Liggett & Myers Tobacco Company and its subsidiaries as of December 31, 1964 and the related statement of consolidated earnings and retained earnings for the year then ended. Our examination was made in accordance with generally accepted auditing standards, and accordingly included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances. In our opinion, the accompanying consolidated balance sheet and statement of consolidated earnings and retained earnings present fairly the financial position of the companies at December 31, 1964 and the results of their operations for the year then ended, in conformity with generally accepted accounting principles applied on a basis consistent with that of the preceding year (after revision of the financial statements for that year as explained in Note 1). February 1, 1965 15 TIMN 446082

Liggett & Myers Tobacco Company and Subsidiary Companies Ten Years in Review Dollars expressed in thousands except per share figures OPERATING RESULTS Year Ended December 31 ear Net Sales Earnings Before Taxes Taxes on Income Net Earnings Per Share of Common Stock (b) Common Dividends Per Share - Preferred Dividends ($7 Per Share) Earnings Retained Sinking Fund Require- ments 1964 $502,666 $52,132 $25,895 $26,236 $6.37 $19,761 $5.00 $1,086 $ 5,389 $5,750 1963 507,164 51,970 27,267 24,703 5.96 19,762 5.00 1,143 3,798 5,750 1962(a) 499,956 53,701 28,290 25,411 6.14 19,755 5.00 1,163 4,493 5,750 1961 516,708 58,624 31,864 26,760 6.47 19,712 5.00 1,205 5,843 5,750 1960 543,173 62,713 34,004 28,709 6.96 19,686 5.00 1,301 7,722 5,750 1959 554,936 65,075 35,036 30,039 7.28 22,585 5.75(c) 1,430 6,024 5,750 1958 556,046 67,912 36,689 31,223 7.60 19,571 5.00 1,461 10,191 5,750 1957 570,385 61,895 33,621 28,274 6.85 19,564 5.00 1,461 7,249 5,750 1956 564,966 58,367 31,916 26,451 6.39 19,561 5.00 1,461 5,429 5,750 1955 546,965 56,678 29,957 26,721 6.46 15,646 4.00 1,461 9,614 2,000 FINANCIAL POSITION Year End ear nventories urr,ent Assets orking Capital Plant and Equipment (Net) otal Assets ong-Term Debt hort-Term Debt (d) tockholders' Equity Book Value Per Common Share (b) 1964 $298,366 $356,100 $302,403 $34,096 $401,641 $ 37,593 $23,769 $310,234 $74.62 1963 313,851 361,165 332,444 33,744 396,988 61,250 5,750 306,380 73.39 1962(a) 326,508 365,870 335,555 31,748 400,326 67,000 5,750 302,764 72.46 1961 331,145 367,929 334,920 33,138 404,903 72,750 5,750 298,887 71.39 1960 314,413 354,846 333,383 35,122 393,080 78,500 5,750 292,868 69.83 1959 330,394 365,064 332,157 36,201 404,391 84,250 5,750 287,234 68.08 1958 341,318 369,974 333,054 35,582 409,103 90,000 7,456 282,182 66.70 1957 381,029 416,458 327,417 36,215 456,440 95,750 59,060 271,649 64.09 1956 409,071 444,693 .328,922 33,667 481,671 101,500 83,750 264,400 62.24 1955 389,014 425,252 332,798 30,634 458,592 107,250 57,750 258,888 60.85 (a) Amounts stated for 1962 and prior years are as previously rep(irtrel tu titockholders and do not include two subsidiaries which were not consolidated in those years. (b) Based on number of shares outstanding at end of each yenr. (c) Commencing June 1, 1959, regular quarterly dividends of S1.^_S per shnre hnt•e been paid. (d) Includes notes payable to banks and long-term debt payable within one year. TIMN 446083 16 PRINTED IN U.S.A.

Liggett & Myers Tobacco Company Executive Personnel Following the sudden death on July 9, 1964, of Zach Toms, then serving as Chairman of the Board and Chief Execu- tive Officer, Milton E. Harrington, who had been elected President on April 1, 1964, was elected Chief Executive Officer on July 14, 1964, to succeed Mr. Toms. At the same time, Ralph P. Moore, Treasurer, was elected a member of the Board of Directors to fill the vacancy caused by the death of Mr.Toms. - -" On April 1, 1964, j Bowling Anderson and Loy D. Thompson were elected Senior Vice-Presidents, and Jonathan W. Old, Jr., was elected a Vice-President. On July 31, 1964, Dr. Frederick R. Dar- kis, Vice-President and Director of Re- search, retired in accordance with the Company's Retirement Plan. Dr. William W. Bates, Jr., was elected Director of Re- search and a member of the Board of Directors to succeed Dr. Darkis. On August 20,1964, R. Haywood Hosea was elected Comptroller. Officers MILTON E. HARRINGTON President, Chie f Executive O fficer, and Chairman Executive Committee J. BOWLING ANDERSON Senior Vice-President, Finance LOY D. THOMPSON Senior Vice-President, Manufacturing and Leaf LAWRENCE W. BRUFF Vice-President, Advertising FRANCIS H. HORAN Vice-President and General Counsel GRAYDON B. LEAKE Vice-President, Domestic Sales JONATHAN W. OLD, JR. Vice-President, Assistant to the President EDWARD J. PARRISH Vice-President, Export Sales SAMUEL WHITE Vice-President, Marketing RALPH P. MOORE Treasurer RUSSELL M. CHENOWETH Secretary R. HAYWOOD HOSEA Comptroller RUSSELL G. CUTTER Auditor JAMES J. MORAN Assistant Treasurer and Assistant Secretary ERNEST W. BALDASSARE Assistant Treasurer CHARLES B. MORGENTHALER Assistant Secretary DONALD G. NYREEN Assistant Secretary JOSEPH F. TAYLOR Assistant Secretary Directors J. BOWLING ANDERSON WILLIAM W. BATES, JR. WILLIAM A. BLOUNT LAWRENCE W. BRUFF MILTON E. HARRINGTON FRANCIS H. HORAN GRAYDON B. LEAKE HOWARD W. McCALL, JR. C. GRICE McMULLAN RALPH P. MOORE JONATHAN W. OLD, JR. EDWARD J. PARRISH FREDERICK SHEFFIELD FRANK TALBOTT, JR. LOY D. THOMPSON SAMUEL WHITE Transfer Agent: Chemical Bank New York Trust Co. 20 Pine Street, New York, N.Y. 10015 Registrar: First National City Bank 55 Waii Street, New York, N.Y. 10015 TIMN 446084

Liggett & Myers Tobacco Company Annual Report 1964 TIMN 446085