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Liggett & Myers Tobacco Company Statement of Consolidated Earnings (for years ended December 31) Net Sales . 1963 $502,683,153 1962 $499,955,681 Other Earnings Interest and dividends received . Equity in net earnings of unconsolidated subsidiaries . . . . . . . . . . . Other . . . . . . . . . . . . . . Total Earnings . Costs and Expenses Cost of goods sold, selling, administrative, and general expenses . . . . . . . . Provision for depreciation . . . . . . . Interest and amortization on funded debt . Loss on conversion of foreign currency de- posits . . . . . . . . . . . . . Other . . . . . . . . . . . . . . Provision for federal income tax . Provision for state income and franchise taxes . . . . . . . . . . . . . Total Costs and Expenses . Net Earnings for the Year . . . . . . . . . Dividends on Preferred Stock . Net Earnings Applicable to Common Stock . 945,502 247,596 25,018 503,901,269 446,090,456 4,253,247 1,881,660 44,437 24,678,000 2,250,000 479,197,800 24,703,469 ;' 1 1,142,827 $ 23,560,642 801,644 220,828 251,449 501,229,602 440, 964, 796 4,081,438 2,034,941 427,049 20,548 25,948,000 2,342,000 475,818,772 25,410,830 1,163,232 $ 24,247,598 14 _ TIMN 446103

Consolidated ASSETS 1963 1962 Current Assets Cash (including negotiable time certificates of de- posit: 1963, $6,500,000; 1962, $7,000,000) . . Short-term commercial paper, at cost plus ac- crued interest . . . . . . . . . . . . Accounts receivable, customers . . . . . . Accounts receivable, others . . . . . . . . Leaf tobacco, at average cost . . . . . . . Manufactured stock and operating supplies, at average cost . . . . . . . . . . . . 15,883,235 5,991,875 23,309,412 1,119,015 281,943,344 30,877,420 $ 17,857,319 20,470,367 1,035,105 300,430,512 26,077,027 Total Current Assets . Property, Plant, and Equipment-at cost Land and buildings . . . . . . . . . . . Machinery and equipment . . . . . . . . Total . . . Less accumulated depreciation . . . . Net Property, Plant, and Equipment.. 359,124,301 20,958,788 64,671,438 85,630,226 52,242,051 33,388,175 365,870,330 20, 764,041 60,559,383 81,323,424 49,575,228 31,748,196 Other Assets Brands, trademarks, and good will ..... Investment in unconsolidated subsidiaries, at equity in net assets . . . . . . . . . . Investment in foreign tobacco companies, at cost Prepaid expenses and deferred charges .... 1 1,689,319 1,005,801 1,065,571 1 1,650,973 4,000 1,052,142 Total Other Assets . Total . 3,760,692 $396,273,168 2,707,116 $400,325,642 12 TIMN 446101

As a result of the forward-looking research at- titude of the past, the Company is especially well equipped to supply products that will meet the changing desires of the consuming public. The most recent of these products, the LARK cigarette, is en- joying excellent acceptance. The "great cigarette controversy" which is pres- ently occupying so much public attention begs for an answer. When this answer will be supplied is not known. The answer will not be generated from emo- tional argument nor enthusiastic dedication to a cause, but only from patient, competent research. Advertising and Marketing With filter cigarettes accounting for approxi- mately 60 per cent of the total cigarettes sold in the United States, the Company programmed its 1963 advertising and marketing plans accordingly, plac- ing even greater emphasis on the promotion of its principal filter brand, L & M, and the introduction of new LARK cigarettes. Throughout the year, L & M was advertised in all major media, and sales continued to react favorably to the promise that "When a cigarette means a lot ... you get Lots More from L & M." The TV and print situations used to illustrate this copy theme con- tinued to receive favorable comment from the trade and from consumers. LARK cigarettes first appeared in test markets in '10 March. Because of good initial reaction to the brand, LARK distribution was rapidly expanded to other areas with national distribution accomplished by mid-September. LARK, because of its demonstrably different 3-piece Keith filter and unusual "back of the pack" story, has relied heavily on the use of visual advertising. This included national and local television, daily newspapers, national magazines, and point-of-sale material for the effective display of the product from corner store to supermarket. In the non-filter field, the Company concentrated its advertising on the promotion of CHESTERFIELD KING. This advertising has stressed the fact that "CHESTERFIELD KING tastes great - Smokes mild-Because the tobaccos are grown mild, aged mild, blended mild, and made to taste even milder through longer length." Both CHESTERFIELD KING and regular-size CHESTERFIELD were strongly supported with display advertising at point of sale. The Sales Department has had good success in obtaining display of our brands in all types of ciga- rette outlets, including vending machines. To achieve greater effectiveness in food stores, which now account for a large percentage of sales especi- ally by the carton, the Company's Marketing Depart- ment has devised a program of mutual benefit to the participating stores and to our Company called the Holiday Ad Promotion. The Company's products re- ceive prominent display in these promotions. TIMN 446099 __ _

Liggett & Myers Tobacco Company alance Sheet as o f December 31 ,IASILITIES Current Liabilities Accounts payable . . . . . , , , , . , Dividend payable on preferred stock .... Accrued interest on debentures . . . . . . Funded debt payable within one year .... Taxes payable and accrued (less, for 1963, U. S. Government tax notes, $4,960,344) . . . . Total Current Liabilities. Funded Debt 25/a% sinking fund debentures, $23,750,000 pay- able in 1965, and $37,500,000 payable in 1966 1963 1 1962 4,058,353 284,009 535,938 5,750,000 17,789,115 28,417,415 61,250,000 $ 2,022,378 288,192 582,422 5,750,000 21,672,252 30,315,244 67,000,000 Reserve For deferred contingent compensation (net of estimated future income tax reductions) .. 225,561 246,806 Stockholders' Equity Preferred stock 7% cumulative, par value $100 - authorized, 341,398 shares; issued, 225,141 shares; in treasury, 1963, 62,850 shares, and 1962, 60,660 shares . . . . . . . . . . Common stock, par value $25 - authorized, 5,000,000 shares; issued 1963, 3,953,593 shares, and 1962, 3,951,363 shares (Note 1) .... Paid-in capital in excess of par values of capital stocks (Note 2) . . . . . . . . . . . Retained earnings (Note 3) . . . . . . . . Total Stockholders' Equity. . Total . 16,229,100 98,839,825 21,165,700 170,145,567 306,380,192 $396,273,168 16,448,100 98,784,075 21,070,828 166,460,589 302,763,592 $400,325,642 13 TIMN 446102

Liggett & Myers Tobacco Company Statement of Consolidated Retained Earnings ( f or years ended December 31) 1963 Balance at Beginning of Year . Add-Net earnings for the year Total . $166,460,589 24,703,469 191,164,058 1962 $162,215,224 25,410,830 187,626,054 Deduct Cash dividends of $7 per share on preferred stock . . . . . . . . . . . Cash dividends of $5 per share on common stock . . . . . . . . . . . . . 1,142,827 19,762,453 1,163,232 19, 755, 046 Total dividends . Excess of cost over par value of preferred stock reacquired . . . . . . . . . Total . . . . . . . . . . Balance at End of Year (Note 31. . 20,905,280 113,211 21,018,491 $170,145,567 NOTES TO FINANCIAL STATEMENTS December 31,1963 1. At January 1, 1963, there were outstanding options granted under the Incentive Stock Option Plan to officers and key employees to purchase, subject to certain limitations, 33,658 shares of the Company's common stock. During 1963, options for 2,230 shares were exercised for an aggregate option price of $150,622, and options for 1,500 shares were canceled. At December 31, 1963, op- tions were outstanding with respect to 29,928 shares having an aggregate option price of $2,264,- 938. In accordance with the Plan, option prices represent closing quoted market values of the shares on the dates the options were granted. 20,918,278 247,187 21,165,465 $166,460,589 2. Paid-in capital in excess of par values of capi- tal stocks increased in 1963 by $94,872, represent- ing the excess of sales price over par value of common stock sold to officers and employees under the Incentive Stock Option Plan. 3. Under the terms of the Indenture covering the 2;/a o sinking fund debentures, $65,746,318 of retained 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. 15 TIMN 446104

Disposition of Total Earnings for 1963 The Company received for goods sold to customers and from dividends and interest a total of $503,901,000. This is how it was used or set aside. 42.3% Federal and other excise taxes $213,046,000 Opinion o f Certi fied Public Accountants 34.1% Leaf tobacco, wages, other manufacturing costs, and freight $171,586,000 13.4% Selling, advertising, administrative, interest, and other expenses $67,638,000 5.3% Federal and state income and franchise taxes $26,928,000 4.1 % Dividends $20,905,000 0.8 % Earnings retained $3,798,000 HASKINS & SELLS CERTIFIED PUBLIC ACCOUNTANTS TWO BROADWAY NEW YORK 10004 To the Directors and Stockholders of Liggett & Myers Tobacco Company: We have examined the consolidated balance sheet of Liggett & Myers Tobacco Company and its wholly-owned consolidated subsidiary as of Decem- ber 31, 1963 and the related statements of consoli- dated earnings and retained earnings for the year then ended. Our examination was made in accord- ance with generally accepted auditing standards, and accordingly included such tests of the account- ing records and such other auditing procedures as we considered necessary in the circumstances. In our opinion, the accompanying consolidated balance sheet and statements of consolidated earn- ings and retained earnings present fairly the finan- cial position of the companies at December 31, 1963 and the results of their operations for the year then ended, in conformity with generally accepted ac- counting principles applied on a basis consistent with that of the preceding year. ~/r,¢~.s,srJ d ~cfiy January 24, 1964 11 TIMN 446100

Research The Research Department of Liggett & Myers has for the past year continued to pursue a balanced program of research in those phases of scientific en- deavor designed to ensure the successful operation of your Company, not only in the immediate future but also for years to come. This necessarily broad program encompasses re- search on essentially all of the tobacco business - ranging from the tobacco varieties planted on the farms to the kind of cigarettes that may be sold sev- eral years in the future. For many years, the Research Department has cooperated with both state and federal agricultural Equipment used to determine constituents existing, in small quantities, in smoke. research agencies in programs directed toward de- veloping the best tobacco varieties for the farmers to use in growing their crops. The department has emphasized studies of all available tobaccos and, in addition, has studied many of the manufacturing operations in order to produce the very best prod- ucts for the consumer in an efficient and economi- cal manner. The Company has also been concerned with the chemical composition of tobacco and tobacco smoke as well as the process of combustion of tobacco and the relationship of these to the biological activity of tobacco smoke in various test systems. 9 TIMN 446098

Liggett & Myers Tobacco Company Ten Years in Review (Dollars expressed in thousands except per share figures) OPERATING RESULTS Year Ended December 31 ear Earnings Net Before Sales Taxes Taxes on Income E Per Net Co arnings St Share of mmon Comm ock (a) Divide on Per nds Share Preferred Sinking Dividends Fund ($7 Per Earnings Require- Share) Retained ments 1963 $502,683 $51,631 $26,928 $ 24,703 , $ 5.96 $19,7 62 $5.00 $1,143 $ 3,798 $5,750 1962 499,956 53,701 28,290 25,411 6.14 19,7 55 5.00 1,163 4,493 5,750 1961 516,708 58,624 31,864 26,760 6.47 19,7 12 5.00 1,205 5,843 5,750 1960 543,173 62,713 34,004 28,709 6.96 19,6 86 5.00 1,301 7,722 5,750 1959 554,936 65,075 35,036 30,039 7.28 22,5 85 5.75 ( b) 1,430 6,024 5,750 1958 556,046 67,912 36,689 31,223 7.60 19,5 71 5.00 1,461 10,191 5,750 1957 570,385 61,895 33,621 28,274 6.85 19,5 64 5.00 1,461 7,249 5,750 1956 564,966 58,367 31,916 26,451 6.39 19,5 61 5.00 1,461 5,429 5,750 1955 546,965 56,678 29,957 26,721 6.46 15,6 46 4.00 1,461 9,614 2,000 1954 548,862 47,835 25,634 22,201 5.30 19,5 58 5.00 1,461 1,182 FINANCIAL POSITION (Year End) Book ear Value Plant and Per Current Working Equipment Total Funded Short-Term Stockholders' Common Inventories Assets Capital (Net) Assets Debt Debt (c) Equity Share (a) 1963 $312,821 $359,124 $330,707 $33,388 $396,273 $ 61,250 $ 5,750 $306,380 $73.39 1962 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 1954 423,439 459,146 330,112 28,692 491,309 113,000 97,220 249,275 58.39 (a) Based on number o f shares outstanding at end o f each year. (b) Commencing June 1, 1959, regular quarterly dividends of S1.25 per share have been paid. (c) Includes notes payable to banks and funded debt payable within one year. 16 TIMN 446105

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TIMN 446106