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Special marketing programs have been developed and employed to promote sales with several different and impor- tant segments of the trade, including a national college pro- gram, a supermarket merchandising program and others. All of these special programs are supported with appropriate advertising and with extra promotion effort by the Sales Department. In addition, distribution in vending machines has been given special attention resulting in improved sales through these outlets. Disposition of Total Earnings for 1962 The Company received for goods sold to customers and from dividends and interest a total of $501,230,000. This is how it was used or set aside. t-~ 42.3% Federal and other excise taxes 4 $212,209,000 34.2% iloaf tobaoco, "ges, other manufacturing-casts_and freight S171,643,000" ~-- 12.7% Selling, advertising, administrative, interest and other expenses $63,677,000 5.7% Federal and State Income and franchise taxes $28,290,000 \ 4.2% Dividends $20,918,000 14 TIMN 446123

KING tastes great because the tobaccos are." In the latter part of 1962, the CHESTERFIELD KING carton was attractively rede- signed to emphasize "KING" and to distinguish it from the regular CHESTERFIELD carton. In addition to national magazines, all other major media are used to convey sales messages to the consumers' atten- tion, including newspapers, Sunday supplements, network and spot television, radio, outdoor billboards and transporta- tion posters. Through the efforts of our Sales Department, point-of-sale posters, signs and displays are placed at im- portant outlets where cigarettes are sold. In television the Company's brands are represented in pro- grams designed to reach all types of adult viewers. Included are highly successful dramatic shows such as "Dr. Kildare" and "The Virginian"; musical variety, "The Andy tiVilliams Show" and Johnny Carson's "Tonight"; comedy, "Ensign O'Toole"; and three special features which have received wide press acclaim, "The River Nile," "Shakespeare: Soul of an Age," and "The Polaris Submarine." ~ more body in the blend mote f!awr in the smoke ~-~ more teste chrough the filter 4'. We rtri-E.rer IeJ W.t dep itl L3M hu more neY.e..or kJ W.n e.en wme ue6ltueJ ci6.rtttnAM LbM1 Ntnl. tke..den /Hx -.ff vMU-inride.od w.ude-w ady pun vhi.. wushn yew 4p. LlYY uLN~rn6./^cPwW vAe.eapY Gt. a.mol.. 2! Crat To6ume ®ake 20 Wonderfnl 5®u!cn! CFEST£AFIFl.D KING wio.rn...moYe. _M. Ynu... n rm~... wW<.>.~e.n mM....d mJd .d MwdM m~W. T..tn vca...ek<..ild.., kcc.... Ik, l.k........1 TIMN 446122 13

Liggett & Myers Tobacco Company flance Sheet as of December 31 abilities CURRENT LIABILITIES: Accounts payable . . . . . . . . . . . . . Dividend payable on preferred stock ...... Accrued interest on debentures . . . . . . . . . Funded debt payable within one year ...... Taxes payable and accrued . . . . . . . . . . . TOTAL CURIiENT LIABILITIES . . . . . . . FUNDED DEBT: 25/ °Jo Sinking Fund Debentures, $5,750,000 pay- able in 1964, $23,750,000 payable in 1965, and $37,500,000 payable in 1966. . . . . . . . . . RESERVE: For deferred contingent compensation (net of esti- mated future income tax reductious )..... STOCSHOLDERS'EQUITY: Preferred stock 7% cumulative, par value $100 - authorized, 341,398 shares; issued, 225,141 shares; in treasury, 196i. M ,660 shares, and 1961, 55,660 shares ~_,,. . Common stock, par~,lue $25-authorized, 5,000,000 shares; issued, 1962, 3,951,363 shares, and 1961, 3,949,438 shares (Note 1) . . . . . . . . . . Paid-in capital in excess of par values of capital stocks (Note 2 ) . . . . . . . . . . . . . . . . . . Retained earnings (Note 3) . . . . . . . . . . . TOTAL STocKHoLDERS' EQUITY . . . . . . . TOTAL . . . . . . . . . . . . . . . 1962 $ 2,022,378 288,192 582,422 5,750,000 21,672,252 30,315,244 67,000,000 246,806 . 16,448,100 98,784,075 21,070,828 166,460,589 302,763,592 $400,325,642 1961 $ 5,340,328 297,817 628,906 5,750,000 20,991,916 33,008,967 72,750,000 256,940 16,948,100 98,735,950 20,987,493 162,215,224 298,886,767 $404,902,674 17 TIMN 446126 T

Liggett & Myers Tobacco Company Statement of Consolidated Earnings (for years ended December 31) NET SALES . . . . . . . . . . . . . . . . . . . . 1962 $499,955,681 1961 $516,708,042 OTHER EARNINGS: Interest and dividends received . . . . . . . . Equity in net earnings of unconsolidated subsidiary companies . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . 801,644 220,828 251,449 846,920 169,587 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 deposits . 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 COLf\foN STOCZ . 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 $ 24,247,598 517,724,549 452,867,835 3,977,215 2,188,223 67,156 28,703,000 3,161,000 490,964,429 26,760,120 1,205,092 $ 25,555,028 I$ TIMN 446127 `

Financial Condition Net Worth Compared With Long-Term Debt Net North '56 '57 '58 59 '60 '61 '62 Taxes Federai and State Income tnd Franchise iaxes .. Net Income After Taxes ~ 40 '56 '57 '58 59 0 '61 '62 For the fourth successive year there vvere no short-term borrowings at the year end. The surplus cash available during the vear was invested in Treasury Bills and negotiable time certificates of deposit. Cash on hand at the end of the year, including negotiable time certificates of deposit, amounted to S1 7,S57 319, as compared to 813,923,707, a year earlier. The principal amount of the 2>:~"~ debentures outstanding was reduced by $5, 750,000 in 1962 through operation of the Sinking Funds. This reduction, together with the addition of S3,S76,S?5 to net Nvorth, further improved the ratio of funded debt to net «•orth. Funded debt at December K. 1962 amounted to $67,000,000 which reflects a reduction of S-1S,000,000 compared with 1953 when such debt amounted to $115,000,000. The ratio of current assets to current liabilities at end of year 1962 was 12.1 to 1«•hich was a further improvement as compared to a ratio of 11.1 to 1 in 1961. The Company reacquired 5,000 shares of non-callable i '(, Preferred Stock during the year. There was held in the treasury a total of 60,660 shares as of December 31, 1962. Taxes Federal and State inconne taxes and franchise taxes amounted to 5?5,290,000 in 1962 compared with S31•S6-l,t)0() in 1961. Despite the decrease in taxes, it is to be iwtecl tliat the amount paid was about 11'(, larger than net incoine' uml amounted to S i.16 per share compared «-ith net earniw_,, f tt $6.14 per share. The Company's tax bill for 1962 for Federal and c)tlicr excise taxes amounted to $?L,?09,0? i. Examination of the Company's Federal income tax rc tt-I ri I , by the Internal Revenue Service has been completecl if tr ill years through 1959. Capital Expenditures Priiwit).il capital expenditures during 1962 were f+)r pir- cha',t', t1 ftt,t(liiiiery and equipment for improvemeiit itt dtt., efficif'nt % rl It.tffdling and processing leaf tobacco as «t'il as 8 TIMN 446117

for quality controls in manufacture. These expenditures in 1962 totaled S?,?00,000 compared Nvith 81,700,000 in 1961. Depreciation charbes to costs and expenses amounted to 5-1,081,438 during 1962 as against $3,9; 7,? 15 in 1961. While no major expenditures for capital improvements are antici- pated for the near future, the Company will continue to use funds for modernization of its operations. Manufacturing The Company's cigarette factories are located in Durham, N. C. and Richmond, Va. The many complimentary remarks and letters from the thousands Nvho visit these nioclern fac- tories each year attest to their efficiency and cleanliness. Pipe and plug tobacco brands are manufactured in St. Louis, '\Io. Five leaf processing plants are strategically located through- out the tobacco growing, areas in Dtu-ham and Rocky- NIount, N. C., Danville, Va. and Lexington and Paris, hy. 1,000 pound hogsheads of muny types o f a~ed lea f tobaccos are selected to a precise formula, assembled and fed by these automatic feeder units to the blending line.

Liggett & Myers Tobacco Company Ten Years in Review (Dollars expressed in thousands except per share figures) Operating Results learEndedDecember31 ear Earnings Net Before Sales Taxes Taxes on Income Net Earnings Per Share of Common Common Stock (a) Dividends S Per hare (a) Preferred Dividends ($7 Per Earnings Share) Retained Sinking Fund Require- ments 1962 $499,956 $53,701 $28,290 $25,411 $6.14 $19,755 j $ 5.00 ~ $1,163 $4,493 $5,750 1961 516,708 58,624 ' 31,864 26,760 6.47 19,712 i 5.00 i 1,205 5,843 5,750 1960 543,173 62,713 34,004 28,709 6.96 19,686 1 5.00 1,301 7,722 5,750 1959 554,936 65,075 35,036 30,039 7.28 22,585 ' 5.75 (b) 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 i 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 i 1,461 9,614 2,000 1954 548,862 47,835 25,634 . 22,201 5.30 19,558 5.00 1,461 1,182 1953 586,499 51,964 28,985 I 22,979 1 5.50 19,558 ~ 5.00 1,461 1,960 Financial Position (yearEnd) p. Plant and Book Value Per Current Working Equipment Total Funded Short-Term Stockholders' Common Year Inventories Assets Capital (Net) Assets Debt Debt (c) Equity Share (a) 1962 $326,508 ~ $365,870 i $335,555 $31,748 . $400,326 ' $67,000 $ 5,750 $302,764 $72.46 1961 331,145 ! 367,929 j 334,920 33,138 404,903 72,750 5,750 298,887 71.39 1960 314,413 i 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 i 327,417 36,215 456,440 95,750 59,060 , . k 271,649 64.09 1956 409 071 693 ~ 444 328 922 667 33 481 671 101 500 83 75 1955 , 389,014 1 , 425,252 , 332,798 , 30,634 , 458,592 , 107,250 , 0 57,750 264,400 62.24 258,888 60.85 I 1954 423,439 i 459,146 330,112 28,692 491,309 113,000 97,220 249,275 58.39 1953 431,342 i 467,549 j 333,412 26,789 497,229 115,000 99,000 248,092 58.09 (a) Based on number of shares outstanding at end of each year. (b) Commencing June 1, 1959 regular quarterly dividends o f$1. °5 per share have been paid. (c) Includes notes payable to banks and funded debt payable within one year. 20 TIMN 446129

Liggett & Myers Tobacco Company Statement of Consolidated Retained Earnings (f or years ended December 31) BALANCE AT BEGINNING OF YEAR . . . . . . . . . . ADD: Net earnings for the year . . . . . . . . . . . Equity in undistributed earnings of unconsolidated subsidiaries to January 1, 1961 . 1962 $162,215,224 25,410,830 1961 $156,071,334 26,760,120 718,805 TOTAL . . . . . . . . . . . . . . . . . DEDUcr: Cash dividends of $7 per share on preferred stock Cash dividends of $5 per share on common stock Total dividends . . . . . . . . . . . . . . Excess of cost over par value of preferred stock reacquired . . . . . . . . . . . . . . . . . TOTAL . . . . . . . . . . . . . . . . . BAr AivcaE AT Errp OF YEAa (Note 3) . . . . . . . . . 187,626,054 1,163,232 19,755,046 20,918,278 247,187 21,165,465 $166,460,589 Notes to Financial Statements DBcemb&r3z,19sa 1. At January 1, 1962 there-.Were outstanding options granted under the Incentive*jp_4 Option Plan to officers and key employees to purchase, subject to certain limita- tions, 36,283 shares of the Company's common stock. During 1962, options for 1,925 shares were exercised for an aggregate option price of $131,460 and options for 700 shares were cancelled. At December 31, 1962, options were outstanding with respect to 33,658 shares having an aggregate option price of $2,529,060. In accordance with the Plan, option prices represent clos- ing quoted market values of the shares on the dates the options were granted. 2. Paid-in capital in excess of par values of capital stocks increased in 1962 by $83,335, representing the excess of sales price over par value of common 183,550,259 1,205,092 19,712,461 20,917,553 417,482 21,335,035 $162,215,224 stock sold to officers and employees under the Incentive Stock Option Plan. 3. Under the terms of the Indenture covering the 2g/s% Sinking Fund Debentures, $65,527,318 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. 4. The Company's investment credit, which resulted in a reduction of its Federal income tax liability in ac- cordance with the Revenue Act of 1962, amounted to $149,000 for 1962. Amounts equal to the investment credit are included in provision for depreciation in the statement of consolidated earnings and in accumulated depreciation in the consolidated balance sheet. TIMN 446128 19

We have examined the consolidated balance sheet of Liggett ~Myers Tobacco Company and its wholly-owned consolidated subsidiarv as of December 31, 1962 and the related statements 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 statements of consolidated earnings and retained earnings present fairly the financial position of the companies at December 31, 1962 and the results of their operations for the year then ended, in con- formity with generally accepted accounting principles applied on a basis consistent with that of the preceding year.

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