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3 Liggett & Myers Tobacco Company Highlights of Operations 1961 1960 Net S ales . . . . . . . . . . . . . . . Earnings before taxes . . . . . . . . . . Income and franchise taxes . . . . . . . Earnings before preferred dividends . . . Net earnings after preferred dividends .. $516,708,042 58,624,120 31,864,000 26,760,120 25,555,028 $543,172,587 62,712,895 34,004,000 28,708,895 27,407,640 Percentage of net sales . . . . . . . . . Net earnings per share of common stock .. Dividends per share of common stock ... 4.95% $6.47 $5.00 5.05% $6.96 $5.00 Current assets . . . . . . . . . . . . . $367,929,332 $354,845,972 Current liabilities . . . . . . . . . . . 33,008,967 21,463,405 Ratio . . . . . . . . . . . . . . . . . 11.1 to 1 16.5 to 1 Funded debt . . . . . . . . . . . . . 72,750,000 78,500,000 Capftall stock . . . . . . . . . . . . . 115,684,050 116,262,425 AdclitFonal paid-in capital . . . . . . , . 20,987,493 20,534,676 Retained earnings . . . . . . . . , , , 162,215,224 156,071,334 Approximate number of stockholders . . . 50,000 48,200 R 44 2 TIMN 446138

~.ontents page 2 3 Highlights of Operations Letter to Stockholders 4 Officers and Directors 6 Sales, Earnings and Dividend Record 7 Financial Condition and Taxes 9 Capital Expenditures, 10 Manufacturing and Export Leaf Tobacco and Research 12 Disposition of Total Earnings 13 Opinion of Certified Public Accountants 14 Consolidated Balance Sheet 16 Consolidated Earnings 17 Consolidated Retained Earnings and 18 Notes to Financial Statements Ten Years in Review 20 Advertising and Sales Promotion l~~6l Annual Repo~t Liggett & Myers Tobacco Company pposite Jhen Bright tobacco is f ully matured, ze leaves are pulled individually and re then flue-cured to a bright gold efore they go to auction. over right or Virginia-type tobacco, re important ingredient in the popular lended cigarettes, is grown in the arolinas, Virginia, Georgia and Florida. Stockholders' Annual Meeting The Annual Meeting of Stockholders will be held on Tuesday, March 27, 1962 at Hotel Plaza, Journal Square, Jersey City, New Jersey, at 2:30 P.M. Formal notice of this meeting, to- gether with the proxy and proxy state- ment, will be mailed to stockholders on February 23, 1962. Those of you who are unable to attend the meeting are urged to sign your proxies and re- turn them promptly to the Company so that the stock of the Company will be represented as fully as possible at the meeting. Today your Company is owned by approximately 50,000 stockholders. About 83% of the total Common and Preferred stock was voted by person or proxy at the last annual stock- holders' meeting on March 28, 1961. TIMN 446137

February 2, 1962 To the Stockholders: The 1961 Annual Report describes the Company's operations together with audited financial statements for the year 1961 and comparative figures for 1960. This year, which marked the 50th Anniversary of the organization of the Company, has been spent by the Management in a complete overhauling of sales methods and a rearrangement of advertising and marketing responsibilities, all aimed at increasing the Company's share of the total market. Extensive marketing research has been employed to gain public preference information on which to base decisions. Management operations have been meshed more closely together with diligent cooperation on the part of all employees. The most significant step taken was the transfer about mid-year of all the advertising accounts of the Company to one agency, J. Walter Thompson Company. After a most thorough study it was concluded that this agency has the experience and facilities for successfully advertising the Company's products on the television screens of the nation, on radio, in publications and all other media. This agency is well qualified to give expert assistance in marketing operations. Much concerned at having to report a small decrease in sales and a consequent drop of 7% in earnings, we believe that the strengthened methods adopted recently will in the coming months direct the sales curve upward. The principal factor involved today is the multiplicity of brands being offered to consumers. Whereas ten years ago there were only four or five brands of ciga- rettes that had any appreciable volume, there are today approximately 20 brands or variations with substantial sales. The effect of this has been most noticeable in the large cities where CHESTER- FIELD used to be dominant. During the trend toward filter cigarettes, which we think is steady- ing, the city markets proved to be very volatile. All the "regular" cigarettes suffered badly. Nor has the switching about of consumers ended. Recently a significant number have been smoking menthol type cigarettes, a field in which we are trying strongly to establish ourselves. We are especially encouraged by the sound position occupied by the industry as a whole. In spite of repetitive attacks from some sources blaming tobacco for most of the ills of mankind, the business has shown a steady tendency toward growth. We mean to share in this growth and believe that with our experience and energy we will. During the year a vacancy on the Board of Directors was filled by the election of a Director not in the employee group. With changing times and changing problems we believe that our Board can now be strengthened by enlisting from time to time the services of "outside Directors" with experience and established reputation. On behalf of the Board of Directors, we wish to express our appreciation to our shareowners, customers and the employees of the Company for their loyal support and cooperation throughout the past year. WILLIAM A. BLOVNT ' ZACH TOMS Chairman of the Board President TIMN 446139 3

Liggett & Myers Tobacco Company Executive Offices: 630 Fifth Avenue, New York 20, N. Y. Directors J. BOWLING ANDERSON CRAYDON B. LEABE WILLIAM A. BLOUNT LAWRENCE W. RRUFF C. GRICE A1C DfULLAN Executive Personnel ZACH TOMS FREDERICK R. DARKIS EDWARD J. PARRISH On Apri130, 1961, William B. Lewis, Jr., Vice President, Sales, retired in accordance with the Company's Retirement Plan. On August 16, 1961, «'illiam A. Blount was elected Chairman of the Board of Directors and Zach Toms was elected 1're,ident. Elected to the Board of Directors to succe•v,I \ir. Lewis was Frederick Sheffield..I tie•nior t'.Irtner in the law firm of Webster, Stu•tfieId. Flrt.chlllann, Hitchcock and Chrystie. Also t•It~utv<1 on this MILTON E. HARRINCTON FREDERICK SHEFFIELD FRANCIS H. HORAN date was J. Bowling Anderson, Vice President, Finance, to succeed William L. Perry who retired August 31, 1961 in accordance with the Company's Retirement Plan. Elected Vice Presidents on August 30, 1961, effective September 1, 1961, were Lawrence W. Bruff, Advertising, Graydon B. Leake, Sales c and Samuel White, Marketing. Mr. White was also elected to the Board of Directors on this date. 4 TIMN 446140

ni//ions 300 200 100 Taxes 40 30 20 10 Net Worth Compared With Long-Term Debt ,M Net Worth '55 '56 '57 '58 '59 0 '61 Federal and State Income and Franchise Taxes ~ Net Income After Taxes Financtai Condition The Company's over-all financial position continued to grow stronger in 1961. For the third successive year there were no short-term borrowings at the year end. The surplus cash available during the year was invested in negotiable time certificates of deposit because of high yields. Cash on hand at the end of the year, including negotiable time certifi- cates of deposit, amounted to $13,923,707 as compared to $11,059,994 a year earlier. Long-term debt was reduced by $5,750,000 in 1961 as a result of retirement of debentures through operation of the Sinking Funds. This reduction, together_ with the addition of $6,018,332 to net worth, further improved the ratio of funded debt to net worth. The funded debt was only 24.39 of net worth at the end of 1961, as compared with 41.4% six years ago. An over-all reduction of $42,250,000 in such debt from the high point of $115,000,000 in 1953 has been accomplished. Net working capital at the end of 1961 was $334,920,365 compared with $333,382,567 a year earlier. Your Management was successful in reacquiring 8,380 shares of non-callable 7% Preferred Stock during the year. As of December 31, 1961 there was held in the treasury a total of 55,660 shares. In the absence of unusual developments no need for new long-term financing is anticipated in the foreseeable future. Taxes Taxes contuiued unabated during the past year with many states and municipalities increasing their income, franchise and excise taxes. Federal and State income and franchise taxes in 1961 amounted to $31,864,000. These taxes alone came to $8.07 per share of common stock compared with net earnings per common share of $6.47. Although the Com- pany is not involved in the collection of state and local tobacco taxes, they do represent a substantial levy on the sales of its products, resulting in higher prices to the con- sumer. At the end of 1961, 47 of the 50 states (all except Colo- rado, North Carolina and Oregon ) had a tax on cigarettes. The Company's tax bill for 1961 for Federal and other excise taxes amounted to $219,227,047. While the payment to the Treasurv Department of excise tax was deferred from a daily to a semi-monthlv basis in June 1959, it is hoped fur- ther adjustments will be permitted in the near future. TIMN 446143 7 I

Officers WILLIAM A. BLOUNT Chairman of the Board and Chief Executive Officer ZAcH Toms President and Chairman of Executive Committee J. BOWLING ANDERSON Vice President and Treasurer LAwRENCE N'~ BRUFF Vice President, Advertising FREDERICP R. DARKIS Vice President and Director of Research MILTON E. HARRINGTON Vice President, Leaf FRANCIs H. HORAN Vice President and General Counsel GRAYDON B. LEAKE Vice President, Sales LOY D. THObiPSON Vice President, Production SAMUEL WHITE Vice President, Marketing RUSSELI. M. CHENOWETH Secretary RALPH E MOORE Assistant Treasurer RussELL G. CuTTER Auditor RuFus H. HOSEA Assistant Secretary C`iF2ART FR B. MORGENTHALER Assistant Secretary DONALD G. NYREEN Assistant Secretary Transi.r Agent: Reyistrsr: Directors J. BOWLING ANDERSON WILLIAM A. BLOUNT LAWRENCE W BRuFF FREDERIcg R. DARxEs MILTON E. HARRINGTON FRANCIs H. HoRAN J. C`rA1VIDEN HUNDLEY GRAYDON B. LEAgE C. GRICE MCMuLLAN EDWARD J. PARRISH FREDERICK SHEFFIEr.n Loy D. THaMPSON ZACx Toms SAMUEL WHITE Chemical Bank New York Trust Co., 30 Broad Street, New York 15, N. Y. The First National City Bank of New York, 55 Wall Street, New York 15, N. Y. TIMN 446141 5

~ LIGGETT & MYERS TOBACCO COMPANY P-tt Notice o f Annual Meeting o f Stockholders Notice is hereby given that the Annual Meeting of Stockholders of LIGGETT & MYERS TOBACCO C011PANY, for the election of fourteen Directors for the ensuing year, and the transaction of such other busi- ness as may properly come before the meeting, will be held at Hotel Plaza, Journal Square, Jersey City, New Jersey, at 2:30 P.M. on Tuesday, March 27, 1962. Stockholders of record at the close of business on February 16, 1962 will be entitled to vote at the meeting. By order of the Board of Directors, R. M. CHENOWETH, Secretary New York, N. Y., February 23, 1962. The stock of the Company should be represented as fully as possible at the Annual Meeting. If you will not be present at the meeting please date, sign and return promptly the enclosed proxy in the accompanying envelope. PROXY STATEMENT Revocability of Proxy. The shares represented by all properly executed proxies which are sent to us will be voted in the man- ner specified. Under New Jersey law any person giving a proxy has the power to revoke it by written notice to the Secretary at any time before it is voted. Persons Making the Solicitation. The enclosed proxy is being solicited by the Management. The cost of solicitation will be paid by the Company. In addition to solicitation by mail, arrangements may be made with brokerage houses and other cus- todians, nominees and fiduciaries to send proxies and proxy material to their principals. No solicitation is to be made by specially engaged employees or other paid solicitors. Voting Securities and Principal Holders Thereo f. As of December 31, 1961, there were outstanding 169,481 shares of Preferred Stock and 3,949,438 shares of Common Stock, such stock being the voting stock of the Company. Each share of Preferred Stock (Par Value $100.00) entitles the holder to four votes and each share of Common Stock (Par Value $25.00) entitles the holder to one vote. As stated in the notice of meeting, stockholders of record at the close of business on February 16, 1962 will be entitled to vote at the meeting. Nominees and Directors. The number of Directors of the Company is fixed at fourteen who are annually elected and hold office until the next Annual Meeting of Stockholders, or until their successors are duly elected and qualified. It is intended that a vote under the proxy will be cast for the following nominees, who have been designated b ~ the Board of Directors: J. B. ANDERSON, W. A. BLOUNT, L. W. BRUFF, F. R. DARKIS, M. E. HARRINGTON, F. H. HORAN, J. C. HUNDLEY, G. B. LE;:11:E. C. G. McMULLAN, E. J. PARRISH, FREDERICK SHEFFIELD, L. D. THOMPSON, ZACH TOMS and S.41tUEL WHITE. If any such nominee is not a candidate for election as a Director at the meeting, an eeent ++hich the Management does not anticipate, the proxy will be voted for a substitute nominee and for the othera named above. All of the foregoing persons are now Directors of the Company. TIMN 446134

Capital Expenditures Capital expenditures in 1961 were mainly for machinery and other equipment to improve the efficiency of handling and processing tobacco in our cigarette factories, stemmeries and storages. Equipment was also added to our modern re- search laboratory. The construction started in 1959 on an addition to the Company's Turkish tobacco processing plant at Izmir, Tur- kev, was completed in 1961. This enlargement of facilities will result in further economy in operations. Total capital expenditures in 1961 amounted to approxi- mately $1,700,000 compared with $2,800,000 in the previous year. Depreciation charged to costs and expenses in 1961 amounted to $3,977,215. In the near future no major outlays for plant and equipment are anticipated. Manufacturing In 1961 the Manufacturing Department of the Company continued to provide modern machinery and equipment to obtain greater operational efficiency and at the same time protect and improve upon our high standards of quality. Among the more important improvements completed dur- ing the year were facilities for expanding our printing opera- tions, improved methods in leaf tobacco processing and blend- ing, the installation of atmospheric control equipment in leaf tobacco storages, and automatic machinery for enclosing cigarette packages into cartons. All of these improvements in manufacturing methods contributed to greater efficiency of operations. Finest quality is a Company tradition and toward this end your Management is constantly engaged in making further improvements in manufacturing methods. Our cigarette factories are located in Durham, North Caro- lina and Richmond, Virginia. Our smoking and chewing tobacco factory is located in St. Louis, Missouri. All leaf storages and processing plants are conveniently located near the supply of tobacco for the most efficient and economical operation. Export The Company's export sales were higher in 1961 than last year and continued to make an important contribution to An automatic machinery unit for packaging, cellophane wrapping, and cartoning L & M cigarettes. 9

=inar.c3ai,Condition millions 300 200 100 Taxes 40 30 20 10 Net Worth Compared With Long-Term Debt M Net Worth '55 '56 '57 '58 '59 '60 '61 . Federal and State Income ~ and FrancMe Taxes ~ Net Income After Taxes '55 '56 '57 '58 '59 '60 '61 The Company's over-all financial position continued to grow stronger in 1961. For the third successive year there were no short-term borrowings at the year end. The surplus cash available during the year was invested in negotiable time certificates of deposit because of high yields. Cash on hand at the end of the year, including negotiable time certifi- cates of deposit, amounted to $13,923,707 as compared to $11,059,994 a year earlier. Long-term debt was reduced by $5,750,000 in 1961 as a result of retirement of debentures through operation of the Sinking Funds. This reduction, together with the addition of $6,018,332 to net worth, further improved the ratio of funded debt to net worth. The funded debt was only 24.3% of net worth at the end of 1961, as compared with 41.4% six years ago. An over-all reduction of $42,250,000 in such debt from the high point of $115,000,000 in 1953 has been accomplished. Net working capital at the end of 1961 was $334,920,365 compared with $333,382,567 a year earlier. Your Management was successful in reacquiring 8,380 shares of non-callable 7% Preferred Stock during the year. As of December 31, 1961 there was held in the treasury a total of 55,660 shares. In the absence of unusual developments no need for new long-term financing is anticipated in the foreseeable future. Taxes Taxes continued unabated during the past year with many states and municipalities increasing their income, franchise and excise taxes. Federal and State income and franchise taxes in 1961 amounted to $31,864,000. These taxes alone came to $8.07 per share of common stock compared with net earnings per common share. of $6.47. Although the Com- pany is not involved in the collection of state and local tobacco taxes, they do represent a substantial levy on the sales of its products, resulting in higher prices to the con- sumer. At the end of 1961, 47 of the 50 states (all except Colo- rado, North Carolina and Oregon ) had a tax on cigarettes. The Companti"s tax bill for 1961 for Federal and other excise taxes amounted to $219,227,047. While the payment to the Treasurv Department of excise tax was deferred from a daily to a senii-inonthly basis in June 1959, it is hoped fur- ther adjustments .vill be permitted in the near future. 7 TIMN 446145

Operations 1961 Net Sales millions 600 - 500 400 300 200 100 '55 '56 '57 '58 '59 Net Earnings 20 16 12 '55 '56 '57 '58 5 '61 60 61 ~ Liggett & Myers Tobacco Company 1 ~ The following pages present some of the accomplishments of vour Company for the year 1961, giving an over-all picture of its activities as well as audited financial statements com- paring 1961 results with those of 1960. _ Sales Net sales for 1961 were $516, 7 08,042 compared to $543,172,587 for the previous year, representing a decline of about -1.9 q. The lower sales are largely accounted for by the continuing decline in CHESTERFIELD Regular Size ship- ments. Sales of CHESTERFIELD King Size and L&`I King Size, two of the Company's principal brands, continued to show an increase in the year. Earnings Consolidated net earnings for the year 1961 were $26,760,120 compared to $28,708,895 for 1960. Based on 3,949,438 shares outstanding at the end of the year, net earn- ings amounted to $6.47 per share as compared with $6.96 in 1960. Of the loss in earnings, 310 per share occurred in the first quarter and the balance of 18~ in the last three quarters. The percentage of net earnings after preferred dividends to net sales decreased from 5.05% in 1960 to 4.95% in 1961. Dividend Record 1961 was the 50th consecutive year in which common divi- dends have been paid by your Company. Total payments for the year amounted to $5.00 per share consisting of four quar- terly dividends of $1.25 each. The total amount of dividends paid in 1961 on both com- mon and preferred stock was $20,917,553. The balance of the year's earnings amounting to $5,842,567 was retained for use in the business. There .v,is de clared on January 17, 1962 the usual quar- terly dividcnd of S1.25 per share on common stock, payable on 'March 1, 1962 to stockholders of record February 16, 1962. , 6 TIMN 446144

included a cigarette factory pilot plant located in the engi- neering area of the new wing of the Center. It contains all of the operations of cigarette manufacturing, including the processing of tobacco, the making, wrapping and packaging of cigarettes. This pilot plant enables the Company's research staff to investigate all of the variables in tobacco processing and cigarette manufacturing under controlled conditions. It serves to improve the manufacturing operations as well as cigarette quality control, and to test all changes that are incorporated into the production line. The Research Department's program contributes mate- rially to the highest standards of quality for our present products and provides a continuous scientific effort to pro- duce even better products for consumers to enjoy. Disposition of Total Earnings for 1961 The Company received for goods sold to customers and from dividends and interest a total of $517,725,000. This is how it was used or set aside. 42.3% Federal and other excise taxes $219,227,000 33.9 "o Leaf tobacco, wages, other manufacturing costs and freight $175,277,000 12.5 °o Selling, advertising, administrative, interest and other expenses $64,596,000 6.2% Federal and State income and franchise taxes $31,864,000 ~R\ 4.0 % Dividends $20,918,000 ~--- 1 .1 %'o Earnings retained $5,843,000 12 TIMN 446150

Assets 1961 1960 CURRENT ASSETS: Cash (including, for 1961, negotiable time certifi- cates of deposit, $5,000,000) . . . . . . . . . $ 13,923,707 $ 11,059,994 U. S. Government securities - at cost plus accrued interest (quoted market value, $-1,999,750 ) . . . 4,998,055 Accounts receivable, customers . . . . . . . . . 21,708,701 23, 223,150 Accounts receivable, others . . . . . . . . . . . 1,152,322 1,151,657 Leaf tobacco, at average cost . . . . . . . . . . 298,454,565 282,169,184 Manufactured stock and operating supplies, at average cost . . . . . . . . . . . . . . . 32,690,037 32,243,932 TOTAL CURRENT ASSETS . . . . . . . . . . 367,929,332 354,845,972 PROPERTY, PLANT AND EQUIPMENT - AT COST: Land and buildings . . . . . . . . . . . . . . 20,722,849 20,578,094 Machinery and equipment . . . . . . . . . . . 59,214,150 58,170,734 Total . . . . . . . . . . . . . . . . . . 79,936,999 78,748,828 Less accumulated depreciation . . . . . . 46,799,429 43,626,750 NET PROPERTY, PLANT AND EQUIPMENT ... 33,137,570 35,122,078 OTHER ASSETS: Brands, trade-marks and good will . . . . . . . . 1 1 Investments in unconsolidated subsidiary companies: 1961, at equity in net assets; 1960, at cost (Note 1) . . . . . . . . . . . . . . 1,631,396 919,004 Investment in foreign tobacco company, at cost .. 4,000 4,000 Foreign currency deposits subject to withdrawal restrictions . . . . . . . . . . . . . . . . . 946,731 1,005,034 Prepaid expenses and deferred charges .. .... 1,253,644 1,183,911 TOTAL OTHER ASSETS . . . . . . . . . . 3,835,772 3,111,950 TOTAL . . . . . . . . . . . . . . . $404,902,674 $393,080,000 14 TIMN 446152

With respect to each person nominated for election as a Director for the ensuing year, the following information is supplied: Principal Occupation Period served (with the Company as Director Name unless otherwise noted) (Since Year) Shares of Common Stock Beneficially Owned December 31, 1961 J. B. Anderson .................. Vice President and Treasurer (a) 1958 400 W. A. Blount ...................Cliairman of the Board 1941 3.000 and Chief Executive Of}?cer (a) L. W. Bruff .................... Vice President and 1953 225 Director of Advertising F. R. Darkis .................... Vice President and Director of Research 1956 1,050 M. E. Harrington ................T'ice President_and Leaf 1955 410 Department 1tlanager F. H. Horan ................... Vice President and General Counsel (a) 1954 400 J. C. Hundley ................... Branch Manager 1947 825 G. B. Leake .. ...................Vice President and Sales Manager (a) 1959 500_ C. G. McMullan ................. Branch Manager 1960 700 E. J. Parrish ................... Export Department Manager 1960 311 Frederick Sheffield ............... Partner in the law firm of Webster 1961 100 Sheffield Flrischmrnnz Hitchcock & Ch ryst ic L. D. Thompson .................T'ice President, tllanufacturing 1951 500 and Leaf (a) Zach Toms ..................... President and Chairman 1945 3.000 of Executive Committee (a) Samuel White .................. T'ice President and 1961 100 Director of alarketing (a) Member of the Executive Committee. Effective September 1. 1961 Messrs. J. B. Anderson (Treasurer). L. W. Bruff (Advertisin~), G. B. Leak~~ (Sales) and Samuel White (Marketing) were elected Vice Presidents respectively on August 30. 1961. Mr. White, an employee of the Sales Department since 1951. became a Director on September 1. 1961. Mr. Sheffield is and for more than the last five years has been a partner in the law firm of Webster Sheffield Fleischmann Hitchcock & Chr}-stie and a predecessor firm. He was elected a member of the Board of Directors on August 16, 1961. Remuneration and Other Transactions with 1Vlanagement and Others. For the calendar year 1961, the Company and its subsidiaries paid directly to each of its Directors and Officers, where the same exceeded $30,000, the following amounts: Name of Individual Capacities in or Identity Which Remuneration of Group was Received Direct Aggregate Remuneration (a) Estimated Annual Benefits Upon Retirement J. B. Anderson .................. Treasurer and Vice President $ 55,000 $25,000 W. A. Blount ................... President and Chairman of the Board 180,000 25,000 L. W. Bruff .................... Director o f Advertising and 80,000 25,000 Vice President F. R. Darkis .................... Vice President and Director o f Research 60,000 9,663 M. E. Harrington ................ Vice President and Lea f 60,000 19,827 Department Manager F. H. Horan .................... Vice President and General Counsel 135,000 25,000 J. C. Hundley ................... Bran,ch Manager 50,000 15,322 G. B. Leake ..................... Assistant to Vice President, 53,333 23,708 Vice President and Sales Manager W. B. Lewis, Jr . ................. Vice President and Sales Manager 45,000 (b) 25,000 C. G. McMullan ................. Branch Manager 38,000 14,820 W. L. Perry .................... Vice President 96,000 (c) 25,000 L. D. Thompson ................. Vice President 100,000 25,000 Zach Toms .....................Vice President and President 144,000 25,000 Directors and Officers as a Group 1,155,333 (a) Does not include the deferred portion of rompensation for 1961 provided for five of the senior officers, as ex- plained hereafter. (b) Retired April 30, 1961. (c) Retired August 3.1, 1961. TIMN 446135

Liggett & Myers Tobacco Company The following pa-es present soine of the uccompli.tihneuts of %'our Companv for the year 1961, giving an over-all picture of its activities as well as audited financial statements crnu- parin~ 1961 results with those of 1960. 300 200 !ca 6 Net Sales Net Earnings '55 56 "57 '58 59 60 '61 ~ \et sales for 1961 were 5516,705,0-12 compared to $54.3,1 7?,5$ 7 for the previous vear, representing a decline of about 1.9 '-C'. The lower sales are largelN' accounted for b%- the continuing decline in CHESTERFIELD Regular Size ship- nlents. Sales of CI-IESTERFIELD King Size and L & N [ King Size, two of the Compan~'s principal brands, continue d to show an increase in the year. Consolidated net earninbs for the veai 1961 vvere 826,760,120 compared to $?S, i 05,895 for 1960. Based on 3,9-19,435 shares outstanding at the end of the year, net earn- ings amounted to $6.-17 per share as compared with $6.96 in 1960. Of the loss in earnings, 31c per share occurred in the first quarter and the balance of 1S4• in_the last three quarters. The percentage of net earnings after preferred dividends to net sales decreased from 5.05 % in 1960 to 4.95 % in 1961. 1961 ,vas the 50th consecutive y-ear in which common divi- dends have been paid by' N-our Company•. Total pa\~inents for the vear amounted to $5.00 per share consisting of four du~u~- terh' dividends of $1.25 each. The total amount of dividends paid in 1961 on both coin- mon and preferred stock was $?0,917,553. The balance of the vear's earnin~s amollnting to $0,842,56 i~ras retained f~~r use in the business. There was declared on January• 17, 1962 the usual qilar- terly- dividend of S1.?5 per share on common stock, paN-able on March 1, 196•2 to stockholders of record Februar\' 16, 196?. TIMN 446142

During 1961 tlte firm of Web~ter Sheffield Fleisclunann Hitchcock & Chry•stie, of which Frederick sheflield is a partner. was paid $93.115.00 for legal services plus $4,852.40 for disbursments. Under employment contracts with the Company, Messrs. W. A. Blount, F. H. Horan, W. B. Lewis, Jr., \V. L. Perry and Zach Toms will each be entitled, contingent upon their compliance with certain conditions, to receive annual post retirement compensation in varying amounts, payable to each participant in sixty equal monthly installments over a period of five years, the first thereof to be payable in the month next succeeding his retirement or termination of employment. The respective amounts of contingent compensation for 1961, payable to them during each of the five years after termination of employment and constituting, in each case, one-fifth of the contingently payable part of compensation for such year, and, in parentheses, the total respec- tire amounts contingently payable to them during each of the five years after termination of employment as a result of all contingent remuneration for years prior to 1961, constituting one-fifth of the total of all such amounts, are: W. A. Blount, $4,000, ($26,000) ; F. H. Horan. $3.000, ($21,000) ; W. B. Lc«6z. Jr., $3,000, (821,000) ; W. L. Perry, $2,133. ($22.-100) ; Zach Toms. $3.200. ($22,-}00) ; and Directors and Officers as a group, $15,333, ($112,800). Pursuant to the Incentive Stock Option Plan for Key Employees, the Company granted options on March 15. 1961 to Directors and Officers named in the preceding tabulations to purchase shares of common ~tock of the Company at a price of $913j per share as follows: L. W. Bruff. 100 shares: F. R. Darkis, 100 shares; M. E. Harrington, 100 shares; G. B. Leake, 100 shares; Samuel White, 100 shares and Directors and Officers as a group, 500 shares. For each such option the option price is the closing market price on the dav the option was granted and the duration is ten years from such date. Since the be=inning of the last fiscal year and up to Februarv 1, 1962 Directors and Officers exercised options to purchase, 7.709 shares of the common stock of the Company. Of this number 405 shares were pur- chased at $625/g per share, 100 shares were purchased at $82%' per share and the balance were purchased at $67% per share. The name of each such person, the number of such shares purchased by him and the market value per share (the mean between the high and low prices on the New York Stock Exchange) on each date of purchase are as follows: F. R. Darkis, 100, $90.63; 250, $91.50; M. E. Harrington, 300, $95.25; F. H. Horan, 1.000, $91.88; J. C. Hundley, 750, $94.88; G. B. Leake, 305, $108; W. B. Lewis, Jr., 3,000, $109.88; C. G. McMullan, 104, $82.69; E. J. Parrish, 100, $104.25; W. L. Perry, 1,000, $95; L. D. Thompson, 100, $109.13; Zach Toms, 600, $108.75; and Samuel White, 100, $94.88. Directors and Officers as a group purchased 1,204 shares of common stock of the Company during the first calendar quarter of 1961 when the price range per share on the New York Stock Exchange was $94.875- $81.375; 250 shares during the second calendar quarter when such price range was $94.50-$85.125; 2,150 shares during the third calendar quarter when such price range was $97.375-$89.25; and 4,105 shares during the fourth calendar quarter when such price range was $111.75-$96. Other 1Vlatters. As of this date the Management knows of no business which will come before the meeting other than the election of a Board of fourteen Directors, but if any other matters properly come before the meeting, the per- sons named as proxies will vote on them in accordance with their best judgment. The •Company's financial statements for the year 1961 and for many prior years have been examined by Messrs. Haskins & Sells, independent public accountants. They are appointed each year by resolution of the Board of Directors. A member of that firm will be present at the Annual Meeting and will be available to answer such questions as may properly be asked of him. Upon written request to the Secretary of the Company, there will be furnished to any Stockholder a report of the Annual Meeting which will he prepared as soon as practicable after the meeting has been held. The Stockholders are urged to send in their proxies without delay. Prompt response is helpful and your cooperation will be appreciated. New York, N. Y., February 23. 1962 By Order of the Board of Directors, R. DZ. CHENOWETH. Secretary TIMN 446136

Liggett & Myers Tobacco Company 3alance-- SDheet as of December 31 `!?CDti:ti3f?S 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 1960, U. S. Treasury tax anticipation notes, $9,934,413 ) . . . TOTAL CURRENT LIABILITIES . . . . . . . FUNDED DEBT: 2j/ °Jo Sinking Fund Debentures, $5,750,000 pay- able annually during the years 1963 and 1964, $23,750,000 payable in 1965, and $37,500,000 pay- able in 1966 . . . . . . . . . . . . . . . . RESERVE: For deferred contingent compensation (net of esti- mated future income tax reductions )..... STOCKHOLDERS' EQUITY: Preferred stock 7% cumulative, par value $100 - authorized, 341,398 shares; issued, 225,141 shares; in treasury, 1961, 55,660 shares, and 1960, 47,280 shares . . . . . . . . . . . . . . . . . . . Common stock, par value $25-authorized, 5,000,000 shares; issued, 1961, 3,949,438 shares, and 1960, 3,939,053 shares (Note 2 ) . . . . . . . . . . Paid-in capital in excess of par values of capital stocks (Note 3 ) . . . . . . . . . . . . . . . . . . Retained earnings (Note 4 ) . . . . . . . . . . TOTAL STOCKHOLDERS' EQUITY . . . . . . . TOTAL . . . . . . . . . . . . . . . 3st 1960 $ 5,340,328 $ 3,167,198 297,817 311,607 628,906 675,391 5,750,000 5,750,000 20,991,916 11,559,209 33,008,967 21,463,405 72,750,000 78,500,000 256,940 248,160 16,948,100 17,786,100 98,735,950 98,476,325 20,987,493 20,534,676 162,215,224 156,071,334 298,886,767 292,868,435 $404,902,674 $393,080,000 15 TIMN 446153

Liggett & Myers Tobacco Company St-------:~,temGnt of ('onsQl1dated Ec'`~ r1'"1 i hl gS(f or years ended December 31) 1960 NET SALES , , , , , , , , , , , , , , , , , , , , , , , , $516,708,042 ; $543,172,587 OTHER EARNINGS: ! Interest and dividends received (Note 1) . . . . . . . . • 846,920 889,330 Equity in net earnings of unconsolidated subsidiary companies ( N'ote 1) . . . . . . . . . . . . 169,587 ' - TOTAL EARNINGS . . . . . . . . . . . . . • • . . 517,724,5-19 ; 544,061,917 COSTS AND EYPENSES: Cost of goods sold, selling, administrative and general expenses . . . . . . . . . . . . . • • • . 452,867,835 Provision for depreciation . . . . . . . . . . . . . . . . 3,977,215 Interest and amortization on funded debt . . . . . . . . . 2,188,223 Other . . . . . . . . . . . . . . . . . . . . . . . . 67,156 Provision for Federal income tax . . . . . . . . . . . . . 28,703,000 Provision for State income and franchise taxes ... .... 3,161,000 TOTAL COSTS AND EXPENSES . . . . . . . . . . . . 490,964,429 NET EARNINGS FOR THE YEAR . . . . . . . . . . . . . . . . . 26,760,120 DIVIDENDS ON PREFERRED STOCK . . . . . . . . . . . . , , 1,205,092 NET EARNINGS APPLICABLE TO COM3,ION STOCK . . . . . . , , , $ 25,555,028 474,847,617 3,909,369 2,341,504 250,532 31,573,000 2,431,000 515,353,022 28,708,895 1,301,255 $ 27,407,640 4

Liggett & Myers Tobacco Company 59 1958 1957 1956 1955 1954 1953 1952 4,936 $556,046 $570,385 $564,966 $546,965 $548,862 ; $586,499 $603,081 5,075 67,912 61,895 58,367 56,678 47,835 ~ 51,964 46,295 5,036 ~ 36,689 33,621 31,916 29,957 25,634 28,985 24,846 0,039 31,223 28,274 26,451 ?6,721 22,201 22,979 21,449 7.28 i 7.60 6.85 6.39 6.46 5.30 : 5.50 5.11 2,585 i 19,571 19,564 19,561 15,646 19,558 19,558 19,558 5.75 (b) j 5.00 5.00 5.00 ; 4.00 , 5.00 ; 5.00 ~ 5.00 1,430 1,461 1,461 1,461 1,461 1,461 1,461 ~ 1,461 6,024 10,191 7,249 j 5,429 9,614 ; I 1,182 f 1,960 I I 430 5,750 i 5,750 ' 5,750 5,750 2,000 I • 0,394 341,318 381,029 409,071 389,014 423,439 431,342 421,281 5,064 369,974 416,458 444,693 425,252 459,146 467,549 460,754 2,157 333,054 327,417 328,922 332,798 330,112 333,412 333,598 6,201 35,582 36,215 33,667 30,634 28,692 26,789 25,003 4,391 409,103 456,440 481,671 458,592 491,309 497,229 488,288 4,250 90,000 95,750 101,500 107,250 113,000 115,000 115,000 5,750 7,456 59,060 83,750 57,750 97,220 99,000 96,000 7,234 282,182 271,649 264,400 258,888 249,275 248,092 246,132 8.08 66.70 64.09 62.24 60.85 58.39 58.09 57.58 19 19 55 6 3 3 2 TIMN 446157

Ten Years in Review (Dollars expressed in thousands except per share figures) Year Ended December 31 1960 :'361 14 Operating Results Net Sales $516,708 1 $543,173 Earnings before taxes 58,624 62,713 Taxes on income 31,864 34,004 ~ Net earnings 26,760 28,709 ~ Per share of common stock (a) 6.47 6.96 Common dividends 19,712 19,686 Per share(a) 5.00 5.00 er share ) Preferred dividends ($7 1 205 1 301 p , , Earnings retained 5,843 7,722 Sinking fund requirements 5,750 5,750 Financial Position (1earEnd) Inventories 331,1-I5 314,413 Current assets 367,929 354,846 Working capital 334,920 333,383 (a) Based on number of shares outstand- Plant and equipment (net) 33,138 35,122 ing at end of each year. Total assets 404,903 393,080 (b) Commencing June 1, 1959 regular Funded debt 72,750 78 500 quarterly dividends of $1.25 per share have been paid. Short-term debt ( c ) 5,750 , 5,750 ' Stockholelers e•ql litv 298,887 292,868 (c) Includes notes payable to banks and funded debt payable within one year. Per share of common stock(a) 71.39 69.83 18 TIMN 446156

the Coinpaiiy's business. The friciicll\, and fine business rela- tionship with oi_ir nlan%- loyal and well established c:ustomers t11rOUyllc)itt the world has CUI1tPil)Lltt'd much to this success. During the \-ear ad~'ertising and sales promotion programs were strengthened in foreign markets, «,hich we expect to improve further our export sales. The Go\-ernment has controlled for inanti' vears the grow- ing and marketing of flue-cured and btrlev leaf tobacco which are used in making cigarettes. This control restricts the acres a farmer can plant and supports the price on the auction market. The crop of flue-cured tobacco in 1961 totalled 1,563,- 000.000 pounds compared «•ith 1,365,000,000 pounds in 1960. The a\'erage selling price was 6~. ~ e per pound, the highest on record and about -lc• per pound abo`~e the 1960 average. The GoN'erzlment price support le~•el for the 1961 crop was 55.5r per pound. The 1961 burley tobacco crop is estimated at approli- matelv 550,000,000 pounds or about 155 above the previous crop. Approximately 90`(* of the 1961 crop had been sold by the end of the year compared with S0 'C' at the same time in 1960. Auction market prices through the end of the year averaged 66.84' per pound «Iiich was higher than last year. The price support le~•el for the 1961 crop was 57.2c per pound. Inventorv value,of our leaf tobacco at the end of the N-ear was $298,454,565 compared with $282,169,184 at the end of the previous year. The increase of $16,?55,381 is due prin- cipallv to a larger stock of leaf tobacco. This additional in- ventory is deemed advisable to insure a well rounded stock of properly aged tobaccos to take care of your Company's requirements. Following a long established custom of the Companv, inv-entorti• of leaf tobacco is carried at average cost, new averages being established each month as purchases are added and usings deducted. The Liggett c~ 'Myers Research Center in Diirhaiil. North Carolina was further expanded during the t•ear In tlic adcli- tion of scientific personnel and new equipmeiit. Among the varied facilities in the research IaIrrrr,&rr\ is k - - rr t the laboratory pilot plant slwu irr, , .pri.rrr, rrt for processing tobacco. 10

Advertising and Sales Promotion Company continues to strengthen its market- rogram with new merchandising plans for all 'tant segments of the consumer market, in- g special programs for college, military and s. Particular attention is being given to devel- g closer relationships with the wholesale and 1 trade with the important objective of always having our brands conveniently available to the consumer. National and local television and radio, magazines and newspapers, and outdoor posters are widely used to adver- tise the Company's leading brands, supported at point-of- sale by extensive use of posters and displays which are placed and maintained by our own Sales Department. The advertising for CI=iESTERFIELD, L&M and OASIS em- phasizes the fine quality of these cigarettes and the pleasures of smoking. CHESTERFIELD puts it this way: "21 GREAT TOBACCOS MAKE 20 WONDERFUL SMOKES. If you smoke for pleasure, not just from habit, you'll like Chesterfield. 21 vintage tobaccos grown mild, aged mild, blended mild, not filtered mild - They Satisfy." To the filter smoker we say: "When a cigarette means a lot - YOU GET LOTS MORE FROM L0l. 'MOre body in the blend ... more flavor in the smoke ... more taste through the filter. L&M in the red-headed pack or box - The filter cigarette for people who really like to smoke." And, for the menthol smoker, OASIS: "TIiE BASIS FOR OASIS Is TOBACCO ... the forgotten flavor in other menthol cigarettes. Of all menthol cigarettes OASIS gives you the smoothest, richest taste!" Shown on these pages are the princ•ihal rig.uette brands made by the Company together with the leaCling smoking and chewing tobacco products. 20 Cigarettes CHESTERFIELD COUPON DUKE FATIMA HOME RUN L&M OASIS PICAYUNE PIEDMONT Smoking Tobaccos BUCKHORN BUFFALO COCKADE CORN CAKE COUNTRY GENTLEMEN DINNER BELL DUKE'S GRANGER GROWLER HARMONY HOME RUN KENTUCKY LONG CUT KING BEE LA TURKA MASTERPIECE MEERSCHAUM MOUNTAIN ROSE OLD STYLE PLOW BOY S. & M. SUMMERTIME SWEET TIP TOP VELVET VIRGINIA EXTRA Chewing Tobaccos CLIPPER DRUMMOND NATURAL LEAF EVERY DAY SMOKE FISH HOOK GRANGER TWIST HONEY DIP TWIST HORSE SHOE J. T., R. & R. J. T. SMOOTH J. T. BRIGHT CLUBS KING PIN MASTERPIECE PICK NATURAL LEAF PICNIC TWIST RED BELL SPARK PLUG STAR STERLING SWEET BURLEY SWEET CUBA TINSLEY'S THICK UNCLE SAM UNION STANDARD W. N. T. NATURAL LEAF TIMN 446158

Liggett & Myers Tobacco Company Statem--_--z,nt of +..... on'..,,~" oliL...d at ed t°'t eL a, i netz,i E~,'-„ j" ;"'iings ( for years ended December .31) +*a61 1960 BALANCE AT BEGINNING OF YEAR . . . . , , , ADD: $156,071,334 $149,168,514 Net earnings for the year . . . . . , , , , , , . . , Equity in undistributed earnings of unconsolidated 26,760,120 28,708,895 subsidiaries to January 1, 1961 (Note 1) . . . . . . . , . 718,805 TOTAL . . . . . . . . . . . . . . . . . . . . . 183,550,259 177,877,409 DEDUCT: Cash dividends of $7 per share on preferred stock ..... 1,205,092 1,301,255 Cash dividends of $5 per share on common stock ...... 19,712,461 19,686,491 Total dividends , , , , , , , , , , , , , , , , , , , 20,917,553 20,987,746 Excess of cost over par value of preferred stock reacquired . . 417,482 818,329 TOTAL . . . . . . . . . . . . . . . . . . . . . 21,335,035 21,806,075 BALANCE AT END OF YEAR (Note 4) . . . . . . . . . . . . . $162,215,224 $156,071,334 Notes to Financial Statements December31, 1961 1. As of January 1, 1961, the basis of stating investments in unconsolidated subsidiaries was changed from cost to equity in net assets of the subsidiary companies. This change in account- ing practice decreased net earnings for 1961 by $16,413, and increased retained earnings at the beginning of the year by $718,805. The Com- pany's equity in the subsidiaries' net earnings is recorded as additions to the investment accounts, and dividends received from subsidiaries are re- corded as reductions of the investment accounts. 2. At January 1, 1961 there were outstanding options granted under the Incentive Stock Option Plan to officers and key employees to purchase, subject to certain limitations, -4.3, 76g shares of the Company's common stock, and 48,700 shares were reserved for the grantin4 oE additional options on or before March :31, 1961 Options for 3,300 shares were granted on \Larc h 15, 1961 for an aggregate option price of $302,775. Also during 1961, options for 10,3ti.5 shares were exercised for an aggregate option price of $712,442, and options for 400 shares were cancelled. At December 31, 1961, options were outstanding with respect to 36,283 shares having an aggregate option price of $2,718,182. In accordance with the Plan, option prices repre- sent closing quoted market values of the shares on the dates the options were granted. 3. Paid-in capital in excess of par values of capital stocks increased in 1961 by $452,817, representing the excess of sales price over par value of common stock sold to officers and employees under the Incentive Stock Option Plan. 4. Under the terms of the Indenture covering the 23s% Sinking Fund Debentures, $65,027,318 of retained earnings is restricted as to payment of cash dividends on common stock. This limi- tation does not apply to stock dividends on c ommon stock, nor does it restrict payment of dividends on preferred stock. TIMN 446155 17

61 F/LUTER LI CHESTERFIELD TH E', M 1^RrA C_L E T P 0 0 R © f° 1 tT E fY S n^. i ca Aa, fG I._ U °r a C 1 G A i p 0 ,N w TIMN 446159

ff coni©lidated gs and ret cotripanits at Bece HASKINS & SELLS CCRTtrtCO rUitfC ACCQUNTANTS e D{reptQ~ `and St Liggett~dr ~44"4ors Toca (:oinpurt~: TWQ *RQJtGWAY NEW YORK < We have examined the consolidated=bal~~nce- sheet of. Liggett _ &. Myers. Tobacco- Conipany and its wholly-owned consolidated subsidiary as of December_ 31, 1961 and the- related •statem,ents of consolidated, imatngs and retained. earnings for the year then ended. Our exairunatigri was imac_ie inn accordaace witl gene~ally 4 ~ e~ tests accepted audit2ng stmdards, and accorcUng.ly iuicTided ~~` iires t~f t~e g~i~tu~tinp recuxz~s at~ sucli at~ier auditing ~Sra P Trlnrd clareAnecessar"ve eircumstances: f. _ ... e result :'_ o iioris fox . ~ ~ar then e zi ; , ~~ . ~- ,. , a tth ~ accepeea aceau~g prinelpl applied the- chainge,- which we approve; in the basis -- of stat ieritin unconsolidated subsidiary companies espIai~x ~t~feFl to the financial statements) on a basis con- sisten" ` 1t ot the prececting year. TIMN 446151

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