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Operations 1960 There is presented on the following pages some of the accomplishments of your Company for the year 1960. For the industry, it was a year of intense activity char- acterized by increasing competition and further switch- ing of brand loyalties among the consumers. Net Sales 60o 500 400 300 200 100 fifil '54 5 '57 '58 '5 Net Earnings 32 28 24 20 16 12 M '54 '55 6 '57 '58 'S9 0 '60 Sales Net sales of the Company declined from $554,936,026 in 1959 to $543,172,587 in 1960, or about 2.1%. The major portion of this decline took place during the first nine months of the year. For the year as a whole the sale Of CHESTERFIELD king size and L&M king size cigarettes each showed a substantial gain from the pre- vious year and offer encouragement for the months ahead. CHESTERFIELD regular size continued to decline, however, the rate of decline was considerably reduced. Earnings Earnings after taxes amounted to $28,708,895 as com- pared with $30,038,689 in 1959. Based on 3,939,053 common shares outstanding at the end of the year, net earnings amounted to $6.96 per share as compared with $7.28 in 1959. Earnings in the fourth quarter were equal to $1.76 per share whereas earnings in the comparable period of the previous year were $1.47 per share. Dividend Record The Company's record of continuous dividend pay- ments on the Common Stock was extended for the 49th consecutive year. Total payments in 1960 amounted to 5 TIMN 446171

$5.00 per share, consisting of four quarterly dividends of $1.25 each. The total amount of dividends paid in 1960 on both Common and Preferred stock was $20,987,746. The balance of 1960 earnings amounting to $7,721,149 was retained for use in the business. On January 18, 1961, a regular dividend of $1.25 per Common share was declared, to be paid on March 1, 1961, to stockholders of record February 17, 1961. Financial Condition - The financial condition of the Company continued to grow stronger in 1960. For the second successive year there were no short-term borrowings at the year end. The investment in United States Government securi- ties, including tax anticipation notes, amounted to $14,932,468 on December 31, 1960 compared with $4,992,485 at the end of the previous year. Long-term debt was $5,750,000 lower at the end of 1960 as a result of retirement of debentures through operation of the Sinking Funds. This reduction, together with the addition of $5,634,191 to net worth, produced a further improvement in the ratio of funded debt to net worth. At the end of 1960 funded debt was only 26.8% of net worth compared with 45.3% at the end of 1954. Further steps were taken to reduce the number of shares of non-callable 7% Preferred stock of the Com- pany outstanding. During the year your Management succeeded in reacquiring 17,820 shares of such stock. As of December 31, 1960 there was held in the treasury a total of 47,280 shares. In the absence of unusual developments no need for new long-term financing is anticipated in the foresee- able future. Net Worth Compared With Long-Term Debt  Net Worth  Long-Term Debt 300 200 100 4 '55 '56 '57 '59 '60 Capital Expenditures The construction of the new addition to the Com- pany's research building in Durham, North Carolina, was completed on schedule during the past summer and appropriate dedication ceremonies took place on Sep- tember 30, 1960. 6

Taxes 70 60 50 40 30 20 10 Federal and State Income ' and Franchise Taxes Net Income After Taxes '54 '55 '56 '57 '58 '59 60 The program of maintaining plant and equipment at maximum efficiency was continued during the year 1960. Capital expenditures amounted to approximately $2,800,000 or slightly more than the amount of pur- chases in 1959. No major capital expenditures appear necessary in the near future. Depreciation charged to cost and expense in 1960 amounted to $3,909,369. Taxes Taxes continued to be an imp~it factor in the Company's operations. Excise taxes in 1960 totaled $232,786,174. Although the Treasury Department adopted in June 1959 a semi-monthly method for pay- ment of such taxes instead of a daily basis formerly in effect, it has not resulted in any material savings to the Company. The excise taxes must still be paid several weeks prior to the time when the Company receives payment from its customers. The industry has every right to expect that further adjustments will be granted in the future. Federal and State income and franchise taxes in 1960 amounted to $34,004,000. Such taxes alone came to $8.63 per share of common stock compared with net income of $6.96 per share. Manuf acturing Our factories are strategically located near the source of supply of leaf tobacco and are considered to be among the most modern in the industry. The up-to-date machinery used in all departments is the finest equip- ment available. Our cigarette factories are located in Durham, North Carolina and Richmond, Virginia. You are cordially invited to visit either of them whenever you are in the vicinity. Since the manufacturing methods used in producing the finished product contribute greatly to quality and consumer acceptance of the product, the Company is constantly exploring the possibility of making further Almost 800,000 people have visited our modern cigarette factories in Durham, N. C. and Richmond, Va. 7 TIMN 446173

improvements in manufacturing methods that will pro- tect the standards of quality and at the same time pro- duce greater efficiency in operations. Liggett & Myers buyers bid at auctions for mild, top quality tobaccos. 8 Export The export sales of the Company's products, prin- cipally its cigarette brands, continue to make an impor- tant contribution to the Company's over-all business. We have engaged in trade with maWTloyal, well estab- lished customers throughout the w d for a long num- ber of years and through a mutually cooperative and satisfactory relationship with them we have been able to develop good markets for our products. Wherever American cigarettes are sold, whether to foreign tobacco monopolies, ship's-stores, U. S. military overseas, air lines, diplomatic corps or other outlets, we are adver- tising and actively promoting the sale of the Company's brands. Leaf Tobacco Our tobacco buyers are present on every important tobacco market, selecting only the choicest tobaccos to meet the exacting standards set for all Liggett & Myers' products. The 1960 crop of flue-cured tobacco totalled 1,368,- 000,000 pounds, compared with 1,185,000,000 pounds in 1959. The season average price was 59.90 per pound, the highest on record and more than 20 per pound above the average for the 1959 crop. The Government support price for the 1960 crop was 55.50 per pound. The U. S. Department of Agriculture has announced a national marketing quota of 1,122,000,000 pounds for the 1961 crop. The burley markets had sold approximately 80% of the 1960 crop before the end of the year. The crop is estimated at approximately 500,000,000 pounds, or slightly lower than the previous crop. Market prices through the end of the year averaged 65.20 per pound, just a shade lower than the all-time high average of 66.20 established for sales of the 1958 crop. The support price for the 1960 crop was 57.20, the same as the previous year. TIMN 446174

Research GEN. JAMES M. ~'iAVIIW The new Liggett & Blyers Research Center is more than twice the size of the original building. At dedication ceremonies for the new Liggett & Myers Research Center on September 30, 1960, Governor Luther H. Hodges of North Carolina said: "I would lil:e to commend Liggett & Myers Tobacco Company on the wisdom and initiative they have displayed in expanding their research activities ... we gather here to dedicate a great research establishment second to none in its field." In his dedication address, General James M. Gavin stated: "We look upon Liggett & Myers as being outstanding in its awareneso of the importance of research." General Gavin, famous#or his World War II combat record and his scientific roles in the United States defense program after the War, is today Presi- dent of Arthur D. Little, Inc., one of the nation's leading engineering and research firms. When Liggett & Myers was incorporated in 1911, scientific research was conducted at the Company's St. Louis plant. In 1950, the Company completed the most modern research laboratory in the industry in Durham, North Carolina, primary location of the Com- pany's leaf buying and cigarette manufacturing opera- tions. By 1958, it had become apparent that the "new" research building, despite its generous size and modern design, would soon be inadequate for the Company's rapidly expanding research program. A new wing that 9 TIMN 446175

would more than double the size of the building was planned, and construction was completed on schedule in 1960. This 100 percent increase in capac•ity should provide for the Company's needs in the next decade. The new Liggett & Myers Research Center represents an investment of more than $2,250,000 and contains over 48,000 square feet of floor space, largely devoted to laboratory work space. Included in these amounts are 27,500 square feet of floor space in the new wing, which was constructed at a cost of approximately $1,250,000; and it has been constructed so that a third level can be added when further expansion is needed. The upper level of the new wing houses a 120-seat auditorium, five new organic chemistry laboratories and seven new specialized laboratories, including a Tracer Laboratory, an Instrumentation Laboratory, Hood and Chromatography rooms and a Cold Laboratory. The lower level is primarily devoted to engineering research and development. It contains two conventional chem- ical laboratories, an explosion-proof laboratory, two Temperature and Humidity Controlled laboratories, an Electronics Laboratory, a Dust Controlled Laboratory, a drafting room and a machine shop. Occupying both levels of the new wing at the North end, is a 90-foot by 67-foot Engineering Pilot Plant Area, which will house the facilities necessary to perform all cigarette manufacturing operations, thus making it possible to investigate all variables in these operations under controlled conditions. With these facilities, the Company's research engineers are now better equipped to improve present manufacturing processes, to develop new ones and to test all changes and innovations before they are incorporated into the production line. The original building now contains four large physi- cal chemistry laboratories on the ground floor. In the basement, there is a new glass blowing shop, three Tem- perature and Humidity Controlled laboratories, a pho- tographic dark room, Preparation and Grinding rooms and a new, expanded area specially equipped for flavor investigations, including a new Flavor Laboratory and new Flavor Storage and Smoking Panel rooms. The top floor now houses six modern analytical chemistry labo- 10

ratories, standard Kjeldahl and Titration rooms and an expanded area, for the growing research library facilities. At the dedication of the Company's new Research Center, Dr. Frederick R. Darkis, Vice President and Director of Research, made the following remarks about the Coinpany's research program. "During the past sev- eral centuries, tobacco in the form of numerous manu- factured products has been used.~.i.i3 ever increasing quantities by a continuously greaterf 6umber of people. The use of tobacco has made a sigru&ant contribution to the pleasure, satisfaction and sense of well-being of those who use it. "Beginning with the period when tobacco was first used in Europe, many people have vigorously opposed its use. Over the years, many criticisms of it have been made and numerous impediments to its use, including legislation, have emerged from time to time. In large part, these accusations and impediments have fallen by the wayside, due to the unreliable information on which they were based. During the first half of the 20th century, the use of tobacco became rather gen- erally accepted and was subject to less criticism. How- ever, during the past decade, the use of tobacco has experienced its most severe opposition. This opposition is based on the contention that using tobacco in the form of cigarettes will seriously impair the health of the smoker. "Those medical and statistical investigators who have produced the information that has led to the most seri- ous indictments ever leveled against tobacco have been quite vigorous in their attack on its use. They have drawn and given wide circulation to many conclusions from their findings that most people trained in the same disciplines fail to find justifiable. Some of their findings merit consideration and they should not be ignored. "We have carried on cooperative work with govern- ment agencies over the years, and have contributed financially and otherwise to the programs of research carried on by governmental and private organizations. "We have devoted much effort to fundamental re- search and have and are publishing information obtained as a result of this work. We have not restricted Vacuum system for handling 11 gaseous materials in a Physical Chemistry Laboratory. TIMN 446177

our research program to that necessary developmental work so pertinent to the everyday operations of the Company. "We have organized and developed what we believe is the most inclusive program in existence directed toward the separation, identification and the quantita- tive determination of the numerous constituents that make up those two complex materials, namely tobacco tissue and tobacco smoke. This_~Trogram goes even further in that the biological act'iv& of the component parts as well as that of the whole are being studied by the best available techniques. It is hoped that these findings will help to clarify the maze of opinion that exists at present in respect to the problem of tobacco and health." Disposition of Total Earnings for 1960 The Company received for goods sold to customers and from dividends and interest a total of $544,062,000. This is how it was used or set aside. 12

qr . Opinion of Certified Public Accountants HASKINS & SELLS CERTtFiEU PUBLIC ACCOUNTANTS TWO BROADWAY NEW YORK 4 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 December 31, 1960 and the related statements of consolidated earnings and retained earnings for the year then ended. Our examina- tion was made in accordance with generally accepted auditing stand- ards, 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, 1960 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. X4'4.;' a•4-~ January 25, 1961 13

Liggett & Myers Tobacco Company Assets CURRENT ASSETS: U. S. Government securities - at cost plus accrued interest (quoted market value: 1960, $4,999,750; 1959, $4,992,485 ) . . . . . . . . . . . . . . . Accounts receivable, customers . . . . . . . . . . Accounts receivable, others . . . . . . . . . . . Leaf tobacco, at average cost . . . . . . . . . . Manufactured stock and operating supplies, at average cost . . . . . . . . . . . . . . . . TOTAL CURFEENT ASSETS . . . . . . . . . , PROPERTY, PLANT AND EQUIPxiENT - AT COST: Land and buildings . . . . . . . . . . . . . . . Machinery and equipment . . . . . . . . . . _ , Total . . . . . . . . . . . . . . . . . . Less accumulated depreciation . . . . . . , NET PROPERTY, PLANT AND EQUIPMENT ... OTHER ASSETS: Brands, trade-marks and good will . . . . . , , , Investments in unconsolidated subsidiary companies, at cost . . . . . . . . . . . . . . . . . . . . Investment in foreign tobacco company, at cost ... Foreign currency deposits subject to withdrawal restrictions . . . . . . . . . . . . . . . . . . Prepaid expenses and deferred charges ....,. TOTAL OTHER ASSETS . . . . , , , , . . . TOTAL . . . . . . . . . . . . . . . . 14 1960 $ 11,059,994 4,998,055 23,223,150 1,151,657 282,169,184 32,243,932 354,845,972 20,578,094 58,170,734 78,748,828 43,626,750 35,122,078 1959 $ 7,328,241 4,992,485 21,189,902 1,159,595 292,005,364 38,388,176 365,063,763 20,229,351 57,361,691 77,591,042 41,390,536 36,200,506 1 919,004 4,000 1 887,004 4,000 1,005,034 1,183,911 3,111,950 $393,080,000 1,025,076 1,210,726 3,126, 807 $404,391,076 TIMN 446180