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Liggett & Myers 1970 An n ual Report TIMN 445954

Stockholders' Annual Meeting The annual meeting of stockholders will be held on Tuesday, April 27, 1971, at the Commodore Hotel, 42nd Street, between Lexington and Park Avenues, New York City, at 2:30 P.M. Eastern Daylight Time. A formal notice of this meeting, together with a proxy and proxy state- ment, will be mailed to stockholders on March 26, 1971. Stockholders who are unable to attend the meeting are urged to sign and return their proxies promptly so the stock of the company will be repre- sented as fully as possible at the meeting. The company is owned by approxi- mately 50,100 stockholders. About 76 per cent of the total common, preferred and preference stock was voted in person or by proxy at the last stockholders' meeting on April 28, 1970. Highlights of Operations Contents Operating Income and Sales by Product Lines 2 Cigarette and Tobacco Division 3 Alcoholic Beverages 6 Pet Foods 8 Other Products 10 Products and Company Locations 13 Six Years in Review and Disposition of Earnings 14 Financial Review 15 Financial Statements 16 Officers and Directors 24 1970 1969 Net sales ......................... $696,663,577 $658,784,013 Earnings before extraordinary charge ... 32,038,913 24,898,167 Net earnings ....................... 28,843,913 24,898,167 Amounts per common share Earnings before extraordinary charge .. 3.86 2.92 Extraordinary charge .............. .41 Net earnings ..................... 3.45 2.92 Net earnings - assuming full dilution .. 3.38 2.87 Dividends per share of common stock ... 2.50 2.50 Current assets ..................... 343,041,031 348,891,187 Current liabi lities ................... 127,341,355 116,619,986 Ratio ............................ 2.7 to 1 3.0 to 1 Long-term debt .................... $ 84,140,672 $ 97,810,644 Stockholders' equity 7% preferred stock ................ 11,990,100 13,451,100 $5.25 convertible preference stock (involuntary liquidation value) ..... 16,924,600 25,313,600 Common stock .................. 296,502,181 281,546,720 Per share of common stock .......... 37.63 36.51 Number of stockholders ............. 50,111 51,510 Number of employees ............... 7,540 8,730 TIMN 445955

, MEW s'<D f1", _o sWa ioa1=0 March 22, 1971 Dear Editor: Attached is a copy of Liggett & Myers' 1970 annual report, which I think you will find interesting as well as useful for editorial background purposes. Net earnings of Liggett & Myers in 1970 increased approximately 16 per cent to $28,843,913, equal to $3.45 per share of common stock, from $24,898,167, equal to $2.92 per share in 1969. Net sales increased 6 per cent to a record high of $696,663,577, from $658,784,013. 1970 earnings before an extraordinary charge of $3,195,000, equal to $0.41 per share of common stock, were $32,038,913, equal to $3.86 per share. Earnings before the extraordinary charge were almost 29 per cent higher than 1969 net earnings. The extraordinary charge in 1970 resulted from the closing of our cigarette manufacturing plant in Richmond, Virginia in December, 1970. The estimated costs of the plant closing were $6,684,000 ($3,195,000 after related income tax benefits of $3,489,000); and consisted principally of severance pay and retirement annuities for terminated employees. The consolidation of Richmond operations with our primary operations in Durham, North Carolina, together with capital expenditures for modernization and expansion of our plant facilities in Durham, will increase manufactur- ing efficiencies and should result in savings beginning this year. Non-tobacco sales of Liggett & Myers Incorporated in 1970 increased 12 per cent to $313,192,398 from $280,716,696- in 1969; and operating income from non-tobacco sales increased 19 per cent to $43,679,882 from $36,856,361 in 1969. TIMN 445956 -more-

Cigarette and Tobacco Division Domestic Cigarettes Despite unprecedented efforts of the anti-tobacco forces, increased state and local excise taxes resulting in higher retail prices, and a general slowdown in the economy, domestic cigarette con- sumption increased in 1970, the first advance in three years. The downward trend in domestic cigarette consumption of the previous two years leveled off in the first half of 1970 and made a dra- matic turn upward in the second half of the year. I n 1970, filter cigarettes again in- creased their share of the total domestic market and now represent almost 80 per cent of all cigarettes sold in the United States. 100 millimeter cigarettes increased their share of the total market to about 18 per cent, and menthol cigarettes increased their share to 23 per cent. Our Cigarette and Tobacco Division, under the direction of its new President, Kenneth McAllister, improved its opera- tions and profitability considerably in 1970. Although unit cigarette sales de- clined slightly, dollar sales were higher, and operating income from cigarette and tobacco product sales increased more than 21 per cent, a sharp reversal of the downward trend in 1968 and 1969. As a result of a number of innovative measures undertaken by our new Ciga- rette and Tobacco Division in its first full year of operation, the rate of decline of our cigarette sales slowed considerably, and after losses in unit sales in the first six months, there were substantial gains in unit sales in the second half of 1970. I n the important and fastest growing 100 millimeter and menthol segments of the cigarette market, sales of our 100 __ millimeter and menthol brands increased at a rate greater than that of the industry. During the year, major changes were made in two of our principal brands. Fol- lowing the introduction at mid-year of a completely innovative packaging tech- nique, as well as new improved tobacco blends, for our CHESTERFIELD filter product line, equally exciting new pack- aging and improved tobacco blends were also introduced for all L&M filters, our principal brand. To enhance further the competitive position of both L&M and CHESTERFI ELD, each was supported by a new advertising campaign, and con- sumer response has been encouraging. At mid-year, a new print advertising cam- paign was also launched for the LAR K brand. Since the introduction of consumer redemption coupons on all CHESTER- FIELD cigarettes, the long-term decline of the brand, traditionally a non-filter cigarette, has leveled off. Last year, sales of the CHESTERFIELD filter and menthol brands increased, and TIMN 445960 3 I I I I

-2- For the year 1970, non-tobacco sales were 53 per cent of total corporate sales, excluding tobacco and liquor excise taxes, and operating income from non-tobacco sales was 52 per cent of total operating income. Liggett & Miers currently has a higher percentage of non-tobacco sales than any other major cigarette manufacturer in the United States. Cigarette and tobacco sales also increased last year to $383,471,179 from $378,067,317 in 1969; and operating in- come from these sales climbed 21 per cent to $39,738,284, compared with $32,749,413 in 1969. In 1970, net sales of alcoholic beverages climbed to $146.8 million, up 5 per cent from 140.1 million in 1969. Operating income from alcoholic beverages in 1970 increased 6 per cent to $26.1 million compared with $24.8 million the previous year. Pet food sales in 1970 increased to $129.6 million; up 18 per cent from $110.2 million in 1969. Pet food opera- ting income rose to $13.6 million, an increase of 49 per cent over operating income of $9.1 million a year ago. Sales of other non-tobacco products (cereal, popcorn, household cleaners and watch bands) increased to $36.8 million in 1970, up 21 per cent from $30.4 million the year before.. Operating income from these products rose to $3.9 million, a gain of 33 per cent over operating income of $3 million in 1969. The 1970 increases in non-tobacco sales and operating income are extensions of the dramatic gains made by Liggett & Myers' diversified interests in the past six years. From 1965 through 1970, non-tobacco sales increased from $78.7 million in 1965 to $313.2 million in 1970, and non-tobacco operatinq income climbed from $4.5 million to $43.7 million. 1970 was indeed a good year for Liggett & Myers. As we move on into 1971, we hope to be able to report continuinq growth. Please feel free to contact me concerning this or future reports regarding the progress of our company. Sin~ rely, (` Dan Provost ~'IM1V 445957 Director of Corporate Communications DP:seh

Operating Income and Sales by Product Lines 1965 Operating Income 1965 Operating Income 1969 1970 1965 1966 1967 1968 1969 Net Sales (Excluding Excise Taxes) 1966 1967 1968 1969 (Dollars Expressed in Thousands) 1970 1970 Tobacco Products ....... $ 40,321 $ 37,323 $ 38,347 $ 36,284 $ 32,749 $ 39,738 Alcoholic Beverages ...... 2,143 13,858 19,113 23,279 24,757 26,149 Pet Foods ............. 2,382 2,793 3,724 3,487 9,150 13,617 Other ................. - - 173 958 2,950 3,914 Total ............... $ 44,846 $ 53,974 $ 61,357 $ 64,008 $ 69,606 $ 83,418 Net Sales (Excluding Excise Taxes) Tobacco Products ....... $265,164 $265,677 $257,425 $244,304 $237,790 $247,812 Alcohol ic Beverages ...... 39,461 118,583 115,788 105,264 110,240 115,651 Pet Foods ............. 23,794 35,028 47,647 65,122 110,191 129,642 Other ................. - - 4,968 23,558 30,445 36,783 Total ............... $328,419 $419,288 $425,828 $438,248 $488,666 $529,888 Net Sales (Including Excise Taxes) Tobacco Products ....... $454,467 $446,741 S427,181 $397,270 $378,067 $383,471 Alcoholic Beverages ......_ 54,892 153,489 151,984 131,290 140,080 146,767 Pet Foods ............. 23,794 35,028 47,647 65,122 110,192 129,643 Other ................. - - - 4,968 23,558 30,445 36,783 Total ............... $533,153 $635,258 S631, 780 $617,240 $658,784 $696,664 Notes: (1) Operating income represents income before corporate expenses ^terNst trer income and expenses, income taxes, minority interest, and an extraordinary charge in 1970. (2) Net sales and results of operations of companies acquired hv p,.rthase juring the period are included from dates of acquisition; companies acquired on a pooling of interests basis are included for the znt re period; i.e. Austin, Nichols & Co., Incorporated. (3) 1966 and 1967 net sales include sales by Star Industries, Inc. and certain of its subsidiaries for the period that these companies were subsidiaries, May 26, 1966 to May 15, 1967 (excluding excise taxes: S45.191.345 for 1966 and $20,057,752 for1967; including excise taxes: $49,141,555 for 1966 and $22,819,457 for 1967). TIMN 445959 Tobacco Products Alcoholic Beverages Pet Foods Other Products 1966 1967 1968 2

Earl Grissmer Co., Inc. In July, 1970, Liggett & Myers acquired the assets of Earl Grissmer Co., Inc., producer of the nationally distributed BLUE LUSTRE line of household cleaning products. Last year, sales increased 34 per cent and both sales and earnings were the highest in the_ company's 27-year history. In addition to the widely known BLUE LUSTRE Carpet and Upholstery Shampoo, the company markets BLUE LUSTRE Glass Cleaner, Furniture Polish, and a complete line of replacement Vacuum Cleaner Bags. Earl Grissmer is the nation's largest distributor of carpet shampoo machines to hardware, paint, drug and variety stores for use under the BLUE LUSTRE daily rental program. BLUE LUSTRE in- creased its share of the carpet shampoo market in 1970 and maintained its num- ber one position in rental carpet shampoo programs for retailers. Last year, the company used local tele- vision commercials for the first time, and because of their success, network tele- vision was added to the advertising pro- - gram in 1971. BLUE LUSTRE Vacuum Cleaner Bags, a new product line, made good gains in distribution and sales last year. New models are being added to the line, and new marketing methods are being tested. All of the company's liquid products - Carpet Shampoo, G lass Cleaner and Furniture Polish - have been repackaged in custom-designed plastic containers, and distribution of the new packaging was completed by mid-1970. I mprovements in the company's d istri- bution system during 1970 enabled retail customers to receive BLUE LUSTRE shipments overnight from 16 distribution warehouses in the United States. Distribu- tion also was extended in Alaska and Hawaii.

Allen Products Company, Inc. In 1970, sales and operating income of Allen Products Company again reached record levels, and ALPO premium-priced dog food continued to be the country's number one canned dog food in dollar volume. Total pet food sales in the United States increased to a new high of approximately $1.25 billion, and ALPO sales continued to grow at a rate greater than that of the industry. A significant product change in ALPO was made in late 1970 to enhance its traditional all-meat components. Vita- mins and minerals were added to the entire product line in sufficient quantities to exceed the National Research Coun- cil's standards for a complete and balanced diet. A new television adver- tising campaign was launched to bring this story home to consumers, and a spe- cial campaign was addressed to vet- erinarians. A new ALPO product, Chicken & Liver, was successfully developed and introduced in some markets in 1970 and will be expanded to all markets in 1971. In addition, all ALPO labels were rede- signed last year to improve the product's visibility and eye appeal. ALPO CAT FEAST, the company's new luxury line of canned cat food, had good results in test markets last year, but further tests are being made before the new product line is introduced nationally. Manufacturing capacity will be in- creased 50 per cent in 1971 in both the Allentown, Pennsylvania and Crete, Nebraska plants by the installation of new hydrostatic cookers. Research and development facilities at the Allentown plant, which were almost doubled in 1969, will be expanded again in 1971 with construction of a new metabolic and palatability testing kennel. A new office building to be located in Allentown is also planned for 1971. Liv-A-Snaps, Incorporated I n its first year as a Liggett & Myers sub- sidiary, Liv-A-Snaps, Incorporated, a small manufacturer of nationally dis- tributed pet food treats operating under the management of Allen Products, had substantial increases in sales and a small increase in operating income. The prod- 8 uct line includes CHAR-O-SNAPS as well as LIV-A-SNAPS. During the yean, new package designs were introduced, a new advertising pro- gram was launched, and wider distribu- tion of the product line was achieved. Product research and development were emphasized, and the test marketing of several new pet food treat items is planned in 1971. Perk Foods Co. Perk Foods Co., formerly called Ready Foods Corp., manufactures a popular- priced l ine of canned and dry dog foods under the VETS' label, and recorded higher sales and operating income in 1970. VETS' canned dog foods include seven varieties, and VETS' dry dog foods include Regular and Gravy Style Nuggets. A new marketing team, under the supervision of a new marketing director with extensive experience in the pet food industry, was organized last year. Two buildings adjoining the Los Angeles factory were acquired in 1970 to expand the volume of Perk's West Coast operation, and a second shift was added at the Camp Hill, Pennsylvania facility to provide for additional production volume in the East.

CHESTERFIELD king non-filter had the only increase of all non-filter brands on the market. EVE, our new cigarette brand espe- cially designed for women, was given national distribution late in 1970, fol- lowing extensive and successful test marketing without any broadcast adver- tising. Named after the first woman, EVE has a package design which features a con- temporary rendering of her, surrounded by an intricate pastel-colored floral design that also appears on the filter tip and the carton. This new luxury length brand is available in both filter and menthol filter. The tobacco blend has been carefully selected to give women a rich, yet gentle, f l avor. The female segment of the cigarette market has continued to grow and in- crease its share of the total market, and EVE, the first truly feminine cigarette, is our commitment to this growth area. Smoking and Chewing Tobaccos The domestic consumption of pipe to- baccos increased in 1970, while that of chewing tobaccos declined slightly. Our sales of smoking and chewing tobaccos, and the operating income from these sales, increased in 1970. Early in the year, we introduced HARMONY Mixture Pipe Tobacco, a mild flavorful mixture of domestic and imported tobaccos in an award-winning package, with good results. During the year, we improved the packaging of many of our smaller brands of smoking to- baccos to give them longer shelf life, and greater eye-appeal and brand identi- fication. The sales and operating income of The Pinkerton Tobacco Company rose to record highs again in 1970, and sales of Pinkerton's loose leaf chewing tobaccos continued to outpace the industry, with an increase of almost 15 per cent. While RED MAN is the leading brand, UNION STANDARD and RED HORSE also had good increases. International Cigarettes Unit cigarette sales outside the United States are approximately five times those of the U.S. domestic market, and world- wide cigarette consumption continues to grow. For long-range growth, the greatest potential lies in the foreign marketplace, where per capita income and cigarette consumption are still considerably below U.S. levels. To capitalize on this poten- tial, and to meet the growing demand for American-type cigarettes in the more affluent countries and in those areas where the standard of living is rising, Liggett & Myers uses three approaches. We export our principal brands to more than 100 countries. Licensees in Europe, South America, Asia, Africa and Australia manufacture our brands under royalty arrangements. Finally, to develop our tobacco business in important world trading areas, we hold equity positions in foreign cigarette manufacturing com- panies in Argentina, Brazil, Mexico, Peru, Switzerland and West Germany. Our new International Cigarette and Tobacco Division has taken a number of steps to improve our position in the inter- national marketplace. In 1970, our export sales gained for the first time in several years, and royalties from sales of our cigarettes manufactured and marketed abroad made an important contribution to corporate earnings. The majority of our foreign licensees had sales increases last year. Early in the year, we signed our first licensing agree- ment in Africa with Societe Nationale des Tabacs et Allumettes in Algeria, one of the faster developing North African countries. We are currently negotiating additional licensing agreements in North Africa and elsewhere. I n West Germany, however, and to a lesser extent in Switzerland and Brazil, where we hold majority equity positions, we incurred losses again in 1970 from high reorganization and start-up costs. These expenditures should eventually place us in a better position to participate successfully in the fast-growing European market, which is about equal to our domestic market. In Argentina, our locally manufac- tured L&M brand became the second best-selling cigarette of all domestic and foreign brands. At mid•year, CHESTER- FIELD menthols were introduced in the Philippines, where many of our other brands are manufactured under license. In late 1970, we started test marketing locally made L&M's in Brazil; and we began test marketing our first locally made entry, CHESTERFIELD filter, in West Germany. Our export brands also made advances in a number of overseas areas last year. Our principal filter brands, including the 100 millimeter and menthol versions, continued to gain an increasing share of our export sales as the trend from non- filter to filter continues in international markets; although non-filter CHESTER- FIELD is still a major export brand. I n Japan, we increased our share of market, largely due to greater export sales of LARK,which became the third largest- selling foreign brand in that country last year. CHESTERFIELD filter export sales to Spain have doubled since the introduc- tion of new packaging last summer, and LAR K export sales to Spain have doubled since the introduction of LAR K com- mercials on Spanish television in early 1970. Our new L&M and CHESTERFIELD photographic packs are being test marketed in a number of overseas manu- facturing locations and are being ex- ported to Puerto Rico, the Virgin Islands and overseas military markets. TIMN 445961 4

To Our Stockholders: The year 1970 was a good one for Liggett & Myers. Sales reached a record high, and earnings increased substantially. All of our principal product lines contributed higher sales and earnings, and most of these gains represented internal growth. Net earnings in 1970 increased ap- proximately 16 per cent to $28,843,913, equal to $3.45 per share of common stock, from $24,898,167, equal to $2.92 per share, in 1969. Earnings in 1970 be- fore an extraordinary charge of $3,195,000, equal to $0.41 per share of common stock, were $32,038,913, equal to $3.86 per share. Earnings before the extraordinary charge were 29 per cent higher than 1969 net earnings. Net sales in 1970 increased to $696,663,577, a gain of 6 per cent over the $658,784,013 reported in 1969. The extraordinary charge of $3,195,000 in 1970 resulted from the closing of our cigarette manufacturing plant in Richmond, Virginia in December, 1970. The estimated costs.of the plant closing were $6,684,000 ($3,195,000 after related income tax benefits of 53,489,000) and consisted principally of severance pay and retirement annuities . for employees. The consolidation of Richmond operations with our primary operations in Durham, North Carolina, together with capital expenditures for the modernization and expansion of our plant facilities in Durham, will increase manufacturing efficiencies and should result in savings beginning in 1971. Our program to diversify into strong consumer product growth areas con- tinued to make excellent progress in 1970, and our non-tobacco lines of busi- ness again played an important role in the growth of our company. During 1970, our non-tobacco sales represented ap- proximately 53 per cent of consolidated net sales, excluding tobacco and alcoholic beverage excise taxes, and operating income from non-tobacco sales was approximately 52 per cent of total oper- ating income. In 1970, total sales of all non-tobacco product lines increased 12 per cent from $280,716,696 in 1969 to $313,192,398, and operating income from these non- tobacco sales increased 19 per cent from t $36,856,361 to $43,679,882. The dra- matic growth in non-tobacco sales and operating income from 1965 to 1970 is shown in the charts and tables on the following page. In 1970, our diversification program moved into two new areas: household cleaning products and real estate. Earl Grissmer Co., Inc., producer of the nationally distributed BLUE LUSTRE line of household cleaning products, was acquired in July, 1970. The Corporation's new real estate division, established in September, 1970, made its first move with the acquisition of property in Greenwich, Connecticut, where a modern, four-story office building will be erected and leased for investment purposes. Meanwhile, our substantial worldwide tobacco operations represent a large and profitable segment of our total business. In 1970, there was considerable improve- ment in this area of our business. Ciga- rette and tobacco dollar sales increased from $378,067,317 in 1969 to $383,471,179 in 1970, and operating income from these sales increased 21 per cent from $32,749,413 to $39,738,284 in 1970. The new Federal law prohibiting ciga- rette commercials on broadcast media became effective January 2, 1971. While we do not anticipate a major flow- through to earnings from advertising dollars that would normally have gone to broadcast media, we do feel that the broadcast advertising ban gives Liggett & Myers an opportunity to compete on a more equitable basis with other cigarette manufacturers who were able to out- spend us by considerable margins on television. As of February 1, 1971, most cigarette manufacturers, including Liggett & Myers, have voluntarily agreed to list "tar" and nicotine content, as determined by the Federal Trade Commission's testing laboratories, in rertain advertising materials. But, likP the hroadcast adver- tising ban and thr ,t,ongor ha alth warn- ings on cigarettf• c t.ju• <~it .vent into effect Novemt.,Nr 1 1 I 'i I •~ , hould have no maten,,l ~i•,, - t ,o;. Con- sumers have sho:>n rUr .,r,v years that they will not necessarily su, nfice good Liggett&Myers incorporated taste and flavor for lower "tar" and nico- tine, and the health charges against ciga- rette smoking still remain unproved. Many eminent scientists and medical authorities continue to challenge the alle- gatioris against cigarette smoking. We are strongly committed to a policy of diversification into growing and profit- able businesses, and we are continually -- seeking well-managed growth companies whose acquisition would be advantageous to the Corporation and in the best interests of its shareholders. We are grateful to our stockholders for their support of the company and its products. The dedication and talents of our employees contributed significantly to our-growth and progress last year, and we appreciate their loyalty and cooperation. Respectfully submitted, Milton E. Harrington President March 4, 1971 TIMN 445958 1