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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

Six Years in Review (Dollars expressed in thousands except per share figures) Operating Results - Year Ended December 31 1970 1969 1968 1967 1966 1965 Net sales • • • • • • • • .......................... $696,664 $658,784 $617,240 $631,780 $635,258 $533,153 Excise taxes included in sales .................. 166,775 170,118 178,992 205,952 215,971 204,735 Operating income ..•.•••••••••••••••••••••-• 83,418 69,606 64,008 61,357 53,974 44,846 Earnings before extraordinary charge ............ 32,039 24,898 24,066 25,127 23,439 22,597 Net earnings ............................... 28,844 24,898 24,066 25,127 23,439 22,597 Amounts per common share Earnings before extraordinary charge .......... 3.86 2.92 2.82 2.93 2.71 2.56 Net earnings ............................. 3.45 2.92 2.82 2.93 2.71 2.56 Dividends on common stock - per share ......... 2.50 2.50 2.50 2.50 2.50 2.50 Financial Position - Year End Working capital ............................. 215,700 232,271 247,728 250,303 270,345 265,455 Plant and equipment (net) .................... 62,904 56,915 48,224 42,773 40,263 35,170 Total assets ................................ 549,141 544,644 507,385 490,382 490,506 382,764 Long-term debt ............................. 84,141 97,811 84,019 75,636 73,322 564 Short-term debt ............................ 71,182 66,135 51,712 51,292 41,643 40,526 Stockholders' equity ......................... 325,417 320,311 318,104 315,334 313,177 311,448 Book value per share of common stock ........... 37.63 36.51 35.96 35.45 34.91 34.58 Disposition of Total Revenues for 1970 The company and its subsidiaries received for goods sold to custo- mers and from royalties, etc., a total of $698,744,000. This is how it was used or set aside. 46.2% Cost of goods sold, exclusive of excise taxes $322,971,000 1.0% Earnings retained $7,318,000 3.1% Dividends $21,526,000 5.3% Income taxes $37,358,000 18.0% Other operating costs and expenses $125,580,000 2.5% Non-operating expenses, minority interest and extraordinary charge (net) $17,216,000 23.9% Excise taxes $166,775,000 TIMN 445971 14

. Liggett & Myers Incorporated 630 Fifth Avenue, New York, N.Y. 10020 TIMN 4459~2

Consolidated 8alance Sheet As of December 31 Assets 1970 1969 Current Assets Cash ......................................................... $ 16,715,937 $ 13,626,359 Marketable securities - at cost which approximates quoted market value .... 4,337 10,210,566 Accounts receivable Customers (less allowances for discounts and doubtful accounts: 1970, $899,544; 1969, $696,179) ................................... 66,304,357 61,440,289 Others ..................................................... 3,679,846 4,321,621 Inventories - principally at average cost (Note 2) Leaf tobacco ................................................ 187,900,048 188,547,952 Bulk whiskeys ............................................... 13,543,676 a 10,203,884 Finished goods and work in process ............................... 35,422,508 I 40,945,249 Other materials and supplies ..................................... 19,470,322 19,595,267 Total current assets ...................................... 343,041,031 348,891,187 Investments Capital stocks of and advances to foreign companies Unconsolidated subsidiaries (Note 1) .............................. 7,647,224 9,002,542 Other companies - at cost ...................................... 10,092,132 11,892,877 Other - at cost ................................................. 1,285,820 1,241,944 Total investments ....................................... 19,025,176 22,137,363 Property, Plant, and Equipment - at cost (Note 3) Land ......................................................... 5,542,702 4,468,773 Buildings ..................................................... 38,249,675 36,209,824 Machinery and equipment, etc . .................................... 81,414,782 86,959,723 Total ................................................ 125,207,159 127,638,320 Less accumulated depreciation ............................. 62,303,267 70,723,663 Property, plant, and equipment - net ....................... 62,903,892 56,914,657 Franchises, Goodwill, Brands, and Trademarks - at cost, less amortization (Note 1) .................................. 118,784,111 110,832,155 Deferred Charges and Prepaid Expenses ........................... 5,387,008 5,868,617 Total ................................................ $549,141,218 $544,643,979 .See Notes to Financial Statements. TIMN 445973 ~ 16

LIGGETT & MYERS INCORPORATED AND CONSOLIDATED SUBSIDIARIES Statement of Consolidated Paid-In Capital In Excess of Par Values of Capital Stock For the Years Ended December 31 Balance, January 1 ................................................ Add (Deduct) Excess of par value of shares (194,952 in 1970 and 105,954 in 1969) of common stock issued and cash paid in lieu of issuing fractional shares of common stock over the par value of shares (84,834 in 1970 and 46,112 in 1969) of $5.25 preference stock converted into common stock (Note 6) ... Excess of sales price over par value of capital stock sold to officers and employees under the Company's stock option plans (Note 7) ........... Excess of par value over cost of 7% preferred stock acquired .............. Excess of cost over related average quoted market value of 27,522 and 23,012 shares of common treasury stock issued in 1970 and 1969, respectively, in payment of awards for the 1969 and 1968 Plan years under incentive compensation plans for employees (Notes 6 and 8) ................... Other ........................................................ Balance, December 31 ............................................. See Notes to Financial Statements. 1970 1969 $117,746,183 $117,711,703 (113,106) (62,043) 36,700 23,177 122,870 12,951 (47,668) 84,951 1,711 (24,556) $117,746,690 $117,746,183 Statement of Consolidated Retained Earnings For the Years Ended December 31 Balance, January 1 ................................................ Add (Deduct) Net earnings ................................................... Cash dividends Preferred stock - $7 per share ................................... Preference stock - $5.25 per share ............................... Common stock - $2.50 per share ................................ Balance, December 31 (Note 5) ...................................... See Notes to Financial Statements. 1970 1969 $192,908,804 $189,678,988 28,843,913 24,898,167 (864,052) (967,530) (1,195,565) (1,450,318) (19,465,983) (19,250,503) $200,227,117 $192,908,804 TIMN 445976 19

Alcoholic Beverages The Paddington Corporation Sales and operating income of The Paddington Corporation, exclusive United States importer of J&B Rare SL 1) tIJh Whisky, rose to record highs in P-170. The rate of gain of alcoholic beverage sales slowed considerably in 1970, and the increase in the domestic consumption of spirits was only a fraction of its annual gains in recent years. Sales of Liggett & Myers' alcoholic beverages, however, increased several times the industry average. While sales of domestic whiskies de- clined last year, imported whiskies had substantial gains, with Scotch whisky showing the greatest increase of any major category. Our principal brand, J&B, shared in these gains, and according to independent trade reports, J&B was again the country's best-selling Scotch and moved up to sixth place among all liquor brands of all types. Despite the economic slowdown, premium liquor items, including Scotches, posted gains last year, and to participate in this growth sector of the industry, we introduced into major markets ROYAL AGES, a 15-year-old premium-priced Scotch, from the vener- able house of Justerini & Brooks. We strengthened our Paddington marketing team last year with the addi- tion of two principal executives with extensive experience in the alcoholic beverage industry. Austin, Nichols & Co., Incorporated The principal brands of Austin, N ichols & Co. had substantial sales increases in 1970, particularly the company's leading brand, WI LD TUR KEY, a 101-proof, 8-year-old bourbon. While industry bourbon sales declined last year, the premium brands improved their positions, and the gains made by WI LD TURKEY were considerably greater than the increase achieved by premium-priced bourbons as a group. With the possibility of broadening the consumer appeal, and hence the market, for the prestigious W I LD TU R KEY brand, we began test marketing a new 86.8 proof version, which also sells at premium prices, in several markets in the last quarter of 1970. 6 Reflecting the continued diversity in the consumption of alcoholic beverages in this country, the sales of brandies, - cordials, cognacsand other specialties increased at a rate greater than the rate for total spirits last year, and the leading Austin, N ichols imported brands did con- siderably better than these categories, especially METAXA, the Greek liqueur, and CAMPARI, the Italian aperitif. Wine consumption in the United States continued to grow in 1970, and sales of imported wines, now more than 11 per cent of the total, increased at a rate about twice as great as that for domestic wines. Austin, Nichols, as a leading importer of premium quality European wines, improved its position in this area with a sales increase of approxi- mately 28 per cent last year. The com- pany has exclusive distribution rights in the United States for CHAUVENET RED CAP sparkling and still wines and CHARLES HEIDSIECK French Cham- pagne and has taken a leadership position in the distribution of fine Chateau and Estate-Bottled wines from the great vineyards of Bordeaux, Burgundy, The Rhine and Moselle. Carillon Importers Ltd. Carillon I mporters again had record sales and operating income in 1970. Carillon's sales growth exceeded that of brandies, cognacs, liqueurs and other specialty cate- gories, which in turn exceeded the growth of the spirits industry as a whole. The prestigious GRAND MARNIER, Carillon's leading brand, made substantial sales gains. The GRAND MARNIER drink recipe and haute cuisine demon- stration program conducted in leading department stores throughout the country, GRAND MARNIER recipe booklets and "The Spirit of Grand' Cuisine," published by The Macmillan Company, continued to introduce the brand to many thousands of new custo- mers. CHERRY MARNIER also had a good sales increase in 1970. Despite the lack of significant growth in gin consumption last year, Carillon's imported English brand, BOMBAY, had considerably higher sales again in 1970. I mpressive sales increases were also made by other major Carillon imported brands, including GOLD LEAF French Cognac, ACHAIA CLAUSS Greek wines and aperitifs, BARDINET NAPOLEON French Brandy and BOMBAY French Vermouth. Last year, Carillon became the exclu- sive American importer for the widely known CALVET French wines from Burgundy and Bordeaux. CALVET is the largest producer and shipper of wines in F rance. During the year, Carillon further broadened its product line with a new Kentucky straight bourbon whiskey named W. C. FIELDS,which was offered in a ceramic bust of the comedian. Dis- _ tributed in limited quantities as a collec-_ tor's item, it was highly successful and established an important new brand name for the company.

Financial Review'1970 Sales Net sales in 1970 increased 6 per cent to an all-time high of $696,663,577, com- pared with $658,784,013 in 1969. Sales of non-tobacco products in 1970 amounted to approximately 45 per cent of con- solidated net sales. If excise taxes on tobacco and alcoholic beverage products were excluded from the reported sales figures, the percentage of sales of non- tobacco products in 1970 would be approximately 53 per cent. Cigarette and tobacco sales increased 1 per cent from $378,067,317 in 1969 to $383,471,179 in 1970; sales of non- tobacco product lines increased 12 per cent from $280,716,696 to $313,192,398. Sales of alcoholic beverages increased 5 per cent from $140,080,190 to $146,767,267; sales of pet foods increased 18 per cent from $110,191,539 to $129,642,286; and sales of other non-tobacco product lines in- creased 21 per cent from $30,444,967 to $36,782,845. Earnings Consolidated net earnings for 1970 were $28,843,913 ($3.45 per share of common stock), compared with $24,898,167 for 1969 ($2.92 per share). In 1970, earnings before an extraordinary charge of $3,195,000 ($.41 per share) were $32,038,913 ($3.86 per share). Net earn- ings for 1970 were 16 per cent higher than for 1969; earnings before-the extraordinary charge were 29 per cent higher than 1969 net earnings. The extraordinary charge of $3,195,000 represents the estimated costs of $6,684,000 for the closing of the cigarette manufacturing plant in Richmond, Virginia, less related income tax benefits of $3,489,000. Concurrent with the closing of the Richmond plant, the company has undertaken the modernization and ex- pansion of its primary plant facilities in Durham, North Carolina. These changes are expected to increase manufacturing effi- ciencies and result in savings beginning in 1971. Operating Income Operating income (income before cor- porate expenses; interest, other income and expenses, income taxes, minority interest, and the extraordinary charge) applicable to non-tobacco products amounted to approximately 52 per cent of consolidated operating income in 1970. Operating income generated from ciga- rette and tobacco products increased 21 per cent from $32,749,413 in 1969 to $39,738,284 in 1970; operating income from non-tobacco product lines increased 19 per cent from $36,856,361 to $43,679,882. Operating income from alcoholic beverages increased 6 per cent from $24,756,451 to $26,148,604; oper- ating income from pet foods increased 49 per cent from $9,149,825 to $13,616,974; operating income from other non-tobacco product lines increased 33 per cent from $2,950,085 to $3,914,304. Dividend Record Common stock dividends have been paid each year since the Corporation was organized in 1911. Common stock divi- dends in 1970 amounted to $2.50 per share. Dividends of $7.00 and $5.25 per share were paid on the 7 per cent preferred stock and the $5.25 preference stock, respectively. There were 50,11 1 stock- holders at the end of 1970. Taxes I ncome taxes amounted to $33,869,000 in 1970 ($37,358,000 as shown in the accompanying statement of consolidated earnings, less $3,489,000 income tax bene- fits included in the extraordinary charge). This amounts to $4.36 per share of common stock, compared with net earnings of $3.45 per share of common stock. The Federal income tax surcharge was reduced from 10 per cent for 1969 to an effective rate of 2'h per cent for 1970 and has been discontinued for 1971. The sur- charge reduced per share earnings by $.10 in 1970 and by $.34 in 1969. Capital Expenditures Capital expenditures during 1970 con- sisted mainly of disbursements for expan- sion and modernization of the Corpora- tion's cigarette manufacturing facilities in Durham, North Carolina and for plant expansion and improvement of the manu- facturing facilities of Allen Products Company, I nc., Perk Foods Co. and National Oats Company. These expendi- tures totaled $10,800,000 in 1970, compared to $7,800,000 in 1969. Depreciation charges in 1970 aggre- gated $5,336,255, compared to $6,724,516 in 1969. The reduction in depreciation charges is due principally to a change in the method of computing depre- ciation, as explained in Note 3 to the ac- companying financial statements. Financial Condition The sound financial condition of the Corporation is indicated by the 2.7 to 1 ratio of current assets to current liabilities and by the fact that long-term debt is only 20.5 per cent of total capitalization. The Corporation acquired 55,900 shares of its common stock during 1970 at an average cost of $34.64 per share, bring- ing the total number of common shares held in treasury to 349,068. The Corpora- tion also acquired 14,610 shares of its 7 per cent preferred stock during 1970 at an average cost of $91.59 per share. TIMN 445972 15

LIGGETT & MYERS INCORPORATED AND CONSOLIDATED SUBSIDIARIES Liabilities Current Liabilities 1970 1969 Notespayable......••••••.••.•-••••••••••••••••••-•••••-••••.•• $ 70,752,805 $ 65,961,614 Accounts payable ............................................... 19,539,102 14,989,998 Dividends payable .............................................. 210,509 235,394 Taxes payable and accrued ........................................ 16,388,874 20,142,117 Portion of long-term debt due within one year ......................... 429,134 172,960 Estimated costs relating to closing of Richmond plant (Note 4) ............ 3,430,841 - Other accrued liabilities .......................................... 16,590,090 15,117,903 Total current liabilities ................................... 127,341,355 116,619,986 Long-Term Debt 6% sinking fund debentures, due 1992 ($3,000,000 to be redeemed annually from 1973 to 1991) ........................................... 72,000,000 75,000,000 Other (Note 5) ................................................. 12,140,672 22,810,644 Total long-term debt .................................... 84,140,672 97,810,644 Other Long-Term Liabilities (Note 4) .................................. 4,425,301 1,877,765 Minority Interest in Consolidated Subsidiaries ........................... 7,817,009 8,024,164 Stockholders' Equity Capital stock (Notes 6, 7, and 8) 7% cumulative preferred stock, par value $100 per share - authorized, 139,621 shares; issued, 139,621 shares; in treasury, 1970, 19,720 shares, 1969, 5,110 shares .......................................... 1,990,100 3,451,100 $5.25 cumulative convertible preference stock, par value $1 per share - authorized, 310,000 shares; issued, 1970, 169,246 shares, 1969, 253,136 shares (involuntary liquidation value, 1970, $16,924,600, 1969, $25,313,600) .............................................. 69,246 53,136 Series preference stock, par value $1 per share - authorized, 1,000,000 shares; issued, none ......................................... Common stock, par value $1 per share - authorized, 12,000,000 shares; issued, 1970, 8,228,172 shares, 1969, 8,033,220 shares .............. Paid-in capital in excess of par values of capital stock ................... Retained earnings (Note 5) ........................................ Total ................................................ Less cost of common stock in treasury (1970, 349,068 shares; 1969, 321,756 shares) ......................................... Total stockholders' equity ................................ Total ................................................ See Notes to Financial Statements. - - 8,228,172 8,033,220 117,746,690 117,746,183 200,227,117 192,908,804 338,361,325 332,392,443 12,944,444 12,081,023 325,416,881 320,311,420 $549,141,218 $544,643,979 TIMN 445974 17

National Oats Company National Oats Company, a producer of breakfast cereals, popcorn an l,1nimal and poultry feeds, increased its sales arid operating income in 1970. A new marketing team was organized in 1970 under a new experienced market- ing director, and improvements were made in marketing strategies, financial controls, manufacturing techniques, and also in research and development activ- ities, in order to improve present product lines and develop new, related products. Our breakfast cereal sales declined slightly in 1970 in line with industry sales of hot cereals. Despite the general trend to convenience foods, the instant hot cereal products introduced in recent years, including our own brands, have not reached the potentials anticipated. Exaggerated publicity to the contrary, breakfast cereal products generally, in- cluding our brands, are not low in nutri- tional values and do not represent "empty calories." Sales of oat products to some seg- ments of the food industry increased last year, but the gains were more than offset by reductions in sales to ready-to-eat cereal manufacturers. Our consumer popcorn sales and our bulk popcorn sales to the commercial and concessionaire trades were higher in 1970. The present short supply situation due to the adverse corn crop conditions last year is expected to benefit us in 1971 because of our favorable inventory position. The Corno Feed Products Division of National Oats had record sales and oper- ating income in 1970, with substantial gains achieved by the aggressive market- ing program of the CORNO animal and poultry feed product lines. Construction was begun in 1970 on two new feed mills, which will be in oper- ation early in 1971. Strategically focated in Flora, I Ilinois and Montgomery City, Missouri to expand the marketing areas, the new olants will rin, hia tha Division's manufacturing capacity and enhance its competitive position. 10

Statement of Consolidated Source and Application of Funds For the Years Ended December 31 Source of Funds From operations Earnings before extraordinary charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Minority interest in earnings of consolidated subsidiaries ............... Depreciation and amortization ................................... Equity in net losses of unconsolidated foreign subsidiaries .............. Total ................................................ Extraordinary charge ............................................ Decrease in working capital ....................................... Increase in long-term debt ........................................ Increase in other long-term liabilities ................................ Decrease in other investments ..................................... Related average quoted market value of 27,522 and 23,012 common shares issued in 1970 and 1969, respectively, in payment of awards for the 1969 and 1968 Plan years under incentive compensation plans for employees ... Decrease in deferred charges and prepaid expenses ...................... Proceeds from exercise of the Company's stock options ................. Other ........................................................ Total ................................................ Application of Funds Cash dividends ................................................. Additions to franchises and goodwill ................................ Decrease in long-term debt ........................................ Purchase of property, plant, and equipment, less retirements: 1970, $1,314,278; 1969, $655,940 ................................... Cost of common and preferred stock purchased ........................ Investments in and advances to unconsolidated foreign subsidiaries ......... Reductions in minority interest due to changes in capital and payment of dividends to minority stockholders .................... . .......... Increase in other investments ...................................... Other ........................................................ Total ................................................ See Notes to Financial Statements. 1970 1969 $32,038,913 $24,898,167 994,086 835,285 9,077,228 10,465,215 2,357,000 1,256,000 44,467,227 37,454,667 (3,195,000) - 16,571,525 15,456,852 645,000 14,025,355 2,547,536 - 1,756,869 - 985,479 960,032 481,609 - 37,643 23,765 41,240 - $64,339,128 $67,920,671 $21,525,600 $21,668,351 11,692,929 22,698,959 14,314,972 233,709 11,325,490 15,414,923 3,274,227 1,978,776 1,001,682 3,522,601 1,201,241 534,038 - 1,312,608 2,987 556,706 $64,339,128 $67,920,671 TIMN 445977 20

Liggettb Myers Officers *MILTON E. HARRINGTON President and Chief Executive Officer *J. BOWLING ANDERSON Executive Vice President *KENNETH McALLISTER Executive Vice President *JONATHAN W. OLD, JR. Executive Vice President CURT K. BRI LL Vice President *FREDERICK P. HAAS Vice President and General Counsel R. HAYWOOD HOSEA Vice President and Comptroller JAMES G. HUCKABEE, JR. Vice President RALPH P. MOORE Vice President JAMES J. MORAN Vice President *SAMUEL WHITE Corporate Vice President ERNEST W. BALDASSARE Treasurer CHARLES B. MORGENTHALER Secretary and Associate General Counsel THOMAS M. GAFFEY, JR. Assistant Comptroller RUSSELL G. CUTTER Auditor JOSEPH R. SACCA Assistant Treasurer RICHARD H. GOODWIN Assistant Treasurer DONALD G. NYREEN Assistant Treasurer and Assistant Secretary JOHN W. MILES, JR. Internal Auditor JOSEPH H. GREER Assistant Secretary M. JOAN MURTHUM Assistant Secretary JOSEPH F. TAYLOR Assistant Secretary *Executive Committee; Chairman: Jonathan W. Old, Jr. Directors J. BOWLING ANDERSON WILLIAM W. BATES,JR. CURT K. BRILL S. BACON FULLER FREDERICK P. HAAS MILTON E. HARRINGTON JAMES G. HUCKABEE, JR. KENNETH McALLISTER HOWARD W. McCALL, JR. RALPH P. MOORE RAYMOND J. MULLIGAN JONATHAN W. OLD, JR. ABRAHAM ROSENBERG FREDERICK SHEFFIELD ROBERT L. TAYLOR OGDEN WHITE SAMUEL WHITE Executive Changes On May 1, 1970, Edward J. Parrish, Vice President and Director, retired in accord- ancewith the Company's Retirement Plan. On April 29, 1970, R. Haywood Hosea and James J. Moran were elected Vice President; Ernest W. Baldassare was elected Treasurer; Richard H. Goodwin was elected Assistant Treasurer; and Joseph H. Greer was elected Assistant Secretary. On August 18, 1970, Joseph R. Sacca was elected Assistant Treasurer and Comptroller, Subsidiary Operations; Donald G. Nyreen was elected Assistant Treasurer and continued as Assistant Secretary; and John W. Miles, Jr. was elected Internal Auditor. Transfer Agent: Chemical Bank 20 Pine Street, New York, N. Y. 10015 Registrar: First National City Bank 111 Wall Street, New York, N. Y. 10015 i 24 TIMN 445981 Printed in U.S.A.

Statement of Consolidated Earnings For the Years Ended December 31 1970 1969 Revenues Net sales (including excise taxes: 1970, $166,775,344; 1969, $170,117,975) . $696,663,577 $658,784,013 alties and other operating revenues .............................. R 2,080,912 2,566,477 oy Total 698,744,489 661,350,490 Costs and Expenses Cost of goods sold .............................................. 489,746,318 471,502,084 Selling, administrative, and general expenses .......................... 119,482,032 115,245,933 Amortization of J&B franchise and excess of cost of investments in certain subsidiaries over equity in their net assets (Note 1) ................... 3,740,973 3,740,699 Equity in net losses of unconsolidated foreign subsidiaries ................ 2,357,000 1,256,000 Total ................................................ 615,326,323 591,744,716 OperatingIncome......•••••.•••.•••••...••••••••••••••••••..••••• • 83,418,166 69,605,774 Other Expenses Corporate expenses ............................................. 4,664,878 3,712,629 Interest expense ................................................ 10,174,430 9,924,817 Other (income) deductions, net .................................... (1,812,141) (1,996,913) Total ................................................ 13,027,167 11,640,533 Earnings Before Income Taxes, Minority Interest, and Extraordinary Charge ... 70,390,999 57,965,241 Provision for Federal and Other Income Taxes Currently payable ............................................... 35,960,790 31,965,717 Deferred ...................................................... 1,397,210 266,072 Total ................................................ 37,358,000 32,231,789 Earnings Before Minority Interest and Extraordinary Charge ................ 33,032,999 25,733,452 Minority Interest in Earnings of Consolidated Subsidiaries .................. 994,086 835,285 Earnings Before Extraordinary Charge ................................. 32,038,913 24,898,167 Extraordinary Charge (Note 4) ....................................... 3,195,000 - Net Earnings ..................................................... $ 28,843,913 $ 24,898,167 Amounts Per Common Share (a) Earnings before extraordinary charge ................................ $3.86 $2.92 Extraordinary charge ............................................ .41 - Net earnings ................................................... $3.45 $2.92 Amounts Per Common Share - assuming full dilution (a) Earnings before extraordinary charge ................................ $3.76 $2.87 Extraordinary charge ............................................ .38 - Net earnings .................................. . ................ $3.38 $2.87 (a) Amounts per common share have been computed on the basis of the weighted average number of shares of common stock outstanding during each year and take into consideration the dividend requirements for preferred and preference stocks. Amounts per common share - assuming full dilution were determined on the arsumption that the $5.25 convertible preference stock outstanding at the end of each year was converted into shares of common stock at the beginning of each year, and that the conversions of such preference stock into common stock during 1970 and 1969 had occurred at the beginning of each such year. The computation of fully-diluted amounts per share also comprehends the assumed exercise of options for the purchase of shares of preference and common stock where the effect thereof would be dilutive. See Notes to Financial Statements. 18 TIMN 445975

LIGGETT & MYERS INCORPORATED AND CONSOLIDATED SUBSIDIARIES Notes to Financial Statements December 31, 1970 1. Principles of Consolidation, Acquisition, Etc. The accompanying consolidated financial statements include all subsidiary companies except certain foreign subsidiaries which are not material in relation to the consolidated financial statements. In July 1970, a company was acquired for cash in a transaction accounted for as a purchase, and the accounts of the acquired company have been included in the consolidated financial statements since date of acquisition. The cost of investment in the acquired company exceeded the Company's equity in its net assets at the date_of acquisition by $11,017,453. Such excess cost will be increased by the amount of any additional payments to be made to the former er stock- holders of the acquired company (see Note 9). At December 31, 1970, the unamortized portion of the cost of an exclusive franchise, held by the Com- pany's subsidiary, The Paddington Corporation, to im- port J&B Rare Scotch Whisky aggregated $66,439,543, and the unamortized excess cost applicable to the acquisition of Paddington and Carillon Importers Ltd. (a subsidiary of the Company) aggregated $7,117,566. These costs are being amortized over the remaining lives of the J&B franchise and a franchise held by Carillon by annual charges to earnings of approximately $3,740,000. At December 31, 1970, the net excess of cost of investments in certain other consolidated subsidiaries, including the company acquired in 1970, over equity in their net assets at times of acquisition aggregated $45,227,000, and is regarded as goodwill which is not being amortized since, in the opinion of the Company, there has been no diminution of value since acquisition. This amount, together with the unamortized portion of the cost of the J&B franchise and the remaining excess cost applicable to Paddington and Carillon, is included in Franchises, Goodwill, Brands, and Trademarks in the accompanying consolidated balance sheet. At December 31, 1970, the Company's equity in the net assets of its unconsolidated foreign subsidiaries aggregated $3,665,979. The excess of cost of invest- ments in these unconsolidated subsidiaries over equity in their net assets at times of acquisition, which aggregated $3,981,245, is regarded as goodwill which is not being amortized since, in the opinion of the Company, there has been no diminution of value since acquisition. No dividends have been received from these companies since dates of acquisition. 2. Inventories inventories of imported leaf tobacco, bulk whiskey, and cased goods in bond and in transit are subject to Federal, state and local taxes upon withdrawal from bond. In accordance with the practice of the industries, the liability for such taxes has not been recorded in the accounts. When paid, the amount of such taxes will result in a corresponding increase in the cost of inventories. upon the estimated useful lives of the various classes of assets. Depreciation provided amounted to $5,336,255 in 1970 and $6,724,516 in 1969. As of January 1, 1970, the method of computing straight-line depreciation for the Company's machinery and equipment was changed from the composite method to the year-of-acquisition method. Accumulated depre- ciation computed as of that date under the new method was approximately $4,100,000 less than the aggregate amount recorded on the books of the Company under the method previously used. The difference, to the extent of $3,050,000 was allocated to the undepreciated cost of the machinery and equipment retired in connec- tion with the closing of the Company's cigarette manufacturing plant in Richmond, Virginia (see Note 4) and the remainder of $1,050,000 was allocated to other machinery and equipment considered to be obsolete. As a result of this change in method, depreciation expense for 1970 decreased by approximately $1,100,000 and net earnings for the year increased by approximately $550,000 or $.07 per share of common stock. 4. Extraordinary Charge Resulting from Closing of Cigarette Manufacturing Plant In December 1970, the Company discontinued opera- tions at its cigarette manufacturing plant in Richmond, Virginia. The estimated costs (consisting principally of severance pay and retirement annuities for terminated employees) expected to be incurred in connection with the closing of the plant, less the related income tax benefits of $3,489,000, are shown as an extraordinary charge in the accompanying statement of consolidated earnings. The estimated cost of retirement annuities ($2,540,000) will be funded over a period of approxi- mately ten years, and accordingly, the non-current portion has been included in Other Long-Term Liabili- ties in the accompanying consolidated balance sheet. 5. Long-Term Debt and Dividend Restrictions In accordance with a covenant in the Indenture covering the 6% sinking fund debentures, the amount which could be expended for the payment of cash dividends on common stock was limited to $39,185,881 at December 31, 1970. This limitation does not apply to stock dividends on common stock, nor does it restrict payment of dividends on preferred and preference stocks. At December 31, 1970, other long-term debt of the Company and its consolidated subsidiaries is summarized as follows: 713/16 % unsecured notes ........... S 2,028,582 83/16 % unsecured notes ........... . 7,442,283 51/2-71/2 % mortgage notes, payable in installments through January 1, 1988 1,858,307 Other .......................... 811,500 Total ........................ $12,140,672 3. Property, Plant, and Equipment and Depreciation Depreciation has been provided by charges to costs and expenses generally on the straight-line method based The unsecured notes were issued pursuant to a credit agreement for financing the Company's investments in foreign companies. The termination date of the agree- TIMN 445978 21

By Using Your Company's Products and Recommending Them to Your You Will Add to the Value of Your Investment Friends, LiggettaMyers incorporated Cigarette and Tobacco Division Alcoholic Beverages Perk Foods Co. Camp Hill, Pennsylvania Brussels, Belgium The Paddington Corporation 'Chicago, Illinois Durham, North Carolina • New York, New York Kansas City, Kansas .New York, New York - Los Angeles, California Rocky Mount, North Carolina J&B Rare Scotch ' Louis, Missouri St ROYAL AGES 15-Year-Old Scotch VETS Canned Dog Foods . Stoughton, Wisconsin BEEF FLAVOR Carillon Importers Ltd. CHICKEN FLAVOR Licensing Agreements In: 'New York, New York LIVER FLAVOR Algeria Costa Rica HORSEMEAT FLAVOR Argentina Holland GRAND MARNIER French Liqueur LAMB FLAVOR Australia Italy BOMBAY English Dry Gin REGULAR FLAVOR Austria Mexico CHERRY MARNIER French Liqueur VARIETY Belgium Philippines COGNAC MARNIER ' Bolivia Switzerland BOMBAY French Vermouth VETS Dry Dog Foods Brazil West Germany GOLD LEAF French Cognac REGULAR NUGGETS BARDINET NAPOLEON French Brandy GRAVY STYLE NUGGETS Equity Positions In: THE "ANTIQUARY" 12-Year-Old Scotch Argentina Peru BARDINET RHUM NEGRITA • Brazil Switzerland ACHAIA CLAUSS Greek Still Wines Mexico West Germany and Ouzo Liqueur Other Products DOPFF, ALSATIAN Brandies and Wines Cigarettes CALVET Bordeaux and Burgundy Wines National Oats Company CHESTERFIELD (King, Regular) 'Cedar Rapids, Iowa (Cereal CHESTERFIELD FILTER Austin, Nichols & Co., Incorporated and Pop Corn Division) CHESTERFIELD MENTHOL 'Maspeth, New York Delaware, Ohio 101 CHESTERFIELD Washington, D. C. - Wall Lake, Iowa EVE 'East St. Louis, Illinois (Feed Division) EVE MENTHOL WILD TURKEY Bourbon Whiskey Cabool, Missouri FATIMA METAXA Greek Liqueurs Crane, Missouri HOME RUN CAMPARI Italian Aperitif Flora, Illinois LARK VIRGINIA GENTLEMAN Bourbon Whiskey LaBelle, Missouri LARK 100 PADDY Irish Whisky Montgomery City, Missouri L&M FILTER (King, Box) MURPHY'S Irish Whisky L&M (Super Kings) WYBOROWA Polish Vodka Cereal Products L&M MENTHOL MOUQUIN 10-Year-Old Italian Brandy CREAM OF OATS OASIS MENTHOL PEDRO West Indian Rum 3-MINUTE STIR 'N EAT OATMEAL PICAYUNE FIOR D'ALPI Italian Liqueur (plain and flavored) PIEDMONT NICHOLS Blended Whiskey 3-MINUTE QUICK OATS CHARLES HEIDSIECK French Champagne 3-MINUTE OLD FASHIONED OATS Smoking Tobaccos F. CHAUVENET Burgundy Wines 3-MINUTE RAISINOATS BUCKHORN NATH'L JOHNSTON ET FILS 3-MINUTE YELLOW CORN MEAL BUFFALO Bordeaux Wines 3-MINUTE GRITS COUNTRY GENTLEMAN WOLTNER FRERES Chateau Bottled DINNER BELL Bordeaux Wines Pop Corn DUKE'S "WEDDING VEIL" Liebfraumilch 3-MINUTE POP CORN GRANGER LAGOSTA Rose Portuguese Wine 3-MINUTE COL-R-CORN HARMONY MIXTURE NICOLAOU Greek Wines KING BEE Feeds MASTERPIECE • CORNO Products PLOW BOY - - S&M • STERLING BLEND Pet Foods SUMMERTIME Earl Grissmer Co., Inc. SWEET TIP TOP `Indianapolis, Indiana VELVET Allen Products Company, Inc. VIRGINIA EXTRA 'Allentown, Pennsylvania BLUE LUSTRE Household Cleaning Products Cleveland, Ohio CARPET SHAMPOO Chewing Tobaccos (Plug) Crete, Nebraska UPHOLSTERY CLEANER DRUMMOND NATURAL LEAF St. Paul, Minnesota VACCUM CLEANER BAGS HORSESHOE FURNITURE POLISH MASTE RPI ECE ALPO Canned Dog Foods GLASS CLEANER PICK NATURAL LEAF BEEF CHUNKS SPARK PLUG HORSEMEAT CHUNKS • STA R CHICKEN TINSLEY'S THICK CHICKEN & LIVER Brite Industries, Inc. UNION STANDARD LIVER CHUNKS 'Providence, Rhode Island W.N.T. NATURAL LEAF LAMB CHUNKS St. Petersburg, Florida RIB OF VEAL The Pinkerton Tobacco Company MEAT BALLS WITH GRAVY Watch Bands 'Toledo, Ohio EGGS 'N BEEF BRITE CHOPPED BEEF KIMTRON Loose Leaf Chewing Tobaccos CHOPPED HORSEMEAT MEDALIST PAY CAR RED MAN MEAT TRIO ROGER WILLIAMS RED HORSE UNION STANDARD SAVORY STEW CARRIAGE COLLECTION SUPERSTRAP Gary Tobacco Company (Turkish Tobaccos) Pet Food Treats "HUSH PUPPIES®" Cavalla and Xanthi, Greece L I V-A-S N APS BRIGADIER •Durham, N.C.; Izmir, Turkey CHAR-O-SNAPS CASTLE COLLECTION *Headquarters locations. TIMN 445970 13

ment is April 19, 1972, but the Company may extend the termination date to June 20, 1976 with the approval of the bank. The mortgage notes and other debt are obligations of acquired companies. 6. Capital Stock The holders of the Company's 7% cumulative pre- ferred stock are entitled to the par value, $100 a share, in the event of any liquidation of the Company (whether voluntary or involuntary) and the amount of any dividends accumulated and unpaid thereon before any amount shal I be paid to the holders of any other class or series of stock. The preferred stock is not callable, and the voting rights of such stock are eight votes per share. Both as to dividends and upon liquidation, shares of the $5.25 cumulative convertible preference stock rank senior to shares of common stock and rank on a parity with shares of any series of preference stock. The $5.25 preference stock may be redeemed, at the option of the Company, after January 24, 1974, at stated redemption prices ranging from $110 to $100, and each share of such stock is convertible, at the option of the holder thereof, at any time prior to redemption into one share of common stock of the Company for each $43.50 of involuntary liquidation value ($100 per share) of the $5.25 preference stock. I n 1970, 84,834 shares of $5.25 preference stock were converted into 194,952 shares of the Company's common stock. In 1970, the Company acquired 55,900 shares of its common stock and 14,610 shares of its 7% preferred stock for its treasury at a cost of $1,936,097 and $1,338,130, respectively, and issued 27,522 shares of its common treasury stock, having a cost of $1,033,147, in payment of awards under the I ncentive Compensation Plan for Senior Executives and the Restricted Stock Incentive Plan for Key Employees for the Plan year ended December 31, 1969 (see Note 8). In connection with an acquisition of real estate, the Company also issued 1,066 shares of its common treasury stock, having a cost of $39,529. At December 31, 1970, 494,137 shares of the Company's common stock were reserved for options granted under the Company's I ncentive Stock Option Plan, for issuance pursuant to the Incentive Compensa- tion Plan for Senior Executives and the Restricted Stock Incentive Plan for Key Employees and for the conver- sion of the $5.25 preference stock and options therefor (see Notes 7 and 8). 7. Stock Options At January 1, 1970, there were outstand ing options granted under the Incentive Stock Option Plan to officers and key employees to purchase, subject to certain limitations, 13,584 shares of the Company's common stock. No additional options may be granted under this Plan. During 1970, no options were exercised and options for 8,384 shares were terminated. At December 31, 1970, options were outstanding and exercisable with respect to 5,200 shares having an aggregate option price of $238,550. In accordance with the Plan, option prices represent closing quoted market values of the shares on the dates the options were granted. At January 24, 1969, the effective date of merger between the Company and Austin, Nichols & Co. Incorporated, there were outstanding options granted under Austin's stock option plan for key employees which became options to purchase shares of the Com- pany's $5.25 preference stock (subsequent to the date of merger, no additional options could be granted under the plan). At January 1, 1970, there were outstanding options under the plan to purchase 1,118 shares of the Company's $5.25 preference stock. During 1970, options for 944 shares of $5.25 preference stock were exer- cised for an aggregate option price of $37,643. At December 31, 1970, options were outstanding and exercisable with respect to 174 shares of $5.25 prefer- ence stock having an aggregate option price of $10,461. When options are exercised, the capital stock ac- counts are credited with the par value of the shares purchased, and paid-in capital in excess of par values of capital stock is credited with the remainder of the option price. 8. Employee Incentive Compensation and Retirement Plans The Incentive Compensation Plan for Senior Execu- tives, as amended, provides for distribution of incentive awards in restricted common stock of the Company and in cash, if authorized by the I ncentive Award Com- mittee. All senior executive officers, except the Chief Executive Officer, are eligible to receive a portion of their award, up to a maximum of 50%, in cash. Awards are to be made only if consolidated earnings of the Company (as defined) show an increase over the average consolidated earnings for the three years pre- ceding the year in which the award is earned, only out of such increase, and only if earnings per share (as defined) are not less than 1967 earnings per share (as adjusted for stock splits and certain other events). The maximum amount chargeable to earnings (before income tax) for any Plan year is $750,000, and the maximum aggregate number of shares issuable under the Plan is 100,000 (subject to adjustment for future stock splits and stock dividends). The Plan is limited to five years ending December 31, 1972 unless extended by the stock- holders. The Restricted Stock Incentive Plan for Key Em- ployees, as amended, provides for the distribution of incentive awards in restricted common stock to not more than one hundred and fifty supervisory and key employees each year. The maximum aggregate number of shares issuable under this Plan (subject to adjustment for future stock splits and stock dividends) is 50,000, with a limitation of 10,000 shares in any one year. For the Plan year ended December 31, 1970, the Company has provided for incentive awards under both plans aggregating $1,151,026. The number of shares of restricted common stock of the Company to be issued in 1971 for the 1970 incentive awards under the senior executives' plan will be based on the average of the closing price of the Company's common stock on the 22 TIMN 445979

New York Stock Exchange on the last day of each quarter in 1970. The aggregate number of shares to be issued in 1971 under both plans is 28,686. The Company also has a profit sharing plan in effect and certain consolidated subsidiaries have profit sharing and incentive compensation plans in effect. Amounts to be provided under such plans are generally based upon annual earnings of the respective companies. The aggre- gate amount provided by charges to consolidated earn- ings for these plans for the year ended December 31, 1970 was $2,642,748. The Company and certain of its consolidated subsidi- aries have retirement plans covering most of their employees. The total retirement expense amounted to $2,185,789 for 1970 and $1,444,182 for 1969, which includes, as to certain of the plans, amortization of prior service cost over a maximum period of thirty years. The companies' policy is to fund accrued retirement cost. At December 31, 1970, the assets of the retirement plan funds exceeded the aggregate vested benefits. 9. Commitments and Contingent Liabilities At December 31, 1970, commitments for the acquisi- tion of property, plant, and equipment aggregated approximately $11,000,000. Agreements between the Company and the former stockholders of three subsidiary companies provide for additional cash payments to be made by the Company if operations of the acquired companies reach certain levels. The maximum additional amounts to be paid under these agreements aggregate $6,900,000, of which approximately $3,400,000 is expected to be paid in 1971. The payments will increase the excess cost of investments in subsidiaries over equity in their net assets at dates of acquisition. I n 1967, the common stock of Star I ndustries, I nc. held by a subsidiary of the Company was exchanged in redemption and retirement of such shares for a portion of the shares of common stock of The Paddington Opinion of Certified Public Accountants HASKINS & SELLS CERTIFIED PUBLIC ACCOUNTANTS Corporation and Carillon Importers Ltd. then held by Star. The Company has agreed to indemnify Star Industries, Inc. for any income tax liability of Star attributable to the redemption of shares of common stock of Star. Under the agreement, Star has the right to sell to the Company, at any time prior to April 19, 1974, the remaining shares of common stock of The Paddington Corporation and Carillon Importers Ltd. held by Star for a price per share equal to 14 times the net earnings (as defined) per share of such common stocks for the fiscal year next preceding the year in which Star exercises its right under the agreement. If all such shares were purchased, the cost thereof would aggregate $12,423,300 on the basis of the purchase price currently in effect; such cost would be approximately $5,937,000 in excess of the equity in net assets applicable to such shares as of December 31, 1970. Under a related agreement, certain stockholders of Star have agreed not to exercise their previously existing rights to sell to the Company the common stock of Star held by them, and the Company has agreed to indemnify those stockholders for income tax liability, if any, resulting from such related agreement. Carillon Importers Ltd. has agreed to purchase, under certain circumstances, its common stock held by certain of its officers. I f all such shares were purchased, the cost thereof would aggregate $2,008,194 on the basis of the purchase price currently in effect; such cost would be approximately $1,082,000 in excess of the equity in net assets applicable to such shares as of December 31,1970. At December 31, 1970, the Company was con- fingently liable as guarantor for borrowings of certain unconsolidated subsidiaries in an amount aggregating approximately $6,234,000. At December 31, 1970, there were several lawsuits pending against the Company and certain of its consoli- dated subsidiaries. In the opinion of the Company and its counsel, none of the plaintiffs should prevail on the merits of such actions. TWOBROADWAY NEW YORK 10004 To the Directors and Stockholders of Liggett & Myers Incorporated: We have examined the consolidated balance sheet of Liggett & Myers Incorporated and its consolidated subsidiaries as of December 31, 1970 and the related statements of consolidated earnings, paid-in capital in excess of par values of capital stock, retained earnings, and source and application of funds 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 financial statements present fairly the financial position of the companies at December 31, 1970 and the results of their operations and the source and application of their funds for the year then ended, in conformity with generally accepted accounting pr nriples applied (except for the change, which we approve, in the method of computing depreciation for the Corrpdny's machinery and equipment explained in Note 3 to the financial statements) on a basis consistent with that of the preceding year. February 9, 1971 H~ 4 ZL) TIMN 445980 23

Brite Industries, Inc. Sales of Brite Industries reached record highs in 1970, and unit sales of BRITE watch bands continued to exceed those of any other watch band manufacturer. The growing consumer demand for fashion watch straps and the trend to- ward ownership of more than one watch band accelerated in 1970 and were aggres- sively promoted by Brite. Sales of BRITE watch bands, dis- tributed through drug stores and other high traffic retail outlets, were stimulated by excellent consumer acceptance of BRITE "SUPER STRAPS," mod leather watch straps aimed at the fashion- conscious youth market. The company's ROGER WI LLIAMS product line, distributed to mass- merchandising retailers, has become the most widely accepted popular-priced watch band in discount stores across the nation. The addition of higher quality watch bands to the ROGER WI LLIAMS product line resulted in increased unit sales in this high-volume market. Last year, Brite introduced its new KIMTRON brand, designed exclusively for sales in better department stores. A special marketing program was developed for this new product line, and preliminary efforts to penetrate this important market indicate a good opportunity for future growth. Brite also increased sales to the mili- tary in 1970 as well as sales of metal parts and leather as raw material to other manufacturers of consumer products. Construction is underway to double the production capacity of the new Brite factory in St. Petersburg, Florida. M © 0 ynail'~.:,.qyhn, r i' «r.+ ~ ' r..n. Jw: ,..,, - - 4 f i ~ ++ nMMr,•1 . ~ ..~..~..r...,, a.Y ..M:.. . ~,,,~„ ., . ~ _ ,~....~.. ~ ~... . .~.., .~. .~., ==»..~~. ..._ .- . - F 111 M r- -: TIMN 445969

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