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Irectors J. BOWLING ANDERSON ROBERT F. HUNSICKER WILLIAM W. BATES, JR. HOWARD W. McCALL, JR. FREDERICK SHEFFIELD ROBERT L. TAYLOR S. BACON FULLER RALPH P. MOORE FREDERICK P. HAAS JONATHAN W. OLD, JR. EDGAR M. WALLER, JR. OGDEN WHITE MILTON E. HARRINGTON EDWARD J. PARRISH JAMES G. HUCKABEE, JR. ABRAHAM ROSENBERG SAMUEL WHITE TIMN 446013

Liggett & Myers Incorporated 1968 Annual Report ;. ,`~r~--~ 4 L Contents Officers and Directors Page 3 Letter to Stockholders 4 Domestic Cigarettes 7 International Cigarettes 8 Smoking and Chewing Tobaccos 9 The Pinkerton Tobacco Company Alcoholic Beverages 10 The Paddington Corporation Carillon Importers Ltd. Austin, Nichols & Co., Incorporated Allen Products Company, Inc. 2 National Oats Company 13 Brite Industries, Inc. 14 Financial Review 15 Highlights of Operations 16 Disposition of Total Earnings 17 Consolidated Balance Sheet 18 Consolidated Earnings 20 Consolidated Paid-In Capital 21 Consolidated Retained Earnings 21 Consolidated Source and Application of Funds 22 Notes to Financial Statements 22 Opinion of Certified Public Accountants 24 S tockholders' Annual Meeting The annual meeting of stockholders will be held on Tuesday, April 29, 1969, at the Company's Operations Center, Durham, North Carolina, at 2:30 P.M. Eastern Daylight Time. A formal notice of this meeting, together with the proxy and proxy statement, will be mailed to stockholders on March 28, 1969. Stockholderswho are unable to attend the meeting are urged to sign their proxies and return them promptly so that the stock of the Company will be represented as fully as possible at the meeting. Today the Company is owned by approximately 50,000 stockholders. About 73 per cent of the total common and preferred stock was voted by person or proxy at the last annual stockholders' meeting on Apri130,1968. Five Years in Review Inside Back Cover TIMN 446012

Liggett & Myers Incorporated Executive Offices: 630 Fifth Avenue, New York, N.Y. 10020 Executive Personnel On March 11, 1968, Ogden White was elected to the Board of Directors to fill the vacancy resulting from the retirement from the Board of William A. Blount who retired as President and Chairman in 1963. Mr. White is a General Partner of White, Weld & Co., a prominent international investment banking firm. On January 6, 1969, Charles B. Morgenthaler was elected Secretary to succeed Russell M. Chenoweth who retired in accordance with the Company's Retirement Plan. Mr. Morgenthaler is Associate General Counsel and General Counsel, International. On the same date, Miss M. Joan Murthum was elected Assistant Secretary. On February 28, 1969, C. Grice McMullan, a Director and Branch Manager, retired in accordance with the Company's Retirement Plan. Officers MILTON E. HARRINGTON President and Chief Executive Officer JONATHAN W. OLD, JR. Executive Vice-President and Chairman Executive Committee J. BOWLING ANDERSON Senior Vice-President, Finance FREDERICK P. HAAS Vice-President and General Counsel JAMES G. HUCKABEE, JR. Vice-President, Manufacturing EDWARD J. PARRISH Vice-President, International SAMUEL WHITE Vice-President, Marketing RALPH P. MOORE Treasurer CHARLES B. MORGENTHALER Secretary, Associate General Counsel and General Counsel, International R. HAYWOOD HOSEA Comptroller RUSSELL G. CUTTER Auditor JAMES J. MORAN Assistant Treasurer and Assistant Secretary ERNEST W. BALDASSARE Assistant Treasurer M. JOAN MURTHUM Assistant Secretary DONALD G. NYREEN Assistant Secretary JOSEPH F. TAYLOR Assistant Secretary D lY2clOYS J. BOWLING ANDERSON WILLIAM W. BATES, JR. S. BACON FULLER FREDERICK P. HAAS MILTON E. HARRINGTON JAMES G. HUCKABEE, JR. ROBERT F. HUNSICKER HOWARD W. McCALL, JR. RALPH P. MOORE JONATHAN W. OLD, JR. EDWARD J. PARRISH ABRAHAM ROSENBERG FREDERICK SHEFFIELD ROBERT L. TAYLOR EDGAR M. WALLER, JR. OGDEN WHITE SAMUEL WHITE 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 TIMN 446014 3

To the Stockholders: Net earnings by Liggett & Myers Incorporated for 1968 were $24,066,287, equal to $2.82 per share of common stock, compared to net earnings for 1967 of $25,127,358, equal to $2.93 pershare. The 10 percent Federal income tax surcharge reduced earnings by $.31 per share. Net sales for 1968 were $617,240,028, compared with $631,780,056 in 1967. On December 3, 1968, stockholders approved a merger of Austin, Nichols & Co., Incorporated with Liggett & Myers. The merger was consummated on January 24, 1969, as of which date shares of the Company's $5.25 cumulative convertible preference stock were issued in exchange for the outstanding stock of Austin, Nichols, as explained in detail in the financial statements. Since this transaction is being accounted for as a pooling of interests, the financial statements for 1968 include the accounts of Austin, Nichols for the entire year. The financial statements for 1967 and all other prior year data in this report have been similarly restated to include the accounts of Austin, Nichols. In 1968, there were increases in sales of alcoholic beverages, pet foods, cereal products, and smoking tobaccos, but there was a decline in cigarette sales. An important factor in the decline of sales was that sales by Star Industries, Inc. were not included in 1968, because Star ceased to be a subsidiary on May 15, 1967. The Company made further progress in its diversifi- cation program during the year with the acquisition of Brite Industries, Inc. on September 30, 1968. Brite is a major manufacturer of watch bands. As stated above, Austin, Nichols, a leading importer, rectifier, bottler and distributor of alcoholic beverages, was merged with Liggett & Myers. On January 29, 1969, the Company acquired 100 per cent of the stock of Ready Foods Corp., a manufacturer of popular-priced pet foods, including the Vets and Perk brands. For the year ended December 31, 1968, approximately 36 per cent of consolidated sales were of non-tobacco products. The Company's corporate reorganization, adopted by stockholders at the 1968 annual meeting, accom- plished a number of changes that should be beneficial both to the Company and its stockholders. The name of the Company was changed from Liggett & Myers Tobacco Company to Liggett & Myers Incorporated, because the former name was no longer fully des- criptive of the Company's diversified activities. The legal domicile of the Company was changed from New Jersey to Delaware. There was a two-for-one split in the Company's common stock in order to make it available to more people, thus broadening its market. An additional 7,000,000 shares of common stock were authorized to provide flexibility in capitalization for a number of corporate purposes, including diversification activities, financing the expansion of existing businesses, accom- plishing stock splits or declaring stock dividends, or issuing new preferred stock which might be convertible to common. New shares of preference stock were authorized to improve the Company's bargaining position in negotiating acquisitions and to provide greater flexibility in financing the expansion of existing businesses or of other corporate activities. These changes did not alter the aggregate cash dividends paid on common stock; nor did they diminish the voting rights of the 7 per cent cumulative preferred stock. In the face of unprecedented adversities during 1968, total cigarette production in the United States increased to a record high level, and domestic con- sumption held near its record high level of 1967. According to the United States Department of Agriculture, domestic cigarette consumption in 1968 was about the same as that of 1967, whereas exports and shipments to United States possessions and over- seas military forces gained about 10 per cent. Anti-cigarette propaganda today is based on the simple assumption that there is no longer any controversy among scientists about the relationship between smoking and health and that a cause and effect relationship has already been proven in a number of instances. This is not true. The statistical evidence which to some suggests a correlation receives most of the publicity, but the public hears relatively little of the criticism thereof. There is much evidence which raises serious doubts as to conclusions drawn and which indicates a greater need than ever for massive scientific research before any conclusions can be meaningful. Since 1954, The Council for Tobacco Research- U.S.A. has awarded almost $12,000,000 for research grants, with no strings attached, to 313 scientists in 4 TIMN 446015

Liggett & Myers Incorporated and Consolidated Subsidiaries Disposition of Total Earnings for 1968 The Company and its subsidiaries received for goods sold to customers and from dividends, interest. etc., a total of $620,763,000. This is how it was used or set aside. 43.3% Leaf tobacco, wages, other manufacturing costs, freight, etc. $268,991,000 28.8% Federal and other excise taxes $178,992,000 19.2% Selling, advertising, administrative, interest, and other expenses $119,220,000 4.8% Income taxes $29,493,000 3.3% Dividends $20,377,000 ~~ 0.6% Earnings retained $3,690,000 TIMN 446028 17

Net Sales Highlights,i operat,o,ts 1968 1967 Net sales .......................... ----........................... 8617,240,028 $631,780,056 Income taxes ...............•••.•••••- 29,493,343 27,351,923 Net earnings .......................................... 24,066,287 25,127,358 Net earnings, including minority interest, as a percentage of net sales .........................•..•..•~~ 4.03% 4.14% Net earnings applicable to common stock ........ $ 21,519,421 $ 22,521.202 Net earnings per share of common stock (after Federal income tax surcharge of $.31 in 1968) ........................................................... 2.82 2.93 Dividends per share of common stock .............. 2.50 2.50 Current assets .... .............................. . -----.......... 343,319,057 340,905,473 Current liabilities ............................................. 95,591,004 90,602,333 Ratio .................................................:.............. 3.6 to 1 3.8 to 1 Long-term debt ................................................ $ 84,018,998 $ 75,636,381 Stockholders' equity 7% preferred stock .................................. 13,962,100 14,202,100 $5.25 convertible preference stock (invol- untary liquidation value) .......................... 29,895,600 29,895,600 Common stock ......................................... 274,245,936 271,236,206 Per share of common stock ...................... 35.96 35.45 Number of stockholders .................................. 49,965 49,391 Number of employees ...................................... 8,265 8,087 700 -- 600 ;n0 -- 64 65 66 67 i 16 TIMN 446027

Liggett & Alyers Incorporated and Consolidated Subsidiaries Statement of Consolidated Earnings for the years ended December 31 1968 1967 (Note 1) NET SALES .........:.................................................................... $617,240,028 $631,780 ,056 OTHER REVENUES Interest and dividends ........................................................ 837,721 904,502 Royalties and other ............................................................ 2,684,936 2,015,173 Total revenues ....................................................... 620,762,685 634,699,731 COSTS AND EXPENSES Cost of goods sold .............................................................. 447,982,841 468,619,940 Selling, administrative, and general expenses ...................... 106,732,926 103,168,723 Interest ............................................................................... 7,963,245 6,574,421 Amortization of J&B franchise and excess of cost of invest- ments in certain subsidiaries over equity in their net assets (Note 1) ........................................................................ 3,740,495 2,829,027 Provision (credit) for income taxes Federal Currently payable ....................................................... 27,039,334 24,671,168 Deferred ..................................................................... (191,473) (250,592) Other Currently payable ....................................................... 2,681,042 2,997,899 Defeired ..................................................................... (35,560) (66,552) Total costs and expenses ........................................ 595,912,850 608,544,034 EARNINGS BEFORE MINORITY INTEREST ................... 24,849,835 26,155,697 MINORITY INTEREST IN EARNINGS OF CONSOLIDATED SUBSIDIARIES ................................ 783,548 1,028,339 NET EARNINGS (per share earnings applicable to common stock: 1968, $2.82; 1967, $2.93) (a) .............................. $ 24,066,287 $ 25,127,358 (a) Per share earnings are based on the weighted average number of common shares outstanding in each year, after recognition of the dividend requirements on the 7% preferred stock and the $5.25 convertible preference stock. See Notes to Financial Statements. TIMN 446031 20

Consolidated Baiance Sheet as of December3! ASSETS 1968 1967 (Note 1) CURRENT ASSETS Cash (including negotiable time certificates of deposit: 1968, S 13.440,000; 1967, $200,000) ........ .............. $ 26,017,718 $ 9,195,093 Marketable securities-at cost which approximates market . value ...................................... ........................................... 1,403,287 1,846,831 Accounts receivable Customers (less allowances for discounts and doubtful accounts: 1968, $607,372; 1967, $677,962) ................ 53,798,404 52,221,141 Others ................................................................................ 3,459,435 2,650,387 In%entories--principally at average cost (Note 2) .......... .............. Leaf tobacco .............................................. 200,608,127 224,992,911 Bulk whiskeys .................................................................... 6,934,324 4,472,776 Finished goods and work in process .................................. 34,124,010 31,439,746 Other materials and supplies .............................................. 16,973,752 14,086,588 Total current assets .................................................... 343,319,057 340,905,473 INVESTMENTS-at cost Capital stocks of and advances to foreign companies Unconsolidated subsidiaries (Note 1) ................................ 6,735,941 - Other companies ............................................................... 10,650,905 8,449,469 Other ...................................................-.................................. 1,171,308 1,1 06,377 Total investments ....................................................... 18,558,154 9,555,846 PROPERTY, PLANT, AND EQUIPMENT-at cost (Note 3) Land ...................................................................................... 3,806,879 3,663,383 Buildings .......... ........ ............................. ................................. 32,394,789 29,690,241 Machinery and equipment ...................................................... 83,962,147 78,482,110 Total .......................................................................... 120,163, 815 111, 835,734 Less accumulated depreciation ................................... 71,939,565 69,062,919 Property, plant, and equipment-net ........................ 48,224,250 42,772,815 FRANCHISES, GOODWILL, BRANDS, AND TRADE- MARKS-at cost, less amortization (Note 1) ......................... 91,873,895 93,579,263 PREPAID EXPENSES AND DEFERRED CHARGES ........ 5,409,867 3,568,751 TOTAL ................................................................................. $507,385,223 $490, 382,148 See Notes to Financial Statements. TIMN 446029 rR

Liggett & Myers Incorporated 0 Fifth Avenue, New York. N.Y. 10020

Liggett & tti1}•ers Incorporated and Consolidated Subsidiaries LIABILITIES 1968 1967 (Note 1) CURRENT LIABILITIES Notes payable ......................................................................... $ 51,647,107 $ 51,252,000 Accounts payable ...................................... .._.._._....................... 14,043,112 7,937,044 Dividends payable ................................................................. 244,337 353,591 Taxes payable and accrued .................................................... 19,673,836 23,048,363 Portion of long-term debt due within one year ........................ 65,102 40,230 Other accrued liabilities ......................................................... 9,917,510 7,971,105 Total current liabilities ............................................... 95,591,004 90,602,333 LONG-TERM DEBT 6% sinking fund debentures, due 1992 ($3,000,000 to be redeemed annually from 1972 to 1991) ............................ 75,000,000 75,000,000 Other (Note 7) ...................................................................... 9,018,998 636,381 Total long-term debt ................................................... 84,018,998 75,636,381 DEFERRED COMPENSATION .............................................. 1,948,668 1,523,163 MINORITY INTEREST IN CONSOLIDATED SUBSIDI- ARIES ................................................................................... 7,722,917 7,286,365 STOCKHOLDERS' EQUITY Capital stock (Notes 4, 5, and 6) 7% cumulative preferred stock, par value $100 per share- authorized, 1968, 139,621 shares, 1967, 341,398 shares; issued, 1968, 139,621 shares, 1967, 225,141 shares; in treasury, 1967, 83,120 shares ........................................ $5.25 cumulative convertible preference stock, par value $1 per share-authorized, 310,000 shares; issued, 298,956 shares (involuntary liquidation value, $29,895,600) ..... 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, 1968, 7,927,266 shares, 1967, 7,927,256 shares ............................................................ Paid-in capital in excess of par values of capital stock ............ Retained earnings (Note 7 ) .................................................. Total .......................................................................... Less cost of common stock in treasury (1968, 301,768 shares; 1967, 274,968 shares) ........................................................ Total stockholders' equity .......................................... TOTAL ...................................................................... See Notes to Financial Statements. 13,962,100 14,202,100 298,956 298,956 7,927,266 7,927,256 117,711,703 117,080,671 189,678,988 186,332,662 329,579,013 325,841,645 11,475,377 10,507,739 318,103,636 315,333,906 $507,385,223 $490,382,148 TIMN 446030 19