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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

Liggett &Xlyers Incorporated and Consolidated Subsidiaries Statement of Consolidated Paid-In Capital In Excess of Par Values of Capital Stock for the years ended December 31 1968 1967 (Note 1) BALANCE, JANUARY 1, AS PREVIOUSLY REPORTED $ 21,586,697 ADD Transfer from common stock in connection with the reduc- tion of the par value of such stock (Note 4) .................. 91,163,444 Excess of par value of capital stock and capital surplus of Austin, Nichols over par value of $5.25 cumulative con- vertible preference stock issued therefor (Note 1) ........ 3,946,586 BALANCE, JANUARY 1, AS RESTATED .......................... $117,080,671 116,696,727 ADD (DEDUCT) Excess of sales price over par value of common stock sold to officers and employees under the Incentive Stock Option Plan ................................................................... 02 ,037 Capital stock and surplus transactions of Austin, Nichols (1968 includes transactions for the period from August 1, 1967 through date of inerger) (Note 1) .................... 1,066,618 379,907 Costs incident to merger with Austin, Nichols .................... (435,988) - BALANCE, DECEMBER 31 .................................................. $117,711,703 $117,080,671 See Notes to Financial Statements. Statement of Consolidated Retained Earnings for the years ended December 31 1968 1967 (Note 1) BALANCE, JANUARY 1, AS PREVIOUSLY REPORTED $177,908,157 RETAINED EARNINGS OF AUSTIN, NICHOLS AT JULY 31, 1966 (Note 1) ............................................................ 5,162,610 BALANCE, JANUARY 1, AS RESTATED .......................... $186,332,662 183,070,767 ADD (DEDUCT) Net earnings for the period (Note 1) ................................ 24,066,287 25,127,358 Cash dividends-Liggett & Myers Preferred stock-$7 per share ...................................... (977,347) (1,036,637) Common stock-$2.50 per share .............................. (19,063,726) (19,216,910) Cash and stock dividends-Austin, Nichols ...................... (335,540) (767,439) Excess of cost over par value of preferred stock reacquired (44,400) (190,994) Excess of cash and stock dividends declared over net earn- ings ($785,750) of Austin, Nichols for the period from August 1, 1967 through December 31, 1967 (Note 1).... (298,948) - Excess of average cost over quoted market value of treasury stock issued in exchange for the net assets of National Oats Company ............................................................... - (653,483) BALANCE, DECEMBER 31 (Note 7) .................................. $189,678,988 $186,332,662 See Notes to Financial Statements. TIMN 446032 Zt

Smoking and Chewing Tobaccos Although domestic consumption of smoking tobaccos increased more than 4 per cent to approximately 70 million pounds in 1968, this was considerably below the peak level in recent times of 84 million pounds in 1964. Imports of smoking tobaccos increased more than 35 per cent. and exports of smoking tobaccos both in packages and in bulk increased more than 2 `' per cent. Our Smoking and Chewing Tobacco Division, headiluartered in St. Louis. Missouri, had increased sales during 1968. Sales of our leading brand, VELVET, increased more than the average for the industry. In the popular-price segment of the smoking tobacco market, Liggett & Myers has an important share of the market with VELVET and GRANGER pipe tobaccos. In the premium-price segment of the market, the Company's leading brand is MASTERPIECE pipe tobacco. The Pinkerton Tobacco Company Pinkerton, a wholly-owned sub- sidiary of Liggett & 34yers, located in Toledo, Ohio, is a large producer of scrap chewing tobaccos. The new foil-laminated pouches introduced in 1967 for its four principal brands. RED MAN, RED HORSE. PAY CAR, and UNION STANDARD, played an important role in ;aining significant increases in sales of each brand in 1968. TIMN 446020 9

Sales and Earnings Consolidated net earnings for 1968 were S3-1.066,287 (S~'.8-n per share of common stock), compared to S-25,127,358 for 1,-)67 (S21.93 per share). The 10 per cent Federal income tax surcharge enacted in 1908 reduced earnings by S.31 per share. If all of the convertible preference stock issued in connection with the Austin, Nichols merger were converted into common stock, the effect on earnings per share of common stock would not be material. Net sales in 1968 by the Company and its subsidiaries were S617,240,028, compared with S631,780,056 in 1967. SSales of non-tobacco products in 1968 amounted to approximately 36 per cent of consolidated net sales. Earnings and sales in both years include those by Austin, Nichols & Co., Incorporated, which was merged into Liggett & Myers on a pooling of interests basis on January 24, 1969. Operations of Brite Industries, Inc., which was purchased on September 30, 1968, are included in the finan- cial statements from date of acquisition. Dividend Record Common stock dividends have been paid each year since the Company was organized in 1911. Common stock dividends in 1968 amounted to S-1.50 per share (adjusted for the two-for-one stock split on May 31, 1968). Four quarterly dividends of S1.75 each were distributed on the 7 per cent preferred stock. There were 49,965 stockholders at the end of the year. Total cominott and preferred dividends paid in 1968 amounted to $20,041,073. Regular quarterly dividends have been paid in 1969 on the three classes of stock now outstanding as follows: 7 per cent preferred stock -$1.75 per share on January 1, 1969; $5.25 convertible preference stock -$1.31'/.~ per share on February 1, 1969; common stock -$.6'?!% per share on March 1, 1969. Financial Review / 1968 Taxes Income taxes amounted to S39.493,3-13 in 1968, equal to S3.87 per share of common stock. This compares with net earnings of S-2.82- per share of common stock. Federal and other excise taxes (including liquor import duties) included in consolidated sales amounted to S178.992,000. The Federal excise tax on cigarettes is eight cents on each package, and the liquor tax rate is S 10.50 per aallon (excluding duty of approximately one dollar). Although the industries generally do not collect state and municipal excise taxes, these add up to substantial additional taxes paid by the consumer. Capital Expenditures Capital expenditures during 1968 consisted chiefly of disbursements for construction of additional facilities for manufacturing ALPO products and for machinery and equipment for the manufacturing facilities of the Company and its other subsidiaries. These expenditures totaled S8.300,000, compared to $7,400,000 in 1967. Depreciation charges in 1968 aggregated 55,630,675, compared to 54,911,290 in 1967. Financial Condition The sound financial condition of the Company is indicated by the ratio of c:urrent assets to current liabilities which is 3.6 to 1, and to the fact that long-term debt is 20.9 per cent of total capitalization. The Company reacquired 26,800 shares of common stock during 1968 at an average cost of S36.11 per share, bringing the total number of common shares held in treasury to 301,768. The Company also reacquired 2,400 shares of non- callable 7 per cent preferred stock during 1968. The 85,520 shares of preferred shares held in treasury on May 31, 1968 were canceled as of that date. TIMN 446026 15

Brite Industries, Inc. On September 30. 1968, the Company acquired 100 per cent of the common stock of Brite Indus- tries. Inc. Brite, a major producer of watch bands, founded fifty years ago, has home offices and its principal Inanufacturing plant in Providence. Rhode Island. The Providence plant was constructed in 1967 and was expanded in 1968. Sales and earnings reached record high levels in 1968. While a con- siderable portion of the watch band production is sold to watch manu- facturers as "original equipment," the major portion of the product is packaged for consumer sales. Indi- cations are that more people wear BRITE watch bands than any other kind. The company markets three major brand names. BRITE watch bands have 80 per cent of the busi- ness in major drug chains and also sell in variety chains and, through wholesalers, to independent drug, tobacco and miscellaneous sundry retailers. MEDALIST watch bands, which include the new "Date- watcher" Perpetual Calendar Watch Band, are sold through the same channels but are generally confined to larger retail stores. ROGER WILLIAMS watch bands are distri- buted exclusively and are the largest-selling brand in the large dis- count stores. All BRITE watch bands are sold from self-merchandising, point-of- purchase displays designed to promote high turnover consumer im- pulse sales. These attractive counter fixtures are complete watch band departments and feature a large variety of metal-expansion, leather, nylon, plastic and fabric watch bands for women, men, teenagers and children in a wide range of sizes, colors and designs. Wrist watch sales are approaching double what they were five years ago, and this will mean a growing market for replace ment watch bands at popular prices. Products BRITE Watch Bands MEDALIST Watch Bands ROGER WILLIAMS Watch Bandti TIMN 446025 14

Alcoholic Beverages The Paddington Corporation The sales of J&B Rare Scotch Whisky, imported exclusively by The Paddington Corporation, increased to a record high in 1968. This was partially due to increased sales in anticipation of the dock strike in the latter part of the year. Indications are that the over-all popularity of Scotch whisky con- tinued to rise significantly during 1968 and that J&B is still the leading brand. J&B continued to have sales in- creases in most major markets, and made further progress in smaller markets, especially in the South and the West and in controlled states where alcoholic beverages are sold through state stores. Sales of the half-gallon unit also increased in areas where its sale is legal. Special promotions for Father's Day and the year-end holidays. including appro- priate packaging, were successful. Carillon Importers Ltd. Sales and ecu-ninu-s by Carillon again climbed to r~,-.'ord levels in 1968, with si<<niii,.int increases in the company', t~~,) I,nn.ip.il brands: GRAND MAEZ\II K , ,,I Itc>NTBAY English gin. ~ ~1, , 11 ( I II RRY MARNIER, iian-I ...,I , ,. r.d years ago, were also Ii i_n r With the trenICndO~U~ in~_rease in travel to foreign CowltriC, :und ex- p o s u re to foreign cuisine, the American public is showing greater interest in gourmet cooking and more eleaant dining. This is espe- cially beneficial to sales of GRAND MARNIER, not only because of its use as an after-dinner drink but also for its use in grand cuisine. Products J&B Rare Scotch Whisky GRAND MARNIER BOMBAY English Gin BOMBAY French Vermouth CHERRY MARNIER GOLD LEAF French Cognac BARDINET NAPOLEON French Brandy DOPFF, RIQUEWIHR Alsatian Wines ACHAIA CLAUSS Greek Liqueurs and Wines RHUM NEGRITA 10 TIMN 446021

Intern,ttional Cigarettes T h e ( o m pany's international ciga1-CttC business includes export sale> to more than 100 countries, equit\ in foreign cigarette manu- faCturinL1 companies in some countriC',. and licensing agreements for tlW munufacture and sale of our cigaret te products in a number of COlllltrlC~. L\hurt sales for the industry In- crea,eti t3uring 1968, according to the United States Department of Agriculture. Our principal filter brands, including the 100 millimeter versions of L&M and CHESTER- FIELD. have contributed signifi- eantlv to our export sales in overseas markets where the filter share of the market is increasing at a greater rate than it is in the United States. We strengthened our export product line by introducing new LARK 100 in mans• export markets in the last half of 1968. The volLune of our cigarette brands manufactured in foreign countries in 1968 was substantially greater than it was in 1967. In March. CHESTERFIELD Menthol was added to other brands which are manufactured under license in Costa Rica. and CHESTERFIELD Regular was added in Bolivia. In April. CHESTERFIELD Filter and L&M Box were introduced as brands locally manufacttred under license in ItalN'. In June, the Company SlgneCl a Illallllfac;tllring-hC:ellSing agreenlent with Rothmans of Pall Liggett & N7NIers cigarette brands are exported to more than 100 countries and are manufactured lucall% _ in: Argentina Australia Austria Belgium Mall (:1u.tr.tliat Ltd., and in November. ('HI.S I-I_RFIELD Filter. King and Re,ular were introduced in Australia. In March. 1968. the Company acquired an interest in Fabrica de Cigarros Florida, S/A. which was founded in S5o Paulo in 1935 and is today the second largest cigarette manufacturer in Brazil. In July, the Company acquired an interest in Eilebrecht Cigaretten Fabrik GmbH in Baden-Baden and West Be_rlin, Germany, and also in United Cigarettes Company Ltd. in Geneva, Switzerland. During the third quarter of 1968, the Company established, through a recently formed stlbsidiary, its new tobacco marketing headquarters for Europe in Brussels, Belgium. This provides the means for Liggett & Myers to develop its tobacco business in the EEC (European Economic Com- munity) and EFTA (European Free Trade Association) countries of Europe. The first important step was taken in October when CHESTER- FIELD Regular and King and L&M King manufactured in Germany were introduced in France. The Company now has an equity position in cigarette companies in Argentina, Brazil, Germany, Mexico. Peru and Switzerland. Royalties from sales of our ciga- rettz brands mamtfaCtured in foreign COLlntrles are making aIl Illlportallt contribution to corporate earnings. Bolivia Costa Rica Hotland Ital}~ Mexico Philippines Switzerland West German\• Factory Locations The Company has a smoking and chexving tobacco factor}• in St. Louis. Missouri. The Pinkerton Tobacco Company, a wh oll} -o\vned su bsidiary. has a chewing tobacco plant in Toledo, Ohio. Smoking Tobaccos BUCKHORN BUFFALO CORN CAKE COUNTRY GENTLEMAN DINNER BELL DU KE'S GRANGER GROWLER HOME RUN KENTUCKY LONG CUT KING BEE MASTERPIECE MOUNTAIN ROSE OLD STYLE PLOWBOY S&M SUMMERTIME SWEET TIP TOP VELVET VIRGINIA EXTRA Chewing Tobaccos Plug CLIPPER DRUMMOND NATURAL LEAF FISH HOOK HORSE SHOE J.T. KING PIN MASTERPIECE PICK NATURAL LEAF SPARK PLUG STAR TINSLEY'S THICK UNCLE SAM UNION STANDARD W.N.T. NATURAL LEAF Twist GR.ANGER HONEY DIP PICNIC Fine Cut RED BELL SWEET BURLEY Scrap PAY CAR RED HORSE RED MAN UNION STAND.4RD TIMN 446019

LiQ2ett &.lll•ers Incorporated and Consolidated Subsidiaries Five Years in Review ( Dollars expressed in thousands except per share hgtu•es) 1968 1967 1966 1965 1964 Operating Results-Year Ended December 31 Net sales ................................................ 5617.2-10 $631.780 $635,258 $533,153 S555, 719 Income taxes .......................................... 29.493 27.352 25.158 20,501 26.-105 Net carninLs .......................................... 24.066 25,127 23,439 22,597 26.941 Net earnings per share of common stock 2.82 2.93 2.71 2.56 3.07 Dividends on common stock-amount 19,064 19,217 19,218 19,509 19,761 Dividends on common stock-per share 2.50 2.50 2.50 2.50 ''.~; 0 Financial Position-Year End Inventories ............................................ 258,640 274,992 293,034 278,637 305,438 Working capital ......... ......... ._................. 247,728 250,303 270,345 265,455 309.109 Plant and equipment (net ) ..................... 48.224 42,773 40,263 35,170 35.551 Total assets ........................... .__. ........... 507,385 490,382 490,506 382,764 414,672 Lony~-term debt ....................... _.............. 84,019 75,636 73,322 564 38.138 Short-term debt ....................... .......... ..._.. 51,712 51,292 41,643 40,526 26,184 Stockholders' equity .............................. 318,104 315,334 313,177 311,448 318,120 Book value per share of common stock .. 35.96 35.45 34.91 34.58 34.52 By Ilslilg 1'olli' COYi2pail)''s prodt[ct.s', ti h1c'h are i1a7Yted in this report, and by recolYli'iZeiZd[71og 1he711 to 1'olfr friends, A'~~ll tt ill cl,r`(1 to the ValZfe of your investment. TIMN 446036 Printed in U.S.A_ _

Au.tin, Nichols & Co., Incorporated The merger of Austin. Nichols & Co.. Incorporated into Liggett & Myers Incorporated was approved at special stockholder meetings by Austin. Nichols stockholders on November 26, 1963 and by Lio,ztt &- Myers sto&holders on December 3, lt?b3. Austin. Ni.chols, foun(lCcl in 1855, is a leading importrr, rectifier and bottler of alcoholic beverages. Its headquarters, rectifying and bottling plant and Custom and Internal Revenue bonded warehouses are located in MaSpt th. Lon T Island. The conlpany is also a di;tributor of aleoholie bevera Tes in New York City and Washlllgton, D.C., \ti'lth \\•arehousts at JlaSpeth and %%'est- bury. Lon- Island. and White Plains. New York. _ The principal brand owned hy Austin. Nichols is WI LD TL.i RI:EY, a 101-proof, 8 -year-old hotlrbon whiskey. which is advertised as "b eyonti auplication." The company is the eXelusi\ e -iistributor of VIRGINIA GENTLE1IAN botu•- boIl \vhiskey in a number of states. As the exclusive importer of I11aI1V talllOtls bralllls, the conlpallVI s principal imported brand is GRANT'S 8-_vear-old, one of the more popular Scotch \vhiskics in the United States. Other important im- ported brands inelllde METAXA, the Greek brandy. and C'.aMPARI. the Italian aperitif. Other \vell known names include PADDY IRISH WHISKY. CHARLES FIEID- SIECK Champagne, CHAUVEtiE.T sparkling and still Bur11unLlti wines and NNIOUQUIN Italian brandy. Products WILD TURKEY Bourbon GRANT'S Scotch N[ET:aXA Greek Liqueur CAMPARI Italian Aperitif CHARLES HF.IDSIECK Fren,h t h u lt_nr CHATEAU LA MISSION HAl I Itk It tN French \b'ine CHAUVENET Sparkling and SttII Ior_undies GLENFIDDICH, Single Malt 'S, t, It it,rtnt's) LAGOSTA Rose Portuguese \~ inr MOUQUIN Italian Brand} NICHOLS Blended Whiskev PADDY IRISH WHISKY VIRGINIA GENTLEMAN 11'iurh-n \S'EDDING VEIL LIEBFR.\t'\III t II German \Vine ZELLER SCHWARZE KA I I l,rrnt.in ~\ine TIMN 446022 tt

Liggett &.lfyers Incorporated and Consolidated Subridiaries Statement of Consolidated Source and Application of Funds for the Years ended Deceniber 31 SOURCE OF FUNDS From operations 1968 1967 (Note 11 Earnings before minority interest ............................................... $24,849,835 $26,155,697 Depreciation and amortization .................................................... 9,371,170 7,740,317 Total 34,221,005 33,896,014 Decrease in working capital Market value of common stock issued for net assets of 2.575,087 20,042,337 National Oats Company .............................................................. 5,263,544 Increase in long-term debt .............................................................. Proceeds from exercise of stock options 8.382.617 2,314,736 Liggett & Myers ........................................................................... 412 6.537 Austin, Nichols ........................................................................... Net earnings of Austin, Nichols, less cash dividends of $227,685, for the period from August 1, 1967 through December 31, 1967 211,594 15.360 (Note 1) ................. ..................................................................... 558,065 - Other ................................................................................................ 423 .516 691,093 TOTAL .............................................:.:............. $46,372,296 $62,229,621 APPLICATION OF FUNDS Payments of cash dividends Liggett & Myers ........................................................................... $20,041,073 $20,253,547 Austin, Nichols ........................................................................... 335,540 402.892 Additions to franchises and goodwill .............................................. 2,035,127 22,815.663 Cost of common and preferred stock purchased ............................ Net additions to property, plant, and equipment (including 1,252,038 7,599,729 property of consolidated subsidiaries purchased) .................... 11,082,110 7,432,464 Acquisition of majority interests in foreign tobacco companies .... 6,735,941 - Increase in other investments .......................................................... Reductions in minority interest due to changes in capital and 2,266,367 2,070,131 payment of dividends to minority stockholders ........................ 346,996 1,750,168 Increase (decrease) in prepaid expenses and deferred charges ...... 1,841,116 (94,973) Costs incident to merger with Austin, Nichols .............................. 435,988 _ - TOTAL ............................................................ $46,372,296 $62,229,621 See Notes to Financial Statements. Notes to Financial Statements December 31, 1968 1. Principles of Consolidation, Acquisitions, Etc. All significant subsidiary companies are included in the accompanying consolidated financial statements. In 1968, the Company acquired majority interests in three foreign tobacco companies at a cost of $6,735,941. At December 31, 1968, the Company's equity in the net assets of these unconsolidated subsidiaries aggregated $3,424,620, and its equity in their net earnings since dates of acquisition aggregated $82,648. No dividends were received from these companies. On December 3, 1968, the stockholders of Liggett & Myers Incorporated approved a proposed merger of Austin, Nichols & Co., Incorporated with the Company (see Note 4). The merger was effective on January 24, 1969 and the Company will issue, in 1969, a maximum of 298,956 shares of its $5.25 cumulative convertible preference stock in exchange for the outstanding common stock of Austin. This transaction, which is being accounted for as a pooling of interests, has been given retroactive effect (based on the maximum number of $5.25 preference shares to be issued) in the accompanying consolidated financial state- ments. The 1968 consolidated balance sheet includes the December 31, 1968 balance sheet of Austin, and the 1968 statement of consolidated earnings includes Austin for the year ended December 31, 1968. The 1967 consolidated balance sheet includes the balance sheet of Austin as of July 31, 1967, and the 1967 statement of consolidated earnings includes Austin for its flscal year ended July 31, 1967. Net sales and net earnings, respectively, of Austin included in the statement of consolidated earnings were $58,912,277 and $1,072,678 in 1968 and 556.562?49 and $1,194,975 in 1967. The results of operations of Austin for the period from August 1, 1967 through December 31, 1967 have been credited directly to retained earnings. On September 30, 1968, the Company purchased for cash all of the outstanding capital stock of Brite Industries, Inc. and its affiliated companies, and the accounts of the acquired companies have been included in the consolidated financial statements since ;2 TIMN 446033

niore than 100 hospitals, universitizs, and research institutions, and 016 scientific papers have been in- dependently published as a result of' this research. The Council's 1968 Annual Report states: "The fact that reputable, indepenclen t scientists at leading research organizations and institutions See thC neeLi for more study is a clear indication that the smoking and health situation is not as simple- as somz people would have us believe." In 1963, the tobacco industry pledged 510.000,000 to the American Medical Association's Education and Research Foundation in support of its Project for Research on Tobacco and Health: and an additional pledge of at least S8,000,000 was made in 1968. In its published report in mid-1968 at the, ANIA Annual Convention in San Francisco, the A`IA-ERF indicated it had awarded 104 grants to 50 institutions; and in its review of the research activity it stated: "...the problems related to establishing any kind of cause and effect relationship between tobacco use and health are far more complex than had been supposed. "It is evident that we have a long road to travel and that this will be done slowly. Many years may be required to gather sufficient experimental facts and data to clear what is at best a muddied picture." Perhaps the most important adversity in the ci--a- rette industry in 1968 was the increasing use of anti-cigarette announcements on radio and television, which began in late 1967 as the result of the application of the "Fairness Doctrine" to cigarette commercials by the Federal Communications Commission. In November, the United States Circuit Court of Appeals for the District of Columbia upheld a ruling of the Federal Communications Commission requiring radio and television stations which carry cigarette advertising to devote a significant amount of broadcast time to free anti-cigarette announcements. The case involved whether the Federal Cigarette Labeling and Advertising Act of 1965 pre-empted the field of cigarette regu- lation, whether the ruling evJti authorized, and whether the ruling was constitutional. In February, 1969, The Tobacco Institute. Inc., eight cigarette manufacturers, including your Company, the National Association of Broadcasters, and several broadcast networks petitioned the United States Supreme Court to review the decision of the Circuit Court of Appeals. On February 5, 1969, the Federal Communications :~ommission announced its intention to adopt a pro- posed rule that would prohibit the broadcast ot' -igarette advertising on radio and television, "assuming, the absence of a contrary Congressional direction." The rising retail prices of cigarettes resulting from increasing state and local taxes continue to be a serious problem for the industry. Although manufacturers' prices have increased little since mid-1907. retail prices have risen more than 7 per cent. chiefly because thC weighted average state cigarette excise tax has climbed almost 17 per cent, from 7.8 cents per pack to Q.1 cents. Eight increases in these state taxes during 1968. althou0h less than twelve increases in 1967, was a greater amount than usual for an zvzn-numbered legislative year. Most unreasonable were the 7-cent per pack increase in Florida from 8 to 15 cents and the 5-cent increases in Oklahoma and Rhode Island from 8 to 13 cents. There were defeats of such legislation in twelve states. Seventeen states now have cigarette taxes of 10 cents per pack or more. Thirty-four states have taxes of 8 cents or more, which is the equivalent of the Federal excise tax on cigarettes. Forty-five states have taxes of 5 cents or more. Thz total state and local revenues from cigarette excise taxes (about S3.1 billion) have increased to about the same level as the Federal cigarette excise taxes, bringing the total direct cigarette revenues to approximately S4.2 billion. If there were no excise taxes on cigarettes, the consumer would pay about half as much as he now pays for his cigarettes. These tax figures do not include income and franchise taxes, state and local sales taxes and other direct and indirect taxes. The value of the Company's leaf tobacco inventories on December 31, 1968, was S-100,608.137. The United States Department of Agriculture estimated the production of flue-cured tobacco at 1,000 million pounds, the smallest crop since 1957 and 13 per cent lower than in 1967. The decline was caused by the dry weather in the flue-cured growing areas. The average price per pound increased about 4 per cent to 66.5 cents, almost equal to the record price of 1966. Based on sales of approximately 80 per cent of the burley crop through December 18, it is estimated that total production will be approximately 557 million pounds, slightly more than the 1967 crop of 541 million pounds. The average market price per pound increased to a record high of about 74 cents, approyi- mately 3 per cent above the 1967 average price. On behalf of the Board of Directors, I express our ~incerc appreciation for the cooperation and loyalty of oLu• omployees, and for the continued support of our •<OL LIloldersk z~v March 0, 1969 Milton E. Harrington Presiden t TIMNI 446016 5

Allen Products Comp lity, Inc. Sales hy Allen Pro(fucB ugain itr creased to a record hiUh in l')68. Sales increases of ALPO dog fooLi Contlnllell to be several timesgreater than the average gains for the indus- trv, and today the ALPO line of produCts has thz highest dollar sales ot any premium dog food in one of America's fastest-growing industries. AL.PO sales also increased in all foreign markets where the brand is distributed, especially in Canada, Holland, and Switzerland. C h o p ped Beef and Chopped Horsemeat were introduced nation- ally in early 1968 after test mar- keting and regional introduction in late 1967. Two additional new products. Meat Trio and Savory Stew, were added in 1968 to the ALPO line of products, which also includes Beef Chunks, Horsemeat Chunks, Liver Chunks, Chicken, Lamb Chunks, Rib of Veal, Meat Balls with Gravy and Eggs'n Beef. In December, the company intro- Ciuced its new luxury line of canned cat foods, called CAT FEAST, into test markets. The new line consists of seven items to satisfy even the most finicky cats: River Herring, T u n a. S a rdines, Beef & Fish, Chicken & Fish. Liver & Fish, and I louse Special, a variety of ineats and fish. Each variety has a differently colored label and the familiar ALPO name. The cat food market is growing at a more rapid rate than the total pet food market. Allen Products opened its third and newest packing plant in Cleve- land in October, 1968. The new plant is designed to increase pro- duction capacity by 50 per cent, with provisions for further expansion as needed, and will supply markets in the east-central part of the Country. The original ALPO 12 plant is located in Allentown, Pennsylvania, and the second plant was opened in Crete, Nebraska, in 1965. Factory Locations Allen Products Cumpany h., pn,, r„ ng plants located in Allentu~~n, 1'ennsti hunia: Crete, Nebraska; and Cleveland, Ohio. Produc ts BEEF CHUNKS HORSEMEAT CHUN KS CHICKEN LIVER CHUNKS LAMB CHUNKS RIB OF VEAL MEAT BALLS WITH GRAVY EGGS 'N BEEF CHOPPED BEEF CHOPPED HORSEMEAT MEAT TRIO SAVORY STEW TIMN 446023

National Oats Company National Oats produces packaged cereal prociucts, pop corn, and the CORNO line of animal and poultry feeds. The sales of all grocery products increased Itl 1968. iI1ClUCllnc, C R E A M OF OAT_S,_ INSTANT CREAM OF OATS, 3-MINUTE OATS. 3-MINUTE RAISINOATS, 3-,NIINUTE POP CORN. 3-MINUTE COL-R-CORN, and 3-N-IINUTE corn QooCls. CREAM OF OATS was intro- (luced nationally in the last quarter of 1967, and INSTANT CREAM OF OATS was introduced in some areas in late 1967 and nationally in 1968. Distribution of 3-MINUTE POP CORN and 3-MINUTE COL-R- CORN was extended to manv ne\v markets. The other products. \vllicll have had their primary success in tlle Southeast and Soutllwest. are being introduced in other areas. ~ To capitalize on the unique and superior qualities of CREAM OF OATS and INSTANT CREANI OF OATS. a new theme,'`The Improved Oatmeal." is being applied in aclver- tisina. merchandising and packaging of these proCiucts. "Whoever thougllt they'd improve oatnleal'' INSTANT CREAM OF OATS has done it!" will appear in television, magazine and newspaper advertising. National Oats is the second largest producer of rolled oats and the largest processor and packer of pop corn for home Consumption: the 3-MINUTE brand. It also produces BUTTERFLAI:E POP CORN for the commercial and ConCesSlOllaire trades. The company is the lar Test pro- c.lucer of a variety ofoat products for the processors of ready-to-eat cereals, the bakery trade, the baby food_ industry and processors of canned foods and convenience dry mixes. By-products from oat and pop corn processing are shipped to rhemical plants. foundries. feed mills and others. Factory Locations National Oats Cnmp;tn~ has a rolled oats mill in CeJ,tr Rapids, ro%va; pop c,rn processing plants in \\ all Lake, Iowa: Dela%~ are. i )liiu: and Hagersto~rn. %I,tr% IanJ: and animal and pIiultr% teed mills in East St. Imt,. Illinois, and Cahmul. '.l -quri. Products CREAbi OI• O,\ I ~ INSTANT CR1 .\\I 3-MINUTE O:\ I S , t I i t\ I S 3-MINUTE RAItil\t I \ I ~ 3-MINUTE POI't tII,% 3-MINUTE C()I k i k\ 3-MINUTE \11Il I I i K\ \tL.-\L 3-MINUTE YI L.l t t`.% , , tRN MEAL 3-MINUTE GRI 1 ti BUTTERFLAKI I't il' ~ tRN TIMN 446024 13

P \C

Domestic CiQarettes Factory Locations The Company has two cigarette factories, one in Durham, North Carolina, and me in Richmond, Virginia, and leaf tobacco processing plants and storage warehouses in Durham and Rocky %Iount. North L'arolina: Danville, Virginia: Lerington and Paris, Kentucky: and Stoughton, Nisconsin. The Gary Tobacco -umpany, a %cholly-owned ;uhsidiary, has plants in [zmir. Turketi•, and in Cavalla ind Xanthi, Greece, for huN•ing and processing iromatic Turkish-type leaf tobaccos. Products ,'HESTERFIELD (King, Regular) ::HESTERFIELD FILTER _-H ESTER FIEL D MENTHOL 101 CHESTERFIELD DUKE I~ILTER FATIMA HOME RUN LARK LARK 100 L&M FILTER (King, Box, Regular) L&M GOLDEN 100 L&M MENTHOL 100 OASIS MENTHOL l'ICAY UNE PIEDMONT There was a continutli trend to filter cigarettes in 1968 and a further decline from 1967 in the non-filter category. The filter gain was largely in the 100 millimeter size, but the 100 millimeter gain slowed frolll the 1967 rate. The menthol cigarette share of market also increased slightly. The introduction of Lark 100 in 1965 strengthened the Company's position in the growing filter and 100 millimeter segments of the mar- ket, as did L&JI Golden 100. L&M Menthol 100, and 101 CHESTER- FIELD which were introduced in 1967. L&,NI advertising and promotion were strengthened durina the year, and while L&M Golden 100 and L&M Menthol 100 eontributeli im- portantly to the sales of the brand, L&M King remains the Company's largest-selling single cigarette. Several LII11C1Ue (:OLIpOIling plans for the CHESTERFIELD family of brands were sLlcressfully test- marketed during 1968. CHESTER- FIELD is the Company's second largest cigarette brand line and is sold as filter, menthol filter, 101 millimeter filter, and king and regular non-filter. In October, the price of regular non-filter cigarettes, inCluding CHESTERFIELD as well as com- petitive brands, was increased from S9.25 per thousanci to S9.45 per thousand, the ec7Llivalent of 0.-1 cents per pack. The last price increase by manufacturers. for all types of ciga- rettes, was in Junc. IQ07. Advertising for LARK. uLlr third largest-selling branc], ~~'as Chanoed early in 190S to emphasize the uniclue featLlres of LARK's Gas-Trap MI) filter. LARK's 3-piece filter. protected by U.S. Patent No. 3,_'51,365. consists of' t%co Com en- tional outr:r filters and a,eharate inner chamber that contains aCt1- vatzli, speeially fortified charcoal granules. The activated eharcoal granules trap certain harsh ;ases that conventional filters do not: in fact. almost twice as effecti.vel~ aN in any other popular brand. The two outzr filters relluee "tar" and nicotine the same way conventional filters do. Charcoal filter ciUarettes. like LARK, continued to rzceiNe fae or- able publicity in 190S. Other changes in our domestic cigarette marketin_c, in l968 inCludzll further reorganization Ot Ollr sales department, the expansion of our sales training department and pro- gram, an increase in both on-thz job and off-the job educational oppor- tunities, and the enhancement of our sales incentive program. Domestic marketing continuel.l to give special attention to various channels of cigarette Llistribution, including retailers and wholesale distribLltors. Our vending sales force provides specialized services to the vending operators who sell cigarettes through approximately one million vending outlets. Our special In l ll tary sales force services the military establishment, another important segment of the market. TIMN 446018 7

for the distribution of incentive awards in restricted common stock to not more than one hundred supervisory and key employees each year. The maximum aggregate number of shares issuable undet this Pl.ln I<uhject to adjustments for future stock splits and stock dividen,l,) i, 50,000, with a limitation of 10.000 shares in an}• one year. For the Plan year en.l-,i December 31, 1968, the Company has provided for incentn• nwlrds under both plans aggregating 5985.063. The number uf shares of restricted common stock of the Company to be issued in 1969 for the 1968 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 New York S tock Exchange on the last day of each quarter in L968. The aggregatz number of shares to be issued in 1969 under both plans is 23,612. The Company and certain of its consolidated subsidiaries have retirement plans covering most of their employees. The total retirement expense amounted to S897,460 for 1968 and S 1,558,307 for 1967, which includes, as to certain of the plans, amortization of prior service cost over a period of twelve years. The companies' policy is to fund accrued retirement cost. At December 31, 1968, the assets of the retirement plan funds- exceeded the aggregate vested benefits. 7. Long-Term Debt and Dividend Restrictions In accordance with a covenant in the Indenture covering the 6-1 sinking fund debentures, the amount which could be expended for the payment of cash dividends on common stock was limited to $28,637,751 at December 31, 1968. 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, 1968, other long-term debt of the Company and its consolidated subsidiaries is summarized as follows: 7 3/8" unsecured notes, due March 31, 1971 ......... .. ............. $6,800,000 6-6 1/4 . unsecured notes, payable in installments through June 30, 1972 ........................ 936,244 4 1/4-6 ~'c mortgage notes, payable in installments through January 1, 1988 ...................... 1,282,754 Total ............................ $9,018,998 The unsecured notes were issued pursuant to credit agreements for financing the Company's investments in foreign tobacco companies. The mortgage notes are obligations of acquired companies. 8. Commitments and Contingent Liabilities At December 31, 1968, commitments by the Company and its consolidated subsidiaries for the acquisition of property, plant, and equipment aggregated approximately S 1,850.000. The purchase agreement between the Company and the former stockholders of Brite Industries. Inc. and its affiliated companies, pertaining to the acquisition by Liggett of the capital ,tock of those companies (see Note 1), provides for additional payments to be made by the Company if the aggregate net earnings (as defined) of Brite and its affiliated companies for the three years ending J une 30, 1971 exceed a stated amount. The maximum additional amount to be paid under this agreement is S3,000.000. In 1967, the common stock of Star Industries. Inc. 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 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. fteld by Star for a price per share equal to 14 times the net earnings (as det`med) 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 $10,104,745 on the basis of the purchase price currently in effect: such cost would be approximately S3,723,000 in excess of the equity in net assets applicable to such shares as of December 31, 1968. Under a related agreement, certain stock- holders 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. At December 31, 1968, there were several lawsuits pending against the Company and certain of its consolidated subsidiaries. In the opinion of the Company and its counsel, none of the plaintiffs should prevail on the merits of such actions. Opinion of Certified Public Accollntntlts HASKINS & SELLS CERTIFIED PUBLIC ACCOUNTANTB TWO BROPDW.Iv NEW YORK 10004 To the Directors and Stockholders of Liggett & alyers Incorporated: We have examined the consolidated balance sheet of Liggett &:ltyers Incorporated and its consolidated subsidiaries as of D«rrnher 31, 1968 and the related statements of consolidated earnings, paid-in capital in excess of par values of capital stock, retained e,unrr,g., and source and application of funds for the year then ended. Our examination was made in accordance with generally accepted .ru,llt In_ standards, and accordingly included such tests of the accounting records and such other auditing procedures as we considered nc, r...rr% in the circumstances. In our opinion, the accompanying financial statements pre.rnt t,,uly the financial position of the companies at December ? 1. P+r ti and the results of their operations and the source and appli~:.ruun ,t rhrrr funds for the year then ended, in conformity vkith _rncr.lll~ accepted accounting principles applied on a basis consistent ~~ rth th.,t .t thr preceding year. F ebruary 14, 1969 ~ ~e "C'ye~ TIMN 446035 24

October 1, 1968. The cost ot investments in Brite and its affiliated companies exceeded the Company's equity in their net assets at time of acquisition by S2.03-1.891. Such excess cost will be increased by the amount of any additional payments required to be made to the former stockholders of Brite and its affiliated companies (see Note 8). At December 31, 1968, the unamortized portion of the custof an exclusive franchise, held by the Company's subsidiary, The Paddington Corporation. to import J&B Rare Scotch Whisky aggregated S73,167,607, and the unamortized excess cost appli- cable to the acquisition of Paddington and Carillon Importers Ltd. (a subsidiary of the Company) aggregated 57,860,27-1. 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, 1968, the net excess of cost of investments in certain other subsidiaries. including Brite, over equity in their net assets at times of acquisition aggregated 510.846.012, 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. On January 29, 1969, the Company purchased for cash and notes due in installments to January 15, 1971 all of the out- standing capital stock of Ready Foods Corp. 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. 3. Property, Plant, and Equipment and Depreciation Depreciation has been provided by charges to costs and ex- penses generally on the straight-line method based upon the estimated useful lives of the various classes of assets. Depreciation provided amounted to 55,630,675 in 1968 and $4,911,290 in 1967. 4. Capital Stock At the Company's annual meeting on April 30, 1968, the stockholders approved (1) a change in the name of the Company from Liggett & Myers Tobacco Company to Liggett & Myers Incorporated, (2) a change in the domicile of the Company from New Jersey to Delaware, and (3) certain changes in the Company's capitalization as hereinafter stated, all of which became effective on May 31, 1968. (a) The voting rights of the 7:'c cumulative preferred stock were changed from four to eight votes per share. The 85,520 shares previously held in the treasury were canceled (2,400 shares were purchased by the Company from January 1 to May 31, 1968) and the number of shares authorized was reduced to 139,621. The holders of the Company's preferred 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 shall be paid to the holders of any other class or series of stock. The preferred stock is not callable. (b) The Board of Directors is authorized to issue up to 1,000,000 shares of series preference stock, $1 parvalue, in series, and to fix the dividend rates, redemption prices, liquidation values, voting rights, and other terms and conditions of each series. (c) The common stock of the Company was split two for one. In addition, the authorized number of shares was changed from 5,000,000 shares with a par value of $25 per share to 12,000,000 shares with a par value of $1 per share. The two-for-one stock split and the reduction in par value had no effect on the aggregate capital accounts of the Company. These changes have been given retroactive effect to lanuary 1, 1967 in the accompanying financial statements, and all statistical data in this report have been adjusted to ret7ect the two-for-one stock split. On December 3, 1968, at a special meeting of the stockholders of Liggett & Myers Incorporated, the stockholders approved an amendment to the Company's Certificate of Incorporation which authorized the Company to issue up to 310,000 shares of 55.25 cumulative convertible preference stock, par value S 1 per share. In connection with the merger of Austin with the Company, a maximum of'_98,956 shares of such stock will be issued (see Note 1), and 1,706 additional shares will be reserved for issuance for an aggregate price of S71,869 under stock options for Austin's common stock held by its key employees; at the date of merger, these options became options to purchase shares of the S5'5 preference stock at the rate of four tenths of a share of such stock for each share of Austin's common stock subject to option. Both as to dividends and upon llquidation, shares of the S5.25 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 55.25 preference stock may be redeemed, at the option of the Company, after January 24, 1974 at stated redemption prices ranging from S 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 (S 100 per share) of the $5.25 preference stock. At December 31, 1968, 854,225 shares of the Company's common stock were reserved for options granted under the Company's Incentive Stock Option Plan, for issuance pursuant to the Incentive Compensation Plan for Senior Executives and the Restricted Stock Bonus Plan for Key Employees (see Notes 5 and 6), and for conversion of the $5.25 preference stock and options therefor. 5. Stock Options At January 1, 1968, there were outstanding options granted under the Incentive Stock Option Plan to officers and key employees to purchase, subject to certain fimitations, 18,844 shares of the Company's common stock, as adjusted for the stock split referred to in Note 4. No additional options may be granted under this Plan. During 1968, options for 10 shares were exercised for an aggregate option price of $412, and options for 3,570 shares were terminated. At December 31, 1968, options were out- standing and exercisable with respect to 15,264 shares having an aggregate option price of $656,248. In accordance with the Plan, option prices represent closing quoted market values of the shares on the dates the options were granted. Reference is made to Note 4 for information regarding options to purchase shares of the Company's $5.25 preference stock. When options are exercised, the capital stock accounts 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 sales price. 6. Employees' Incentive Compensation and Retirement Plans The Company adopted an Incentive Compensation Plan for Senior Executives and a Restricted Stock Bonus Plan for Key Employees, as approved by the stockholders at the annual meeting on April 30, 1968, which became effective as of January 1, 1968. The Incentive Compensation Plan for Senior Executives provides for distribution of incentive awards in restricted common stock of the Company. Awards are to be made only if consolidated earnings of the Company show an increase over the average consolidated earnings for the three years preceding 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 ad,justed for stock splits and certain other events). The ma\imum amount chargeable to earnings (before income tax) for any Plan ycar is S750,000, and the maximum aggregate number of shares issuable under the Plan is 100,000 (subject to adjustment for future ,tuck splits and stock dividends). The Plan is limited to five >'ears ending December 31, 1972 unless extended by stock- holders. The Restricted Stock Bonus Plan for Key Employees provides TIMN 446034 23

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