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Stockholders' Annual Meeting The annual meeting of stockholders will be held on Tuesday, April 30, 1968, at the Company's Operations Center, Durham, North Carolina, at 2:30 P.M. Eastern Daylight Time. A formal notice of this meeting, to- gether with the proxy and proxy state- ment, will be mailed to stockholders on March 29, 1968. Stockholders who are unable to attend the meeting are urged to sign their proxies and return them promptly so that the stock of the Com- pany will be represented as fully as possible at the meeting. Today the Company is owned by ap- proximately 49,400 stockholders. About 77 per cent of the total common and preferred stock was voted by person or proxy at the last annual stockholders' meeting on April 25, 1967. Liggett & Myers Tobacco Company 1967 Annual Report Contents Officers and Directors Inside Front Cover Letter to Stockholders Page 2 Domestic Cigarettes 5 Smoking and Chewing Tobaccos The Pinkerton Tobacco Company 7 International Cigarettes 9 Alcoholic Beverages The Paddington Corporation Carillon Importers Ltd. 11 Allen Products Company, Inc. Irradiated Foods, Inc. 13 National Oats Company 15 New Operations Center 16 Financial Review 17 Highlights of Operations 18 Disposition of Total Earnings 19 Consolidated Balance Sheet Consolidated Earnings and 20 Retained Earnings Consolidated Source and 22 Application of Funds 23 Notes to Financial Statements Opinion of Certified Public 23 Accountants 24 Trn Years in Review Inside Back Cover TIMN 446040 I

Liggett & Myers Tobacco Company Executive Offices: 630 Fifth Avenue, New York, N.Y. 10020 Executive Personnel On August 15,1967, Frederick P. Haas was elected Vice-President. Mr. Haas has served as General Counsel and a member of the Board of Directors since 1965, when he came to the Company from the law firm of Webster Sheffield Fleischmann Hitchcock & Brookfield in New York, where, as a partner, he was active for a number of years in the legal affairs of Liggett & Myers. O f f icers 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. Vicr-President, Manufacturing EDWARD J. PARRISH Vice-President, International SAMUEL WHITE Vice-President, Marketing RALPH P. MOORE Treasurer RUSSELL M. CHENOWETH Secretary R. HAYWOOD HOSEA Comptroller. RUSSELL G. CUTTER Auditor JAMES J. MORAN Assistant Treasurer and Assistant Secretary ERNEST W. BALDASSARE Assistant Treasurer CHARLES B. MORGENTHALER Assistant Secretary DONALD G. NYREEN Assistant Secretary JOSEPH F. TAYLOR Assistant Secretary Directors J. BOWLING ANDERSON WILLIAM W. BATES, JR. WILLIAM A. BLOUNT S. BACON FULLER FREDERICK P. HAAS MILTON E. HARRINGTON JAMES G. HUCKABEE, JR. ROBERT F. HUNSICKER HOWARD W. McCALL, JR. C. GRICE McMULLAN RALPH P. MOORE JONATHAN W. OLD, JR. EDWARD J. PARRISH ABRAHAM ROSENBERG FREDERICK SHEFFIELD ROBERT L. TAYLOR EDGAR M. WALLER, JR. SAMUEL WHITE TIMN 446039 Transfer Agent: Chemical Bank New York Trust Co. 20 Pine Street, New York, N.Y. 10015 Registrar: First National City Bank 55 Wall Street, New York, N.Y. 10015 ~

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the Department of Health, Education and Welfare also endorsed and to which reference is made below. During 1967, legislation was introduced in the Congress which, if enacted, would require, among other things, (1) listing of "tar" and nicotine con- tent of cigarettes on packaging and in advertising, (2) a change in the wording of the caution notice on all packaging. Proposed legislation also would remove the present statutory moratorium against regulation of cigarette advertising by the Federal Trade Commission. Hearings on these and related bills may take place during 1968. Another development was the ruling by the Fed- eral Communications Commission in June that all licensed broadcasting media carrying paid cigarette commercials must under its "Fairness Doctrine" allow significant free time to anti-smoking propo- nents to disseminate anti-smoking messages. His- torically, the "Fairness Doctrine" has afforded free time to those differing with a station's announced editorial policy, to political opponents, or state- ments on controversial issues. Never before has the "Fairness Doctrine" been applied to commercial messages. The ruling met with widespread criti- cism, and proceedings have been commenced, in which the industry has intervened, to test the legality of this administrative mandate. The Federal Trade Commission undertook to test a selected number of cigarette brands for "tar" and nicotine content and published the results of its initial tests in November, 1967. It is expected that the testing and periodic reporting will continue on a broader basis. The results are being monitored by a testing laboratory set up for the purpose by the industry in Washington, and the industry from the outset has made every effort, with some but not entire success, to persuade the Commission to adopt accurate and proved testing procedures. On behalf of the Board of Directors, I express our sincere appreciation for the cooperation and loyalty of our employees, and for the continued support of our stockholders. Milton E. Harrington President March 11, 1968 Executive Committee; left to right: Samuel White, Vice-President, Marketing; \tilton E. Harrington, President and Chief F:rerutive Officer; Jonathan W. Old, Jr., f:.rcutive Vice-President and Chairman F:xc(;utive Committee; J. Bowling Anderson, tienior Vice-President, Finance; and Frederick P. Haas, Vice-President and General Counsel. TIMN 446042 ~

-,S . ,Y .. To the Stockholders: Net earnings for 1967 were $23,932,383, equal to $5.96 per share of common stock. This is an in- crease of 7.4 per cent over the 1966 earnings of $22,276,920, equal to $5.52 per share. Net sales for 1967 were $575,221,446, slightly below the 1966 total of $577,476,258. Sales for the first six months of 1967 were higher than in 1966, primarily because they included sales by The Paddington Corporation and Star Indus- tries, Inc., control of which was acquired on May 26, 1966. Sales for the second half of 1967 were lower than in 1966, primarily because they did not include the sales by Star Industries, Inc., which ceased to be a subsidiary on May 15, 1967. The sales by National Oats Company have been in- cluded since September 29, 1967, the date of its ac- quisition. The increase in earnings was favorably affected by the rise in cigarette prices and by increased sales of J&B Rare Scotch Whisky and ALPO dog food, but was adversely affected by the introductory costs of three new cigarettes: L&M Menthol 100 and L&M Golden 100 in the first half of the year and 101 CHESTERFIELD in the third quarter. In 1967 we continued to strengthen our domestic and international marketing operations, expanding our program of licensing the manufacture and sale of our cigarettes in foreign countries and further diversifying our business with the acquisition of the net assets of National Oats Company. According to the United States Department of Agriculture, total cigarette production and con- sumption increased about 2 per cent to record high levels in 1967, while cigars and smoking tobaccos continued their declines from 1964 highs. Ship- ments of tax-free cigarettes to overseas military forces increased almost 18 per cent, and 1967 ex- port shipments were about the same as in 1966. The increases in consumption were attributed to more people reaching smoking age, high levels of consumer income, and greater shipments to over- seas armed forces, the same factors which are apt to contribute further to modest sales gains in 1968. Our leaf tobacco inventories totaled $224,992,911 on December 31, 1967. Production of flue-cured tobacco was estimated to be 1,268 million pounds, according to the United States Department of Agri- culture, compared to 1,108 million pounds produced in 1966. The average price per pound declined from 66.7 cents to 64.2 cents. Based on sales of approximately 78 per cent of the 1967 burley crop, the Department estimated total production at 559 million pounds, compared to 587 million pounds produced in 1966. The aver- age market price increased to a record high of 71.8 cents per pound, 7.3 per cent above the 66.9 cent average in 1966. Inequitable and punitive state and local excise taxes are a serious problem to the cigarette indus- try. The weighted average rate of state cigarette taxes, now almost equal to the Federal rate of eight cents per pack, increased approximately 10 per cent in 1967. During 1967, these taxes were raised in ten states by amounts ranging from one cent per pack in Tennessee to seven cents in California, but similar bills failed passage in twenty states. Tax increases are being considered, and enacted, despite the deplorable bootlegging situation in New York. Here state sales were off almost 14 per cent in fiscal 1967, and city sales were off about 23 per cent. In fiscal 1967, sales were off more than 3 per cent in the twenty-three states which increased taxes in 1965, and up almost 4 per cent in the twenty-six states which did not enact increases. North Carolina continues as the only state with no cigarette tax. Federal, state, and local excise taxes on tobacco climbed to a record total of approximately $3.8 billion in fiscal 1967. Although this is a substantial portion of the $9.4 billion consumer expenditure for tobacco products, it does not include income and franchise taxes, state and local sales taxes, and many other direct and indirect taxes. On or about July 1, 1967, both the Department of Health, Education and Welfare and the Federal Trade Commission filed reports with the Congress, as required by the Federal Cigarette Labeling and Advertising Act. The Federal Trade Commission recommended further restrictive legislation which TILMN 446041 2

International Cigarettes Our leading cigarette brands are exported to more than 100 countries and are manufactured locally in: Argentina Austria Belgium Bolivia Ccsta Rica Holland Mexico Philippines Switzerland Exports of L&M, CHESTERFIELD, and LARK continued to contribute importantly to corporate sales and earnings. Export sales of CHESTERFIELD Filter and CHESTERFIELD Menthol, introduced in 1966, increased in 1967. Non-filter CHESTERFIELD declined in line with the international trend from non-filters to filters, but continued to be a major export cigarette. New 101 CHESTERFIELD was introduced in some export markets in late 1967. Our L&M Filter export business was expanded with the introduction of L&M Menthol 100 and L&M Golden 100 into many export countries in the latter half of the year. These new L&M brands in 100-millimeter size will be introduced in additional countries in 1968. The volume of our cigarette brands manufactured under license in foreign countries in 1967 was ap- proximately double that of 1966. In March, CHES- TERFIELD was added to several other brands manufactured under license in the Philippines. In May, LARK was added to L&M and CHESTER- FIELD in Switzerland, and CHESTERFIELD Filter was added to L&M in Costa Rica. New agreements were negotiated in other coun- tries where locally manufactured brands have sales advantages over imported cigarettes. In May, L&M was introduced in Bolivia, and in July, L&M and CHESTERFIELD were introduced in Austria. Our brands are also manufactured locally in Argentina, Belgium, Holland, and Mexico; and licensing agreements have been signed in Italy and Peru. Although our expanding foreign manufacturing operations do not increase corporate sales, royal- ties account for a growing share of our international cigarette earnings and are making an important contribution to corporate earnings. In every coun- try where our brands are manufactured locally, the sales of our cigarette brands are greater than they would otherwise be. TIMN 446048 9

Smoking and Chewing Tobaccos Factory Locations Fhe Company has a smoking 3nd chewing tobacco factory '.n St. Louis, Missouri. The Pinkerton Tobacco Company, a wholly-owned subsidiary, has a chewing tobacco plant in Toledo, Ohio. Smoking Tobaccos 3UCKHORN 3UFFALO 'OCKADE CORN CAKE COUNTRY GENTLEMAN DINNER BELL DUKE'S GRANGER GROWLER HOME RUN KENTUCKY LONG CUT KING BEE MASTERPIECE MOUNTAIN ROSE OLD STYLE PLOW BOY S&M SUMMERTIME SWEET TIP TOP VELVET VIRGINIA EXTRA Chewing Tobaccos Plug CLIPPER DRUMMOND NATURAL LEAF EVERY DAY SMOKE 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 GRANGER HONEY DIP PICNIC Fine Cut RED BELL STERLING SWEET BURLEY Scrap PAY CAR RED HORSE RED MAN UNION STANDARD In the Smoking and Chewing Tobacco Division, headquartered in St. Louis, Missouri, the sales and marketing functions were reorganized during 1967. Also, in May, Weightman, Inc., an advertising agency in Philadelphia, was appointed to handle the advertising for VELVET, GRANGER, MASTER- PIECE, and other brands. Sweepstake promotions for GRANGER and VEL- -VET were run in St. Louis, Kansas City, Philadel- phia, and Boston with the use of newspapers, radio, and endorsements from leading baseball stars. GRANGER was introduced in a 7-ounce canister as a companion product to the pocket-size pouch and the 14-ounce canister. Both VELVET and GRANGER featured in-pack pipe offers. The Pinkerton Tobacco Company Pinkerton, a wholly-owned subsidiary of Liggett & Myers, located in Toledo, Ohio, is a large pro- ducer of scrap chewing tobaccos. In 1967, Pinkerton introduced new packaging for its four principal brands: RED MAN, its leading seller, RED HORSE, PAY CAR, and UNION STANDARD. The new foil- laminated pouches give the products longer shelf life, improved graphics, more effective brand iden- tification, more consumer convenience, and more merchandising appeal. ,riMS 446046 7

The Paddington Corporation The year 1967 was an excellent one for Scotch whiskies, and sales and earnings by Paddington rose to record highs. The increase in sales was due primarily to the popularity of J&B Rare Scotch Whisky, which, according to published reports, continues to be the largest selling Scotch in the United States. 'roducts &B Rare Scotch Whisky :RAND MARNIER ~OMBAY English Gin 'OMBAY French Vermouth :HERRY MARNIER :OLD LEAF French Cognac '~ARDINET NAPOLEON French Brandy )OPFF, RIQUEWIHR Alsatian Wines ~CHAIA CLAUSS Greek Liqueurs and Wines tHUM NEGRITA Carillon Importers Ltd. Sales and earnings by Carillon in 1967 climbed to record levels with significant increases in the sales of GRAND MARNIER and BOMBAY Gin. Carillon also imports and distributes BOMBAY Vermouth and a variety of wines, brandies, and cordials. Changes in Ownership On May 15, 1967, the Company exchanged all of its 792,369 shares of Star Industries, Inc., for 933,812 shares of Paddington and 101 shares of Carillon, formerly owned by Star. As a result, Lig- gett & Myers ceased to own Star but retained an equity in Carillon of 50.5 per cent. As a result of the above acquisition of Padding- ton shares from Star, and of purchases by Pad- dington of 317,244 shares of its own stock, Liggett & Myers' equity in Paddington at December 31,1967, was increased to 92.8 per cent, Star's equity was 6.4 per cent, and the public stockholders' equity was 0.8 per cent. Formerly a New York corporation, Paddington is now a Delaware corporation, and its shares are no longer listed on the American Stock Exchange. TIMN 446050 11

Domestic Cigarettes Because of the continued trend to filter cigarettes, and the new trend to 100-millimeter cigarettes, we introduced three new filter cigarettes in the 100- millimeter category in 1967. L&M Menthol 100 was introduced in February, and national distribution was completed in April. Following consumer acceptance of L&M Menthol 100, L&M Golden 100 was introduced in forty states in June and the remainder of the states in August. The L&M 100 package design is distinc- tively different from the traditional L&M red-and- white package design. L&M Menthol 100 has a modernized, white L&M monogram on its green pack, and L&M Golden 100 has a matching white L&M monogram on its gold pack. Our newest cigarette, 101 CHESTERFIELD, was introduced in ten major markets in August; and after a good response from wholesalers, retailers, and consumers, it was moved swiftly into national distribution a month later. The unique 101 name, the superior tasting prod- uct, the striking gold-and-plum packaging, and the lively advertising make 101 one of the most appeal- ing cigarettes on the market. As the name indicates, 101 is one millimeter (39/1000ths of an inch) longer than the 100-millimeter cigarettes. As the advertis- ing indicates, 101 is "a silly millimeter longer ... It isn't much. But wait 'til you taste it. It's one better." actory Locations he Company has two igarette factories, one in urham, North Carolina, and ne in Richmond, Virginia, rid leaf tobacco processing lants and storage rarehouses in Durham and ocky Mount, North ;arolina; Danville, Virginia; exington and Paris, :entucky;and Stoughton, Visconsin. The Gary Tobacco ompany, a wholly-owned ubsidiary, has plants in :mir, Turkey, and in Cavalla nd Xanthi, Greece, for uying and processing romatic Turkish-type leaf )baccos. Products C[-IESTERFIELD (King, Regular) CHESTERFIELD FILTER CHESTERFIELD MENTHOL 101 CHESTERFIELD DUKE FILTER FATIMA HOME RUN LARK L&M FILTER (King, Box, Regular) L&M GOLDEN 100 L&M MENTHOL 100 OASIS MENTHOL PICAYUNE PIEDMONT This third strong entry in the new, longer ciga- rette category, together with the two new L&M 100's, is contributing importantly to our total filter sales. Our third major filter brand, LARK, continued to receive favorable publicity in 1967. As a leading national magazine stated: "The gases have been shown to inhibit defense mechanisms that protect the lungs of animals.... The program at Arthur D. Little, directed by Dr. Charles J. Kensler* and fi- nanced mainly by Liggett & Myers, has led to devel- opment of improved 'activated' charcoal filters. Charcoal is specially treated to enhance its ability to adsorb gas molecules and the filters remove one- half to two-thirds of certain irritant gases in ciga- rette smoke. It was this Arthur D. Little research that led Liggett & Myers to market its LARK brand." The Company continued to expand its cigarette marketing during 1967 with special programs to in- crease military and vending sales, a comprehensive merchandising program for retailers, and extended services to wholesale distributors. *Copies of Dr. Kensler's testimony before Congressional hearings held in August, 1967, by the Subcommittee on Con- sumer Affairs of the United States Senate Committee on Commerce are available on request. Write: Liggett & Myers Tobacco Company, Box 21, 90 Church Street, New York, N.Y. 10008. TINgN 446044 fi

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National Oats Company Further progress in the Company's diversifica- tion program was made by the acquisition on Sep- tember 29, 1967, of the net assets of National Oats Company, which produces packaged cereal prod- ucts, pop corn, and the CORNO line of animal and poultry feeds. Sales and earnings by National Oats Company increased to record highs in 1967. The packaged consumer products include: CREAM OF OATS, a new and different breakfast cereal, which was introduced nationally in the last quarter of 1967; INSTANT CREAM OF OATS, which was introduced in some areas in late 1967 and should be in national distribution by mid-1968; 3-MINUTE POP CORN, 3-MINUTE COL-R-CORN, 3-MINUTE OATS, 3-MINUTE RAISINOATS, 3- MINUTE WHITE CORN MEAL, 3-MINUTE YEL- LOW CORN MEAL, and 3-MINUTE GRITS, all products which have enjoyed their primary success in the Southeast and Southwest, but which are now being introduced in other areas and will eventually be in national distribution. The company 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 provides large quantities of individ- ual oat products to the processors of ready-to-eat cereals, the bakery trade, and manufacturers of baby foods. In addition, the National Oats Com- pany produces BUTTERFLAKE POP CORN for the commercial and concessionaire trades. Factory Locations National Oats Company has a rolled oats mill in Cedar Rapids, Iowa; pop corn processing plants in Wall Lake, Iowa; Delaware, Ohio; and Hagerstown, Maryland; and animal and poultry feed mills in East St. Louis, Illinois, and Cabool, Missouri. Products CREAM OF OATS INSTANT CREAM OF OATS 3-MINUTE POP CORN 3-MINUTE COL-R-CORN 3-MINUTE OATS 3-MINUTE RAISINOATS 3-MINUTE WHITE CORN MEAL 3-MINUTE YELLOW CORN MEAL 3-MINUTE GRITS BUTTERFLAKE POP CORN

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Allen Products Company, Inc. Sales and earnings by Allen Products again in- creased to record highs in 1967. Sales increases of ALPO dog food were several times greater than average industry gains, and the ALPO line of prod- ucts continues to be the nation's largest-selling all- meat dog food. ALPO sales also continued to climb in Canada and Europe. The company advertises: "Your dog needs meat. ALPO is 100% meat." Although ALPO prices are higher, the consumer is not paying for starchy cereals and other fillers. One advertising trade journal referred to Allen Products Company as a "breakthrough advertiser," and another referred to ALPO as "one of the great all-time success stories of TV advertising." The ALPO line of products in- cludes Beef Chunks, Chicken, Liver Chunks, Horse- meat Chunks, Lamb Chunks, Meat Balls with Gravy, Scramble (a mixture of eggs and meat), and Rib of Veal, which was introduced in 1967. Two new prod- ucts for puppies and cats, Chopped Horsemeat and Chopped Beef, were test-marketed in the last quar- ter of 1967 and were introduced regionally begin- ning in January, 1968. Other new products will be test-marketed in 1968. In order to keep pace with the increasing demand for ALPO, construction of a third processing plant was started on a 12-acre site in Cleveland, Ohio, in July, 1967, and will be completed during the spring of 1968. Capacity of the new plant will be equal to the original plant in Allentown, Pennsylvania, and to the second plant which was opened in Crete, Nebraska, in August, 1965. The company owns a 16-acre tract of land in Oxnard, California, which will be the site for another plant. 'actory Locations fflen Products Company as processing plants :)cated in Allentown, 'ennsylvania, and Crete, Tebraska. Products BEEF CHUNKS CHICKEN LIVER CHUNKS HORSEMEAT CHUNKS LAMB CHUNKS MEAT BALLS WITH GRAVY SCRAMBLE RIB OF VEAL Irradiated Foods, Inc. In June, 1967, Allen Products Company, Inc., to- gether with Isotopes, Inc. (a Teledyne, Inc. com- pany), Martin Marietta Corporation, and Uniroyal, Inc., formed a new company, which was selected from among ten corporate groups to enter into a contract with the United States Atomic Energy Commission for the design, construction, and operation of the first large, commercial processing plant for the preservation by irradiation of food for human consumption. The name of this new com- pany is Irradco, Inc. Construction of the new irradiation plant at Allentown, Pennsylvania, will begin when the United States Food and Drug Administration ap- proves the irradiation of ham for human consump- tion. Irradiation destroys bacteria which normally cause spoilage so that food can be stored for months or even years without refrigeration and without loss of taste or wholesomeness. Irradiation of food could eventually prove important in popu- lous or military areas where there are food and refrigeration shortages. Irradiated bacon and pota- toes have already been approved by the United States Food and Drug Administration for use by the Armed Forces. The United States Department of Defense will purchase irradiated meat from the new company, and the remainder of the production will enter normal commercial distribution channels for civil- ian foods. Although it is not planned to irradiate ALPO dog food, the company may eventually develop and market irradiated pet food products. President of the new company, Irradco, Inc., is Robert F. Hunsicker who is also a Director of Lig- gett & Myers and President of Allen Products Company, Inc. TIM1,4 446052 12

HlghhghtS o f Operations Liggett & Myers Tobacco Company and Subsidiary Companies 1967 1966 Net sales ............................ S575.221.446) $577,476,258 Income and franchise taxes ............. 26,497.364 24,462,768 Net earnings ......................... 23,932,383 22,276,920 Net earnings, including minority interest, as a percentage of net sales ........... 4.34°/0 4.07°/0 Net earnings applicable to common stock $ 22,895,746 $ 21,224,550 Net earnings per share of common stock 5.96 5.52 Dividends per share of common stock. .. 5.00 5.00 Current assets ........................ 324,370,973 351,591,547 Current liabilities ..................... 82,974,278 89,459,670 Ratio ................................ 3.9 to 1 3.9 to 1 Long-term debt ....................... $ 75,000,000 $ 72,644,670 Stockholders' equity Preferred stock ................... 14,202,100 14,994,100 Common stock ................... 290,916,211 288,775,023 Per share of common stock ......... 76.03 75.16 Number of stockholders ................ 49,391 49,269 Number of employees .................. 8,087 8,539 Net Sales millions 600 - I 200 100 '61 '62 '63 '64 '65 '66 '67 18 TIMN 446057

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Consolidated ASSETS 1967 1966 CURRENT ASSETS Cash (including negotiable time certificates of deposit: 1967, $200,000; 1966, $7,500,000) ................. $ 8,455,722 $ 20,827,039 Marketable securities-at cost which approximates market value ................................. 1,846,831 2,538,813 Accounts receivable Customers (less allowances for discounts and doubt- ful accounts: 1967, $543,576; 1966, $598,674) ..... 49,077,512 43,013,729 Others ....................................... 2,537,039 2,354,343 Inventories-principally at average cost (Note 2) Leaf tobacco .................................. 224,992,911 230,661,994 Bulk whiskeys ................................ 73,321 2,571,179 Finished goods and work in process .............. 23,580,469 37,856,027 Other materials and supplies .................... 13,807,168 11,768,423 Total current assets ........................ 324,370,973 351,591,547 INVESTMENTS-at cost Capital stocks of and advances to foreign companies. . 8,449,469 6,132,503 Other .......................................... 1,106,377 1,353,212 Total investments ......................... 9,555,846 7,485,715 PROPERTY, PLANT, AND EQUIPMENT-at cost (Note 3) Land .......................................... 3,407,830 3,734,743 Buildings ....................................... 27,908,389 26,057,011 Machinery and equipment ......................... 77,718,191 70,822,714 Total .................................... 109,034,410 100, 614,468 Less accumulated depreciation ............... 67,798,254 61,911,790 Property, plant, and equipment-net .......... 41,236,156 38,702,678 FRANCHISES, GOODWILL, BRANDS, AND TRADE- MARKS-at cost, less amortization (Note 1) ......... 93,579,263 73,592,627 PREPAID EXPENSES AND DEFERRED CHARGES ...... 3,159,879 3,341,160 TOTAL .................................. $471,902,117 $474,713,727 See Notes to Financial Statements. TIMN 446059 20

New Operations Center Welcome from President Harrington The Company's new Operations Center in Durham, North Carolina (above), was dedicated on October 20, 1967. Housing several hundred skilled personnel and the most modern electronic data processing equipment, the new Operations Center centralizes the accounting and distribution functions of the Company's diversified, worldwide operations. The Center provides greater efficiencies as well as instant, accurate, and meaningful information essential to continuous growth in today's competitive world economy. U.S. Congressman Nick Galifianakis from the Fifth District of North Carolina (right, in photograph at left) delivered the dedication address, and Mayor R. Wensell Grabarek (left, in same photograph) expressed greetings from Durham. Others shown in ribbon-cutting ceremony are J. Bowling Anderson, Senior Vice-President, Finance; Milton E. Harrington, President; and Jonathan W. Old, Jr., Executive Vice-President. 16 TIMN 446055

t t Balance Sheet as o f December 31 LIABILITIES CURRENT LIABILITIES Notes payable .................................. Accounts payable ............................... Dividends payable on preferred stock ............... Taxes payable and accrued ....................... Other accrued liabilities .......................... Total current liabilities ..................... LONG-TERM DEBT 6°/o sinking fund debentures, due 1992 ($3,000,000 to be redeemed annually from 1972 to 1991) .......... Other .......................................... Total long-term debt ....................... DEFERRED COMPENSATION ....................... MINORITY INTEREST IN SUBSIDIARIES ............. STOCKHOLDERS' EQUITY 7% cumulative preferred stock, $100 par value-au- thorized, 341,398 shares; issued, 225,141 shares; in treasury, 1967, 83,120 shares; 1966, 75,200 shares. .. Common stock, $25 par value-authorized, 5,000,000 shares; issued, 1967, 3,963,628 shares; 1966, 3,963,- 528 shares (Note 5) ............................ Paid-in capital in excess of par values of capital stocks (Note 5) ...................................... Retained earnings (Note 6) ........................ Total .................................... Less cost of common stock in treasury (1967, 137,484 shares; 1966, 121,500 shares) .................... Total stockholders' equity ................... TOTAL .................................. See Notes to Financial Statements. Liggett & Myers Tobacco Company and Subsidiary Companies 1967 1966 $ 46,868,000 $ 39,472,791 6,820,169 13,865,550 249,447 262,397 21,276,800 27,130,286 7,759,862 8,728,646 82,974,278 89,459,670 75,000,000 72,300,000 - 344,670 75,000,000 72,644,670 1,523,163 832,070 7,286,365 8,008,194 14,202,100 14,994,100 99,090, 700 99,088,200 21,590,734 21,586,697 180,742,516 177,908,157 315,626,050 313,577,154 10,507,739 9,808,031 305,118,311 303,769,123 $471,902,117 $474,713,727 21 TIMN 446060

Financial Review / 1967 Sales and Earnings Consolidated net earnings increased from $22,- 276,920 in 1966 ($5.52 per share of common stock) to $23,932,383 in 1967 ($5.96 per share), an increase in earnings of 7.4 per cent. Net sales in 1967 by the Company and its subsidiaries were $575,221,446, compared with $577,476,258 in 1966. Dividend Record Common stock dividends have been paid each year since the Company was incorporated in 1911. Common stock dividends in 1967 consisted of four quarterly payments of $1.25 each, a total of $5.00. Four quarterly dividends of $1.75 were distributed on preferred stock. There were 49,391 stockholders at the end of the year. Total common and preferred dividends paid in 1967 amounted to $20,253,547. The balance of earn- ings retained for use in the business amounted to $3,678,836. A regular quarterly dividend of $1.25 per com- mon share was paid March 1, 1968. Taxes Federal and state income taxes and franchise taxes were $26,497,364 in 1967, equal to $6.90 per share of common stock. This compares with net earnings of $5.96 per share of common stock. Federal and other excise taxes (including liquor import duties) included in consolidated sales amounted to $190,420,000. The Federal excise tax on cigarettes is eight cents on each package, and the liquor tax rate is $10.50 per gallon (excluding duty of approximately one dollar). Although the industries generally do not collect state and muni- cipal excise taxes, these add up to substantial addi- tional taxes paid by the consumer. Capital Expenditures Capital expenditures during 1967 consisted chief- ly of disbursements for construction of the new Operations Center in Durham, North Carolina, and for additional facilities for manufacturing ALPO products. These expenditures totaled $7,300,000, compared to $5,600,000 in 1966. Depreciation charges in 1967 aggregated $4,823,839, compared to $4,597,409 in 1966. Financial Condition The sound financial condition of the Company is indicated by the ratio of current assets to current liabilities which is 3.9 to 1, and to the fact that long- term debt is 19.7 per cent of total capitalization. No additional long-term financing was required during 1967, although the amount of short-term notes payable increased approximately $7,400,000. Further financing may be required in connection with our expansion and diversification program. The Company reacquired 89,600 shares of com- mon stock during 1967 and issued 73,616 shares for the acquisition of the net assets of National Oats Company. These transactions brought the total number of common shares held in treasury to 137,484. The Company also reacquired 7,920 shares of noncallable 7 per cent preferred stock during 1967, which brought the total number of preferred shares held in treasury to 83,120. TIMN 446056 17

mdlions 28 Disposition of Total Earnings for 1967 The Company and its subsidiaries received for goods sold to customers and from dividends, interest, etc., a total of $578,065,000. This is how it was used or set aside. 40.0°% Leaf tobacco, wages, other manufacturing costs, freight, etc. $231,215,000 Net Earnings '61 '62 '63 '64 '65 '66 67 3.5°/o Dividends $20,254,000 = Net worth millions ~ Long-termdebt Net Worth Compared With Long-Term Debt '61 '62 '63 '64 '65 '66 '67 18.3% Selling, advertising, administrative, interest, and other expenses $106,001,000 0.6% Earnings retained $3,678,000 4.6°% Federal and state income and franchise taxes $26,497,000 mi/lions Taxes ~, Federal and state income ~.. and franchise taxes .  Net income after taxes 33.0% Federal and other excise taxes $190,420,000 TIMN 446058 19

Liggett & Myers Tobacco Company 630 Fifth Avenue, New York, N.Y. 10020

Liggett & Myers Tobacco Company and Subsidiary Companies Statement of Consolidated Earnings and Reta1.I],e d Earnings f or the years ended December 31 1967 1966 NET SALES ....................................... $575,221,446 $577,476,258 OTHER REVENUES Interest and dividends............•.•••••••••••••• 904,502 1,844,978 Royalties and other........-..••••••••••••••••••• 1,938,711 862,576 Total revenues .........•.••••••••••••••••• 578,064,659 580,183,812 COSTS AND EXPENSES Cost of goods sold ............................... 421,634,479 434,290,660 Selling, administrative, and general expenses ........ 95,775,548 92,970,887 Interest ........................................ 6,367,519 4,173,574 Amortization of J&B franchise and excess of cost of investments in certain subsidiaries over equity in their net assets (Note 1) ......................... 2,829,027 770,000 Provision (credit) for income and franchise taxes (Note 4) Federal income Currently payable ........................... 3,651,168 1,862,809 Deferred ................................... (250,592) (207,736) Other Currently payable ........................... 3,163,340 2,833,662 Deferred ................................... (66,552) (25,967) Total costs and expenses ................... 553,103,937 556,667,889 EARNINGS BEFORE MINORITY INTEREST........... 24,960,722 23,515,923 MINORITY INTEREST IN EARNINGS OF SUBSIDIARIES ................................. NET EARNINGS (per share earnings applicable to common stock: 1967, $5.96; 1966, $5.52) (a) ................. 23,932,383 22,276,920 RETAINED EARNINGS AT BEGINNING OF YEAR ..... 177,908,157 176,120,960 Total .................................... 201,840,540 198,397,880 DEDUCT Cash dividends Preferred stock-$7 per share .................... 1,036,637 1,052,370 Common stock-$5 per share .................... 19,216,910 19,218,171 Total dividends ........................... 20,253,547 20,270,541 Excess of cost over par value of preferred stock reac- quired ....................................... 190,994 219,182 Excess of average cost over quoted market value of treasury stock issued in exchange for the net assets of National Oats Company (Note 1) .............. 653,483 Total .................................... 21,098,024 20,489,723 RETAINED EARNINGS AT END OF YEAR (Note 6) ..... $180,742,516 $177,908,157 (a) Per share earnings are based on the weighted average number of common shares outstanding during each year, after recognition of the dividend requirements on the 7°/o preferred stock. See Notes to Financial Statements. TgMN 446061 Y 22

Liggett & Myers Tobacco Company and Subsidiary Companies Statement of Consolidated Source and Application of Funds f or the years ended December 31 SOURCE OF FUNDS From operations Earnings before minority interest ................... Depreciation and amortization ..................... Total ............................. Decrease in working capital .......................... Market value of common stock issued for net assets of National Oats Company ........................... Increase in long-term debt ........................... Minority interest in subsidiaries at dates acquired ...... Proceeds from exercise of stock options ............... Other ............................................. TOTAL ........................... APPLICATION OF FUNDS Payment of dividends ............................... Increase in franchises and goodwill ................... Cost of common and preferred stock purchased for treasury ........................................ Net additions to property, plant, and equipment (includ- ing property of subsidiaries acquired) ............... Increase in investments ............................. Increase in working capital .......................... Net decrease in minority interest due to changes in capital and in percentage of ownership of subsidiaries in the alcoholic beverage industries (Note 1) ............... Increase (decrease) in prepaid expenses and deferred charges ......................................... TOTAL ........................... See Notes to Financial Statements. 1967 1966 $24,960,722 $ 23,515,923 7,652,866 5,367,409 32,613,588 28,883,332 20,735,182 5,263,544 - 2,355,330 72,644,670 - 6,769,191 6,537 103,032 691,093 590,100 $61,665,274 $108,990,325 $20,253,547 $ 20,270,541 22,815,663 65,194,198 7,599,729 1,198,724 7,357,317 9,507,153 2,070,131 6,479,914 - 4,136,589 1,750,168 (181,281) 2,203,206 $61,665,274 $108,990,325 NOTES TO FINANCIAL STATEMENTS December 31, 1967 1. ACQUISITIONS, ETC. On May 15, 1967, in accordance with a Redemption Agreement be- tween the Company, Charing Cross Importers, Limited (a wholly- owned subsidiary-formerly Liggett & Myers Corporation), and Star Industries, Inc., the shares of common stock of Star held by Charing Cross (representing 81.13°/0 of the outstanding common stock of Star) were exchanged in redemption and retirement of such shares for 933,812 shares (35.03°/0) of common stock of The Paddington Corpora- tion (New York) and 101 shares (50.50°/0) of common stock of Carillon Importers Ltd. (a subsidiary of Star) then held by Star. Prior to this transaction, Charing Cross owned 46.74°/0 of the common stock of Paddington (New York) which was acquired in 1968. The operations of Star Industries, Inc. and its subsidiaries have been included in the accompanying statement of consolidated earnings and retained earn- ings for 1967 and 1966 for the period from May 26, 1966 (date of acqui- sition of controlling interest in Star) to April 30, 1967. Through an offer to purchase shares, Paddington (New York) ac- quired 261,299 shares of its common stock during the period from May 5 to May 19, 1967, at an aggregate cost of $11,989,807. On May 22, 1967, Paddington (New York) was merged with Charing Cross Im- porters, Limited, and the surviving corporation was named The Pad- dington Corporation (Delaware). As a result of the transactions explained in the two preceding para- graphs and subsequent acquisitions of its own stock by Paddington (Delaware), the Company's equity in the common stock of Padding- ton was increased to 92.81°%, and the unamortized portion of the ex- cess of cost of its investment in Paddington (Delaware) and Carillon over equity in their net assets increased to $87,102,165. Of such ex- cess. $78.634.153 was allocated to the exclusive franchise held by Pad- dington to import J&B Rare Scotch Whisky and is being amortized over the remaining life of the franchise by annual charges to earnings ,ygMN 446062 23

Liggett & Myers Tobacco Company and Subsidiary Companies Ten Years in Review Dollars expressed in thousands except per share figures OPERATING RESULTS Year Ended December 31 ear Net Sales Taxes on Income Net Earnings Per S o Com Stock hare f mon Common (b) Dividends Per Share Preferred Dividends (S7 Per Share) Earnings Retained 1967 $575,221 $26,497 $23,932 55. 96 $19,217 $5.00 $1,037 $ 3,678 1966 577,476 24,463 22,277 5. 52 19,218 5.00 1,052 2,007 1965 478,261 19,546 21,607 5.2 6 19,509 5.00 1,078 1,020 1964 502,666 25,895 26,236 6.3 6 19,761 5.00 1,086 5,389 1963 507,164 27,267 24,703 5.9 6 19,762 5.00 1,143 3,7198 1962(a) 499,956 28,290 25,411 6.1 4 19,755 5.00 1,163 4,493 1961 516,708 31,864 26,760 6.4 8 19,712 5.00 1,205 5,843 1960 543,173 34,004 28,709 6. 96 19,686 5.00 1,301 7,722 1959 554,936 35,036 30,039 7.2 8 22,585 5.75(c) 1,430 6,024 1958 556,046 36,689 31,223 7. 60 19,571 5.00 1,461 10,191 FINANCIAL POSITION Year End Book Value Working Plant and Equipment Total Long-Term Short-Term Stockholders' Prr Common Year Inventories Capital (Net) Assets Debt Debt (d) Equity Share 1967 $262,454 $241,397 $41,236 $471,902 $75,000 $46,868 $305,118 $76.03 1966 282,858 262,132 38,703 474,714 72,645 39,473 303,769 75.16 1965 269,770 257,995 33,793 368,478 - 37,609 302,858 74.69 1964 298,366 302,403 34,096 401,641 37,593 23,769 310,234 7-1.ti2 1963 313,851 332,444 33,744 396,988 61,250 5,750 306,380 73.39 1962(a) 326,508 335,555 31,748 400,326 67,000 5,750 302,764 72.-1('i 1961 331,145 334,920 33,138 404,903 72,750 5,750 298,887 71.34) 1960 314,413 333,383 35,122 393,080 78,500 5,750 292,868 69.83 1959 330,394 332,157 36,201 40-1,.3tJ1 84,250 5,750 287,234 68.08 1958 341,318 333,054 35,582 4 0J.1(l:3 90,000 7,456 282,182 66.70 (a) Amounts stated for 1962 and prior years are as previou,!v -i - ,tockholders and do not include two subsidiaries which were not consolidated in those yenr 5. (b) Based on weighted average number of shares outstnn(!in !ur n h year. (c) Commencing June 1, 1959, regular quarterly dividends of S1.25 per shrire have been paid. ~+ ~~~T (d) Includes notes payable and long-term debt payable rvithin one year. .g ~li'll~ 446064 PRINTED IL4 CS.S.A.

Notes to Financial Statements (continued) of approximately $3,365,000. The remaining portion of such excess, $8,468,012, is also being amortized over the remaining lives of the J&B franchise and a franchise held by Carillon by annual charges to earn- ings of approximately $375,000. In the opinion of counsel to the Com- pany, the amount of the cost allocated to the J&B franchise pursuant to the Internal Revenue Code and applicable regulations is amortiz- able for Federal income tax purposes, and appropriate reduction in the provision for Federal income taxes has been made. At December 31, 1967, the unamortized portion of the cost of the J&B franchise and the remaining excess cost applicable to Paddington and Carillon aggregated $76,531,635 and $8,236,504, respectively. On September 29, 1967, the Company acquired the net assets of National Oats Company and its subsidiary in exchange for 73,616 shares of the Company's common stock held in treasury. The accounts of National and its subsidiary have been included in the consolidated financial statements since October 1, 1967. The Com- pany's equity in the net assets of National exceeded the cost of investment at time of acquisition by $357,306, and such amount has been applied to reduce the excess of cost of investments in certain other subsidiaries over the Company's equity in their net assets at times of acquisition. The net amount of such excess, which aggre- gated $8,811,122 at December 31, 1967, is regarded as goodwill which is not being amortized since, in the opinion of the Company, there has been no diminution in 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 Trade- marks in the accompanying consolidated balance sheet. 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 expenses generally on the straight-line method based upon the estimated useful lives of the various classes of assets. Depreciation provided amounted to $4,823,839 in 1967 and $4,597,409 in 1966. 4. DEFERRED INCOME TAXES Amounts equivalent to estimated future income tax reductions for provisions made in 1966 and 1967 for deferred compensation and retirement plans are included in the statement of consolidated earn- ings and retained earnings as credits in the provisions for deferred income taxes for those years net of amounts equivalent to tax reduc- tions realized in 1966 and 1967 relating to provisions for deferred compensation made in prior years and less, in 1967, provisions made for deferred income taxes on the excess of accumulated depreciation for income tax purposes over accumulated depreciation for account- ing purposes at December 31, 1967. Depreciation rates used for in- come tax purposes for certain of the Company's plant and equipment were revised in 1962 to conform with the guideline lives established by the United States fireasury Department; the depreciation rates previously used for accounting purposes were continued. Prior to 1967 the Company's accumulated depreciation for accounting pur- poses exceeded its accumulated depreciation for income tax pur- poses, and no provision was required for deferred income taxes. 5. STOCK OPTION PLAN At January 1, 1967, there were outstanding options granted under the Incentive Stock Option Plan to officers and key employees to purchase, subject to certain limitations, 11,572 shares of the Com- pany's common stock. During 1967, options for 100 shares were exercised for an aggregate option price of $6,537, and options for 2,050 shares were terminated. At December 31, 1967, options were outstanding and exercisable with respect to 9,422 shares having an aggregate option price of $802,315. In accordance with the Plan, option prices represent closing quoted market values of the shares on the dates the options were granted. Paid-in capital in excess of par values of capital stocks increased in 1967 by $4,037, representing the excess of sales price over par value of common stock sold under the Plan. 6. 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 $25,685,215 at December 31, 1967. This limitation does not apply to stock dividends on common stock, nor does it restrict payment of dividends on preferred stock. 7. EMPLOYEES' RETIREMENT PLANS The Company and certain of its subsidiaries have retirement plans covering most of their employees. The total retirement expense for the year 1967 was $1,466,307, 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. A plan amendment and changes during the year in actuarial assump- tions and in the method of reflecting actuarial gains and losses in the computation of retirement expense had the effect of reducing net earnings for the year by approximately $43,000. 8. COMMITMENTS AND CONTINGENT LIABILITIES At December 31, 1967, commitments by the Company and its sub- sidiaries for the acquisition of property, plant, and equipment aggre- gated approximately $4,000,000. 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 referred to in Note 1. 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 rights under the agreement. If all such shares were purchased, the cost thereof would aggregate $8,580,132 on the basis of the purchase price currently in effect; such cost would be approximately $2,576,000 in excess of the equity in net assets applicable to such shares as of December 31, 1967. 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, result- ing from such related agreement. At December 31, 1967, there were several lawsuits pending against the Company and certain of its subsidiaries. In the opinion of the Company and its counsel, none of the plaintiffs should prevail on the merits of such actions. Opinion o f Certi fied Public Accountants HASKINS & SELLS CERTIFIED PUBLIC ACCOUNTANTS TWO BROADWAY NEW YORK 10004 To the Directors and Stockholders of Liggett & Myers Tobacco Company: We have examined the consolidated balance sheet of Liggett & Myers Tobacco Company and its subsidiaries as of December 31, 1967 and the related statements of consolidated earnings and retained earnings and of 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, 1967 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 principles applied on a basis consistent with that of the preceding year. February 9, 1968 24 TIMN 446063 Y

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