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.ft r 00001726 Contents 2 Highlights 3 Charts 5 Letter to Shareholders 6 Sales and Merchandising 8 Advertising 10 International 12 Research ' 14 ' Leaf 17 Manufacturing 18 People 21 Other Corporate Activities 21 For the Future 22 Financial Review 23 Consolidated Earnings 24 Consolidated Balance Sheet 26 Notes to Financial Statements 27 Ten Year Financial Comparison 28 Lorillard Directors and Officers 1963 Annual Report

t,rrnr•;~1.„~t F.r..~M_... 00001727 C v07J30a~• and Subsidiary Companies C/ 2 Financial Highlights Sales ...................... 1963 . S516,144,614 1962 $516,108,381 Net Earnings ............... 27,918,457 26,631,920 Results per Common Share: Net Earnings . ....... ... Dividends ...:.......... Taxes ............... Shareholders' Equity .... 4.14 2.47'/2 . 38:38 26.92 3.94 2.40 38.19 25.25 Current Assets .............. 291,807,246 290,058,674 . Current Liabilities ........... 84,437,572 93,669,449 Working Capital ............ 207,369,674 196,389,225 Long-Term Debt ............ 67,365,000 68,400,000 Shareholders' Equity ........ 186,816,458 175,817,124 Number of Shareholders ..... 42,649 43,584 Number of Employees ....... 6,664 6.461

Net Sales !millions o` dollars) Earnings before Income Taxes (millions of dollars) 600 Taxes on Income ® Dividends 0 Retained Earnings 500 400 300 200 100 ~ 1954 '55 '56 '57 '58 '59 '60 '61 '62 '63 l Inventories and Short Term Borrowings (millions of dollars) Total Inventories E.."' leaf Inventories - Short Term Borrowings 1954 '55 '56 '57 '58 '59 '60 '61 '62 '63 Retained earnings 2.12 1. Preferred and common dividends 3.29 11- How our sales dollar was distributed Tobacco, other purchases and depreciation 38.09 • 300 250 200 150 100 50 00001'728 Permanent Capital Employed (minions of dollars) long Term Debt © Shareholders' Equity 1954 '55 '56 '57 '58 '59 '60 '61 '62 '63 300 250 200 150 100 50 I Excise taxes 41.78 lo. Income and other taxes 7.12 • Interest .99 • Wages and salaries 6.61.

00001730 Fe/low Shareholders: During the year 1963, P. Lorillard Company did well-earnings increased, sales volume set new records, our filter brands sold at un- precedented rates, international operations hit new highs, and dividends to shareholders increased. Beyond these "numbers" gains, measurable forward strides were taken in all important operational areas. The illustration on the page facing these words epitomizes and symbolizes our entire Management focus in 1963: Lorillard's total effort to deliver to smokers tomorrow's ciga- rettes today-the very best tobacco products that modern science can perfect and modern technology produce. Within the framework of our established position as the industry's "house of filters," Lorillard pursued this goal harder than ever during 1963 with good re- sults for all concerned: The smoker who buys Lorillard cigarettes gets what we honestly believe to be the best products on the mar- ket today. They are literally "tomorrow's cig- arettes" in terms of quality and advanced scientific improvement. For Lorillard, pursuit of this goal has been productive-in the last seven years our sales have grown more than 150 per cent, while earnings have increased more than 500 per cent. And, during 1963, sales of our filter brands increased to levels that enabled us to weather, without serious hurt, a dramatic but not unexpected decline in non-filter sales. Perhaps the most notable fact about 1963 for the tobacco industry is that it made any gains at all. Never before in history has the industry been the target for so many charges, allegations and attacks; never has it been so beset, from so many quarters, on so many counts. Hopefully, 1964 will bring some definitive scientific truths, arising out of research now being conducted in laboratories all over the world. For, as we have said before, once the actual truth is known, there can be no doubt that the industry will be able to meet it and come to terms with it. Until then, Lorillard- with its pioneering attitudes and zestful pur- suit of sales tempered and balanced by 204 years of accumulated know-how and sense of responsibility-will continue on its chosen path of striving for new solutions, both in the laboratory and in the market place; we will continue our probing scientific search for ways to improve existing products; and we will introduce new products for which studies indicate a genuine need. It is Managernent's hope and expectation that this continuing concentration on ad- 5

6 . Plans for 1964 are subjecf of discussion when Chair.^ian of the Board Lewis Gruber and Vice President and.:ssistanf to the President J. E. Bennett meef with President Morgan Cramer (1, to r.). vanced "cigarettes of tomorrow" will con- tinue to result in ever-better, ever-improved cigarettes forourcustomers and in increased prosperity for our Company, its workers and shareholders. In 1963, for the third consecutive year, sales reached a new high-S516,144,614, compared with the record $516,108,381 achieved in 1962. Net earnings for 1963 increased to $27,- 918,457, or S4.14 per common share, from last year's $26,631,920, or $3.94 per common share. The 4.8 per cent gain is attributable mainly to increased efficiency and opera- tional economies at production levels. Dividends during 1963 were increased and the new annual rate is $2.50 per common share, a rise of 10 cents over the previous yearly rate of S2.40 per common share. Sales and Merchandising During 1963 Lorillard further consolidated its position as a leader in the filter cigarette field, which is unquestionably the important area of the tobacco industry today. In 1963 filters accounted for some 58 per cent of all ciga- rettes bought by Americans, a 3.6 per cent increase over the previous year, and almost a tenfold increase in share of market in the decade since 1953. At the same time, non-filter cigarettes con- tinued their downward trend; they now rep- resent 42 per cent of the total market, and eventually, we believe, will settle at some- thing less than 25 per cent of the market.

, Typical ol Lorillard point-of-sale promotional activity is this major display . in huge East Coast supermarket. lA. Assistant Director ol Sales William Jordan (seated, lelt) receives latest sales and merchandising reports from members of lorillard's headquarters sales sta/l. lv lake home t%carton!;; ,;:- , KENTor" NEWPORT

. 8 , During the year in review, Kent, with the Micronite filter, again set new sales records and further solidified its position as the coun- try's leading high-filtration cigarette. In the rapidly expanding menthol category, our brands advanced strongly in the face of a number of heavily promoted new brands introduced during the year. Newport, our leading menthol filter, made gains and continues to grow. Spring forged ahead with sales increases of more than 40 per cent in the year and, while not yet a major brand, its potential looks better every day. Old Gold Spin Filter did well in the market place, maintained its considerable volume, and by its performance lent luster to the ven- erable name Old Gold. In the non-filter area, our brands did not do as well, and we are presently reconsider- ing our position in this field, which is shrink- ing more rapidly than had been anticipated: During 1963 Old Gold Straights fell off signifi- cantly. Even York Imperial-size, which has continued to establish a solid base, experi- enced a sales decline from last year when the initial filling of distribution channels ac- counted for heavy shipments. In 1963, while industry sales of smoking tobaccos declined, Lorillard's India House brand made notable gains, and our entire smoking tobacco group-which also includes Briggs, Friends and Union Leader-fared better than the industry as a whole. Our chewing tobacco sales increased ap- preciably and Beech-Nut, our principal brand, further enlarged its market share as it con= tinued to be the nation's biggest seller. In the growing little cigar business we maintained and enlarged our dominant posi- tion via: 1) a new and well-accepted 20 cigar crush-proof package for Between The Acts; and 2) an aggressive advertising and sales campaign for our Madison brand, which is the nation's top-selling little cigar. Addition= ally, manufacturing economies achieved at our Louisville plant (to which our little cigar operation was moved late last year) added to the profitability of this line. During the course of the year, the Lorillard national sales staff was augmented to the highest levels in Company history, with con- sequent improved sales coverage of the nationwide market. Training programs were expanded, both at the supervisory and field levels, to provide a reservoir of highly trained sales personnel for your Company's future requirements. And, at the executive level. As- sistant Director of Sales William A. Jordan was elected a member of the Lorillard Board of Directors during the year. A dvertising Mindful of the oft-demonstrated fact that, in the tobacco industry, advertising and sales go hand in hand to a greater extent than in virtually any other business, your Company again in 1963 devoted considerable planning and money to. making its advertising pro- grams effective efficient sales tools. To give even greater cohesion and unity of thinking to sales and advertising at all levels, top echelon responsibility for both major func- '-Y'..booo 1733 Meeting with executives of Loriltard's advertising department. Vice President for Advertising aro Sales Manuel Yellen (standing /eft) reviews ad campaigns and strategy for policy and sales ellectiveness i.

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O001735 10 tions was placed under one senior executive. Thus, during the year, Manuel Yellen, our sales vice president. was named Vice Presi- dent for Advertising and Sales to oversee both departments, each of which continues to be fully sta`fec. individually operated and independently suoervised. While strategic use was made of all media, our principal e`fort again was focused on net- work televisicn, which has long since proved itself the most efficient (and expensive) ad- vertising mecium ever known. To give our TV commercial messages added impact, wherever pos.sib'e we used personal on-the- air endorsements delivered by the big-name performers a ho s:ar in our shows. Thus, spe- cial commercials utilizing the talents of such top stars as DicK Van Dyke and Jack Paar for Kent, anc Joey Bishop for Newport, were integrated ir,;o each program. For Kent, we are now reaching more peo- ple through =otn television and magazines than ever be'ore and millions of smokers are being told "f--r t`-:n best combination of filter and good taste, Kent satisfies best." Newport. our ;pading menthol brand, is represented on both nighttime network tele- vision shows ar•,d network TV sports pro- grams, with tne selling message "Newport smokes fres^er ... than any other menthol cigarette." For Old Gz)td Spin Filters, we also utilized TV sports programrning, sponsoring both regularly sc^eduled and special events. - Advertisira for our other tobacco products -little ciga=s, pi?e and chewing tobaccos- was expanded :nroughout the year. In all advertising media during 1963, Lorillard brands were well represent=d: In major consumer magazines, a creater number of insertions than ever before. =lmost all in full color, carried our brands' s:ories. while Sunday newspaper supplemer:s and daily newspapers were used extens~,aly in over 100 U. S. markets. Spot TV was an important elemen: of our media mix for all our cigarette produc:s, and we maintained schedules in most of th= r;iajor U. S. markets throughout the year. Both local and national radio were used effectively-particularly in summer -.onths when greater numbers of current anc poten- tial customers listen to radios in the r cars or outdoors. Our use of outdoor advertising increased substantially and we utilized giant bil coards on major traffic arteries, and large :rinted bulletin boards in major markets thrc.;ghout the summer months. lnfsrr, ationai With rising world consumption of c'ca-arettes increasing the demand for the American product-particularly filters-to ne.v high levels, your Company's name and products are achieving wider recognition than ever be- fore in the world market place. Our interna- tional business has become an increasingly important part of our overall opera':on and in 1963 it expanded on all fronts: I Export sales set new records `or the I eighth consecutive year;

d e 00001736 (Topl i.eek•long international sales conference produced new ideas, activities and guidelines for Lor;;tard's expanding /oreign operations in every area of the world. (9otPcc) From the 1ar corners of the world, visitors come to inspect Lorillard's "showcase" plants at Danville, Va:, and Greensboro, N. C. This group of Koreans later watched Kent c,;areltes being made. f Royalties from our licensees increased to new high levels; and, most significantly, F Anewdimensionwasaddedto Lorillard's world-wide operation with our first direct in- vestment in manufacturing facilities abroad. 'As the first in a planned series of Lorillard capital investments overseas, a new Euro- pean tobacco company-jointly formed, owned and operated by our wholly owned subsidiary, P. Lorillard International S.A. and Heintz Van Landewyck s.a.r.l. of Luxem- bourg, one of Europe's best known cicarette manufacturers-was established principally to serve the European Common Market coun- tries. The new company, known as P. Lorillard s.a.r.l., initially will manufacture Kent and Newport at a specially designed, ultra-mod- ern plant now being built at Ettelbruck. Lux- embourg, and is expected eventually to man- ufacture other Lorillard products as well. All will be marketed at popular prices com= petitive with other locally manufactured cigarettes. With our first direct manufacturing venture abroad successfully underway, we are ac- tively pursuing other appropriate investments of this nature. As this is being written. nego- tiations have been substantially completed for such an investment in a highly regarded Far Eastern manufacturer of popular ciga- rette brands, and this second move toward more direct participation in burgeoning world markets should be completed early in 1964. During the year in review, total industry exports of cigarettes from the United States fell slightly below the previous year's levels. 11