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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

Lorillard export sales, however, rose some 19 per cent, giving us a substantially increased share of the important export market. In addition, licensee production and reve- nues were up considerably over last year. Significantly, the combined cigarette produc= tion of international licensees continues to be greater than our export volume. Additional licensing agreements, designed to give Lorillard extensive distribution where high tariff barriers make it uneconomic to import United States cigarettes, are under negotia- tion as this is written. Reflecting the increasing importance of the role ascribed to international operations in the continued growth of your Company, Lorillard in 1963 held its first international sales conference - in Zurich, Switzerland, just a few miles from the headquarters (in Zug. Switzerland) of Lorillard's wholly owned subsidiary, P. Lorillard International S.A. At- tended by headquarters executives and Loril- lard people from all parts of the world, the week-long meeting set new goals, policies and guide lines for future growth in the inter- national arena. Other steps taken during the year to strengthen the international organization, to keep pace with our expanding volume, and to provide for the opportunities and chal- lenges of the future: -3 Appointment of a new Director of Inter- national Operations, whose international sales and marketing experience in tobacco and allied industries spans two decades. 12 0 Executive promotions and personnel ad- ditions at our two wholly owned international subsidiaries, P. Lorillard Pan American, Inc. (which services Lorillard products through- out 40 marketing areas of Central and South America and Canada) and P. Lorillard Inter= national S:A. of Zug, Switzerland. 9 Increased international advertising and . sales promotional activity, each carefully planned for and geared to the particular market in which it will appear. Research In keeping with the basic Lorillard concept that has earned for our Company its standing as the industry's "house of filters," in 1963 greater emphasis than ever before was put on intensive scientific research. New meth- ods of filtration, new filter ingredients, new types of cigarette paper, improvements in packaging materials, modifications of the blending process, new types and varieties of quality control, deep-probing investigations into the chemistry of cigarette smoke, and of raw tobacco leaf straight from the fields- all these and many more, involving every phase of tobacco and its use, are pursued by our scientists. Working unremittingly to find improvements in every possible area, our re- search personnel explores in depth any and all leads that may prove beneficial. And, once found, these scientific advances are'incorpo- rated as soon as possible in either existing or new products, so that your Company will continue to stand "First with the Finest Ciga- rettes through Lorillard Research." To enable us to pursue this goal even more effectively, Lorillard's research staff was 00001737 I

Giant "smoker" puffs away at 100 cigarettes at a time. Machines like these contribute materially to Lorillard studies into the nature of tobacco smoke. At Greensboro Research Laboratory, Vice President for Research Harris B. Parme/e l.'elt) and chemists await results of tests designed to enlarge man's knowledge of tobacco components.

J 14 again expanded during the year and a num- ber of new highly trained, science-oriented technicians and chemists were added. Undoubtedly the most significant aspect of our advanced studies in 1963 was the ex- tended investigation of the composition of cigarette smoke. Stimulated by Lorillard's 1962 breakthrough in achieving selective fil- tration-whereby, for the first time, a signifi- cant percentage of a superfluous ingredient (in this case, phenol) was identified, isolated, and removed from the main stream of ciga- rette smoke-our scientists this year suc- ceeded in isolating, and in many cases iden- tifying, many hitherto-unknown compounds and groups of compounds in the smoke. Such isolation and identification are, of course, the first prerequisites to cigarette and filter improvements of the future. In addition to our main Research Labora- tory at Greensboro, North Carolina, where our most extensive scientific programs are conducted, your Company maintains a smaller research facility at its Louisville, Kentucky, manufacturing plant, and control laboratories at its Danville, Virginia, and Lex- ington, Kentucky, (eaf processing and stor- age facilities. These are mainly quality control laboratories and their function is to insure. that the exact standards set for all .Lorillard products are maintained and ad- hered to. As part of our standard quality con= trol activities, our laboratories continuously run more than 100 different tests, covering not only each element that goes in, on, or around the product-from the leaf before it is aged to the cellophane used on the pack- age-but even the "feel" a cigarette has in the hand of the consumer. In 1963 this section too extended its activi- ties, initiating studies in new areas, ranging from leaf processing to manufacturing pro- cedures, with many already resulting in prod- uct improvement and cost reduction: Beyond its own "in-house" studies, your Company sponsors wide-ranging research by independent scientists and organizations, both in the United States and abroad. Note= worthy in this category was the project under- taken for Lorillard by Dr. Tore Dalhamn, in- ternationally known Swedish authority on air pollutants and their effect on the human breathing passages. Associated with Stock- holm's famed Karolinska Institutet, Dr. Dal- hamn, in his work for Lorillard, used his own specially developed technique to test the ef- fects of smoke from various cigarettes, in- cluding Kent, on the breathing passages of living animals. A film describing this superior technique and the results achieved with it is now in preparation, and will be shown to medical and scientific groups throughout the worid under Lorillard's sponsorship. ± eaf Our leaf buying activities range half way round the world-from more than 100 mar- kets in the United States to farmers' markets in Greece and Turkey-seeking out the best tobaccos, of the best producing areas, at the best possible prices. As usual, our leaf buying program was closely coordinated with our Greensboro Re- 1.4moa.w,., Q„

_•pw -..'Z *., ' . I r.',a. . r~ . ? ~"4,>, . ": ~' ~~ ~ M-.~~"a . ..•.~~,'. - ~ .. .~, -~ .._ . . .. . _ . .. . . . - . . ? Rows of giant hogsheads, each holding almost 1,000 pounds of tobacco, are stored in Danville and other Lorillard warehouses for the slow, leisurely curing process necessary to creating fine Lorillard cigarettes. 00001740 search Laboratory: More leaf samples were analyzed than ever before and our leaf super- visors received both pre-marketing reports and daily reports during auctions, enabling them to select only that leaf that meets our rigid quality standards. During 1963, our Danville, Virginia, leaf processing and storage center-in full opera- tion only since August, 1962-continued to exceed expectations in terms of operating efficiencies and economy, cutting some areas of our operational costs by as much as half and delivering a significantly increased yield 'and a superior product. Planned with our future needs in mind, the Danville plant is readily expandable. In- creased production schedules necessitated its first enlargement, and two new ware- houses were constructed during 1963. During 1963, the Leaf Department made notable progress in other significant areas: On one of many trips to the tobacco auctions. Vice President for Leaf Activities Henry Erickson (center) consults with members of Lorillard leaf buying staft. 15 1;

At meeting ol plant managers chaired by Vice President lor Personnel B. Lowell Jacobsen (second from lelf, lacing camera), training programs come in for thorough analysis. 16

-"::ye cigaretfe=mak ng area of Greensboro plant, ==sr machine is v;rtua!ty a separate entity, =ce.7/e of producirg 2.000 perfectly finished _ ya•etres every minute. . a- Our leaf buying organization was ex- panded, with more Lorillard buyers placed on key tobacco markets than ever before. C Our quality control program relating to leaf processing activities was enlarged, yield- ing valuable information as to the most desir- able specifications for manufacturing needs. C The Leaf Department trainee program, launched in 1962 to provide a reserve of skilled buyers in the years to come, "gradu- ated" a number of "students" who are now representing Lorillard in various markets as assistant leaf buyers; and new trainees were added to the program this year. ! Further, reflecting the paramount impor- tance of our continually expanding leaf buy- ing operations, P. Lorillard's Director of Leaf Activities, Henry E. Erickson, was elected a Vice President of the Company. bfonufacturirn For the Manufacturing Department, the year was marked by progress in two major areas: production efficiency increased, and operat- ing costs decreased. Both the rise and the cut resulted from a planned program of up- grading, involving both machines and men, and all of our facilities. In terms of machines, much of the equip- ment we use today was not even thought of as recently as five years ago. Highly auto- mated, electronically controlled, performing hundreds of complex functions in a span of seconds, today's industrial equipment de- livers extraordinary efficiency at maximum speeds and lowest operating cost. During the year we made these advances: G At our Greensboro manufacturing plant, now eight years old and still one of the indus- try's standout models of efficiency and func- tional design, we added the newest available type of making machines. Capable of produc= ing an unprecedented 2,000 cigarettes per minute, they deliver a better, more uniform product at lower cost. C To improve filter production, we in- stalled automated machines which scientifi- cally test and measure the circumference of the filter "rod" as it is being produced and before it is assembled into the cigarette. ( Leaf processing equipment installed in 1962 was brought to optimum operating speeds, and is already effecting cost savings. ( At our Louisville plant, a new automatic tobacco distribution system was installed in 1963 and will be completed this year. Liter- ally a self-starter, it automatically air-speeds tobacco, through pneumatic tubes, direct to any cigarette-making machine whose tobacco supply drops below a pre=set level; in the process, it also air-cleans the tobacco. ( New equipment for our chewing tobacco production was added and is already result- ing in a more uniform, higher quality product. Modernized packaging and weighing ma- chinery, developed by our own engineers and research people, is being tested. When perfected, it is expected to speed up and improve the quality and efficiency of our chewing tobacco production. 00001742 17

P 18 • New electronic controls-designed to spot and automatically reject any imperfect units-were installed in our little cigar manu- facturing operations. I The bulk of the automatic equipment installed in 1962 in Louisville's cigarette man- ufacturing department reached proper oper- ating levels during 1963 and markedly in- creased the overall efficiency of this division. To keep pace with our improved equip- ment, we have also stepped up our training and educational programs for the men who "boss" the machines. ) Technical training programs, inaugu- rated in 1962 and conducted by outside con- sultants, were immediately resultful; we ex- panded these programs substantially in 1963, and will further expand them this year. Not- able among the results achieved from these training courses are: improved operating procedures, better scheduling, work simplifi- cation, and more effective utilization of man- power in several key areas of our operation. ? Extensive computer courses, for our office and accounting personnel in both Greensboro and Louisville, were inaugurated during 1963. High speed electronic com- puters, which are expected to markedly ac- celerate and increase the efficiency of our accounting, payroll, cost and waste control departments and our engineering operations, will be installed this year. * Management trainees, added at both our Greensboro and Louisville facilities, are receiving thorough schooling in every aspect of our operations and should provide for our future management needs in this area. 9 And, in the year's most significant Manu- facturing Department personnel move, Loril- lard named a new Director of Manufacturing. Finding the man most qualified for the job right within its own ranks, the Company pro- moted the manager of its Greensboro opera= tions to the executive post. Other executive promotions in the Manufacturing Department gave both Greensboro and Louisville new up-from-the-ranks management heads. PaoA1o Which brings us to our next subject-people. As reported throughout these pages, 1963 was a year in which, more than ever before, we focused on people: getting the right man in the right job; promoting from within our own organization wherever possible; train- ing and schooling Lorillard people at all levels, both for their own and the Company's benefit; adding new people with the potential to grow within the Company: As part of this program-and mindful of Lorillard's steady growth here and abroad, and our consequently increased need for more and better personnel at all levels=in 1963 we created a new post, Vice President, Personnel, and named to it B. Lowell Jacob- sen, a long-time specialist in the field. The new position carries with it responsibility for direction of our management development program, organizational planning and ex- panded industrial relations program. U9onl'743

f ; ~ 0OO01'744 Informal meeting of "outside" directors gets briefing from President Cramer (far right) on latest Lorillard activity. Left to right, directors are: Harold X: Schreder, Donald A. Henderson, F. Gladden Searle, Melvin E. Dawley. Harold E. Stassen. Other significant managerial changes that took place during the year were: 1) The appointment of Vice President J. Edgar Bennett as Assistant to the President as well. In his new role, Mr. Bennett acts as liaison with the International Division and all of the Company's operating departments- manufacturing, leaf, traffic, purchasing and engineering; 2) The election to the Board of Directors of our special counsel on international activi- ties, Harold'E. Stassen, a direct reflection of the growing importance of our international business to Lorillard. Numerous steps were taken during the year to strengthen the hard core of special- ists from which Lorillard can draw its future supervisors and executives. One of the most significant: Initiation of a program under which selected supervisory employees may pursue accelerated advanced management courses given at leading universities. Through such courses, the "students" become familiar with, and learn to cope with, management concerns and problems beyond those they encounter in the normal course of their par- ticular present Lorillard assignments. Equally important, a formalized manage- ment evaluation program is now well under- way to determine all capabilities-as well as limitations=of our supervisory personnel. Armed with detailed knowledge on the full range of the qualifications of our people, we are assured of promoting the most capable each time a vacancy or new post is created in our expanding organization. 19

f 20 Supplementing the expanded training pro- grams in our Sales, Leaf, and Manufacturing Divisions, during 1963 your Company intro- duced a tuition loan policy.This program per- mits employees at all levels to continue their education in approved fields related to their Lorillard assignments. It has met with enthu- siastic response, and is expected to expand on a yearly basis. Our labor relations with five international labor organizations, representing our employ= ees, continued satisfactory. On the Govern- ment level, your Company cooperated fully with the President's Committee on Equal Opportunity for Employment, and other state and local organizations dedicated to fair em; ployment practices. Another aspect of our activities this year involved another group of Lorillard's "peo= ple"-shareholders and investors. We made presentations to two of the most influential financial groups in the country-The New York Society of Security Analysts, and The Boston Security Analysts Society-and, through them, the story of P. Lorillard's cor- porate growth and its potential was pre- sented in depth to many shareholder-owners and potential owners of our Company. The Lorillard corporate story was given further display in 1963 with the opening of an audio-visual exhibit-the first by any tobacco company-in the New York Stock Exchange Visitors' Gallery. Featuring Lorillard scien- tists at work on tomorrow's cigarettes, the animated display will be seen by some 500,000 visitors in a year's time. Establt<hcd t,na EST CIGARETTES THROUGH LORILLARD (Top) In the Visitors' Gallery of the New York Stock Exchange. investors and potential investors see and hear the story of Lorillard's growth via this animated "talk ng" display.' (Bottom) Lorillard booth at North Carolina International Trade Fair, one of many at which the Company exhibits annually, is visited by the State's chief executive, Governor Terry Santord.

00001746 Other Corporate Activities For your Company's wholly owned subsidi- ary, Federal Tin and Paper Products, Inc., 1963 was a year of expansion in every area from sales, equipment and personnel, to new products and new customers. A new operating head took over at Federal Tin and Paper Products during 1963 when a 30-year career man with the company was named Vice President and operations chief. Continuing the aggressive program of growth and diversification begun four years ago, Federal Tin and Paper during 1963 virtu- ally doubled its national sales force and, to increase its penetration in the important New York-New England area, opened its first re- gional sales office, in New York City. Installation of new equipment for high speed fabrication of spice containers has begun and this improvement is expected to significantly lower the cost per thousand units of an important metal product. 1963 saw the further expansion of Federal's Paper Division, with sales of its folding car- tons and labels both increasing. This Division continues to supply a major portion of Loril- lard's packaging needs for its cigarette, little cigar, and smoking tobacco products. To deveiop new uses for metal containers and new concepts of paper packaging, a De- sign Research Department was set up in 1963, and has already produced tangible re= sults, with acceptance of its designs by new customers in the metal and paper fields. Through Federal Tin and Paper, your Com- pany is already reaping-on a limited scale - some of the benefits of expansion into fields beyond our main business, cigarettes. We are seriously interested in diversifying further and during the year have actively studied a number of situations, none of which, under investigation, met our require- ments for growth potential. To actively pur- sue this matter, during the past year a special Cominittee on Diversification was formed. Headed by Board Chairman Lewis Gruber and comprising both top-level executives and outside consultants, the Committee is now seeking out and evaluating numerous situa- tions which seem potentially promising. !' Z).' tJ]_° I-(: i vrl? As P. Lorillard enters its 205th year, we dedi- cate ourselves anew, as the industry's "house of filters," to bringing smokers every-:vhere the very best products that our advanced re= search and manufacturing facilities ca'l pro- duce, to being first with tomorrow's cigarettes today. And we acknowledge with gratitude the loyalty, cooperation and support ex- tended to us by our approximately 6.603 em- ployees and 43,000 shareholders, without which we would not have been able so effec- tively to pursue these goals in the past. As for the future, it is our sincere belief that, as we continue to discharge our keenly felt re- sponsibility to the smoking public, our for- tunes will continue to advance: \ President 21

~ ~~~~ :. y::'-V 00001747 22 Financial Review 1963. Net sales in 1963 were $516,144,614, com- pared-to $516,108,381 in the preceding year. Both total dollar sales and unit cigarette sales were in record amounts. Net earnings of S27,918,457 were S1,286,537, or 4.8~1~ higher than in the previous period. Earnings in- creased more than proportionately to sales principally because of operational econornies and efficiencies at the factory level. After payment of Preferred stock divi- dends of 5686,000, net earnings on 6,575,548 Common shares outstanding at year-end amounted to 54.14 per share compared to 53.94 in 1962. Total dividend payments of $16,958,623 for the year included an increase Financial Vice President George O. Davies (seated) reviews Lorillard costs and expense figures with headquarters financial executives: in the regular quarterly rate paid on Common stock. Effective in the second quarter, the dividend was raised from 60c to 62'/2c pe:r share, equal to an annual rate of S2.50. Dollar amounts of leaf tobacco inventories were lower by $4,364,664 at year-end than at the close of the previous year, a reduction in- fluenced primarily by the earlier than usual Christmas closing of the burley auction mar- kets. Manufactured stock was higher by $5,016,278 than at the end of 1962, a com- parison reflecting a lower than normal fin- ished inventory position at 1962 year-end. Short-term borrowings of $51,550,000 were $950,000 less than at the close of the previous period. During the year, the final installment was paid on Long-Term Notes originally issued in 1955. In addition, $10,000,000 of 3`'/~ Deben- tures issued in 1943 became due and payable in 1963. Representing debentures not re- deemable through operations of the Sinking Fund, this obligation was retired in October without recourse to new financing. No long- term financing appears needed for present operations during the course of the current year. Sinking Fund requirements on long- term debt currently require annual payments of $1,025,000 with initial Sinking Fund pay- ments on the 4'/a% Debentures due in 1986 not scheduled until 1966. Depreciation charges for 1963 were virtu- ally the same as for 1962, amounting to $3,360,953 and $3,323,285 respectively. Real estate, machinery and equipment, after ad- justment for depreciation and disposals. totalled $44,463,260 at the end of 1963, reflect- ing a reduction of $1,661,583 from the close of the previous year. Capital expenditures in 1963 of $2.135,367 were considerably lower than comparable expenditures in the previous year and it is anticipated that capital outlays in 1964 will be considerably higher than those for 1963. In relation to our international operations. capital investment of approximately S500,000 appears in the Balance Sheet, reflecting a 50 %% interest in P. Lorillard s.a.r.l., a Euro- pean Common Market tobacco operation located in Luxembourg. Initial production is scheduled in the forepart of the current year. Lorillard products produced domestically for shipment abroad increased by nearly 20"~. and royalty income, reflecting sales overseas by licensees locally manufacturing our prod- ucts, increased substantially. Financially speaking, the comparative posi- tion of your Company was improved during 1963. Retained earnings of $10,959.834 for such purposes as future replacement and betterment of corporate facilities or for direct investments wherever warranted, combined with additional reduction of Long-Term Debt by direct retirement and by Sinking Fund op- erations, further increased the percentage of shareholders' equity in relation to total debt employed. This was accomplished while divi- dends in 1963 were increased by S495,541.

Consolidated Earnings and Retained Earnings and SubSidiaryGo^:'nies ~ Year Ended December 31 1963 1 1962 Revenues: Net sales ••••••••.••,•.••.••,,..•••••••••.••.. ••••••••••. $516,144,614 S516,103.381 Other.................................................. •.... 1,174,384 904.557 Total ............................................ 517,318,998• 517,012.938 Costs and Expenses: ' Cost of goods sold, selling, advertising, and administrative expenses 452.010,092 ~ 456.078.661 Interest .................................................... •. 5.129,449 !~ 5.3E5.357 Federal, state, and foreign income taxes ........................ 32.261= 000 I 28.917,000 Total ......................................... 489,400,541 1 490.331.018 Net Earnings ••••••••••••••••• 27.918,457 ~ 26.631.920 Dividends on Preferred Stock (S7 per share in each year) •:•.•.....,. 686,000 I 636•000 Earnings Applicable to Common Stock (S4.14 per share in 1963; $3.94 per share in 1962) ........................•.•••••••• ••••••• 27,232,457 25.9,5,920 Retained Earnings, beginning of year .............................. 103.138,399 92.9-^-9.561 Total ......................................... 130,370,856 118.91 5,481 Dividends on Common Stock (52.47'/z per share in •1963; $2.40 per sharein 1962) ................................................ 16.272,623 15.777_082 Retained Earnings, end of year ..................••.••••••••••••• $114,098,233 $103.138,399 00001748 See Notes to Financial Statements on page 26. 23

Consolidated Balance Sheet /;~111~i- - ~~ 3~~h,idia~yco~i~)~~~~~~ f 1963 December 31 1962 , Current Assets: Cash ....................................................... $ 11,159,872 Accounts receivable-customers (less $1,004,450 in 1963 and Assets , $971,827 in 1962 for doubtful accounts and cash discounts) 26,327•299 ` Other accounts receivable and deposits ......................... 911,913 Inventories (at average cost): Leaftobacco .............................. ............ 222,627,755 Manufactured stock ........................................ 24,395,054 Materials and supplies ...................................... • 6,385,353 Total current assets ............................ 291,807,246 Investment in Associated Company (at cost) ........ : : : . : .......... • 501,555 Property, Plant, and Equipment (at cost): Land' .............. .................................,:... 848,630 Buildings and building equipment .................... : : ........ 20,533,602 Machinery and equipment ................................... . . . 42,615,816 Total ......................................... 63,998,048 Less accumulated depreciation ................................ 19,534,788 Total property, plant, and equipment-net......... 44,463,260 Other Assets: Prepaid expenses and deferred charges .. . . . . . . . . : • . . : . . . . . . . . . . 2,957,047 Unamortized debenture discount and expense ................... 1,275,813 Mortgage note receivable ..................................... 239,072 Brands, trade-marks, and goodwill ............................. 1 Total other assets ............................... 4,471,933 Total ...................... .............. $341,243,994 $ 10,738,981 25,238,286 1,104,894 226,992,419 19.378,776 6.605.318 290,058,674 880,124 20•585,207 42,072.228 63,537,559 17,412,716 46,124,843 3,246,748 1,381,977 247,790 1 4,876,516 $341,060,033 00001749 24 See Notes to Financial Statements on page 26.

JI Decem 1963 ber 3 1 1962 Current Liabilities:. $ 51,550,000 $ 52,500.000 Notes payable : 4,807,630 5,804.217 Accounts payab r 11,154.014 Liabilities . Long-term debt col• ~• ;c,e year (less held by Compai10 22,977,174 19,781.022 Accrued taxes : 2,705,050 2,445.375 Accrued payrol!s 425,954 520." 53 Accrued interest 1,971,764 1-46= 368 Other accrued 572 84 437 93,669.449 liabilities ............... , , Long-Term Debt (pmrl1r amount due within one yealti : tures, due 1976 ($350,000 t; t- 1 vtired Twenty five yeai 3"• S,k;3 000 held by Compam O $99 11,051,000 11,496.000 , , annually to 1P7:•) 1!~ _.ntures, due 1978 ($675,000 1•• I~' Ittired Twenty-five year i''," `" „ I m ~ C 16,314,000 16•90-'.000 a~~~ t o annually to 1977) 1 ti;3, $111,000 held by ~~" ` ed i r 4'/e% sinking fLin,i 'i( +_='tiires, due 1986 ($1,600,000 t., Iw ict . 40,000,000 40.000000 ............... ' ....... ann ll 1 6 000 40 0 8 ua y 9 6 to debt 67.365•000 . , 6 .... ............ . Trlnl ~, •,, tr.rm 964 624 2 173 460 3 , . . , Reserves for Employrr I~r~~Nt~ts . . . . . . . . . . . . . . . . . . . • Shareholders' Equily: l 7% cumulative I~r~;l~ ~~~' ~:•!r~r.k (par value $100 per sh,vr') 000 shares ss d 98 9,800,000 9,800,000 ue , authorized 99.571; I ..... Common stock (I)r11 ""!"" $'5 per share)-authoriz~~l I~!,t100.000 shares; issueci I'trl, r'•,.75,548 shares; 1962=6,57 !:' !!! 5hares mon 32,877,740 32:872.740 Additional paid=ir, (premiums less expenses till r•om stock issued) ................. ....... : ...... i h b 30,040,485 114,098,233 30.005.985 103.1;; 8,399 us ness .. . . . ....... e Earnings retained f-~~ ~~ _ il, t isttcolders' equity .. . . . . .. ... . 186.816•458 175.817,124 $341,243,994 $341.060,033 See Notes to Finrinct101 •';tatements on page 26. :-M 0000175o 25

! Notes to Financial Statements tJ• ~.CUIGUEI ~lfi ~CI~~>~»~ and Subsidiary Companies ~ (17 n rD .~,~ (w (1) Provision for depreciation amounted to $3,360:953 in 1963 and S3.323.285 in 1962. (2) Under the Restricted Stock Option Plan for Employees approved by the shareholders on April 8. 1958. options were outstanding at December 31. 1962 to purchase 55.500 shares of common stock• and 5.000 shares were available for the granting of additional options. During 1963 options to pur- chase 1,000 shares at S39:50 per share were exer- cised and options for 1.300 shares iapsed. At December 31. 1963 options were outstanding to purchase 9,200 shares at S39.50 per share at any time up to September 18. 1969: and to purchase 44.000 shares at S43.50 per share at any time up to June 20, 1972. and 6.300 shares were available for the granting of additional options. The option prices are not less than 95': ot the fair market value of the shares at the dates the options were granted: Under the Stock Purchase, Option and Incentive Plan adopted by the shareholders on April 2, 1963. 127.870 shares of common stock were offered to employees on July 31. 1963 at $44.75 per share (100'( of the fair market value of the shares on such date) including 1.125 shares the rights to pur- chase which subsequently lapsed. At December 31, 1963 there were outstanding options to purchase 35.400 shares on February 3, 1964 or at any time thereafter up to July 31. 1973 upon payment of the purchase price, and rights to purchase 91.345 shares on February 3. 1964 or at any time there- after up to September 1, 1964 under stock purchase or stock subscription arrangements• and 201.982 additional shares were available for issue under the Plan. The above-mentioned expiration dates may be accelerated or the commencement dates delayed under prescribed circumstances. (3) Covenants lirrmiting the payment of dividends on common stock and the purchase. redemption, or retirement of such stock are contained in the debenture indentures. Under the most restrictive of these covenants the amount which could have been expended for the foregoing purposes at De- cember 31, 1963 was limited to approximatety $55•000•000. ; N 000a1 /51 Accountants' Opinion HASKINS & SELLS CERTIFIED PUBLIC ACCOUNTANTS 2 B4bADAar NEW YORK 4 To the Board of Directors and Shareholders of P. Lorillard Company: We have examined the consolidated balance sheet of P. Lorillard Company and its suos diary compames as of December 31. 1963 and the related statement of consolidated earnings and retained earnings for ;he year then ended. Our examination was made in ac- cordance with generally accepted auditing standaris. and accordingly included such tests of the accou-it- ing records and such other auditing procedures as we considered necessary in the circumstances. In our opinion• the accompanying consolidated t31= ance sheet and statement of consolidated earn ngs and retained earnings present fairly the financial No- sition of the companies at December 31. 1963 and :he results of their operations for the year then en~jed. in conformity with generally accepted accounting principles applied on a basis consistent with that of the preceding year. 26 January 27, 1964

r ~ / , 6~ Ten Year Comparison of Financia! Statistics ~J)_~-G~CClll;rd andSubsidiaryCc'rzanies 00001752 Year Ended Dec. 31 Net Sales Earnings belore Taxes on Income Income and Excess Profits Taxes Net Earnings Earnings per Common Share't D vidends per Common Sharet 1963 $516,144,614 $60,179,457 $32,261,000 $27,918,457 $4.14 S2.47'/i 1962 516,108,381 55.548,920 28.917,000 26,631,920 3.94 2.40 Re!ating to Operations 1961 492,930,882 59.659,073 31.240,000 28,419,073 4.22 2.20 1960 487,329,716 59.052,257 31,671,000 27,381,257 4.06 2.20 1959 490,873,749 . 60.431,157 32,166,000 28,265,157 4.20 2.20 1958 479,120,409 57.915,08,3 30,878,000 27,037,083 4.01 2.00 1957 293,415,430 25,145,412 13,661,000 11.484,412 1.89 .97 1956 203,280,417 8.618.758 4.099,000 4,519,758 .67 .60 1955 228,268,392 13,098,500 6,502.500 6.596,000 1.03 .67 1954 : 231,046,695 12.629,143 6.287,000 6.342,143 .99 .80 -Property, Plant and Equipment- -Shareholders Equ!ty At Dec.31 Total Inventories Working Capita/ Gross Amount Net alter Depreciation Amount' 1963 5253,408,162 S207,369,674 $63,998,048 $44,463,260 $186,816,458 1962 252,976.513 196,389,225 63.537,559 46,124,843 175,817,124 Relating to Balance Sheet 1961 265,874.251 198:405:520 59,906,262 44,532,885 165,513,986 1960 236,427,503 155.195,423 51,666,882 38,771,079 151,945,219 1959 218,613.345 150,577.898 45.690,733 34,621,223 139,690,868 1958 197,069.209 143.916,484 41:037,558 31,475,731 126,552,617 1957 161,449,360 , 109,803,777 37,495,633 28,777,280 86,674,232 1956 136,652;281 110.245:323 35,079,590 26,399,561 81,438,885 1955 140,988,335 112,451,576 34,292,757 25,488,791 81,028,497 1954 144,189,440 108,876,796 27,518,065 18,615,223 78,969,754 ' Based on number of shares outstanding at end of each year. t 1958 and prior years adjusted to give ef/ect retroactively to 2 for I common stock split in 1959. Per Comrrc,, Share'* S26.92 25.255 23.69 21.65 19.79 17.78 13.47 12.55 12.48 12.12 27

i .. y Board of Directors C~C J. Edgar Bennett Morgan J. Cramer 'George O. Davies Melvin E. Dawley Henry E. Erickson Lewis Gruber S t and Subsid ary Companies Donald A. Henderson William A. Jordan Harris B. Parmele Harold X. Schreder F. Gladden Searle Harold E. Stassen Manuel Yellen Officers Lewis Gruber Chairman of the Board Morgan J. Cramer President and Chief Executive Officer J. Edgar Bennett Vice President and Assistant to the President Manuel Yellen Vice President, Advertising and Sales George O. Davies Vice President and Director of Finance Dr. Harris B. Parmele Vice President and Director of Research Henry E. Erickson Vice President and Director of Leaf Activities B. Lowell Jacobsen Vice President, Personnel Anna F. Woessner Secretary Edward G. Kontos Treasurer John J. Darby Comptroller 00001753 Other Corporate Information Executive Offices 200 East 42nd Street, New York 17, N. Y. Corporate Offices 15 Exchange Place, Jersey City, N. J. General Counsel Perkins, Daniels & McCormack Advertising Agencies Lennen & Newell, Inc. Grey Advertising Agency, Inc. Albert Frank-Guenther Law, Inc: (Financial) Public Relations Counsel Sidney J. Wain, Inc. Manufacturing Plants Greensboro, N. C,; Louisville, Ky. Research Laboratories Greensboro, N. C.; Louisville, Ky. Leat-Storage Warehouses Louisville, Ky.; Lexington, Ky.; Danville. Va.; Lancaster, Pa.; Madison. Wis.: LaCrosse, Wis.; Evansville, Wis. Stemmeries Louisville, Ky.; Lexington, Ky.; Danville. Va. Field and Division Sales Offices In all Principal Cities Subsidiaries Federal Tin and Paper Products, Inc.. Baltimore, Md; P. Lorillard Pan American, Inc.. New York. N. Y. P. Lorillard International S.A., Zug. Switzerland. Auditors Haskins & Sells New York, N. Y. Transfer Agent Chemical Bank New York Trust Company New York, N. Y. 28 Registrar First National City Bank New York, N. Y.

00001755 1963 Annual Re port l.aYr~. .rr '

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