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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