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Contents 2 Highlights 3 Letter to Shareholders 6 Marketing 10 International 11 Research 11 Leaf 12 Manufacturing 13 Diversification 14 Good Will Abroad 16 For the Future 17 Financial Review 18 Charts 19 Consolidated Earnings 20 Consolidated Balance Sheet 22 Notes to Financial Statements 23 Ten Year Financial Comparison 24 Lorillard Directors and Officers The Cover The ancient castle in Montbeliard, France, where P. Lorillard Company's founder was born, symbolizes both our rich heritage from the past and the opportunities of the future in the world market place. The castle's great hall, restored by Lorillard as part of its international relations program (see page 14), is now a museum known as the Salle Lorillard. Opposite Page P. Lorillard Company literally circles the globe with sate of its products in more than 100 countries of the Free World, production of Lorillard brands by licensees in 12 countries, and direct manufacturing ventures in Europe and the Far East. 6s4tooo0 1964 Annual Report Annual Meeting The Annual Meeting of Lorillard shareholders and Proxy will be held on April 6, 1965, at the Americana Hotel in New York City. Meeting time will be 2:00 P.M. Notice of the Meeting, along with proxy and proxy statement, is being mailed to you under separate cover. The proxy is your way to approve or disapprove of Management's stewardship, and your vote is important, whether it be for five or 5,000 shares. If you are unable to attend the Annual Meeting, please sign and return your proxy before you put it aside. It will let us know of your continued interest.

and Subsidiary Companies Financial Highlights 1964 1963 Sales ...................... $466,773,167 $516,144,614 Net Earnings ............... 25,330,410 27,918,457 ~ ~" Results per Common Share: Net Earnings ........ Dividends ......... Taxes ................. Shareholders' Equity .... 3.77 2.50 33.72 27.95 4.14 2.47'/2 38.38 26.92 ~ Current Assets ............. 290,479,638 291,807,246 ~ .J Current Liabilities ........... 79,690,577 84,437,572 4 . ~ W k' C't 1 or mg api a .. .. . . . 210 789 061 . . 207 369 674 . . Long-Term Debt ............ 66,235,000 67,365,000 Shareholders' Equity ........ 192,226,031 186,816,458 Number of Shareholders ..... 44,600 42,649 Number of Employees ....... 6,488 6,664 6S4T0000 2

Fel%w Shareholders: President Morgan J. Cramer (right) and Executive Vice President for Operations J. Edgar Bennett review 1964 results and discuss plans for 1965. Q94tao0a The year 1964 was perhaps the most discon- certing in P. Lorillard Company's 205 year history. Starting with the Report of the Ad- visory Committee to the Surgeon General of the United States on Smoking and Health in January, it was a period marked by consum- er confusion, Congressional and Govern- ment hearings, industry-imposed cigarette advertising restrictions and anti-cigarette campaigns. Cigarette sales reacted sharply, with the greatest impact coming in the first six months. As the year wore on, the situa- tion began to improve, the down curve re- versed itself, and sales started to march up- ward again. Nonetheless, total sales de- clined from last year's record levels, and earnings along with them. Sales were $466,773,167 compared with the all-time high of $516,,144,614 recorded in 1963. Net earnings were re $25,330,410 or $3.77 per common share, versus $27,918,457 or $4.14 per common share for the earlier year. Two-fold goal Since it was obvious from the beginning that 1964 would be an unpredictable period, P. Lorillard Company set itself a two-fold goal: First, to meet and resolve the day-to- day problems as rapidly, decisively and effectively as circumstances would permit; and, second, to prepare a solid base for fu- ture operations in the new climate engen- dered by the Surgeon General's Report. In this new climate, many Americans shifted their smoking habits and allegiances, and non-cigarette tobacco products enjoyed an unprecedented sales spurt. As the dominant producer of little cigars, Lorillard benefited from this strengthened consumer demand and moved immediately to capitalize on it still further: We introduced a new fiiter-tipped little cigar called Omega, as a companion to our best-selling Madison and Between The Acts. In the field of regular cigars, we introduced Erik, a unique small cigar and the first with a built-in filter. Both Omega and Erik took off strongly and have, we feel, excellent potential. Overseas, our operations continued to prosper and demand for our products inter- nationally continues to expand at an emi- nently satisfactory rate, well ahead of that for the industry as a whole. Here again, Man- agement strengthened operations and dur- ing the year our export sales set a new rec- ord; we added a new licensee in Australia to produce Kent for sale throughout that con- tinent; we expanded P. Lorillard s.a.r.l. which produces Kent and Newport in Luxembourg for the Common Market countries; and we purchased a half interest in a large Hong Kong cigarette manufacturer to supply the fast-growing markets in Southeast Asia, Africa and the Middle East. New Ventures This was also the year in which Lorillard's diversification efforts moved into high gear 3

Executive Vice President for Sales and Advertising Manuel Ye/len (left) makes regular trips into the field to view Lorillard operations at first hand; here Inspects typical supermarket display of Lorillard brands. t94toooa and late in December we took steps to enter the booming pet food business with execu- tion of an agreement to acquire the country's Number Two producer of canned cat food, Usen Canning Company. As a rapidly grow- ing company in a new growth industry, Usen -which produces the Tabby and Three Little Kittens brands - amply meets our primary requirement for acquisition: Its products have a two-way advantage in that they can contribute to our profits while we contribute to their sa/es. Other attractive and potentially profitable situations are now being considered and we anticipate additional diversification and ac- quisition moves in the future. In our cigarette operations, the last part of the year was measurably better than the first -Kent sales turned upward, Newport actu- ally outsold the same months last year, and Spring ended 1964 with a net gain. To im-e prove sales, we backed our brands with new effective sales promotional devices and de- veloped ad campaigns that, within the limits and restrictions of the Industry Advertising Code, are strong and effective. We continue to pursue unflaggingly the scientific road to better and better filters and during 1964 our Research Department found new ways to improve our cigarette brands. New scientific findings indicate further im- provements in 1965. As the pioneer in the field of filter development, Lorillard believes in filter cigarettes, believes in their future and will continue to honor its commitment to the smoker to produce the very best cigarettes that can be made. Organizational Improvement In the last ten years, our business has grown appreciably-saies have more than doubled, earnings have more than tripled, and dividends have almost quadrupled. To fill the gaps created by the new breadth and dimension of our business, and to position us to operate most effectively in the post- Surgeon General's Report era, during 1964 the following steps were taken to restructure our organizational set-up for maximum effectiveness: Three senior executives - given the new title of Executive Vice President-were charged, respectively, with overall responsi- bility for: Operations (Manufacturing, Research, Leat, International, Purchasing, Engineering, Traffic, Subsidiary Operations) Sales and Advertising (Sales, Sales Promotion, Sampling, Merchan- dising, Advertising, Market Research, and all marketing operations) Finance (Treasurer, Comptroller, all financial matters) Three new Vice Presidents, each reporting to the appropriate Executive Vice President, were named to oversee Sales, Manufacturing and Advertising. Two new members were elected to the Board of Directors, one from Finance, the other from Manufacturing. A new Corporate Planning and Develop- ment Department was created and a highly qualified executive put in charge. The International Department, reorgan- ized and restaffed by its new Director, was expanded with more men in Europe, the Far East and South America. At all levels increased focus was placed on Lorillard people-new posts were created, staffs bolstered, specialists added, training programs accelerated. And to ensure that the best people in each area would be brought to the forefront, a new Management Evaluation Program for key people was set in operation. 4

With members of headquarters stalf, Sales Vice President William A. Jordan (seated, center) sets up work plans and merchandising techniques for expanded field sales organization. To meet 1964's increased demand for little cigars, emergency air shipments of Madison and Between The Acts were rushed to out-of-stock retailers. Lorillard salesmen "sample" crews of foreign merchant ships docked in U. S. ports. Above, Kent poster decorates wardroom while seamen enjoy Erik filter-tipped cigars. Z94t0000 5

, Advertising Vice President Daniel Ladd (seated) presents new campaigns necessitated by Industry Advertising Code for Mr. Yellen's consideration. Creative presentation for Kent and Newport campaigns Is made to Lorillard executives by advertising agency team. Spring TV commercial and Newport four-color magazine ad point up Company's use of settings directly related to brand characteristics. E91tooo0 IV Marketing The coordination of all activities designed to move finished Lorillard products from the warehouse floor into the hands of smokers everywhere is the responsibility of Executive Vice President for Sales and Advertising,. Manuel Yellen. Thus, Lorillard sales, adver- tising, promotion, merchandising, sampling, market research, etc. are planned as a uni- fied operation and the impact of each seg- ment is greater by its relation to the total plan. Implementing the various operations are Advertising Vice President Daniel Ladd and the internal Advertising Department; and Sales Vice President William Jordan backed by an expanded field sales organization which is the largest in Lorillard history. To ensure that it is also the most efficient, new sales training methods were inaugurated during 1964 and intensified on-the-job train- ing for those who, according to our recently- instituted Evaluation Studies, have the great- est potential for supervisory positions. Cigarettes Kent, our leading cigarette and pioneer of the "filter revolution", started its upward sales climb at mid-year, made steady gains throughout most of the second half, to re- cover much of the ground lost immediately following the Surgeon General's Report. Newport, our major contender in the men- thol category, made a most encouraging turnabout, and in the last months of the year exceeded its sales for the same me months in 1963. Spring ran strong through much of the year and its overall sales for 1964 were higher than for 1963. Its steady progress over the past two years indicates that Spring, while not yet a major brand, holds s promise for the future.

Before Lorillard Board meeting, Director Melvin E. Dawley (left) chats with advertising agency executive at New York headquarters. For four brands, Spring, Old Gold Filters, Old Gold Straights and York, we participated in the Gift Star Trading Stamp Program in several test areas with eminently satisfactory results. Old Gold Straights, although part of a de- clining market, is a profitable brand and enjoys a not inconsiderable sales volume. Sampling. One of the most effective methods of creating new customers is "sampling" - at the supermarket, the factory gate, on a downtown thoroughfare, wherever people congregate. In 1964 our consumer sampling program, with Kent and Newport the main beneficiaries, was considerably expanded and encompassed even such specialized locales as foreign merchant ships which put 7

8 Directors Harold X. Schreder and F. Gladden Searle (standing left and right) discuss agenda for regular monthly Board Meeting with President Cramer. With production of Kent begun by new licensee in Australia, Lorillard's leading filter brand is now manufactured abroad in twelve countries spanning three continents. in at U.S. ports. One tangible result: sales to "sea stores" customers increased sub- stantially, to record levels. Advertising Advertising expenditures were about the same as those of the previous year but we were able to achieve greater flexibility than ever before in our utilization of these funds. Throughout 1964 this flexibility enabled us to move more rapidly, to give additional support to a particular brand when and where it was needed, and to capitalize on strong demand when and where it arose. As usual, our cigarette brands received the major share of our advertising effort, with prime-time network television programs, starring big-name performers, as our major medium. Newspapers, magazines, radio and outdoor billboards on main traffic arteries were also utilized. For Kent and Newport we sponsored both the Winter and Summer Olympics on network television. To supplement the hundreds of millions of Kent and Newport impressions already reaching viewers via our regularly scheduled shows, these "specials" carried our commercial messages into well over half of all television homes. Kent received additional advertising sup- port via a heavy concentration of TV spots in the early part of the year, and later by special daytime television network commercials de- signed to reach supermarket customers. For Spring, we continued our daytime net- _ worktelevision programming on an expanded basis, and in selected markets added TV spot schedules. A major advertising development last year was the cigarette industry's self-imposed Advertising Code, prescribing certain limita- tions for cigarette advertising. Although not actually in effect in 1964, considerable time

and effort was expended during the year planning for all eventualities under the Code in the current year. Other Tobacco Products With sales of non-cigarette products on the rise, advertising for our smoking and chew- ing tobaccos and especially little cigars was expanded considerably throughout the year, and new products, backed by strong adver- tising support, were introduced. All of our non-cigarette products made significant gains. In the small but important and profitable little cigar business, we kept our substantial lead on considerably increased volume, with our Madison and Between The Acts brands continuing as the nation's two top-selling little cigars. Introduction of a new king-size filter-tipped little cigar, Omega, backed by network and spot television commercials, was highly successful. National distribution was completed by mid-year. With Erik, a small regular cigar and the first cigar with a built-in filter, your Company entered a new area. Supported by extensive network television and (in key markets) spot TV, newspaper and outdoor advertising, Erik surpassed expectations, achieved national distribution in just two months and has al-y ready captured a significant share of a grow- ing market. In 1964, sales of our smoking tobaccos increased at a faster rate than those of the industry as a whole, and each of our principal brands - India House, Briggs, Friends, and Union Leader -showed substantial gains. Expanded distribution and intensified point- of-sale activities In volume outlets helped in- crease consumer acceptance. Beech-Nut, our principal chewing tobacco, increased its sales in 1964 and was again the country's biggest seller. 99LI(1000 In Hong Kong plant of P. Lorlllard Limited (new Lorillard loint venture) Director of International Operations Gordon O. Fraser (left) and Company executives observe production for Far East growth markets. New plant of P. Lorillard s.a.r.l. !n Luxembourg meets strong demand for American filter cigarettes in European Common Market. 9