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At Greensboro Research Laboratory, Vice President for Research Harris B. Parmele (Ieft) checks results of experiments aimed at continued improvement and development of Lorillard products. Operations The operational departments of P. Lorillard Company cover virtually all aspects of Ameri- can mass production and distribution. Raw tobacco and other materials must be bought and processed; shipped to our manufactur- ing facilities for conversion, by the most modern equipment and most advanced man- ufacturing methods, into finished products; then shipped to distribution points at home and abroad. In 1964 responsibility for all operational functions, including international activities and subsidiary companies, was vested in one senior executive-J. Edgar Bennett, who was named Executive Vice President for Operations. Reporting directly to him are all operational division heads and the vice pres- idents for Research, Leaf and Manufacturing. International Our international operations made gratifying gains in 1964, with export sales and royalties from licensees both attaining record levels, and our joint ventures s overseas operating profitably and well. Our international organization was ex- panded and new territories formed. We established our own distribution organization for the fast-growing Puerto Rico market; opened offices in Uruguay and in Lebanon (to supervise sales in lower South America and in the important Middle East export mar- kets); and set up warehousing facilities in the Suez Canal Zone to provide improved service to the more than 1500 ships that pass through the area each month. While total industry exports of cigarettes rose only slightly above the previous year's levels, Lorillard in 1964 substantially in- creased its export sales and, for the ninth consecutive year, enlarged its share of the important world market. Our Kent brand was the leading imported cigarette in such widely separated countries as Japan and Sweden, and outsold all other American filter brands in the Middle East, Peru, Switzerland and Luxembourg. Production of our international licensees also rose in 1964 and continues to be greater than our export volume. Wherever indicated, particularly in countries where import restric- tions and tariff barriers make it uneconomic to import United States cigarettes, our licensee program will continue to be ex-d panded and during the year we added God- frey Phillips International Pty. Ltd. of Victoria, Australia for our Kent brand. Perhaps our most significant international move in 1964 was expansion of our program of direct investment overseas. We acquired a half interest in a leading Far Eastern ciga- rette producer, now known as P. Lorillard Limited. Based in Hong Kong, it is jointly owned by our subsidiary P. Lorillard Inter- national S. A. and principals of the predeces-r sor company. It produces uces both Lorillard and domestic brands for the burgeoning markets of SoutheastAsia, Africa and the Middle East, where growth potential for cigarettes-es- pecially filters - is probably greater than in any other world area. P. Lorillard Limited is operating profitably and growing so rapidly we are already expanding its operations and have begun construction of a multi-story manufacturing facility adjacent to the pres- ent plant. Our Luxembourg joint Investment-P. Lorillard s.a.r.l., established late in 1963- is also growing most satisfactorily. Its new, modern plant, completed early in 1964, is now being expanded; sales in the Benelux countries of Kent and Newport increased substantially during 1964; and we are now

. . Stepped-up scientific Inve_ stigation by Lorillard researchers required new equipment, additional laboratory space during 1964. selling our Luxembourg-made cigarettes at popular competitive prices in France and Italy. With our current joint ventures progressing satisfactorily, Lorillard is now investigating other similar investments. In addition, we are actively considering another step toward more direct participation in expanding world markets_-acquisitions in which Lorillard will be majority owner. We are currently ex- ploring possibilities of this nature on several continents. Eventually we hope to have a firm foothold in all important world trading areas. Research That your Company has continued to stand "First with the Finest Cigarettes through Lorillard Research" is attributable to the many contributions and genuine discoveries of its Research Division, founded In 1929, and one of the first in the industry. All of our present-day products have come out of our Research Laboratories and great emphasis is put on continual product im- provement and development. During 1964, Vice President for Leaf Activities Henry E. Erickson (left) makes regular visits to Lorillard stemmeries to check on leaf storage and processing methods. To meet Company's rigid leaf standards, samples of new crops are sent directly from field to Lorillard laboratories for analysis. s34TOOOo new types of filters, blends, filtering sub-, stances, flavoring agents, cigarette paper- materials and techniques involving every phase of tobacco and its use - were studied by our scientists. They continued their inves- tigations of the properties of tobacco leaf, the composition of cigarette smoke, and the results and by-products of the combustion process. Our scientific staff was augmented during the year and a reserve laboratory, heretofore unassigned and designated for future expan- sion, was equipped with specialized ad- vanced apparatus and put into operation. Leaf The Leaf Division buys and processes many scores of millions of pounds of leaf tobacco a year. During 1964 our costs for this tobacco were slightly higher than in 1963, due mainly to increases in Flue-Cured and Burley price supports. Our purchases of other types of tobacco - seed leaf or cigar-type, and Oriental to- baccos grown mainiyy in Turkey and Greece 11

Electronically-controlled conveyors leed precise amounts ol dilterent tobaccos to blender lor production ol line Lorillard cigarettes. 6340000 -e were made more advantageously, due to anticipation of demands and pre-marketing studies made by our leaf organization. Our leaf buying organization was expand- ed, with more Lorillard buyers placed on more key tobacco markets. In each of its three years of.operation, our Danville, Virginia, leaf processing and stor-e age center has exceeded our most optimistic expectations of operating efficiency and economy. 1964 was no exception and sub- stantial cost savings, over and above those achieved in prior years, were realized. Our Lexington, Kentucky, stemmery re- ceived a complete refurbishing during the off-season, with a consequent rise in both employee morale and operating efficiency. During the year we started consolidation of our Wisconsin leaf storage operations into the more modern and better-equipped Lexington leaf storage facility, where auto- mated handling and fuller off-season utiliza- tion of year-round personnel are expected to result in substantial savings. Manufacturing For the Manufacturing Department, 1964's shifting consumer demands necessitated fast reactions to changing production needs, redesigned machinery, new manufacturing processes, s, and revised production schedules. Despite the numerous change-overs, pro-n duction efficiency increased sed and operating costs decreased. Award for Lorillard stockholder report for 1963, judged best in the tobacco industry /n Financial World Magazine competition, is accepted on behalf of the Company by Executive Vice President lor Finance George O. Davies (lelt). These results stemmed mainly from our continual probing of the future needs of the market and our program of developing in advance the necessary equipment and proc- esses to meet these needs. Among the new and redesigned equipment put into opera- tion in 1964-all developed by Lorillard engineers and machine specialists when suppliers could not respond quickly enough -were: the unique machines required to producer our new filter-tipped cigar brands, Omega and Erik; special equipment to affix coupons to Gift Star cigarette packages; making machines adapted to produce Madi- son and Between The Acts. All of this equip- ment was operated by regular personnel, trained to operate in a variety of capacities, and thus available for assignment where the need is greatest. During the year, our various training pro- grams-technical in-plant courses designed to improve operating procedures, and execu- tive training programs at leading universities Specially-designed equipment for Lorillard research projects must be labricated by Company's own glass blowers at Greensboro Laboratories when unavailable from suppliers.

Operation of special Lorillard-designed equipment is discussed at Greensboro plant by Manufacturing Vice President William D. Okerson (center) with top manufacturing aides. Lorillard technician checks newly-made filter "rods", which are about to be joined to cigarettes on Greensboro making machines. -were expanded. This program continues to show excellent results in tapping the potential of our employees and In more effi- cient operations and cost savings. The most significant personnel advance In Manufacturing came at mid-year with ap- pointment of William D. Okerson, a long-time Lorillard employee, as Vice President for Manufacturing. During the year, new machinery was In- stalled for production of new types of filters and for automatic loading of finished filter "rods." Modifications were made in our pack- aging and cartoning machinery which greatly speed up these operations and produce a more uniform package at lower cost. At our Louisville plant, installation of the automatic tobacco distribution system, begun in 1963, was completed, and our leaf process- ing operations improved and speeded up. Diversification In 1964 we entered the first stage of our planned diversification program, with execu- tion of an agreement to acquire Usen Can- More than 10,000 visitors toured the Greensboro plant in 1964 and heard Company guides explain the intricate production of Lorillard cigarettes. Manufacturing area of Lorillard Greensboro plant covers three and one hall acres, or the equivalent of three football fields. O44IUUUU 13

New equipment tor high-speed production of metal containers enabled Lorillard's Federal Tin and Paper subsidiary to increase sales of those products in 1964. Lorillard President Cramer and Usen Canning Company founder Irving Usen (seated right and teft) sign acquisition agreement. Robert Usen, Company head, and Lorillard corporate planning director Walter M. Aikman (standing left and right) look on. Honorary Chairman Lewis Gruber and Corporate Secretary Anna F. Woessner set preliminary plans for annual shareholder meeting. ning Company, of Woburn, Mass., makers of the nationally-distributed Tabby and Three Little Kittens brands of cat food. Usen's an- nual sales (approximately $8 million in 1964) have increased more than 250 per cent in the past five years. This compares with a 45 per cent gain in the same period for the entire pet food industry, and an increase of 110 per cent in sales of cat food alone. Usen Canning is thesecond largestcanned cat food producer in the country and the Number One producer in the lucrative New England market. We plan to expand its op- erations with new products, new plants to facilitate distribution, and increased adver- tising and sales promotion. The Management that built the_ company will continue e to direct operations. We are now actively considering expan-n sion into other fields where our experience and knowledge of consumer sales, distribu- tion outlets, promotional, marketing and ad- vertising know-how can be of value. To seek out and evaluate potentially promising situ- ations, during the year we created a new post, Director of Corporate Planning and Development, and named to it a highly ex- perienced management development spe- cialist, Walter M. Aikman. Our other non-tobacco subsidiary, Federal Tin and Paper Products, Inc., in 1964 ac- quired a variety of new customers, in new industries, for both old and new types of its metal and paper packaging. A part of the Lorillard corporate picture since 1911, Federal Tin and Paper during 1964 increased sales of its metal containers, discontinued certain unprofitable odd-size lines, and installed a new quality control laboratory. Staffed by Federal Tin employees and operated under the direction of our Greensboro Research Laboratory's quality control specialists, it is expected to improve product uniformity and quality. The Design Research Department, which develops new uses for metal containers and new concepts of paper packaging, was enlarged and in- stallation of high speed equipment for fabri- cation of spice containers was completed. Good Will Abroad As world demand for American cigarettes continues to grow, two important factors in expanding distribution and sale of our brands are a close working relationship with foreign government tobacco officials and the good will of the consumer. In a project de- signed to foster good relations abroad on both levels, your Company in 1964 honored its "ancestral home" in France. Montbeliard, in eastern France, was the birthplace of Pierre Lorillard, who more than 200 years ago, emigrated to America. In 1760, he opened a small snuff manufactory in colonial New York City and, by his ambition and pioneering spirit, laid the foundations for the company which today still bears his name. I44t0000 14

Celebration in Montbeliard featured huge parade by local populace. Costumed folklore groups and Montbeliard- produced floats with home-made representations of Lorillard cigarette brands were highlights. Newspapers at home and abroad covered the events in two languages and at great length. "Hands across the sea" program occasioned much good will and many activities in both Europe and U. S. Mayor of Montbellard, French birthplace of Founder Pierre Lorillard, presented specially-struck medal to President Cramer, visited Lorillard plant, participated in sister city rJ ceremonies at Greensboro City Hall. In 1964, in the city in which its founder was born, your Company restored a large hall of the ancient castle. Known as the "Salle Lorillard", it is now a museum, hous- ing an important collection of Gallo-Roman antiquities found in the Montbeliard region. To bring P. Lorillard Company's historic relationship with Montbeliard up to date, we were instrumental in arranging a "sister city" affiliation between the birthplace city, and Greensboro, North Carolina, Lorillard's lat- ter-day "home" and site of our principal facility. Preceded by ceremonies in New York honoring the Mayor of Montbeliard, Dr. Jean- Pierre Tuefferd, the first of official affiliation ceremonies on both sides of the Atlantic took place at Greensboro. Return ceremonies in Montbeliard were climaxed by a celebra- tion for the entire populace of the region. During the two-day festivities, Lorillard Presi- dent Cramer officially opened the restored Salle Lorillard, in the presence of French Government and Tobacco Monopoly offi- cials; the Mayors of Greensboro and Mont- beliard; and other French and American dignitaries. 15 I e . . .

Perhaps the most telling comment on the effectiveness of this international project came from a representative of the French Tobacco Monopoly (which is an arm of the Government and controls all matters in France dealing with cigarettes, from manu- facture and importation to distribution and sale). He said, "This is good international relations at its best. You have done much to create better understanding and sincere good will between our nations and our peo- ple. Vive Lorillard!" For the Future Our Company's past has been character- ized by renewal and revita!izations, and it is in this tradition that we look to the future. During 1964 we re-assessed every aspect of our activities and took every step possible to strengthen our organization forwhat's ahead. The dedication and perseverance of our 6,500 employees and the confidence of our 44,000 shareholders serve as a constant in- spiration to us. It is our firm resolve to con- tinue to merit this support and loyalty. President To advance Lorillard's expanding international interests, Executive Vice President Bennett (center) meets constantly both here and abroad with Lorillard overseas altiliates. EL4TUUU4 16 Future diversification and expansion moves are studied by Lorillard Directors Donald A. Henderson (lelt) and Harold E. Stassen. Personnel Vice President B. Lowell Jacobsen met with employees at all Lorillard otlices to explain new evaluation procedures and benelits programs. Prize-winning Lorillard booth at National Association of Tobacco Distributors convention is typical of Company's participation in trade conventions and lairs throughout the year.

Executive Vice President for Finance Davies (seated) reviews year-end figures showing Company reduced costs and operating expenses in 1964. New Lorillard Director, Comptroller John J. Dar6y (left), examines up-to-the-minute reports from new computer installation with Treasurer Edward G. Kontos. V44I0000 Financial Review 1964 Net sales in 1964 were $466,773,167 com- pared to $516,144,614 for the previous year. The larger part of the sales decline occurred in the first half of the year, influenced pri-y marily by the release of the Surgeon Gener- al's Report in mid-January. Net earnings for 1964 of $25,330,410 were lower than earnings of $27,918,457 reported for 1963. After dividend payments on Pre- ferred stock totalling $686,000, net earnings per Common share equalled $3.77 and $4.14 respectively, based upon shares outstanding at the close of each year. However, aggre- gate earnings for the last three quarters in 1964 were slightly ahead of the same period in 1963. Measures taken during the year to enhance efficiencies and to control costs contributed materially to profit margins which, at year-end, were comparable with those in 1963. Dividend payments for the year of $16,455,310 slightly exceeded last year's out- lays, reflecting a full year's payment at the annual rate of $2.50 per Common share, initi-d ated in 1963. At year-end, inventories totalled $256,095,871 against $253,408,162 at the close of 1963, and short-term borrowings of $52,800,000 were $1,250,000 higher than at the end of the previous year, reflecting an increase in leaf tobacco inventories of less than 2%. Capital expenditures during the year to- talled $2,598,272, slightly higher than com- parable outlays in 1963. However, expendi-s tures in both years are considered low and it is anticipated that capital outlays in 1965 will be substantially increased. Depreciation charges amounted to $3,365,063, virtually unchanged from the pre-g ceding year's $3,360,953. Real estate, machin- ery and equipment, net of accumulated depreciation and adjustments for disposals, amounted to $43,459,469, or $1,003,791 less than at the end of 1963. Capital investments in operations abroad rose in 1964 from $501,555 to $3,498,263, rep- resenting a further matching investment in P. Lorillard s.a.r.l. in Luxembourg, while still retaining a 50% interest therein, and the pur- chase of a half interest in P. Lorillard Limited, Hong Kong, both tobacco operations. The investment value includes your Company's equity in the net earnings of these two com- panies. Lorillard products manufactured here for shipment abroad increased about 31/2% and royalty Income, representing sales abroad by licensees locally producing our brands, increased slightly. The financial position of your Company continues strong. Working capital increased by some $3,400,000 in 1964, Long-Term Debt was reduced by$1,130,000 and retained earn- ings of $8,189,100 will be used for purposes such as replacement or improvement of fa-s cilities and equipment, and investment, either directly or by acquisition in additional oper- ations of both a tobacco and non-tobacco nature, whenever warranted. In 1964, all areas of financial responsibility were vested in a senior executive-George O. Davies, who was named Executive Vice Presi- dent for Finance. Reporting to him are the Comptroller, John J. Darby, who was ap- pointed to the Board of Directors, and the Treasurer. Thus, all matters relating to finance are planned under a unified administration. 17

Net Sales (millions of dollars) Earnings before Income Taxes (millions of dol(ars) t;l Taxes on Income  Dividends _ , r- 60  Retained Earnings Property, Plant and Equipment (millions of dollars) 93 Accumulated Depreciation  Net after Depreciation 60 50 40 30 20 10 1955 '56 '57 '58 '59 '60 '61 '62 '63 '64 Inventories and Short Term Borrowings (millions of dollars) 300 L Total Inventories  Leaf Inventories 250 n Short Term Borrowings s:! 1 ]! 200 i ;150 / 100 - - - _ = 50 1955 '56 '57 '58 '59 '60 '61 '62 Permanent Capital Employed (millions of dollars) i.j Long Term Debt  Shareholders' Equity '63 '64 - 300 1955'56 '57 '58 '59 '60 '61 '62 '63 '64 How our sales dollar was distributed Retained earnings 1.75 ~ - Excise taxes 40.80 Taxes Income and other taxes 6.35 eferred and common dividends 3.67 - 70 Tobacco, other purchases and depreciation 39.31 Interest 1.01 Wages and 11 f i ~~ salaries 7.11 1955 '56 '57 '58 '59 '60 '61 '62 '63 '64 1 1 1955 '56 '57 '58 '59 '60 '61 '62 '63 '64

1 Consolidated Earnings and Retained Earnings Revenues: Net sales ................................................... Other ...................................................... Total ......................................... Costs and Expenses: Cost of goods sold ........................................... . . . . . . . . . . . .. .. . . . . . . . . . . . . Selling, advertising, and administrative expenses ................ Interest ..................................................... Federal income taxes ................ State and foreign income taxes ................................ Total ......................................... Net Earnings .................................................. Dividends on Preferred Stock ($7 per share in each year) ........... Earnings Applicable to Common Stock ($3.77 per share in 1964; $4.14 per share in 1963) ........................... , .............. Retained Earnings, beginning of year ............................ Total ......................................... Dividends on Common Stock ($2.50 per share in 1964; $2.47/2 per share in 1963) .... ... ................................... Retained Earnings, end of year .................................. and Subsidiary Companies Year Ended December 31 1964 1 1963 $466,773,167 1,473,345 468,246,512 336,316,330 76,343,454 4,689,318 23,774,000 1,793,000 442,916,102 25,330,410 686,000 24,644,410 114,098,233 138,742,643 16,455,310 $122,287,333 See Notes to Financial Statements on page 22. 9UIQ000 $516,144,614 1,174,384 517,318,998 375,925,063 76,085,029 5,129,449 30,065,000 2,196,000 489,400,541 27,918,457 686,000 27,232,457 103,138,399 130,370,856 16,272,623 $114,098,233 19