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The Board of Directors -~o HERBERT A. KENT (1939) Chainnan of the Board JOSEPIt J.,BLAclcvaLL (1930). Vice President and Di'rectorof'A'fanu jacturina WILLIAM J. HALLEY (194L)President LEw[s GnUDER', (1946) Vice 1"resident and' Director of, Sales, DR. HARR[S I3! PARSIELE.(19J0)Director of Research ALDEV JAIucS (1950 Vice Presidert mrdDi'rectoro f'Advertising HA'ROLD F..TEMPLE(1943) Director of Brand Development 1[ELIT\ E..llAdV.I:EY(19J0). I)O1qLD A. HENDERSON (1916) , Vice Presidentand'Director, Treasurer and'Secretary; Lord c€ Tit}lor Twentieth CenturY-Fox Fi1m Corp. FRAPiK HOPEWELL (1940) Executive Vice Presid'ent '-V I I IRt,m~ H. Pe \~K (1913)~ Vice President antl Dir~ector~ aj'L'eafActirities~ FRLDEr,tc M. WALSON (1933Y Director ofPltrchasinm F. GLADDEN SE.aRLE (1943), I'ndu.strialist. The year shown in parenth'eses is the year of'firsrelection as a Director

ANNUAL REPORT for the Year Ended' December 31, 1954 INCORPORATED t2 D Maker of OLD GOLD and KENT Cigarettes, MURIEL Cigars,, and other tobacco products OFFICERS HERBERT A. KENT WILLIAM J. HALLEY . FRANK HOPEWELL JOSEPH J. BLACKNALL . . . . . . . . . . Chairman of the Board . . . . . . . . . . . . . . . President Executive Vice President . Vice President and Director of Manufacturing LE`4IS GRUBER . . ALDEN JAMES . . IRVIN H. PEAK . ., . . . ..... Vice President and Director of' Sales . Vice President' and Director of Advertising Vice President and Director of Leaf Activities GEORGE 0. DAVIES ANNA F. WOESSNER JOHN J. DARBY . . . .. Treasurer Secretary Comptroller Other Corporate Information General Counsel . . Auditors . . . . . Transfer~ Agent . . Registrar . . . . . . . . . . . . . . . . . Perkins, Daniels & Perkins . . . ., . Haskins & Sells. ... The New York Trust Company; New York. N. Y The National City Bank ofl New York, New York, N. Y Advertising Agencies Executive Offices Corporate Offices Manufacturing Plants Leaf-Storage Warehouses . Lennem & Newell~ Inc. (OLD GOLD. MLRIEL) ; Young & Rubicam. Inc. (KENT) ; Albert Frank-Guenther Law. Inc. (Financial'). . 119 Wesr 40th Street, New York 18; N. Y. ....., 15 Exchange P1ace, Jersey City, N. J. Jersey City, N. J.; Louisville„Ky.; Richmond. Va. . Louisville, Ky.; Riehmond„Va.; Lexington. Ky.; Danville, Va.; Lancaster, Pa.;, Madison„Wis.; La Ci'osse;,Wis.; Evansville,,Wis.; Windsor. Conn. Stemmeries ....... Louisville, Ky.; Lexington. Ky.; Danvillr, Va. Field! and Division Sales Offices . . . . . . . ., . . . In All Principal Cities Subsidiary . . . . . . . . . . . Federal Tin Company, Inc., Baltimore. Md. ANNUAL MEETING AND PROXY The Annual! Meeting of Lorillard shareholdhrs will be held on April 5, 1955, at the restored! Lorillard Mill, now a restaurant and meeting place, in the New York Botani- cal Garden. Meeting time will be 11 A. M. and doors will be closed! promptly at 1i1:15 tokeep~the session free of interruption. Notice of the Meeting is enclosed with this Report, along with proxy and proxy statement. Balance Sheets Page 16 Earnings Page 18 Your proxy i'syour way to approve or disapprove of :11an- agement's stewardship. Your vote is therefore important personally to Management, whether it be for five shares or 5,000 shares. If you are unable to attend our Annual Meeting on, April 5 in New York„ please sign and return your proxy before you put it aside. It willi let us know of your continued interest. TABLE OF CONTENTS Letter to Shareholders Page 2 Financial Highligl-tts Page 4 Filters Highlighted Sales Page 6 Advertising Faced New Challenge Page 8 How Lorillard Made News in 1954 Centerfold Leaf' Costs Held Firm Page 12 Greensboro Progress Report Page 13 Research Activities Page 14

TtaFYFxe195=I was a difficult one: for cigarette producers and, conforming to the Industry pattern. Lorillard sales of .5231,016,69a were less than in 1953. Reflecting the decline in, sales, as wel1 ashiaher operating costs, net earnings dropped from $l,l'93'.a 71 in 1953 to $6,342,1'-13' in 1954. P'arn- ingsper share of common st'ockwere S1.98, enabling the Board of Directors to declare divi- dend payments for the year of `±'1.60 per common share- the same as in 1953. Wlty scdPsir•ere clotcn Many reasons have been advanced for the Industry-wide sales decline. Throughout the year publicity linkingsmokingto lung cancer cont'in- uedi to vex the Industry, and' while there is noo accurateindett'o hotivareat was its inflhencee on sales, there can be no d'enyinathat it has been a factor. Another reason advanced' was the fact that there was a population shrinkage in thee youn~er aaegroups andi an increase in the olderage groups. Contributina~ t'othe total sales decline were king size cigarettes which, requiring more tobaceobut reducin, unit! consumption, enjoyed a wider popularity. Too. 1195-I witbessed the in- troduction of more thani a dozen new brands, or types and sizes ofl established brands, stiffening the traditional competitlivesituation in our In- dustry.. Our own sales situation requires clarification of still another significant factor. In 1953. when the 1'nrlustry as a whole failed to advance. Lonil- lard sales shot up an exciting 1'?',, _~. Responsible were the spectacular ~rowthi of Ite~~r. whose ad- vertisinaand promotional support achieved near- masimumi efffncti%-eness, andl thesuecessful intro- duction of0't.n GOLD king size: Dist'ributiion channels, already overloadedl in the rush t'o: beat a priceincreasee reached the bursting point to accommodate KENT and OLD GOLD king size. Thus corrective adjustment of tlie1953salos fi-ure isessent2als to reflect realistically our sales growth. While the sales chart on Page 7 shows a sharp decrease in the past year. the truer measure of sales-an increase-must span two years. For althaugh flooded' distribution channels during, 1953 gave us a sharp sales increase in contrast to tlieIndustry, looking backnoic icerealize that some time was required in early 119-D 1 to siphon offhi;hinR-.entoriesat tlieretail levell Sales of OLD GOLD regular were down sonie- what'. while sales of OLD GOLD king size were up - both, ino~ementsfolloN~ -ing an Industry trend of past years. Totall unit sales, hoscever, were ofl. Filwr brttrrrl:, Itir;lrli_-~htvd Yvru- The year was marked by progress in our con- stant endeavor to streng-theni our po~!ition in the Industry. Emphasis in 195[ was given to prepara- tions for meeting competitive conditions of! the next few years. Hi,lilight of this activitiy was ann accclicrationi ofprocluct development and revision of marketing operations. Today filter tip cigarettes account for more than 1V; ofthemarket, as compared to 3_3`=r' 2

in 1953, a: spectacular growth which f'oreshadows the entrenched prominence such brands will have in tomorrow's market. To secure our position, we made KENT available in king size as well as regu- lar, and introduced OLD GOLD filter kings. Sales of KENT, both regular and'i king size, were up 32 % over 1953. Mindful, however, of the mounting acceptance of the filter tip cigarette, Management early in 1954 re-evaluated Lorillard's position with re- gard' to the popular priced filter tip field. Thus came the decision to introduce a king size filter tip OLD GoLD„ making our principal brand thee first famous name to offer a "Family of! Ciga- rettes," OLD GOLD regular, king, size, and filter kings. OLD GOLD filter kings doing icell OLD GOLD filter kings mad'e their debut in~ the. Fall, and while we have only a three-month period - the last quarter of the year - in which to measure their acceptance, it is gratifying, to report a measure of success, presaging greater performance now that we have achieved' nat'ion- wide distribution. Many factors influenced the decision to make our entry in the popular priced filter tip field bear the name OLD GOLD. Primarily; we were swayed by the fact that sales of OLD GOLD regular - like those of all regular length brands - were dec]fin- ing as the swing to king size and filter accelerated. We also took into consideration~ the many millions of dollars spent across the past quarter century in building the brand name. Now every OLD GOLD advertising dollar will be doing triple work, pro- moting OLD GOLD regular, king size and filter kings. Many shareholders may have wondered about our fourth-quarter earnings figure after comparing it with the first nine-month figures. It~ was in this period' that we introduced OLD GOLD filter kings and gave them the strongest promotional and advertising support possible, confident' that the not inconsiderable investment will be returned in Chairman of the Board 1955 with OLD GOLD filter kings contributing to corporate profits. Cigarette smoking and lung cancer The Industry continued to be harassed~ in 1954 by repeated attempts of some researchers to asso- ciate cigarette smoking with lung cancer. How- ever, many distinguished' men of medicine and recognized authorities in the health field; stepped forward in 1954 to challenge the evidence. One eminent cancer authority is quoted in an Asso: ciated Press dispatch as calling his medfcall col- leagues who started this controversy "fanatics on the subject of non-smoking." Leonard Engel~ in an article entitled "Do We$ave to Give up Smok- ing?" in the December Harper's Magazine, to cite only one of the many articles by leading medical writers in 1954, took a penetrating look at the evidence today - and~ then~ went on to ex- plain why he is not giving, up cigarettes. Corporate statesmanship dictates the course we must follow in this matter. While confident that Lorillard products are not injurious to human health, we are actively engaged in seeking scien- tifically to: determine the truth in our own lab~ oratories and with the Industry through the Tobacco Industry Research Committee. Our new Greensboro plant Ground~ was broken in June at Greensboro, N.C:, for our new manufacturing plant, and work is progressing according to schedule. Our engi, neers develope& new methods in the year for processing and handling, tobacco, and new equip- ment has been~ designed and developed. Proto- type machines are now being put through pilbt plant operation to pre-test techniques proposed for the Greensboro operation. On the following pages will'.be: found compara- tive statistics and summaries of the principal operations of the Company by departments, fol~ lowed by the 1954 financial statements certified ' by independent public accountants. 3

FINANCIAL HIGHLIGHTS 1954 1953 WAGES & SALARIES 0.48¢- \// \ \ 9.08¢ = PREFERRED & COMMON INTEREST = DIVIDENDS 1.14¢ ~ 2.27¢ ~ INCOME AND OTHER TAXES ~ 3.73¢ HOW OUR SALES DOLLAR WAS DISTRIBUTED Net Earnings . . . $ 6,342,143. Results per Common Share: \et Earnings . . . . . . . . . . . . . . . . . . „ , . $ 1198 Dividends . . . . . . . . . . . . . . . . . . . . . 1160 Taxes and Revenue Stamps . . . . . . . . . . . . . 3.02 Book Value . .. . . . . .. . . . . .. . . . . .. . . . . . 24.25 Sales . . Current,Assets . . . . . . . . . .. . . . . . . . . . . $163,116,595 Current Liabilities . . . . . . . . . ., 54,239,799 [Torking Capital_ . . . . . . . . . . . . . . . . . . . 108;876,796 Ratio . . . . . . . . . . . . . . . . . . 3.01 Long-Term Debt . . . . . . . . . . . . . . . . $ 51,00000 Sbareholders' Investment . . . . 78,969;754 $253,933,462 $ 7,193,571 $ 228 1.60 4.86 23.86 $155,432,525 44;163,027 111,269,498. 3.52 $, 51,950,000 77,878,061 Number of S'tockholders. . . . . . . . . . . . . . . . 28,453' I 28,425 Number of Employees. . . . . . . . . . . . . . . . . 6,126 I 6,586 TOBACCO; OTHER PURCHASES & DEPRECIATION 40.20 d' $231,046,695 RETAINED: EARNINGS REVENUE STAMPS 43.10¢

TEN-YEAR COMPARISON OF'' FINAwTCIAL STATISTICS RELATING TO OP'ER_1TIO:N'S 3ear Ended Dec. 31 195V Net Sales $231,0-16,695 Earnings. 6e/ore Taxes on I ncome $12.629,143 lnrome and' Ezcess. ProfitsTaxes $ 6;287,000 tYet Earnings $6,342;143 Earnings. per Common. Share° $1.98 Diuidend.fs per Common Share $1.60 1953 253,y33,-662 18,7187,,571 11,5941,000 7,193;5 7. 11 2.28 1.60 1952 214,508.182 11,640.942 5,940,000 5,700;942 2.011 1.50 195t 188 -147 -130 : 10~943.-172 5,817,,000 5,126,472 1.78 1.50 1950 , , 167,936,931 12,632;-68 5,895,000 6,73;, 7168 2.69 1.85 1949 153.500.123 11,211.133 4,387,000. 6:824,ll33 2.73 11.75 1948 110,279,236 9;1-13,839 3,498;900 5,611.939 2.21 1.501 1947 127,919;655 8,946,625 3,430;:00 5.515,925 2.15 1.50! 1946: 124.0-11.263' 5:661.513 2,1-19300 3;512.'213 1.26' 1.00! 1945~ 126,-129;130 7,645,1101 4,110;713 3,53-1.-1:i7 1.2: 1.00~ RELaTI`C TO BALANCE SHEET Property, Planr and Equipment. At Total working Dec. 31 Inoentories. Capital Book Duluee Gross. .Vet after Shareholders' per Com- Amo.n2 Depreciation Incestmenh. mon .Sh'are" 1954 v1.1-1,189.4!10 $108,876,796, $ 27,518;065 51 8;675,223 , I 578,969; 7154 $21'.25 1953 135.72±;170 111,269.498: , 24,392;$84 1 6;218,639 1 77,8 8,061 23.86 1952 125;008,096 81,369.651 22.605,222 1 5,085.814 67,820,512 23.24 1951 101,995,6.719 81,658.130 21,342;441i 1 -4,200.8351 66,549,87~ 22.73 1950 1 84,461.181 69,907.552' 19;433;534 ~ 1 2,734, 1-85 I 60,8 7.6,008 22.73 1949 74,992.955 70,4,4,a8J 17;707279 1 1,09.1.041 58,980.453 21.89' 1948 72,538,273 69,537,669 16,726,561 1 0,509,406 56, 7, 3,869 ' 20.91 1947 73;237,247 69,893,204''. 15;291'5608 9,1153,150 55,18-1,829' 20.20 1946 77,834,711 69;476:241 11,581',787 8,456:319 53;72-1,199' 19.55 1945 8f,196;E04 71,458,027 11,806,081 5, 793,091 52,740.209 19.11 • Based on number of shares outstandingat end oieach year.. LORILLARD SALES OVER 10 YEARS I LORILLARD EARNINGSOVER 10 YEARS I LORILLARD NET WORTH OVER 10 YEARSts~.t. ;. ,~,u;.., ~.a dort.,,t , rs~ai. r„ m:n;.~. or done„t. ~roi~ ~~, mdub~a d d.u..,t

Filter Tips Highliffhtecl Sales Year OLD GOLD note -America's First FamilY of Cigarettes" 7r3th' smol.'ers, shotcing increas.ing !rndencp 1an suitchbrnnds, sales_nrceexpcnd'ed srnmplingactcnit,r, T HE 195-1 sales }'ear was marked bv the dra- maticemereence of the filter tiRas the `cigarette ofitomorrow: 'Filter brands today ac- count formare than 10 c~ of! the total market. as compared to 3.3 c in 1953, and Industry ob• sercer predict cigarette producers s,ill continue to ticitness the very growth of filter tips. Earl}- in 1954 NIanagement took steps to strengthen Lorillard's,market position in the filter field, confident the popularity of the filter tip would continue at its current accelerating rate. In April we marketed a king size KENT as a corn- panion to the regular KENT, and adoptedlthe strategy, of offeringboth~sizes at the sameprice. Sales of 6EN T. our entry in [he premium or prestige filter tip field;, showed a sales gain of ,32 :r over 1953- the vear when KENT established' am Inslustcy record for sales acceptance. OLD C'OLD /idterkings liozv Even more exciting sales,nescswas madh when Lorildard introdueedal filter tip king size OcnGutn. and set an Industry precedent by market- ia:z the firsu/amou.r name brand with a filter and creating "America's Firsti Family of Cig.arettes° - rrzulAq king siie and filter kings. 6 IF'iadoie displa>s, like this one ior KENT. rna6eshbppers, more conscious. oitheLorilland linee ol, risarettes;. t Cur br+rnds uon uiiler Cigar Disisiorz created distribution inr~end- neu:merchandisingaids In~ maehine.5 in 1954. fOr 11I'RIF.I!- 11E\DLI\'E. The new OLU GOLD filter kines made their lebut in six \ew England states the s, eek of Sep- tember 27. and acceptance by wholesalers, re- tuilers and consumers hasbeen ti,dthout~parallel in our experience. R'e had anticipated considerable reluctance by wholesalers to take onanother brand: and'.the normal resistance of retailers whose count- ers were alreadA' crowded. Ifistead of reluctance and resistance. the brand was accorded a scarm seelcom.. Following an Industry trend of laFt year, sales of OLD GOLD regular were off'~ while sales of OLD GOLD king size enjoyed al significant increase. Total unit sales,for the vear;,hotis-ever. were off as the big- swingtcas to filter tips. Thi; prompted our decision to bring out 00 LD GotD filter kings. Industry cigar sales were down sornetishat- buti our leading brand. MURIEL. showed a 3`c sales gain while our little cigars adcancc& 16`c over 1953. Sales of HEAoLINE,H-ere off slightly, andl from a profit vie.point cigars in 195+1 s.'ere a little disappointing. Throughout the Industrv, chescing tobacco sales declined slightly durinz the year. with our brand'. Beectl \uT. the leader in its class- remaining rela- tii eh° stable. Lorillard smoking tobacco sales tvere off somewhat, continuing an Industr}, trend of

~ ~ © rl• ' \,i~ . " .~~ i i ` ,_-~ - firide placement of nemly-designed counter-d'uplayaa :. forsO~.m.Go~a.frltee>-.king.t Rar.re,impetua~toauccess~ . futiinrrodueriona.o/U neur` cigareue<at; retail:~level..: ... Neur poinGOfssale:. materialagives-v-- greate+sprominence to-our.brands~r" in6supermarketr, rrndschainssroressr M Z : ~ W ~ - , ~ - -=~~ -~ t :T--tta r _ I Q. +It>E~T wEws` ; OLDG_OLD i j FILTER KINGS " WhF IQUE Ot'rFR f- ~JttAj "6 W~i OLD GocD ~ FILTER KINGS ; mt''i'er .i. °ua~r 1 _ .~ OIil Gultl OIJ Co10 I e! a~l :~~E~~6 :. ~ --- 010 GoJO + 0IJ Go1J - - OIJ Goli r ~- ~ Qt~`.) eu ` QILI (~oIJ -- - - , itt, t ` -- n19 '°14 _'-f \ -(o ." „eM,,, IUrCUUr1Mf~rpr ft OLD GOLD f im* f4l . E severallvears in a narro%cinemarl:etL but our big- gest volume brand, Lmo-N Leauee., enjoyed a small sales gain. The Industrv'e most competitive vear - ac- cented by the inHtt.:of new brands and new sizes POST-WAR GROWTH OF LORILLARD~QGARETTES .~,r. V5. ALL OTHER INDUSTRY BRANDS i9.65eiln lasv.1o 5.1LE5 19'M195. :o... ~ ... ,. ,., oa . ., .a .9 .~, >1 5: 55 and types of established brands - hurled new challenges at t}ieSales, organii•ation. Brand switching by the smokersof the country reached a new higlii The basic «ork of our Sales organization - tm put our prodhet- before the con=umen-wa, in- tensified. Dramatic new point-of-sale merchandis- ing material was created. Emphasis was giien to counter displaysfor use at alllt%pes of retail!out- lets,from the corner drus store:to stores geared to volume shoppin,n.,to maheit easy fhr the con- sumer in~ w brand' s,aitching, frame of mind to become better acquainted with a Lorillard ciaa- rette: Special attention «as Licen to themajor mass outlets- the supermarkets and chains which are now responsible for asub~tantial share of' all retail cirarettesales. To boost -alesoflour brands in vending machines oun saiesmen chanr=ed from business suitfito~co%erall, and %cenF out on the routes witHvending olierltnrs' servicc rnen. Thcvsucceerled in getting wider distribution and greater prominence for all our brands. R'ith so mam <mnkers =Niftina hrand Ib.allfcs the Salh~- or=anizntion accrla~ialcil ,ts sarupiing 1ettN -It/es. ` 7

ae N Herb Shriner, as star of Two for the Money, now has weekly audience of sonu 3S,00Q00Lk- 0 © 22 Our advertising messages.-reach' 62,000,000#F- Ameriawu weekly: via radio-andd televisianR, 'i'ruth or G,m.rquencrs, triflr:lack Hailry;i- .is lnlrsl TV hit on bchal(o/ Ot.o (:uwr ® ke, continues as our hig/tfj4a lonathars: Bla eQective spokesman on teletmsios /or Kenrr' t RQ .+ J J elt 0 lliss OLD Gbcu Filter Itiiirgsjalned, our popialhr lrlbrision"irndroaarF'.' iri lienuary.

Advertising Faced New Competitive Challenge THE RoLEofl advertising~ in 1954 assumed dra- matic new importance as the greatest st'orm ofl competition in many years swept the Industry. New ci' -arette brands; and new sizes and't'ypes of established brands - more than a dozen, in all,- crowded retail counters, no small number of them representing the entries of major tobacco manu- facturers with seemingly unlimited resources for their promotion. With all these: brands competing for the smoker's attention, the Industry witnessed thee uncorking of one ambitious advertising program after another. The extension of these pre-selling, efforts w•as without precedent in cigarette market- ing history. To meet this highly competitive challenge, we steadfastly held'to those qualities in our advertis- ing endeavors which have long been character- istic of Lorillard - directness, simplicity, and trustworthiness. These, we believe, not only dis- tinguish~ and dignify our advertising, but'~ g~ive. cont'inuityy to our messages which, according, to widely accepted! and authoritative trad'e surveys, have proved to be most effective. some 34,824,000 Americans now enjoy this com~ edy quiz show - 16,500,000 more than in 1953 - and at year's end, according to American Re- search Bureau figures, was one of' television's top ten shows. OLD GoiLn's advertising messages reached an additional 7,000,000 audience weekly with~ our perennially popular radio show Qu.een f or a Day, which also stars Jack Bailey. "Three for the .lloney~"tcith OLD GOLD Shareholders will be particularly interested in how we are getting triple value from Oin GoLn's advertising dollar since introdUction~ of OLD GOLD filter kings made our principall brand "t~merica's First Family of Cigarettes." In~ 1952 one full page magazine advertisement and one regularly scheduled television or radio~show supported only OLD GOLD regular. In 1953 the same advertising supported OLD GOLD regular and kin g size. Today, each advertising dollar on behalf of' OLD GOLD does a three-fold jpb - pre-selling OLD GOLD regular, king size and OLD GOLD filter kings. Higher dollar value in magazine advertising The pages of Life, Look and The Saturday Evening Post took our OLD GOLD adbertising messages to an audience of 58,550,000 with each adL The impact of our program for winning ac- ceptance of OLD GOLD is measured by continuing surveys to determine the number ofl magazine readers who: note OLD GOLD advertising. In 1954 OLD GoLn showed a 33 ~'o higher recognition per dollar spent than other brands. We revised' our television schedule on behalf of OLD GOLD in 1954, dropping sponsorship of Judge for Iourself and replacing,it with the very popular audience participation~ show Truth or Consequences starring Jack Bailey. Our new show enjoys a weekly audience of 19,332.000 - about 1,006,000 more than we were previously reach- ing. This is especially significant because the new show costs us about one-third less: For t'he third consecutive year Zivo for the .llonev wh2ch~ stars Herb Shriner, continued to reach an increasi'ngly larger audience. Each week KENT received added ad support We expanded our magazine schedule of adver- tising, on behalf of KENT. During the year we kept as the brand's mainstay The Saturday Evening Post and Life,, adding insertions in Holiday, Look, Newsweek and Collier's when we believed the investment would do the most for KE1T: To introduce KENT king size we diverted a por- tion of KENT'smagazine advertising~ appropria- tion to newspapers. Dominant insertions in~ more than 140: leadina dailly newspapers in 60 key areas from coast to coast provided the impetus necessary to springboard king size KENT into prominence. Our television commercial for 'MtiRtEr. Cigars. which had been~ "hitch-hiking" on our regular shows, was picked as one ofl the'`besb '5=1TVcommercials" by.fl'dvertising ~4~re-The National Newspaper of Marketing. commenting that Loril- lardlhad made the cigar a'`sellinn symbol." while subordinating selling to entertainment. 9

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LORILLARD SALESd INYENTORIES -WYRS. 2 Tobaceorleaftlik$uriamraas4hqagedeaheaaW oj ~ solesr. Basiattinneatories+mustsequalitwaei:: yrar.R'.7 maaafaGariaareyairemeatsFaf}',Leaallrr.- Leaf Costs Held Firlil in 1954 nAF TOBACCO imentoriesrepre ent a sub~tan- thal annual espendlture;and NNhile this phase of our busincss prusides occasional opportuniri- for economies tishich mighti reflect 1'urger divi- dends, itis Manaoement'e convictiouthat to pur- chaseprofiti at the cost of qualityis; indeed, short-sighted. Thus, in 195-61 tirhilb increased crop} iNlds of flue-cured tobacco brought run-oGlcarehouse leaf prices dbu°n somcs%haY~ the prices we paid for premium leaf boosted costs to about the sameasNce paidl in 1953. Y~c enjoyed some relief - buti toato significant extent - in ourpnrchalea of burlov tobacco this past %ear. Burley prdces were do%cn sliLdhth~, but enough only to reflect a token reduction in cust~. Burley,is marketedlat auctionhistoricall}- dur- ina themonths ofl December and January, and for many vears the total ofour purchascs has been spread over hro calbndar years. In, 1951. hoT~ever, because of the rate at nhich tobacco fartnersmarketed the burley crop. by cear s end rre had purchased otier'dQ; of ourburle}- needs. larger purchases than Nce haaemade in, an} pre- N iomLs year. lN hilb this makes our tobacco im-en- tories a litttbHinherthan usual at year's end. purchases in January, 1955. were considerably less than 1ce Tcould normalhmake. The O:ompany has on hantl a l,ell-roundcd stock of all tollaeco: Inventories_ hme~'er. %rhich are~eared to sales. arenut in cwos~ofcurrent rcyuinement, 12

Our New Greensboro Plant Pro~.ressed on Schedule GROr\D wXS RR(DKE\, on JUne 23 for Our nerc manufacturing plant at Gieensboro, \orth Carolina. and conversion from~ blueprint to hard steel was well along cear;end as eon- sttuctiun proeressed in accordance with the endineeriit,timetable. 1leamrbile, neia, equipment was being de- signedt ptrototypemachiites %sere builband placed in pilot plant oper~ationito establish the feasibility of productionlayouts and techniques contem- plated for the(;reensboro, operation, which will make it', one of the country's mosti modern ciga- rette plants. The inttodhotion in April of king size, KENT and iii Septembcr of OLD Go[.Dfilter kings cre- ated complex problems for the Jlanufireturing Deparhnent., Special filter tip machinery hadl to beimported and regulhn standard equipment modified for extension of KsNrto~the 85 millia meter leng4h. Introduction of O1JD GOt.D filter, kings folloticedl months ofresearchand experimental work in, collaborationscith the Research and Development Department. Ti meet the requirements for filtra- tion andl easy drasc. as well as mechanieall work- abilitv of the fiitished filter, kept manufacturing , personnellhard pressed to meet prodhction dead- lines established bp.the sales, adr-ertisingand', merchandising program. Once achieved, new de- mands wereplaeed on the limited equipment assigoedl to OtDGotD filter kings as market acceptanceesceeded expectation. By year's encl., howm er, deliveries ofl (,h.D GoLD filter kings could almost mea the demand. Gronnd'uasb'raken, (br onn netc pEtrnt at Greensboro in Jnne. 1951. Thee four photu.raph:srrt ri,;brr illus- trate hou, rapidlti, . ronstrurtion has adranced since then.

Industry's Problems Challenge RESEARCH is an investment in tomorrow. To keep abreast of, and if possible, ahead of, rapidly changing trends, and to sustain~ our posi- tion as a: leading producer of quality tobacco products, Lorillard in 1954 increased its research investment. The importance of research and:1 development work in tobacco does not always get the spotlight scientific inquiry receives in such fields as elec- tronics or medicine,, but! Lorillard is no less cog- nizant of the great need for it. We saw one dividend on our investment in research three years ago when the laboratory responded' to the call of Management for a revo- lutionary new filter tip cigarette and created KENT with its superior Micronite filter. At the outset of 1954 the laboratory was given these instructions: "Produce a filter for OLD GOLD which will be the easiest drawing ever made, will let through the true tobacco flavor of OLD GOLD and yet provide effective tar and nico- tine removal." Challenge was the assignment. Hundreds of new materials were testedy thousands of experi~ ments performed; all of the laboratory know-how and the rich resources of scientific literature were reviewed and d'igested; and, with characteristic determinationy the challenge was met. Thus the laboratory yielded another dividend by making, ; OLD GOLD "America's First Family of Cigarettes" with~OLD GoLD~filter kings. Research probes ltealtla~ aspects of srnoking Supplementing the work of outside labora- tories and the work of the Scientific Advisory Board of the Tobacco Industry Research Com- mittee, Lorillard's Research and Development Department accelerated and intensified its inti- mate st'ud'y of the constituents found in cigarettc smoke. Public interest in smoking and its possible relationship to health has prompted greater emphasis in this research directione Mechanical smoking machines are puffing continuously. The resultant smoke is fractionated by chemists in an unrelenting attempt to identify the hundreds of compounds found in smoke. The Research and! Development Department continued its studies relating to leaf tobacco, our basic raw materiall and by far the greatest cost factor in all our production. As the cost of the leaf continues to hold firm, economies relating to its purchase, curing, aging, blending and~process- ing take on added sigpificance. A fourth~ phase of Lorillard's Research~ and Development Department is that of quality con: trol. Here the scientist! becomes the sentry, main~ taining a vigil over all the material that goes int'o; on and around our finished product'~ and standing guard around the clock. The tedious task of keep- ing a trained eye on paper, cartons, adhesives, foils, cellophane,, ad infinitum is essential to as- sure the maintenance of the high quality l'ong associated wit'h the house of LorillardL In formulating corporate policy and in direct- ing the future course of all activity for maximum effectiveness, Management looks to Market Re- search for a constant flow of information~ about its operations and' their relation to Industry trends and to the financiall and! economic environ- ment. The stiffening of traditional competition for leadership in our Industry in recent years gives new emphasis to the responsibilities of Market Research. The multiple brand competition strikes at ai time when we are witnessing a chang}ng mar- keting, picture and feeling the tremendous impact off television advertising. These, and other con- tingent factors, present to Management a com- plex situation~ in which many unf'oreseeable events may arise: To meet such situations, to circumvent many potential problems, to establish solutions before problems beconie critical„and'to keep a sensitive finger on the Indust'ry's pulse, Lorillard's -,Man- agement assigns to Market'. Research the continu- ing task of gathering and interpreting data~ NC"hether it be that ofl sales forecasting, budget recommendations, advertising themes, new prod~ uct ideas, the sole: aim of eaehi research project ist'~oenable Lorillard's Management to guide the Company in the direction of continued growth. 14

® ® t, ..~ = -.-jrs - ® m Tobacco-Indastry ResearchiCommittee membera- are-shown- at early: 1954•organization-rneetinge. r 0 ® m m OF ° mm- ~F .~ -_- =~W% Draw-test machine determines ciga- retle's "draw" for quality control. ® Tensile=strength test,: of. cigarettem paper is another controlmeasnre:-.. Chentist decide.s tobacco quality by its measure of nicotine content. ® ® : 4 c- a the Laboratory Thousandsof samples of' filter tip cigarettes irere ecal/ratedand.d tested as the Laboraton~ decelope&the.neu'.Ot-u GotnIfilterkings- b1ar&et Research isassignedthecontinuing.task of gathering data to guide Company's executives.

P. Lorillard Company CONSOLIDATED eM ASSETS December 31 1954 1953 CURRENT ASSETS: Cash . .. . . . . . . . . . . . . . . . .. . . . . . . . . . $ 7,812;959 $ 7,622,449 Accounts receivable - customers (less $582,908' in 1954 and $660;?39 in 1953 for doubtful accounts and cash discounts) 10,456,765 11,629;297' Other accounts receivable . . . . . . . . . . . . . . . . . . 657.431 453,609 Pnventories (at average cost) : Leaf tobacco . . . . . . . . . . . . . . . . . . . . . . . 127,432,128 116,690;466 Manufactured stock and' revenue stamps . . . . . . . . . . . 12,341,618 14,188,749 Materials and supplies . . . . . . . . . . . . . . . . . . . 4,415,694 4,847,955 Total currea assets . . . . . . . . . . . . . . . . $1,63,116,595 $155,432,525 PROPERTY, PLANT, AND EQUIPMENT (as adjusted December 31, 1932 by authorization of stockholders, plus subsequent additions at cost, less retirements) : Land . . . . . . . . . . . . . . . . . . . . . . . . . . $ 991,874 $ 991,874 Buildings and building equipment . . . . . . . . . . . . . . 9,546,357 7,979,883 Machinery and equipment . . . . . . . . . . . . . . . . .. 16,979,834 15,421,127 $' 27,518,065 $, 24,392,884 Less accumulated depreciation . . . . . . . . . . . . . . . . 8,842,842 8,174,245 Total property, plant, and equipment - net . . . . . . $ 18,675,223 $I 16,218,639 PREPAID EXPENSES AND DEFERRED CHARGES . . . . . . . . . . . . $ 1,529,459 $ 1,387,373 UNAMORTIZED DEBENTURE DISCOUNT AND EXPENSE . . . . . . . . . $ 888,2 75 $ 952,550 BRANDS,,TRADE MARKS„AND GOODWILL . . . . . . . . . . . . . . $ 1 $ 1 TOTAL . . . . . . . . . . . . . . . . . . . $184.209,553 $173,991,088' 16

and Subsidiary Company BALANCE SIIEETS LIABILITIES December 31 1954 1953 CURRENT LIABILITIES: Notes payable (banks) . . . . . . . . . . . . . . . . ~' 40,,100;000 8 25.700;000 Account's payable . . . . . . 4,288,466 3,450,46 7 Debentures due within one year (less in 1954 $100,000 held by Company) . . . . . . . . . . . . . . . . . . 850;000 1 950,000 Accrued taxes . . . . . . . . . . . . . . . . . . . 6;$51,05 i 12,042;93-1 Accrued payrolls . . . . . . . . 616,643 1,225,7 ; 9 Accrued int'erest~. . . . . . . . . . . . . . . . . . . 467,437 47 6,438 Other accrued liabilities . . . . . . . . . . . . . . . 466,196. 317,409 Total current liabilities . . . . . . . . . . . . $ 54,239!i99 S I 44,163,027, LO\G-TERm DEBT: Twentv Year 3~`o Debentures, due October 1, 1963 ($600,000 t'o be retired annuall}v to 1962) ..... S 14,200;000. S 14,800,000 Twenty-five Year 37c Debentures, due March 1, 1916 ($350,000 tb~be retired! annuallyto 1975) . . . . . 14,300;000. 14,650,000 Twenty-five Year 33/~,c/~o' Debentures, due April 1, 19780' ($675,000 to be retired annually 1956-19 r1) 22;500;000. 22,500,000 Total long-t'erm debt . . . . . . . . . $ 51,000;000. 8 51,950,000 CAPITAL AND RETAINED EARNINGS: 7~~o Cumulative Preferred Stock (par value 3100: per share) - authorized 99;576 shares; issued 98;000 shares . . . . . . . . 9,800;000. S 9,800,000 Common Stbck (par value $''10 per share) - authorized 5,000;000 shares; issued 2,852,85=1.89 shares . . . . . . . . . . . 28,528,549 28,528,549 Additional paid-in capital (premiums less expenses on, common stock issued) . . . . . . . . . . . . . . . 8,085,5708 ' 8,085,518, Earnangsretaine& for use in the business (see page 18 for increase of $1,091,693 during 195-1!,) . . . . . . . . . . . 32,555,627 31,463,934 Total capital and retiained' earnings . . . . . . ., . . . $ 78;969; 7154 S 77,878,061 TOTAL . . . . . . . . . . . . . . . . . S'184,209,553 $1 73,991,088. As a result of restrictions,contained in the debenture indentures on the payment of dividends on common stock and the pureba,e; redemptioni or retirement of suckustock, tile amount which could! have been expended for such purposes at December 31, 1954''i was limited to approxi- mately $10,641,000. 17

P. Lorillard Company and Subsidiary Company CONSOLIDATED EAR\I\GS Iear Ended December 31 REVENUES: 1954 1953'~ Net Sales. . 5231.046.696 $263,933.462 Other(net) 150:190'. 152.148 Total Revenues . S2311.196,880 S254.083.610 COSTS AND EXPENSES: Cost of Goods Sold, Selling. Advertising. and Administrative Expenses . . . Interest! . . . . . . . . . . . . . . . . S215.936.0,151 2.630:891 $232.1< <.823 2,520.216 Federal Income Taxes . . . . . . . . . 6;122:000 9,503.000 Federal! EYcess Profitb Tax . . . . . 1,7112,000 State Iincome Taxes . . . . . . . . . . . 165.000 3 19.000 Total Costs and Expenses . S221,854.7-12 ~246,892:039 NET EARNINGS . . . . DIVIDENDS ON PREFERRED~S`rOCK per share ineach, }"ear)- E.1RNINcS APPLICABLE To CoWNfoN STOCK (S1.9i; per sharee in 195d,, $2.28' in 1I933) . . . . . . . . . . .. . . . . DIVIDENDS ON COMMON STOCK ($1.60 per share in each vear) - REMAINDER OF'EARNiNGS (retained for use in the business) . S 6.342,143 '. 686.000 ' S ' 5,656.143 4.564.450 . $ 1,091.693 Provision for depreciation aniounted to81'.136:83:r in 1934 and 81.051.-151 in 11953. S i;193.5 71 686.000 S 6,507.5 71 4.43 74! 17 $ 2,050.094 18

HASKINS & SELLS CE4T[F1ED PUBLIC ACCOUNTANTS To the Board of D'zrectors~~ and ~~ St~ockhold~ers~ of P. Loril~lard~ Company:~ 67 BROAD STREET NEW YORK 4 Februarv 14. 1905. '~Ne have examined the consolfidat'ed bal'ance sheet of P Lorillard Conipan}'and its subsidiary eomlpany-as of December 31, 195dand tkrerelatedl ;tat'euient of', consolid'ated earnings for the year then ended. Our etaniiiiation was made in~ aecordancewit'h generally accepted auditingstandards., andl accordingl}'includedl such tests of the accounting records and such other auditing pro- cedures as we considered necessarv in the circumstances.. In our opiniom theaccompany.ing consolidated balance sheet: and statement of consolidated earnings present fairh-t'~he financial position ofl the companies at December 31. 1954 andl the results of their operations for the year then ended. in conformity withaenerally accepted accounting principles applied on a basis cousistent with that of the preceding year. 11r, L ~' W, a 19

Shareholders and Mana~-einent Get To~ether at Annual lIeeting C~ Lorillard ececutiree and!shareholdersalike find the Annual lleetingyieldsrich rewards in understanding. Before last vear's meeting , as Kell as after it shareholders exchanged their vietis on the past year s developments and Management had an opportunity to get better acquainted with the meniandwomen Nvho own P.'Lorillard Company. Shareholders were also shown thelatestiLorillard documentary 6lm~in the Indianiseries. Pictures on this page show Company officers chattine, with shareholders.

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