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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