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unions representing them have- been good and in our opinion are steadily improving. With the return of more settled conditions we anticipate that many of the difficulties we have encountered in the past year will be eliminated or reduced and that our labor relations will be correspondingly improved. Since the year 1940, through the year 1946, total wages and salaries paid to all the employees of the Company and its subsidiaries have increased by about forty per cent. To our employees we extend our sincere thanks for the loyal services rendered under the trying conditions of 1946. I deeply regret to announce that CHANGES ON THE three vacancies on the Board of BOARD OF DIRECTORS Directors occurred during the year 1946 due to the deaths of George H. Hummel, Chairman of the Board, J. Strother Freeman, Vice President, and James T. Keel, Manager, Leaf Department. These vacancies have been filled by the election to the Board of Directors of Donald A. Henderson, Treas- urer and Director of Twentieth Century-Fox Film Corporation, New York City, Lewis Gruber and Claude W. Berkley. Mr. Gruber and Mr. Berkley have been in the employ of the Company for many years. Mr. Gruber is now Sales Manager and Mr. Berkley is now Director of Sales Personnel. Recent years have seen a steady growth OUTLOOK FOR 1947 in the consumption of tobacco prod- ucts, especially cigarettes and cigars. This Company's products have [io1 89300735

consistently enjoyed wide consumer acceptance and their sales have increased as the market grew. We believe that our facilities are ade- quate to place us in a favorable position to respond to future trade trends and that our promotion program is successfully attracting new consumers. It is also hoped that conditions will permit the return of several products which were discontinued on account of wartime controls. On the basis of the earnings during the last three months of 1946 the outlook for better earnings in 1947 appears bright. Respectfully submitted, 1 President. ~ GO CD CJ O ~* O ~ [11] W ~

Jersey City, N. J., February 7, 1947 To the Stockholders of P. Lorillard Company: Statements showing the results of the operations of your Company and its subsidiaries for 1946, the financial posi- tion at December 31, 1946, and comparative figures for the preceding year, are set forth on the following pages. Respectfully submitted. W. J. HALLEY, Treasurer

I P. LORILLARD COMPANY and SUBSIDIARY COMPANIES CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1946 With Comparative Figures f or Preceding Year 1946 1945 Gross Sales, less Discounts, Returns and Allowances.. $124,047,263.28 $126,429,130.46 Cost of Goods Sold, Selling, General and Administrative Expenses ......................... $116,914,832.49 $117,417,951.31 Provision for Depreciation .......................... 362,973.58 417,718:62 $117,277,806.07 $117,835,669.93 Operating Income .................................. $ 6,769,457.21 $ 8,593,460.53 Renegotiation refund, net ........................... 48,450.00 - Other Income ...................................... 40,169.77 89,715.72 $ 6,858,076.98 $ 8,683,176.25 Income Deductions : Interest on funded debt .......................... $ 888,172.50 $ 897,772.50 Amortization of debt premium and expense....... 13,775.94 14,004.58 Other interest ................................... 294,615.46 126,228.81 $ 1,196,563.90 $ 1,038,005.89 Balance before Provision for Taxes on Income....... $ 5,661,513.08 $ 7,645,170.36 Provision for Taxes on Income: Federal income taxes ............................ $ 2,076,000.00 $ 1,997,000.00 Federal excess profits tax ........................ - 2,010,000.00 State income taxes .............................. 73,300.00 103,712.93 $ 2,149,300.00 $ 4,110,712.93 Net Income ........................................ $ 3,512,213.08 $ 3,534,457.43 CONSOLIDATED STATEMENT OF EARNED SURPLUS FOR THE YEAR ENDED DECEMBER 31, 1946 With Comparative Figures f or Preceding Year 1946 1945 Balance at beginning of year ....................... Add : $ 19,236,360.17 $ 18,634,495.78 Net Income per Consolidated Statement of Income.... Profit on sales of property and equipment (based on 3,512,213.08 3,534.457.43 book values as adjusted December 31, 1932) ........ 404,971.49 - $ 23,153,544.74 $ 22,168,953.21 Deduct : Dividends on Preferred Stock ....................... $ 686,000.00 $ 686,000.00 ~ Dividends on Common Stock ........................ 2,246,593.96 2,246,593.04 C~ ~ $ 2,932,593.96 $ 2,932,593.04 J O ............................. y Balance at end of ear $ 20 220 950 78 ,,. 19236360 17 $ ,,. ~ ~ [13] C..~ ~

P. LORILLARD COMPANY ASSETS CURRENT ASSETS Cash in banks and on hand ....................... Accounts receivable-trade (less reserves 1946 $544,124.86; 1945 $504,585.20) ................... Other accounts receivable ......................... Inventories, at cost: Leaf tobacco ................................... Manufactured stock ............................. Revenue stamps ................................ Materials and supplies .......................... Special deposits-contra .......................... Total current assets ....................... NOTES RECEIVABLE-due serially to 1949......... PROPERTY, PLANT AND EQUIPMENT, as ad- justed December 31, 1932 by authorization of stock- holders, plus subsequent additions at cost, less retire- ments ........................................... Less: Reserves for depreciation .................... BRANDS, TRADE MARKS AND GOODWILL.... = DEFERRED CHARGES ~ Prepaid insurance, advertising and taxes ........... Debt premium and expense ........................ Miscellaneous ................................... CONSOLIDATED BALANCE With Comparativr 1946 1945 $ 7,752,895.88 $ 5,248,527.18 5,406,128.08 4,969,771.71 368,089.13 697,649.28 68,164,223.32 75,964,249.76 5,893,961.58 7,628,195.01 1,029.972.61 480,557.48 2,746,553.35 3,123,402.24 212,877.36 254,525.16 $ 91,574,701.31 $ 98,366,877.82 $ 187,500.00 $ 250,000.00 $ 14,581,737.60 $ 11,806,081.23 6,125,417.79 6,012,989.53 $ 8,456,319.81 $ 5,793,091.70 $ 1.00 $ 1.00 $ 257,751.96 $ 246,873.10 87,371.78 95,547.72 175,063.86 132,118.08 $ 520,187.60 $ 474,538.90 $100,738,709.72 $104,884,509.42 [14] g9300139

and SUBSIDIARY COMPANIES SHEET - DECEMBER 31, 1946 Figures f or 1945 LIABILITIES CURRENT LIABILITIES Notes payable-bank loans ........................ Accounts payable ................................. Tax and war bond deductions from payrolls........ Twenty Year 3% Debentures (due within one year) Accruals : Payrolls ...................................... Taxes ........................................ Interest ....................................... Advertising . ....... . . . . . . . . . . . . . . . . . . . . . . ..... Miscellaneous ................................. Dividends, matured funded debt and interest-funds on deposit, contra .............................. Total current liabilities ................... FUNDED DEBT 5% Gold Bonds, maturing August 1, 1951 .......... Twenty Year 3% Debentures, due October 1, 1963 (the indenture requires the annual retirement of $320,000 to 1948 and $600,000 from 1949 to 1962) CAPITAL STOCK AND SURPLUS Capital Stock : 7% Cumulative Preferred Stock par value $100 per share: Authorized 99,576 shares ; issued 98,000 shares Common Stock par value $10 per share: Authorized 5,000,000 shares Issued 2,246,681.89 shares .................. Paid-in Surplus .................................. Earned Surplus, as per statement ($12,541,469.88 not available for cash dividends on common stock under provisions of Twenty Year 3% Debenture indenture ) .................................... 1946 1945 $ 16,000,000.00 $ 18,500,000.00 1,698,236.24 2,016,527.25 120,690.10 158,775.45 320,000.00 320,000.00 192,825.16 114,694.92 2,989,060.18 4,937,829.06 271,871.87 274,271.87 100,788.92 116,612.72 192,110.20 215,613.91 212,877.36 254,525.16 $ 22,098,460.03 $ 26,908,850.34 $ 6,195,450.00 $ 6,195,450.00 18,720,000.00 19,040,000.00 $ 24,915,450.00 $ 25,235,450.00 $ 9,800,000.00 $ 9,800,000.00 22,466,818.90 22,466,818.90 1,237,030.01 1,237,030.01 20,220,950.78 19,236,360.17 $ 53,724,799.69 $ 52,740,209.08 $100,738,709.72 $104,884,509.42 NOTE: Certain portal-to-portal wage suits have been filed against the companies, but the liability there- under, if any, cannot no c be determined. [15]

Report of INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders o f P. Lorillard Company: We have examined the consolidated balance sheet of P. Lorillard Company and its subsidiary companies as of December 31, 1946, and the consolidated statements of income and earned surplus for the year then ended, have reviewed the systems of internal control and the accounting procedures of the companies and, without making a detailed audit of the transactions, have examined or tested accounting records of the companies and other supporting evidence, by methods and to the extent we deemed appropriate. Our examination was made in accordance with generally accepted auditing standards applicable in the circumstances and included all procedures which we considered necessary. In our opinion, the accompanying consolidated balance sheet and related consolidated statements of income and earned surplus present fairly the position of P. Lorillard Company and its sub- sidiary companies at December 31, 1946, and the results of their operations for the year, in conformity with generally accepted accounting principles applied on a basis consistent with that of the preceding year. DELOITTE, PLENDER, GRIFFITHS & CO. 111 Broadway, New York, N. Y. February 3, 1947.

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