Tobacco Documents Online

Board of D!irectors J'. Edgar Benneft John J. Darby George 0. Davies. Melvin E. Dawley Henry E. Erickson Lewis Gruber William D: Okerson Donald A. Henderson Haroldl X. Sichredl?r Will!iamA. Jordan HaroldiE: Stassen Peter G. Levathes Anna F. Woessner Robert Meyer Manuel Yellen Officers Manuel Yellen, J! Edgar Bennett George:O'. Davies Henry'E. Erickson William A. Jordan William D. Okerson B; Lowell Jacobsen Peter G. Levathes Walter M! Aikman Anna F. Woessner Edward G. Kontos John JL Darby Lewis Gruber Chairman of the Board and Chiet Executive Officer President Executive Vice President, Vice President, Leaf Vice President, Sales Vice Ptesident, Manufacturing Vice President, Personnel Vice Pcesident;,A'dvertising Vice President; Corporate Development: Secretary Treasurer Comptroller Honorary Chairman atheri Corporate Ilnformation Executive Offices 200 EasY42ndiStreet„New York, N. Y: 10017 Corporate Offices 15 Exchange Place, Jersey City, N. J. General ICounsel Perkins, Daniels Si McCormack Adverti'singiAgencies Lennen & Newell, Inc Public Relations Counsel NAanufacturi'ng Plants Research Laboratories Leaf!Storage Warehouses Stemmeriies Field and'Qivision Sales Offices Subsidiaries Grey Advertising Agency, Inc:. Foote, Cone & Belding, Albert Frank-GuentherLaw, Ihc. (Financial) Sidney J. VNain;,Inc. Greensboro„Nl C,; Louisville, Ky: Greensboro;,N. C:; Louisville, Ky: Louisville, Ky.; Lexington„K'y: Danville, Va.; Lancaster; Pa. Louisville, Ky.; Lexington, Ky.; Danville, Va. In all Principal Cities Federal Tin 8 Paper Products, Inc., Baltimore, Md. P. Lorillard Pan Americana,lno., San Juan, P: R. P'., Lorillard Ihternational S.A., Zug, Switzerland' Usen ProdUct's Company, Woburn, Mass. Golden Nugget Candy Company;,San Francisco. Cal;, Associated Companies P. Lorillardls:hr:l., Ettelbruek, Luxembourgi P. Lorillard Limited, Hong Kong, B.C.C. Auditors Haskins & SeIIs,,New York, N. Y:, T'ransferAgeni Chemical Bank NewYorkTrusfCo,,NewYork,N.Y. Registrar Firsf, National City Bank, New York, N. Y.

t ['. P. L(Ji bL I LIl.~1 1T' D CQMP' A NY Notice of Annuiial Meeting, of S'tockholders , TO! BE HELD APRIL 12,, 11966, To the Stockhol'ders of P: Lorillard Compan.y: NOTTCE is hereby given that the Annual Meeting of' the Stockholders of P. LORILLARD COMPANY, a New Jersey corporation~, will be held at the Georgian Ball'roomy Americana Hotel, 52nd Street and Seventh Avenue„ New York, N. Y., at 2:00 o'clock in the afternoon of A'pri1112, 1966, for the following: (1) The election of fift'een directors to hold office until the next Annual Meeting of' Stockholders and until their successors are elect'ed' andl qualified; (2) Taking action on a proposal to concur in, the reduction of the deferment period for certain, awards under'the Company's i'ncentive compensation plan by the amendment to the By-laws diescribed in the accompanying proxy statement; and'. (i3) The transaction of such other business as may properly come before said meeting and any adjournment or adjournments thereof. The stock transfer books will not be closed, but only stockholders of record' at the close of business on February 21, 1966; willlbe entitled to vote, notwithstanding any: transfer of any stock on the books of the Company; after such record date., ARIN'AF. WqESSNER,, Secretary:. Jersey City„ N: J. March 4,, 1966. 89301198 If unable to be present at the meeting, please sign the enc'losed proxy and return it in the accompanying envelope so that the meeting, may be properly held.

Proxy Statement I This proxy statement is furnished! ini connection with the solicitation by man- agement of ' proxies for use at the Annual Meeting of Stockholders of P. lLoriillard Company: to be held on April 12, 1966, . A proxy may be revoked by the stockholder notifying the Secretary in vvriting prior to the voting of the proxy. The Company will bear the cost of the solicitation of' proxies, including, the charges andi expenses of' brokerage firms and' others for forwarding solicitation material to beneficiali owners of stock., In addition to the use of the mails, proxies may be solicilt'ed by personal interview, by telephone or by telegraph.. The Company has 6;668,354' shares of' Common Stock and 98,000: shares of' Preferred Stock issued. Each: stockholder is entitled to one vote for each share of Common Stock and Preferred Stock registered in hi's name at the close of business on February 21, 1966. ELECTION OFmI!RECTORS Fifteen directors are to be elected,, to serve untill the next Annual Meeting and' untiill their successors are duly elected and qualified. It is, the intention of the persons namedl in the enclosed form of proxy to vote for the election of' the nominees named bel'ow: If any of the nominees namedl below iis not a candidate for 2 8930119'91

election as a director at the meeting-an event whieh the management does not anticipate-the proxies will be voted for a substitute nominee and the other nominees named bel'ow: NaeM1e~af ~~ womiaee, Name o f ' Year orgamisatwn ml'un. Prirripal'iw.mAtitbrnck. rst accupatian or occapat{on is e ected employment carriedaa director A'pprasirerate amount of.each clarr of' securities of the Contpawyy beneficially omned'directly or indirectly at of' Jaerary 25,1966 J. Edgar Bennett President P. Lorillard Company 1960' 11,247 shares of' John J. Darby Comptroller P. Lorillardi Company 1964, Common Stock(3) (4). 3,661 shares of George O. Davies Executive Vice P. Lorillardi Company 1955 Common Stock(3). 22;573 shares of Melvin E. Dawliey President President and Lord & Taylor- 1950 Common St'oc&(3) (4) 1,126 shares of Henry E. Erickson. Lewis Gruber Chief Executive Officer Vice President, Leaf Consultant d6partment stores P. LorilIardl Company P. Lorillard Company 1961 1946 Common Stock 1,712 shares of Common Stock (4) 14;392' shares ofl Common Stock(1) (3) Donald A. Henderson Vice President„ Finance Twentieth Century-Fox Film Corporation 1946 . 656 shares of Common Stock William A. Jordan Peter G. Levathes Robert Meyer William D. Okerson Vice President, Sales Vice President, Adverti'sing, President Vice P'resident, Manufacturing P. Lorillard Company P. Lorillard Company Heintz van Landewyck s:a.r.l'.-tobacco, products P. LoriIlard Company 1963 1966 1965 1964, 1,745 shares of Common Stock (J) 200 shares of Common, Stock 400 shares of Common Stock 826 shares of' Common Stock (4'), T . Harold X.,Schreder President Distributors Group, 1956' 224 shares of ~ Incorporated. Common iStock Q:7 -investment bankers and' O ~ Group Securities, Inc. -mutual fund C O 3

ame.of' nomiwee rinc~pal occrpatwnor employmentt Name of' Year orpanisationn tahen in which srck' first occrpationiuelected carned on ~~ director~ Approximate amoua0 of each class of' securities of the Compaxy.b-ficially, owned dsrectly, or indirectlyasof' lannary.2S'..1966 Harald E. Stassen Attorney Stassen,, &ephart4 1963' 1,050 shares of Sarkis & Kostos Common Stock Anna F: Woessner Secretary P. Lorillard Company 1965' 524~ shares of Manuel Yellen Chairman of' P. Il:orillard! Company 1956 Comman Stock(4) 29,011 shares of' the Boar&and i Common Stock (2)! (3)1(4) Chief Executive : Officer (1)~ Includes: 7y4,00 shares held in trusts. (2). Includes,337 shares held as custodian f'or his children and 2,950 shares held in trusts: (3), Includes shares held in escrow for release in instalments„ subject to compliance with pre- scribed' conditions, over ten and fifteen-year periods follawing, termination of employment. The numbers of shares to be released annually during,the ten-year periodland,,where appli- cable,,during the fifteen-year period, are, respectirrely,,as follows: J. Edgar Bennett„32land 174; John J. Darby, 43';, George 0. Davies, 437 and 246; Lewis Gruber,, 699; William A. Jardan, 29; 1Wlanuel,Yellen,, 437 and 246. (4) Includes shares of Common Stock purchased' on September 1, 1964, or, December 1,, 1965, under a stack purchase agreement providing for the immediate, sale and transfer of shares, with a down payment of $5 per share to be made forthwith; annual, instalments of approxi- mately ' 2% %a or 4% of principal to be paidl thereafter; the unpaidl balance,, secured by the shares as collateral, to be paid within five years;', an& simple interest' at 2VZ%'a or 4%& on the unpaid balance, with, a right of prepayment in full, but only' as to alli shares. The approximate amount of the purchase price remaining, unpaid'as of' February 1,, 1966 and', in parentheses, the largest amount, outstanding at any time during 1965 weree as follows: J. E. Bennett,,$1!9,004 ($20,000) ; G: 0. Davies, $134,000 ($;139,000) ;: H. E. Erickson, $19,000 ($206000) ; W. D., Okerson„ $19;000 ($20,000) ; A. F. Woessner, $20;000 ($20,000) ; and M. Yellen, $134,000 ($,139;000). All of' the nominees, except for Miss Woessner and Mr. Levathes, were elected as directors by the stoekholders. For' more than the last five years'. Miss Woessnerr has'served the Company as Corporate Secretary and Mr. Levathes servedI Twenti- eth Centlury-Fox Film Corporation in various capacities including Executive : Vice President and was thercafter' Executive ! Vice President of' the advertising firm~ of Clyne-Maxon Inc. 8930112011 4

REMUNERATION AND OTHER 'I'RANSACTIONS' WITPi. DIRECTOR'S A'ND' NOMINEES FOR' ThiE' FISCAL. YEAR ENDED DECEMBER 31, 1i9'65 Set forth below is the remuneration for the year 1965 for the persons there named and for directors and officers' of the Company as a group r .tpprcDate disect. ContiwpeNtrentNNe.atiant tornpensation Jar (incliidiNp'cNrreNt 1'965'' payablae in incentive annNalinstalments~ Capadties in which ~. campeNsation ! in 19!67;1'968 and ~. Na+Nraf: individnal~l remNneration~.raas~received' for1963): 1969~~if~, earned~owt J. E. BAnnett----_--__ President; andl Executive Vice Presi- dent,, Operations'---------- ------------------------ $ 105,132' $ 54;636 M. J. Cramer---------- President and Chief Executive Officer; and employee (1) ------ ------------------------ 95,064' 50,710 J. J. Darby------- ------- Comptroller---------------------------------------------- 41,912 10,000 G. 0. Daviea'_-_-------- Executive Vice P*esident, Finance_-_- 79,E117 45,747 EI. E. Erickson_-_----- Vice President, Leaf'--------- ------------------ 80,000 55,747 W. A. Jordan------------- Vice President, S'alcs,----- _---- ----.------------ 68,836 44,302 W. D. Okerson--------- Vice President, blanufacturing.-_-.-_--- 66,166 37,638 H. B. Parmele------------ Vice Presid'ent, Research(2) ------------------ 49,684 40,826 A F.,Woessner-------- Secretary ---------- -------- ------------------------------- 33;000 - M. Yellen --------- _----- Chairman of' the: Board I and Chief Ex- ecutive Of'icer; and Executive Vice President, Sales and Advertising_---- 100,648 65,409 Directors and officers as a group (35' in number, including, those named' above) "(3)I(4) 1 127,285 419;470, , , * Includes for this purpose all employees liaving'an, officer title.. (1) 1 On July 13, 1965, Mr. Cramer resigned as President and' Chief Executive Officer andd continued as an employee under an employment agreement dated September 15,, 1965{, in which he agreed that he would render until October 31, 1971, specific services in connection with tbee international' andl export business of' the Companyy, with, customary employment to be not less than,six months a year, at a salary of $50,000 per year eommencing,January 11, 1966~ (with, con- tinuation of his previous $;75;000 salary until that date), and' would thereafter render, without additional, consideration, such, consulting andI advisory services as the Company might reasonably request for a period notl exceeding five years.. (2) For the:period prior to Dr. Permele's death:oni September,27, 1965. (3) The Company has a two-year agreement terminating on November 30, 1966, with I41r. Gruber, who retired November 30, 1964, and whose retirement payments started as of I that date. Under such agreement, payments at the rate of $251000 per year' are bei'ng, made to 5 893110l"A.012

Mr. Gruber, for consulting services.. On retirement, Mr. Gruber commenced to receive contingent compensation awarded over a period l of' prior years consisting in 1965 ofl the release of' 350 of the escrowed shares ref'erred' to in note 3' on, page, 4 and $2,512' a monthl (4) In addition, the sum of' $39,300 was paid as compensation for legal services in inter- nationall matters to the law Orm, of Stassen, Kephart, Sarkis & Kostos, of which Haroldl E. Stassen is a partner. The foregoing, table reflects all current andl contingent awards for 1965 to officers and directors under the Company's incentive compensation plani The retirement benefits to which, employees,, including officers and directors, are entitled' are set forth in the table on page 7. Incentive compensation under the Company's incentive compensatiion plan for key personnel may be paidl currently andi as contingent awards. Contingent awards of incentive compensation for 11964 and subsequent years under an amend- ment to the plan referred to below are payable in three equal annual instalments, commencing with the second year following the year for which the awards are made, if' earned out by continued services and„ in the event of retirement or other approved termination of'emplo,ynment, if requirements as to non-competition and conduct not prejudicial to the Company are complied with. Contingent awards for years prior to 1964 were contingently payable following termination of employ- ment over a period! of fifteen years (ten years in the case of contingent awards for years prior to 1960). The amounts so contingently payable to the directors and officers referred to in the foregoing table during each of the fifteen years follbwing termination of'emplbylnent (and, in parentheses„where applicable, any additional amount payable during each of the ten years following, termination of employ- ment)i are as fol'lbws: d. E: Bennett, $4,682; M. J. Cramer, $8,693';, J. J. Darby,. $1,571 (ib500')', ; G. 0. Davies, $4,682; H. E. Ericksons $5,015; L. Gruber, $22,735 ($7,412) ;W. A. Jordan, $1,$35($,388')', ($388); W. D: Okerson, $250!; H.: B. Parmele, $4,682; M. SPelleny $4,682;, directors and officers as a group, $60,091' ($9,,176)1. Alll the remunerationi set forth was receivedl by, or is contingently payable to, the persons named in, their capacities as ofl'icers or employees of' the Company. The following table illlustrates the estimated normal annuall retirement allow- ances payable under the Employees' Retirement Plan of the Company upon, retire- 6 89'301a03

ment at age sixty-five to employees in the earnings classifica.tions and with the years of' service shown: Emptoyeers average annual earnings during the highest consecutive 10 5 th Total'annual benefits for ears of credited'serUice shown years of e preceding retirement 20 years y 25 years 30 years $ 25,000-__________-_- $ 6,980 $ 8,680 $10,370 35,000_____________- 9,980 12,430 14,870 50;000-------- -------- 14„480I 18,050 21,620 75,000-------- ____--------- 21,980 27,430 32,870 100;000------------- _------ __ 29,480i 36;800 44,120 125;000___--------------- _- 3'6y980 46,180, 50„000! On December 1, 1965, options to purchase the following, shares of Common Stock were granted: J. E'. Bennett, 7,500; J. J. Darby,,1,000; G. 0. Davies, 6,000; H. E. Erickson,, 3,000; W. A. Jordan, 5,000; W. D: Okerson,, 5,000; M. Yellen,. 10,000 andl officers and directors as a group, 47,600. In addition, a right to pur= chase was grantedl to and exercised by A. F. Woessner on such dat'e to purchase 500 shares under the stock purchase arrangement referred to belbw. In, the case of each option, the option priiee was $45 per share, which was not less than 100%a of the fair market value on the date of grant. The option term in each case is five years, subject to earlier termination upon death, severance of' employment or other events. Subject to specified exceptions, shares acquired on, the exercise of the option are required to be held for two years after such exercise. Each optilonee has agreed to serve the Company for a period of at least two years from the date of' grant. Under Article XV of the By-laws; the Company has a Stock Purchase, Option andl Incentive Plan, pursuant to which an offering of Common Stock was made by the Company on July 31, 1963; to, a totall of' 697, employees, including officers and directors, in each case at a purchase price of $44.75 per share which was 100 per cent of the fair market valtie on such d'at'e. Three forms of offering were used, namely, a, stock subscription arrangement, a stock purchase arrangement and a, stock option arrangement. 7 893012104'

The stock subscription arrangement calls for the issue of stock only wheni full payment for the stock has been made, requires no down payment, butt pre- scriibes authoriization of payroll deductions over a period endl'ng, in July, 1968, with interest credits to the emplbyee's account compounded semi-annually at the rate of' three per cent per annumi on amounts deduetedl from payroll. The employee has the right at any time until the stock is issued to rescind his purchase as t'oo all (but not as to part) of the shares subscribed for and' to the return of alll amounts so withheld plus interest credits: The employee has the right of prepay= ment„ but only in fulll and only on or after August 1, 1966: If' employment termi- nates prior to that date, the purchase is deemed rescinded. Under this arrange- ment, 407 emplbyees subscribedl for a total of 19,720 shares of the Company's Common Stock during 1964. The stock subscription arrangement was not made available to any oflicer, or director listed in the remuneration table, but 1185 shares were subscribed for by other officers as a group on August 3, 18' and 27, 1964. The market values of the Company's Common Stock, based upon the mean between the highest and lowest selling prices of the Company's Common Stock on the New York Stock Exchange oni such dates, were $44.06, $44.75 and $46.50, respectively.. The stock purchase arrangement provides for the immediate sale and transfer of shares, withiten per cent of the purchase price (but not less thani $5 per share) to be paid forthwith; annual instalments of approximately two and one-half per cent to be paid'thereaf'ter; the unpaid balance to be paid over a periodi endingg in July, 1968, with right of prepayment in, full but only as to all shares; and simple interest payable to the Company at two and one-half percent to be charged on the unpaidl balance of the purchase price. The employee is entitled to all di'vidends on the stock, such dividends being at a rate of approximately 5.6% based' upon a purchase price of $44.75' per share andi uponi the dividend rate currently paid on outstanding shares. The stock is heldi as collateral, subject to being returned to the Company if the purchase price is not paid before the end'i of the periodl in July, 1968, without refund of any payments made or release of shares equivalent to such payments, but with no further liability on the part of' the employee. If employment is terminated within two, years after the purchase agreement is made, the Company is entitled to repurchase all shares for the amounts paid by the employee exclusive of' interestl. Thirty-two employees agreed to purchase a total of 17,950 shares under this arrangement and such shares were alll soldl andi transferred: at a purchase price of $44.75 per share upon receipt by the Company of the 8 89:30!12015

required down payment of $5' per share. Each such stock purchase contract was executed under date of September 11, 11964, on which date the mean between the highest and lowest selling prices of the Company's Common Stock on the New York Stock Exchange was $47.31 per share. Included among the employees agreeing to purchase shares under the stock purchase arrangement were the follow- ing directors and officers referred to in the remuneration table: J. E. Bennett, 500 shares; M. J. Cramer, 1,500 shares; G. 0. Davies, 3,500i shares; H. E. Erickson, 500' shares;, W. D. Okerson, 500 shares; M. Yellen, 3,500 shares; directors and officers as a group, 11,400 shares. The stock option arrangement provides for ani option term of ten years or such shorter period, but not less than five years, as may be required to qualify the option for specifiedl tax treatment under the applicable provisions of the Internal Revenue Code, subject in any event to earlier terminationi upon death or severance of employment. Subject to specified exceptions, shares acquired' on the exercise of options are required to be held for two years after such exercise. Each optiionee must agree to serve the Company for a, periodl of at least two years from, the date of grant. LiJnder this arrangement options were granted as foll'ows :. J'. E. Bennett, 3',000'; M. J. Cramer, 4,000; J. J. Darby, 1,000; H. E. Erickson, 3,000; W. A. Jordan, 2,000; W. D. Okerson, 1,000; officers and directors as a group, 20,400 andi all employees, 35,400. The Company also has a Restricted Stock Optioni Plan which was approved at the annual meeting,of stockholders ini 1958 and which authorizedi the granting of options to purchase a maximum of 200,000 shares of Common Stock (after giving effect to the 2-for-1 stock split of 1959) to officers and key employees. In addition to the options referred to, above, options for the following, shares were granted under that plan during the last five years : J. E. Bennett, 3,000; ML J. Cramer, 7,000 ;, Ji. J. Darby, 1,000 ; H. E. Erickson, 3,000 ;W'. A. Jorda:n, 1,000; W. D.. Okerson, 2,000 and A. F. Woessner, 500 ; all officers and directors as a group,. 25;000 ; all employees, 45,300. There were no bonus, profit-sharing or other remunerationi or incentive plans, now in effect or in effect within the past five years, other than as stat'ed above. Mr. Robert Meyer, a director of the Company, is President of Heintz van. Landewyck s,a.r.L, a Luxembourg, tobacco manufacturer (hereinafter called 9 883012-06

HVL), all of the share capital of which: is owned by Mr. Meyer andl members of his family. P. Lorillard' International S.A., a wholly-owned subsidiary of the Company, and HVL each own a one-half interest in P'. Lorillard's.a.r.1., a Luxem- bourg corporation, which~ since April, 1964, has manufactured andl sold under lieense certain of the Company's brands for several of the Common Market countries. PROPOSAL T'O' CONCUR' IiN REDUCTION OF DEFERMENT PERIO'D, FOR CERTAIN INCENTIVE. COMPENSATION AWARDS Upon the recommendation of a committee of directors not eligible to par- ticipate in the Company's incentive compensation plan (Article XII of' the By- laws)'„ the Board of Directors amended the plan, so as to reduce the period of' deferment for a portion of awards made in 1965 andl subsequent years. In sub- stance, the amendment, described' more fully below, provides that, as a contingent award is earned out, it will become payable in annual instalments in succeeding years instead of being payable following termination of employment. The amendtnent involves no increase in incentive compensation. Explanation and' Lfject' of ' Change: Under the Company's incentive com- pensation plla.n;, a committee of non-participating dlirectors designates a Conr tingent Compensationi Group, with the awardlto each employee in the group being divided into a "Current Allotment" and a "Contingent All'otrnent."' The plan pro- vides that $5,000 of the total award, and not more than 75 ~o nor less than 25'% of the balance of the award, is to be a Current Allotment payable at the time of'f the award, wit'h: the remaindier, of' the totall allotment being, contingently payable: as a Contingent Allotment. Contingent Allotments must be earned out by con- tinued employment with the Company for three years after the incentive com- pensation awards are made unless termination of employment results from: death, disability or retirement (including early retirement) or under circumstances& deemed by the committee not to be contrary to the Company's int'erests. Heretofore, Contingent Allotments have been payable in, monthly instalments over a period of'years following termination of employment (ten years in the case. 10 89s1012'0'7

of awards for 1959 and prior years; fifteen years in the case of awards for 1960 and' subsequent years). This provision has been changed so as to make Contingent Alilotments payable in three annual instalments commencing with the second' year after t'he year for which the award has been made. The requirement that Con- tingent Allotments be earned outl by continued service remains unal't'ered. The change in the deferment period, which was made on the recommendation of'an independent consultant on, compensation matters, is in keeping, withi current industry trends for the reason, among others, that' amounts paid currently are today more of ani incentive to many employees than heretofore as the result of the reduction of tax rates made by the Revenue Act of 1964. The requirement of earning out, as heretofore stated;, has not been changed. Also, payments of Contingent Allotments following termination of employment continue to be conditional on the employee not engaging in competition with the Company or in conduct prejudicial to the Company. The acceleration in the pay- ment of def'erred' compensation, however, will result iin limiting this condition to the three-year earn-out period. On the other hand, under the Company's retire- ment plans each, retirement allbwance is conditioned on the employee not engaging, in any occupationi eonneeted! with, the manufacture or distribution of tobacco products which, is in competition with the Company, andl any employee who does so engage' may thus lose his ent'ire pension thereafter. Since incentive compensation received during, employment is countedI for the purpose of calculating, pensions, the acceleration in payment of deferred compen- sation will result in some increase in retirement benefits. The Company's inde- pend+ent actuary has estimated that the increase in suchi benefits will result in an increase in the Company's annual contribution to, the retirement plan from approximately $59,000 to approximately $Z3,000 per year after four years. Facts Concerning the Company's Incentive Compensation Plan: Article XII of the By-laws of the Company relating to incentive compensation, as heretofore amended, copies of which will be available at the Annual Meeting; provildes; in general, for an annual incentive compensation amount determined by application of the following, percentages to net operating income (that is, consolidated earn- ings before Federal taxes on income, incentive compensation awards and capital gains or losses)', : 3 fo of the first $50' million, 4 jo of the next $3 million, 5°Jo of the in 893012108

next $5 million and 8°fo of any balance. Incentive compensation for any year can be paid only if a cash dividendl has been paid' on t'he Company's Common Stock during such year and only if net operating income, as defined above, for such year exceeds 12% of net worth as diefined in the By-lavw. The total incentive com* pensation amount is subject to di'stribut'ion among the following classes of per- sons: 10% to the Chairman, 8e to the President, 6clo to each of not more than four Vice Presidents (the By-law o ~fl'icers) andl 587c to other officers and key personnel but not in excess of' 47o to any one person. At present, the Company has a Chairman, a President and six Vice Presidents, including an Executive Vice President. The aggregate number of oflicers„directors and employees (other than the six By-law officers referred to) who participate for any year is deter- mined, after the close of such year, by the Board of'D2rectors on recommend'ationi of the Chief Executive Officer and, accordingly, itl is not possible to state what the number thereof will be for 1966' or subsequent years. For the year 1965, twenty-three officers and directors and approximateNy 404 other employees are expected to participate in incentive compensation. The only persons who will participate in, the amendenent' to the plan described above are those in the Contingent Compensat'ion Group, which is a class of employees determined according to rules and regulations of general application by the committee appointed under the plan. T!Jnder such, rules and regulations as promulgated in, 11958 and in effect at all times thereafter, such class is composed of' employees whose salary andl incentive eompensat'ion for any calendar year aggregates $35,000, and to whom incentive compensation in excess of $5,000 is allottedl for such year. The number of such persons in 1965 was sixteen. The amounts payable as Contingent Allotlments as the result of' awards made in 1965' are: (11) to the officers and directors referredl to in the remuneration table on page 5' as follows: J. E. Bennett, $45;037; M. J. Cramer, $78,540; Ji. J'. Darby, $10,000; G:O: Davies, $45,898!;H. E. Erickson, $52;12'4I; W'. A.J'ordan, $18,750; W. D. Okerson, $10;q00';, H. B. Parmele, $52,124; M. Yellen{ $45,037; and (2) to all other ernployees,.$33',412. The amounts so payable as Contingent Allothnents as the result of awards in 1966 to the persons named in the remunera- tion table and those expeetedl to be made to officers and directors as a group in 1966' are shown in the remuneration table. The amounts so payable as Contingent Allotments as a resultl of'awards to all other employees are not known at the date hereof, since such awards hadl not then been determined by the Board of Directors. 12 89301 0z09'

The plk ni cannot be amended by the Bbard of Directors so as to, increase the incentive compensation amount for any year or so as to change the stated per- centages that may be allottedi to the By-law officers, but may otherwise be amended by the Boardl so as to alter the allocation of' benefits as between other officers and directors and employees. The Cbmpany believes that the amendment to whsch, the proposal relates does not require concurrence by stockholders, but the Company is submitting the plany as so amended, to the stockholders before action is taken under the amendL ment in view of the change from long-term to short-term deferment. In the event that the stockholders do not concur, the Board of Directors will review the plan with the viewpoint of'the stockholders in mind and will determine the course with respect thereto which it may consider, appropriate, including, but not limited to, a determination to rescind or modify the amendment to which the proposal relates or otherwise amending the plan. The affirmative vote of two-thirds in interest of each class of stockholders voting at the meeting is required for concurrence in the proposal. There will be no rights of appraisal in connection with the proposal. AUDI'Il'ORS, The Board of Directors has appointed, Messrs. Haskins & Sells, Certified Pub- lic Accountants, to be the independent auditors of the Company, and a represen- tative of that firm wi1'1~ be present at the Annual Meeting, of Stockholders. OTHER MATTERS The Annual Meeting, is called for the purposes set forth above and for the transaction of such other business as may properly come before the meeting. Atl the date of this proxy statement, the managem~ent knows of no other matters which may come before t'he meeting. However, if' any other matters properly come before the meeting, it is the intention of the persons named ini the enclosed formm of proxy to vote such proxy in accordance with their judgment. Dated March 4, 1966. 1389'3012'30

196"mzaae,Wqoom Contents 2' Letter to Sharehoiders 4 Review of'the Year 15 16 Research Subsidiary Operations 4' Sales 18 People 6 MarketAesearch 19 Financial Review 6 Advertisingi 20' Charts 8 International 21 Consolidated Earnings 10 Leaf Operations 22 Consolidated 8aiance Sheet 11 Portfolio of' Fine Products 24 Notes to Financial Statements 15 Manufacturing 25 TeniYearfinancial Comparison Annual Meeting and i Proxy The Annual Meeting of Lorillard' shareholders will be heid on Tuesday„ Aprill 12, 1966, at the Americana Hotel, Seventh Avenue and I 52nd St'reet, New York Cityr: Meeting time will be 2:qq! P:M'. Notioe of, the Meeting„ along withi proxy and proxy statement, Is being mailed to you under separate cover: Stockholders who are unable to:attend the Meeting are urged to sign, theirproxies and return them promptly so that the stock of the Company will be represented as fully as possible at the Meetingi

Fellow Shareholders: D uring the year 1965j, sales and learnings increased mod- erateiy over those of the previous year. Domestic sales Financial Highlights 1965 1964 Sales .................... 5479,046;310~ $473,832,231. Net Earnings ............ 26,716,434 25,916;220. Results per: Common Share: Net Earnings ........... 3!.96' 3'.78 Dividends ...,.......... 2.50 2.50' Taxes ................. 33.63 3104 Shareholders!' Equity~ ... 28:66 27:49 Current. Assets .......... 292,159,999 291,403,902 Current Liabilities ......... 8009;540 ' 80;469,470' Working, Capital ......... 211,260,459 210,934.432 Long-Term Debt .......... 63,029;0001 66,2356000 Shareholders' Equity ..... 1'97,970,4011 1i93;120,6011 Numberof'Sharehoiders .. 46,532 42,649 Number, of Employees .... U92 6,744 improved, with all of the gains coming from ou r filter brands and volume in the second half of the year was greater than in the first half. New salesi and' promotional techniques were formulated during the later months of the year which could only become effective in 1966, iiat the earliest. InternaRionally; sales of' our brands increased and all phases of our international activities-export, licenseee manufacture and joint.venturecompanies-expanded from, a year, ago. Our brands are now soW in, more than 150, overseas markets and are manufactured under license by 12 foreign companies on five continents; and by joint~ven- ture companies in the Far East~ and in the European Com- mon Market. These: matters are dealt with; in greater detaill later on in the Report. There is am additionai subject+ how- ever, which merits immediate comment. In July;, 1965, a new Management team was elected by your Board of Directors and this Report, therefore, marks the first; opportunity this Management has had to review the Company's operations with its shareholders. The ob- jective of better executive balance was marked by the selection of the new Board Chairman and! new Presidenti both of whom are veteran Lorillard empioyees; with one moving up through Sales and Advertising and' the other, through Operations. Together, they bring to their respec- tive responsibilities a thorough and~ balanced knowledge of'all phases of'Lorillard's activities. To further the objective of' broadened responsibilities, one of the first actions of'the new Management team was to strengthen and reaiign the Company's executive line- up: New officers were appointed in important andlgrowing, areas and in, each instance the present incumbent is a recognizedlauthority iin his field. Again, three new Directors were elected to: the Board during, the year: a European industrialist, long,versed ini tobacco, and a partner in our joint~ venture company in the European Commoni Market became a, Board member at last year's Shareholders' M'eeting;~ our long-time Corpo- rate Secretary became the first woman director of'a major cigarette firm; and our new advertising Vice President, 2 89301212

who brings to ~ the Company a comprehensive knowledge of advertising and marketing techniques. Ad'ditionailyi; our laboratories and! Research Division were reaiigned~ late In the year and this vital l function, of our Company is now compri'sed, of three separate co- ordinaRedl sections-Basic Research, Applied Researchi and', Special Projects;, each equipped to function in, both, tobacco and non-tobacco product areas.. Thus, new product development is being given, fresh impetus and our reinforcedl program of'potential growth in this area is directed to searching i out gaps in, i'ndustry product lines-and developing the right products to fill them, Our laboratories are developing a number, of' new cigarette products,, two of, which were consumer-tested' Iate in 1965. We expect~ to market at Ieast' two, others in 1966, as well as another new and'distinctiveipipe tobacco: The subject of cigarettes and health remains contro- versial, with reputable scientists disagreeing among them- selves: Many prominent; doctors have questioned the con- clusions reached by the Surgeon General's Committee in its report on Smoking and'Healft We, as responsible citi- zens, both individually andl corporately, are deeply con- cerned with this cont'roversy, We believe that far more comprehensive researteh is necessary to uncover final definitive facts. To that end, and as a: part of ouri responsi- bility, we suppoft a great deall of wi'de-ranging research, both i as part of: the Tobacco Industry and I on our ownI ali I aimed: at determiningithe precise facts and exact truth., In diversifiication, we took several measurable forwardl strides i'n 1965. Late: in the year wesntered an entin3ly, new, fieidJ-candy-with acquisition of' a regional Western man- ufacturer, Golden Nugget Candy Company: This will form the basis for an expanding, Loriliard candy operation. At our pet foods subsidiary-Usen Products Company- acquired early in 1'965„ both sales and distribution in- creasedl substantially compared~ wi'th, the previous year, construction of a second pet food plant was begun in December, and new productsi are being readied for 1966 inkroductiom At our oidest~ subsidiary-Federal Tin andi Paper Prod- ucts, Inc.-g,rowth was also sustained d'uring,the year„and sales and earnings of'this packaging subsidiary increased. While the groundwork has thus been laid for continuing growth, in our existing subsidiary, operations, our plans doo not stop there. We are constantly seekingi companies whose products and potentials show promise and whose operations can i suceessfully meld with i ours to further the benefitof.P: LorillardCompany. We consider that 1:965 was the year in which we reaiis- tically assessed the expanding inature of'our Company and prepared solid foundations for new, growft We focussed~ more sharpiy than ever on our domestic cigarette business -which remains our prime interest and major operation. At'the same time, we accepted a new, concept of our Com- pany as a diversified global: organization whose market- place embraces the woridl The outlook for the future is promising. Your Manage- ment is organized for growth andl during: the: past year, we set in motion activities. which we hope and expect will l enable our Company continually to go fonnrard at, all levels. lt is our intention to expand in our established fields of, business and movei into new ones of major promise for the future. These goals are being pursued with every tooll at our command.. We thank our, many shareholders and employees for their loyaity; cooperation and support of' our products and' policies during;1965. We gratefully acknowledge our debt to them as welll as to the i wholesalers and retailers who market our products and to the consumers who use them.. 1~~_4,__ Chairman of the Board, Chief' Executive President, 3

Review of the Year Salrrs. Cigarettes.- During 1965, Lorillard sales f'ollowed' the industry trends, namely, filter cigarettes again, increased their share of the total market, with the greatest growth being, shown by ment'hol' filters. Sales of' non-filter cigarettes, in line with the trend of' recent years, again declined. Over-aIIJ our cigarette volume increased- with filter sales, most notably those of menthol Newport, accounY ing!for the growth. Kent', despite Increasing competition from new filter entries, held its level of output andlretained its position as the country's number, two non-menthol filter. Newport, a leadingi contender in the expanding mentholi filter category, increased its sales substantially, and its performance in special market development tests throughout the country Indicates additional growth for the future. A new and completely redesigned package for Old Gold Filters was placed in national distribution shortly after mid-year. Sales responded satisfactorily, and the potentiali for this brand Iboks better every d'ay:. Our parrticipation, in the Gift Star Program for four brands- Spring, Old GoW Filters, Old Gold Straights and York-was ex- tend'ed during the year with i gratifying, results, and we now cover approximately 25 per cent of' the United States population with this plan. Late in the year„ we began market tests, on a limited scale, of'two new cigarette products. One of these tests has been concluded I and' its results are now being evaluated; the other continues. Other tobactyo products,-1Mhile industry sales ofi all non-cigar- ette products declined during 1965, many of Lorillardis brtands~ fared better than the industry as a whole. In, the little cigar field, Lorillard remainedlthe lleader and-while sales were downi from last year's peaks-we increased our share of this relatively small but, profitable business. Lorilllard's Madison, Between The Acts and filtertipped Omega were the Industry's first, second aW third place brands. Erik, our small regular cigar with, a built-in filt'er, countered' the industry's downward trend and increased its;sales i'n11985. Now firmly established throughout the country, Erik shows promise for additional'growth. Beech-Nut; ,our principaleaf' chewing i tobacco lbrand, was again the nation's best seller, and your Company continues as a major factor inthis area. Annual, sales meeting (below), held every Januaryr, bdngs to- gefher more than 20o Lorillard sales executives llrom al!, over the country to discuss work plans,, sales goals for the year. LOpILuaD t9o .,. 4.

Regional'sales managers meet'regul8rlyr (ab'ove)~with Sales Vice Presi- dent William A. Jordan (standing), to periodically reriewprogress made in the field by Lorill8rd's nation-wide sales organization. Promotional 'displayS at the point of purchase ln super- markets, drug, department and'discount'stores present' Lorillard 'b'rands'to consumer. ®

Review of the Year Sales of' Lorillard's principal' smoking: tobaccos.-India House, BriggS, Friends and Union Leader-declined in line with industry trends. Burgundy, a first-of-its-kind' wine-flavor mixture, was suc- cessfully introduced in 1965;, and its reception by the growingi number of pipe smokers who prefer an aromatic mixture has beeni eminently satisfactory. Marlket Research To ensure that our marketing efforts are on-target, Lorillard, dur- ing11965, broadened~ its wide-range programi of' market research.. The most advanced' computer techniques and scientific sampling and auditing methods were utilized in a continuing analysis of sales and advertising data, share-of-market trends and movemenU of goods at wholesale and: retail levels.. To help pinpoint those groups who constitute our present and; potential l customers, modern, psy- chological interview techniques were used. These studies assist in defining the average consumer& productliikes and: dislikes andl help us determine how they affect, consumer brand loyalty and usage. Such research, which also points out gaps in.the market, is basic to the development of new products, and we are constantlij extending the scope of' our investigations in this area. Advertising Cigarettes-Duringl 1965; prime-time network teievision, starringg big-name perf'ormers„ was again, our major advertisingi medium. With such programs as The Ed Sullivan Show„The Dick Van Dyke Show, The M'arn From U.N.C.L.E., The Dean Martin Show and~ The CBS Movies, we achieved the most efficient use of network TV in the cigarette industry;, reaching more homes at1ower cost thaniany competing eompany. A larger proportion than ever before of Lorillard advertisingg weight in 1965 was concentrated in those areas where our greatest present and potentiall business lies. Print media, especially mational magazines, were also utilized, and special! foreign-language campaigns were conducted in, selectedlmajor markets. Our principal cigarette brands;, Kent and Newport, were, of course; the main beneficiaries of Lorillardladvertisingiin all media; but advertising for Old Gold Filters was carried on both network and~ spot TV; Spring was seen orn daytime network television plUs spot TV; and, for York, four-color magazine schedules were. maintained. Counter cards,, window displays, magazine adver- fisements round out Lorillard commercial messages ?or various brands. ~ULa ~OLDI RtW_11S' OrMiI~OY~li~ElrUlfal~ _~. 893011216 LQPoILLhMO~.tB65~. 6 ~.

;fi.harkiwYa.~k" Posters on buses, trains,, highways adMertise Lorillard~ prodLcts. `Mos$ d6sinable ciigareb ~:..li~l~ertasbe In virtually every section o/dhe worldi. in dozens of /anguages, sdvertise- mentsbring Lorillard brand8 to attention of smokers. Vice President PeterG: Levathes (center)',supervises world-wide advertising lorall Lorillard products. v9301217 7

Review of tlhe'llf'ear ~ ` A major consideration i in alll our advertising In11g65 was the Oligarette Advertising Code, a voluntary Industry code, which, pre- scribes certain limitations for cigarette advertising. Alll of our mate- rial conformed to the Cod'e: Other Tobacco Products-Our leadingi little cigar brand, M'adi- soni, was advertised in major men's magazines, and Between The. Acts and Omega, received appropriate magazine and newspaper, support. In, the largest cigar, market of the country, the New York metropolitan area, subway car cards were also utilized. Erik, ourr filter-tip regular cigar, was seen, on, network and spot TV; and on bus posters and subway cards in the large New York market. Beech-Nut chewing tobacco was advertised onioutdoorbillboards; India House and Briggs pipe tobaccos used network TV com- mercials and Burgundy was given reasonable national magazine exposure. Internationali One out of every five Lorillard-brand cigarettes now produced is sold outside the United States and world demandi for American- type cigarettes continues to grow: To ensure expansion of' Loril- lard's participation in this vast market;,llate in,1965 an international conference; attended by headquarters executives and Loriiiardd representatives from all parts of the worldJ vvas held in Luxembourg, home of our jpint venture company in the European Common Market. 1~Wf,eek-long work sessions set new goals, policies and guide-lines for continued growth of Lorillard operations through-, ouf the world. Lorillard export sales have more than tripled in the past six years, and in 1965 we enlarged our share of' the world market for the tenth, consecutive year. Licensee production and revenues also increased over 1964, and our licensee program was extended to Pakistani where Old. Gold Straights-produced by Mogul Tobacco Company, Limi'ted- is the first American cigarette to be manufactured locally. Our joint venture companies increased their operations and' both were enlarged during 1965 to accommodate present requirements and' to prepare for future growth. In Hong Kong„ a new nine-story manufacturing and storage facility more than doubled the size and produetion capacity of the P. Lorillard Limited plant„ which sup- plies the burgeoning markets of Southeast Asia; , Africa and the M'iddle East, In Luxembourg, at the ultra-modern, highly automated International sales convention In Luxembourg charted'plana for Lorillard growth in increasingly lmportant world'marketa. Top Lorillard executives participated In seminars and workk sessions at' Luxemhourg„ headquarters ol'R: Lorillard s.ar.l: LURILLARO~.1965'~, 8 89301218 8

President, 8ennett : (right) I studies expansion plans tor Hong Kong joint' venture with partners Richard Yung (/sN) and Paul Y. Tso., and Nepalese smokers. Lorillard's newest licensee; Mogul Tobacco Com- pany in Paklstan, produces Old Golds lor Pakistani In Brussels, Colombia, Switzerland, Trinidad., Jtrpan and 15Qatheraverseas markets, Lorillardd brands are sol'd and promoted. ®oard, Chairman Yellen (right) visits Luxembourg lactory with Jolnt venture partner Robert', Mlsyer„ who fs also a Lorlllard Director. . 8!13012.19 9

Review'of'the Year P. Lorillard s:ar.IL plant-which makes cigarettes for the increas- ingly prosperous Commoni Market nations-additional manufac- turing equipmentwasinstalled and, i'nlanticipationlof futurelneeds,, additionallproperty purchased. With well+establishedl manufacturing bases in the European, Common Market andthe Far East, Lorillard lis actively investigating similar investments in other world trading blocs, such as EFTA, Europe's Outer Seven marketing, group. To take immediate advant- age of, reducedltariffs between, members of'this group, in i9651P. Lorillard International began shipments to Sweden of, made-in- Switzerland'I cigarettes. With the' resultingi lower retaill prices, Swedish sales of Kent and Newport rose nearly 70 per cent. Later in the year, Swiss-made Kents were introduced under a siimilar arrangement'I in the United Kingdom. Kent is the firstAmeri- can-blend cigarette to be offered' in Great Britain, the third largest cigarette market in the Free World, at prices competitive withi English Virginia-type cigarettes. AI'so during 1965, Luxembourg-made Kents were shipped'Ito bothl France and Italy to take advantage ofl the' substantially lower European'Common Market tariffs. As a result, retail Iprices dropped„ distribution broadened and sales have grown substantially in both, countries. ILeaf I Operations Leaf' processing operations in 1965 reflected higher overall costs, despite increased operating efficiency and significant'I savings at many levels. The rise was due to higher labor costs, and to the highest average prices oni record paid for 1965 crop Flue-Curedd andl Burley tobaccos, the principal domestic cigarette types,. As it has every year since it started operations, four years ago, the Danville, Virginia, leaf, processing and storage' facility again improvedl in operating efficiency, and in yield and quality ofi prod- uct. For the first time, in 1i965~,we were able'to consolidate, at this one facility, all processing of'the many millions ofi pounds of Flue- Cured tobacco we purchase annually. Two new warehouses, each capable of' storing 6,000 hogsheads of tobacco, were added duringl the year, virtually eliminating the need for rental of I costly' outside storages. Automated equi'pment' to facilitate the unloading of'tobaeco was installed'I, and significant economies were achieved vial a new, highway trailer, developedl by Lorillard in conjunction with one of our major carriers. Consolidation of the Wisconsin leaf storage operation into the continued'on page 15 k Vice President, Leat ACtivities,: Henry Erickson inspects treshly^opened hogshead of aged and processed tobacco. At highly=automated, Danvillb facility, hogsheada loaded with tobacco are sealed prior to lengthy aging process. Manufacturing Wce President'William D. Okerson in Greens- boro cutting room, with I Manufacturing Operations head, At Louisville plant; newly-installed'eQuipment,improves and speeds up production of' Lorillard chewing, tobaccos. LGRILLARq 1965 110'. 8'9V OIY2-2a

Jo~ F or more than 20Q'years, your Company has been in the vanguard of, the tobacco in.r dustry with the finest products thaf can be made. Th:at this company policy still continues is attested' to by our corporate watchword'.. "First with the Finest Cigarettes through Loril- lard Research." In this tradition; Lorillard pioneered the filter cigarette field, and today holds a leading posi- tion in this key area of'the industry writh,FCent~ Newport, Old: Gold Filters and Spring. For the sizable number of' smokers who stilll prefer their tobacco: straight; we offer Old Gold Straights and York. Although best known as a cigarette producer, Lorillard is well represented in virtually all tobacco areas. Our three little cigar brands, Madison, Between The A'cts,, and filter-tip Omega,, lead this field; and for the enlarged cigar market we manufacture Erik„ a small reg- ular cigarwithia built-in.fiilter. Burgundy, alwine- ftavor aromatic mixture, has joined our leading pipe tobaecos-Ilndia House, Briggs, Friends andl Union Leader; and Beech-Nut; the coun- try's top-selling brand of chewing tobacco, is complemented by two regional brands, Bag- pipe and: Havana; Blossom. In, addition to our fine tobacco brands; the Lorillard product line norv: extends to the pet food, confectionery, and packaging f'ields. Our Usen Products subsidiary is a leading producer of cat food with the Tabby and Three Little Kittens brands; Golden Nugget Candy Com~- pany, the newest facet of, our operations, pro- duces Big Hunk, Look, and Charleston Chew candy bars; and metal containers and varied paper packaging are products of' a long-time Lorillerd subsidiary, FederaJl Tin and Paper Ptoduct's, Inc. 11

OLD GOLD K I N G S I Z a I S PlZ'lNCc. , YORK NEWPORT FILTER CIGARETTES KINiG SIZE' CiGARETiTE'S w & KENT owr Ileading, cigarette brand~s . Mi ~ ® E ~ 1411 GOLD FILTH/ftS CICARETTES . ZHE'. \ sr ,. `.~G~RETTE~. ~ "pO/P[OSI ffNf KING SIZE Lasiu.RO,tgs5' 12 ' JAAd./j'(en"

Otfier Lorillard tobacco products MADISON ~W~0-- .Ykb/ F~n ta-r / /3xG s UMION 'WHEN A FELLER 1L E A D E 1R NEEDB A FRIENG Friends SNAiOMlNO ~TOBA000 TOBACCO It A mildad tbslefiA 6bnd I FOiL POllCN INSIDE NET 1MtT1lI OZS m 'At AROn+.w.nC ~ txTV4 FOIL POLICH INSIDE' FILTER TIPPED CUG ARS 13

14 kabby 4~r" c 'I; AT Fo~o Fb M1I,41FLoAVpF ~- ~ ~,~abbY' F _ ALU_FISH : Qg~ ,..'ta.bby *iry~ncGiNds ~ C i YpGO The qualiry cat foods made by our pet'food I subsidiary, Usen Products Company Some of the packaging products made by our Federal Timand Paper Products, Inc. subsidiary ® ~ .'.tabbY~. 3littfle kitte~s r~a ra :_1 ~,"IIUESEfISf t 001 ~aL _,evoa ~ L,: JF3 U 1"et K c-' 6f4 I 1<' F3D~,C~~~ -.rC Af1l.6AT ; . ~ l 15 ~~ A 31ittle kitte. 96M HUNK ~ 31i4t1e k ~ itte,~ ~ ~-1 ~~~la bt FL®®II- cnoc®,ate n.~.~ co,ew Glc ' Candy bars produced'by our' newest'subsidiary; W Golden Nugget Candy Company O ~ ~

lleafi'Operations continued from page 10' " more efficient Lexington,, Kentucky, facility was compUated„ and' anticipated cost savings have been achievedL Manufacturing Production etficiency was substantia9y improved in 19fi5~, but was offset by the d'uaI impact of wage increases set by new labor contracts andlby highemcost's of'materials: As a result, the level of' operating costs remained largely the same as a year ago. In recent years, majpr cost savings i'n manufacturing have been realized throughi upgrading of equipment and personnel!, automa- tion and computer-prognamming of operations. While continuingg these programs, Lorillard is also embarked: on a review of' "tradi- tionali" processes and: techniques. In some areas„thisialready: has resulted in better and more economical methods than those that have: Iong been accepted as "standardi' by the Industry: During 1965, new and more efficient! equipment was again added at our manufacturing plants in Greensboro,, N.C., and': Louisville,, Ky., resulting in improved quality of'prod'uct and/or lower manufac- turing cost We:becamethe first domestic cigarette manufacturer to fully automate loading of' finished filter "rods" in ali our filter pro- duction, and began installation of: new electronic equipment for automatic inspection and: loading of finished cigarettes as they come f'rom, the makingi machines. Unique Lorillard-designed ma- chinery for the manufacture:of' products under development wass added, and packaging and eart'oning machinery was f'urther improved. In our little cigar and chewing, tobacco operations, improvements were made and new equipment, much of it Lorillard-developed, was addedl Research With the realignment of the Research Division during 1:965, the Company's advanced programs of scientific investigation, new product d'evelopmenti and quality control'i have been, expanded in breadth and: depth. While continuing to focus mainly on, tobacco, research, these investigations now embrace subsidiary products and ioperations as well. Fundamental chemicall investigations: into the composition of' cigarette smoke, the combustion process„ and the properties of' tobacco leaf continued in 1965: Raw tobacco leaf samples were analyzed, new types of, equipment and engineering methods.were Hbge making roam ol Greensboro, North Carolina plbnt turns out billions of L'orillard cigarettes annually. Three Research, Division Heads discuss coordination of sci- entitic projects at Greensboro Laboratory. Company programs ot'research, experimentation and prod- uct'devrelapment were expanded'during year 1965. 15

IReriew of the Year evaluated, and a: new group was formed' for control and develop- ment of' processes and materials. Studies und'ertaken in, this new area are expected to: lead to quality improvements andl cost reduction. Greater emphasis was given new product development, and' all such projects are being, closely, coordinated with, Lorillard marketl research, prograrrms. New types of filters, biends and'fiavorings are being investigated and' unique smoking, concepts developed. Thesei scientific programs are cond'uctedlmainly at our central Research Laboratory at the Greensboro, North Carolina, plant, while quality control and other studies are carriedout at branch laboratories at the Louisville and Lexington„KentuckyandiDanville, Virginia facilities; and at the Federal Tin andiUsen instaiiations: In addition,, the: Company sponsors research by Independent scienti'sts and organizations both at home and abroad., Subsid'iary Operations. In 1'965; Lorillard's diversification program moved forward with thei Company's entry into: two 1 new fields outside : the tobacco industry: In the eariy part of the: year, acquisition, of ai leading catfoodipro- ducer„ now known as Usen Products Company, was completed. Late in the year, we acquired Golden Nugget Candy Company, as the first step toward formation of a: Lorillard candy division., tJsen Products Company-During its first year as a wholly-owned l Lorillard subsidiary, Usen sales increased substantiaily and distri- bution of' its products was considerably broadened. The Company's sales and marketing organization was expanded,, advertising was increased, one new product~ was int'roduced and others pU in development for 1966 introduction. To accommodate, the sharply increased demand for, Tabby and Three Littl'e Kittens cat foods, construction of a 45,D001 square foot,, expandable processing and canning planton Louisiana's Gulf Coast~ was begun. When completed this year, the new plant will increase Usen i production i capacity by more than 60, per cent and4-4or the Southern and Western markets, now serviced'by Usen"s main plant In, Wobum, Mass.-this will mean lower shipping costs and faster, deliveries. Gotddn Nugget Candy Company-Acquired in November4 1965;. Loriliard's newest operation places the Company in still another: growth industry--candy: Golden Nugget' Candy Company of' San Ffrancisco, Calif., produces Big Hunk, Look and Charleston Chew five+cenf nougat bars. Over the past severallyears, its growth pat- r~;> Ciitrcal "pouring+' process takes place at' candy subsidiary. LOFILLU.kD 1953'I6, 8930122G

Pet food subsidiary President' Robert USen inspects ready-for-shipment cat'toods. gw~~ Honorary Chairman Lewis Gruber consults with Corporate Secretary Ahna Woessner. Both are Directors ot' the Cbmpany, "Outside" Directors-Harold X. Schreder, Melvin E. Dawtey and, Donald A: Henderson - ah reguler monthly Board meeting. World-wide operations are subject when Board members (and, international experts)' Harold Stassen and Robert Meyer meet: y At packaging subsidiery„spice can tops are readied lor assembly. President Bennett (right), and Vice President, Corporate Development'Walter Af. Aikman review subsidiary progress. 17

Review of tlhe Year, '. tern has been, greater than t'hat' of t'he confectionery imdustry as a whole. Distribution of Golden MJ'uggeftbrands has been, limitedi to, 111 western states, but plans are now being formulated to expandl its operations withi nationalldistribution, advertising, new' products and new facilities.. Federal Tin and' Paper Products, Irrc. For Lorillard's oldest non- tobacco, subsidiary, Federal' Tin and Paper Products, Inc., which, produces metal andlpaper packaging i for industry, 1965 was a year of increased sales and improved'earnings:. A quality cont'rol~program inaugurated in, 1964 was expanded and' the new Packaging Design Departlnent movedl into full operation, withsuccessfull designs for both old and!new customers. New equipment~ resulted in, increased production, and/or better quafity at lowercost: People A major factor affecting some 4,000 Lorillard employees was the negotiation in 1i965 ofi eight new labor contracts with the four inter- national labor unions representing them. The new three-year con- tracts grant improvements in emplbyees' wages, benefits and pen- sion plans and, in each case, all locallissues were resolved without Ibss of production time. Under the terms of, collective bargaining agreements,, negotiated during 1965 and expiring January 1, 1868; the Company agreed, in conformity with the practice of all l other majpr tobacco companies, to install„not later than January 1,1968;. algeneral profit-sharing plan fbr employees. It is contemplated that the profit-sharing pltin, will be submitted to shareholders for their approval'. As Lorillard continues to expand at home andlabroadl the need for quafifiedj rigorously-trained personnel at alli levels increases. During 1965, numerous steps were taken tolensure that this need will be met and to build a reservoir, ofiskilled personneliforfuture management and'supervisory posts.. Forty supervisors from the Greensboro and' Danville facilities participated in a 10-week management training seminar, while selected executives pursued advanced Istudies in sales training,and management deveibpment programs at four leading universities. Iwibre than sixty emptoyees availed themselves of the Company's tuition loan and refund program, in order to further their education inifields related to theirLorillard assignments, and in June the first' graduate chemist under this program joined our research staff. The Management Evaluation Program, which by ascertaining the capabilities of employees, assures promotion,of the most qNalified,, was extended' and now embraces the Usen, subsidiary, as well as Lorillard and Federal I11im Personnel Vice President Bl Lowell Jacobsen (center) stud- ies employee work and b'enerit'programs with associates: Plant supervisors, taking advanced study couraea relating to their work assignments, "graduate" Irom seminar. Chairman NYellen (centAr) and'President Bennett (rlght) re- vtew new Kent'promotions with Vice Preaident, Jordan. LqRILLARq~1%S 18~~~. l'l':Q,30,7L228

Financiial Review Net sales in 1965 totalled I$479,046;31i01 compared' with sales of $473,832,231 for the previous year. On a quar- terly basis, sales for each period were ahead of' those. for, comparable periods in 1964, other than for the third qu3rt'er.The increase in other operating revenues largelyy reflected a two-f'old' improvement, namely, an increase in normal royalty income, arising from licensee opera« tions abroad, and an adjustment ofprioryears'royalt'ies:. Net earnings for 1'9651of $26,716,434 advanced by3% from the $25,916,220 registered a year ago. Earnings per Common, share of $3.96 for the subject year compared with $3:78' earned in 1964, in each instance after divi- dend payments of $686,000 on outstandingi Preferred shares in the respective periods. Total dividends for 1965 and 1964' amounted to $1'7,285,446 and $17,1'41,310; respectively: The financial statements for 1965 and 1964 have been, adjjusted to reflect the acquisition on February 24, 1965,, of the business of our subsidiary, Usen ProdUcts Com- pany. This transaction, accomplished bythe issuance of 156,250 Common shares of the Company, has been, ac- counted for as a pooling of interests and l the accounts of' Usen, save for minor adjustments, have been com- bined with those of Lorillard in the comparative state- ments. Also, on November 8; 1965, the business of our I'atest subsidiary, Golden Nugget Candy Company,, was acquired' and was considered, for accounting purposes, as a purchase. Inventories, at 1965 year-endj were lower by $4,362,$33' than comparable inventories a year ago. This was prin- cipally accounted'for by a decline in the dollar value of leaf inventories (1.4%) which, in turn, became the primary reason for virtually an equivalent reduction in short-term borrowings from $52,800,000 ta $48;800,000 at' the clbse of' 1965. Depreciation charges in 1i9651of'$3,591,266 were only nominally changed' from comparable charges in, 1964! Net property, plant and equipment, adjusted for dis, posals, of'$44;034;644! at year-end' closely approximated' comparable valuations at the end of the previous period. While the Usen acquisition is refl'ectedlin the 1965 and. 1964 financial statements, adjustments to reflect cor- responding plant and equipment dollars were not large in relation to its sales revenue. Executive Vice President, George O. Davies (seated„ center) reviews year-end figures with Comptroller John J. Darby (ireated, lett) and financial executives. Property expendatures in 19651 of' $3,716,490 were. about $600,000 higher than, outlays made in the prior year. For 1966, contemplated outlays for, this purposee may exceed $6,000,000, principally in connection with continuing modernization of machinery and' equipment invariousof'ourtobacco manufacturing and leaf'proces- sing plants and for our Federal Tin & Paper Products, Inc: subsidiary; and for construction of an additional plant facility for Usen. Currently, no new, capital finan- cing Is under consideration for this purpose: Export operations continued to progress in 1965; with dollar sales reflecting better than an 8% increase: Both jpint venture operations abroad continue satisfactorily, Loriilardrs equity therein being reflected in investments in associated companies.. RedUction, in long-term debt from $66,235,000 to $63,029,000 at the close of 1965' resulted from the pur- chase of' bonds in the open, market, at a cost appreciably less thani faee value; to meet the requirements ofi the respective Sinking Funds and from including in current liabilities an amount representing the Initial Sinking. Fund requirement ~for th4'/s% debentures, due 1986. At year-end', there were 102,000 shares of Commoni stock in the treasury at an average cost of' $45.28. Ac- quired largely in the latter part of, the year6 they weree purchased rto, be avai I'able for possible future acquisitions. Working capital, at 1965 year-end, increased slightly to $21i1,26o,459 fromiayearago and continued to reflect a strong financial position. Current assets of,$292,159,999 amply cover current liabilities of, $80;899;540. Share- holders' equity, in, turn„ was enhanced by $4,849,800 to $197,970,4'01,, despite treasury stock purchases of $4,61'9',11' 1l 893'al~ 29 1i9'.

IHlow! our, salles dolWr was distributed flet'Salas Excise'Taxes 39.81% 39.72% Tobacco, Other Purchases and' Depreciation = 7.59% Wages and Salaries 11!0D% Interest W 6.30% Incame and Other Taxes /,3.61% Preferred, and Common Dividends I t.97% Retained Earnings N6t Saiea, Millions of Oollars 600 IIIIIII IIIIIII Earninya tiefbre Income Tazea N Taxes on In  Dividends  Retained Earnings '59 '60 `6;1 '62 '63 '64 Prmpertyl;,Pliant and Equipment '56 '57 '58 '59 '60 Iiii '62 '61 '63 , '64 '65 Invemtories and SMort'~ Term Borrowings Milliaia of' Dollxs 300  1 Tota6Inventories a', Lbaf Inventories . Sha!t!Term Bonowirqs Permanent6apital Employed  LongTermOe6'rt.  I Shareholders' Equity LaNQ.ldiFO~.l8B9 20

e9 and Subsidiary Companies idated Earnings and Retained'' Earnings: Kearr Ended December 31 Revenues: Net sales ................................................... Other ...................................................... Costs and' Expensesr Cost of'good's soid, ............................................ Selling, advertisingl and administrative expenses ................ (Federaiincome taxes .......................................... State andforeignincometexes ................................ Totali .......... Net Earnings ................................................... Dividends on PneferrediStock ($7 per share in each year) ........... . Earnings Applicable to Common Stock ($&96 per share in 1965; $3.78 8 per share ini 1964) ............................................ Retained Earni'ngs,deginning of'year............................... Deduct: Dividends on common stock ($2:50 per share in each year) ....... Portion of' excess of cost over par vafue of' common, treasury stockk issued in pooling of interests .................................. Total ........................................ Retained' Earnings, end of year ..................... See Notes to Financie/ Stetements on page 24: 1965 1964 $479;046,310. $473',832,231 2;670;936' 1,512.819, 481,717,246' 475,345,0501 344,003j939 340,972,023 80,168;425' 77,559,417 4';794,448' 4,689,318 23,334',p00. 24,323,317 2;700,000. 1,884,755 455;00iJJ812' 449,428,830' 26;7M434 25,916,220 1 686;000. 686,0001 26,030,434 25,230,220 120,851,242 114,590,793 1,46,881,676 139,821,013 16,599,446 16,455,310 2,514,461 16,599,446 1i84969',771' $130,282,230 $120,851 ~242 21'

_OF ~r.r~~rrY, O and Subsidiary Companies Consolidated Balance Shieet Assets Current Assets: 1965 December 31 1964 $' 12;406i894 $ 10.399;11:6 Accounts receivable-customers (less $934,222 in 1965 and $847,229 in 1964 for doubtful' accounts andcash discounts) ...... 26;551i,13a. 23,844,580' Other accounts receivable ..................................... 1,132;966'. 728,864 Inventories (at average cost): , 222,929,499 226,157,475 Manufactured stock ........................................ 23,143,971 23,757,628 Materials and supplies ..................................... 5,995;539 6,516,239 Total current assets ............................ 292,159;999 291,403,902 Investments inAssociated Companies (at! cost plus equity in earnings) 3,779,870 3,498;263. Property, Plant, and Equipment (at cost): 880,652 855;130. Buildings and buildingiequipmenf ............................. 21,175,398 20;781,306 Machinery and equipment ..................................... 47,262,380 45,190;884 Total ........................................ 69,318,430 66;827,320 Less accumulated depreciation ............................... 25,283,786 22,623,772 Property, plant, andi eqpipment-net ............. 44,034,644 44X3;54'8 Other Assets: Prepaid expenses and deferred charges ......................... 2;072;306'. 2,547,961 Unamortized'debenture discount and expense .................. 1i,073;598'. 1,173,957 Mortgage note receivable ....................................... 230',000'. Trade-marks and goodWiil .................................... 2,157,422 1 Total other assets.............................. 5;903;326'. 3,951,919 $345;877,839. $343,057,632 SeeJWlotes to Financial'Statements on page 24: LDIEILLAMU.1965 22 .

Liabilities Current Liabilities: Notes payable, .............. Accounts payable ............................................ 4'/e% sinking fund l debentures, due in 19661 ..................... Accrued taxes ............................................... Accrued payrolls ............................................... Accrued interest~ ............................................ Other accruedlliabilities. ....................,................... Total current liabilities ......................... LongTTerrn iDebt: Twenty-five year 3% debentures; due 1'976' ($350,000 to be retired annually to: 1975)i (less 1965; $445,000 heid by Company) ........ Twenty-five year 3'/.% debentures, due 1978'($675;000 to: be retired annually to 1977) (less 1965, $1,476;000 heidiby: Company)I ...... 4'/s%' sinking fund debentures; due 1986 ($1i,600;000 to be retired annually 1967 to 1985) ...................................... Totalilong-term debt ........................... Reserves for Empl'oyee Benefits .................................. Shareholiders" Equity: 7% cumufative! preferred stock (par vafue $100 per share)~- authorized 99,576'shares;issued 98,000 shares ................. Common stock (par value $5 per share)-authorized' %000',000'0 shares; issued 11965-6;668',354 shares; ~1964-6,667,854 shares .. Ad'ditional paid+in capital ........................................ Earnings retained for use~inithe business ........................ Less 102,000 shares of'common stock in treasury (at cost) ........ Total shareholders' equity ........................ Totall ........................................ See Notes to Financial Stgfements on page 24: Deaember 31: 1965 $ 48,800X0' 5,638,467 1 ~600,000 19,577,986 2',097,492' 405,364 2',780,231 I!9641 . $ 52,8W;000 5;630,711 17,941,618 1 ~835,641 415,466 1;846,034' 80,899,540 10,355,000 14',274',000: 38,400;000 ~ 63;029;000. 3,978,898 9;800,000 33;341',770 29,165,512 130,282,230 (4;619,11i1), 197,970,401 $345,877;839 80,469,470, 10;747;000 15,488;000. 40,000,000 66,235,000 3,232,561 9,800:000I 33,339;270! 29,130,089 120;851,242' 195;120;I601 $343,057;632' 23'.

Source: and'Applicationof' Financial Resources Source and Subsidiary Companiess grants). At'I December 31,, 1965~ options exercisable at anyy time until expiration in the years 1969-73'were outstanding to purchase 133',500 shares at prices ranging from $39.50 to $45.00 per share„18,565 shares were reserved for sale, at $44.751 per share„ under stock subscription arrange- ments expiring in 1968, and 213,612 additional shareswere available for purposes of! the Plans: As to the outstanding options and stock subscriptions, the prices af which 108,665 shares may be purchased are not less than 100%, andlthe prices at which 43,400 shares may be; purchased are not less than 95%, respectiveiy, of' the fair market vaiue lof the shares on the dates the options or rights were granted. (3) Additional paid-in capital has been creditbd with prer miums on common stock: soid'I to employees, amounting to $35,423 in 1965 and $16,570 in 1964, and charged with $999,280, as of' December 31, 1964„as explained In Note 1. (4), Covenants limiting the payment' of' dividends onl com- mon stock and the purchase, redemption, or retirement of'suchi stock are containediin the debenture indentures: Under the most', restrictive of these covenants the~amount. which couid' have been I expended fon the foregoing purv poses at December 31'i 1965 wasJimitedit'o approximately $66,000,000. (S)i Provisionl for depreciation amounted to $3,591,266 inl 1965 and' $3,543,522' in 1964. Year Ended December31; 1965 Operations: Net earnings .................... $26,716,434 Depreciation and other non-cash I charges against current earnings 4,437,962 Total ..................... ................... 31~154,396 Sale of' common stock to employees . 37,923 $31,192,319 Appiicatimnl Payment of' dividends .............. $17,285,446 Property additions (less disposals $294':128): ., . . . . . . . . . . . . . - . -- .. . . .. 3,422,362 Purchase of! trade-marks and goodwill 21,157,421 Reduction in long-term debt ........ 3=000 Purchase of common stock (in th®asury) 4',619,111 Ihcrease in working capital ......... 326;027' Other ., .....................,.,...,.,..., 175,3521 $31,192,3191 Notes to Fiinancial Statements (1')i On February 24; 1965,1 a whoiiy-ownedl subsidiary of' the Company acquired: the business and substantially all of the assets of Usen Canning i Co. (Usen) and I assumed substantially all of' Usenrs liabilities. Theltransaction has been accounted for as alpooiing of', interests and, accord- ingly, in the accompanying financial statements the ac- counts of Usen (adjusted for certain assets retained by Usen), have been combined with those of'' the Company. Also, retroactive: effect to December 31, 1964 has been given to the issuance to Usen of 1561250 shares of com- mon stock of' the Company;, consisting of Z4;056' unissued shares and 82;194 treasury'shares, inciuding.15,100 shares purchased i,u 19651for $656,11'4;,and to charges to paid-inI capital and retained earnings in l the amounts of: $999;2800 and $2,514,461', respectiveiy, being the:excess of the par value of the unissuedlshares plus the cost'of theAreasury shares over the stated value of the capital stock: of Usem(2)I At December 31, 1964, under the Restricted Stock Op- tion Plan for Employees and the I Stock Purchase„ Option and Incentive Plan, options were outst'anding~to purchasel 88;3001 shares of common stock, 19,550 shares were re- served for sale under stock subscription arrangements, and 260,827 additional shares were available for, purposes of' the Plans. During 1965 options to purchase 56,200 shares at $45:00 per share were granted, anoptionltD pur- chase 500 shares at $45:00' per share was exercisedJ and options or subscriptions to purchase 1i1,4'851shares termi+ nated (2,500 of the shares: are not available for future Accountants' Qpinioni HASKINS & SELLS CERTIFIED. PUBLIC.ACCOUNTANTS 2'BROADYY'AY, NEW YORK 10004 To the Board of Directors and Shareholders oPP. Lorillard Company: vNe Ihave examined the consolidated balance sheetof' P: Lorii-, tard Company and its subsidiary companies as of'December31, 1965' and I the related statements of consoiidated earnings and retained eamings and source and appiioation of' financial re- sources for the year then ended. Our examination was madeJn accordance with generally accepted I auditing standards, and accordingly inciuded such tests oflthe accounting records and suchlother auditingl procedures as we considered necessary in the circumstances. In I our opinion, the accompanying statements present fairly the financial position of, the companies at December 31, 1965 and the results of their operations and the source and apptica- tion of their, financial resources for the year: then ended, In I conformity with generally accepted accounting principles ap- plied on a basis consistent with that of'the preceding year. January, 31', ,1'966' LORILLARID.196524

nwZw and Subsidiary Companies TeniYear Comparison ot' Financial Statistics Relating to, Operations NparEndodDec..31Not9a~les Earnings tiefore. Taxes on Income Income and~ Excess~. Profits~.Taxes~. NehEarnings Earnings per Common Share, DiwidAndsper Common Share . 1965 $479,046,310 . .----------~-- $52,750,434 --.- __ - $26i034,000. $26i71i61434 $3.96 $2.50 1964 473,832,231 52,124,292 26i208;072 25,91fi;220 3.78 2:50~ 1963 5211184,181 60;988,937' 32,710,963 28;277,974 4.10 2:47V2 1962 519,841,184 56,033,107 29,174;040 26,859,067 3:89 2:40' 1961 495,519,755 59;978,390 31,414,075 28;564;315 4.14 2:2& 1960 489,436,030 59;1'51',006' 31',717,821 27,433,185 3.98 2:20. 1959 490,873,749 60;431',1'57 32,166,000 28,265,157 4.20 2:20. 1958 124;409 1 479 57,915,083 30,878,000 27,037,083 4.01 2.00 , -- - - - - --- __- - _ 1957 293;41'5;43& 25,145,412 ' 13,661,000 11~484,412 1.89, .97 1956 203;280;417' 8,618,758 4',099,000 4,519,758 .67' .60 Relatingto Balance Sheet -Property; Plant and Epuipment- ---Shareholders'Epurty.- ArDec.3L Total.lnmentories Working Capital Gross Amount' NetalterDepreciation Amount Per Common Share 1965 $252,069,009 $21i1i,260,45T $69;318,430' $44,p34;6441 $197;970',401 $28.66'. 1964 342 256,431 210;934',432' 66,827,320 44;203;548 193,120,601 27:49 , - - - ---- --- --- -- -- --- 1963 253,408,162 207;369;674' 63,998,048 44I4631260 186,816,458 26:92' 1962 252,976,513 1'96,389,225'. 63,537,559 46,124,843 175,817,124 25.25 1961 265,874,251 198,405,520 59,906,262 44,532,885 165,513;9W 23.69' 1960 236,427,503 155,195,423 51',666,882 38,7711,079 151,94'5;21T 21.65 1959 218,613,345 150,577,898 45,690,733 34,621,223 139;690;868I 1919 1958 197,069,209 143,916,484 4'1,037,558 31,475,731 126;552;61'7' 17.78 GD' 1957 161,449,360 109',803,777' 37,495,633 28,777,280 86;674,232' 13.47 1956' 136,652,281 110,245,323 35;079;59T 26;399;561 81,438,885 12.55 47 ~. ~ ~11

ANNUAIL R E PO RT 1965 6~ 5

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