Tobacco Documents Online

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 ~.