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) ag amounts in the con- d j ustments companies Pro Forma Combined $389,920 215,308 191,719 30,710 $827,657 $107,677 165,129 415,025 14,612 1,029 14,306 109,879 MARKET PRICES The following table sets forth the range of approximate reported closing sale prices on the New York Stock Exchange for shares of Common Stock of Loew's (adjusted for 2/ for 1 stock split in January, 1968 and for 3 for 1 stock split in November, 1968) : High Low 1963 ......................... 3 3/is 2 ii1s 1964 ......................... 3 % 1 % 1965 ......................... 4 % 3 %s 1966 ......................... 5 %6 2 34 1967-First Quarter ............ 6 %6 3 / Second Quarter .......... 9 51/is Third Quarter ........... 13 % 9 %ls Fourth Quarter .......... 19 5/6 1113/i6 1968-First Quarter ............ 21 Yi 6 14 Second Quarter .......... 3311i6 20 %ls Third Quarter .......... 40i1/ts 25 %s Fourth Quarter .......... 49 % 39 (to November 19) General BUSINESS OF LOEW'S Loew's was organized in 1954 under the laws of the State of New York. Its executive offices art located in New York City. Loew's is principally a holding company, owning directly or indirectly the capital stock of a number of operating subsidiaries. Loew's operates 14 hotels in the United States and the Caribbean and is engaged in the business of exhibiting motion pictures in the United States and Canada through owning or operating 110 motion picture theatres and the related real estate and other facilities connected with such theatres in the United States and Canada, owns a combination office-luxury apartment building in New York City and is con- structing another such building in New York City. Loew's has also derived income from its portfolio of marketable securities. Through Lorillard, Loew's has recently become engaged in the production and sale of cigarettes and other tobacco products, candy and pet food. Year Ended August 31 1966 1967 1968 Hotel Operations ............... $3,546,000 $5,449,000 $7,362,000 Theatre Operations ............. 1,816,000 2,294,000 3,335,000 Securities Transactions .......... - -7,114,000 7,364,000(1) ~ 457 000 Dividend Income 898 000 1 962 000 ~ , ............... , , , a- (1) Exclusive of $15,165,000 gain on sale of Commercial Credit Company and Control Data Corporation common tJ ~ stock. tst 9 ca Sources of Income During the periods indicated (all of which are prior to Loew's acquisition of Lorillard) Loew's net income was derived from the sources set forth in the following table. No interest expenses or general and administrative expenses have been allocated to securities transactions or dividend income, and accordingly income from these sources may be overstated to this extent and income from other sources correspondingly understated. In addition, no interest has been charged on intercompany transactions. Hotel operations and theatre operations include allocations of rent and other income.

Because of the decline in market prices of securities during the latter part ot the hscal year ended August 31, 1966, Loew's established a reserve for unrealized losses of $1,990,000. The unused portion of the reserve, amounting to $1,862,000, which was no longer required, was restored to income in the fiscal year ended August 31, 1967. If the excess of cost over market values of the Company's portfolio at August 31, 1966 had not required the establishment of this reserve, income from securities transactions for the year then ended, as shown in the foregoing table, would have amounted to $1,550,000 (i.e., $1,990,000 less taxes of $440,000). The restoration of the unused portion of the reserve in the fiscal year ended August 31, 1967, increased income from securities transactions in the year then ended by $1,422,000 ($1,862,000 less taxes of $440,000) over the amounts which would otherwise have been reported for that period. Income from securities transactions for the year ended August 31, 1968, was not affected. See "Other Interests" for information regarding Loew's transactions in stock of Commercial Credit Company (now Control Data Corporation). Hotel Activities and Properties Loew's now operates 14 hotels of which five are in New York City, one is in Chicago and one is in San Francisco, four are resort hotels (one in San Juan, Puerto Rico, one in Bal Harbour, Florida, one in Paradise Island, Nassau, Bahamas and one in Atlantic City, New Jersey) and three are motor hotels (in New York City). A 500 room hotel to be operated by Loew's under a lease agreement is under construction in London, England and is expected to open during 1970. A new hotel in Washington, D. C., on land owned by Loew's is in the planning stage, but no date for commercement of construction can presently be set. Loew's regularly has under review opportunities for expansion of its hotel business. The following table sets forth information and operational data concerning hotels operated by Loew's during at least 11 months of the years ended on the dates indicated : Year Ended August 31, Number of Hotels Number of Rooms Percentage of Occupancy Average Rate per Occupied Room 1963 .................... 3 2,946 75.18 $18.63 1964 .................... 7 4,979 77.31 20.23 1965 .................... 8 5,623 82.32 20.55 1966 .................... 11 7,439 81.44 20.31 1967 .................... 11 7,449 83.63 21.55 1968 .................... 12 7,887 83.36 23.38 No one hotel property contributed as much as 10oJo to the net earnings of Loew's in the fiscal year ended August 31, 1968, although on an interim basis one or more resort hotels may make a greater contribution to earnings due to seasonal factors. The principal sources of revenue of the hotels are rentals of rooms (54.6% in fiscal 1968) and receipts from the sale of food and beverages (34.2%). Additional revenues are received from supplemental services customarily offered in hotels such as parking, telephone and valet services, from a gaming casino in the hotel in Puerto Rico and from rentals of stores and shops comprising parts of the hotels. In addition to the usual dining room facilities, the hotels contain specialty restaurants, cocktail lounges and bars. Some of the supplemental services and facilities are operated directly by the hotels, while others are operated by lessees or concessionaires. The hotels are subject to mortgage indebtedness aggregating approximately $77,400,000 at interest rates ranging from 5 jc to 6/ % and maturing from 1970 to 1988. Apartment buildings referred to below are subject to mortgages aggregating approximately $11,100,000 at interest rates of 6/ % and 6/ c/`c and maturing in 1986 and 1998. Extensive facilities, accon 76 offices locate The follo• time to time, a The Rege New York Cit and cocktail lt facilities neces: and the tenant The Amei Avenue and 5" and contains 1 restaurants an sary for opers The Szcuc New York Ci occupied by th 1990, with the The Dral Avenue, New portion which banquet room, has renovated The War Americas and 502 rooms to; for the opera The Asrt owned by it k sador West w East and the together with operation of a Mark H Francisco, Cz rooms and st other facilitie. by Loew's. L, between the 1 2062. The va Legal Procee 10

year ended ised portion :ome in the y's portfolio transactions 50,000 (i.e., in the fiscal !n ended by ! have been )68, was not Commercial nd one is in Florida, one motor hotels iin London, d owned by mtly be set. d by Loew's ~rage Rate per cupied Room $18.63 20.23 20.55 20.31 21.55 23.38 Extensive advertising and other forms of publicity are used to bring to public attention the Company's facilities, accommodations and services. Loew's operates a reservation service for all of its hotels through 76 offices located throughout the United States, Canada and abroad. The following are Loew's hotel properties. Since the number of rooms in a hotel varies trom time to time, all numbers of rooms in the following descriptions are as of August 31, 1968: The Regency: Loew's operates this luxury hotel upon leased land at 61st Street and Park Avenue, New York City. The hotel opened on March 1, 1963, and contains 489 rooms, together with a restaurant and cocktail lounge, banquet and meeting rooms, on-premises parking and the other concessions and facilities necessary for operation of the hotel. The initial term of the ground lease expires June 30, 1991, and the tenant has options to renew the lease for successive terms of 22, 23 and 24 years, respectively. The Americana: Loew's operates this first class convention hotel upon land owned by it at Seventh Avenue and 52nd-53rd Streets, New York City. The hotel opened for business on September 24, 1962, and contains 1,843 rooms, together with ballrooms and meeting rooms, an exhibition hall, a supper club, restaurants and cocktail lounges, on-premises parking, stores and other concessions and facilities neces- sary for operation of the hotel. The Summit: Loew's operates the Summit, a 781-room hotel at Lexington Avenue and 51st Street, New York City, which opened on July 31, 1961. On September 6, 1961, a subsidiary sold the land occupied by the hotel for $3,200,000 and the subsidiary leased the land for a term expiring September 30, 1990, with the privilege of renewing the lease for four successive 20-year periods. The Drake: Loew's has operated this luxury hotel upon land owned by it at 56th Street and Park Avenue, New York City, since June, 1964. The hotel contains 642 rooms of which 457 are in the main portion which opened in 1926 and 185 are in a new wing which opened in 1962, together with restaurants, banquet rooms, a cocktail lounge and other facilities necessary for the operation of a luxury hotel. Loew's has renovated and refurnished the hotel. The L!/a.rwick: Loew's has operated this first-class hotel upon land owned by it at Avenue of the Americas and 54th Street, New York City, since hlarch, 1965. The hotel, which opened in 1926 contains 502 rooms together with a restaurant, cocktail lounge, stores, concessions and other facilities necessary for the operation of a first-class hotel. Loew's upon acquisition renovated and refurnished the hotel. The An.bassadors, East and West: Loew's has operated the Ambassadors, East and West, on land owned by it located at 1300 North State Street, Chicago, Illinois, since September 10, 1965. The Ambas- sador West was originally opened in 1921 and the Ambassador East in 1927. The 17-story Ambassador East and the adjoining 12-story Ambassador West, operated as one hotel, provide a total of 648 rooms together with restaurants, cocktail lounges, stores, concessions and other faci?ities necessary for the operation of a first-class hotel. Loew's upon acquisition renovated and refurnished the hotel. Mark Hopkins: Loew's has operated the Mark Hopkins Hotel, located at One Nob Hill, San Francisco, California since February, 1967. The hotel, originally opened in 1926, contains 426 guest rooms and suites, meeting and banquet rooms, restaurants, cocktail lounges, stores and concessions and other facilities necessary for the operation of a first-class hotel. The hotel was renovated and refurnished by Loew's. Loew's purchased the leasehold interest in a lease, which lease was amended by an agreement between the lessor and Loew's to grant an option to Loew's to extend the term of the lease from 1989 to 2062. The validity of the option has been questioned in a lawsuit brought by the lessor; see "Pending Legal Proceedings: " 11 f

Paradise Island Hotel and Villas: Loew's operates under lease this hotel located on Paradise Island, Nassau, the Bahamas, which opened for business on December 1, 1967. The hotel contains 503 rooms, together with beach and swimming facilities, a supper club, restaurants and cocktail lounges, ballroom, meeting rooms, stores and concessions, and other facilities necessary for the operation of a resort hotel. The lease is for a term of 20 years, from December 1, 1967. Americana o f San Juan: Loew's operates this resort hotel upon land owned by it at Isla Verde, San Juan, Puerto Rico. The hotel opened on November 29, 1962 and contains 450 rooms, together with beach and swimming facilities, a supper club, restaurants and cocktail lounges, a ballroom, meeting rooms, stores and concessions, and the facilities necessary for the operation of a resort hotel. The Company has been granted tax exemption through 1972 for the income from hotel operation of this hotel under the Puerto Rican Industrial Incentives Act of 1954 and a license, which must be renewed quarterly, to operate a gaming casino. Americana of Bal Harbour: Loew's has operated this hotel, located at 9701 Collins Avenue, Bal Harbour, Florida, pursuant to a lease agreement, since January 31, 1965. The hotel opened for business on December 1, 1956 and contains 717 rooms together with beach and swimming facilities, a supper club, cocktail lounge, ballrooms, meeting rooms, stores and concessions and all facilities necessary for the operation of a resort and convention hotel. The lease is a net lease which terminates on April 14, 1980 with the option to renew until April 14, 1995. Traysnore Hotel: Loew's has operated this resort hotel, located on the Atlantic City, New Jersey boardwalk at Illinois Avenue, pursuant to a management agreement, since March 1, 1968. The Traymore Hotel, constructed in 1915, is a 14-story structure containing 560 guest rooms. The hotel was recently renovated and refurnished. The hotel contains several restaurants, coffee shop, indoor swimming pool, health club and banquet rooms and other concessions and facilities necessary for the operation of a resort hotel. Adjoining the hotel there is a new banquet and convention structure which has a seating capacity for 2,500 persons. No part of the cost of construction of the convention hail or the renovation and refurnishing of the hotel has been or will be borne by Loew's. The owner bears all operating expenses in connection with the Traymore and also reimburses Loew's for various home office services provided by Loew's and out-of-pocket expenses as well as for reservations made through the Loew's reservation service. Loew's receives a fixed minimum management fee of $50,000 per annum, payable in equal monthly installments, against a percenta.ge fee on the gross revenues ranging from 2% to 5°fo. See "Management-Certain Transactions". The City Squire: Loew's operates this motor hotel at Broadway and 51st to 52nd Streets, New York City, which opened on September 9, 1963. The motor hotel contains 722 rooms, a restaurant and cocktail lounge, public rooms, a swimming pool, on-premises parking, stores and other facilities necessary for the operation of a motor hotel. A subsidiary has a net lease of the land for a term expiring October 31, 1989 with successive renewal options until October 31, 2051. Howard Johnson's Motor Lodge: Loew's operates this motor hotel at Eighth Avenue and 51st-52nd Streets, New York City. The hotel opened for business on June 25, 1962. It contains 300 rooms, a Howard Johnson restaurant and cocktail lounge, on-premises parking and the facilities necessary for the operation of a motor hotel. Loew's has been licensed to use the name "Howard Johnson" for this hotel. rh t{tc; casc loca %%•hit .1nlU tury moti, Whol Subsi let;: Other . Z a:;grep: 12

ise Island, ~03 rooms, ballroom, sort hotel. Terde, San ether with ing rooms, npany has under the arterly, to •enue, Bal r business pper club, •y for the I 14, 1980 ew Jersey Traymore s recently iting pool, ttion of a a seating ; ation and cpenses in ovided by eservation in equal 5°fo. See Loew's Midtown Motor Inn: Loew's operates this motor hotel upon land owned by it at Eighth Avenue and 48th-49th Streets, New York City. The hotel opened for business on December 12, 1962 and contains 367 rooms, restaurant and cocktail lounge, roof swimming pool, on-premises parking and the facilities necessary for the operation of a motor hotel. Theatre Activities and Properties Loew's owns or has leasehold interests in 110 theatres in the United States and Canada. The theatres operated vary in size and include suburban theatres, drive-in theatres and large, deluxe "show- case" theatres. The majority of the theatres present the first showing of feature pictures in given localities. Loew's theatres exhibit feature motion pictures and, occasionally, accompanying short subjects which are licensed for exhibition by film distribution outlets in the United States and Canada, including, among the major distributors, Columbia, Buena Vista (Disney), M-G-M, Paramount, Twentieth Cen- tury-Fox, United Artists, Universal and Warner Brothers-Seven Arts. As of August 31, 1968, Loew's owned, leased or operated under management contract a total of 110 motion pictures theatres, classified as follows : wned in Fee Built on Part Fee and Part Leased Land Built on Leased Land eased Operated Under Management Contract otal Wholly Owned Subsidiaries .... 34* 5 7 54 1 101 Subsidiaries more than 50% but less than 100% owned ...... 5 - - 1 - - 6 Other Affiliates .............. 3 - - - - 3 42 5 7 55 1 110 * These theatres, some of which are also commercial properties, are subject to mortgage liens securing indebtedness aggregating approximately $14,700,000 at August 31, 1968. Four of the above theatres are leased to other operators. ~ ~. v ~ w 4:1- 13 °

The chart below shows the location of the theatre properties as of August 31, 1968 (figures in paren- theses indicate number of theatres in each state) : Location Number Number of Theatres Location of Theatres :lrizona ( 3 ) Phoenix 3 Calif ornia (26) Anaheim 1 Bakersfield 1 Beverly Hills 1 Buena Park 1 Covina 1 Chatsworth 1 Fullerton 1 Glendale 1 Granada Hills 1 Hollywood 2 Inglewood 2 Los Angeles 3 Oxnard 1 Pasadena 2 Redondo Beach 1 San Bernardino 2 Santa Monica 1 Stanton 1 West Covina 1 W estwood 1 Colorado (1) Denver 1 Connecticut (2) New Haven 1 Waterbury 1 Delaware (1) Wilmington 1 District of Columbia(2) Washington 2 Florida(8) Bay Harbor 1 Boynton Beach 1 Coral Gables 1 Fort Lauderdale 1 Miami Beach 1 Miami 1 St. Petersburg 1 West Palm Beach 1 Indiana(3) Evansville 2 Indianapolis 1 Louisiana (1l New Orleans 1 \Iaryland(1) Oxon Hill 1 Missouri(2) St. Louis 2 New Jersey(3) Jersey City 1 Newark 1 Parsippany-Troy Hills 1 New York (31) Bayshore 1 Buffalo 2 Rochester 1 Syracuse 1 i\Tew York City 24 New Rochelle 1 White Plains 1 Ohio(12) Akron 2 Cleveland 5 Columbus 3 Dayton 2 Rhode Island (1) Providence 1 Tennessee(3) Memphis 1 Nashville 2 Texas (2) Houston 2 Virginia(3) Fairfax 1 Norfolk 1 Richmond 1 Georgia (2) Canada(3) Atlanta 2 Toronto 3 On November 1, 1967 Loew's purchased the fee interest or leasehold interests in 26 of the theatres in California and the three theatres in Phoenix, Arizona. Loew's has operated the theatres since that date and has extensively renovated and refurbished some of them. Additional theatres are under agreement to be acquired or under construction for operation by Loew's in Tampa, Florida ; Warren, Ohio ; Natick, Massachusetts ; New York, New York ; Dallas, Texas ; East Brunswick, New Jersey; and Woodland Hills, California. Since August 31, 1968, Loew's acquired a theatre in San Francisco, California. The Natick and New York theatres are owned by Loew's and the balance are leased. Other theatre projects, as to which Loew's has conditional arrangements pending required court approvals, are in various stages of planning. 14 Oth( that and sharf Com effec• 1968 Subc merc Offe: appr, appr Loe,v appli value 1968 signi will I able servi- who inves such lesse: sales the s New See ` 53rd was J. C. Bank floor, Aver 1969. to rel renta intert merci to inc made loan ; f

s in paren- :mber heatres 2 1 1 1 > Other Interests Exchange Offer for Cosiz;nercial Credit Conipany Common Stock: In April, 1968, Loew's announced that it had acquired 1,000,700 shares of common stock of Commercial Credit Company ("Commercial"), and would make an Exchange Offer to the holders of common stock of Commercial to exchange their shares for Loew's 5% ~/'o Convertible Subordinated Debentures due 1993, convertible at any time into Common Stock of Loew's at $30.00 a share. A Registration Statement was thereafter filed which became effective on June 13, 1968. Loew's acquired through such Exchange Offer, which expired on June 28, 1968, 11,787 shares of Commercial for which it issued $530,400 principal amount of its 5/% Convertible Subordinated Debentures due 1993. Control Data Corporation ("Control Data") sold its assets to Com- mercial for stock, effective on or about August 15, 1968. Subsequent to the expiration of the Exchange Offer through November 15, 1968 Loew's sold Commercial stock and Control Data stock for a profit of approximately $28,500,000 before related taxes and expenses. At November 15, 1968, Loew's held approximately 5,300 shares of Control Data stock. Marketable Seciirities: In order to pursue di, ersified acquisition opportunities and for other purposes Loew's has maintained a significant cash position. In order to utilize this cash productively pending application to such purposes, Loew's has invested a portion of it in marketable securities. The market value of these securities was in excess of $48,000,000 (including Control Data stock) on August 31, 1968. Income from transactions in such portfolio and dividends on portfolio securities contributed significantly to the total income of Loew's in fiscal 1968. There can be no assurance that such income will be derived in the future. Loew's does not employ an investment adviser ; its transactions in market- able securities are under the direction of one of its employees who receives a fixed salary for such services. These services are performed under the supervision of the chief executive officer of Loew's, who devotes less than 10% of his time to such supervision, and under the general supervision of an investment committee of the Board of Directors which periodically receives reports of and reviews such portfolio transactions. Primary emphasis is placed on the possibility of capital appreciation and lesser importance is attached to achieving current income. Loew's has on occasion engaged in short sales, but Loew's had no short sales contracts on August 31, 1968. Westchester Foraon: Loew's has an 80ofo interest in a partnership which has been designated as the sponsor of the commercial portion of an Urban Renewal Project Plan by the City of `Vhite Plains, New York. The project has not been commenced and is subject to fulfillment of various conditions. See "Management-Certain Transactions . Tower 53: Loew's operates on leased land located on the northeast corner of Seventh Avenue and 53rd Street, New York Citt•. a 39-story combination commercial and apartment building. Construction was completed in September, 1967. The commercial portion consists of 8 stories completely rented to J. C. Penney Company, Inc. under a long-term lease and ground floor space leased to Chelsea National Bank. The residential portion contains 213 apartments, all of which were rented as of August 31, 1968. Tower 58: Loew's is constructing a 33-story apartment building, comprising 169 apartments, 4 floors of commercial space and an underground garage, located on 57th and 58th Streets, between Fifth Avenue and Avenue of the Americas in New York City. Construction is expected to be completed during 1969. Loew's has agreed to sell the leasehold interest nz this building for $5,000,000, with an obligation to repurchase such interest payable at the rate of (a) $400,000 per annum plus (b) 50ofo of the net annual rental income less the sum of $448,000, for a period of 40 years. 89th & Madison: On August 28, 1968 Loew's sold, at a price in excess of its investment its 50~fo intere: t in a partnership which is engaged in construction of a luxury apartment complex with cor.i- mercial space, located at 89th Street and Madison Avenue, New York City. The purchaser also agreed to indemnify a subsidiary of Loew's against any liability which may arise under a guaranty of completion niade by the subsidiary of Loew's and Loew's partner, jointly and severally, in connection with a building loan mortgage of $7,750,000 obtained by the partnership. 15 ~

Capitol Theatre Property: The land under the Capitol Theatre on Broadway in New York City, together with adjoining property owned by Loew's has been leased for an initial term of 43 years to a developer who is presently demolishing the theatre and buildings on the property and is erecting a new office building which will contain no less than 1,000,000 square feet. Concurrent with the lease, Loew's purchased the adjoining premises (which is a part of the leased premises) at the northwest corner of 50th Street and Broadway. Other Pi'operties: Loew's also operates four commercial office buildings located respectively in New York City ; Syracuse, New York ; Kansas City, Missouri ; and Los Angeles, California ; and owns approximately 6,700 acres of unimproved land in Brevard and Volusia Counties in Florida. Competition Loew's considers its hotels and tneatres to L)e leading establishments in the areas in which they are located in respect to desirability of location, size, facilities, physical condition and quality of service. The business of providing hotel accommodations and services is highly competitive. There is sub- stantial competition from other hotels, some of which are owned by local competitors and some of which are owned by international or nationwide chains. The business of motion picture exhibition is also highly competitive. Loew's is one of several theatre chains which are nationwide in scope. Loew's operates theatres in certain areas of the United States which are heavily saturated with the theatres of various national and local exhibitors. Conseouently, Loew's faces intense competition from locally signif;cant competitors. In addition to competition from other motion picture theatre operators, Loew's film exhibition business is confronted with other forms of competition in the entertainment field, including television. Employee Relations Loew's employed approximately 9,650 persons as of August 31, 1968. A substantial part of such personnel are represented by labor unions under separate contracts with many local unions which expire at varying times and are then severally renegotiated and renewed. Loew's considers its employee rela- tions satisfactory. The Company has amended the Retirement Plan for Employees of Metro-Goldwyn-Mayer ("M-G-M") which covered the employees of the Company and its subsidiaries prior to March 1, 1959. All "eligible employees", as therein defined, of the Company and its subsiuiaries are entitled to share in the benefits provided in the amended Plan. BUSINESS OF LOEW'S CONDUCTED THROUGH LORILLARD Products Cigarettes-Cigarettes represented approximately 90% of Lorillard's consolidated net sales in 1967. The principal filter cigarette brands of Lorillard are KENT, NEWPORT (menthol), TRUE and TRUE (menthol), OLD GOLD Filters and SPRING (menthol) and the principal non-filter cigarette brand is OLD GOLD Straights. In 1967 distribution of CENTURY 100's filter cigarettes was begun in a limited number of areas. Other Tobacco Products-Other tobacco products represented approximately 5ojo of consolidated net sales in 1967. Lorillard's more important smoking tobacco brands are BRIGGS, UNION LEADER, FRIENDS, INDIA HOUSE and BURGL'NDY. Its chewing tobacco brands are BEECH-NUT, BAGPIPE and HAVANA BLOSSOM. Lorillard's little cigar brands are BETWEEN THE ACTS, MADISON and filter-tipped OMEGA, and it also markets a small cigar brand, ERIK. Sub Con chus Stoc "poc natic Proc facto acqu an II of Lc of inl label. acqui Swee is opc five-c adde~ tion t• I and F were tured such : Comp A T and tb Lorilla *Sc Lc little ci share c O] tobaccc 16

Subsidiaries In February, 1965, a wholly-owned Delaware subsidiary of Lorillard, now known as Usen Products Company, acquired substantially all of the assets, business and goodwill of Usen Canning Co., a Massa- chusetts corporation, and assumed substantially all of its liabilities in exchange for shares of the Common Stock of Lorillard. For accounting purposes, the transaction was accounted for in accordance with the "pooling of interests" concept. Usen Products Company is a leading producer of canned cat food with a national distribution of its Tabby and 3 Little Kittens brands. In August, 1968, a subsidiary of Usen Products Company acquired three fishing vessels to supply raw material to its Louisiana cat food factory. In April, 1966, a wholly-owned Delaware subsidiary of Lorillard named Reed Candy Company acquired substantially all of the assets, business and goodwill as a going concern of Reed Candy Company, an Illinois corporation, and assumed certain of its liabilities in exchange for shares of the Common Stock of Lorillard. For accounting purposes, the transaction was accounted for in accordance with the "pooling of interests" concept. Reed Candy Company produces packaged hard candies and rolls under the REED'S label. In July, 1967, Golden Nugget Candy Company, a Delaware subsidiary of Lorillard (which had acquired for cash certain assets and the business and goodwill as a going concern of Golden Nugget Sweets, Ltd., a California corporation, in November, 1965) was merged into Reed Candy Company and is operated as a division thereof. The Golden Nugget Division, which until recently principally produced five-cent nougat candy bar7 with distribution of its B_a Hurrx and Loox bars in eleven Western states, has a(lded the five-cent and the ten-cent nougat candy bar SIR to its line and has increased its area of distribu- tion to 35 states. In September, 1968, substantially all the assets of Lorillard's wholly-owned subsidiary, Federal Tin and Paper Products, Inc., and the factory in Baltimore, Maryland, leased by Lorillard to such subsidiary were sold for cash approximately equivalent to the book value of such assets. Such subsidiary manufac- tured and sold to Lorillard and to others metal and paper packaging for a variety of products. In 1967 such subsidiary accounted for about 1°fo of consolidated net sales. Competition All of Lorillard's products are sold in highly competitive markets. '."he following table, which sets forth the total unit production of all cigarettes in the United States and the total unit sales of all cigarettes by Lorillard, indicates the relative position in the industry of Lorillard : Calendar Year Industry* (000) Company (000) Company to Industry 1963 ..................... 550,558,727 57,168,726 10.4qo 1964 ..................... 540,906,845 50,941,646 9.47fo 1965 ..................... 556.80r 053 51,211,701 9.2% 1966 ..................... 567.264.483 53,051,966 9.4% 1967 ..................... 576.182,539 57,566,575 10.070 * Source: Reports and bulletins of Commissioner of Internal Revenue. Lorillard for many years has occupied a leading position in the scrap chewing tobacco field. Lorillard's little cigar brands, bIADisoN, BETwEErr TaE ACTS, and filter-tipped OMEGA, accounted for a substantial share of the total little cigar market in 1967. On the basis of information currently available, Lorillard ranks fifth among the major producers of tobacco products in the country. 17

Advertising and Sales Promotion Lorillard's principal brands are advertised and promoted extensively. Advertising and sales promo- tion expenses, accordingly, have been substantial during the past years, and the policy of Lorillard is to continue substantial expenditures for these purposes. The advertising media used by Lorillard include television, radio, magazines, newspapers, outdoor advertising and point-of-sale display materials. In addition, Lorillard nationally distributes Gift Star coupons on its SPRING, OLD GOLD Filters, and OLD GOLD Straights cigarette brands. Sales promotion activities are carried on Uy Lorillard through salesmen, by distribution of samples, point-of-sale display advertising and personal contract with distributors, retailers and consumers. Lorillard's as well as the industry's sales of cigarettes declined following the publication in January 1964 of the report of the Advisory Committee to the Surgeon General, which purported to associate smoking with a number of diseases. (See "Statement of Consolidated Earnings" herein.) Pursuant to Federal legislation, effective January 1, 1966, packages of cigarettes are required to bear the following statement :"Caution : Cigarette Smoking May Be Hazardous To Your Health." The same legislation also provided that no statement relating to smolcing and health would be required in cigarette advertising, if the packages of such cigarettes were labled in conformity with its provisions. Such provision with respect to cigarette advertising will terminate, unless extended, on July 1, 1969. The Secretary of Health, Education and Welfare is directed by such legislation to transmit a report to Congress not later than July 1, 1967 and annually thereafter, concerning (A) current information on the health consequences of smoking and (B) such recommendations for legislation as he may deem appropriate. The Federal Trade Commission is also directed to submit a report to Congress at the same time concerning (A) the effectiveness of cigarette labeling, (B) current practices and methods of cigarette advertising and promotion and (C) such recommendations for legislation as it may deem appropriate. Such reports were submitted to Congress in 1967 and 1968 with recommendations for legislation. Included in such recom- mendations are legislation to ban or limit cigarette advertising on television and radio, to require a revised caution notice in all advertisements and on all cigarette packages reading "Warning : Cigarette Smoking is Dangerous to Health And May Cause Death From Cancer And Other Diseases", and to require a statement setting forth tar and nicotine content on packages and in all advertising. None of such recom- mendations has been enacted. The nine leading manufacturers of cigarettes in the United States, including Lorillard, voluntarily established a Cigarette Advertising Code, effective January 1, 1965, which imposed uniform standards for cigarette advertising for the member companies. Under the Code, no advertising may be used t:nless it has first been subnr" --d to an indel endent Code Administrator and determined by him to comply with the Code standards which relate primarily to such matters as health representations and advertisements directed toward persons under twenty-one years of age. On March 25, 1966, the Federal Trade Commission announced that a factual statement of the tar and nicotine content in cigarette smoke on cigarette labels and advertising would not violate its Cigarette Advertising Guides provided no col- lateral representation is made as to reduction or elimination of health hazards. As Lorillard believed that the Commission's policy as expressed in such announcement provided a greater opportunity to develop and market cigarettes low in tar and nicotine content for thos:e consumers who desire such products, Lorillard resigned from the Code. In so resigning, Lorillard stated that it still intended to adhere to the principles underlying the Code's limitations on advertising to youth. It is the intention of Lorillard to utilize data regarding tar and nicotine content in cigarette smoke ,o wherever appropriate in future advertising. v O- It is not possible to predict the effect of the foregoing developments on Lorillard's sales and earnings. EJ .p n- Distribution Methods Lorillard secures its products distribution through direct sales to jobbers who in turn service retail outlets, and through chain store organizations and vending machines operators who purchase their ,4 I c I S si 11' S m P H A co P. Lc brr ci~ frc ott otl pre To in S and bur for its Nei van tob< n in t acrf trol end froi ave to a tob pro inv 18