Tobacco Documents Online

Annual Report 1969 r € t I .:.,_. ,. J. Reynolds T®bacco Company ~ V 0 ~ w ,n Z.) v ~

Contents Comparative Summary 1 Letter to Stockholders 2 Tobacco 8 Foods and Beverages 9 Aluminum and Packaging 10 Corn Refining 11 Containerized Freight Transportation 12 Products and Services 13-24 Internationa l Operations 25 Ten Year Summary 26 Financial Statements 28 Directors and Officers 36

R. J. REYNOLDS TOBACCO COMPANY AND CONSOLIDATED SUBSIDIARIES Sum^:ury. 1969 1968 Consolidated (Note A) Net sales and operating revenues ............. $2,252,694,525 $2,188,870,601 Net earnings ............................. . . _ 172,304,874 168,929,934 Per common share ...................... 3.82 3.71 Per common share-assuming full dilution .. 3.57 3.48 Net earnings as a percentage of net sales and operating revenues ................... 7.65% 7.72% Dividends paid on Preferred Stocks .......... .. 11, 538,144 1,352,995 . Dividends paid on Common Stock ...... : ....... 90,530,052 88,518,214 Per share of Common Stock . . .............. 2.25 2.20 Average number of shares outstanding ......... 40, 235, 578 40,235, 552 Average number of shares outstanding- assuming full conversion ....... .. .......... 48,123,711 48,184,929 ..... Capital expenditures - ~ $ 197 902 993 67 079 559 ................. ... Depreciation and amortization ................ , , 45,368,732 , , 41,312,224 Total assets .............................. $1, 693, 373, 221 $1,476,562,415 Current assets ............................ 921, 488, 045 957,483,787 Current liabilities ............................ 298,606,718 273,728,055 Net current assets-working capital ........... 622,881,327 683,755,732 Property, plant and equipment-net ........... 524,876,122 381,412,509 Long-term debt (less current maturities) ........ 274, 031,238 112,502,332 Book value of Preferred Stock ................ 85,773,542 105,657,451 Book value of Common Stock ................. 992,950, 580 918,593,624 Number of RJR stockholders at year end ........ 136,539 136,129 Number of regular employees at year end ....... 26,062 21,332 See Notes to Consolidated Financial Statements. 1

T: t. E The year 1969 was one in which the Company charted new directions for growth and established records for sales, revenues, and earnings. With the merger of McLean Industries, Inc. into R. J. Reynolds, the Company entered a new and growing field - containerized freight transporta- tion -further broadening and diversifying its operations. This report accordingly reflects for the first time on a consolidated and comparative basis the oper- ating ating results of McLean, as explained in detail in the financial review of the year which follows this letter. With the inclusion of these figures, the Com- pany's sales and operating revenues have passed the $2 billion mark. Because of the Company's growing diversifica- tion, this report also shows for the first time the respective contributions to sales and earnings from operations of its principal operating com- ponents: tobacco, transportation, and other sources (foods and beverages, aluminum and packaging, and corn refining operations). While tobacco sales accounted for 76% of the consolidated total in 1969, the non-tobacco operations represented an increasingly greater share of the Company's busi- ness, rising to 24%. The Company continued to lead the tobacco in- dustry in both domestic and export cigarette sales. Reynolds' share of the domestic cigarette market held almost unchanged, at about one-third. Three of the Company's brands - WINSTON, SALEM, and CAMEL-again led all other brands in 'their respective categories. WINSTON, the nation's No. 1 seller, widened its lead over its nearest rival. The f.ast-c_hanging nature of the Company's business, resulting from substantial diversification and growth in non-tobacco areas, has made it desirable to realign the corporate structure. The first step was taken at the last annual meeting of stockholders when approval was given to a change of name to R. J. Reynolds Industries, Inc. Formal adoption of the new name, however, has been deferred to coincide with a reorganization plan to be submitted to the next annual meeting in April of this year. Under this plan, subject to approval by stockholders and certain other conditions, R. J. Reynolds Tobacco Company would become a wholly-owned subsidiary of a new corporation to be named R. J. Reynolds Industries, Inc. Stockholders of the present Company would become the stock- holders of the new corporation. In line with a decrease in domestic cigarette consumption, the Company's tobacco sales both - --- -= -- -_ __ - _ in unit and dollar volume were slightly lower in 1969, as were earnings from tobacco operations. _- Transportation earnings were higher. Earnings from operations of the other businesses were lower in total than the previous year in spite of an in- crease in the contribution by Archer Products and a better showing by Penick & Ford. While the progress made in diversification has been substantial, and we are confidently looking forward to further growth by each of the subsid- iaries, tobacco continues to be - as it has been for ninety-five years - the foundation of our busi- ness. Because of it, the Company has been able to pay uninterrupted dividends to its stockholders for seventy years. Despite the unsubstantiated at- tacks against the industry in recent years, and de- spite the unfair tax burden that it bears, tobacco remains a good business. 2

The Company's research and development pro- grams to improve existing products and develop new ones that can be profitably marketed continue to produce good results. For example, from the new Development Center, dedicated in October, 1968, have come more than 20 new or improved products for R. J. Reynolds Foods and three new cigarette brands (one of which, DORAL, is in na- tional distribution and the others in test markets). With profound sorrow we record the death of Mr. Bowman Gray on April 11, 1969. At the time of his death Mr. Gray was Chairman of the Board of Directors and he had previously served as Presi- dent. As chief executive officer for many years, he had guided the Company during a period of great growth, and he had served as a forceful spokesman for the industry. Among our greatest resources are the people, including the newer members of the R. J. Reynolds -family, who have contributed to our growth in many areas. To them, as well as to our loyal stock- holders, we express the appreciation of the direc- tors and management and pledge our renewed efforts to maintain the Company's progress. Respectfully submitted for the Board of Directors. February 16, 1970 I n O ~

-Ten Year Net Sales and Operating Revenues 2,400 Miil,ons of Dof/ars 1: TOBACCO Financial Review TRANSPORTATION- U_ OTHER Net sales and operating revenues in 1969, the highest in the Company's history, totaled $2,252,694,525, an increase of $63,823,924 or 2.9% over 1968. Net earnings, also a record, were $172,304,874,a gain of $3,374,940 or 2% over the 1968 figure. Net earnings per share of Com- mon Stock were $3.82 for 1969, compared with $3.71 the year before. These amounts reflect the merger of McLean Industries, Inc. into the Company on May 13, 1969. Approximately 76% of McLean's Common Stock was exchanged for Reynolds $2.25 Convertible Preferred Stock and 24% was purchased for cash. Accordingly, McLean's results for the full year have been included on a pooling of interests basis, 400 : Ten Year Earnings from Operations L TOBACCO TRANSPQRTATIOh E :;n?'4 but net earnings have been reduced by an amount equal to 24% of McLean's net earnings prior to May 13, 1969. Tobacco sales, which accounted for 76% of the consolidated total, declined $22,663,000 or 1.3% in 1969. (Tobacco sales included excise taxes of $677,606,584 in 1969 and $697,806,366 in 1968.) Transportation revenues in 1969 increased $53,951,000 or 23.8% over 1968, in spite of a longshoremen's strike which adversely affected 1969 operations. Additional container capacity and the first full year of containership service to Japan, which was inaugurated in December of 1968, ac- counted for the increase in 1969. Sales of other products, including food, aluminum sheet and foii, packaging, and industrial corn products, rose $32,536,000 or 14.2% in 1969. 4

The following tabulation sets forth an analysis of net sales and operating revenues for the year, with comparative figures for 1968: NET SALES AND OPERATING REVENUES 1969 1968 (000 Omitted) % (000 Omitted) Tobacco ..................... $1,709,914 75.9 $1,732,577 Transportation ................ 280,334 12.4 226,383 Other ....................... 262,447 11.7 229,911 Consolidated ................. $2,252,695 100.0 $2,188,871 % 79.2 10.3 10.5 100.0 Earnings from operations, shown below for major operating components, represent earnings before interest and debt expense, the adjustment for earnings applicable to the McLean Common Stock pur- chased, and provision for income taxes. EARNINGS FROM OPERATIONS 1969 (000 Omitted) % Tobacco ..................... . $319,746 82.4 Transportation ................ 55,853 14.4 Other ....................... 12,551 3.2 Consolidated ................. $388,150 100.0 Consolidated earnings from operations totaling $388,149,879 in 1969 were up $3,431,702 or 0.9% over the comparable 1968 amount of $384,718,177. Tobacco earnings from operations decreased slightly in 1969 to $319,746,000 from the 1968 amount of $320,850,000. Rising manu- facturing costs, new brand introductions, and the effect on profits of a 3.8% decline in cigarette unit sales during 1969 were about offset by an in- dustry-wide cigarette price increase effective in May, 1969. Transportation earnings were up $5,330,000 or 10.5% over 1968. Earnings from other operations declined $794,000 in 1969, down 6% from 1968, resulting largely from heavier than normal market- ing and promotional expenditures and introduction of new products by Reynolds Foods. Dividends With an increase in the dividend rate in the final quarter, dividends on the Common Stock totaled $2.25 per share in 1969, marking the sixteenth 1968 (000 Omitted) % _$320,850_ 83.4 50,523 13.1 13,345 3.5 $384,718 100.0 consecutive year of increased dividend payments. Dividends paid during the year on the Common and Preferred Stocks aggregated $102,068,196, the highest for the Company's seventy consecutive years of dividend payments. Debt Position The merger with McLean Industries, Inc. in 1969 brought about significant changes in the Com- pany's financial structure. The Preferred Stock, 3.60% Series, was converted into 7% Subordi- nated Debentures. Subsequently, $50,000,000 of 81,'a% Five Year Notes and $100,000,000 of 7'/a% Twenty-five Year Debentures were issued to pro- vide funds for reductions in short-term debt, which had been increased by $125,020,000 to finance the purchase of approximately 24% of McLean's Common Stock. During the year the Company arranged for loans from banks in the Federal Republic of Germany and The Netherlands aggregating 503,200,000 German Marks and 272,736,000 Dutch Florins i ~ 0 0 -a w

Source and Disposition of Corporate Funds for 1969 SOURCE DISPOSITION From operat:: n<- Netearn:ngs $172,304,874 Dep•ecuatio^ and amort~zat,an . _ 45,368.732 tncrease tn deferred income taxes and de`erred tiab.trtues 11,177.788 Mtnorrt; interest In - earnings of subsidiary 1,469.503 / - - $230.32C.981i Net tncrease,n iong-term debt .. 161,528.906! _ Decreasern net : current assets 60.874,405/ -- Totat ...,.. $452.724.258 (totaling about $210,000,000 at present exchange rates) to finance 80% of the cost of eight super containerships to be constructed within the next four years in those countries. Equipment obligations were increased by $32,569,941 to finance the purchase of containers and various equipment. During 1969 payments of $37,788,097 were made on long-term debt, which at year end totaled $274,031,238. Short-term debt was $116,621,874 on December 31, 1969, or $9,121,874 higher than at year-end 1968. The Company was free of short-term debt for a short period in November. Capital Expenditures The Company made record capital outlays during 1969 of $197,902,993,an increase of $130,823,434 over the restated 1968 amount of $67,079,559. The major portion of the 1969 expenditures, $176,202,013, represented payments for the ac- quisition and conversion of vessels and purchase of associated equipment to expand Sea-Land's con- 102,068,196_ ...Cashdvldend•> Rebrenre~t o? 24,464,655 . . . Preferred Stocks / ~ 3.268.599 , Other $452.724,298 Tota, tainerized fleet. During the year the Company began additions to improve leaf processing facili- ties at the Whitaker Park cigarette plant in Winston- Salem, and continued the modernization and ex- pansion of food processing facilities. A small spe- cialty plant of the Company's corn refining subsid- iary was completed last year, Expenditures for non- tobacco facilities accounted for approximately 92°0 of the 1969 total, compared with 75% of the 1968 amount. Capital expenditures for 1970 are currently estimated at $245,000,000 and include further expansion of the containership fleet, continued modernization of tobacco processing facilities, and expansion and modernization of aluminum sheet and foil, packaging, and food processing facilities. Construction of a new cigarette manufacturing plant in Puerto Rico, begun in late 1969, will be completed by the end of 1970. Approximately 93% of planned 1970 expenditures are for non-tobacco operations. Expe•.d-tures icr ercaRs _ \$197,902.943 and modern'zat.a Cas! pu•chases o' McLea~ Industries Inc. ~_ 125,019,855 comman shares ~

Revenues, Total Assets and Net Earnings RerenuesBAsseis . . Miilmnsof Dollars _ _ NetEarnings 2.400 600 2.200 2.000 1.800 1.600 _ 400 1,400 ~ _ 350 1,200 300 1,000 -250 Capital Expenditures and Depreciation 200 180 160 140 120 100 8G 40 20 Mdthons of Dollars '60 '61 '62 '63 64 '65 '66 '67 '68 ~ CAPITAL EXPENDITURES . DEPRECIATION I 9 4,00 Earnings Per Common Share Dividends Per Common Share i. ;1,RNINGS ~ DIVIDENDS Total Liabilities and Stockholders Equity Total Capitalization and Long-Term Debt 1800 Mdhors of Dollars 1 '60 '61 '62 '63 '64 '65 '66 '6% '68 '6? ~ TOTAL LIABILITIES AND STOCKHOLDERS EQUITY F_- G- , - _ +-. TOTAL CAPiTALIZATiON -6, LON„-TERG7 DEBT

i C . The growth of the tobacco industry continues to be hampered by accelerating taxation and the cam- paigns of anti-smoking forces. Sharp increases in state taxes on cigarettes, coupled with the unre- mitting barrage of anti-smoking propaganda, appear to have caused an estimated 3.6% decrease in domestic per capita cigarette consumption last year. Eighteen states, plus the District of Colum-__ bia, increased their cigarette taxes and North Carolina imposed a tax for the first time. In the past five years, state cigarette taxes have doubled, increasing from an average of 5C to 10C per pack- age. American consumers are now forced to pay more than $4.5 billion annually in taxes on cig- arettes. Congress is presently considering amendments too the 1965 Federal Cigarette Labeling and Ad- vertising Act, including amendments to prohibit cigarette advertising on television and radio after December 31, 1970, and to require cigarette packages to bear a statement designed to be more cautionary than the present statement. The pro- posed legislation now before the Congress would also permit the Federal Trade Commission, sub- ject to certain conditions, to revive_its proposal that a warning statement be required in printed advertising of cigarettes. At the time of this writing, the form of the final legislation is still un- certain. The report last spring of the House of Repre- sentatives' Committee on Interstate and Foreign Commerce, after thirteen days of hearings on the proposed legislation, included this statement: "On the basis of these hearings the committee con- cludes that nothing new has been determined with respect to the relationship between cigarette smoking and human health since its hearings in 1964 and 1965." While the anti-smoking forces are giving the impression that a causal relationship has been established, the Company and others in our indus- try are continuing to support, through unrestricted grants to the Council for Tobacco Research - USA and the Committee for Research on Tobacco and Health of the American Medical Association, the scientific research that still must be done to learn_the true facts about smoking and health. In the past fifteen years the tobacco industry has contributed more funds for tobacco and health research than have the Federal Government and the private health agencies combined. In 1969 the Company announced the develop- ment of a new process to increase the filling ca- pacity of tobacco. While this unique method of "puffing" tobacco will effect manufacturing econ- omies, it will not significantly reduce leaf require- ments in the foreseeable future. In an effort to help tobacco farmers cope with critical labor shortages and harvest their crop at lower cost, the Company has developed and suc- cessfully field-tested a compact mechanical har- vester. Further modifications and field tests are scheduled this year, and it is hoped that a produc- tion model can be provided by 1971. The Com- pany will continue its own research and grants to others toward solving the cost problems of farmers in the growing of tobacco. 8

'c`... L _ ,vrac.:.. R. J. Reynolds Foods had another year of excel- lent sales growth in 1969. Five brands continued in top position in their respective product cate- gories: CHUN KING in Oriental Foods; PATIO In Mexican foods; HAWAIIAN PUNCH in fruit punch- es; COLLEGE INN in broth and boned chicken; and BRER RABBIT in molasses. CHUN KING introduced a line of premium five- course dinners - one of the most successful new product introductions in the frozen food field. Other new offerings were four flavors of egg rolls, four entrees in cooking pouches, and two fried rice products in pouches. CHUN KING packaging was redesigned for greater merchandising impact. PATIO introduced a line of burrito rolls very successfully in the Southwest. These items - crisp pastry shells stuffed with a variety of fillings - are scheduled for national distribution. Sales of HAWAIIAN PUNCH continued to rise, with the "Punchy" TV cartoon character used as the focus for a total marketing approach. New flavors for the fine are being test-marketed. MY-T-FINE desserts were reformulated and the packaging redesigned for more aggressive mer- chandising. MY-T-FINE canned puddings were in- troduced in selective markets. VERMONT MAID experienced a significant sales increase. It also became the first national-brand syrup to be marketed in a plastic bottle, with substantial savings in packaging and shipping costs and greater appeal to consumers. COLLEGE INN had a good year, reflecting its commitment to strong promotions directed to home economics teachers and students. Throughout the entire Reynolds Foods organiza- tion, emphasis will continue to be placed on de- velopment of new specialty products. JOHN PHILLIPS President, R. J. Reynolds Foods, Inc.

f ` 10 Aluminum and Packaging Archer Products, Inc. increased its sales in 1969 in all three divisions - Metals, Packaging, and Consumer Products. Each division exceeded the growth rate of its respective industry group. Archer's sales to outside customers continued to accelerate and for the second successive year ex- ceeded those made to the parent company. Work was begun on an expansion program at the Winston-Salem facilities of the Metals Division. In addition to supplying continuous cast aluminum for its two metals plants in Winston-Salem, the increased casting capacity will enable Archer to furnish a substantial portion of the aluminum re- quired by its Huntingdon, Tennessee, plant. The past year brought to all three divisions a broader acceptance of their product quaiity and increased recognition of their technical compe- tence and service. Closer working relationships were developed with major corporations to meet many diverse applications, and more than sixty of the nation's top companies were customers of Archer last year. The Consumer Products Division, which intro- duced two new lines of gift wrap, had an outstand- ing year, far outstripping its industry in the pace of its growth. At Filmco, Inc., dollar sales volume was down from 1968 because of extreme price deterioration in packaging films during the first half of the year, although volume was up on a poundage basis. __ A shrink film developed by Filmco to capitalize on the growing trend to automated meat packag- ing in supermarkets made sales gains the last half of 1969, and a high proportion of these sales rep- resented new business rather than replacement for regular meat films. A new gold-tinted film for meat also had fine acceptance. SAMUEL A. ANGOTTI President, Archer Products, lnc. PAUL J. VAUGHAN President, Filmco, Inc.

. In September, 1969, the Company agreed to divest itself of its subsidiary, Penick & Ford, Limited. By consenting to this action, the Company will retain the properties and products of the former grocery division of Penick & Ford, which were transferred to R. J. Reynolds Foods, Inc. in 1967. As the stockholders were advised in the interim report dated October 27, 1969, under the final judgment the Company is required within two years to divest itself of its interests in the present Penick & Ford company as a going viable concern engaged in the corn wet milling business and the potato starch business. The divestiture may be made by any of several methods, but at this time no decision has been made as to how it will be accomplished. Penick & Ford's dollar sales for the year, includ- ing the Potato Products Division, were 24% great- er in comparison with 1968, which was marked by a three-month strike. Prices and profit mar- g,-,!: for corn syrups were higher than in 1968 but re.malned unsatisfactory for starch products. The Potato Products Division showed a good increase in dollar volume and profits compared with 1968. A promising new product developed at Penick & Ford during 1969 consisted of a group of hydro- phobic starches with unique properties for paper and other applications. Production of commercial quantities is expected in early 1970. R. V. CRONIN President, Penick & Ford, Limited .~ ~ Lu 1 1

r i -. J.-;,t'-_ i^h The merger of McLean Industries, Inc. into R. J. Reynolds in May was the most significant step yet taken by the Company in its continuing diversifi- cation program. Sea-Land Service, Inc., the operating company of McLean Industries, is a containerized freight service company utilizing the concept of inter- modal highway trailers over land and sea. The company began pioneering containerized freight transportation thirteen years ago on the first regularly scheduled containership run be- tween Newark and Houston. Since then Sea-Land has grown to a fleet of 48 containerships trans- porting more than 35,000 computer-controlled containers on regular calls to 51 port terminals throughout North America, Europe, the Caribbean, and the Far East. Four fundamentals account for Sea-Land's effi- cient and economical container transportation: ocean-going capability, a world-wide network of _ ports, modern container facilities at dockside, and a system of inland coverage through strategically located terminals. The key to this whole concept is the Sea-Land container itself, a highway trailer that travels equally well aboard ship, by rail, or by motor carrier. In effect, the container becomes a sea-going vessel, a rail car, or a truck trailer. The benefits of this approach to freight handling are several: vessel turn-around time is greatly reduced; expensive packaging even for overseas shipments becomes unnecessary; and goods move under seal from door to door. Two important steps have been taken to extend Sea-Land's capabilities. Orders have been placed for the construction of eight high-speed container- ships, which will be added to the Sea-Land fleet as they are completed during the period 1971-73. Each vessel will have a speed of 33 knots and a capacity of 1,082 trailers of 35- and_ 40-foot _ lengths. In addition, Sea-Land has entered into a MALCOM P. McLEAN Chairman, Sea-Land Service, Inc. MICHAEL R. McEVOY President, Sea-Land Service, Inc. 20-year agreement with United States Lines, sub- ject to approval by the U. S. Maritime Commission, to charter 16 containerships and to lease related equipment, with an option to buy the vessels and equipment at the end of 20 years. Competitors have objected to the proposed charter, and hear- ings before the Maritime Commission have not been completed. The additional capacity to be provided by con- struction of the new fast ships, and the proposed time-charter arrangements if consummated, will contribute significantly to Sea-Land's capabilities in the rapidly expanding containerized freight transportation industry.

Tobacco Foods and Beverages Aluminum and Packaging Containerized Freight Transportation

r'o. 11 among all cigarettes, WINSTON continued to outsell all other brands in the nation In 1969, widening its lead over its nearest rival. WINSTON King Size was the Industry's top- selling 85-millimeter brand, and WINSTON Super King led in the 100-millimeter category. I t , 22

iR 0 i Ii a 0 © ® a t7m aw R K ? In Sa[cm %I1Flllfiell-7RJfI A-* I No. :1 among menthol cigarettes, SALEM was the country's best sellfig brand in its category for the twelfth consecutive year and ranked fourth among all brands. SALEM Super King, leading the 100-millimeter menthols, gained in volume over 1968. SALEM King Size headed the 85-millimeter menthol category.

...- ~ rcRrcrSit r nnNESr7C 3L~ RLF..1'n among regular-size non-filter cigarettes, CAMEL continued as the dominant brand in this field. Its market share of that business was well over 50 per cent. CAMEL Filter enjoyed a good growth in sales during the year. t i

i DORAL, combining good flavor with a unique filter system, was placed in national distribution in mid-1969 and outsold every other new cigarette brand introduced in the last two years. Shortly after its introduction in 1967, WINSTON Super King forged to the top of the 100-millimeter field, and it maintained its lead in 1969. PRINCE ALBERT maintained its position as the nation's largest selling smoking tobacco, and CARTER HALL again showed a substantial increase in volume. DAYS WORK retained the top spot in sales of all plug chewing tobacco brands and gained in volume and share of market. ,.., ..... .. -r.c-_=a.44 4

0 0 .` M1,~ ` !~~ ',is ~i~~ ® !!"i ~IJ~1 '. .. ~ i{Ls y~. 1 r. f t ~~;r '; ,j.. :h22'' _Y' . 'u a YIS { .J sA 4{ +r S. ~ ~.K6.:~

From R. J. Reynoi!ds Foods, Inc.: Beverages and convenience foods for every occasion. Thirst-quenching HAWAIIAN PUNCH (1) in tempting flavors-fruit juicy red, orange, grape and pineapple-featuring seven natural fruit juices.. . Bavarian mold and fruit and nut cake made with MY-T-FINE (2) Pudding Mixes... PATIO (3) frozen tortillas, stuffed with a variety of colorful fillings for a festive party table... COLLEGE INN (4) chicken specialties featuring choice ingredients -plump chicken and rich egg noodles ... BRER RABBIT (5) light molasses, the success secret of southern pecan pie ... For a colorful Luau feast, a variety of CHUN KING (6) products-Hawaiian barbecue sauce, frozen sweet and sour pork, shrimp chow mein, fried rice and tiny frozen egg rolis ... And for any cold winter morning a hearty breakfast of hot pancakes topped with golden VERMONT MAID (7) Syrup. cn ~ 0 ~ a

i~ A luminum sheet and foil are manufactured by Archer Products, Inc. in various gauges and alloys for many industrial and packaging uses. From the rolling mills of Archer's Metals Division come products for the electrical, building, packaging, air conditioning and heating industries.

ier 1 y S g , n , pe : :- r-. " ~. :P ~ ~ ~ Baae+ '~ C A ~E ~w_B~+B7 J r ,~... ,,,<._ _Royat_~u~et~ ~ .~ ;.. .~SMOICkp~FL'A - ® ® FHb'~R1TE ~9' ` NG LEMONADE ~ ® Products found in every grocery store, with of foil and paper combinations, polyethylene Protective vinyl wraps made by Filmco, (; brand names known to every housewife, laminations and coatings, and foil and are supplied to grocers for displaying are protected by Archer packaging. specialty paperboard cartons. Archer's fruits and vegetables as well as meats. Archer's Packaging Division provides Consumer Products Division makes gift wrap, Filmco also makes vinyl wraps services to many top companies in the form household and florist foils, ribbons and bows. for industrial packaging. pANISMFLAVOi7 s ,

Containerized Freight Transportation

Through port facilities like those shown at the left, the container in Glasgow, Scotland bound for the United States Sea-Land fleet of 48 ocean-going trailerships moves and a Sea-Land dry van In the streets of Kobe, Japan. containerized cargo throughout the world. Complementing This world-wide freight transportation service this ocean fleet is a land fleet now numbering more than is the principal business of McLean Industries, Inc., 35,000 trailers. Shown above are a Sea-Land bulk liquid the newest member of the R. J. Reynolds family.

12 ._-. __.._ .. -. .~.A E7 1S W

The Company maintained its leadership in 1969 as the largest exporter of cigarettes from the United States and increased its share of this business. Total cigarette exports, however, were down. While there was a gain in commercial exports, this was more than offset by a decline in overseas military shipments, resulting from Armed Forces cutbacks in Southeast Asia. In Europe, sales of the Company's cigarettes, including those exported from the United States and those produced in Europe, rose substantially. CAMEL Filters scored a notable success, particu- larly in Germany. To supply the increasing de- mand, plans were completed to build a cigarette factory in Trier, West Germany, and a factory near Lucerne, Switzerland. Both are scheduled to be in operation by mid-1971. A licensing agreement was announced in May with Sylvana Tobacco Corporation in the Philip- pines for the manufacture of WINSTON, SALEM, and CAMEL Cigarettes. In Mexico the Company's affiliate established WINSTON on a national basis and introduced CAMEL Filters in test markets. Construction is under way on a plant in Puerto Rico to manufacture WINSTON, SALEM, and CAMEL for sale there and in the Virgin Islands. Initial production is set for the fall of 1970. 25

R. J. REYNOLDS TOBACCO COMPANY AND CONSOLIDATED SUBSIDIARIES Ten Year Financial Summary (1) (Dollar amounts in thousands except share statistics) Year ended December 31 1969 1968 1967 REVENUES, EARNINGS AND DIVIDENDS Net sales and operating revenues: Tobacco .............................................. Transportation ......................................... Other ............................................ .. $1,709,914 280,334 262,447 $1,732,577 226,383 229,911 $1,695,1e; 180,49: 216,23: _ Total ................................................. Earnings from operations: Tobacco .............................................. Transportation ...................................::.... Other ................................................ 2,252,695 319,746 55,853 12,551 2,188,871 320,850 50,523 13,345 ----_ 2,091,91; 300,53; 33,315 14,666 Total .........:..................................... Interest and debt expense .................................... Provision for Income taxes ................................... Extraordinary items, net of income taxes ........................ 388,150 23,092 191,283 - 384,718 14,327 195,767 - 348,51E 16,104 161,48E _. Net earnings (2) ........................................... 172,305 168,930 166,344 Dividends paid on Preferred Stocks (historical) .................. 11,538 1,353 1,423 Dividends paid on Common Stock (historical) .............. . . . ... . . 90,530 88,518 82,284 FINANCIAL POSITION Working capital ........................................... 622,881 683,756 623,385 Inventories ............................................... _ 723,968 757,135 801,134 Total current assets ........................................ 921,488 957,484 983,680 Net property, plant and equipment ............................ 524,876 381,413 350,964 Total assets ............................................. 1,693,373 1,476,562 1,475,843 Short-term debt .......................................... 116,622 107,500 175,500 Current maturities of long-term debt ........................... 23,395 23,670 19,388 Income taxes accrued ...................................... 34,881 47,063 46,455 Total current liabilities ...................................... 298,607 273,728 360,295 Long-term debt less current maturities ......................... 274,031 112,502 121,239 Book value of Preferred Stock ................... . ............ 85,774 105,657 104,958 Book value of Common Stock ................................ 992,950 918,594 839,802 OTHER INFORMATION Capital expenditures ....................................... 197,903 67,079 71,516 Depreciation and amortization ................................. 45,369 41,312 37,619 Net earnings per common share .............................. 3.82 3.71 3.65 Net earnings per common share-assuming full dilution ........... 3.57 3.48 3.45 Dividends per common share (on R. J. Reynolds Tobacco Company shares) ....................................... . . 2.25 2.20 2.05 Book value per common share ................................. . . 24.68 22.83 20.87 Average number of shares outstanding ......................... 40,235,578 40,235,552 40,302,863 Average number of shares outstanding-assuming full conversion ... 48,123,711 48,184,929 47,784,586 Number of RJR shareholders at year-end ........................ 136,539 136,129 134,038 NOTES: (1) Amounts for all years include the accounts of McLean Industries, Inc.except as noted. ~ O ~ (2) After deducting net earnings applicable to purchased portion of McLean Industries, Inc. Common Stock prior to acquisition. :.J c11 ~ O 26

R. J. REYNOLDS TOBACCO COMPANY AND CONSOLIDATED SUBSIDIARIES i 3 r ~ 1966 1965 1964 1963 1962 1961 1960 $1,635,238 $1,601,014 $1,571,762 $1,632,892 $1,597,091 $1,527,181 $1,414,954 147,464 101,782 94,158 75,699 64,425 44,678 34,780 168,961 92,134 42,040 39,553 30,451 28,345 23,593 1,951,663 1,794,930 1,707,960 1,748,144 1,691,967 1,600,204 1,473,327 268,017 261,873 247,490 275,194 262,161 264,359 227,198 24,312 12,448 9,316 3,477 5,497 4,515 1,058 17,919 8,765 8,657 9,538 7,673 8,222 5,370 310,248 283,086 265,463 288,209 275,331 277,096 233,626 11,823 7,108 7,508 10,458 10,248 8,035 9,588 145,623 136,812 129,404 148,840 140,672 147,194 118,285 - 6,701 1,556 245 908 - - 149,939 143,101 128,893 129,344 124,434 121,119 105,901 1,485 1,600 1,761 1,738 1,376 1,044 1,135 79,825 75,006 73,734 67,602 64,512 56,439 48,345 583,842 626,865 668,419 613,893 558,685 537,875 498,576 795,162 787,407 777,651 797,703 846,938 845,787 745,598 964,435 927,302 887,640 892,089 943,159 938,622 834,140 315,929 265,912 194,213 221,111 211,514 148,070 127,700 1,395,981 1,254,126 1,100,929 1,136,009 1,181,199 1,113,391 989,313 180,650 125,000 67,000 114,500 222,350 258,556 216,639 16,080 15,622 11,282 15,709 18,812 11,797 9,842 68,375 80,304 83,789 96,640 90,399 93,270 - 77,814 380,593 300,437 219,221 278,196 384,474 400,747 335,564 115,524 103,945 90,089 115,668 112,463 84,824 92,518 100,416 99,998 85,550 87,727 90,233 93,129 94,769 760,003 719,158 685,859 636,000 575,311 517,277 452,455 86,156 126,626 26,819 40,948 81,139 32,376 27,711 33,844 27,398 29,621 29,340 20,951 15,268 15,267 3.22 3.08 2.77 2.78 2.66 2.58 2.21 3.10 2.96 2.71 2.72 2.58 2.48 2.21 2.00 1.85 1.80 1.65 1.60 1.40 1.20 18.83 17.89 16.78 15.52 14.05 12.63 11.05 40,800,745 40,528,050 40,968,611 40,964,177 40,957,619 40,957,106 40,951,641 47,844,569 47,800,123 47,073,953 46,922,492 47,696,453 48,143,363 46,453,441 131,371 118,281 114,010 103,282 97,383 89,550 81,856

R. J. R>=YNOLDS TOBACCO COMPANY AND CONSOLIDATED SUBSIDIARIES Cac B_.....r_ ° . _ DECEMBER 31, 1969 AND 1968 1969 1968 (Note A) ASSETS Current assets: Cash ........................................ $ 39,952,777 $ 49,772,036 Marketable securities-at cost (approximate market value -$6,314,256 and $11,292,804 respectively) ...... 6,800,000 6,800,000 Accounts receivable (less allowances of $4,378,684 and $3,497,706 respectively) ......... . ............ 145,602,406 139,486,835 Leaf tobacco, supplies, manufactured products, etc.- at cost (substantially all on last-in, first-out basis) .... 723,967,878 757,135,468 Prepaid expenses .............................. 5,164,984 4,289,448 Total current assets ............................ 921,488,045 957,483,787 Property, plant and equipment-at cost-Notes C and D: Land and land improvements ..................... 12,489,201 12,383,141 Buildings and leasehold improvements .............. 147,694,157 133,694,131 Machinery and equipment ....................... 271,219,781 271,009,910 Vessels, containers and other marine equipment ....... 347,799,180 214,686,444 Construction-in-process ......................... 58,304,550 24,401,343 837,506,869 656,174,969 Less allowances for depreciation and amortization ..... 312,630,747 274,762,460 Net property, plant and equipment ................. - 524,876,122 381,412,509 Investments in and advances to unconsolidated foreign - subsidiaries-Note B ........................... 18,649,135 17,823,112 Cost in excess of net assets of businesses , acquired- Note B ...................................... 184,643,517 86,384,961 Brands, trade-marks and good will ................... 1 1 Deferred charges and other assets ................... 43,716,401 33,458,045 $1,693,373,221 $1,476,562,415 I See Notes to Consolidated Financial Statements. r 28 .~ -- M.

R. J. REYNOLDS TOBACCO COMPANY AND CONSOLIDATED SUBSIDIARI ES 1969 1968 (Note A) LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable ................................ $ 116,621,874 $ 107,500,000 Accounts payable and sundry accrued accounts ...... 123,709,146 95,494,717 Current maturities of long-term debt-Note D........ 23,395,078 23,669,940 Income taxes accrued ........................... 34,880,620 47,063,398 Total current liabilities .......................... 298,606,718 273,728,055 Deferred liabilities ............................... 12,678,689 8,744,901 Deferred income taxes ............................ 29,332,454 22,088,454 Long-term debt (less current maturities)-Note D....... 274,031,238 112,502,332 Minority interest ................................. - 35,247,598 Stockholders' equity-Notes E and F: Preferred Stock 3.60°!o Series-Par $100 Authorized and issued 490,000 shares .......... - 9,000,000 $2.25 Convertible Preferred Stock-without par value Authorized-8,633,929 shares; issued-8,114,810 shares in 1969 ............ 85,773,542 85,657,451 Common Stock-Par $5 Authorized-60,000,000 shares; issued-40,971,639 shares in 1969 ............. 204,858,195 204,857,665 Paid-in capital ................................ 8,492,310 - Earnings retained .............................. 809,416,850 739,124,149 1,108,540,897 1,078,639,265 Less cost of stock in treasury: Preferred Stock, 3.60% Series (290,000 shares) .... - 24,571,415 Common Stock (735,981 shares) ................ 29,816,775 29,816,775 29,816,775 54,388,190 Total stockholders' equity ..................... 1,078,724,122 1,024,251,075 $1,693,373,221 $1,476,562,415 See Notes to Consolidated Financial Statements. ~ ~ S . W

R. J. REYNOLDS TOBACCO COMPANY AND CONSOLIDATED SUBSIDIARIES Consolidated Statement of Earnings FOR THE YEARS ENDED DECEMBER 31, 1969 AND 1968 Net sales and operating revenues .................... Costs and expenses: Cost of products sold and operating expenses ......... Selling, advertising, administrative and general expenses ......................... 1969 $2,252,694,525 1,630,746,761 233,797,885 1968 (Note A) $2,188, 870,601 1,594,919,734 209,232,690 Earnings from operations .......................... Interest and debt expense .......................... 388,149,879 23,092,412 384,718,177 14,327,409 365,057,467 370,390,768 Less: Provision for income taxes-Note J ................ Earnings applicable to purchased portion of McLean Industries, Inc. Common Stock prior to acquisition ... 191,283,000 1,469,593 195, 766, 643 5,694,191 192,752,593 201,460.834 Net earnings .................................... $ 172,304,874 $ 168,929,934 Net earnings per common share .................... Net earnings per common share-assuming full dilution- Note K ...................................... Consolidated S:aienteni of Earninc_r5 RetairFcd FOR THE YEARS ENDED DECEMBER 31, 1969 AND 1968 $3.82 3.57 1969 $3.71 3.48 1968 (Note A) Earnings retained at beginning of year: As previously reported .......................... $ 678,333,067 Less: Restatement to give retroactive effect to pooled portion of McLean Industries, Inc.-Note A.... 18,000.932 As restated ............................... $ _ 739,124,149 660,332,135 Add net earnings . . . . . . . . . . . : . . . . . . _ 172,304,874 168,929,934 911,429,023 829,262,069 Deduct: Cash dividends: The Company: Preferred Stock-3.60% Series . . ............. 65,000 20,000 $2.25 Convertible Preferred Stock ............. 11,051,831 Common Stock ........................... 90, 530, 052 88,518,214 McLean Preferred Stock ....................... 221,313 632.995 dividends ......................... Total cash 102,068,196 89,871,209 - -_ Excess of stated value of the Company's $2.25 Convertible Preferred Stock over the pooled portion of McLean's common equity .................... (56,023) 266,711 Earnings retained at end of year .................... $ 809,416,850 $ 739,124,149 See Notes to Consolidated Financial Statements. 30

R. J. REYNOLDS TOBACCO COMPANY AND CONSOLIDATED SUBSIDIARIES 1969 1968 (Note A) FOR THE YEARS ENDED DECEMBER 31,1969 AND 1968 Source: From operations: Net earnings ......................... . .... $172;304,874 $168,929,934 Depreciation and amortization .................. 45,368,732 41,312,224 Increase in deferred income taxes and deferred liabilities ......................... 11,177,788 12,594,609 Minority interest in earnings of subsidiary ........... 1,469,593 5,694,191 Net increase in long-term debt .................... 161,528,906 - Decrease in net current assets . . .................. 60,874,405 - $452,724,298 $228,530,958 Disposition: Expenditures for expansion and modernization ........ $197,902,993 $ 67,079,559 Cash purchases of McLean Industries, Inc. common shares ............................. 125,019,855 - Cash dividends ................................ 102,068,196 89,871,209 Net decrease in long-term debt .................... - 8,736,654 Retirement of Preferred Stocks ..................... 24,464,655 - Increase in net current assets .................... - 60,371,137 Other ....................................... 3,268,599 2,472,399 $452,724,298 $228,530,958 See Notes to Consolidated Financial Statements. 31

R. J. REYNOLDS TOBACCO COMPANY AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financia( Statements NOTE A - Merger with McLean Industries, Inc. of the Company and its domestic and Canadian subsidiar;es. McLean Industries, Inc. was merged into the Company on Accounts of other foreign subsidiaries were not consolicated, May 13, 1969. Prior to the merger, 2,304,000 shares of such investments being carried at equity. On consolidation McLean's 10,632,000 common shares were purchased for all significant intercompany accounts and transactions have $115,200,000 cash. In accordance with the terms of the been eliminated. merger agreement, each McLean shareholder not requesting The Company is not amortizing the cost in excess of the the right of appraisal received one share of the Company's net assets of businesses acquired. $2.25 Convertible Preferred Stock for each share of McLean Common Stock held. At December 31, 1969, 8,109,781 NOTE C - Depreciation and Amortization. shares of McLean Common Stock had been exchanged for During the year, depreciation and amortization charged $2.25 Convertible Preferred Stock. Holders of 218,219 shares against earnings totaled $45,368,732 compared with of McLean Common Stock who perfected the right to ap- $41,312,224 in 1968. Depreciation on assets owned by the praisal have been paid $45.00 per share aggregating Company and its subsidiaries, other than assets used in the $9,819,855. transportation business, was determined for both book and income tax purposes using the straight-line method for as- For accounting purposes, the merger was treated as a sets acquired prior to 1954 and accelerated methods for pooling of interests as to approximately 76% and a purchase assets acquired in 1954 and thereafter. Depreciation on as to 24%, and has been reflected accordingly in the Con- assets used in the transportation business was determined solidated Financial Statements. using the straight-fine method for book purposes and acceler- - ated methods for income tax purposes; therefore, provision NOTE 8-Principles of Consolidation and Other Matters. was made for deferred income taxes which may be payable The Consolidated Financial Statements include the accounts in future years. NOTE D - Long-Term Debt. Long-term debt consists of the following: 221z% Promissory Note, due October 1, 1972 ......................... 3% Debentures, due October 1, 1973 (reduced by $5,000,000 of such debentures held by the Company on December 31, 1969 and 1968 for future sinking fund requirements). . . 7% Subordinated Debentures, due June 1, 1989 .................. 77/s% Debentures, due September 1, 1994 ...................: 82/a% Notes, due September 1, 1974 Equipment obligations (6% to 8r/z%) secured by liens on containers and equipment, having a net book value of approximately $122,000,000, payable in monthly fnstallments through 1977 Other indebtedness ................ December 31, 1969 Due Within Due After Total One Year One Year ^ $ 6,000,000 $ 2,000,000 $ 4,000,000 23,000,000 -- 23,000,000 - 15,849,200 - 15,849,200 100,000,000- - 100,000,000 50,000,000 - 50,000,000 101,887,000 21,264,878 80,622,122 .690,116 130,200 559,916 $297,426,316 $23,395,078 $274,031,238 Payment schedule of debt due after one year: Due in: 1971 ........................... $28,549,027 1972 ........................... 28,133,408 1973 ........................... 25,825,447 December 31, 1968 Due Within Total One Year Due After One Year $ 8,000,000 $ 2,000,000 $ 6,000,000 28,000,000 - 28,000,000 - - - - - - - - - 89,091,170 18,370,400 70,720,770 11,081.102 3,299,540 7,781.562 $136,172,272 $23,669,940 $112,502,332 1974 .......................... 58,642.631 1975 and thereafter .............. 132.880.725 $274.031.238 32

R. J. REYNOLDS TOBACCO COMPANY AND CONSOLIDATED SUBSIDIARIES NOTE E - Capital Stock Redemption and Conversion Provi- sions and Substitute Stock Options. Each share of the $2.25 Convertible Preferred Stock is con- vertible into 1.5 shares of the Company's Common Stock on surrender of the Preferred share and payment of $22 in cash. The Company may redeem the Convertible Preferred Stock after May 31, 1979, at $50 per share plus accrued dividends to the redemption date. The aggregate redemption value of shares outstanding at December 31, 1969 was $405,740,500. In the event of involuntary liquidation, holders of $2.25 Convertible Preferred Stock are entitled to $10.57 per share plus accrued dividends. Of the authorized but un- issued common shares, 12,496,928 are reserved for conver- sion of the 8,331,285 shares of $2.25 Convertible Preferred Stock. Substitute stock options for 228,100 shares of $2.25 Con- vertible Preferred Stock were issued in accordance with the terms of the merger agreement with McLean Industries, Inc., pursuant to a former plan for McLean officers and employees. These substitute options, expiring at various dates to Jan- uary 7, 1974, were issued at the following prices per share: 217,800 shares, $37.25; 1,000 shares, $40.00; 7,300 shares, $42.50; 2,000 shares, $4.50. During 1969, substitute options for 6,525 shares were cancelled and substitute options for 5,100 shares were exercised. At December 31, 1969, 216,475 shares of $2.25 Convertible Preferred Stock were reserved for exercise of sutistitute options outstanding at option prices per share as follows: 208,175 shares, $37.25; 1,000 shares, $40.00; 7,300 shares, $42.50. NOTE F-Capital Changes. The following changes in the Company's capital accounts have occurred during the two years ended December 31, 1969: Preferred Stock Shares Amount 3.60% Series - Par $100 Balance at beginning of 1968 ......................................... 490,000 $ 49,000,000 Stock in treasury cancelled, May 13, 1969 ............................... (290,000) (24,571,415) Shares converted into $80 principal amount of debentures or purchased for cash during 1969 ..................................................... (200,000) (16,008,604) Amount transferred to paid-in capital .................................. (8,419,981) Balance, December 31, 1969 ......................................... $ $2.25 Convertible Preferred Stock - without par value ($10.57 per share stated value) Shares issued in connection with the merger of McLean Industries, Inc. into the Company ...................................................... ,109,781 85,720,385 Sales under substitute stock options during 1969 .......................... 5,100 53,907 Shares converted into Common Stock of the Company during 1969 ............ (71) (750) Balance, December 31, 1969 ......................................... 8,114,810 $ 85,773,542 Common Stock - Par $5 Balance at beginning of 1968 ..............................:............ 40,971,533 $204,857,665 Shares issued during 1969 upon conversion of the Company's $2.25 Convertible Preferred Stock ............................ ......_...................... -.. 106 530 Balance, December 31, 1969 ........................................... 40,971,639 $204,858,195 Paid-in Capital Balance at beginning of 1969 ........................................... $ Excess of par value of 490,000 shares of Reynolds Preferred Stock, 3.60% Series over: the cost of 290,000 treasury shares; the principal amount of 7% Subordinated Debentures issued In exchange for 198,113 shares and the cost of 1,887 shares purchased for cash ................................................. 8,419,981 Proceeds ($22 per share) from conversion of the $2.25 Convertible Preferred Stock and the stated value ($10.57 per share) of the converted preferred stock less par value ($5.00 per share) of the common shares issued ...................... 1,761 Proceeds from exercise of substitute stock options to purchase $2.25 Convertible Preferred Stock less the stated value of the shares issued .................. 70,568 Balance, December 31, 1969 ....................................... $ 8,492,310 NOTE G - Pension Plans. The Company and its consolidated subsidiaries have several aggregate cost method. The cost of improvements to this pension plans covering substantially all employees. The plan during 1969, which were approved by the Company's total expense for such plans for the year was $5,844,561 stockholders on May 13, 1969, increased 1969 pension ex- compared with $3,723,214 for 1968, of which the major pense by $2,900,000. This increase was partially offset by a portion applied to the Employees' Retirement Plan of reduction of $1,125,000 as a result of a change in an actu- R. J. Reynolds Tobacco Company, a plan funded under the arial assumption. .~ ...~ ~ N 33

R.J. REYNOLDS TOBACCO COMPANY AND CONSOLIDATED SUBSIDIARIES 34 The Company's policy is to fund pension cost accrued. The total amount of assets so funded exceeded in the aggregate the actuariaily computed value of vested benefits according to the most recent a..tuarial valuation. Contributions are also made to various union administered plans established urider the terms of collective bargaining agreements. NOTE H - Commitments. Leases and time charters for vessels and related equipment and facilities are used extensively in connection with the transportation business and generally provide for initial periods of ten years, with renewal periods of up to thirty additional years. In 1969, such lease and time charter ex- penses amounted to approximately $24,150,000, and in 1970 are expected to be approximately $27,000,000, not including expenses in connection with the United States Lines Agreement referred to below. During 1969, Sea-Land Service, Inc. entered into an agree- ment with United States Lines, Inc. to charter 16 contain- erships and to lease related equipment for a period of twenty years, subject to an option by Sea-Land to purchase the vessels and equipment at the end of the term. The fixed portion of the vessel and equipment lease payments amounts to approximately $30,520,000 per year. In addition, Sea- Land would be required to reimburse United States Lines for its expenses in operating and maintaining the vessels, esti- mated at $30,800,000 annually if the vessels are operated on a full schedule. Sea-Land would also assume equipment obligations aggregating a maximum of $6,000,000. Applica- tion for approval of the agreement has been filed, as re- quired, with the Federal Maritime Commission. Various parties, including the Department of Justice, have intervened In the proceeding. The agreement will not be consummated without Federal Maritime Commission approval, and it is not known when the Commission will rule on the agreement. The Company has signed agreements for the construction during the next four years of five super containerships in the Federal Republic of Germany for a total of 629,000,000 German Marks and three super contalnerships in The Netherlands for a total of 340,920,000 Dutch Florins. The Company has made an initial payment of $23,900,000 and at present exchange rates, has a remaining commitment of approximately $240,000,000. Interim financing amounting to 80% of the construction cost has been arranged for in Germany and The Netherlands to cover the construction period. It is anticipated that interim financing will be re- placed with long-term loans as the ships are delivered. At December 31, 1969, the Company also had various other capital spending commitments of approximately $42,000,000. NOTE I - Legal Matters. In November, 1969, American Export Isbrandtsen Lines, Inc. filed an antitrust suit in the United States District Court for the Southern District of New York seeking a preliminary as well as a permanent injunction against consummation of the agreement between Sea-Land and United States Lines re- ferred to in Note H above. Such suit also asserted that the merger of McLean into the Company violated the Sherman Act and the Clayton Act and requested that the Company be required to divest itself of McLean and also requested treble damages. The request for preliminary injunction was with- drawn in December, 1969, and, by stipulation, the entire case has been stayed pending the decision by the Federal Maritime Commission on the proposed transaction between Sea-Land and United States Lines. The Company intends to defend the case vigorously. The Company and its subsidiaries are defendants in other litigation which in the aggregate is not expected to have any material effect on the Company's consolidated financial position. NOTE J- Provision for Income Taxes. Provision for income taxes includes current and deferred taxes in the following amounts: 1969 1968 Current .............. $184,039,000 $185,447,000 Deferred .... ........ 7,244,000 10,320.000 $191,283,000 195.767,000 The provision for income taxes reflects reductions resulting from investment tax credits, principally from investments in transportation assets, of $9,096,010 in 1969 and $4,651,000 in 1968. Investment tax credits are used to reduce the pro- vision for income taxes in the year the credits are first avail- able. Deferred Income taxes result from differences between book and tax accounting for depreciation, vessel charter payments and pension expense. For book purposes, charter costs are expensed on a straight- line basis over the estimated vessel service life (generally 15 years). For tax purposes, vessel charter payments are deducted in accordance with charter agreements which generally provide for an initial 10-year period and renewa;s thereafter at reduced rates. The difference between charter costs for book and tax purposes is Included as a deferred charge on the balance sheet. NOTE K - Net Earnings Per Common Share-Assuming Full Dilution. Net earnings per common share assuming full dilution are based on the assumption that all shares of Reynolds $2.25 Convertible Preferred Stock have been converted into Reynolds Common Stock at December 31 of each year and the proceeds have been used to purchase Common Stock for the treasury at the average daily price of Reynolds Com- mon Stock during the respective years. Under these as- sumptions there would have been 48,123,711 average com- mon shares outstanding during 1969 and 48,184,929 out- standing during 1968. NOTE L - Divestiture of Penick and Ford, Ltd. On September 22, 1969, the Company consented to a Final Judgment requiring divestiture within two years of the corn wet milling and potato starch businesses acquired from Penick & Ford, Ltd., Incorporated. The divestiture may be by public offering or distribution to Reynolds common share- holders of Penick stock, or by sale of the stock or assets and business of Penick to an acceptable purchaser. The financial effects of the divestiture cannot now be determined because the method and terms of divestiture are unknown. At December 31, 1969, the Company's investment in Penick was approximately $79,300,000, of which approximately $30,800,000 represented cost in excess of net assets of businesses acquired. During 1969 Penick had net sales of approximately $59,800,000, and net earnings of approxi- mately $54,000.

4 ERNST S ERNST Fourth and Main Streets, Winston-Salem, N.C. R. J. Reynolds Tobacco Company, its Directors and Stockholders We have examined the consolidated financial state- ments of R. J. Reynolds Tobacco Company and consolidated subsidiaries for the year ended De- cember 31, 1969. We also examined the consoli- dated statement of source and disposition of funds. Our examination was made in accordance with generally accepted auditing standards, and accord- ingly included such tests of the accounting records and such other auditing procedures as we con- sidered necessary in the circumstances. In our opinion, subject to adjustments, if any, that may result from the divestiture of Penick & Ford, Limited described in Note L, the accompanying balance sheet and statements of earnings and of earnings retained present fairly the financial posi- tion of R. J. Reynolds Tobacco Company and con- solidated subsidiaries at December 31, 1969, and the results of their operations and changes In stockholders' equity for the year then ended, in conformity with generally accepted accounting principles applied on a basis consistent with that of the preceding year. It is also our opinion that the accompanying consolidated statement of source and disposition of funds presents fairly the information shown therein. c.-v.,.../- r 2,v~h Distribution of the 1969 Revenue Dollar Manufacturing costs. operating expenses and freight Earnings retained ~ ~.' $20 /Dividends ~r r g e ~ Taxes on income \. 11At Selling, advert sing. `\ , - administratrve.and a- February 10, 1970 s Excise Taxes interest expenses

R. J. Reynolds Tobacco Company - -- Winston•SalemlNorth Carolina Board of Directors A. H. GALLOWAY GORDON GRAY REUBEN P. HUGHES WILLIAM R. LYBROOK MALCOM P. McLEAN THRUSTON B. MORTON CHARLES F. MYERS, JR. DAVID S. PEOPLES H. H. RAMM FENTON D. ROYSTER JOSEPH H. SHERRILL W. S. SMITH, JR. J. PAUL STICHT COLIN STOKES CHAS. B. WADE, JR. Of; ets A. H. GALLOWAY Chairman/ President COLIN STOKES Executive Vice President _ DAVID S. PEOPLES Executive Vice President W. S. SMITH, JR. Executive Vice President H. H. RAMM Vice President and General Counsel CHAS. B. WADE, JR. Vice President WILLIAM R. LYBROOK Vice President and Secretary JOSEPH H. SHERRILL Vice President FENTON D. ROYSTER Vice President WM. D. HOBBS Vice President EDWARD A. VASSALLO Vice President E. C. RITCHELL Vice President C. F. BENBOW Vice President and Treasurer R. A. EM KEN Comptrol ler Registrar MANUFACTURERS HANOVER TRUST COMPANY 350 Park Avenue New York, New York 10022 Transfer Agents THE CHASE MANHATTAN BANK, N.A. 1 Chase Manhattan Plaza New York, New York 10015 FIRST JERSEY NATIONAL BANK I Exchange Place Jersey City, New Jersey 07303 36

2: - 1::. J. ReynoldsTobacco Company • Winston-Salem / North Carolina w