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R. J. Reynolds Tobacco Company Annual Report 1964 N N

R.J. REYNOLDS TOBACCO COMPANY WINISTON-SALEM, NORTH CAROLINA Notice of Annual Meeting of Stockholders April 14, .1965 . .. . . _ . ,_ ._. TO THE STOCKHOLDERS OF R. J. REYNOLDS TOBACCO COMPANY The Annuali Meeting of the Stockholders of R. J. Reynolds Tobacco Company will be held at Hotel Plaza, Journal Square, Jersey City, New Jersey, at 2 o'clock in the afternoon, Eastern Standard Time, on Wednesday, April 14, 1965, for the purpose of (a) electing directors; (b) considering and acting upon the resolution (more fully described in the accompanying Proxy State- ment) which is expected to be presented by two stockholders and which is oppose& by management; and (c) transacting such other business as may properly come before the meeting. Holders of Common Stock of record at the close of business on February 23, • 1965 will be entitled to vote at the meeting. WILLIAM R. LYBROOK Secretary March 4, 1965 You are cordially requested to attend the meeting. If you are unable to do so, please sign and date the accompanying proxy and mail it at once in the enclosed envelope.

Y Proxy Statement GENERAL The accompanying proxy is solicited by the management of the Company. All shares represented by duly furnished proxies will be voted in accordance therewith. A stockholder furnishing the accompanying proxy may revoke it at any time before it is voted by fiiling written notice with~ the Sec- retary of the Company. Solicitation other than by maili may be made personally, by telephone and by telegraph, by regularly ernploye& officers and employees of the Company who will not be additionally compensated therefor. The Company may request persons holding stock in, their names for others, such as brokers and nominees, to forward proxy material to their principals and request authority for the execution, of the proxy and will reimburse such persons for their expenses in so doing. The total cost of soliciting the proxies will be borne by the Company. As of the close of business on February 23, 1965, there were outstanding and entitled! to vote 40,826,147 shares (one vote per share) of the Company's Common Stock. Stock- holders of record at the close of business February 23, 1965 will be entitled to vote.

ELECTION OF DIRECTORS A board of fifteen directors, to serve for a term of one year and untiI their successors are chosen and shall qualify, is to be elected at the meeting. It is in- tended' that the proxy, unless otherwise directed, will be voted for the election of the nominees named below. If any nominee shall not become a candidate for election as director at the meeting, an event not now anticipated by management, the proxy will be voted for such substitute as shall be designated by management. Name PrinciROllOccuPation First Beeame Director WILLARD M. BRIGHT Vice President_ 1964 L. H. COLEMAN Attorney, member of Davis Polk Wardwell Sunderland & Kiendl----- _----- _ 1959 A. H. GALLOWAY President and Chairman, Executive Committee 1951 BOWMAN GRAY Chairman, Board of Directors (b) _______-__ 1947 GORDON GRAY Chairman, National Trust for Historic Preservation 1961 S. B. HANES, JR. Executive Vice President 1948' REUBEN P. HUGHES President, Pacific Hawaiian Products Cbmpany -- - - - 1965 WILLIAM R. LYBROOK CHARLES F. MYERS, JR. Vice President and Secretary_____ President and Chief Executive Officer, Burlington Industries, Inc----- _________- 1952 1964, DAVID S. PEOPLES Vice President and Comptroller_-__ 1959 H. H. RAMM Vice President and General Counsel (b)_ 1946 JOSEPH H. SHERRILL Vfce President- 1960 W. S. SMITH, dR. Vice President 1960 COLIN STOKES Executive Vice President (b) 1957 CHAS. B. WADE, JR. Vice President 1955 the Shares of Common Stock Beneficially Owned On January 29, 1965 (a) 800: 1,200 24,841 142,000 (c) 138,600 (d) 8,200 124,636 (e) 3,250 (f) 200 700 2,400 6,000 400 15,053 1,412 (g) Profit Sharing Plan of the Company and' credited (b) Member of the Executive Committee of the Board of Directors. (c) Bowman Gray also is income beneficiary of a trust holding 1,366 shares of Common Stock and has a remainder interest in a trust holding 2,000 shares of Common Stock. (d); Gordon Gray also has a- reversionary interest- in three trusts holding a total of 5,190 shares of Common Stock, has a remainder interest in a trust holding 2,000 shares of Common Stock and is income beneficiary of a trust holding 682 shares of Common Stock. (e) Reuben P. Hughes also has a reversionary interest in a trust holding 53,334 shares; of Common Stock. (f) William R. Lybrook also has a remainder interest in a trust holding 1,332 shares of Common Stock. (g) Colin Stokes is income beneficiary of a trust holding 6,900 shares of Common Stock. (a) Shares held by the Trustee under to any individual's account are not included. 3 ~s~3~..,•s%.

All of the persons nominated for election~ as directors were elected to their present terms as directors at the Annual Stockholders Meeting held in 1964 with the exception of Willard M. Bright, Charles F. Myers, Jr. and Reuben P. Hughes, who became directors on May 4, 1964, October 8, 1964 and January 1, 1965, re- spectively. For the last five years prior to his becoming a director Willard M. Bright was associated with Lever Brothers Company, being Director of Research and Development until February, 1960 when he became a Vice President of that Company. For the last five years prior to his becoming a director Charles F. Myers, Jr., has been associated with Burlington Industries, Inc. being Treasurer until February, 1962, Executive Vice President from 1961 until February, 1962 and President and Chief Executive Officer since February, 1962. For the last five years prior to his becoming a director Reuben P. Hughes was President of Pacific Hawaiian Products Company (now known as PHP Co., Inc.), a California corpora- tion, the assets of which were acquired by the Company's subsidiary of the same name in February, 1963, and since that time he has beeni President of the Com- pany's subsidiary, Pacific Hawaiian Products Company, a Delaware corporation. _ REMUNERATION OF DIRECTORS AND OFFICERS The following inforrnation is given as to each director, and each of the three highest paid officers, of the Company who received~ direct remuneration for 1964 from the Company and its subsidiaries of more than $30,000, and as to all the directors and officers of the Company as a group. Amount Credited Accumulhted' Credits in Profit Sharing Trust as of December 31, 1964 (2) Direct for 1964 Shares of Cash and Remuneration Name of Individual for in Profitl Sharing Company's Common Miscellaneous Investments or ldentity of Group 1964 (1) Trust (2Y Stock (a) (at market) Willard M. Bright__ _$ 48,000 $ - - $ - A. H. Galloway__ - 140,000 17,889 1,088:23 81,416 Bowman Gray_- _ 170,000 21,723 1,711.06 124,310 S. B. Hanes, Jr. 89,167 11,394 858.07 60,836 Kenneth H. Hoover (5) ____ 70,000 8,945 808.60 55,785 William R. Lybrook_-____- 65,000 8,306 627.11 44,737 David S. Peoples_ _-___ 49,833 6,368 306.11 23,857 H. H. Ramm.___----- 89,187 11,394 911.29 63,503 Joseph H. Sherrill_---___ 47,400 6,057 264.76 17,115 W. S. Smith, 62,500 7,986 347.14 28,539 Colin 81,667 10,435 567,83 43,840 Chas. B. Wade, Jr------------------- 58,500 7,475 552.68 39,980 All Directors and Officers (18 in number) as a group 1,035,5711 124,302 8,304.65 603,219 4 Estimated Annual Normal' Retirement .- Allowance (3) $115,726 (4) 48,500 56,107 35,625 (6) 28,233 22,776 28,684 21,804 26,226 33,750 27,125 ~

I (a) The closing price of the Common Stock on December 31, 1964 was $38.875 a share. (1) The capacity in which remuneration was received by each of the individuals name& is shown in the second column of the preceding table. Mr. Peoples became a Vice President on May 4, 1964. Mr. Hoover was a Vice President and a Director until his retirement on December 311, 1964. (2) Under the Profit Sharing Plan, which became effective on January 1, 1956 and was last amende& in 1963, a cert'ain share of the annual "Operating Income", as defined in the Plan, is paid in trust for credit by the Trustee to the respective accounts of regular, full-time em- ployees, who have completed certain service requirements, in proportion to their wages or salaries for the year. Distributions from the Trust are made upon termination of employment except discharges for certain causes. In case of voluntary resignation, a member of the Plan is entitled to distribution of his accounts on the basis of 10 ryo for each full year of membership in the Plan, the balance being forfeited. Accumulated credits in the Profit Sharing Trust as of December 31, 1964 shown above do not include credits for 1964 as the profit sharing contribution for that year was not paid into the Trust until after the end of the year. The number of shares of stock shown excludes fractions of less than an hundredt'h~ of a share. (3) The estimated annual! normal retirement allowanees shown are computed as pro- vided under the Employees' Retirement Plan, as amended, and are based on the assumption that the persons named will continue to receive until age 65 salaries at the same rates as in effect at the beginning of 1965. (4) Under an agreement dated May 14, 1964 between Willard M. Bright and the Company, in the event he remains in the employ of the Company until he reaches age 65 and then retires, the Company is obligated to supplement his retirement allowance so that such~ supplement and the retirement allowance will total $2,500 per month. (5) Under an agreement' dated June 12, 11964 between Kenneth H. Hoover and the Com- pany, for the period of five years commencing January 11, 1965 he is obligated to render to the Company advice an& consultation as to the operations of the Research Department and for such services will be paid $20,000 annually. (6) Kenneth H. Hoover, pursuant to the Employees' Retirement Plan, as amended, elected to receive upon his retirement a reduced annuali allowance of $6,605 payable during his life and thereafter to his wife during her life. (7) During 1964the firm of Davis Polk wardwell! Sunderland & Kiendl, of which L. H. Coleman is a partY-er, was paid $132,000 for legal services. Pursuant to the Agreement dated December 17, 1962, between the Company and Pacific Hawaiian Products Company (such name having subsequentliy been change& to PHP Co:, Inc.), under the conditions set forth in the agreement and for a period of three years from February 14, 1963, should Reuben P. Hughes, or the trustee of the trust in whi& he has a reversionary interest, desire to selli any of the shares of Common Stock of the Company received', by them respectively upon the liquidation of PHP Co., Inc., he, or the trustee, as the case may be, may request the Company either to register the shares under the Securities Act of 1933 or to purchase the shares. Mr. Hughes received 124,636 shares of such Common Stock and the trustee 53,334 shares upon such liquidation. Should the Company elect to purchase the shares, the purchase price is to equal the average, for the five busi- ness days preceding, the date of receipt of the request, of the mean for each day of the high and low sale price of the Company's Common Stock on the New York Stock Exchange. 5

PROPOSAL OF TWO STOCKHOLDERS Lewis D. Gilbert and John J. Gilbert, 1165 Park Avenue, New York 28, N. Y., who state that each of them is the owner of 120 shares of the Company's stock and that they represent an additional family interest of 120 shares, have advised the Company that they will introduce at the meeting the following resolution: "RESOLVED: That the stockholders of R. J. Reynolds Tobacco Company, assembled in annual meeting in person and by proxy, hereby request the Board of Directors to take the steps necessary to provide for cumulative voting in the election of directors, which means each stockholder shalU be en- titled to as many votes as shall equal the number of shares he owns mul- tiplied by the number of directors to be elected, and he may cast all of such votes for a single candidate or any two or more of them as he may see fit." They have submitted the following as a statement of reasons in support of their resolution :"At the last annual meeting 3,779 owners with 1,062,485 shares vote& in favor of our similar resolution. The vote against included company stock held by the Trustee under the Profit Sharing Plan which was cast without request- ing confidential voting instructions from the beneficial owners. California Corpora- tions Commissioner Charles E. Rickershauser has declared himself in favor of cumu- lative voting and insisted his statement on~ the beneficial effects of cumulative vot- ing to be sent to California American Broadcasting-Paramount Theatres owners when management soiicit'ed! proxies to eliminate this democratic voting procedure." The Board of Directors recommends voting "AGAINST" adoption of this resolution. OBJECTIONS TO RESOLUTION The same proposal was considered at the Annual ;~Ieetings held in 1959 and in 1964, iand was overwhelmingly rejected both, t'imes: At the 1964 meeting 33,527,648 shares, or 96.93 1c, were cast against the resolution. These shares were held by approximately 72,661 stockholders of record. To be effective, it is important that each member of the Board of Directors have the responsibility of representing all stockholders of the Company. Directors elected through cumulative voting could regard themselves as representing only the special group of stockholders who elected them and this might well be contrary to the interests of the stockholders as a whole. Cumulative voting makes possible 6

partisanship among directors which would interfere with their ability to work to- gether, a requirement essential to the effective functioning of the Board. The Board: of Directors is convinced that it would not be in the interest of the Company or its stockholders to change the existing method of electing direc- tors, which method has worked satisfactorily and successfully during the entire history of the Company. MISCELLANEOUS The management has no knowledge of any other matters to be acted upon pursuant to the proxy. If any other matters should properly come before the meet- ing, it is the intention of the persons designated in the proxy to vote thereon ac- cording to their best judgment. Messrs. Ernst & Ernst for many years have been the independ'ent auditors for the Company. They are appointed each year by resolution of the: Board of Di- rectors. A member of that firm will attend the Annual Meeting and will be avail- able to answer questions that may be asked by stockholders. A summary of the proceedings of the Annual Meeting will be sent to the stockholders. Stockholders who are unable to attend the meeting in person are urged to forward their proxies without delay. A prompt response will be greatly appreciated. R. J. REYNOLDS TOBACCO COMPANY Winston-Salem, N. C. March, 4,' 1965 7

t Notice of Annual Meeting and Proxy Sta temen t Annual Meeting of Stockholders April 14, 1965 R. J. REYNOLDS TOBACCO CO. WINSTON-SALEM, NORTH CAROLINA

To the Stockholders Throughout the past year the tobacco industry has been confronted by multiple problems and challenges from many di- rections. We of the Company have tried our best to live up to the promise we ex- pressed! in this letter last year: to face these problems realistically in a continu- ing effort to do what is best for the users of the Company's products, for its stock- holders.and employees, for the communi- ties in which it operates, and for the industry of which it is a part. In this course we will persist. A&expected, the report of the Surgeon General's Committee on Smoking; and Health, released on J,anuarv 11, 1964 , had an immediate and adverse effect on ciga- rette consumption. However, with the passing months, figures reported by the Internal Revenue Service have indicated~ a reversal of the downward: trend, and at the end of the year consurnption was ap- proaching a more normal level. What ef- fects the report may have on cig;arette consumpt'ion over the longer term are most difficult, of course, to predict. Sales and net earnings of the Company in 1964 were below the record! highs reached in 1963. Sales of 51,6131802,495~ were 3.57less than in 1963 and net earn- ings of $124,005,490 were 3:9 o belowthe 1963'figure. Net earnings available for the Common~Stock were $3.02 a share in 1964 as against $3.13 a share in the preceding year. The decline in earnings was attribu~table principally to reduced sales, greater promotional costs, particularly for the new TEMro Cigarette brand «,hich was introduced early in the year, and higher costs for leaf tobacco. ~ : . As we have said on many occasions, it is our firm conviction that the answers to questions about smoking and health will finallv come only through scientific re- search. Early last year six of the major tobacco companies, including this Company, made available grants which aggregated $10,000;000to the American~ AIedical Association Education and Research Foundation, to help finance the Founda- tion's long-range study of the possible relationship of smoking to disease. This: research project had been authorized by the AMA's house of delegates the pre- vious December, and the A\IA's board of trustees, after appropriating an initial $500,000, had announced its intention to solicit funds from industry, founda- tions, voluntarv health organizations, and physicians: The grant from the six tobacco companies is being made available over a five-year period. A joint letter from the presidents of the companies made the offer of the funds "in the hope and ex- pectation that the research project pro- posed will aid materiallv in finding solu- tions to the public health problems of national and international concern." The Education and Research Foundationsub- sequentlv appointed a committee of five to direct the research. A large number ofgrant's have already been made under this program. 0 The vear 1964 marked the tenth anni, versai.v of a program established by rep- 1

resentatives of tobacco manufacturers ( including this Companv ), growers, and warehousemen to support research by independent scientists into questions of tobacco use and health. Known originally as the Tobacco4ndustry Research Com- mittee, the organization last year was redesignated The Council for Tobacco Research - U.S.A., to clarifythe fact that it is devoted to~ health research rather than to commercial or technologicall study. Research is supported by the Council through grants-in-aid, which are admin- istered by a Scientific Advisorv Board of ten independent scientists and doc- tors who maintain their institutionall af- filiations. Research grants totaling over $7,000;000 have been made to some 230 scientists in more than 100 hospitals, uni'- versities, and research institutions across the countrv. The research is in fields , selected by the scientists and approved by the Scientific Advisory Board. The Company is~continuing its support of the Council's far-reacliing program. In April, 1964, the nine leading ciga- rette manufacturing companies~ in the United States announced the adoption of the Cigarett~e Advertising Code. This Code,wliich became effective Januarv 1, 1965, applies to all advertising of ciga- rettes by the member companies iiii the United States, Puerto Rico, any territory or possession of the United S tates, or any militarv instalhation of the United States: Former \ ewJersev Governor Robert B. Mevner is the Administrator of the Code. No advertising for ciJarettes may be used unless ithas first been~subnnitted, to the Administrator and foundlto comply with the Code st'andards. If a Company should violate the Code, it can be re- quired to pay up to $100,000. The announcement of the Code was front-page news in many of the nation's newspapers. It was praised~ in numerous editorials as a serious effort by the indus- try for self-regulation of advertising. Following a series of hearings begun in 'March, 1964, the Federali Trade Com- mission in June issued a trade regulation rule requiring that all cigarette labels in- clude a health warning after January 1, 1965, and that all cigarette advertising carry such a warning after July 1, 1965. The announcement of this rule was made by the Chairman of the: Commission while testifying before the House: Com- mittee on Interstate and Foreign Com- merce which was then holding hearings with respect to a number of bills relating to the labeling and~ advertising of ciga- rettes and health problems associated with smoking. Subsequently at the re- quest of the House Committee the Fed- eral Trade Commission postponed~ the effective date of its:rule until July 1, 1965, to give Congress an opportunity to con- sider the matter more fully. At the hearing before the House Com- mittee your Chairman appeared as~ a spokesman for the manufacturers of vir- tually-~~ all cigarettes produced in the country and presented their views with respect to the pending bills. His testi- monv incllided the following statement of the industry's position as to the Federal Trade Comrnission's rule: Our attorneys have advised us that the Commission does not have author- ity to issue this Trade Regulation Rule. We opposed the issuance of this rule during the~ course of the Commission proceedings. We shall oppose it in the courts if necessary. We oppose it be- cause we believe the:Commission acted unlanvfully. We oppose it because we believe this matter shoultl! be resolved 2

by the Congress and not by a Federal agency. We oppose it because we be- lieve, as Chairman Dixon acknowl- edged, the Commission's rule would not have preemptive effectS and the in- dustry would be exposed to the possi- bility of diverse state and municipal laws. We oppose it because we believe the Commission's warning requirement is unwise, unwarranted and is not a fair factual statement of the present state of scientific knowledge. A number of prominent doctors, ap- pearing as witnesses during the Com- merce Committee hearings, questioned the conclusions of the Surgeon General's Advisory Committee Report. The essence oftheir testimony was that even though there may be a statistical association be- tween smoking and various diseases, this does not, prove cause and effect. Experi- mental and laboratory proof to supporti the statistics is lacking, they said, and other explanations for the statistics exist - and many factors, in addit'ion to smok- ing, need investigation. : : . In 11964 farm leaders and all other seg- ments of the industrv continued to be confronted with the problem of the mounting surplus of flue-cured leaf to- bacco. Despite the fact that acreage allot- ments under the Federali government's production and price stabilization pro- grams had been reduced 40 per cent since 1954, the 11964! crop of flue-cured tobacco was larger than the crop produced in 1954. The explanation, of course, is that agricultural practices used by most grow- ers have continued to produce larger per- acre yields. This, however, has resulted in the production of much tobacco of quality not desis•ed~ by domestic manufac- turers. In November the Secretary of Agriculture announced a reduction for 1965 of about 19~:5 per cent in acreage al- lotments for flue-cured tobacco. In the opinion of many farm leaders, eventually some form of poundage as well as acreage control is ahnost inevitable if leaf sur- pluses, particularly of undesirable qual- ities, are to be curbed and the govern- ment's price support system for tobacco is to be preserved. s s s For many years we have closed this letter with a few remarks about your em- ployees with whom it is our pleasure to work; and in reporting to you on the year just closed this paragraph has~ special significance and meaning. By careful and successful planning, despite the drop in sales, we have been able to work the plants almost the total number of hours that we had in previous years. Through the weeks of shorter work schedules the employees were cooperative and under= standing. A rededication of effort to produce quality prodhcts was evident throughout the entire organization. The administ!rative and sales groups renewed their efforts to serve our customers and gain new ones for our brands. The pro- ductionofTEMPO involved a uniq;ue manufacturing process requiring the com- bined efforts of research, leaf„ manufac- turing, engineering and service depart- ments. For all these things and for the count!less acts of lbvaltv and extra effort on the part of the emplovees, we express the gratitude of the Board~ of Directors. Respectf ullysuUmitted fortJie Board of Directors, Chairman, Board of Directors February 4, 1965 3

Comparative Summary CONSOLIDATED SALES, EARNINGS AND DIVIDENDS 1963 Net~ Sales . . . . . . . . . . . . . . . . . . $1,613,802,495 $1,672,444,707 Net Earnings . . . . . . . . . . . . . . . . . 124,005,490 129,065,759 Net Earnings as a: percentage of Net Sales . . 7.68% 7.72°jo Earnings per share om Common Stock before taxes on income* . . . . . . . . . . . . . $ 6.14 $ 6.75 Taxes on income per share of Common Stock* . . . . . . . . 3.12 - 3.62 Net Earnings per share of Common Stock- . 3.02 3.13 Dividends per share on Common Stock . . . . . . . . . . 1.80 1.65 Dividends on Preferred Stock . . . . . . . . . . . . 768;352 857,898 Dividends on Common Stock . . . . . . . . . . . . 73;734,383 67,602,086 *Based on shares outstanding at year end' . FINANCIAL POSITION AND EQUITIES AT YEAR END Total Assets . . . . . . . . . Current Assets . . . . . . . .. Current Liabilities . . . . . . . Net Current Assets-Working Capital . . Real Estate, hiachinery and Equipment-Net Funded Debt, . . . . . . . . . Equity of holders of Preferred Stock Equity of holders of Common Stock . Number of stockholders at year end . . . Nhmher of regular employees at year end . 4 40;868;647 40,970,423 $11,019,201,700$1,037,639,534 865;360;515 878,115,844 202,160,282 257,995,847 663, 200, 233 620,119,997 144,360,897 150,023,031 62,000,000 68,000,000 20,271,500 22,459,000 734,769,918 689,184,687 114,010 103,282 14,353 14,932

Financial Review Sales in 1964 were $1,613,802,495, down 3:5 per cent from record sales in 1963 of $1,672;444,707. Net earnings for 1964 of $124,005,490 were 3.9 per cent less than the all-time high of $129,065, 7 59 attained in 1963: Net earnings on the Common Stock, after payment of dividends on the Pre- ferred Stock, amounted to $3.02 per share on the basis of 40;868;647 shares~ out- standing at year end. This compares with $3.13 per share earned in 1963. Dividends on~the Common Stock amounted to $1.80 per share for the year compared to $1.65 during 1963. Dividend payments amounted to $ 73,73-1,883 on the Common~ Stock and $768;352' on the Preferred! Stock for a total of $74,502,735, the larg- est for any year in the Companv's]iistorv. During the year, a number of factors contributed to the decline in earnings. The: majpr factors were lower sales vol- ume, higher advertising costs and in- creased leaf tobacco costs. Partially off- setting factors~ included lower interest and debt expense, resulting from smaller average borrowings, and the reduction ofl the Federal'. corporate income tax rate in 1964. Another Federali income tax change fa- vorably affecting net earnings for the year related to the investment credit. Prior to 1964, the amount of the investment credit, whichi relates to the purchase of new ma- chinery, had to be deducted from the cost basis of the machinery in calculating de- preciation. This requirement in the law was reversed in 1964. Accordingly,, the provision for taxes on income for the year was reduced by $2,818,593, equivalent to DISTRIBUTION OF THE 1964 SALES DOLLAR 7.4ie 4.6e TAXESON SELLING, DIVIDENDS INCOME ADVERTISING, ADMINISTRATIVE, INTEREST AND OTHER EXPENSES 5 35.1 t LEAF TOBACCO; OTHER MANU- FACTURING COSTS AND FREIGHT 3.1 e EARNINGS RETAINED N ~ ~

TWENTY YEAR SALES Millions o! Dollars 1600 1400 1200 1000 800 600 400 200 1945 '46 '47 '48 '49 '50 '51 '52 '53 '54 '55 '56 '57 '58 '59 '60 '61 '62 '63 '64 the prior years' investment credits. A sim- ilar amount was restored to the machin- ery accounts. Short-term borro«•ings at vear-end 1964 were $67,000,000, or 847,500,000 less than at the close of the previous year. For six weeks during late summer, the Company was completely free of this type of debt. The low point in~ 1963 was $26,500,000, and in 1962 it was $75,000,000. In 1964 funded debt was reduced by $6,000,000. In October, 1964, the Com- pany started purchasing on the New York Stock Exchange shares of its Common Stock to be available for possible future acquisitions. At: year end there were 102,886 shares in the treasury at an av- erage cost of $41 per share. Additionally, 21,875 shares of Preferred Stock were purchased during the year at an average cost of $88 per share, bringing to 287,285 the total number of such shares in the treasury at year end. Sales of the: HAWAIIAN PUNCH line - manufactured~ and sold by the Company's wholly-owned subsidiary, Pacific Hawai- ian Products Company-increased over the previous year, and net earnings on this line were up 30 per cent. Sales and~ profits of the Archer Aluminum division: of theCompanv increased significantlyduring the year. The CompanVincreased to 60 per cent its interest in Zigarettenfabrik Haus 1'euerburg, K. G., the Company's West German affiliate, by purchasing an addi- tional 9 per cent dkuing the year. There was charged to general expense in 1964 the amount of $650,000 to reflect in the 6

Company's accounts its share of the loss from operations of foreign affiliates for the year. Capital expenditures during the year amounted to $11,084,506, principallh, in connection with continuing moderniza- tion of cigarette and~ processing plants and equipment and! expansion of facilities for the Archer Aluminum Division. Siini- lar expenditures in 1965 are presentl~-~~ estimated at $20;000,000.. DISPOSITION OF NET EARNINGS for the year ended December 31,1964. Dividends paid' . . . . . . . . . $ 74,502,735 Purchase ofiPreferred Stock . . . . . 1,938,301 Purchase ofCommon Stock . . . . . . 4,166,723 Reduction in funded debt ...... 6;000,000. Net reduction in real estate, machineryand equipment: Capitalexpenditures ($11,084,506) less net asset disposals . $10,102,724 Restoration of prior years`, investment credits . . . . 2,818,593 Depreciation forthe year (18,583,451) (5,662,134) Increase in working capitaf' ...... 43;080,236 Decrease in other, assets . . . . . . . (20,371) Net earnings . . . . . . . . . $124,005,490 COMPUTATION' OF INCREASE IN WORKING CAPITAL Decrease in current liabilities .....$ 55;835,565 Less decrease in current assets ... 12;755,329 Increasein working oapital . . . . . . $ 43,080,236 45,000 40,000 35,000 30,000 ( 25,000 20,000 15,000 10,000 5,000 0 MEN WOMEN JOINT FIDUCIARIES ACCOUNTS INCLUDING' Insurance Companies Banks and Brokers Foundations Hospitals Churches Colleges *:{ Charities Custodians OTHERS tnvestmentFunds 7 Estates and Trusts Pension Funds

Marketing During 1964 the Company continued its leadership in the United States aslhe largest manufacturer of cigarettes in the domestic and export markets. Three of the Company's brands - WINSTON, CAMEL and SALENn - were among the top four best sellingcigarettes and each was the leader in its own cate- gory. WiNsroa, the Companv's largest-sell- ingbrand, led all other filter cigarettes by a«-ide margin. It was second in sales of all cigarettes. CANIEL improved its share of the non- filter, regular-size cigarette market and had a larger percentage of this market than ever before. It was third ini sales of all cigarettes. SALEM, the best-selling menthol eiga- retitle, was second in sales of filter ciba- rette brands~and!fourth amongall brands. SALE-u had over 5011 of the totalimenthol cigarette business. TEMPO, the Companv's new charcoal- tip cigarette, was introduced~ in March in New England and by the end! of June was in distribution nationally. TENiPO s filter construction was an innovation ini that it was the first to use granules of charcoal bound together. The brand was extensively promoted throughout the year in media and point-of-sale advertis- ing. TEMPO has ah-eady become the: fa- vorite brand of many smokers preferring filter cigarettes with charcoal. PRINCE ALBERT, the nation's largest- sellzng smoking tobacco, showed a good increase in sales. To provide the smoker wit17i PRtNcEALBERT in either thefamiliar pocket tin or the new foil pouch, national distribution of the pouch was achieved in 1964. CARTER HALL, our second=largest-sell- ing smoking tobacco, hadi a substantial increase in sales. 8

/ "- ~~ \:_~,~ While the Company's chewing tobacco sales were slightly lower, our DAYS «'oR: brand continued to hold its leadership among chewing tobaccos. ADVERTISING PROGRAM Intensive advertising support for the Company's major cigarette and! smoking tobacco brands played! an important role in maintaining sales leadership in the in- dustry during 1964. Advertising messages were placed on a wide selection of network television programs in order to reach adult smokers with varying tastes in entertainment. Comedy shows included "The Beverly Hillbillies," "NicHale's Navy," and "The Cara Williams Show." In the categprv of musical variety were "The Andy Wil- liams/Jonathan Winters Show," "Holly- wood at the Palace;" "The Jimmy Dean Show," and "The Garry\loore Show." Viewers interested~ in news and infor- mation saw commercials for the Com- pany's brands on "The Huntlev-Brinklev Report" and "The Today Show." Sports fans were reached by "Wide World of Sports," "AFL Football Games," a num- ber of golf tournaments, and telecasts of majpr league baseball games in some of the nation's largest markets. "To Tell the Truth" and "Password" provided entertainment for those who enjpvpanel shows. Also included in the Company's line-up were "Saturday Night at the 'Alovies" and "Sunday Night Niovie." Television spot! announcements were scheduled in many markets in order to give ad'ditionall support for individual 9

brands. An important advantage of TV spots is the flexibility offered in terms of markets, frequencv, brand allocation, and length of commitment. Use of this ad- vertising medium was substantially in- creased last year. 10 Other media were also used extensively to round out the Company's advertising program. Radio coverage was provided by announcements on network shows and local stations. A wide list of popular mag- azines was used to feature the Company's

brands~ in attractive, full colbr. Several campaigns were run in daily newspapers throughout the country. Strong prorno- tional support at the point of sale was given by the Company's large and effec- tive field sales force. INTERNATIONAL MARKETS The Company maintained its position as the leading exporter of cigarettes from I OTHER PRODUCTS RTF.R FI0 G~R~~~~ tlru° I ~ 1 SMOKING TOBACCOS Prince Alberti Carter Hall George Washington Top PRINCIPAL BRANDS OF CHEWING TOBACCOS (not illustrated) Days Work Brown's Mule Apple Sun Cured Reynolds' Natural Leaf ARCHER ALUMINUM DIVISION Foil Products / Packaging Materials PACIFIC HAWAIIAN PRODUCTS COMPANY Hawaiian Punchi King of the lslands Exotic Drinks 11

the United States and'again substantiallv increased its volume and share of market. It continued its aggressive efforts to ex- pand overseas markets by increasing its manpower and advertising and promo- tional efforts. While filter cigarettes were again the fastest-growing segment of the export market, the Company improved its com- petitive position in both the filter and non-filter categories. Zigarettenfabrik Haus Neuerburg, K. G., the Company's affiliat~e in «'est Germany, continued its intensive pro- gram to develop new filter brands and to increase its share of this large and grow- ing segment of the German cigarette market. Early in 1964 «'ias-roN filter cigarettes, manufactured by Haus Neuerburg under license from the Company, were intro- duced on the German market and have become an established brandL REYNO maintained its1eadership in the menthol- filter category. OVERSTOLZ, Haus \euer- burg'sleading brand, again increased its competitive position in the non-filter cig- arette market. A number of changes were made in the management group and mar- ket!ingorganization to streaznlineand improve efficiency. Diversification ARCHER ALUMINUM DIVISION Archer Aluminum Division's sales of packaging materials to outside customers grew significantly last year, although the major part of production continued to be used by the Company for its cigarettes and other tobacco products. The division's Christmas-wrap busi- ness had a sizable growth. Sales of rigid foil containers used for bakery products showed a marked increase over 1961 Ex- tensive resear& and development went into protective packaging: for food prod- ucts, and the flow of orders during the last quarter indicates substantially in- 12

creased production for such packaging materials in 1965. Additional! develop- ment projects included aluminum for lithographic printing plates, electrical conductor applications, and laminated foil! for tobacco-curing barn insuliition. During 1964 Archer began work on a new product, FOYLON. A laminate of aluminum foil and textile fabric, it is in effect a reflective foil-fabric material that will breathe. Considerable progress was made in exploring the use of ForLON in a variety of applications. PACIFIC HAWAIIAN PRODUCTS COMPANY Pacific Hawaiian's principal products, HAwAIIAN~ PUNCH fruit juice beverages and KiNc OF THE ISLANDS exotic tropical juices,, continued to gain in popularity. A low-calorie HAWAIIAN PUNCH was test-marketed! with success in 1964, and this promising new line is expected to be in national distribution by, earlv 1965. Advertising for HAWAIIAN PUNCH in- cluded network television spot announce- ments on "The Tonight Show" and lbcal television and radio spots in selected markets. In an estimated 230,000 retail outlets throughout the country, HAWAIIAN Puacx is available in ready-to-drink, liquid-concentrate, or frozen-concentrate form. A line of KI.No OF THE IsI.ANDS ex- otic tropical juices made from a variety of fruits is also marketed in many areas in fresh-frozen concentrate form. An affiliate of Pacific Hawaiian which produced CINCH bread and cake mixes was disposed of during the year, as this regional brand was not suitable to the marketing pattern of Pacific Hawaiian's other lines. 13

10 Year Record CONDENSED COMPARATIVE FINANCIAL DATA R. J. REYNOLDS TOBACCO COMPANY AND CONSOLIDATED SUBSIDIARIES Year ended December 31, 1964=: 1963 1962 1961 1960 SALES, EARNINGS AND DIVIDENDS (amounts in thousands of dollars) Net Sales $1,613,802 $1,672,445 $1,627,541 $1,555,527 $,1,438;547 Income before taxes 251,725 277,601 260,977 265,220 224,018 Federal and state taxes on income 127,720 148,535 139;821 146,499 120,841 Net Earnings 124,005 129,066 121,156 118;721 106,375 Dividends on Preferred Stock 768 858 936: 1,044 1,135 Dividends on Common Stock 73,734 67,602 64,512' 56;439 ~ 48,345 FINANCIAL POSITION AND EQUITIES (amounts in thousands ofidollars) Current Assets $ 865,361 $ 878;116 $ 930,246 $ 929,775 $ 827,224 Federal and state tax liabilities 94,563 106,074 101,325 94,314~ 79,068 Other current liabilities 107,598 151,922 260,508 293,414i 248,374 Working Capital 663,2% 620,120 568,413 542,047 499,782 Real Estate, Machinery and' Equipment-Nlet 144,361 150,023 147,568 129,001 112,606 Total I assets 1,019,202' 1,037,640 1,089,127 1,067,861 953,756 Funded debt 62',00& 68,000 74,000 80,000 86,000 Equity of holders of Preferred Stock 20;272' 22,459 24,975 27,871 29,51i1 Equity of holders of Common Stock 734,7701 689,185 628,320 572,262 510,692 FINANCIAL STATISTICS (Based on shares outstanding at year end; adjusted~ for 2-for,listock splits in 1961 and 1959 and the a¢quisitioniof PacificHawaiian Products Cbmpany on a pooling of inter- ests basis): Income taxes per share of Common Stock 3.12 3.62 3.41 3.58 2.95 Earnings per share on Common Stock 3.02 3.13 2.93 2.87 2.57 Dividends per share on Common Stock* 1.80 1.65 1.60 1.40 1.20 Book.value:per share of Common Stock 17.98 16,82 15,34 13.97 12.47 •On R. J. Reynolds Tobacco Company shares. 14

EARNINGS AND DIVIDENDS PER COMMON SHARE Dollars 3.50 3.00 DIVIDENDS 2.50 2.00 1.50 1;00 .50 .00 1955 '56 '57 '58 '59 '60 '61 '62 '63 '64 1959 I 1958 I 1957 1956 1955 SALES,INVENTORY AND SHORT TERM DEBT Millions of Dollars 1800 $1,306,197 $1,163;258 $1,066,727 $ 967,609 $ 872,580 1600 199,825 173,757 139,930 138,187 121,725 INVENTORY 108,507 94,576 75,142 75,722 68,220 1400 ~ SNORTTER WI DED'T 91,318 79,181 64,788 62,465 53,505 1200 1,296 2,306 2,685 2,801 2,838 1000 42,260 37,150 32,785 30,760 25,773 800, 600 ~ l 400, l 200 " Oa ao. m 0 v $ 760,034 $ 665,337 $ 649;841 $ 613,678 $ 568,607 1955 'S6 'S7 'S8 'S9 '60 '61i '62 '63 '64 88,287 75,683 64,300 i 71,684 69,780 191,636 132,137 117,179' 77,121 52,519 480,112 457,517 468,362 464,872 446,309 CAPITAL EXPENDITURES AND DEPRECIATION 96,153 79,830 64,376 45,799 42,246 Millions of Dollars 859,386 748 329 333 717 662,861, 614,386 , , 36 92,000 98,000 104,000 110,000 115,000 GIPITAI EXPENDfiURES 34,301 37,666 67,012 69,033 71,386 33 0 DEPRECIATION 453,234 404i,849 364,842 335,022 305;701 30 27 24 21 18 15 $ 2.65 $ 2:31 $ 1.84 $ 1.85 $ 1.67 12 2.20 1.88 1.52 1.46 1.24 1.05 .92'!2 .821/z .77% .65 9 11.07 9.89 8.91 8.20 7.48 6 3 0 a EARNINGS 1955 'S6 'S7 'S8 'S9 '60 '61 '62 '63 '64

, ~ Financial Position December 31, 1964-witH comparative figures for 1963 R. J. REYNOLDS TOBACCO COMPANY AND CONSOLIDATED SUBSIDIARIES ASSETS CURxE1vT AssETs: Cash . . . . . . . . . . . . . . Marketable securities-at cost (approximately equal to market ) . . . . . . . . . . . . . Accounts receivable from customers (less discounts ). Leaf tobacco, supplies, manufactured products, etc.- at cost (substantially all on last-in4 first-out basis ). 1963 $ 25,193,102 $ 24,214,289 ~ 999,634 1,193,278 63,885,559 57,143,040 775,282,220 795,565,237 TOTAL CURRENT ASSETS . 865,360,515 878,115,844 REAL ESTATE, MACHINERY AND EQUIPMENT-at cost 246,914,775 239,964,050 Less allowances for depreciationi . . . . . 102,553,878 89,941,019 NET REAL ESTATE, MACHINERY AND EQUIPMENT 144,360,897 150;023;031 OTHER ASSETS: Investments in (at cost', less reserves) and advances to unconsolidated foreign a~l'iliates . . . . . 7)136,803 7,161,292 Brands, trade-marks and good will ... ... 1 1 Prepaid expenses and sundry other assets . . . . 2,343,484 2,339,366 TOTAL OTHER ASSETS . . . . . . . . . . 9,480,288 9,500,659 $1,019,201,700 $1,037,639,534 16

R. J. REYNOLDS TOBACCO COMPANY AND CONSOLIDATED SUBSIDIARIES LIABILITIES CURRENT LIABILITIES: 1963 Notes payable . . . . . . . . . . . . 67,000,000 $ 114,500,000 Accounts payable and sundry accrued accounts~ . 35,201,752 31,721,506 Funded debt due within one year (loss principal amount of debentures in Treasury-S;604,000 in 1964; $300,000 in 1963) . . . . . . . . . . . . . 5,396,000~ 5,700,000 Federal and state taxes . . . . . . . . . 94,562,530 106;074,341 TOTAL CURRENT LIABILITIES . . . . . . _ _ 202,160,282 257,995,847 FuNDED DEBT (due annuallv 1966-1972, $7,000,000; 1973, $,13,000,000 ) : 21/z % Promissory Notes . . . . . . . . 18,000,000 23,000,000 3% Debentures, diue October 1, 1973 ... .. 44,000,000 45,000,000 TOTAL FUNDED DEBT . . . . . . . . . . 62,000;000 68;000,000 CAPITAL AND EARNINGS RETAINED: Preferred Stock-Par $100 Authorized and' issued 490,000 shares 3:60 ;yo Series . 49,000,000 49,000,000 Common Stock-Par $5 Authorized-60,000,000 shares; issued-40,971,533 shares . . . . . . . . . . . . . 204,857,665 204,857,665 253;857,665 253,857,665 Earnings Retained for requirements of.the business . 529,723,778 480,221,023 783,581,443734,078,688 Less Cost of Stock in Treasury: Preferred Stock, 3.60% Series (287,285 shares in1964; 265,410 shares in 1963 ). . 24,330,641 22,392,340 Common Stock (102,886 shares in 1964; 1,110 shares in 1963) . . . . . . . . . . . . 4,209;384 42,661 28;540;025 22,435,001 TOTAL CAPITAL AND EARNINGS RETAINED . 755,041,418 711,643,687 $1,019,201,700 $1,037,639,534 17

Statement of Earnings Retainec! R. J. REYNOLDS TOBACCO COMPANY AND CONSOLIDATED SUBSIDIARIES Year ended December 31, 1964!-with comparative figures for 1963 196'4t EARNINCS RETAINED for requirements of the business- at beginning of year . . . . . . . . . . Add Net Earnings Deduct cash dividends: Preferred Stock, 3.60% Series . . . . . . . . Common Stock at $1.80 per share for 1964 ($1.65 per share for 1963), . . . . . . . . . . . EARNINGS RETAINED for requirements of the business-at end of year . . . . . . . . . . . . .. REPORT OF INDEPENDENT ACCOUNTANTS $480,221,023 1963 $419,615,248 124,005,490 129,065,759 604,226,5135483681,007 768;352 857,898 73,734,383 67,602,086 74,502,735 68,459,984 $529,723,778 $480,221,023 R. J. REYNOLDS TOBACCO CDM'PANY,, ITS DIRECTORS AND~ STOCKHOLDERS We have examined the consolidated financial statements of R. J. REYNOLDS TOBACCO COMPANY and consolidated subsidiaries for the year ended December 31, 1964. Our, ex- amination was made in accordance with generally accepted auditing standards, and accordingly included such tests of the accounting records and such other auditing procedures as we considere& necessary in the circumstiinces. We were present when inventories were taken by the companies and checked procedures followed in determining quantities and valuations. Winston-Salern,N. C., February 3, 1965 In our opinion, the accompanying, statement of financial position and statements of earnings and of earnings retained present fairly the financial position of R. J. Reynolds To- bacco Company and consolidated subsidiaries at December 31, 1964, and the results of their operations for the year then ended, in conformity with generally accepted account- ing principles applied on a basis consistent with that of the preceding year. It is also our opinion that the statement of' disposition of net earnings for the year ended December 31, 1964', shown on page 7 presents faiily the inf'ormation shown, therein. 19

! i Statement of Earnings R. J. REYNOLDS TOBACCO COMPANY AND CONSOLIDATED SUBSIDIARIES Year ended December 31, 1964 - with comparative figures for 1963 ' 1964;= Ni,-r SAI.S . . . . . . . . . LESS: Cost of goods sold . . . . . . . . Selling, advertising, general and administrative expenses . . . . . . . . . . Provision for depreciation . . . . . . Interest and debt expense . . . . . . . Provision for Federal and! state taxes on income TOTAL INCOIXiE DEDUCTIONS . . . . . . NET EARNINGS . . . . . . . . . . Dividend&paid on Preferred Stock . . . . . NEr EARNINGS APPLICABLE TO COArMOST STOCK NOTES TO FINANCIAL STATEMENTS NOTE A - PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its doniestic subsidiaries. All intereom+ pany items and transactions have been eliminated in con- solid+ation. Accounts of foreigm affiliates are not consolidated, such investments being carried at cost less reserves to re- duce them to the equity ini the underlying net book assets. NOTE B - OUTSTANDING STOCK OPTIONS Substituted options to purchase shares of Common Stock of the Company, issued in 1963 as a result of the acquisition, of Pacific Hawaiian P'roducts :Company, expire at varying dates 18 $1,613,802,495 1963 $1,672,444,707 1,225,435,044 1,271,050,258 113;637,163 98,323,579 18,583,451 18,338,525 4,421,347 7,131,586 127, 720,000 148,535,000 1,489,797,005 124,005,490. 768,352 1,543,378,948 129,065,759 857,898 $ 123,237,138' $ 128,207,861 to August 1, 1967. During the year, substituted options for 1,533 shares were cancelled and options for 4,624 shares were exercised. At December 31, 1964, substituted options were outstanding at option prices per share as follows: 229 shares, $15.51; 2,773 shares, $34.20; 1,665 shares, $37.80. NATE C - INVESTMIENT CREDIT In 1962and 1963 the Company deferred investment credits in the aggregate amount of $2,818,593, to be amortized over the lives of the related assets. In accordance with revisions in the Revenue Act of 1964, such prior years' amounts, together with investment credits of $865,607 applicable to 1964 additions, have been reflected as a reduction in the 1964! provision for Federal income taxes.

.r R. J. Reynolds Tobacco Company RJ BOARD OF DIRECTORS WILLARD M. BRIGHT LEIGHTON H6 COLEMAN A. H. GALLOWAY BOwSfANGRAYGORDON G$AYS. B. HANES,JR: KENNETH H. HOOVER `VILLIA\f R. LYBROOK CHARLES F. MYERS, JR.DAVID S. PEOPLES H. H. RAM'M JOSEPH H. SHERRILL W. S. SMITH, JR. COLINSTOKES CHARLES B. WADE, JR. OFFICERS BOW'\IAN GRAYChairrhan, Board of Directors A. H. GALLOWAY President cmdChairman, Exeeut i ce Com m ittee S. B. HANES;JR. Executice Vice President COLI?7STOKES Executioe Vice President H. H. RA~MXf Vice President and General Counsel KENNETHH.HOOVER Vice President CHARLESB. WADE, Jtt. Vice President W. S. S\IITH, JR. Vice President `VILLIA\i R. LYBROOKVice President and Secretary JOSEPH M SHERRILL Vice President DAVIDS. PEOPLES Vice President and Comptroller WILLARD M. BRIGHT Vice President E. C. PETERSON Treasurer REGISTRAR MANUFACTURERS HANOVER TRUST CO\fP,1NY350 Park Avenue New Yorl:,N. Y. TRANSFER AGENTS THE CHASE MANHATTAN, BANK 1 Chase Manhattan Plaza NewYork„N. Y. THEFIRSTNATIOIFAL BANK OF JERSEY CITY 1 Exchange Place Jersey City, N. J. 20 BOWMAN:CRAY A.H. GALLOWAY Chairman, Board ofDireetors President andChairman, Director, since 1947 Executive Committee 35 years of companyservice Director since 1951 36 years of company service CHARLESB. WADE, JR. (Ieft)! Vice President Di'rector since 1955 26 years of ~ company service S. B.HANES, JR. (rigjlt)~ Executive Vice President Director since 1948 29'vanr.c nf cmmijnnn_crrriro LEIGHTON M COLEMAN Partner, Davis Polk At'ardu;ell' Sunderland & Kiendl Director since 1959

! Ole JOSEPH M SHERRILL Vice President Director since 1960 30 years of company service (left to right) W. S.SttITH,JR. Vice President Director since 1960 25 years of company service WILLIAm R. LYBROOK Vice President and Secretary Director since 1952 25 years of, company service DR.WILLARDR'Zl BRIGHT Vice President Director since t1ay,1964 One year ofcompany service DAVID S. PEOPLES Vice President and Comptroller Director since 1959 18 years of company service GORDON GRAYChairman, National Trust for Historic Preservation Director since 1961 CHARLES F. MYERS, JR: President, Burlington Inditstries, Inc. Director since October, 1964 (left to right) KENNETH H. HOOVER Vice President Director 1953-1964 14 years of company service COLI\ STOKES Executive Vice President Director since 1957 29 years of company service H. H.RA-xIn[ Vice President and General Counsel Director since1916 19'years of eompanyservice

R.J. REYNOLDS TOBACCO COMPANY Winston-Salem/Nbrth Carolina w

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