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~ 1 . Roora 40 ~ R. J. REYNOLDS INDUSI KIES, INC. • 1970 ANNUAL REPORT

R. J. REYNOLDS INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated (Dollar Amounts in Thousands Except Share Statistics) 1970 1969 Net sales and operating revenues .................. $2,484,599 $2,252,695 Net earnings ................................... 201,885 172,305 Per common share ............................. 4.56 3.82 Per common share-assuming full dilution ...... 4.10 3.57 Net earnings as a percentage of net sales and operating revenues ........................... 8.13°/0 7.65% Dividends paid on Preferred stocks ................ $ 18,275 $ 11,538 Dividends paid on Common Stock ................ 96,584 90,530 Per share of Common Stock ......... . . . . . . . . . . . . 2.40 2.25 Average number of common shares outstanding ..... 40,242,252 40,235,578 Average number of common shares outstanding- assuming full dilution .......................... 49,188,427 48,123,711 Capital expenditures ............................ $ 164,619 $ 197,903 Depreciation and amortization ................... 57,153 45,369 Total assets ..................................... $1,857,651 $1,693,373 Current assets .................................. 902,436 921,488 Current liabilities ............................... 330,647 298,607 Net current assets-working capital ............... 571,789 622,881 Property, plant and equipment-net .............. 627,927 524,876 Long-term debt (less current maturities) ............ 296,094 274,031 Book value of Preferred Stock .................... 85,783 85,774 Book value of Common Stock .................... 1,082,155 992,950 Number of RJR stockholders at year-end .......... . 137,504 136,539 Number of regular employees at year-end .......... 28,255 27,969 1

2 A. H. Galloway David S. Peoples This is the first annual report to you from the new corporation, R. J. Reynolds Industries, Inc. Since our last report we have reorganized the corporate struc- ture as approved by the stockholders at their annual meeting last April. This has permitted clearer defini- tion of duties of key personnel and corresponding clarity in individual accountabilities. We are well pleased with the results. Net sales and operating revenues and consolidated net earnings for 1970 achieved new highs. Increases in net sales or operating revenues were posted by all segments of the Company's operations. Particularly gratifying was the 2.4 percent increase in cigarette unit sales. Improved transportation reve- nues were attributable to expanded trade routes and to lower than normal revenues in 1969 as a result of the longshoremen's strike in that year. Sales of other products (including food, aluminum products and packaging, and industrial corn products) increased $31,344,000. Tobacco earnings from operations were up sub- stantially, but transportation earnings from opera- tions declined, reflecting increased competition, higher operating costs, and the cost of expanding trade routes. Earnings from operations of the Com- pany's other businesses were impressive, doubling the prior year. This was accounted for by the food, aluminum products and packaging, and industrial corn refining segments and the inclusion of American Independent Oil Company (Aminoil) in the fourth fiscal period. The acquisition of Aminoil on September 1, 1970, which was discussed in our third-quarter interim re- port, was a culmination of an extended study the Company had made of natural resource energy and the critical underestimation of the world's long- range energy requirements. In future operations in this area we intend to act with caution and careful selection in trying to locate new sources. Since the close of the year, Aminoil has' announced that it has entered into an oil exploration and development agreement with White Shield Indonesia Oil Corp. covering an area in offshore Indonesia along the west coast of Java and the south coast of Sumatra .encompassing approximately 17 million acres. Amin- oil, as operator, plans to initiate its drilling program during the first half of 1971. We would like to review for you the status of our efforts to acquire United States Lines, Inc., from Walter Kidde and Company, Inc. As you know, dur- ing 1969 we entered.into an agreement under which U. S. Lines would charter its containership fleet to Sea-Land Service, Inc. In October, 1970, and prior to final decision by the Federal Maritime Commission on the charter agreement, an opportunity arose under which we could acquire U. S. Lines at significantly less cost over a period of time than would be incurred on the proposed charter basis. Accordingly, new agreements were announced on November 9 under which, sub- ject to approval by the Federal Maritime Commis- sion and the Interstate Commerce Commission and such approvals of the Federal Maritime Administra- tion as may be required, Reynolds Industries through a subsidiary would acquire all of the capital stock of United States Lines in exchange for a promis- sory note of R. J. Reynolds Tobacco Company for $65,000,000. If the necessary approvals are not ob- tained, Reynolds Tobacco will be required to pro- duce for Kidde consideration equivalent to the pur- chase price and U. S. Lines will be sold or disposed of otherwise for the account of Reynolds Tobacco. On December 15, 1970, the U. S. Department of Justice filed a suit in the United States District Court for the District of New Jersey contending that the new agreements violate the antitrust laws, and seek- ing an injunction prohibiting the proposed transac- tion. The Federal Maritime Commission has moved to block the Justice Department's lawsuit. Hearings before the Commission began February 17, 1971, and it is not known how much time will elapse be-

fore a determination is ultimately made by the Com- mission. As of the date of this letter, the court had not made a decision on the Commission's motion to block the Justice Department's lawsuit. (Addi- tional details are presented in Notes H and I of Notes To Consolidated Financial Statements.) Before signing the new agreements of November 9, we had carefully considered any possible anti- trust problems involved. At the time the proposed acquisition was announced, applications were filed with the Federal Maritime Commission and with the Interstate Commerce Commission seeking the ap- proval of those agencies as required by law before the acquisition can be effected. The statutes enacted by the Congress governing the commerce of the United States vest in those agencies the authority to approve transactions of the kind contemplated where they appear to be in the public interest taking into account all facets of the public interest, includ- ing the antitrust laws. Naturally, it is our hope and intention to earn profits for the Company through this acquisition, if allowed. At the same time, we earnestly believe that this merger will enable American shipping to com- pete more effectively with foreign shipping interests. Worth noting in this regard is the fact that the initial decision of the Federal Maritime Commis- sion Hearing Examiner, after hearings on the original charter agreement, determined that "the industry needs-because shippers deserve-the service which can at this time be made available only by Sea-Land with the use of the U. S. Lines container- ship fleet through our approval of the agreement, and which will be an important public benefit; and we find that the conduct thus legalized does not invade the prohibitions of the antitrust laws any more than is necessary to serve the purposes of the Shipping Act." We turn now to the pending divestiture of our corn refining subsidiary, Penick & Ford, Limited. As you can understand, the credit squeeze and the fall- ..off in the market for stocks which the country has been experiencing have complicated our search for a suitable purchaser. We are continuing our exten- sive efforts to comply with the required divestiture by September, 1971. We are pursuing our negotiations with Rothmans International Group, announced on January 21, 1971, looking toward joint efforts through subsidiaries in the production and marketing of cigarettes and other tobacco products in various areas of the world other than North America and Africa. The form and nature of the future association will be determined in these negotiations, and there is nothing further that we can add to the original announcement at this time. We would not want to close this letter without expressing our appreciation for the loyalty and ef- ficiency of the employees of the Company and its subsidiaries throughout the past year. Their coopera- tion during the transitional phases of reorganization has been - as we had expected it would be - out- standing. We are also grateful for the continuing support of the more than 137,000 stockholders and their interest in the progress of the Company. Respectfullysubmitted for the Board of Directors. &AJ_A~ Chairman, Board of Directors President February 19, 1971 , 'E.~6. 11~qht rwur, wWe yvu cuce-tkist6tq about A yuu coA d6 5c9me" ia h yewc Cwtitpnn~ wtik &ne of ds $iqje5 prt.obleme. We uhqmtplf a5~ (~c9t( to t.trti,te te~ the ht~nesLrlt ~atuveti in tjcsa 5tu.te ~it5laturte and let themt kna,u that you cvice oppmed& to tutrt.ea5cmaf,(.e, antid. Purt:utiue gtate c~ahette tcyce5 u,kh &xec,t~ Wluence yatm inwe5tmer<t: ~n cuux Cwn". Iv(awy tkanleyk t 3

Domestic and International Sales I ncreases Reported R. J. Reynolds Tobacco Company, experienc- ing sales gains in both its domestic and its international business, had 'a good year in 1970. The company continued to lead all others in domestic cigarette sales, and outperformed the industry, which appears to have had a slight sales gain over 1969. Many Reynolds brands contributed to the sales growth, in- cluding WINSTON, SALEM, CAMEL Filter, DORAL and VANTAGE. WINSTON, the best-selling cigarette in the United States, expanded its lead over the No. 2 brand, while SALEM continued to be the No. 1 menthol brand. CAMEL Regular performed better than its category overall, although both the brand and the category continued to decline. A strong performance by CAMEL Filter partially offset the loss CAMEL Regular experienced in 1970. DORAL, introduced in 1969, is one of the most successful new brands in recent years, and contributed significantly to the com- pany's strong performance in 1970. VAN- TAGE, Reynolds' newest brand, was intro- duced in initial markets last July, and went into national distribution November 2. VANTAGE has already- achieved a sufficient share of market to be deemed a successful brand. The rapid initial success of VANTAGE supports the company's belief that this new brand offers smokers full tobacco flavor comparable to the best-selling brands on the market while delivering low "tar" and nicotine levels. WINSTON Super King kept its lead in the 100-millimeter field, and SALEM Super King continued to lead the menthol 100-milli- meter category, both by substantial margins. For the first time in several years, the company and the industry overall experi- enced a gain in total smoking tobacco sales. While PRINCE ALBERT maintained its posi- tion as the nation's largest-selling smoking tobacco, Reynolds' gain in smoking tobacco sales was due primarily to a continued in- crease in volume by CARTER HALL and a significant sales improvement by MADEIRA MIXTURE, the company's aromatic blend. In the chewing tobacco market, DAYS WORK remained the leading plug brand, and performed better than the plug market overall. The improved performance of Reynolds' cigarette brands in 1970 came despite the fact that many states continued to increase their discriminatory taxes and the fact that the unreasonable campaigns of anti-smoking forces were as unrelenting as ever. Taxation continues to be a major deter- rent to greater growth for cigarette sales. According to the Tobacco Tax Council, the median price per package of cigarettes at retail in the United States is now 38.9 cents, including an average tax (Federal and state) of 19 cents. A year earlier the median per package price was 37.1 cents. A decade ago, the most prevalent state cigarette tax was 3 cents per package; today more than half the states are imposing rates of 10 cents or more. At the end of 1970, according to the Tax Council, cigarette taxes imposed at the three levels of government made the cost of ciga- rettes to consumers approximately twice as high as it would have been in the absence of taxes. Commenting on the anti-smoking cam- paigns, Horace Kornegay, president of The Tobacco Institute, said recently that it is apparent that those national organizations opposed to smoking "misjudged public gul- libility when they diverted their funds from ,. R. J. Reynolds Tobacco Company Winston-Salem, North Carolina Colin Stokes, Chairman and Chief Operating Officer William S. Smith, President and Chief Executive Officer t 4

research into efforts to control individual behavior without supportive facts." The tobacco industry has funded more scientific research on smoking and health problems than has any other source, govern- mental or private. In 1971 Reynolds and other members of the tobacco industry will- pool more than $4 million for support of such research through the Council for To- bacco Research-USA and the Education and Research Foundation of the American Medical Association. Congress in 1970 passed legislation alter- ing the caution label required on all cigarette packages and banning all cigarette adver- tising from radio and television. Denied the right to advertise on the electronic media, the company is using new ways to merchandise its cigarette products and keep the brand names before the adult smoking public. One way is through sponsorship of special events, such as bowling and stock car racing. Reynolds feels its participation in these events will create an identification for the company's brands with people at the events and with the fans who follow them. More reliance than ever is being placed on the sales force to promote Reynolds brands in outlets around the country. An increase in print media and outdoor advertising, plus more promotional activities such as last year's highly successful "Win With Winston" sweepstakes, will provide additional support and help Reynolds maintain its position as the industry's leading tobacco company. Reynolds Tobacco has a natural concern for all aspects of the tobacco economy. To help assure an adequate supply of its basic raw material, the company continued its long-time financial support of selected proj- ects at agricultural experiment stations in the major tobacco-growing states. Pursuing a project begun in 1969 to help tobacco farmers overcome a labor shortage, Reynolds completed a production model of a com- pact mechanical harvester. An agreement for the commercial production of the harvester was signed in late 1970, and the manufac- turer plans to have a limited number of the harvesters available for sale before the 1971 flue-cured crop is ready. Despite the problems that beset the indus- try, Reynolds believes strongly that tobacco will continue to be a good and profitable. business. j" ~: --r. . ,~ , > tI_ :~ t,,_„ Recognizing the growth potential for ciga- rettes in foreign markets, Reynolds continued -to-capitalize on expansion opportunities in 1970, and the company's brands experienced sales growth in the licensee, subsidiary and commercial export areas. The company increased its total cigarette exports during 1970 and maintained its lead- ership as the largest exporter of cigarettes from the United States. The gain in commer- cial exports came despite a decline in mili- tary export sales resulting from substantial reduction in United States troop strengths overseas. WINSTON continues to be the company's strongest export brand. Sales continued to improve for R. J. Rey- nolds (Europe) S. A., the company's subsidi- ary which has responsibility for both export and direct international operations in Europe, Africa and the Middle East. CAMEL Filter continued to do well in West Germany, and its success spread to Holland and Switzer- land. To meet the increased demand, two of the company's European manufacturing sub- sidiaries have new cigarette factories under construction, one in Trier, West Germany, and another in Dagmersellen near Lucerne, Switzerland. The plant in Switzerland will be completed in mid-1971, while the factory in West Germany is scheduled to be in opera- tion at the end of the year. Reynolds' International Division, which has responsibility for all foreign operations outside Europe, Africa and the Middle East, also reported major strides. The wholly owned subsidiary in Puerto Rico completed construction of its plant there, and by September the factory was producing Reynolds brands. This plant will supply cigarettes for the company's business throughout Puerto Rico, where Reynolds brands are already the largest-selling. The plant will eventually supply cigarettes for other markets in the Caribbean. Sylvana Tobacco Corporation, Reynolds' licensee in the Philippines, began produc- tion of CAMEL cigarettes in October, 1970. In mid-1970, the International Division formed a subsidiary in Hong Kong to con- duct import and export operations for the 6

company's tobacco products in several Far Eastern markets. The subsidiary operates as a trading company, with all cigarettes manu- factured in Winston-Salem and shipped di- rectly to sub-distributors in Hong Kong and more than a dozen additional Asian markets, where total cigarette consumption is on the increase. A licensing agreement was concluded in 1970 with'Macclonald Totiacco; Inc: for the manufacture and sale of special Canadian blend WINSTON and SALEM brands in Can- ada. The cigarettes, manufactured in Mon- treal by Macdonald, have been in selected test market areas since October. Macdonald has also taken over distribution in Canada of Reynolds' other brands, including United States-made WINSTON and SALEM. R. J. REYNOLDS TOBACCO COMPANY - INTERNATIONAL DIVISION Winston-Salem, North Carolina H. E. RICHMILLER, President R. J. REYNOLDS COMPANY San Juan, Puerto Rico JACK AFRICK, President FABRICA de CIGARROS BALOYAN, S.A. Tijuana, Mexico B. T. TROY, President R. J. REYNOLDS TOBACCO CO. (HONG KONG), LTD. Hong Kong M. L. WHITE, General ManSger TABACALERA NACIONAL, S.A. (Licensee) Lima, Peru SYLVANA TOBACCO CORPORATION (Licensee) Manila, Philippines MACDONALD TOBACCO, INC. (Licensee) Montreal, Quebec, Canada R. J. REYNOLDS (EUROPE) S.A. Geneva, Switzerland JACQUES E. BORIN, President REYNOLDS-NEUERBURG G.m.b.H. Cologne, West Germany DR. HANS BUHLER, General Manager REYNOLDS CIGARETTE CORPORATION Aarau, Switzerland MAURICE PERRET, Manager THEODORUS NIEMEYER, N.V. (Licensee) Groningen, Holland AUSTRIA TABAKWERKE, A.G. (Licensee) Vienna, Austria GLENN TOBACCO COMPANY Athens, Greece EDWIN M. lE1GHT, Manager

Global Service Expanded I n I m portant Trade Areas 8 Sea-Land Service, Inc., the major operating company of McLean Industries, Inc., con- tinued in 1970 to broaden its containerized freight service in important trade areas of the world, further developing a complete and unified transportation system which permits the interchange of cargo between virtually any two points in Sea-Land's global network. In February, 1970, the Sea-Land container- ship Bienville brought containerized ship- ping capability to southern Spain and France and to Italy, and introduced into that trade area the high-capacity, 35-foot container. Service also was expanded among the is- lands of the Caribbean. Jamaica became part of Sea-Land's network early in 1970. Already being served by Sea-Land were Puerto Rico -which had known Sea-Land Service almost from its inception-the Virgin Islands and the Dominican Republic. In August, Haiti, Trinidad and Curacao were added to the list of Caribbean islands being called on weekly by Sea-Land containerships. In May, a new interport service connect- ing Hong Kong, Taiwan, Korea and Japan was inaugurated, making Sea-Land contain- erized freight service available between these Far East countries on a regular basis, and connecting them with United States West and East Coast ports, as well as with the Cari bbean. Sea-Land also broadened service in the United States, adding Boston and Port Ever- glades, Florida, to its East Coast ports of call in mid-July. Port Everglades serves southern Florida. The year also saw numerous changes and enlargements at various established ports of call, such as the complete movement of Sea- Land's Rotterdam facilities into larger, more efficient quarters. On July 10, the Sea-Land containership Panama was the first vessel to arrive at the new $309 million, Kobe, Japan, Port Island complex. Sea-Land's growth in service during 1970 resulted in larger volume, but because of start-up costs associated with this expansion and other factors affecting the industry, profits were lower than in 1969. McLean Industries, Inc. Elizabeth, New Jersey Malcom P. McLean, President Sea-Land Service, Inc. Elizabeth, New Jersey Michael R. McEvoy, Chairman

Sales and Profits Up; New Products I ntroduced i Continued substantial growth in sales and profits and the successful introduction of new products were the highlights of 1970 for RJR Foods, Inc. The company maintained its Iez-.dership in Oriental-style and Mexican-style foods through the development and introduction of CHUN KING five-course frozen Oriental dinners and PATIO five-course frozen Mex- ican dinners. Also popular within a short period after introduction were the CHUN KING "Recipe-in-a-Box" dinners, which call for creativity on the part of the housewife, while providing convenience. Other successful new products include the MY*T*FINE Rich 'n Ready canned pud- ding line, HAWAIIAN PUNCH flavors of Apple-Red, Lemon-Pink and Sunshine Orange, and VERMONT MAID in a plastic bottle. One factor credited with helping RJR Foods products make substantial strides dur- ing 1970 was the heavy support provided through advertising, much of it totally new. The company's advertising during the year demonstrated that strong research into con- sumer motivation, translated into creative copy and graphics, can have a vivid impact. A new series of commercials for CHUN KING has been filmed in Hong Kong and Taiwan, placing the Oriental foods in an authentic background. Pretesting of these commercials indicates strong consumer ac- ceptance. In addition, advertising support during prime time on television in 1971 will be the strongest ever to help this brand. Two types of television advertising have been developed to support PATIO for 1971, one designed for the East where Mexican foods are relatively new and another for the Southwest and West where they are popular. Among other brands, HAWAIIAN PUNCH has intensified its television advertising, par- ticularly for frozen concentrate. BRER RAB- BIT molasses has increased its print media advertising, stressing its wide variety of uses as an ingredient, and COLLEGE INN is de- voting its primary effort to a national cook- ing contest among high school students and home economics teachers. RJR Foods achieved widespread recogni- tion in 1970 through its first sponsorship of a television special, "Tales From Muppet- land." This special featured Muppet puppets known across the country because of their appearances on the "Sesame Street" and "Ed Sullivan" television shows. Additional "Tales From Muppetland" television specials are planned for 1971, -e-spedally_ in support of HAWAIIAN PUNCH drinks. New product development continues to receive great emphasis and a number of new products are scheduled for test market- ing in 1971. RJR Foods, Inc. New York, New York John Phillips, President 10

velopment group. This new group had been a part of the corporate Product Develop- ment Department, but it was reassigned directly to RJR Archer under the corporate re- _ organization which took place last summer. The improvements in all divisions helped RJR Archer have a good year in 1970 and add to the company's ability to meet the challenges of 1971. RJR Archer, Inc. Winston-Salem, North Carolina W. Bradley Blair, President 12 I ncreased Sales Reported By All Four Divisions The addition of an entirely new division, in- creased sales, and expanded research and development facilities were the major de- velopments during 1970 for RJR Archer, Inc. Joining RJR Archer's Metals, Packaging and Consumer Products divisions during the year was RJR Filmco, which had been a sep- arate subsidiary of R. J. Reynolds Tobacco Company until March, 1970. All four operating divisions reported in- creases in sales over 1969, and for the third consecutive year RJR Archer sales to outside customers exceeded sales to the parent com- pany and continued to represent an increas- ing percentage of the company's total sales. RJR Filmco is intensifying its efforts to de- velop industrial films to help broaden its product lines. If this program is as successful as anticipated, RJR Filmco's capacity will be increased to meet market demands. A second gift wrap line was put into full production during 1970 in the Consumer Products Division. The division also upgraded its entire line of gift wrap and introduced a new quality gift wrap which enabled it to increase its share of the quality gift wrap market. The Packaging Division improved its mar- ket position during the year by the addition of new equipment which increased its ex- trusion capacity and capability. This new equipment enabled the division to increase significantly its sales of gravure-printed, multi-layered packaging materials which pro- vide both beauty and protection for such convenience packaging users as the food and drug industries. In the Metals Division, work was com- pleted on an expansion project at a Winston- Salem plant, where a new continuous caster, melting complex was installed. The installa- tion increases the plant's casting capacity more than 50 percent and gives this division the capability of producing the widest con- tinuous cast aluminum in the industry. This additional capacity brings into better bal- ance the division's casting, melting and roll- ing facilities and helps meet its requirements for continuous cast aluminum. Last year was the first full year of three- shift operations for the division's Hunting- don, Tennessee, plant since its start-up in late 1967. The plant is now producing alu- minum sheet and foil at a high level of capacity and efficiency. In June, 1970, RJR Archer's Research and Development Department expanded its ca- pability by the addition of a package de-