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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-

t 14 Market Bright for Mai n Product American Independent Oil Company (Amin- oil), acquired by Reynolds Industries on September 1, 1970, benefited during the year from the change from an oversupply of petroleum products to a relative scarcity of supply-especially in heavy fuel oil, which is Aminoil's main product. Sales efforts were vigorously pursued throughout the year and volume increases over the level attained during the three previous years were recorded from Kuwait operations. Sales from Iran continued the steady increase that has been experienced there over the past several years. Aminoil has been successful in regaining a position in the European market and has concluded a substantial two-year contract that could lead to a permanent re-establishment of its marketing position west of Suez. Because of the very high sulfur content of the Kuwait oil, Aminoil was one of the first companies in the industry to build a de- sulfurizing plant. This plant, which will even- tually desulfurize almost half of Aminoil's Kuwait crude oil production, has encount- ered operating difficulties since start-up in 1969 and although it has not yet reached de- sign capacity, steady improvement continues to be made. Desulfurization of the oil will result in a much cleaner-burning fuel. The year 1970 was a time of changing re- lationships between the industry and the governments of the areas in which Aminoil operates. In Kuwait, British Petroleum and Gulf Oil increased the posted price of their crude oil and submitted to an increase in the income tax rate. The posted price ne- gotiated by oil companies and the local governments is the price agreed upon for computing tax and royalty-payments regard- less of the actual selling price. At the end of the year, Aminoil was preparing to,discuss revisions to its concession agreement with Kuwait. In Iran, Aminoil increased the posted price of its heavy Iranian crude oil and submitted to an increase in the tax rate. Exploration efforts continued in.Abu Dhabi ' in the Persian Gulf and in Ecuador during 1970. There were no developments in Abu Dhabi that would give reason to believe that oil in commercial quantities will be found. there by Aminoil. In Ecuador, the prospects are encouraging and Aminoil has continued, with its partners, in an aggressive exploration program. Three of the four exploratory wells which were drilled were discovery wells; however, evaluations have not yet permitted a determination as to whether the accumula- tions are commercial. During 1970 Aminoil continued to look for concession opportunities throughout the world. At year-end, negotiations were essen- tially completed on the acquisition of a par- ticipating interest in a production-sharing contract in Indonesia. American Independent Oil Company, New York, New York J. B. Sunderland, President

Remodeling Program Improving Operations Operations of Penick & Ford, Limited showed a marked improvement in 1970 as the com- pany's ongoing program of plant remodel- ing began to yield benefits of increased effi- ciency. The company's remodeling program, which has been going on for the past few years and will continue in 1971, also in- cludes the installation of new equipment, which has increased Penick & Ford's produc- tion capabilities. Equipment installed during 1970 enabled the company to use a new method of treating corn syrup. Additional machinery to expand the capacity of the im- Penick & Ford, Limited, Cedar Rapids, Iowa Paul E. Geiser, President proved refining process will be installed during 1971. Several new products developed during the past year hold promise for continued gains in 1971. Reynolds Industries must divest itself of Penick & Ford in accordance with the con- sent decree entered in 1969 in the antitrust case brought by the Department of Justice, attacking the acquisition of Penick & Ford. The decree requires divestiture by Septem- ber, 1971, or before. The former grocery division of Penick & Ford was transferred to RJR Foods, Inc. in 1967 and will not be part of the divestiture. 15

Summary Net sales and operating revenues of the Company were a record $2,484,599,000 in 1970 and consolidated net earnings reached a record $201,885,000 for the year. Consolidated revenues rose 10°/0 over 1969's record $2,252,695,000, an increase of $231,904,000. Consolidated net earnings ad- vanced $29,580,000 or 17°/o over the 1969 amount of $172,305,000. Net earnings per share of Common Stock increased in 1970 to $4.56, up 74 cents over the $3.82 per share reported for 1969. Diversification The Company acquired the Common Stock of American Independent Oil Company (Aminoil) for $55,500,000 cash on Septem- ber 1, 1970. Since this is a foreign operation, Aminoil's accounts are not consolidated, but its earnings from operations, interest ex- pense and provision for income taxes for its fourth fiscal period in 1970 have been in- cluded in consolidated results on the equity basis. Net Sales and Operating Revenues The gains in net sales and operating reve- nues are attributable to improved perform- ances by each segment of the Company's operations. Tobacco sales, representing 73°/0 of the consolidated total, increased 6°/o as a result of increased prices and a 2.4°/o gain in cigarette unit sales. (Tobacco sales included excise taxes of $698,576,000 in 1970 and $677,607,000 in 1969.) Transportation reve- nues rose 34°/o, or $94,572,000, over the prior year. The transportation gain is attrib- utable to expanded trade routes in 1970 and lower than normal revenues in 1969 as a re- sult of the longshoremen's strike in that year. Sales of other products, including food, aluminum products and packaging, and in- dustrial corn products, increased $31,344,000 and contributed 12°/o to the consolidated total. . Earnings from Operations Consolidated earnings from operations of $446,514,000 increased $58,364,000 or 15°% over the 1969 amount of $388,150,000. Tobacco earnings from operations gained $62,805,000 as a result of higher cigarette unit sales and increased prices, partially offset by rising manufacturing costs and the expense of new brand introductions. A decline in transportation earnings from operations reflects increasing competition, higher operating costs and the cost of ex- panding trade routes. It is anticipated that these conditions may continue in the short term; however, it is hoped that profit mar- gins of the Company's transportation busi- ness will improve with the possibility of increased rates in some areas and the restora- tion of cuts in others. Earnings from operations of the Com- pany's other businesses doubled in 1970, in- creasing $12,780,000 over 1969. Significant improvement in the food, aluminum prod- ucts and packaging, and industrial corn re- fining segments contributed to this gain. Also included in the 1970 figures for the first time are American Independent Oil Company's earnings from operations for its fourth fiscal period. 16

R. J. REYNOLDS INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARIES Ten Year Net Sales and Operating Revenues 3dXYr -_--_--- V,l hom of U,I larc Ten Year Earnings from Operations 1 lran,fwrtntion , 11 Tnl- ro 11 KI Tr,r ,."Lmun Othrr b NET SALES AND OPERATING REVENUES (Dollars in Thousands) 1970 0/0 1969 0/0 Tobacco ......... $1,815,902 73.1 $1,709,914 75.9 Transportation .... 374,906 15.1 280,334 12.4 Other ............ 293,791 11.8 262,447 11.7 Consolidated ..... $2,484,599 100.0 $2,252,695 100.0 EARNINGS FROM OPERATIONS* (Dollars in Thousands) 1970 0/0 1969 Tobacco ............ $382,551 Transportation ....... 38,632 Other ............... 25,331 Consoiiaatea ........ $44Es514 o/o 85.7 $319,746 82.4 8.6 55,853 14.4 5.7 12,551 3.2 10G.0 $388,T50 100.0 *Earnings before interest and debt expense and provision for income taxes. 17

R. J. REYNOLDS INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARIES Capital Expenditures and Depreciation Total Liabilities and Stockholders Equity .Total.Capitalization and Long-Term Debt MJlions of Dollars 18 M Cepital EspenAitnres Dividends ® Drpreciauun Dividends per share of Common Stock totaled $2.40 'per share in 1970, marking the seventeenth consecutive year of increased dividend payments. Dividends paid during the year on the Common and Preferred stocks aggregated $114,859,000, the highest in the Company's seventy-one years of con- secutive dividend payments. Debt Position In December, 1970, the Company acquired one containership newly constructed for the Matson Navigation Company, and has contracted to purchase a second Matson containership which is to be completed early in 1971. These vessels are being financed by 1,600 1,400 1.200 1000 800 600 400 200 0 Uintal liah~lrt:<. and St,wAholA,•n Equlq© futal Capdalv,n:on L,.ng-feim Debt long-term debt which increased $13,750,000 with the delivery of the first vessel. During the year the Company borrowed $35,960,000 under interim financing agreements in con- nection with the eight super containerships being constructed in the Federal Republic of Germany and The Netherlands. Arrange- ments have been made to replace the in- terim financing with long-term financing as the eight vessels are completed. At present exchange rates, it is estimated the eight ves- sels will cost $352 million. Of this total amount, $28 million has been supplied out of internal funds, $36 million has been sup- plied by interim bank financing, and $178 million will be supplied by banks as con- struction progresses, leaving $110 million re- maining to be supplied from internal funds in the next three years.

R. J. REYNOLDS INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARIES Re.enues, Tolal Assets and Nel Earnings Rr.rnur. & 3OU` - _ Ji~~ _- 2 Sla - nlillnrn-n Ek.ll.tr. EarninRs Per Common Share Dividends Per Common Share \ct Earninl;• - dn 2.(W ---- _ cai-fi 410 13lutalAxet. \r: EarnlnK. © EarmnE;, n nn idend, During 1970 payments of $28,196,000 were made on long-term debt, which to- taled $296,094;000 at year-erid (excluding $27,542,000 of long-term debt maturing dur- ing 1971). Short-term debt, which totaled $136,444,000 at year-end 1970, increased $19,822,000 over year-end 1969. The Com- pany was free of short-term debt twice dur- ing. the month of August. I Capital Expenditures Outlays for capital expenditures amounted to $164,619,000 in 1970, or $80,381,000 less than the 1970 estimate made at this time last year. This difference was the approximate amount that would have been spent for equipment needed for the United States Lines charter arrangement, which was de- layed. The 1970 outlay was the second high- est in the Company's history, exceeded only by the record $197,903,000 in 1969. Of the total 1970 capital expenditure, $140,735,000, or 85°/0, related to the acquisition, conver- sion and construction of vessels and pur- chase of associated equipment to expand Sea-Land's containerized fleet. During the year the construction of a new cigarette manufacturing plant in Puerto Rico was completed. The Company also continued modernization of tobacco manufacturing fa- cilities and expansion and modernization of aluminum products and packaging, industrial corn refining, and food processing facilities. Capital expenditures in 1971 for currently approved programs are estimated to be $150 million, largely the continuation of the eight- vessel program referred to above. 19

R. J. REYNOLDS INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARIES Too 'e* c"r i-.i ... .~.,} (Dollar Amounts in Thousands Except Share Statistics) Year ended December 31 1970 1969 1968 REVENUES, EARNINGS AND DIVIDENDS Net sales and operating re:Ienues: Tobacco .......................................... $1,815,902 $1,709,914 $1,732,577 .~ Transportation .................................... 374,906 280,334 226,383 Other ............................................ 293,791 262,447 229,911 Total ........................................... 2,484,599 2,252,695 2,188,871 Earnings from operations: Tobacco .......................................... 382,551 319,746 320,850 Transportation .......................... .... 38,632 55,853 50,523 Other ............................................ 25,331 12,551 13,345 Total ........................................... 446,514 388,150 384,718 Interest and debt expense ............................. 30,914 23,092 14,327 Provision for income taxes ............................ 213,715 191,283 195,767 Extraordinary items, net of income taxes ................. - - - Net earnings ........................................ 201,885 172,305 168,930 Dividends paid on Preferred stocks (historical) ........... 18,275 11,538 1,353 Dividends paid on Common Stock (historical) ............ 96,584 90,530 88,518 FINANCIAL POSITION Working capital ..................................... 571,789 622,881 683,756 Inventories ......................................... 702,558 723,968 757,135 Total current assets .................................. 902,436 921,488 957,484 Net property, plant and equipment ..................... 627,927 524,876 381,413 Total ass-ets_,................................................. 1,857,651 1,693,373 1,476,562 Short-term debt ..................................... 136,444 116,622 107,500 Current maturities of long-term debt ................... 27,542 23,395 23,670 Income taxes accrued ................................ 50,072 34,881 47,063 Total current liabilities ............................... 330,647 298,607 273,728 Long-term debt less current maturities .................. 296,094 274,031 112,502 Book value of Preferred Stock .......................... 85,783 85,774 105,657 Book value of Common Stock .......................... 1,082,155. 992,950 918,594 OTHER INFORMATION Capital expenditures ................................. 164,619 197,903 67,079 Depreciation and amortization ........................ 57,153 45,369 41,312 Net earnings per common share ....................... 4.56 3.82 3.71 Net earnings per common share-assuming full dilution ... .4.10. 3.57 3.48 Ut Dividends per common share ........................... 2.40 2.25 2.20 0 0 Book value per common share ......................... 26.89 24.68 22.83 w w Average number of common shares outstanding .......... 40,242,252 40,235,578 40,235,552 J -a r Average number of common shares outstanding- assuming full dilution .............................. 49,188,427 48,123,711 48,184,929 0 Number of shareholders at year-end .................... 137,504 136,539 136,129 20

R. J. REYNOLDS INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARIES 1967 1966 1965 1964 1963 1962 1961 1 1,695,181 $1,635,238 $1,601,014 $1,571,762 $1,632,892 $1,597,091 $1,527,181 180,496 147,464 101,782 94,158 75,699 64,425 44 678 216,233 168,961 92,134 42,040 39,553 30,451 28,345 2,091,910 1,951,663 1,794,930 1,707,960 1,748,144 1,691,967 1,600,204 300,533 268,017 261,873 247,490 275,194 262,161 264,359 33,315 24,312 12,448 9,316 3,477 5,497 4,515 14,668 17,919 8,765 8,657 9,538 7,673 8,222 348,516 310,248 283,086 _ 265,463 288,209 275,331 277,096 16,104 11,823 7,108 7,508 10,458 10,248 8,035 161,485 145,623 136,812 129,404 148,840 140,672 147,194 - - 6,701 1,556 245 908 - 166,344 149,939 143,101 128,893 129,344 124,434 121,119 1,423 1,485 1,600 1,761 1,738 1,376 1,044 82,284 79,825 75,006 73,734 67,602 64,512 56,439 623,385 583,842 626,865 668,419 613,893 558,685 537,875 801,134 795,162 787,407 777,651 797,703 846,938 845,787 983,680 964,435 927,302 887,640 892,089 943,159 938,622 350,964 315,929 265,912 194,213 221,111 211,514 148,070 1,475,843 1,395,981 1,254,126 1,100,929 1,136,009 1,181,199 1,113,391 175,500 180,650 125,000 67,000 114,500 222,350 258,556 19,388 16,080 15,622 11,282 15,709 18,812 11,797 46,455 68,375 80,304 83,789 96,640 90,399 93,270 360,295 380,593 300,437 219,221 278,196 384,474 400,747 121,239 115,524 103,945 90,089 115,668 112,463 84,824 104,958 100,416 99,998 85,550 87,727 90,233 93,129 839,802 760,003 719,158 685,859 636,000 575,311 517,277 71,516 86,156 - 126,626 26,819 40,948 81,139 32,376 37,619 33,844 27,398 29,621 29,340 20,951 15,268 3.65 3.22 3.08 2.77 2.78 2:66 2.58 3.45 3.10 2.96 2.71 2.72 2.58 2.48 2.05 2.00 1.85 1.80 1.65 1.60 1.40 t,n 20.87 18.83 17.89 16.78 15.52 14.05 12.63 0 0 .40,302,863 40,800,745 40,528,050 40,968,611 40,964,177 40,957,619 40,957,106 w w :7,784,586 47,844,569 47,800,123 47,073,953 46,922,492 47,696,453 48,143,363 J s 134,038 131,371 118,281 114,010 103,282 97,383 89,550 ~ 21

R. ). REYNOLDS INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARIES I December 31,1970 and 1969 (Dollars in Thousands) 1970 1969 ASSETS Current assets: Cash ................................................ $ 48,367 $ 39,953 Marketable securities -at cost (approximate market value-$4,250 and $6,314 respectively)-Note B ............................... 6,800 6,800 Accounts receivable (less allowances of $7,510 and $4,379 respectively) ........................ 139,044 145,602 Leaf tobacco, supplies, manufactured products, etc. -at cost (substantially all on last-in, first-out basis) ...................................... 702,558 723,968 Prepaid expenses ...................................... 5,667 5,165 Total current assets .................................... 902,436 921,488 Property, plant and equipment-at cost-Notes C, D and H: Land and land improvements ........................... 14,565 12,489 Buildings and leasehold improvements .................... 164,985 147,694 Machinery and equipment .............................. 302,648 271,220 Vessels, containers and other marine equipment ........... 416,270 347,799 Construction-in-process ................................ 88,821 58,305 _ 987,289 837,507 Less allowances for depreciation and amortization .......... 359,362 312,631 Net property, plant and equipment ...................... 627,927 524,876 Investments in and advances to unconsolidated subsidiaries - Note A .................................. 96,271 18,649 Cost in excess of net assets of businesses acquired- Note A .............................................. 185,888 184,644 Deferred charges and other assets .......................... 45,129 43,716 $1,857,651 $1,693,373 See Notes to Consolidated Financial Statements. 22

R. J. REYNOLDS INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARIES 1970 1969 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable ........................................ $ 136,444 $ 116,622 Accounts payable and sundry accrued accounts ............ 116,589 123,709 Current maturities of long-term debt-Note D ............ 27,542 23,395 Income taxes accrued .................................. 50,072 34,881 Total current liabilities ................................. 330,647 298,607 Reserves and non-current liabilities ........................ 17,041 12,679 Deferred income taxes ................................ . . . 45,931 29,332 Long-term debt (less current maturities)-Note D ........... 296,094 274,031 Stockholders' equity- Notes E and F: Preferred Stock - $2.25 Convertible Preferred Stock-without par value Authorized - 8,293,985 shares; issued--8,115,685 shares in 1970 .................... 5,783 5,774 Common Stock- Par $5 Authorized - 60,000,000 shares; issued-40,290,220 shares in 1970 ..................... 201,451 204,858 Paid-in capital ........................................ 10,398 8,492 Earnings retained ...................................... 870,306 809,417 1,167,938 1.108,541 Less cost of stock in treasury: Common Stock (735,981 shares in 1969) ................ - , 29,817 Total stockholders' equity ............................ 1,167,938 1,078,724 0 0 $1,857,651 $1,693,373 w w a -- .- ~ See Notes to Consolidated Financial Statements. to 23

R. ). REYNOLDS INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARIES For the Years Ended December 31, 1970 and 1969 (Dollars in Thousands) 1970 1969 Net sales and operating revenues ......................... Costs and expenses: Cost of products sold and operating expenses ............. : Selling, advertising, administrative and general - ~ $2,484,599 $2,252,695 1,772,23& - - .1,630,747 expenses ......................................... 274,547 234,753 Earnings from domestic and Canadian operations ........... 437,814 387,195 Equity in earnings from unconsolidated foreign - operations .......................................... 8,700 955 Earnings from operations ................................... . - 446,514 388,150 Interest and debt expense ............................... 30,914 23,092 415,600 365,058 Less: Provision for income taxes-Note )... ............. 213,715 191,283 Earnings applicable to purchased portion of McLean Industries, Inc. Common Stock prior to acquisition ....................................... - 1,470 213,715 192,753 Net earnings .......................................... $ 201.885 $ 172,305 Net earnings per common share .......................... $4.56 $3.82 Net earnings per common share-assuming full dilution-Note K ................................... 4.10 3.57 For the Years Ended December 31,1970 and 1969 (Dollars in Thousands) 1970 1969 Earnings retained at beginning of year ........ ............. $ 809,417 $ 739,124 Add net earnings ....................................... 201,885 172,305 1,011,302 911,429 Deduct: Cash dividends: The Company: Preferred Stock - 3.60°/o Series .................... - 65 $2.25 Convertible Preferred Stock .................. 18,275 11,052 Common Stock .................................. 96,584 90,530 McLean Preferred Stock ............................. -_ 221 Total cash dividends ............................. 114,859 102,068 °o Excess of stated value of the Company's $2.25- Convertible Convertible Preferred Stock over the pooled portion of McLean's common equity .................. - (56) w W Retirement of Common Stock held in treasury .......................................... 26,137 - -~ 306 $ 870 Earnin s retained at end of year 417 S 809 ro , g .......................... = , -M -o See Notes to Consolidated Financial Statements. 24

R. J. REYNOLDS INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARIES r, u'i..... `;r,it. ~( For the Years Ended December 31,1970 and 1969 (Dollars in Thousands) 1970_ 1969 Source of funds: Net earnings ............................................ $201,885 $172,305 Items not involving funds: Add: Depreciation and amortization ........................ 57,153 45,369 Deferred income taxes ............................... 16,599 7,244 Minority interest in earnings of subsidiary ............... - 1,470 Reserves and non-current liabilities ..................... 4,362 3,934 Deduct: Equity in undistributed net earnings of unconsolidated subsidiaries ........................................ 4,499 955 Funds from operations ................................... 275,500 229,367 Proceeds from long-terni debt ........ . . . . . . . . . . . . . . . . . . . . . 54,406 199,042 Proceeds from issuance or conversion of Company's stock ..... 2,188 125 Disposals of net property, plant and equipment .............. 8,458 11,148 Decrease in inventories .................................. 21,410 33,167 Increase in notes payable ................................. 19,822 9,122 Increase (decrease) in accounts payable and sundry accrued accounts ...................................... (7,120) 28,214 Increase (decrease) in income taxes accrued ................. 15,191 (12,182) 389,855 498,003 Disposition of funds: Expenditures for expansion and modernization of property, plant and equipment .................................. 164,619 097,903 Cash purchases of McLean Industries, Inc. common shares in 1969 .............................................. - 125,020 Investment in and advances to unconsolidated subsidiaries ..... 73,123 (129) Cash dividends ......... .............:................• 114,859 102,068 Retirement of Preferred stocks ............................ - 24,465 Repayment of long-term debt ............................. 28,196 37,788 Increase (decrease) in accounts receivable .................. (6,558) 6,115 Other, net .............................................. 7,202 14,592 381,441 507,822 Increase (decrease) in funds for the year ..... . . . . . . . ...... . . . . 8,414 (9,819) Cash and marketable securities at beginning of year ............ 46,753 56,572 Cash and marketable securities at end of year ................. $ 55,167 $ 46,753 See Notes to Consolidated Financial Statements. 25

R. J. REYNOLDS INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements NOTE A - Principles of Consolidation and Other Matters. The Company's consolidation policy is to in- clude in its consolidated financial statements the accounts of domestic and Canadian operations after eliminating significant inter- company accounts and transactions. The earnings from operations, interest expense and provision for income taxes of American Independent Oil Company (acquired Sep- tember 1, 1970 for $55,500,000 cash) for its fourth fiscal quarter of 1970 and other for- eign operations (for the calendar years re- ported) are included in consolidated results. Investments in unconsolidated operations are carried at equity. Foreign assets and liabilities (after elimina- tion of intercompany items) of the Com- pany's operations are as follows: (Dollars in Thousands) 1970 1969 Assets ........ $254,920 $100,600 Liabilities ..... 105,043 47,704 McLean Industries Inc. was merged into the Company on May 13, 1969. Prior to the merger, 2,304,000 shares of McLean's 10,632,000 common shares were purchased for $115,200,000 cash. In accordance with the terms of the merger agreement, each McLean shareholder not requesting the right of ap- praisal received one share of the Company's $2.25 Convertible Preferred Stock for each share of McLean Common Stock held. A total of 8,109,781 shares of McLean Common Stock were exchanged for $2.25 Convertible Preferred Stock. Holders of 218,219 shares of McLean Common Stock who perfected the right to appraisal were paid $45.00 per share aggregating $9,819,855. For accounting purposes, the merger was treated as a pooling of interests as to ap- proximately 76% and a purchase as to 24°/0, and has been reflected accordingly in the Consolidated Financial Statements. The Company is not amortizing the cost in excess of the net assets of businesses ac- quired. NOTE B - Marketable Securities. On February 17, 1971, the date of the Report of Independent Accountants for the year 1970, marketable securities had a value of $5,161,000. NOTE D - Long-Term Debt. Long-term debt consists of the following: 2'/s°% Promissory Note, due October 1, 1972 ........... 3% Debentures, due October 1, 1973 (reduced by $4,514,000 and $5,000,000 of such debentures held by the Company on December 31, 1970 and 1969, respectively, for future sinking fund requirements) .... 7°% Subordinated Debentures, due June 1, 1989 ........ 7'/a°/o Debentures, due September 1, 1994 .............. 8'/e°% Notes, due September 1, 1974 ................. Equipment Obligations (6% to 9°/0) secured by liens on containers and equipment, having a net book value of approximately $114,000,000, payable in monthly installments through 1978 ......................... Vessel Construction Loans from various banks in the Federal Republic of Germany and The Netherlands, at rates varying from 8°/o to 83/.°% .................... Vessel Mortgage Note, payable in quarterly installments through December 31, 1975, with interest at the prime commercial rate plus '/2°% ................... Other indebtedness ................................ Payment schedule of debt due after one year (1): Due in: 1972 .................................$ 54,247 1973 ................................. 44,369 1974 ................................. 61,472 (1) Included in 1972 and 1973 are repayments of $22,732 and $13,228, respectively, representing vessel construc- tion loans which will be replaced with long-term for- eign financing. See Note H. 26

R. J. REYNOLDS INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARIES NOTE C - Depreciation and Amortization. During the year, depreciation and amor- tization charged against earnings totaled $57,153,000 compared with $45,369,000 in 1969. Depreciation on assets owned by the Company and its subsidiaries, other than assets used in the transportation business, was determined using accelerated methods for the most part for both book and income tax purposes. Depreciation on assets used in the transportation business was determined using the straight-line method for book pur- poses and accelerated methods for income tax purposes; therefore, provision was made for deferred income taxes which may be payable in future years. (Dollars in Thousands) December 31, 1970 December 31,1969 Total Due Within One Year Due After One Year Total Due Within One Year Due After One Year $ 4,000 $ 2,000 $ 2,000 $ 6,000 $ 2,000 . $ 4,000 18,486 486 18,000 23,000 - 23,000 15,849 15,849 15,849 - 15,849 . . . 100,000 100,000 100,000 - 100,000 ... 50,000 50,000 50,000 - 50,000 ....... 80,790 21,380 59,410 101,887 21,265 80,622 35,960 35,960 13,750 2,750 11,000 ..... 4,801 _ 926 _ 3,875 690 130 560 $323,636 $27,542 $296,094 $297,426 $23,395 $274,031 1975 ............................... 15,214 1976 and thereafter .................... 120,792 $296,094 27

R. J. REYNOLDS INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARIES NOTE E-Capital Stock Redemption and Conver- sion Provisions and Substitute Stock Options. Each share of the $2.25 Convertible Preferred Stock is convertible into 1.5 shares of the Company's Com- mon Stock on surrender of the Preferred share and payment of $22 in cash. The Company may redeem the Convertible Preferred Stock after June 30, 1979, at $50 per share plus accrued dividends to the re-., demption date. The aggregate redemption value of shares outstanding at December 31, 1970, was $405,784,000. In the event of involuntary liquidation, holders of $2.25 Convertible Preferred Stock are en- titled to $10.57 per share plus accrued dividends. Option price per share .................. $4.50 1969 Options substituted, May 13, 1969 ...... 2,000 Cancelled ........................... - Exercised ........................... 2,000 Balance, December 31, 1969 ........... - 1970 Cancelled ........................... - Exercised ........................... - Balance, December 31, 1970 ........... -- Of the authorized but unissued common shares, ` 12,434,753 are reserved for conversion of 8,115,685 shares of $2.25 Convertible Preferred Stock issued and 174,150 of such shares issuable upon exercise of substitute stock options. Substitute stock options for 228,100 shares of $2.25 Convertible Preferred Stock were issued in accord- ance with the terms of the merger agreement with McLean Industries, Inc., pursuant to a former plan for McLean officers and employees. These substitute options expire at various dates to January 7, 1974. Substitute stock option issue prices and activity dur- ing 1969 and 1970 are shown in the table below. Shares $37.25 $40.00 $42.50 Total 217,800 1,000 7,300 228,100 6,525 - - 6,525 3,100 - - 5,100 208,175 1,000 7,300 216,475 4,075 1,000 5,075 37,2r0 37, 250 166,850 7,300, 174,150 NOTE F-Capital Changes. The following changes in the Company's capital accounts have occurred during the two years ended December 31, 1970: Preferred Stock - 3.60°% Series - Par $100 Balance at beginning of 1969 .................................... Stock in treasury cancelled, May 13, 1969 ......................... Shares converted into $80 principal amount of debentures or purchased for cash during 1969 ......................................... Amount transferred to paid-in capital in 1969 ...................... Balance, December 31, 1969 and 1970 ............................ Shares Amount (In Thousands) 490,000 $ 49,000 (290,000) (24,571) (200,000) (16,009) (8,420) $ 28

R. J. REYNOLDS INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARIES NOTE F-Capital Changes. (Continued) Shares Amount $2.25 Convertible Preferred Stock -Without Par Value (In Thousands) ($10.57 per share stated value) Shares issued in connection with the merger of Mclean Industries, Inc. into the Company ........................................... 8,109,781 $ 85,721 Sales under substitute stock options during 1969 .................... 5,100 54 Shares converted into Common Stock of the Company during 1969 ... (71) (1) Balance, December 31, 1969 .................................... _ 8,114,810 85,774 Sales under substitute stock options during 1970 ................... 37,250 394 - Shares converted into Common Stock of the Company during 1970 ..-. (36,375) (385) Balance December 31, 1970 ..................................... 8,115,685 $ 85,783 Common Stock- Par $5 Balance at beginning of 1969 .................................... 40,971,533 $204,858 Shares issued during 1969 upon conversion of the Company's $2.25 Convertible Preferred Stock .............................. 106 Balance, December 31, 1969 ......... . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,971,639 204,858 Shares issued during 1970 upon conversion of the Company's $2.25 Convertible Preferred Stock .............................. 54,562 273 Stock in treasury cancelled, June 29, 1970 ......................... (735,981) (3,680) Balance, December 31, 1970 .................................... 40,290,220 $201,451 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 during 1969 ................................................ 8,420 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 during 1969 ............................. 2 Proceeds from exercise of substitute stock options to purchase $2..25 Convertible Preferred Stock less the stated value of the shares issued ............................. during 1969 ................... 70 i Balance, December 31, 1969 .................................... 8,492 Proceeds ($22 per share) from conversion of the $2.25 Convertible Preferred Stock and the stated value ($10.57 per share) of the N 0 converted preferred stock less par value ($5.00 per share) of the 0 common shares issued during 1970 ............................ 912 w Proceeds from exercise of substitute stock options to purchase $2.25 ~ Convertible Preferred Stock less the stated value of the shares issued during 1970 ................................................ 994 ~ a Balance, December 31, 1970 .................................... $ 10,398 29

R. J. REYNOLDS INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARIES NOTE G - Pension Plans. The Company and its consolidated subsidiaries have several pension plans covering substantially all em- ployees. The total expense for such plans for the year was $7,718,000 compared with $5,845,000 for 1969, of which the major portion applied to the Em- ployees' Retirement Plan of R. J. Reynolds Tobacco Company, a plan funded under the aggregate cost method. The Company's policy with respect to this plan is to fund pension cost accrued. The total amount of assets so fund4 exceeded in the aggre- gate the actuarially computed value of vested bene- fits according to the most recent actuarial valuation: Contributions are also made to various union admin- istered plans established under the terms of collec- tive bargaining agreements. NOTE H-Commitments and Contingencies. 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. Such lease and time charter expenses amounted to approximately $32,435,000 in 1970 and $24,150,000 in 1969 and are estimated to be $32,500,000 in 1971. In October, 1970,, the Company entered into an agreement with Matson Navigation Company to pur- chase two containerships then under construction for a basic contract price of $27,500,000. Purchase of the first vessel which was delivered in December, 1970 was financed by long-term borrowing. The Company has arranged long-term financing for the second vessel which is scheduled to be delivered early in 1971. Construction is proceeding on five super container- ships in the Federal Republic of Germany and three in The Netherlands. Interim financing in the amount of $214 million (at December 31, 1970 exchange rates) with banks in Germany and The Netherlands will be replaced with long-term foreign financing as the vessels are completed. The summary below shows, based on year-end exchange rates, the esti- mated total cost of the eight vessels and estimated repayments for the bank financing: Bank financing repayment schedule: (Dollars in Thousands) 1971 .................................$ - 1972 ................................. 1,590 1973 .°. • . . . . ; ............................ 12,322, 1974 ................................. 19,322 1975 ................................. 19,322 1976 and thereafter .................... 161,326 $213,882 At December 31, 1970, the Company also had vari-s ous other capital spending commitments of approxi- mately $45 million. On November 9, 1970, a merger agreement was. entered into under which the Company would ac- quire all of the Common Stock of United States Lines, Inc., which is a subsidiary of Walter Kidde & Company, Inc., for a $65,000,000 promissory note of R. J. Reynolds Tobacco Company. The note will bear interest from November 9, 1970 at an annual rate of 8°% plus interest at the rate of 6°/o per annum on deferred installments of interest. The note will be due no.later than November 9,. 1976, _Applications for approval of the proposed merger have been filed, as required by law, with the Federal Maritime Com- mission and the Interstate Commerce Commission. If the necessary approvals are not obtained, Reynolds- Tobacco will be obligated under a supplemental agreement with Kidde to produce equivalent con- sideration for Kidde within 24 months of any disap- proval and in any event no later than November 9, •1976 and United States Lines will be sold or disposed of otherwise for the account of Reynolds Tobacco. The merger agreement modifies the October 27, 1969 Time Charter and an Agreement of Lease and Sublease between Sea-Land and United States Lines under which Sea-Land proposes to charter from United States Lines 16 containerships and to lease related equipment for a period of 20 years (with an option to purchase at the end of the period), and provides for the termination of the charter and equipment lease in the event the proposed merger is not approved. Since the Company cannot own or operate United States Lines without the required Government approvals, neither the merger trans- (Dollars in Thousands) w 0 Remaining 0 w w Total Project Cost Expended Through December 31, 1970 Commitments December 31, 1970 v Bank Financing .............. .. $213 882 $35 960 $177 922 a N . . From Internal Funds .............. , 138 187 , 771 27 , 110 416* kA , , , Total ... .................... $352,069 $63,731 $288,338 *Due 1971-1973. 30

R. J. REYNOLDS INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARIES action nor the operating results of United States Lines have been included in the consolidated finan- cial statements. (See Note I below.) 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 injunc- tion against consummation of the charter and equip- ment lease referred to in Note H above, seeking an order that the Company be required to divest itself of McLean and that Kidde be required to divest itself of United States Lines, and asking treble dam- ages. The request for preliminary injunction was withdrawn in December, 1969, and, by stipulation, the entire case has been stayed pending a decision by the Federal Maritime Commission in proceedings for approval of the proposed charter and equipment lease. The Department of Justice on December 15, 1970, filed an antitrust suit in the United States District Court for the District of New Jersey seeking an in- junction prohibiting the proposed merger referred to in Note H above and an order rescinding the sup- plemental agreement referred to in said Note. The Federal Maritime Commission has moved to inter- vene in the lawsuit and for a stay of proceedings in the suit until determination of the proceedings pend- ing before the Commission for approval of the merger. The Department of Justice has asked the Court for a preliminary injunction prohibiting con- summation of the merger and of the supplemental agreement. Hearings before the Commission began February 17, 1971, and it is not known how much time will elapse before a determination is ultimately made by the Commission. As of such date, the Court had not made a decision on the Commission's motion to stay proceedings in the Department of Justice's lawsuit and the latter's motion for a pre- liminary injunction had not been argued. The Company or its subsidiaries are defendants in other litigation which in the aggregate is not ex- pected to have any material effect on the Company's financial position.. NOTE j-Provision for Income Taxes. Provision for income taxes includes current and de- ferred taxes in the following amounts: (Dollars in Thousands) 1970' 1969 Current .................$197,116 $184,039 Deferred ............... 16,599 7,244 $213,715 $191,283 The provision for income taxes reflects reductions resulting from investment tax credits of $2,614,000 in 1970 and $9,096,000 in 1969. Investment tax credits, resulting primarily from investments in transporta- tion assets, are used to reduce the provision for in- come taxes in the year the credits are first available. Deferred income taxes result from differences be- tween 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 wnich generally provide for an initial 10-year period and renewals thereafter at reduced rates. The difference between charter costs for book and tax purposes is included as a deferred charge on the balance sheet. There are a number of issues pending as a result of Internal Revenue Service audits of certain prior years, but the Company believes any adjustments which may result will not materially affect the Company's financial position. NOTE K-Net Earnings Per Common Share-As- suming Full Dilution. Net earnings per common share assuming full dilu- tion are calculated using the treasury stock method for determining fully diluted shares. This calculation assumes all substitute stock options are exercised and that all shares of $2.25 Convertible Preferred Stock outstanding during the year (plus shares of $2.25 Convertible Preferred Stock which would be issued on exercise of substitute options) were con- verted into Common Stock and the proceeds used to purchase treasury common shares at the higher of the average daily price or year-end closing price of the Common Stock. Under these assumptions there would have been 49,188,427 and 48,123,711 average common shares outstanding during 1970 and 1969, respectively. The 1969 computation includes the as- sumption that the $2.25 Convertible Preferred Stock was outstanding prior to the merger with Mclean Industries, Inc., on May 13, 1969. NOTE L-Divestiture of Penick and Ford, Limited. On September 22, 1969, the Company consented to a Final Judgment requiring divestiture within two years of the corn wet milling and potato starch busi- nesses acquired from Penick & Ford, Ltd., Incorpor- ated. The divestiture may be by public offering or distribution to the Company's common shareholders of Penick stock, or by sale of the stock or assets and business of Penick to an acceptable purchaser. How- ever, the financial effects of the divestiture cannot now be determined because the method and terms of divestiture are as yet unknown. 31

R. J. REYNOLDS INDUSTRIES, INC. AND CONSOLIDATED SUBSIDIARIES 32 At December 31, 1970, the Company's investment in Penick was approximately $79,316,000 of which ap- proximately $30,800,000 represented cost in excess of net assets of businesses acquired. During 1970 Penick had net sales of approximately $62,582,000, and net earnings of approximately $1,325,000. NOTE M-Subsequent Events. On January 21, 1971, the Company and Rothmans REPORT OF I:VDFPENDEN ( ACCOUy fANTS ERNST & ERNST Fourth & Main Streets, Winston-Salem, N. C. International Group announced negotiations look- ing 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. Rothmans International Group has ex- tensive tobacco interests in many parts of the world outside the United States. DISTRIBUTION OF THE 1970 REVENUE DOLLAR R. J. REYNOLDS INDUSTRIES, INC., ITS DIRECTORS AND STOCKHOLDERS We have examined the consolidated financial state- ments of R. J. Reynolds Industries, Inc. and consoli- dated subsidiaries for the two years ended De- cember 31, 1970. Our examinations were made in accordance Mth generally accepted auditing stand- ards, and accordingly included such tests of the accounting records and such other auditing pro- cedures as we considered necessary in the circum- stances. In our opinion, subject to adjustments, if any, that may result from the divestiture of Penick & Ford, Limited described in Note L, the accompanying bal- ance sheet and statements of earnings, earnings re- tained, and source and disposition of funds present fairly the financial position of R. J. Reynolds Indus- tries, Inc. and consolidated subsidiaries at December 31, 1970, and 1969, and the results of their opera- tions, changes in stockholders' equity, and source and disposition of funds for each .of the two years then ended, in conformity with generally accepted accounting principles applied on a consistent basis. February 17, 1971 MANUFACTURING COSTS, OPERATINC EXPENSES AND FREIGHT SELLING, ADVERTISING, ADMINISTRATIVE, AND INTEREST EXPENSES

R. ). Reynolds Tobacco Company makes the nation's top seller in each of its product categories: WINSTON cigarettes, PRINCE AL- BERT smoking tobacco and DAYS WORK plug chewing tobacco. Rey- nolds produces nearly one-third of all cigarettes sold in the United States. Sea-Land Service, Inc. combines the flexibility of over-the-road trucking with the efficiency and low cost of waterway shipping. It currently serves 70 port terminals in 28 coun- tries with 47 containerships and more than 44,000 .computer-con- trolled containers. RJR Foods, Inc. markets a variety of international and convenience foods, irnduding CHUN KING Ori- ental foods, PATIO Mexican foods, HAWAIIAN PUNCH beverages, VERMONT MAID syrups, BRER RABBIT molasses and syrups, COL- LEGE INN foods and MY*T*FINE desserts. RJR Archer, Inc. produces specialty foil and sheet aluminum products, flexible packaging materials, florist foil materials, gift wrapping and protective vinyl wrap. American Independent Oil Com- pany is an independent oil pro- ' ducer and refiner. Its principal sales are to other oil companies. Amin- oil's primary source of oil is in the Neutral Zone between Kuwait and Saudi Arabia, and the main refinery -and desulfurization plant -are in Kuwait. Penick & Ford, Limited is engaged in corn wet milling and potato starch operations. Among the bulk .products it sells to industry for a wide variety of uses are corn syrups and oils, corn and potato starches, dextrines and gums.

nI.:. .~•:~".:ILI~{~`J - .To~.._ ....~ Board of Directors A. H. GALLOWAY Chairman, R. J. Reynolds Industries, Inc. GORDON GRAY Chairman, National Trust for Historic Preservation REUBEN P. HUGHES Vice President, RJR Foods, Inc. WILLIAM R. LYBROOK Senior Vice President and Secretary, R. J. Reynolds Industries, Inc. MALCOM P. McLEAN President, McLean Industries, Inc. THRUSTON B. MORTON Vice Chairman of the Board, Liberty National Bank and Trust Co., Louisville, Kentucky CHARLES F. MYERS, J R. Chairman and Chief Executive Officer, Burlington Industries, Inc. DAVID S. PEOPLES President, R. J. Reynolds Industries, Inc. H. H. RAMM* S_e_n_ior Vice President and General Counsel, R. J. Reynolds Industries, Inc. FENTON D. ROYSTER* Vice President, R. J. Reynolds Tobacco Company J. H. SHERRILL Vice President, R. J. Reynolds Tobacco Company WILLIAM S. SMITH President, R. J. Reynolds Tobacco Company J. PAUL STICHT President, Federated Department Stores, Inc. • COLIN STOKES Chairman, R. J. Reynolds Tobacco Company CHAS. B. WADE, JR. Senior Vice President, R. J. Reynolds Tobacco Company Officers A. H. GALLOWAY Chairman and Chief Executive Officer DAVID S. PEOPLES President and Chief Administrative Officer H. H. RAMM** .Senior Vice President . and General Counsel WILLIAM R. LYBROOK Senior Vice President and Secretary S. A. ANGOTTI Vice President C. F. BENBOW Vice President E. C. RITCHELL Vice President E. A. VASSALLO Vice President J. W. DOWDLE Treasurer R. A. EMKEN Comptroller + " Retired December 31, 1970. C. F. Benbow and H. C. Roemer elected to fiii vacai cies. "' Retired December 31, 1970. Succeeded by H. C. Roemer, elected Vice President and General Counsel. 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 1 Exchange Place Jersey City, New Jersey 07303 34

R. J. Reynolds Indtrstries, Inc./ V%'instoo Salem, North Cir:rolina 27102 -j ~ o~ o

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