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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