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BOARD OF DIRECTORS JOHN C. WHITAKER R. C. HABERKERN E. A. DARR H. N. HARDY I3OWMAN GRAY H. S. KIRK W. J. CONRAD A. H. GALLOWAY S. \1I. SCOTT W. T. SMITHER R. G. VALLANDINGHAM H. H. RA\I\I S. B. HANES, JR. WILLIAM R. LYBROOK KENNETH H. HOOVER TRANSFER AGENTS THE CHASE NATIONAL BANY OF THE CITY OF NEw YORK 11 Broad Street, New York 15, N. Y. 1:t.j. 11. R. J. REYNOLDS TOOACCO COMPANY Chairman Board of Directors Chairman Executive Committee President Vice President Vice President Vice President Vice President and Secretary Treasurer Comptroller Manager Advertising Department Superintendent of Leaf Buying Solicitor and Assistant to Chairman of Board Superintendent of Leaf Processing Associate Counsel Director of Research THE FIRST NATIONAL BANY OF JERSEY G'I7Y 1 Exchange Place, Jersey City 3, N. J. REGISTRAR THE HAXOVER BAA7C / 0 Broadway, New York 15, N. Y.

annual report to the stockholders 1954 contents FINANCIAL HiGHLICHTS 2 LETTER TO STOCKHOLDERS 3 \1'I\STON - NF:X%'EST YHODUCT 8 1'RODCCTS 10 AD\'F.IiTISIN(3 12 1'F.ItSONN EL 14 J-yBAIi RECC)RD 1'rJ FINANCIAL STATEMENTS 16 ItEI'0RT OF INDEI'EXDENT CERTIFIED 1'l'BLIC AC'C't )L'NT ANTS 20 Bc)AIil) OF DI ItECTORS 21 R. J. REYNOLDS TOBACCO COMPANY From TFa4 F50 J° n Corporote Library - WHQ

Financial Highlights 1954 1953 SALES, EARNINGS AND DIVIDENDS Net Sales . . . . . . . . . . . . $814,273,776 $876,189,581 Net Earnings . . . . . . . . . . . 44,826,793 34,172,044 Net Earnings as a percentage of Net Sales ... 5.51% 3.90% Earnings per share on common stocks before taxes on income* . . . . . . . $ 10.04 $ 9.99 Taxes on income per share of common stocks* . 5.85 6.87 Net Earnings per share on common stocks* ... 4.19 3.12 Dividends per share on common stocks ... 2.40 2.00 Dividends on Preferred Stock . . . . . . 2,894,413 2,934,000 Dividends on common stocks . . . . . . 23,731,853 19,756,235 * Based on 10,000,000 shares. FINANCIAL POSITION AND EQUITIES AT YEAR END Total Assets . $617,635,877 $598,609,439 Current Assets 574,025,535 558,393,962 Current Liabilities 144,872,480 137,701,957 Net Current Assets-Working Capital . . 429,153,055 420,692,005 Real Estate, Machinery and Equipment-net .. 40,259,587 36,394,804 Funded Debt . . . . . . . . . . . 120,000,000 125,000,000 Equity of holders of Preferred Stock .... 73,377,500 75,000,000 Equity of holders of common stocks .... 279,385,897 260,907,482 2

TO IHF: STOCi:IIOLI)ERS: The vear's net earnings of $44,826,793, after provision made in the final quarter for an addi- tional contingent tax reserve of $1,800,000 for prior years, were the largest in the Company's history. They exceeded the results of 1949, when the previous high was reached, by $-1,372,6:32 and were $10,654,749 greater than 1953 net earnin as. Earnings per share on the 10,000,000 shares of common stocks also attained a new high of $4.19. This amount is computed after deduction of the additional contingent tax reserve, which is equiva- lent to 18 cents a share. In 1953 earnings on com- mon stocks amounted to $3.12 a share and in 1949 to $3.75 a share. The improvement in net earnings over those of 1953 was due primarily to the termination of the excess profits tax, which for 1953, the last year the tax was in effect, amounted to $12,021,220. Earnings before Federal and state taxes on in- come reached the all-time high of $103,343,302. Dividends During the years 1947 through 1953, dividends paid on each share of the common stocks totaled $2.00 a year. This rate was increased in 1954 to $2.40, consisting of four quarterly dividends of 60 cents each. Dividends paid on the common stocks and the Preferred Stock in 1954 amounted to $26,626,266, or 59.4 ic' of net earnings. Sales In 1954 sales amounted to $814,273,776 com- pared with $876,189,581 in the preceding .•ear. CAMEL remained bv far the most popular ciga- rette on the market, although volume declined in 1954. CAVALIER King-Size Cigarettes attained a new high in sales and PluxcE ALBERT Smoking Tobacco and DAYS WoRIC Chewing Tobacco con- tinued to lead in their respective fields. In the few months that WIxSTOx Filter-Tip Cigarettes have been on the market they have al- ready become one of the leading filter-tip brands. This is a remarkable achievement, particularly since nationwide distribution was not completed until late in September. WlrsTOrs were first introduced in the New o, ~ 0 3 w

LEAF TOBACCO. OTHER MANUFACTURING COSTS AND FREIGHT DISPOSITION OF INCOME-1954 England area in March. Shortly thereafter they were offered in the New York metropolitan market and gradually the distribution was extended to the other parts of the countrv. The demand for AVINSTONS was so great that it became necessarv to increase production capacity. Because of the in- abilitv of machinery manufacturers to supply promptly our requirements of special equipment, the introductory period was somewhat longer than had been anticipated. The increase in popularity of filter-tip cigarettes has been extraordinary. As recently as 1952 on}.• about 11/4`/~ of all cigarettes sold were of this type. i ic' In 1953 filter-tip cigarettes represented about 3' of the cigarette volume and in 1954 about 10'/~. With its WINSTON brand the Company is in posi- tion to have a large percentage of the expanding filter-tip cigarette business. Leaf Tobacco Requirements of the 1954 flue-cured tobacco crop were purchased at an average price which was less than in the previous year. This entire crop was sold at an average price below that of the 1953 crop. Marketing of the 1954 Burley tobacco crop was still under way at the end of the Year but indications at that time were that the average price per pound for the Company's purchases out of this crop would also be less than for the 1953 crop. The volume of the 1954 Burley tobacco crop sold before the end of the vear was substantiallx greater than was the case +with crops of recent years. Leaf tobacco inventories were greater at the end of 1954 than at the close of 1953. In large measure this was due to the heavy marketing before the year end of the 1954 Burley crop and additional leaf requirements for the new WmsTON brand. The in- creased inventories, coupled with the large income and excess profits tax payments in 1954, necessi- tated larger bank borrowings during the ~•ear. Plant Additions and Improvements Considerable expenditures %vere made for new machinerv for the manufacture of WINSTON Ci~a- rettes and for a new leaf processing plant, located near Winston-Salem. These additions accounted for the larger share of $7,510,228 spent on plant 4

and equipment. Charges for depreciation and ob- solescence for the year amounted to $3,411,950. At the end of the year, after making adjustment for disposals, the gross real estate, machinery and equipment account stood at $68,338,682. Additional Contingent Tax Reserve Since the amendment of Article XII of the Com- panv's Bv-La«•s in 1949, the Company, in filing Its Federal income and excess profits tax returns, has deducted the amount paid pursuant to the By- Law. This «•as done for the years 1949 and 1950 in reliance upon the ruling of the Bureau of In- ternal Revenue issued in 1949. Late in 1951 the Bureau revoked its ruling but the Company has contested the matter and has continued to make such deduction for the years after 1950. «'ith respect to 1951 and subsequent years the Company charged to each year's operations, and set up as a reserve, an amount estimated to be equivalent to the additional Federal tax that would be pavable should determination be made that the payments under the By-Law were not deductible. The total of the tax reserves for the Easic research continues in the Company's laboratories. years involved, plus a refund that the Company is entitled to receive in connection with Federal ex- cess profits taxes paid for the years 1940 to 1943, inclusive, is estimated to be about $1,800,000 less than the total additional Federal taxes for the vears 1949 to 1954, inclusive, that would be pay- able in the event of such determination. In order to provide for this contingent liability, which was referred to in previous annual reports, the tax reserve was increased by $1,800,000 in 1954. TAXES ON INCOME-DIVIDENDS-EARNINGS RETAINED F , ~ ~ ~amiammal MILLION f MILLION 6 70 --~~ j 70 .. I 60 ~ ~ ~, / M 1916 1947 19" 1619 1950 M 1961 42 5 W R O ~

MORE THAN 1950 1951 1952 1953 1954 The question of the Company's liability for such additional Federal taxes was recently tried in the United States Tax Court but no decision has as yet been reached. Since 1951 and up to the trial, the Company had endeavored to make a satisfac- tory settlement of the matter. Tobacco Industry Research Committee The Company has joined with certain others in the industry, as well as associations representing leaf tobacco growers and warehouse operators, in sponsoring the Tobacco Industry Research Com- mittee, whose purpose is to aid and assist research into tobacco use and health. In charge of the re- search aetivities for the Committeee is the Scien- tific Advisory Board composed of distinguished and outstanding medical authorities and scientists. Through the Board an independent research pro- gram is being administered, with finances supplied by the Committee. The Board and those to whom the grants are made have complete freedom of action, thus insuring unbiased and unrestricted investigation. Many eminent medical authorities have stated that claims made as to a possible causal relation- ship between smoking and lung cancer are lacking in any real proof. Very little is known as to the true cause or causes of an.• cancer, and it is to be hoped that the research financed by the Committee will aid medical science in discovering the cause. Employees The achievements of the Company have been made possible through the high calibre of its man% employees and their efficiency, interest, loyalh• and cooperation. In 1954 many production prob- lems had to be overcome and in everv instance the employees concerned responded with out- standing accomplishments. At the close of the .•ear, there were 11,540 regu- lar and 3,917 seasonal employees. Of the regular employees, 6,883 had been with the Company for 10 or more years, 4,789 for 20 or more years, 1,3Si for 30 or more years and 183 for 40 or more years. Last year marked the twenty-fifth anniversary of the Company's Group Life Insurance, Total and Pernanent Disability Insurance, and Accide nt and Health Insurance Plan and the original Retirement Plan for employees. In providing such benefits, the 6 Leaf tobacco orrivinp at one of the Company i redrying plants. This plant is located near Greensboro, N. C. 74.000 OWN THE COMrANY'i SHARES eo 70 60 40 30 20 to 0

HOW BOOK VALUE PER SHARE OF COMMON STOCKS HAS INCREASED DOLLARS PER SHARE 90 (9AEED ON 10.000.000 ENAREfI :27.a $2609 341 25 f2,.0. fZ1.]0 f w.~a 20 f1923 917.21 {16.34 is io s 0 '45 '46 '47 '48 '49 '50 '51 '52 '59 '54 Complny was a pioneer in its industry as well as in the section of the country where its plants are located. Since then the Company's benefit pro- gram has been expanded to include the Hospital and Surgical Service Plan, Family Group Life In- surance Plan, Vacation Plans and Jury Service Plan. In 1954 the Company put into effect its Sug- gestion Plan under which eligible employees re- ceive monetary awards for suggestions submitted by them and adopted by the Company. The plan has had gratifying results and by the end of the year 2,477 suggestions had been submitted. By and large the employees eligible under the Suggestion Plan are those below the supervisory level. For em- ployees not eligible under that plan, other than Directors, the Company has its Distinguished Ser- vice Award Plan which provides for non-monetary recognition for such employees who make outstand- ing contributions to the welfare of the Company. Stockholders The number of stockholders reached a new high in 1954. At the close of the year, there were 74,173 holders of record, an increase of 5,746 for the year. Holders included 63,920 having common stocks and 10,253 holding Preferred Stock. At December 31,1954, the Company's net worth was $352,763,397. The equity of owners of com- mon stocks was $279,385,897, equivalent on the basis of 10,000,000 shares to $27.94 a share, an increase of $1.85 a share for the year. For the entire organization, we express appre- ciation to the owners of the Company's shares for their continuing confidence, interest and helpful- ness. Respectfully submitted for the Board of Directors, January 22, 1955. Chatrman Board of Directors President w 1a k ~~ - - - - - - = - _~~

W I NSTON Filter-Tip Cigarette Our Newest Product After a period of over two years of intensive re- search, WirsTON Filter-Tip Cigarettes were intro- duced late in riarch, 1954. In the few months that WixsTO-ss have been on the market, they have achieved a sales volume that is greater, we believe, than has ever before been reached by amy new cigarette in such a short period. At the time the research was begun, the demand for filter-tip cigarettes was not great. Nevertheless, the research was commenced so the Compan,% • could be in position to enter the field with a supe- rior product in the event that the demand became substantial. When the research as to the most suitable blend of tobacco and type of filter had been concluded, plans for production had to be perfected. These involved obtaining the requisite quantities of aged tobaccos to be used, procuring and installing the 8 First shipments of Winston FiNer-Tip Cigarettes leave factory by rail and truck.

special t.•pes of machines required, training em- ployees, and making arrangements for the pur- chase of the filter, tipping and packaging mate- rials and other things required for production. \VIxsTc~a ..•ere first marketed in the New Eng- land area and then gradually, as production was increased, the territory was expanded until late in September the entire United States had been in- clucled. Because of the great popularity of the cigarette and the inabilih, of machinery manufac- turers to supph' promptly the increased number of special machines required, the introductory period was somewhat longer than had been originally anticipated. In order to manufacture the maximum number of WINsTOxs, it was necessary to maintain production three shifts a day, six days a week, until late in the year, %vhen sufficient machines had been installed to permit production on more normal schedule. The successful launching of a new brand such as «'ixsTOxs necessitates a well conceived and exe- cuted merchandising and advertising program. During the introductory campaign in each terri- tory, local newspaper, television and radio adver- tising was used. At points of sale, unique three dimensional and mobile displa\1 signs were placed. The advertising emphasized "Finer Filter' ="Finer Flavor"-"King Size". When national distribution had been substantiallv achieved, the advertising was extended to media covering the entire United States. These included magazines, a television net- work show and announcements on other of the Company's television programs. Because of heavv expenses im•oh•ed in the intro- duction of any new tobacco product and the time generally required to develop volume of sales, it is rare for any such new product to result in profit- able operations for the first year or so. WI\sTo1s' popularity was so quickly achieved that the brand resulted in profits within the first vear.