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Annual Report 1969 r € t I .:.,_. ,. J. Reynolds T®bacco Company ~ V 0 ~ w ,n Z.) v ~

Contents Comparative Summary 1 Letter to Stockholders 2 Tobacco 8 Foods and Beverages 9 Aluminum and Packaging 10 Corn Refining 11 Containerized Freight Transportation 12 Products and Services 13-24 Internationa l Operations 25 Ten Year Summary 26 Financial Statements 28 Directors and Officers 36

R. J. REYNOLDS TOBACCO COMPANY AND CONSOLIDATED SUBSIDIARIES Sum^:ury. 1969 1968 Consolidated (Note A) Net sales and operating revenues ............. $2,252,694,525 $2,188,870,601 Net earnings ............................. . . _ 172,304,874 168,929,934 Per common share ...................... 3.82 3.71 Per common share-assuming full dilution .. 3.57 3.48 Net earnings as a percentage of net sales and operating revenues ................... 7.65% 7.72% Dividends paid on Preferred Stocks .......... .. 11, 538,144 1,352,995 . Dividends paid on Common Stock ...... : ....... 90,530,052 88,518,214 Per share of Common Stock . . .............. 2.25 2.20 Average number of shares outstanding ......... 40, 235, 578 40,235, 552 Average number of shares outstanding- assuming full conversion ....... .. .......... 48,123,711 48,184,929 ..... Capital expenditures - ~ $ 197 902 993 67 079 559 ................. ... Depreciation and amortization ................ , , 45,368,732 , , 41,312,224 Total assets .............................. $1, 693, 373, 221 $1,476,562,415 Current assets ............................ 921, 488, 045 957,483,787 Current liabilities ............................ 298,606,718 273,728,055 Net current assets-working capital ........... 622,881,327 683,755,732 Property, plant and equipment-net ........... 524,876,122 381,412,509 Long-term debt (less current maturities) ........ 274, 031,238 112,502,332 Book value of Preferred Stock ................ 85,773,542 105,657,451 Book value of Common Stock ................. 992,950, 580 918,593,624 Number of RJR stockholders at year end ........ 136,539 136,129 Number of regular employees at year end ....... 26,062 21,332 See Notes to Consolidated Financial Statements. 1

T: t. E The year 1969 was one in which the Company charted new directions for growth and established records for sales, revenues, and earnings. With the merger of McLean Industries, Inc. into R. J. Reynolds, the Company entered a new and growing field - containerized freight transporta- tion -further broadening and diversifying its operations. This report accordingly reflects for the first time on a consolidated and comparative basis the oper- ating ating results of McLean, as explained in detail in the financial review of the year which follows this letter. With the inclusion of these figures, the Com- pany's sales and operating revenues have passed the $2 billion mark. Because of the Company's growing diversifica- tion, this report also shows for the first time the respective contributions to sales and earnings from operations of its principal operating com- ponents: tobacco, transportation, and other sources (foods and beverages, aluminum and packaging, and corn refining operations). While tobacco sales accounted for 76% of the consolidated total in 1969, the non-tobacco operations represented an increasingly greater share of the Company's busi- ness, rising to 24%. The Company continued to lead the tobacco in- dustry in both domestic and export cigarette sales. Reynolds' share of the domestic cigarette market held almost unchanged, at about one-third. Three of the Company's brands - WINSTON, SALEM, and CAMEL-again led all other brands in 'their respective categories. WINSTON, the nation's No. 1 seller, widened its lead over its nearest rival. The f.ast-c_hanging nature of the Company's business, resulting from substantial diversification and growth in non-tobacco areas, has made it desirable to realign the corporate structure. The first step was taken at the last annual meeting of stockholders when approval was given to a change of name to R. J. Reynolds Industries, Inc. Formal adoption of the new name, however, has been deferred to coincide with a reorganization plan to be submitted to the next annual meeting in April of this year. Under this plan, subject to approval by stockholders and certain other conditions, R. J. Reynolds Tobacco Company would become a wholly-owned subsidiary of a new corporation to be named R. J. Reynolds Industries, Inc. Stockholders of the present Company would become the stock- holders of the new corporation. In line with a decrease in domestic cigarette consumption, the Company's tobacco sales both - --- -= -- -_ __ - _ in unit and dollar volume were slightly lower in 1969, as were earnings from tobacco operations. _- Transportation earnings were higher. Earnings from operations of the other businesses were lower in total than the previous year in spite of an in- crease in the contribution by Archer Products and a better showing by Penick & Ford. While the progress made in diversification has been substantial, and we are confidently looking forward to further growth by each of the subsid- iaries, tobacco continues to be - as it has been for ninety-five years - the foundation of our busi- ness. Because of it, the Company has been able to pay uninterrupted dividends to its stockholders for seventy years. Despite the unsubstantiated at- tacks against the industry in recent years, and de- spite the unfair tax burden that it bears, tobacco remains a good business. 2

The Company's research and development pro- grams to improve existing products and develop new ones that can be profitably marketed continue to produce good results. For example, from the new Development Center, dedicated in October, 1968, have come more than 20 new or improved products for R. J. Reynolds Foods and three new cigarette brands (one of which, DORAL, is in na- tional distribution and the others in test markets). With profound sorrow we record the death of Mr. Bowman Gray on April 11, 1969. At the time of his death Mr. Gray was Chairman of the Board of Directors and he had previously served as Presi- dent. As chief executive officer for many years, he had guided the Company during a period of great growth, and he had served as a forceful spokesman for the industry. Among our greatest resources are the people, including the newer members of the R. J. Reynolds -family, who have contributed to our growth in many areas. To them, as well as to our loyal stock- holders, we express the appreciation of the direc- tors and management and pledge our renewed efforts to maintain the Company's progress. Respectfully submitted for the Board of Directors. February 16, 1970 I n O ~

-Ten Year Net Sales and Operating Revenues 2,400 Miil,ons of Dof/ars 1: TOBACCO Financial Review TRANSPORTATION- U_ OTHER Net sales and operating revenues in 1969, the highest in the Company's history, totaled $2,252,694,525, an increase of $63,823,924 or 2.9% over 1968. Net earnings, also a record, were $172,304,874,a gain of $3,374,940 or 2% over the 1968 figure. Net earnings per share of Com- mon Stock were $3.82 for 1969, compared with $3.71 the year before. These amounts reflect the merger of McLean Industries, Inc. into the Company on May 13, 1969. Approximately 76% of McLean's Common Stock was exchanged for Reynolds $2.25 Convertible Preferred Stock and 24% was purchased for cash. Accordingly, McLean's results for the full year have been included on a pooling of interests basis, 400 : Ten Year Earnings from Operations L TOBACCO TRANSPQRTATIOh E :;n?'4 but net earnings have been reduced by an amount equal to 24% of McLean's net earnings prior to May 13, 1969. Tobacco sales, which accounted for 76% of the consolidated total, declined $22,663,000 or 1.3% in 1969. (Tobacco sales included excise taxes of $677,606,584 in 1969 and $697,806,366 in 1968.) Transportation revenues in 1969 increased $53,951,000 or 23.8% over 1968, in spite of a longshoremen's strike which adversely affected 1969 operations. Additional container capacity and the first full year of containership service to Japan, which was inaugurated in December of 1968, ac- counted for the increase in 1969. Sales of other products, including food, aluminum sheet and foii, packaging, and industrial corn products, rose $32,536,000 or 14.2% in 1969. 4

The following tabulation sets forth an analysis of net sales and operating revenues for the year, with comparative figures for 1968: NET SALES AND OPERATING REVENUES 1969 1968 (000 Omitted) % (000 Omitted) Tobacco ..................... $1,709,914 75.9 $1,732,577 Transportation ................ 280,334 12.4 226,383 Other ....................... 262,447 11.7 229,911 Consolidated ................. $2,252,695 100.0 $2,188,871 % 79.2 10.3 10.5 100.0 Earnings from operations, shown below for major operating components, represent earnings before interest and debt expense, the adjustment for earnings applicable to the McLean Common Stock pur- chased, and provision for income taxes. EARNINGS FROM OPERATIONS 1969 (000 Omitted) % Tobacco ..................... . $319,746 82.4 Transportation ................ 55,853 14.4 Other ....................... 12,551 3.2 Consolidated ................. $388,150 100.0 Consolidated earnings from operations totaling $388,149,879 in 1969 were up $3,431,702 or 0.9% over the comparable 1968 amount of $384,718,177. Tobacco earnings from operations decreased slightly in 1969 to $319,746,000 from the 1968 amount of $320,850,000. Rising manu- facturing costs, new brand introductions, and the effect on profits of a 3.8% decline in cigarette unit sales during 1969 were about offset by an in- dustry-wide cigarette price increase effective in May, 1969. Transportation earnings were up $5,330,000 or 10.5% over 1968. Earnings from other operations declined $794,000 in 1969, down 6% from 1968, resulting largely from heavier than normal market- ing and promotional expenditures and introduction of new products by Reynolds Foods. Dividends With an increase in the dividend rate in the final quarter, dividends on the Common Stock totaled $2.25 per share in 1969, marking the sixteenth 1968 (000 Omitted) % _$320,850_ 83.4 50,523 13.1 13,345 3.5 $384,718 100.0 consecutive year of increased dividend payments. Dividends paid during the year on the Common and Preferred Stocks aggregated $102,068,196, the highest for the Company's seventy consecutive years of dividend payments. Debt Position The merger with McLean Industries, Inc. in 1969 brought about significant changes in the Com- pany's financial structure. The Preferred Stock, 3.60% Series, was converted into 7% Subordi- nated Debentures. Subsequently, $50,000,000 of 81,'a% Five Year Notes and $100,000,000 of 7'/a% Twenty-five Year Debentures were issued to pro- vide funds for reductions in short-term debt, which had been increased by $125,020,000 to finance the purchase of approximately 24% of McLean's Common Stock. During the year the Company arranged for loans from banks in the Federal Republic of Germany and The Netherlands aggregating 503,200,000 German Marks and 272,736,000 Dutch Florins i ~ 0 0 -a w

Source and Disposition of Corporate Funds for 1969 SOURCE DISPOSITION From operat:: n<- Netearn:ngs $172,304,874 Dep•ecuatio^ and amort~zat,an . _ 45,368.732 tncrease tn deferred income taxes and de`erred tiab.trtues 11,177.788 Mtnorrt; interest In - earnings of subsidiary 1,469.503 / - - $230.32C.981i Net tncrease,n iong-term debt .. 161,528.906! _ Decreasern net : current assets 60.874,405/ -- Totat ...,.. $452.724.258 (totaling about $210,000,000 at present exchange rates) to finance 80% of the cost of eight super containerships to be constructed within the next four years in those countries. Equipment obligations were increased by $32,569,941 to finance the purchase of containers and various equipment. During 1969 payments of $37,788,097 were made on long-term debt, which at year end totaled $274,031,238. Short-term debt was $116,621,874 on December 31, 1969, or $9,121,874 higher than at year-end 1968. The Company was free of short-term debt for a short period in November. Capital Expenditures The Company made record capital outlays during 1969 of $197,902,993,an increase of $130,823,434 over the restated 1968 amount of $67,079,559. The major portion of the 1969 expenditures, $176,202,013, represented payments for the ac- quisition and conversion of vessels and purchase of associated equipment to expand Sea-Land's con- 102,068,196_ ...Cashdvldend•> Rebrenre~t o? 24,464,655 . . . Preferred Stocks / ~ 3.268.599 , Other $452.724,298 Tota, tainerized fleet. During the year the Company began additions to improve leaf processing facili- ties at the Whitaker Park cigarette plant in Winston- Salem, and continued the modernization and ex- pansion of food processing facilities. A small spe- cialty plant of the Company's corn refining subsid- iary was completed last year, Expenditures for non- tobacco facilities accounted for approximately 92°0 of the 1969 total, compared with 75% of the 1968 amount. Capital expenditures for 1970 are currently estimated at $245,000,000 and include further expansion of the containership fleet, continued modernization of tobacco processing facilities, and expansion and modernization of aluminum sheet and foil, packaging, and food processing facilities. Construction of a new cigarette manufacturing plant in Puerto Rico, begun in late 1969, will be completed by the end of 1970. Approximately 93% of planned 1970 expenditures are for non-tobacco operations. Expe•.d-tures icr ercaRs _ \$197,902.943 and modern'zat.a Cas! pu•chases o' McLea~ Industries Inc. ~_ 125,019,855 comman shares ~

Revenues, Total Assets and Net Earnings RerenuesBAsseis . . Miilmnsof Dollars _ _ NetEarnings 2.400 600 2.200 2.000 1.800 1.600 _ 400 1,400 ~ _ 350 1,200 300 1,000 -250 Capital Expenditures and Depreciation 200 180 160 140 120 100 8G 40 20 Mdthons of Dollars '60 '61 '62 '63 64 '65 '66 '67 '68 ~ CAPITAL EXPENDITURES . DEPRECIATION I 9 4,00 Earnings Per Common Share Dividends Per Common Share i. ;1,RNINGS ~ DIVIDENDS Total Liabilities and Stockholders Equity Total Capitalization and Long-Term Debt 1800 Mdhors of Dollars 1 '60 '61 '62 '63 '64 '65 '66 '6% '68 '6? ~ TOTAL LIABILITIES AND STOCKHOLDERS EQUITY F_- G- , - _ +-. TOTAL CAPiTALIZATiON -6, LON„-TERG7 DEBT

i C . The growth of the tobacco industry continues to be hampered by accelerating taxation and the cam- paigns of anti-smoking forces. Sharp increases in state taxes on cigarettes, coupled with the unre- mitting barrage of anti-smoking propaganda, appear to have caused an estimated 3.6% decrease in domestic per capita cigarette consumption last year. Eighteen states, plus the District of Colum-__ bia, increased their cigarette taxes and North Carolina imposed a tax for the first time. In the past five years, state cigarette taxes have doubled, increasing from an average of 5C to 10C per pack- age. American consumers are now forced to pay more than $4.5 billion annually in taxes on cig- arettes. Congress is presently considering amendments too the 1965 Federal Cigarette Labeling and Ad- vertising Act, including amendments to prohibit cigarette advertising on television and radio after December 31, 1970, and to require cigarette packages to bear a statement designed to be more cautionary than the present statement. The pro- posed legislation now before the Congress would also permit the Federal Trade Commission, sub- ject to certain conditions, to revive_its proposal that a warning statement be required in printed advertising of cigarettes. At the time of this writing, the form of the final legislation is still un- certain. The report last spring of the House of Repre- sentatives' Committee on Interstate and Foreign Commerce, after thirteen days of hearings on the proposed legislation, included this statement: "On the basis of these hearings the committee con- cludes that nothing new has been determined with respect to the relationship between cigarette smoking and human health since its hearings in 1964 and 1965." While the anti-smoking forces are giving the impression that a causal relationship has been established, the Company and others in our indus- try are continuing to support, through unrestricted grants to the Council for Tobacco Research - USA and the Committee for Research on Tobacco and Health of the American Medical Association, the scientific research that still must be done to learn_the true facts about smoking and health. In the past fifteen years the tobacco industry has contributed more funds for tobacco and health research than have the Federal Government and the private health agencies combined. In 1969 the Company announced the develop- ment of a new process to increase the filling ca- pacity of tobacco. While this unique method of "puffing" tobacco will effect manufacturing econ- omies, it will not significantly reduce leaf require- ments in the foreseeable future. In an effort to help tobacco farmers cope with critical labor shortages and harvest their crop at lower cost, the Company has developed and suc- cessfully field-tested a compact mechanical har- vester. Further modifications and field tests are scheduled this year, and it is hoped that a produc- tion model can be provided by 1971. The Com- pany will continue its own research and grants to others toward solving the cost problems of farmers in the growing of tobacco. 8