Reynolds2006

Two shareholder resolutions were presented, both of which were opposed by the Reynolds American Board of Directors. The resolutions and the opposing statements are given below, following the brief quotes.

Proposal 1 -- Study Impact on Youth of Flavored Cigarettes

Quote from this resolution:

An April, 2005 survey conducted by Buffalo's Roswell Park Cancer Institute found that 20 percent of smokers 17-19 smoked flavored cigarettes in the previous month, compared to 6 percent of smokers older than 25. While overall cigarette sales fell in 2004, since the launch of Camel's Exotic Blends, Camel experienced a 9.8 percent sales gain. While Reynolds American has stated it developed and tested these blends only on "adult smokers" (NYT 03.09.04), it has refused to state their influence on youth under 18 and whether a disproportionate number of them smoke the flavored brands. A 2005 "Market Watch" study in Health Affairs (24.6) alleged such brands "are being heavily marketed to youth and racial/ethnic groups, with colorful and stylish packaging and flavors that mask the harsh and toxic properties of tobacco smoke."

Quote from the Reynolds American opposition statement:

"As a responsible manufacturer and marketer of adult products, RJR Tobacco ... "

Please Note the word, "responsible".

Proposal 2 -- Support for Laws at all Levels Combating Use of Tobacco

Quotes from this resolution:

The Company has publicly said it does not want youth to start smoking. It has been running ads to help people to stop smoking. However, it has not demonstrated that such efforts have reduced smoking for young people and/or adults.

RESOLVED that, since a combination of laws against smoking in public places as well as tax increases has been shown to demonstrably reduce smoking, especially among young people, the Company make as public policy a commitment to support legislation at all levels of local, regional, state and federal government which is geared to that end. Furthermore, the Company shall also support all efforts to repeal existing preemption laws limiting local smokefree air ordinances.

Quote from the Reynolds American opposition statement:

"As a responsible manufacturer and marketer of adult products, RJR Tobacco ..."

Again, please note the word "responsible" occurs again.

Another quote from the Reynolds American opposition statement:

Smokers already pay more than their fair share of taxes, and the government is the primary financial beneficiary of tobacco use in the United States, not the manufacturers or their shareholders.

and:

RJR Tobacco encourages smokers who wish to quit to do so, and provides suggested resources for them on the company's web site.

and:

These taxes are regressive, borne by adult smokers who are largely mid- to lower-income. In 2004, the government received more tobacco revenue per minute ($58,940) than the average working family brought home in a year ($41,764).

Please see Compensation, above.

WHEREAS, daily, 1,500 minors begin smoking.

ABC featured a month-long evening news series during November, 2005 on the dangers of smoking. An early segment noted the various kinds of flavored cigarettes sold by Reynolds American under its Camel brand. When asked to respond whether these might be attracting minors to begin smoking, Reynolds American refused.

An April, 2005 survey conducted by Buffalo's Roswell Park Cancer Institute found that 20 percent of smokers 17-19 smoked flavored cigarettes in the previous month, compared to 6 percent of smokers older than 25. While overall cigarette sales fell in 2004, since the launch of Camel's Exotic Blends, Camel experienced a 9.8 percent sales gain. While Reynolds American has stated it developed and tested these blends only on "adult smokers" (NYT 03.09.04), it has refused to state their influence on youth under 18 and whether a disproportionate number of them smoke the flavored brands. A 2005 "Market Watch" study in Health Affairs (24.6) alleged such brands "are being heavily marketed to youth and racial/ethnic groups, with colorful and stylish packaging and flavors that mask the harsh and toxic properties of tobacco smoke."

In May, 2005, the Commonwealth of Massachusetts demanded that this Company, and two other competitors, "pull cigarettes spiked with candy, fruit and other sweet flavors from store shelves." According to The Wall Street Journal, the exotically-named cigarettes, according to Massachusetts representatives, "represent a calculated attempt by tobacco companies to boost market shares by appealing to teenagers and possibly getting them hooked on smoking." (WSJ 05.20.04)

The Journal added: "The newest crop of flavored cigarettes would never have made it to store shelves, had Congress passed previous legislative proposals to give the Food and Drug Administration national authority to regulate tobacco. Those bills, none of which were approved, included language banning the sale of flavored cigarettes other than menthol" (05.20.04). While our main competitor supported various forms of FDA authority to regulate tobacco -- while also refusing to market flavored cigarettes because of the possibility of its enticement toward youth -- Reynolds American has opposed both efforts to promote a healthier public.

New York, Texas, Minnesota, Connecticut, Illinois, and West Virginia have legislation pending to ban candy-flavored cigarettes. The Attorneys General of some of these states have begun investigating whether flavored cigarettes violate the 1998 Tobacco Master Settlement Agreement between major tobacco companies and the states insofar as it prohibits tobacco marketing that directly or indirectly targets youth. They have asked other states to consider suing Reynolds American for its subtle ways of marketing to children, especially through flavored cigarettes.

RESOLVED: the outside Directors of Reynolds American Tobacco Company, within six months of this annual meeting, initiate and oversee an independent analysis of those who begin smoking its flavored brands to be completed within a year. If more than 20% of new initiates are youth, they shall ask the Company to cease immediately all testing, development and marketing of flavored cigarettes anywhere in the world."

Reynolds American opposed this proposal:

Flavorings have been added to cigarettes to refine their taste and aroma for more than 150 years. Sugar, cocoa, licorice and menthol, for example, are used in cigarette blends for the same reason they are used in other products we consume every day -- to develop and refine the taste. Specialty cigarettes, such as Camel Exotic Blends, have the same traditional tobacco taste signature as RJR Tobacco's other cigarette brands, complemented by a slight differentiated flavor.

Over the past decade, there has been a growing demand by adult consumers across many categories, including age-restricted products, for differentiated, specialty blends. For example, there has been a marketplace explosion of specialty blends of alcoholic beverages.

Camel Exotic Blends, first introduced in 1999, were developed to spotlight Camel's Turkish and domestic blend, offer adult smokers additional choices within the Camel brand family and help further differentiate Camel within the marketplace. Today, these specialty styles continue to highlight the brand's tobacco blend and taste signature, help build Camel's equity through its events program and offer adult smokers of competitive brands yet another reason to try -- or re-try -- Camel.

Currently, RJR Tobacco offers five core Camel Exotic Blend styles and markets some limited-edition styles. In total, these styles represent 1/10th of one percent of RJR Tobacco's annual cigarette volume. Limited-edition styles account for approximately 1/50th of one percent of annual volume and are typically available for approximately one month. These styles are not meant to nor do they generally replace an adult smoker's usual brand style. However, these styles play a role in building the equity of the Camel brand, RJR Tobacco's number-one investment brand, among adult smokers. In order to meet the Company's stated goal of growth on investment brands overtaking declines on other brands in a five-to seven-year time frame subsequent to the launch of RJR Tobacco's new brand portfolio strategy in 2005, while continuing to deliver sustainable earnings growth, it is critical that equity behind Camel be supported in innovative ways by the Company.

Camel Exotic Blends are available in a limited number of the retail outlets that sell RJR Tobacco brands. As is true with any brand or style of cigarettes, federal and state laws establish a minimum age of 18 or higher for the sale of cigarettes and require retailers to check identification. RJR Tobacco does not conduct market research among underage, illegal consumers of tobacco products, and is not aware of any credible published, peer-reviewed market research that would indicate that Camel Exotic Blends have any unique appeal among youth. RJR Tobacco's research has verified, however, the styles' appeal among adult smokers.

Specialty blends are marketed and advertised at the point of sale; in age-restricted facilities, such as bars; and in magazines that have at least 85% adult readership or a median readership age of 23.

While Camel Exotic Blends are marketed based on their differentiated flavor, RJR Tobacco recognizes that the use of certain names on a limited number of Camel Exotic Blends resulted in unintended perceptions and concerns regarding their appeal to minors. Consequently, RJR Tobacco avoids using language describing a fruit or candy in magazine and newspaper advertising, or point-of-sale communications in non-age-restricted venues.

RJR Tobacco's one and only audience, regardless of brand or style, is legal-age adults who have made the decision to smoke. As a responsible manufacturer and marketer of adult products, RJR Tobacco makes every effort to ensure that all of its actions are guided by a basic belief -- minors should not smoke. We do not want children to smoke, not only because it is illegal to sell to minors in every state, but also because children lack the maturity of judgment to assess the inherent health risks of smoking.

Underage youth consume between 1 and 2 percent of all cigarette volume sold in the United States, according to the Congressional Budget Office, and styles other than Camel Exotics comprise 99.9 percent of RJR Tobacco's sales. Logic dictates that the shareholder's proposal that analysis of the age of Camel Exotics purchasers to determine whether 20 percent or more of them are underage sales would be unlikely to yields any instructive results. Further, the proposal that the Company's operating subsidiaries cease all testing, development and marketing of "flavored" cigarettes anywhere in the world would severely compromise their ability to serve adult consumers and remain in business, given that nearly all cigarettes sold around the world contain flavorings, including approximately 96 percent of those cigarettes sold in the United States.

Therefore, your Board of Directors urges you to vote AGAINST this proposal.

According to Market Wire (August 25, 2005), the American Lung Association (ALA) has noted an increasing number of states are taking aggressive action to reduce tobacco use. For instance, "during the first half of 2005, several states went completely smokefree, others moved to strengthen existing restrictions on smoking in public places, and new increase in state tobacco taxes are bringing the national average to nearly $1.00 a pack."

The report noted: "While states are making it harder for people to smoke in public places, higher cigarette taxes are also making smoking more expensive. Since January 1, 2005, tobacco taxes have increased in 11 states, including the tobacco-growing states of North Carolina and Kentucky. As of August 15, the average state cigarette tax was $0.89 cents per pack. It will increase to $0.92 cents per pack when tax increases in Maine and North Carolina take effect. Texas is considering a $1.00 increase in its cigarette tax, which would push the nationwide average even higher."

According to John L. Kirkwood, President and CEO of the ALA, "Higher cigarette taxes mean significant drops in smoking rates. Studies show that a 10 percent increase in the price of cigarettes reduces consumption by 7 percent for youth and 4 percent for adults. Raising the cigarette tax is one of the most effective ways to reduce adult smoking and stop kids from ever starting."

The Company has publicly said it does not want youth to start smoking. It has been running ads to help people to stop smoking. However, it has not demonstrated that such efforts have reduced smoking for young people and/or adults.

The report took note of preemption of smokefree laws: "Illinois became only the second state (after Delaware) to repeal preemption of local smokefree air ordinances. This action will allow any local community in Illinois to adopt smokefree air ordinances that are stronger than state law. Once the Illinois law goes into effect on January 1, 2006, 19 states will have total or partial preemption. Preemption is a major priority for th tobacco industry and its front groups because they have less influence at the local level and prefer to lobby for weak statewide smokefree air laws that cannot be replaced by stronger local ordinances."

RESOLVED that, since a combination of laws against smoking in public places as well as tax increases has been shown to demonstrably reduce smoking, especially among young people, the Company make as public policy a commitment to support legislation at all levels of local, regional, state and federal government which is geared to that end. Furthermore, the Company shall also support all efforts to repeal existing preemption laws limiting local smokefree air ordinances.

Supporting Statement [ [from the proponents]
This Company needs to clearly and publicly support efforts that will reduce, if not eliminate, the nation's number one cause of preventable disease smoking. If you agree, please vote "yes" for this proposal.

Reynolds American opposed this resolution:

The proposal put forward by the proponents fails to recognize several key points. While we remain opposed to youth smoking and have successfully worked to reduce youth smoking rates, we steadfastly support the right of adults to choose to smoke. Smokers already pay more than their fair share of taxes, and the government is the primary financial beneficiary of tobacco use in the United States, not the manufacturers or their shareholders. We also believe that adult-only venues such as bars, taverns, nightclubs or similar establishments should be exempt from government-imposed smoking bans or restrictions. In venues such as restaurants, the Company believes that government-imposed smoking restrictions should permit the business owner to set a smoking policy that best suits that establishment's clientele.

RAI and its operating companies are, and have long been, opposed to youth smoking. The companies have spent hundreds of millions of dollars, through funding of the American Legacy Foundation, other Master Settlement Agreement-related funding, and their own programs, to drive youth smoking rates down. RAI's operating companies also comply with the severe marketing restrictions imposed by the Master Settlement Agreement with the states, and other state settlement agreements, which were designed to limit youth exposure to cigarette marketing activities. Contrary to the assertion of the proponent, between 1997 and 2003 (the most recent year for which data from this study are available), cigarette smoking among youth (grades 9-12) declined by over 40 percent, according to the Youth Risk Behavior Survey, reported by the Centers for Disease Control and Prevention. The decline in smoking rates in that period far outstrips declines in other youth risk behaviors such as the usage of marijuana and alcohol, as well as the decline in youth sexual activity.

Also,as reported by the Monitoring the Future Survey sponsored by the National Institute on Drug Abuse, youth smoking rates are the lowest they have been since 1975, when the study began among 12th graders, and the lowest ever since the study began in 1991 among 8th and 10th graders. RJR Tobacco supports legislative efforts that can have a further meaningful impact on youth smoking rates as well as enforcement of current laws that restrict minors' access to cigarettes. To that end, RJR Tobacco ha been a participating sponsor of the WE CARD program since 1995. The success of this and other programs to restrict minors' retail access to cigarettes has been significant. The Substance Abuse and Mental Health Services Administration recently reported that in 2005 all but one state and one district in the United States met -- and many exceeded -- federally established retail compliance goals regarding illegal retail cigarette purchases by adolescents.

Smoking rates among adults are and have been declining for decades, down about 10 percent between 1997 and 2004, according to Centers for Disease Control reporting. RJR Tobacco encourages smokers who wish to quit to do so, and provides suggested resources for them on the company's web site. However, use of the tax code to modify adult behavior is inappropriate.

The Company opposes further cigarette tax hikes, given that cigarettes are among the most highly taxed and heavily regulated consumer products, and the government already profits more from the sale of cigarettes than any other industry participant, including manufacturers and their shareholders. Between 1998 and 2005, the government collected $218 billion in taxes and payments under the Master Settlement Agreement and other state settlement agreements. Federal cigarette excise taxes have increased more than 62 percent since 1999. Since 2002, 42 states have increased tobacco taxes, resulting in an average state cigarette excise tax of 77 cents per pack. On average, 52 percent of the cost of a pack of cigarettes goes to the government.

These taxes are regressive, borne by adult smokers who are largely mid- to lower-income. In 2004, the government received more tobacco revenue per minute ($58,940) than the average working family brought home in a year ($41,764). It is important to note that less than 1 percent of cigarettes sold are sold illegally to minors, so increasing taxes as a means of reducing youth smoking punishes the 99 percent of legal purchasers. Research reported on the effect of tax increases on youth smoking is not conclusive. Tobacco-control advocates point to studies that suggest the impact of tax increases on youth cigarette consumption is greater than its impact on adults. Other published studies, unaffiliated with the tobacco industry, question the accuracy of these findings and suggest minimal to no impact of taxes on youth cigarette consumption.

The Company believes that business owners such as restaurateurs and owners of bars, taverns, and nightclubs should be permitted to determine smoking policies in their private establishments that best suit their clientele. Business dynamics have already made this a reality -- thousands of businesses have declared their facilities to be smokefree to suit the preferences of their customers.

Even without RJR Tobacco's support, as requested by the proponents, legislative bodies are banning or restricting smoking nationwide. According to the American Nonsmokers' Rights Foundation, "6,010 municipalities are covered by a 100 percent smokefree provision in workplaces, and/or restaurants, and/or bars ... representing 39.4 percent of the U.S. population."

RJR Tobacco also believes that states are the appropriate level of jurisdiction to establish laws regarding smoking restrictions. Statewide statutes prevent an inconsistent patchwork of city, county or other local jurisdiction limitations that potentially harm business owners, cause consumer confusion and create enforcement issues.

Given the extraordinary level of existing regulation placed upon the tobacco industry, the disproportionately high tax burden already borne by smokers, and the Company's belief that establishments such as bars should be exempt from government-imposed smoking bans, this shareholder proposal is without merit.

Therefore, your Board of Directors urges you to vote AGAINST this proposal.

The annual shareholders meeting at Reynolds American Inc. is usually a low-key gathering. Yesterday's meeting was no different except for the small protests outside.

Before the meeting, about 20 labor-union supporters passed out fliers on the sidewalk outside the Reynolds American Plaza Building on Main Street, alleging that company officials are threatening to move cigarette production out of Forsyth County, a charge that the company denied.

Production workers at R.J. Reynolds Tobacco Co.'s Whitaker Park and Tobaccoville plants are scheduled to vote next week on whether to unionize.

And after the meeting, nine women from a nurses group, the Nightingales, held up a long banner on the sidewalk across the street from the plaza building that displayed letters from people whose loved ones had died of smoking-related illness.

Inside, it was business as usual at the 75-minute meeting.

Susan Ivey, the company's chief executive, recapped 2005 and summarized initiatives for the future, including the company's $3.5 billion proposed purchase of Conwood, the No. 2 smokeless-tobacco company in the United States.

Anti-smoking activists raised proposed resolutions in the meeting as they do each year. The proposals were soundly defeated.

One proposal asked the company to study the effect on young people of flavored cigarettes, and the other asked the company to support laws to combat the use of tobacco, such as cigarette-tax increases and smoking bans.

The nurses, who also spoke during the meeting, said that they were there to bear witness to the suffering they see from people afflicted with smoking-related disease. The nurses came from several different states, including as far away as California.

Separately, a union official filed an unfair-labor-practices complaint against Reynolds Tobacco on behalf of several workers. The United Tobacco Alliance for a Voice and Freedom has been helping workers in the unionization campaign ahead of the vote next week.

The union alleges that the company has issued "thinly veiled" threats to move production out of the area to Mexico and Puerto Rico if workers voted to unionize.

"Reynolds executives are breaking the law in the vicious anti-union tactics they're using, and we think their shareholders need to know," Bob Wood, a spokesman for United Tobacco Alliance, said before the shareholders meeting.

The company denied any wrongdoing. It is opposed to unionization.

"We are very confident that the company has been in full compliance with all labor laws," said Maura Payne, a company spokeswoman.