1275283--2/27/2007--REYNOLDS_AMERICAN

related topics

{product, liability, claim}

{debt, indebtedness, cash}

{condition, economic, financial}

{operation, natural, condition}

{capital, credit, financial}

{financial, litigation, operation}

{cost, contract, operation}

{competitive, industry, competition}

{cost, regulation, environmental}

{product, market, service}

Individual cigarette-related cases may increase as a result of the Florida Supreme Court s ruling in Engle v. R. J. Reynolds Tobacco Co. RJR Tobacco could be subject to additional, substantial marketing restrictions, and related compliance costs, as a result of the order issued in a case brought by the U.S. Department of Justice. RJR Tobacco could be subject to substantial liabilities from lawsuits based on claims that smokers were misled through its marketing of light, ultra light and low-tar cigarettes. RJR Tobacco could be subject to substantial liabilities from tobacco-related antitrust lawsuits. RJR Tobacco s retail market share has declined in recent years and is expected to continue to decline for the medium term; any continuation in the decline beyond the medium term could further adversely affect the results of operations, cash flows and financial condition of RJR Tobacco and, consequently, of RAI. RJR Tobacco has substantial payment obligations under the MSA and other litigation settlement agreements, which materially adversely affect its ability to compete against manufacturers of deep-discount cigarettes that are not subject to these obligations. RAI s operating subsidiaries have substantial payment obligations under the Fair and Equitable Tobacco Reform Act. The assumption of certain of B W s historical and future liabilities has exposed RJR Tobacco and its subsidiaries to significant additional potential liabilities associated with the cigarette and tobacco industry. RJR Tobacco is dependent on the U.S. cigarette business, which it expects to continue to decline. RAI s operating subsidiaries are subject to significant limitations on advertising and marketing tobacco products that could harm the value of their existing brands or their ability to launch new brands. The U.S. cigarette industry is subject to substantial and increasing regulation and taxation, which has a negative effect on sales volume and profitability. In addition, Conwood s tobacco products are subject to excise taxes and to many restrictions and regulations similar to the ones to which the tobacco products of RAI s other operating subsidiaries are subject, which may have a negative effect on sales volume and profitability of Conwood. RJR Tobacco s and Conwood s volumes, market share and profitability may be adversely affected by competitive actions and pricing pressures in the marketplace. Failure to successfully integrate Conwood into RAI s corporate organization could prevent RAI from attaining the anticipated benefits of the Conwood acquisition. If RJR Tobacco is not able to develop, produce or commercialize new products and technologies required by regulatory changes or changes in adult consumer preferences, sales and profitability could be adversely affected. RJR Tobacco now depends on third-party suppliers for its tobacco packaging materials requirements; if the supply of tobacco packaging materials from the suppliers is interrupted, or the quality of the packaging declines, RJR Tobacco s packaging costs and sales could be negatively affected. Certain of RAI s operating subsidiaries face a customer concentration risk. Fire, violent weather conditions and other disasters may adversely affect the operations of RAI s operating subsidiaries. RAI s credit facilities contain restrictive covenants that may limit the flexibility of RAI and its subsidiaries, and breach of those covenants may result in a default under the agreement relating to the facilities. RAI has substantial debt and may incur substantial additional debt, which could adversely affect its financial health and its ability to obtain financing in the future, react to changes in its business and make payments on its outstanding debt. An increase in interest rates would increase the cost of servicing RAI s variable rate indebtedness and could cause its annual debt service obligations to increase significantly and reduce its profitability. The ability of RAI to access the debt capital markets could be impaired because of its credit rating.

Full 10-K form ▸

1275283--2/27/2007--REYNOLDS_AMERICAN_INC