1275283--2/27/2008--REYNOLDS_AMERICAN

related topics

{condition, economic, financial}

{product, liability, claim}

{debt, indebtedness, cash}

{tax, income, asset}

{operation, natural, condition}

{cost, contract, operation}

{product, market, service}

{financial, litigation, operation}

{capital, credit, financial}

{cost, regulation, environmental}

cash flows from operations. Adverse litigation outcomes could have a negative impact on RAI s ability to continue to operate due to their impact on cash flows. As a result of the order issued in a case brought by the U.S. Department of Justice, RJR Tobacco could be subject to additional, substantial marketing restrictions, which could negatively impact revenue, increase related compliance costs and reduce operating margins of RJR Tobacco, and, consequently of RAI. RJR Tobacco s retail market share has declined in recent years and is expected to continue to decline over the next several years; any continuation in the decline beyond the next several years could adversely affect the results of operations, cash flows and financial position of RJR Tobacco and consequently, of RAI. RJR Tobacco is dependent on the U.S. cigarette business, which it expects to continue to decline, negatively impacting revenue. RAI s operating subsidiaries are subject to significant limitations on advertising and marketing of tobacco products, which could harm the value of their existing brands or their ability to launch new brands, thus negatively impacting revenue. In the U.S., tobacco products are subject to substantial and increasing regulation and taxation, which has a negative effect on revenue and profitability. RJR Tobacco s and Conwood s volumes, market share and profitability may be adversely affected by competitive actions and pricing pressures in the marketplace. If RJR Tobacco is not able to develop, produce or market new products profitably and with new technologies in response to regulatory changes or changes in adult consumer preferences, revenue and results of operations could be adversely affected. If RJR Tobacco and Conwood are not efficient in the production or distribution of tobacco products, profitability could suffer. Increases in commodity prices will increase costs and may reduce profitability. Changes in market conditions could result in higher costs and decreased profitability. Adverse changes in liquidity in the financial markets could result in additional realized or unrealized losses. Certain of RAI s operating subsidiaries may be required to write-down intangible assets or goodwill due to impairment, thus reducing operating profit. Increases in the cost of pension benefits or pension funding may reduce RAI s profitability and cash flow. RJR Tobacco relies on outside suppliers to manage information technology and other administrative and maintenance functions. Any interruption in these services could negatively affect the operations of RJR Tobacco and harm its reputation and consequently the operations and reputation of RAI. RJR Tobacco relies on a limited number of suppliers for direct materials. An interruption in service from any of these suppliers could adversely affect the results of operations, cash flows and financial position of RJR Tobacco, and consequently, of RAI. Certain of RAI s operating subsidiaries face a customer concentration risk. The loss of this customer would result in a decline in revenue and have an adverse effect on cash flows. Fire, violent weather conditions and other disasters may adversely affect the operations of RAI s operating subsidiaries. The agreement relating to RAI s credit facility contains restrictive covenants that may limit the flexibility of RAI and its subsidiaries. Breach of those covenants may result in a default under the agreement relating to the facility. RAI has substantial debt, which could adversely affect its financial position and its ability to obtain financing in the future and react to changes in its business. 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 the credit rating of its debt securities. B W s significant equity interest in RAI could be determinative in matters submitted to a vote by RAI shareholders, resulting in RAI taking actions that RAI s other shareholders do not support. B W also has influence over RAI by virtue of the governance agreement, which requires B W s approval before RAI takes certain actions. Under the governance agreement, B W is entitled to nominate certain persons to RAI s Board, and the approvals of the majority of such persons is required before certain actions may be taken, even though such persons represent less than a majority of the entire Board. In addition, certain provisions of RAI s articles of incorporation may create conflicts of interest between RAI and certain of these persons. B W s significant ownership interest in RAI, and RAI s shareholder rights plan, classified board of directors and other anti-takeover defenses could deter acquisition proposals and make it difficult for a third party to acquire control of RAI without the cooperation of B W. This could have a negative effect on the price of RAI s common stock. RAI shareholders may be adversely affected by the expiration of the standstill and transfer restrictions in the governance agreement, which would enable B W to, among other things, transfer all or a significant percentage of its RAI shares to a third party, seek additional representation on the RAI board of directors, replace existing RAI directors, solicit proxies or otherwise acquire effective control of RAI.

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1275283--2/27/2008--REYNOLDS_AMERICAN_INC