Exhibit 99.1

RAI UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

Please see the “Glossary of Terms” beginning on page 14 of this Exhibit 99.1 for definitions of certain terms used herein.

On July 15, 2014, RAI, merger sub and Lorillard entered into the merger agreement, under which merger sub will be merged with and into Lorillard, and Lorillard will continue as the surviving corporation in the merger and as a wholly owned subsidiary of RAI. Coincident with or immediately prior to the closing of the Lorillard merger, RAI and Lorillard have agreed, subject to various conditions, to divest the transferred assets to Imperial Sub pursuant to the asset purchase agreement and transfer agreement. The following unaudited pro forma condensed combined financial statements give effect to the proposed Lorillard merger and the divestiture. The unaudited pro forma condensed combined balance sheet gives effect to the Lorillard merger and the divestiture as if they had occurred on December 31, 2014, and the unaudited pro forma condensed combined statement of income for the year ended December 31, 2014 gives effect to the Lorillard merger and the divestiture as if they had occurred on January 1, 2014, the beginning of the earliest period presented. The following unaudited pro forma financial information is based on the historical consolidated financial statements of RAI and Lorillard, and the assumptions and adjustments set forth in the accompanying explanatory notes. The divestiture is presented from the historical perspective of RAI and Lorillard and is not intended to be indicative of how the transferred assets would operate on a stand-alone basis.

The historical consolidated financial statements have been adjusted in the pro forma financial statements to give effect to pro forma events that are: (1) directly attributable to the Lorillard merger or the divestiture; (2) factually supportable; and (3) with respect to the unaudited pro forma condensed combined statement of income, expected to have a continuing impact on the combined results of RAI and Lorillard. The unaudited pro forma financial information for the Lorillard merger has been developed from and should be read in conjunction with the RAI audited consolidated financial statements contained in RAI’s Annual Report on Form 10-K for the year ended December 31, 2014, and the Lorillard audited consolidated financial statements contained in Lorillard’s Annual Report on Form 10-K for the year ended December 31, 2014. The unaudited pro forma financial information for the divestiture is derived from the historical accounting records of RAI and Lorillard. The unaudited pro forma financial information reflects the preliminary assessment of fair values and useful lives assigned to the assets acquired and liabilities assumed in the Lorillard merger. Fair value estimates were determined based on preliminary discussions between RAI and Lorillard, due diligence efforts and information available in public filings and are subject to revision. The unaudited pro forma financial information is provided for illustrative purposes only and is based on available information and assumptions that RAI and Lorillard believe are reasonable. It does not purport to represent what the actual consolidated results of operations or the consolidated financial position of RAI would have been had the Lorillard merger or the divestiture occurred on the dates indicated, nor is it necessarily indicative of future consolidated results of operations or consolidated financial position. The actual financial position and results of operations will differ, perhaps significantly, from the pro forma amounts reflected herein due to a variety of factors, including access to additional information, changes in value not currently identified and changes in operating results following the date of the pro forma financial information.

The unaudited pro forma financial information does not include any adjustment for liabilities or related costs that may result from integration and similar activities following the Lorillard merger and the divestiture, since the management of RAI has not completed the process of making these assessments. Significant liabilities and related costs may ultimately be recorded for exit or integration activities following the Lorillard merger and divestiture.

RAI anticipates that the Lorillard merger and the divestiture will result in significant annual operating synergies that would be unachievable without completing the transactions. RAI currently expects that approximately $800 million of annual cost savings and synergies will be realized within two years of completion of the Lorillard merger and the divestiture. No assurance can be made that RAI will be able to achieve these synergies or when they will be realized, and no such synergies have been reflected in the unaudited pro forma financial information.

The unaudited pro forma condensed combined statement of income does not include any material nonrecurring charges that might arise as a result of the Lorillard merger or the divestiture. The unaudited pro forma condensed combined balance sheet only includes adjustments for transaction-related costs that are directly attributable to the Lorillard merger or the divestiture and are factually supportable.

 

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The Lorillard merger and the divestiture may result in changes in RAI’s tax rate used to determine deferred income taxes due to changes in apportionment factors related to state income taxes. Any changes in RAI’s deferred taxes as a result of the Lorillard merger and the divestiture will be reflected in income as of the closing date of these transactions. The unaudited pro forma financial information does not include the impact of such changes on RAI’s existing deferred tax assets and liabilities, as this analysis has not been completed.

Upon closing of the Lorillard merger, each share of Lorillard common stock (other than treasury shares held by Lorillard and any shares of Lorillard common stock owned by any Lorillard subsidiary, RAI or merger sub) automatically will be converted into the right to receive the merger consideration, consisting of (1) 0.2909 of a fully paid and nonassessable share of RAI common stock plus (2) $50.50 in cash. The purchase price will ultimately be determined on the date of the Lorillard merger based upon the fair value of the shares of RAI common stock issued in connection with the Lorillard merger. For purposes of the following unaudited pro forma financial information, giving effect to the merger consideration described above, the estimated aggregate consideration to complete the Lorillard merger is based on the average price of a share of RAI common stock as quoted on the NYSE on March 31, 2015, the most recent practicable trading date prior to the date hereof, which was $68.91, and approximately 360 million shares of Lorillard common stock outstanding as of December 31, 2014. Generally accepted accounting principles in the United States, referred to as GAAP, require that the merger consideration transferred be measured at the date the Lorillard merger is completed at the then-current market price. This requirement will likely result in a total merger consideration that is different from the amount presented in this unaudited pro forma financial information. Based on the approximately 360 million shares of Lorillard common stock outstanding as of December 31, 2014 and the merger consideration consisting of RAI common stock, each dollar increase (decrease) in the per share price of the RAI common stock will result in an approximately $100 million increase (decrease) in the total consideration for the Lorillard merger, substantially all of which RAI expects would be recorded as an increase (decrease) in the amount of goodwill recorded in the Lorillard merger. The number of outstanding shares of Lorillard common stock will change prior to the closing of the Lorillard merger due to transactions in the normal course, including the vesting and/or exercise of outstanding Lorillard equity awards. This change is not expected to have a material effect on this unaudited pro forma financial information.

This unaudited pro forma financial information does not take into consideration the possible required sale of RJR Tobacco’s DORAL cigarette brand as part of the divestiture. Unaudited pro forma financial information giving effect to any divestiture transactions other than the divestiture to Imperial Sub is not presented because of the speculative nature of the need for and form of such alternate divestiture transactions, which could be in the form of a spin-off, sale or other transaction, or a combination thereof.

In accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 805, Business Combinations, the Lorillard merger will be accounted for under the acquisition method with RAI as the acquirer of Lorillard. The purchase price will be allocated to the fair values of the assets acquired and liabilities assumed from Lorillard. Since the pro forma financial statements have been prepared based on preliminary estimates and assumptions, the final amounts recorded at the date of the Lorillard merger may differ materially from the information presented. All estimates reflected in the pro forma financial statements are subject to change pending additional review of the assets acquired and liabilities assumed and the final purchase price, and there can be no assurance that any revisions to estimates will not result in material changes to the information presented.

The following pro forma financial statements should be read in conjunction with:

 

•

the accompanying notes to the unaudited pro forma condensed combined financial statements;

 

•

the separate historical consolidated financial statements of RAI as of and for the year ended December 31, 2014, included in RAI’s Annual Report on Form 10-K filed with the SEC; and

 

•

the separate historical consolidated financial statements of Lorillard as of and for the year ended December 31, 2014, included in Lorillard’s Annual Report on Form 10-K filed with the SEC.

 

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Unaudited Pro Forma Condensed Combined Statement of Income

Giving Effect to the Lorillard Merger and the Divestiture

For the Year Ended December 31, 2014

(Dollars in Millions, Except Per Share Amounts)

 

		RAI				Lorillard				Reclassifications Note 3a				Merger- Related Pro Forma Adjustments Note 3				Notes		Pro Forma for Merger Excluding Divestiture				Divestiture Note 4				Notes		Pro Forma for Merger Including Divestiture
Net sales		$	8,160			$	6,990			$	(1,938	)		$	—					$	13,212			$	(2,248	)		4a		$	10,964
Net sales, related party			311				—				—				—						311				—						311
Net sales			8,471				6,990				(1,938	)			—						13,523				(2,248	)					11,275
Costs and expenses:
Cost of products sold			4,058				4,252				(1,938	)			(24	)		3b, 3m			6,348				(1,092	)		4b			5,256
Selling, general and administrative expenses			1,871				630				(23	)			(70	)		3f, 3m			2,408				(268	)		4c			2,140
Amortization expense			11				—				23				12			3d			46				(23	)		4i			23
Operating income			2,531				2,108				—				82						4,721				(865	)					3,856
Interest and debt expense			286				179				—				472			3g, 3h			937				—						937
Interest income			(3	)			(7	)			—				—						(10	)			—						(10	)
Other income, net			(14	)			—				—				—						(14	)			—						(14	)
Income from continuing operations before income taxes			2,262				1,936				—				(390	)					3,808				(865	)					2,943
Provision for income taxes			817				749				—				(152	)		3i			1,414				(337	)		4d			1,077
Income from continuing operations			1,445				1,187				—				(238	)					2,394				(528	)					1,866
Income from discontinued operations, net of tax			25				—				—				—						25				—						25
Net income		$	1,470			$	1,187			$	—			$	(238	)				$	2,419			$	(528	)				$	1,891
Earnings per share attributable to RAI shareholders:
Basic		$	2.76																											$	2.64				Note 5
Diluted		$	2.75																											$	2.63				Note 5
Weighted average shares outstanding, in thousands:
Basic			533,160																												716,193				Note 5
Diluted			534,970																												718,003				Note 5

See accompanying notes to unaudited pro forma condensed combined financial statements.

 

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Unaudited Pro Forma Condensed Combined Balance Sheet

Giving Effect to the Lorillard Merger and the Divestiture

As of December 31, 2014

(Dollars in Millions)

 

		RAI				Lorillard				Reclassifications Note 3a				Merger- Related Pro Forma Adjustments Note 3				Notes		Pro Forma for Merger Excluding Divestiture				Divestiture Note 4				Notes		Pro Forma for Merger Including Divestiture
Assets
Current assets:
Cash and cash equivalents		$	966			$	1,308			$	—			$	(4,684	)		3h, 3n		$	(2,410	)		$	4,400			4e		$	1,990
Short-term Investments			—				324				—				—						324				—						324
Accounts receivable			116				13				—				—						129				(13	)		4g			116
Accounts receivable, related party			41				—				—				—						41				—						41
Other receivables			12				35				—				—						47				—						47
Inventories			1,281				404				—				283			3b			1,968				(228	)		4f			1,740
Deferred income taxes, net			703				522				—				(110	)		3i			1,115				(5	)		4d			1,110
Prepaid expenses and other			204				28				—				891			3d, 3h			1,123				(850	)		4g			273
Total current assets			3,323				2,634				—				(3,620	)					2,337				3,304						5,641
Property, plant and equipment, net			1,203				308				—				—			3c			1,511				(214	)		4h			1,297
Trademarks and other intangible assets			2,421				63				—				3,087			3d			5,571				(356	)		4i			5,215
Goodwill			8,016				100				—				25,159			3e			33,275				(1,850	)		4j			31,425
Long-term investments			—				167				—				—						167				—						167
Deferred income taxes, net			—				142				(142	)			—						—				—						—
Other assets and deferred charges			233				94				—				(22	)		3g			305				—						305
		$	15,196			$	3,508			$	(142	)		$	24,604					$	43,166			$	884					$	44,050
Liabilities and shareholders’ equity
Current liabilities:
Accounts payable		$	142			$	31			$	—			$	—					$	173			$	(6	)		4l		$	167
Tobacco settlement accruals			1,819				1,187				—				—						3,006				—						3,006
Due to related party			1				—				—				—						1				—						1
Deferred revenue, related party			32				—				—				—						32				—						32
Current maturities of long-term debt			450				—				—				—						450				—						450
Short term borrowings			—				—				—				9,000			3h			9,000				—						9,000
Other current liabilities			1,100				365				—				101			3f			1,566				(15	)		4l			1,551
Total current liabilities			3,544				1,583				—				9,101						14,228				(21	)					14,207
Long-term debt			4,633				3,561				—				484			3g			8,678				—						8,678
Deferred income taxes, net			383				—				(142	)			1,007			3i			1,248				(91	)		4d			1,157
Long-term retirement benefits			1,997				473				—				—						2,470				(139	)		4k			2,331
Other noncurrent liabilities			117				73				—				—						190				(17	)		4l			173
Shareholders’ equity (deficit)			4,522				(2,182	)			—				14,012			3f, 3j, 3k, 3l			16,352				1,152			4m			17,504
Total liabilities and shareholders’ equity		$	15,196			$	3,508			$	(142	)		$	24,604					$	43,166			$	884					$	44,050

See accompanying notes to unaudited pro forma condensed combined financial statements.

 

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Notes to Unaudited Pro Forma Condensed Combined Financial Statements

Note 1—Basis of Presentation

The accompanying unaudited pro forma financial information is intended to reflect the impact of the Lorillard merger on RAI’s consolidated financial statements and presents the pro forma consolidated financial position and results of operations of RAI after giving effect to the Lorillard merger and the divestiture. The accompanying unaudited pro forma financial information for the Lorillard merger is based on the historical financial statements of RAI and Lorillard, and the accompanying unaudited pro forma financial information for the divestiture is based on the historical accounting records of RAI and Lorillard.

Merger-related pro forma adjustments are included only to the extent they are directly attributable to the Lorillard merger, factually supportable and expected to have a continuing impact on the results of the combined company. The accompanying unaudited pro forma financial information is presented for illustrative purposes only.

The Lorillard merger will be accounted for using the acquisition method of accounting with RAI considered the acquirer. The unaudited pro forma financial information reflects the preliminary assessment of fair values and useful lives assigned to the assets acquired and liabilities assumed. Fair value estimates were determined based on preliminary discussions between RAI and Lorillard, due diligence efforts and information available in public filings. The detailed valuation studies necessary to arrive at required estimates of fair values of the assets acquired and liabilities assumed from Lorillard and its affiliates and subsidiaries in the Lorillard merger have not been completed. Significant assets and liabilities that are subject to preparation and completion of valuation studies to determine appropriate fair value adjustments include property, plant and equipment, identifiable intangible assets and debt obligations. Changes to the fair values of these assets and liabilities will also result in changes to goodwill and deferred income taxes.

Coincident with or immediately prior to the closing of the Lorillard merger, as the case may be, and pursuant to the asset purchase agreement and the transfer agreement, RAI and Lorillard, directly or indirectly through one or more of their respective subsidiaries or affiliates, will divest the transferred assets and certain liabilities to Imperial Sub in the divestiture. Divestiture-related pro forma adjustments are included only to the extent they are directly attributable to the divestiture, factually supportable, and with respect to the unaudited pro forma condensed combined statement of income, expected to have a continuing impact on the results of the combined company.

Due to the uncertain scope and duration and expected immaterial impact of certain transition services arrangements, including a reciprocal manufacturing agreement to be entered into by RJR Tobacco and Imperial Sub, any potential impact from these arrangements is not reflected in the pro forma financial information.

The Unaudited Pro Forma Condensed Combined Balance Sheet gives effect to the Lorillard merger and the divestiture as if they had occurred on December 31, 2014, and the Unaudited Pro Forma Condensed Combined Statement of Income for the year ended December 31, 2014 gives effect to the Lorillard merger and the divestiture as if they had occurred on January 1, 2014, the beginning of the earliest period presented.

Other Merger-Related Adjustments

The unaudited pro forma financial information reflects certain reclassifications of the Lorillard statement of income and balance sheet categories to conform to RAI presentation.

The unaudited pro forma financial information does not reflect any adjustments to conform Lorillard’s accounting policies to those adopted by RAI, as no such adjustments have been identified that would have a material effect on the unaudited pro forma financial information.

Further review may identify additional reclassifications, intercompany transactions or differences between the accounting policies of the two companies that, when conformed, could have a material impact on the unaudited pro forma financial information of the combined company. At this time, RAI is not aware of any reclassifications, intercompany transactions or accounting policy differences that would have a material impact on the unaudited pro forma financial information that are not reflected in the pro forma adjustments.

Items Not Adjusted in the Unaudited Pro Forma Financial Information

The unaudited pro forma financial information does not include any adjustment for liabilities or related costs that may result from integration activities, since management has not completed the process of making these assessments. Significant liabilities and related costs may ultimately be recorded for employee severance, exit or integration activities following the Lorillard merger and divestiture.

 

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RAI anticipates that the Lorillard merger and the divestiture will result in significant annual operating synergies that would be unachievable without completing the transactions. RAI currently expects that approximately $800 million of annual cost savings and synergies will be realized within two years of completion of the Lorillard merger and the divestiture. No assurance can be made that RAI will be able to achieve these synergies or when they will be realized, and no such synergies have been reflected in the unaudited pro forma financial information.

The Unaudited Pro Forma Condensed Combined Statement of Income does not include any material nonrecurring charges that might arise as a result of the Lorillard merger. The Unaudited Pro Forma Condensed Combined Balance Sheet only includes adjustments for transaction-related costs that are directly attributable to the Lorillard merger or divestiture and are factually supportable.

The Lorillard merger may result in changes in RAI’s tax rate used to determine deferred income taxes due to changes in apportionment factors related to state income taxes. Any changes in RAI’s deferred taxes as a result of the Lorillard merger and sale of certain brands and assets to Imperial Sub will be reflected in income as of the closing date. The unaudited pro forma financial information does not include the impact of such changes on RAI’s existing deferred tax assets and liabilities, as this analysis has not been completed.

Note 2—The Lorillard Merger

On July 15, 2014, RAI, merger sub and Lorillard entered into the merger agreement, pursuant to which merger sub will be merged with and into Lorillard as provided therein. As a result of the Lorillard merger, the separate corporate existence of merger sub will cease, and Lorillard will continue as the surviving corporation in the Lorillard merger and a wholly owned subsidiary of RAI.

Merger Purchase Price

The Unaudited Pro Forma Condensed Combined Balance Sheet has been adjusted to reflect the estimated fair values of the identifiable assets acquired and liabilities assumed in the Lorillard merger and the excess of the consideration over these fair values is recorded to goodwill. The fair value of the merger consideration, or the purchase price, in the unaudited pro forma financial information is estimated to be approximately $25.6 billion, subject to change based on the per share RAI stock price as discussed below. This amount was based on the 360.0 million outstanding shares of Lorillard common stock at December 31, 2014 and the merger consideration. Each share of Lorillard common stock (other than treasury shares held by Lorillard and any shares of Lorillard common stock owned by any Lorillard subsidiary, RAI or merger sub) automatically will be converted into the right to receive the merger consideration, consisting of (1) 0.2909 of a fully paid and nonassessable share of RAI common stock plus (2) $50.50 in cash. The stock price used to determine the value of the stock portion of the merger consideration, for purposes of the unaudited pro forma financial information, is based on the average price of a share of RAI common stock as quoted on the NYSE on March 31, 2015, the most recent practicable trading date prior to the date hereof, which was $68.91. The actual number of shares of RAI common stock to be issued to Lorillard shareholders upon closing of the Lorillard merger will be based on the actual number of shares of Lorillard common stock outstanding when the Lorillard merger closes, and the valuation of those shares will be based on the trading price of RAI common stock at that time. Lorillard restricted stock and restricted stock unit equity awards outstanding at the time of the closing of the Lorillard merger will receive the merger consideration in accordance with the merger agreement. Lorillard stock options and stock appreciation rights will be cancelled in exchange for a cash payment equal to the excess of the equity award consideration over the exercise price. The fair value of Lorillard equity awards will be considered part of the purchase price. Accordingly, the purchase price includes estimated fair values for Lorillard equity awards of $155 million.

The table below presents the preliminary purchase price as if the Lorillard merger had closed on December 31, 2014, along with a preliminary allocation of purchase price to the assets acquired and liabilities assumed in the Lorillard merger based upon the RAI share price of $68.91 on March 31, 2015, the most recent practicable trading date prior to the date hereof.

 

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Preliminary Purchase Price

 

(In Millions, Except Per Share Data)
Lorillard shares outstanding at December 31, 2014			360.0
Lorillard restricted stock and stock units at December 31, 2014			1.2
Total Lorillard shares (see Note 3(k))			361.2
Share exchange ratio			0.2909
Shares of RAI common stock to be issued to Lorillard shareholders			105.1
Price per share of RAI common stock at March 31, 2015		$	68.91
Fair value of RAI common stock to be issued		$	7,241
Cash paid to Lorillard shareholders at $50.50 per share			18,242
Cash paid for Lorillard stock options and stock appreciation rights			72
Preliminary Purchase Price		$	25,555

Based on the 360.0 million shares of Lorillard common stock outstanding as of December 31, 2014 and the stock portion of the merger consideration, each dollar increase (decrease) in the per share price of RAI common stock will result in an approximately $100 million increase (decrease) in the total consideration for the Lorillard merger, substantially all of which RAI expects would be recorded as an increase (decrease) in the amount of goodwill recorded in the Lorillard merger.

Preliminary Allocation of Purchase Price

 

(Dollars in Millions)
Cash and cash equivalents		$	1,308
Short-term investments			324
Accounts and other receivables			48
Inventories			687
Current deferred income tax assets			412
Prepaid expenses and other current assets			859
Property, plant and equipment			308
Trademarks and other intangible assets			3,150
Goodwill (see Note 3(e))			25,259
Long-term investments			167
Other assets			72
Tobacco settlement accruals and other current liabilities			(1,583	)
Long-term debt			(4,045	)
Long-term deferred income tax liabilities			(865	)
Other liabilities assumed			(546	)
Preliminary Purchase Price		$	25,555

Upon completion of the fair value assessment following the Lorillard merger, RAI anticipates the finalized fair values of the net assets acquired will differ from the preliminary assessment outlined above. Generally, changes to the initial estimates of fair value of the assets acquired and the liabilities assumed will be recorded as adjustments to those assets and liabilities and residual amounts will be allocated to goodwill.

The estimated goodwill to be recognized is attributable primarily to the expected synergies and other benefits that RAI believes will result from combining the operations of Lorillard with the operations of RJR Tobacco. The $25.3 billion estimated goodwill that will be acquired is not expected to be deductible for income tax purposes, and will be included in RAI’s RJR Tobacco operating segment.

No fractional shares of RAI common stock will be issued in the Lorillard merger, and Lorillard shareholders will receive cash in lieu of any fractional shares. The amount of cash required to be disbursed for the fractional shares is not expected to be material, cannot be determined until the closing of the Lorillard merger and is not included in the unaudited pro forma condensed combined financial statements included herein.

 

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Note 3—Reclassifications and Merger-Related Pro Forma Adjustments

The unaudited pro forma financial information reflects the following adjustments related to the Lorillard merger:

 

(a)

Reclassifications—Certain reclassifications have been made to amounts in the Lorillard statements of income and balance sheet to conform to RAI’s presentation, including reclassifying Lorillard’s federal excise taxes as a reduction in net sales, presenting Lorillard’s amortization expense within the amortization expense caption instead of selling, general and administrative expenses and reclassifying deferred income taxes.

 

(b)

Inventory—Adjustment to reflect Lorillard’s inventories at fair value. Lorillard’s tobacco inventories historically have been stated on a last-in, first-out, referred to as LIFO basis, and the adjustment based on historical Lorillard financial information is to reverse the LIFO impact of $19 million for the year ended December 31, 2014. RAI’s assumed fair value of Lorillard’s inventory may change after the closing of the Lorillard merger. RAI’s pro forma fair value adjustment to inventory is based on Lorillard’s inventory as of December 31, 2014. In addition, as RAI sells the acquired inventory, its cost of sales will reflect the increased valuation of Lorillard’s inventory, which will temporarily reduce RAI’s gross margins until such inventory is sold. This is considered a non-recurring adjustment and as such is not included in the Unaudited Pro Forma Combined Condensed Statement of Income.

 

(c)

Property, plant and equipment—Lorillard’s property, plant and equipment is reflected at book value. No adjustment has been made because it is preliminarily assumed that the recorded book value in the Lorillard balance sheet approximates the fair value. In addition, most of the Lorillard property, plant and equipment will be sold to Imperial Sub as part of the divestiture. As such, there is no adjustment to depreciation expense resulting from a pro forma fair value adjustment.

 

(d)

Intangible assets—Adjustment to reflect the preliminary fair value estimates of Lorillard’s identifiable intangible assets, net of the historical Lorillard intangible asset value of $63 million. The primary assets included are customer relationships and trademarks. These preliminary fair value estimates were determined based on an income approach, utilizing discounted cash flow valuation model under a relief from royalty methodology using Lorillard’s long range projections.

A preliminary fair value estimate of $200 million relates to amortizable customer relationships. The fair value of these customer relationships is amortized over 20 years. An adjustment to increase amortization expense related to Lorillard’s customer relationships of $10 million for the year ended December 31, 2014, is reflected in the Unaudited Pro Forma Combined Condensed Statement of Income.

A preliminary fair value estimate of $2.95 billion relates to trademarks. These fair value estimates are consistent with RAI’s methodology for trademark valuation, and are made up of $2.94 billion related to trademarks with indefinite lives and $10 million related to trademarks with a finite life estimated by RAI of 5 years. RAI’s management took into consideration many factors in determining the preliminary fair value of trademarks and their lives. Trademarks that will not be amortized will be tested for impairment at least annually. An adjustment to increase amortization expense related to Lorillard’s finite life trademarks of $2 million for the year ended December 31, 2014, is reflected in the Unaudited Pro Forma Combined Condensed Statement of Income.

Adjustment to reflect preliminary fair value estimates for brands of Lorillard that will be sold to Imperial Sub are reflected as assets held for sale, and are included in prepaid expenses and other current assets. The preliminary fair value estimate of $650 million for the brand MAVERICK was determined based on an income approach, utilizing a discounted cash flow valuation model using Lorillard long term projections. The preliminary fair value estimate of $181 million for the brand blu eCIGS is the aggregate purchase price from the acquisitions of certain assets and operations of blu eCIGS and SKYCIG by Lorillard over the past several years.

 

(e)

Goodwill—Adjustment to record estimated goodwill resulting from the Lorillard merger. Goodwill represents the residual of the purchase price over the fair value of the identified assets acquired and liabilities assumed. Goodwill is not amortized, but rather is assessed for impairment at least annually, or more frequently whenever events or circumstances indicate that goodwill might be impaired.

 

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(f)

Transaction-related costs—Adjustment to record liabilities of $101 million, net of related tax benefits, for transaction-related costs in other current liabilities with the offset in equity. A liability of $50 million, net of $32 million in related tax benefits, relates to merger advisory fees and a corresponding adjustment to RAI’s shareholders’ equity. This amount does not include estimates for fees that are not readily determinable or factually supportable. A liability of $51 million, net of $32 million in related tax benefits, relates to certain payments for merger and change of control payments that will be made to Lorillard employees under the terms of the merger agreement other than equity based awards (that are reflected in the pro forma balance sheet as described in Note 2).

There was also an adjustment to eliminate nonrecurring transaction-related costs of $64 million ($38 million for RAI and $26 million for Lorillard) recorded in the Unaudited Pro Forma Condensed Combined Statement of Income for the year ended December 31, 2014.

 

(g)

Long-term debt—Adjustments to record long-term debt at fair value using quoted market values as of December 31, 2014. Lorillard deferred debt issuance costs of $22 million were also eliminated. The pro forma adjustments are a result of the quoted market values of the Lorillard debt portfolio being higher than the face amount of the related debt. The quoted market value of a debt instrument is higher than the face amount of the debt when the market interest rates are lower than the stated interest rate of the debt. In acquisition accounting, this results in an increase in debt and a reduction in interest expense to reflect the lower market interest rate. The difference between the fair value of each borrowing, which was based on market interest rates and values as of December 31, 2014, based on each borrowing’s CUSIP bid price, and the face amount of each borrowing is amortized as a reduction in interest expense utilizing the effective interest method over the remaining term of each borrowing based on its maturity date. For the total debt portfolio, the adjustment is a reduction in interest expense of $64 million for the year ended December 31, 2014, resulting in interest expense that effectively reflects current market interest rates rather than the stated interest rate. Interest expense is further adjusted to reflect the elimination of amortization related to Lorillard’s previously deferred debt issuance costs of $4 million for the year ended December 31, 2014.

 

(h)

Bridge credit facility borrowings—Adjustment to reflect borrowings of $9 billion under the bridge credit facility to fund a portion of the cash portion of the total estimated purchase price. Borrowings also reflect $132 million of fees associated with the bridge credit facility of which $72 million had been paid as of December 31, 2014. The fees associated with the bridge credit facility that have been and are expected to be paid on or before the closing of the Lorillard merger are reflected in other current assets as deferred debt issuance costs. Interest costs related to the borrowings under the bridge credit facility, using an assumed weighted average interest rate of approximately 6% is $540 million for the year ended December 31, 2014.

The interest rate on the bridge credit facility may not be reflective of the borrowing rates applicable to any debt securities that RAI may issue in lieu of all or a portion of the bridge credit facility. RAI’s weighted average interest rate of 6% includes fees related to its borrowing facilities. Some of these fees are required to be paid assuming that the bridge credit facility is not refinanced within specified time frames following the closing of the Lorillard merger. RAI currently intends to finance the cash portion of the merger consideration and related fees and expenses with proceeds from the issuance of debt securities, the proceeds of the BAT share purchase, the net proceeds to RAI of the divestiture, available cash and, only to the extent necessary, up to $500 million in borrowings under its revolving credit facility and borrowings under its bridge credit facility (subject to reduction by the amount of any prior financings, including the issuance of debt securities, to finance the Lorillard merger). RAI expects to incur approximately $9 billion of new debt to finance the cash portion of the merger consideration. To the extent RAI draws under the bridge credit facility, RAI intends to refinance a portion or all of the bridge credit facility with debt securities that would reduce the requirement to pay these fees. In addition, the bridge credit facility includes terms that would result in additional fees and/or higher interest rates if RAI’s credit rating is downgraded.

Estimates of the sources of cash that will be utilized for the cash portion of the merger consideration of $18.3 billion as of December 31, 2014 are as follows:

 

(Dollars in Millions)
Bridge credit facility (or alternative financing)		$	9,000
BAT share purchase			4,690
Net proceeds from the divestiture			4,400
Subtotal			18,090
Available cash			224
Cash for merger consideration		$	18,314

 

9

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Actual interest rates for this transaction can vary from the 6% assumed rate. The effect of a 0.125% change in interest rates would result in an $11 million change in pro forma annual interest expense on a pre-tax basis.

 

(i)

Income taxes—Adjustment to record the deferred tax impact of acquisition accounting adjustments primarily related to inventory, intangible assets and long-term debt. The pro forma adjustment to provision for (benefit from) income taxes represents the application of RAI’s estimated statutory tax rate of 39.0% to the pro forma adjustments. The pro forma adjustment to deferred tax assets and liabilities represents the difference between the pro forma fair value of assets acquired and liabilities assumed and their historical carryover tax basis using RAI’s estimated statutory tax rate of 39.0%.

 

(j)

BAT share purchase—In connection with the merger agreement, RAI, BAT and B&W entered into the subscription agreement, pursuant to which BAT has agreed, directly or indirectly through one or more of its wholly owned subsidiaries, to subscribe for and purchase, simultaneously with the completion of the Lorillard merger, a number of shares of RAI common stock such that BAT will maintain its approximately 42% beneficial ownership interest in RAI immediately following completion of the Lorillard merger. BAT has agreed to vote and cause its applicable subsidiaries to vote (including by written consent) against any action or agreement that would reasonably be expected to materially impede, interfere with or prevent the share issuance and the other transactions contemplated by the merger agreement, subscription agreement, asset purchase agreement or transfer agreement. The proceeds from the BAT share purchase are estimated to be approximately $4.7 billion (based on the per share reference price of $60.16 for RAI common stock agreed upon by RAI and Lorillard to calculate the merger consideration).

RAI had 531.3 million shares of common stock outstanding as of January 26, 2015. BAT holds 223.3 million shares of RAI common stock, or approximately 42% of RAI’s outstanding common stock. After issuing 105.1 million shares of RAI common stock to Lorillard shareholders in the Lorillard merger, it is estimated that 78.0 million shares of RAI common stock will be issued to BAT, directly or indirectly through one or more of its wholly owned subsidiaries, in accordance with the subscription agreement.

 

(k)

Issuance of RAI common stock—An estimated 105.1 million shares of RAI common stock will be issued to Lorillard shareholders in the Lorillard merger, based on the 360.0 million shares of Lorillard common stock, together with an aggregate of 1.2 million shares of Lorillard restricted stock and Lorillard restricted stock units, outstanding as of December 31, 2014.

 

(l)

Lorillard shareholders’ equity—An adjustment to eliminate all Lorillard shareholders’ equity, including common stock, additional paid-in capital, accumulated deficit, treasury stock and accumulated other comprehensive loss, net.

 

(m)

Pension amortization—Adjustment to remove the amortization of the net actuarial losses and prior service costs for the Lorillard pension and postretirement plans of $11 million ($5 million removed from cost of products sold and $6 million removed from selling, general and administrative expenses) for the year ended December 31, 2014. Net actuarial losses and prior service credits are included in the accumulated other comprehensive income component of equity. Because Lorillard’s equity, including accumulated other comprehensive loss is eliminated in the opening balance sheet, the results for the period following the Lorillard merger will not include any impact from the amortization of these deferred net actuarial losses and prior service costs.

 

(n)

Cash consideration—RAI will also pay approximately $4.7 billion from cash balances for the stock of Lorillard. This amount is primarily obtained through the sale of the transferred assets to Imperial Sub, which is presently estimated to yield $4.4 billion in cash, after taxes, and RAI’s available cash. See Note 4 below for more details of the sale of the transferred assets to Imperial Sub.

 

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Note 4—The Divestiture

In connection with entry into the merger agreement, on July 15, 2014, RAI entered into the asset purchase agreement with Imperial Sub, and for certain limited purposes, Imperial, pursuant to which, subject to the closing of the Lorillard merger, Imperial Sub will acquire the transferred assets from RAI, indirectly through one or more of its affiliates or subsidiaries, consisting of (1) certain assets owned by RAI subsidiaries, related to the cigarette brands WINSTON, KOOL and SALEM (and under certain circumstances, DORAL) and (2) certain assets currently owned by Lorillard subsidiaries, related to the electronic cigarette brand blu eCIGS (including SKYCIG) and the cigarette brand MAVERICK, as well as Lorillard’s owned and leased real property, including its manufacturing, research and development facilities and headquarters in Greensboro, North Carolina and the tobacco receiving and storage facilities in Danville, Virginia, and transferred employees, together with certain associated liabilities. Although most of the transferred assets will be transferred immediately after the closing of the Lorillard merger by RAI directly or indirectly through its affiliates and subsidiaries, pursuant to the transfer agreement, certain of the Lorillard transferred assets will be transferred immediately prior to the closing of the Lorillard merger. The unaudited pro forma financial information includes the effects of the sale of these brands, plus assets and liabilities associated with the transfer agreement.

The purchase price for the transferred assets and certain associated liabilities divested in the divestiture is $7.056 billion, which, after income taxes, will yield $4.4 billion in cash. The unaudited financial information reflects the preliminary allocations of assets, liabilities, revenues and expenses directly attributable to the brands being sold to Imperial Sub in the divestiture, as well as certain other allocations deemed reasonable by management to present the unaudited pro forma financial information. The allocation methodologies developed for the purposes of these pro forma amounts are considered reasonable by management. The costs do not include costs associated with certain shared functions, and accordingly the financial information does not reflect the financial position or results of operations as if these brands and assets were stand-alone entities for the periods presented.

The unaudited pro forma financial information reflects the following adjustments related to the divestiture:

 

(a)

Net sales—Adjustment to reflect the net sales of the cigarette brands WINSTON, KOOL and SALEM from RAI’s historical financial information and net sales of the cigarette brand MAVERICK and the electronic cigarette brand blu eCIGS from Lorillard’s historical financial information.

 

(b)

Cost of products sold—Adjustment to reflect the cost of products sold for the divested brands.

 

(c)

Selling, general and administrative expenses—Adjustment to reflect the estimated costs of these expenses for the divested brands.

 

(d)

Income taxes—Adjustment to record the deferred tax impact of divestiture accounting adjustments primarily related to intangible assets. The pro forma adjustment to provision for (benefit from) income taxes represents the application of RAI’s estimated statutory tax rate of 39.0% to the pro forma adjustments.

 

(e)

Cash and cash equivalents—The purchase price for the transferred assets and certain associated liabilities included in the divestiture is $7.056 billion, which, after income taxes, is estimated to yield $4.4 billion in cash.

 

(f)

Inventories—Adjustment to reflect an allocation of leaf balances and finished goods inventory associated with WINSTON, KOOL and SALEM from RAI subsidiaries’ operations, an allocation of leaf balances, all raw materials and finished goods inventory associated with MAVERICK from Lorillard’s operations and all electronic cigarette brand inventory from Lorillard’s operations.

 

(g)

Accounts receivable and prepaid expenses and other—Adjustment primarily to reflect the estimated value of the MAVERICK and blu eCIGS operations that were reflected in Note 3(d) that are being sold in the divestiture.

 

(h)

Property, plant and equipment—Adjustment to reflect Lorillard’s property, plant and equipment and certain RAI subsidiaries’ machinery sold to Imperial Sub as part of the divestiture.

 

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(i)

Trademarks and other intangible assets—Adjustment to reflect the historical balances of the cigarette brands WINSTON, KOOL and SALEM and the electronic cigarette brand blu eCIGS. Amortization expense is adjusted to reflect the elimination of amortization of these trademarks of $23 million for the year ended December 31, 2014.

 

(j)

Goodwill—Adjustment to reflect the allocation of goodwill from RAI’s RJR Tobacco segment associated with the divestiture of the cigarette brands WINSTON, KOOL and SALEM from the retained operations of RJR Tobacco based on relative fair values.

 

(k)

Pension and postretirement obligations—Adjustment to reflect the pension and postretirement obligations related to Lorillard employees that will be transferred to Imperial Sub.

 

(l)

Other liabilities—Adjustment to reflect certain liabilities that will be assumed by Imperial Sub as part of the divestiture.

 

(m)

Shareholders’ equity—Adjustment to reflect the estimated book gain on the divestiture. A summary of the estimated gain is as follows:

 

(Dollars in Millions)
Purchase price		$	7,056
Estimated income taxes			(2,656	)
Net cash after taxes			4,400
Net assets and liabilities divested			(1,398	)
Goodwill associated with divested RJR Tobacco brands			(1,850	)
Gain on the divestiture		$	1,152

 

(n)

DORAL—The unaudited pro forma condensed combined financial statements do not take into consideration the possible required sale of the DORAL brand as part of the divestiture because it is speculative and RAI management thinks it is unlikely to occur. Unaudited pro forma financial information giving effect to any divestiture transactions other than the divestiture to Imperial Sub is not presented because of the speculative nature of the need for such alternative divestiture transactions.

Under the asset purchase agreement, in the event that the aggregate market share for the WINSTON, KOOL and SALEM brands is less than 4.9% for the three months ended prior to the month in which the closing of the Lorillard merger occurs, the asset purchase agreement provides that RJR Tobacco’s DORAL brand also will be sold to Imperial Sub. Should RJR Tobacco’s DORAL brand be sold to Imperial Sub, RAI will not receive any additional purchase price, and the divestiture of the DORAL brand would not have a material impact on its assets and liabilities on a pro forma basis. A summary of the pro forma impact of the divestiture of the DORAL brand on RAI’s unaudited pro forma condensed combined statement of income for the year ended December 31, 2014, is as follows:

 

		Pro Forma Year Ended December 31, 2014
		(Dollars in Millions, Except Per Share Data)
Net sales		$	(234	)
Operating income		$	(114	)
Net income		$	(69	)
Pro forma basic earnings per share		$	(0.10	)
Pro forma diluted earnings per share		$	(0.10	)

 

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Note 5—Earnings per share

The pro forma combined basic and diluted earnings per share for the year ended December 31, 2014 are calculated as follows:

 

		(Dollars in Millions, Except Per Share Data)
Pro forma net income		$	1,891
Basic weighted average RAI shares outstanding, in thousands			533,160
Lorillard shares converted to RAI shares			105,080
BAT shares issued			77,953
Pro forma basic weighted average shares outstanding			716,193
Dilutive effect of securities:
RAI restricted stock units			1,810
Pro forma diluted weighted average shares outstanding, in thousands			718,003
Pro forma basic earnings per share		$	2.64
Pro forma diluted earnings per share		$	2.63

 

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GLOSSARY OF TERMS

As used herein, references to “RAI” refer to Reynolds American Inc., a North Carolina corporation, and not to any of its existing or future subsidiaries. In addition, as used herein, except where otherwise specified or unless the context otherwise requires, references to:

 

•

“asset purchase agreement” means the Asset Purchase Agreement, dated as of July 15, 2014, as it may be amended from time to time, among RAI, Imperial Sub and Imperial;

 

•

“B&W” means Brown & Williamson Holdings, Inc., a Delaware corporation and wholly owned subsidiary of BAT and RAI’s largest shareholder;

 

•

“BAT share purchase” means the proposed subscription and purchase by BAT, directly or indirectly through one or more of its wholly owned subsidiaries, of a number of shares of RAI common stock such that BAT, directly or indirectly through its affiliates, will maintain its approximately 42% beneficial ownership interest in RAI immediately following completion of the Lorillard merger;

 

•

“BAT” means British American Tobacco p.l.c., a public limited company incorporated under the laws of England and Wales and B&W’s parent;

 

•

“bridge credit facility” means the Bridge Credit Agreement, dated as of September 23, 2014, among RAI, JPMorgan Chase Bank, N.A., as Administrative Agent, Citibank, N.A., as Syndication Agent, J.P. Morgan Securities LLC and Citigroup Global Markets Inc., as Joint Lead Arrangers and Joint Bookrunners, and the lending institutions party thereto providing for a 364-day senior unsecured term loan in the aggregate principal amount of up to $9.0 billion;

 

•

“divestiture” means the transactions contemplated by the asset purchase agreement and the transfer agreement pursuant to which the transferred assets will be acquired by Imperial Sub;

 

•

“Imperial Sub” means ITG Brands, LLC, a Texas limited liability company and wholly owned subsidiary of Imperial (formerly known as Lignum-2, L.L.C.);

 

•

“Imperial” means Imperial Tobacco Group PLC, a public limited company incorporated under the laws of England and Wales;

 

•

“Lorillard merger” means the proposed merger of merger sub with and into Lorillard, with Lorillard surviving as a direct, wholly owned subsidiary of RAI, pursuant to the merger agreement;

 

•

“Lorillard transactions” means the Lorillard merger and the other proposed transactions contemplated by the merger agreement, including the divestiture and the BAT share purchase;

 

•

“Lorillard transferred assets” means certain assets currently owned by Lorillard subsidiaries, related to the electronic cigarette brands blu eCIGS and SKYCIG and the cigarette brand MAVERICK, as well as Lorillard’s owned and leased real property, including its manufacturing, research and development facilities and headquarters in Greensboro, North Carolina and the tobacco receiving and storage facilities in Danville, Virginia, and certain transferred employees;

 

•

“Lorillard” means Lorillard, Inc., a Delaware corporation, and its successors;

 

•

“merger agreement” means the Agreement and Plan of Merger, dated as of July 15, 2014, as it may be amended from time to time, among RAI, Lorillard and merger sub;

 

•

“merger consideration” means the consideration, per share of Lorillard common stock, to be received by Lorillard shareholders in the merger, consisting of:

 

•

0.2909 of a fully paid and nonassessable share of RAI common stock, plus

 

•

$50.50 in cash;

 

14

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•

“merger sub” means RAI’s direct, wholly owned subsidiary, Lantern Acquisition Co., a Delaware corporation;

 

•

“RAI transferred assets” means certain assets currently owned by RAI subsidiaries related to the cigarette brands WINSTON, KOOL and SALEM (and under certain circumstances, DORAL);

 

•

“revolving credit facility” means the Credit Agreement, dated as of December 18, 2014, among RAI, JPMorgan Chase Bank, N.A., as Administrative Agent, Citibank, N.A., as Syndication Agent, and the various Documentation Agents, Joint Lead Arrangers, Joint Bookrunners and lending institutions party thereto, providing for a five-year, $2.0 billion senior revolving credit facility;

 

•

“RJR Tobacco” means the operating segment comprised principally of the primary operations of R. J. Reynolds Tobacco Company, a North Carolina corporation and RAI’s indirect, wholly owned subsidiary;

 

•

“share issuance” means, collectively, (i) the issuance of shares of RAI common stock to Lorillard shareholders as consideration in the Lorillard merger, and (ii) the issuance of shares of RAI common stock to BAT, directly or indirectly through one or more of its wholly owned subsidiaries, pursuant to the subscription agreement;

 

•

“subscription agreement” means the Subscription and Support Agreement, dated as of July 15, 2014, as it may be amended from time to time, among RAI, BAT and B&W;

 

•

“transfer agreement” means the transfer agreement, dated as of July 15, 2014, as it may be amended from time to time, between Lorillard and Imperial Sub; and

 

•

“transferred assets” means the RAI transferred assets and the Lorillard transferred assets.

 

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FORWARD-LOOKING STATEMENTS

This Exhibit 99.1 contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements relate to future events or the future financial performance of RAI and its subsidiaries. Forward-looking information includes statements relating to future actions, prospective products, future performance or results of current or anticipated products, sales and marketing efforts, costs and expenses, interest rates, outcome of contingencies, financial condition, results of operations, liquidity, business strategies, cost savings, objectives of management and other matters. You can find many of these statements by looking for words like “believes,” “expects,” “anticipates,” “estimates,” “may,” “should,” “could,” “plan,” “intend” or similar expressions in this Exhibit 99.1.

These forward-looking statements involve risks and uncertainties. Actual results may differ materially from those contemplated by these forward-looking statements. You should understand that various factors could affect the future results of RAI and its subsidiaries and could cause results to differ materially from those expressed in these forward-looking statements. These risks and uncertainties include:

 

•

the information appearing under the caption “Risk Factors” included in RAI’s most recent annual report on Form 10-K and in any updates to the risk factors in any quarterly or other report RAI files subsequently to such annual report;

 

•

the deviation of actual financial results of RAI and Lorillard and their respective subsidiaries on a combined basis from those reflected in the unaudited pro forma condensed combined financial statements included herein;

 

•

the substantial and increasing taxation and regulation of tobacco products, including the regulation of tobacco products by the U.S. Food and Drug Administration, referred to as the FDA;

 

•

the possibility that the FDA will issue regulations prohibiting menthol in cigarettes, which will have a greater impact on the businesses of RAI and its subsidiaries if RAI completes the Lorillard transactions;

 

•

the possibility that the FDA will require the reduction of nicotine levels or the reduction or elimination of other constituents in cigarettes;

 

•

the possibility that the FDA will issue regulations extending the FDA’s authority over tobacco products to e-cigarettes, subjecting e-cigarettes to restrictions on, among other things, the manufacturing, marketing and sale of such products;

 

•

decreased sales resulting from the future issuance of “corrective communications,” required by the order in United States v. Philip Morris USA Inc. on five subjects, including smoking and health, and addiction;

 

•

various legal actions, proceedings and claims relating to the sale, distribution, manufacture, development, advertising, marketing and claimed health effects of tobacco products that are pending or may be instituted against RAI or its subsidiaries;

 

•

the possibility that reports from the U.S. Surgeon General regarding the negative health consequences associated with cigarette smoking and second-hand smoke may result in additional litigation and/or regulation;

 

•

the possibility of being required to pay various adverse judgments in the Engle v. R.J. Reynolds Tobacco Co. progeny cases and/or other litigation;

 

•

the substantial payment obligations with respect to cigarette sales, and the substantial limitations on the advertising and marketing of cigarettes (and of RJR Tobacco’s smokeless tobacco products) under the state settlement agreements;

 

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•

the possibility that the arbitration award partially resolving disputes relating to the non-participating manufacturer adjustment provision under the master settlement agreement, referred to as the 2003 NPM adjustment, will be vacated or otherwise modified;

 

•

the possibility that the arbitration award with respect to the states found to be non-diligent in connection with the 2003 NPM adjustment will be vacated or otherwise modified;

 

•

the continuing decline in volume in the U.S. cigarette industry and dependence by RAI and its subsidiaries on the U.S. cigarette industry and premium and super premium brands, which dependence will continue following completion of the Lorillard merger;

 

•

concentration of a material amount of sales with a limited number of customers and potential loss of these customers;

 

•

competition from other manufacturers, including industry consolidations or any new entrants in the marketplace, such as Imperial if it acquires the brands and other assets it has agreed to purchase in the divestiture;

 

•

increased promotional activities by competitors, including manufacturers of deep-discount cigarette brands;

 

•

the success or failure of new product innovations, including the digital vapor cigarette, VUSE;

 

•

the success or failure of acquisitions or dispositions, which RAI or its subsidiaries may engage in from time to time, including the Lorillard merger and the divestiture;

 

•

the responsiveness of both the trade and consumers to new products, marketing strategies and promotional programs;

 

•

the reliance on outside suppliers to manage certain non-core business processes;

 

•

the reliance on a limited number of suppliers for certain raw materials;

 

•

the cost of tobacco leaf, and other raw materials and other commodities used in products;

 

•

the passage of new federal or state legislation or regulation;

 

•

the effect of market conditions on interest rate risk, foreign currency exchange rate risk and the return on corporate cash, or adverse changes in liquidity in the financial markets;

 

•

the impairment of goodwill and other intangible assets, including trademarks;

 

•

the effect of market conditions on the performance of pension assets or any adverse effects of any new legislation or regulations changing pension and postretirement benefits accounting or required pension funding levels;

 

•

the substantial amount of RAI debt, including the additional debt expected to be incurred or assumed in connection with the Lorillard merger;

 

•

the possibility of decreases in the credit ratings assigned to RAI, and to the senior unsecured long-term debt of RAI, including the impact on RAI’s credit ratings of the additional indebtedness assumed or incurred in connection with the Lorillard merger;

 

•

the possibility of changes in RAI’s historical dividend policy;

 

•

the restrictive covenants imposed under RAI’s debt agreements;

 

•

the possibility of natural or man-made disasters or other disruptions, including disruptions in information technology systems or security breaches, that may adversely affect manufacturing or other operations and other facilities or data;

 

17

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•

the loss of key personnel or difficulties recruiting and retaining qualified personnel;

 

•

the inability to adequately protect intellectual property rights;

 

•

the significant ownership interest of B&W, RAI’s largest shareholder, in RAI and the rights of B&W under the governance agreement;

 

•

the expiration of the standstill provisions of the governance agreement, and the expiration of RAI’s shareholder rights plan, on July 30, 2014;

 

•

a termination of the governance agreement or certain of its provisions in accordance with its terms, including the limitations on B&W’s representation on RAI’s board and its board committees;

 

•

the expiration of the non-competition agreement between RAI and BAT on July 30, 2014; and

 

•

additional risks, contingencies and uncertainties associated with the Lorillard transactions that could result in the failure of the Lorillard transactions to be completed or, if completed, to have an adverse effect on the results of operations, cash flows and financial position of RAI and its subsidiaries and any anticipated benefits of the Lorillard transactions to RAI shareholders, including:

 

•

the failure to obtain necessary regulatory or other approvals for the Lorillard merger and divestiture, or if obtained, the possibility of being subjected to conditions that could reduce the expected synergies and other benefits of the Lorillard merger, result in a material delay in, or the abandonment of, the Lorillard merger or otherwise have an adverse effect on RAI;

 

•

the obligation to complete the Lorillard merger and divestiture even if financing is not available or is available on terms other than those currently anticipated, including financing less favorable to RAI than its current commitments, due to the absence of a financing condition in connection with the Lorillard merger;

 

•

the obligation to complete the Lorillard merger and divestiture even if there are adverse governmental developments with respect to menthol in cigarettes, and once the Lorillard merger and the divestiture are completed, the effect of adverse governmental developments on RAI’s subsidiaries’ sales of products that contain menthol which represent a substantial portion of RAI’s consolidated net sales;

 

•

the failure to satisfy required closing conditions or complete the Lorillard merger and divestiture in a timely manner;

 

•

the possibility of selling the transferred assets, including the brands currently expected to be divested, or which otherwise might be divested, on terms less favorable than the divestiture, due to the absence of a condition to the consummation of the Lorillard merger that the divestiture be completed;

 

•

the possibility of having to include RJR Tobacco’s DORAL brand as part of the divestiture;

 

•

the effect of the announcement of the Lorillard merger and divestiture on the ability to retain and hire key personnel and maintain business relationships, and on operating results and businesses generally;

 

•

the effect of restrictions placed on RAI’s, Lorillard’s or their respective subsidiaries’ business activities and the limitations put on RAI’s and Lorillard’s ability to pursue alternatives to the Lorillard merger pursuant to the merger agreement and asset purchase agreement;

 

•

the possibility of a delay or prevention of the Lorillard merger by lawsuits challenging the Lorillard merger filed against RAI, the members of the RAI board of directors, Lorillard, the members of the Lorillard board of directors and BAT;

 

•

the reliance of RJR Tobacco on Imperial Sub to manufacture NEWPORT on RJR Tobacco’s behalf for a period of time after the divestiture;

 

18

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•

RAI’s obligations to indemnify Imperial Sub for specified matters and to retain certain liabilities related to the transferred assets;

 

•

the failure to realize projected synergies and other benefits from the Lorillard merger and divestiture;

 

•

the incurrence of significant pre- and post-transaction related costs in connection with the Lorillard merger and divestiture; and

 

•

the occurrence of any event giving rise to the right of a party to terminate the Lorillard merger and divestiture.

Due to these uncertainties and risks, you are cautioned not to place undue reliance on the forward-looking statements included herein, which speak only as of the date this Exhibit is being furnished by Form 8-K. All subsequent written or oral forward-looking statements attributable to RAI or any person acting on its behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. RAI does not undertake any obligation to release publicly any revisions to these forward-looking statements to reflect events or circumstances after the date of this document or to reflect the occurrence of unanticipated events, except as may be required under applicable U.S. securities law.

 

19