Form 8-K REYNOLDS AMERICAN INC For: Jul 25

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 8-K

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

Date of Report (Date of earliest event reported) July 25, 2016

Reynolds American Inc.

(Exact Name of Registrant as Specified in its Charter)

 

North Carolina		1-32258		20-0546644
(State or Other Jurisdiction of Incorporation)		(Commission File Number)		(IRS Employer Identification No.)

401 North Main Street,

Winston-Salem, NC 27101

(Address of Principal Executive Offices) (Zip Code)

Registrant’s telephone number, including area code: 336-741-2000

Not Applicable

(Former Name or Former Address, if Changed Since Last Report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

[  ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

[  ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

[  ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

[  ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

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ITEM 1.01 Entry into a Material Definitive Agreement.

On July 26, 2016, Reynolds American Inc., referred to as RAI, announced that its Board of Directors had authorized RAI to repurchase, on or before December 31, 2018, up to $2.0 billion of outstanding shares of RAI common stock, in open market or privately negotiated transactions or pursuant to the share repurchase agreement described below (such share repurchase is referred to as the Repurchase Program). The execution of the Repurchase Program is subject to prevailing market and business conditions and may be terminated or suspended at any time.

In connection with the Repurchase Program, RAI, Brown & Williamson Holdings, Inc., referred to as B&W, a wholly owned subsidiary of British American Tobacco p.l.c., referred to as BAT, and Louisville Securities Limited, referred to as LSL, a wholly owned subsidiary of BAT, entered into a Share Repurchase Agreement, dated July 25, 2016, referred to as the SRA. BAT and its affiliates including, without limitation, B&W and LSL, are referred to collectively as the BAT Group. The material terms of the SRA are summarized below, with this summary qualified in its entirety by the full text of the SRA, a copy of which is attached to this report as Exhibit 10.1.

As of July 25, 2016, BAT indirectly (through B&W and LSL) was the beneficial owner of 602,028,556 shares of RAI common stock, or approximately 42% of RAI’s outstanding common stock. Subject to the terms of the SRA, the BAT Group will participate in the Repurchase Program (except to the extent the purchases under the Repurchase Program are Excluded Compensation Buybacks, as such term is defined in the SRA) on a basis approximately proportionate with the BAT Group’s percentage ownership of RAI’s equity, and in a manner designed to qualify LSL’s sales of RAI common stock pursuant to the Repurchase Program for the “Intended Tax Treatment,” as such term is defined in the SRA and is described below. The BAT Group will not participate proportionately in Excluded Compensation Buybacks under the Repurchase Program because those share repurchases, which will satisfy the requirements of the Governance Agreement, dated July 30, 2004, as amended, among BAT, B&W and RAI, offset increases in the number of outstanding shares of RAI common stock due to issuances of RAI common stock to RAI’s directors and employees under RAI’s equity-based benefit plans, and the net effect of such share issuances and share buybacks (without the BAT Group’s participation) is to keep the BAT Group’s percentage ownership in RAI unchanged.

Subject to this treatment of Excluded Compensation Buybacks, under the SRA, at the end of each week, referred to as a Buyback Week, during which RAI purchases shares of RAI common stock under the Repurchase Program from shareholders other than a member of the BAT Group, RAI will purchase from the BAT Group shares of RAI common stock in an amount that is equal to the lowest of:

(1) the number of shares such that, after giving effect to RAI’s purchase from the BAT Group, the net total number of shares sold by the BAT Group to RAI under the SRA will be equal to the total number of shares purchased by RAI from shareholders other than the BAT Group for all periods through such Buyback Week pursuant to the Repurchase Program multiplied by the ratio, which is subject to certain adjustments as set forth in the SRA, of (x) the BAT Group’s percentage ownership of the equity of RAI on July 25, 2016, to (y) 1.0 minus the BAT Group’s percentage ownership of the equity of RAI on July 25, 2016;

(2) the maximum number of shares that the BAT Group can sell to RAI without decreasing the BAT Group’s percentage ownership of the equity of RAI from July 25, 2016 to the end of such Buyback Week; and

(3) the maximum number of shares that LSL reasonably determines that the BAT Group can sell to RAI without putting at risk the Intended Tax Treatment.

The per share price to be paid by RAI with respect to any such purchase of RAI common stock from any member of the BAT Group will be equal to the volume weighted average price paid by RAI for shares of RAI common stock purchased from shareholders other than members of the BAT Group during the Buyback Week. If there is a change in the BAT Group’s percentage ownership of RAI’s equity after July 25, 2016 that does not occur as part of the purchases under the SRA or the Repurchase Program, then (i) clause (1) above will be applied separately on a cumulative basis for periods before and after such change, and (ii) the base BAT Group percentage ownership in clause (2) above will be adjusted to reflect any acquisitions or dispositions of shares by the BAT Group causing such change.

 

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The SRA provides that LSL may reduce the number of shares otherwise determined to be sold to RAI pursuant to clause (2) of the preceding paragraph so as to assure itself that the BAT Group’s percentage ownership of RAI’s equity will not decrease as a result of certain transactions. Further, under the SRA, if LSL reasonably determines that (1) there is a reasonable risk that it is not possible to achieve the results in the preceding paragraph because of equity issued or to be issued by RAI which reduces the BAT Group’s percentage ownership of RAI’s equity, and (2) such risk cannot be avoided by reducing the number of shares to be sold to RAI in future Buyback Weeks, then any member of the BAT Group may elect to repurchase from RAI a number of shares of RAI common stock (up to the number of shares that the BAT Group previously sold to RAI under the Repurchase Program) sufficient to eliminate such risk. If the BAT Group has exercised the foregoing reduction right or purchase right due to an expected issuance by RAI of additional shares of RAI common stock and RAI subsequently determines that such issuance will not take place, or if the BAT Group has reduced the number of shares to be sold to RAI in reliance upon certain facts or assumptions and RAI or the BAT Group subsequently determines that such facts or assumptions are no longer correct or applicable, then RAI will in certain circumstances purchase from the BAT Group a certain number of shares of RAI common stock as a result of such cancelled issuance or subsequent determination, all as set forth in, and otherwise subject to the terms of, the SRA.

The parties intend for the proceeds of any sales of RAI common stock pursuant to the SRA paid by RAI to a member of the BAT Group to be treated as a dividend for tax purposes. If LSL is the member of the BAT Group that sells to RAI shares of RAI common stock under the SRA, then the Intended Tax Treatment is (1) withholding tax of no more than 5% on the gross purchase price for shares otherwise payable to LSL, and (2) no additional material adverse U. S. or U. K. tax effects to the BAT Group from the sale of shares pursuant to the SRA. If the Intended Tax Treatment is not available to LSL, then the parties will negotiate in good faith to determine if they can carry out the purposes of the SRA with tax results to the BAT Group no more burdensome than the Intended Tax Treatment, without other adverse tax or non-tax effects to the BAT Group or RAI, by structuring sales of shares of RAI common stock to RAI in a different manner.

RAI has agreed under the SRA, in certain circumstances, to indemnify members of the BAT Group from loss or liability arising from their failure to obtain the Intended Tax Treatment resulting from the inaccuracy of any information provided to the BAT Group by RAI in certain periodic certificates delivered to the BAT Group under the SRA. LSL has agreed under the SRA, in certain circumstances, to indemnify RAI from loss or liability arising from its failure to withhold the required amount on any proceeds paid to a member of the BAT Group from sales of RAI common stock under the SRA.

Subject to the earlier termination by LSL or RAI as set forth therein, the SRA will terminate on the earlier of December 31, 2018, and the expenditure of $2.0 billion pursuant to the Repurchase Program, including pursuant to the SRA.

ITEM 2.02 Results of Operations and Financial Condition.

The information in this Current Report is being furnished and shall not be deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subjected to the liabilities of that Section. The information in this Current Report shall not be incorporated by reference into any registration statement or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such a filing.

On July 26, 2016, Reynolds American Inc. issued an earnings release announcing its financial results for the second quarter and six months ended June 30, 2016. A copy of the earnings release is attached as Exhibit 99.1.

ITEM 9.01 Financial Statements and Exhibits.

(d) Exhibits.

The following is furnished as an Exhibit to this Report.

 

Number		Exhibit
10.1		Share Repurchase Agreement, dated July 25, 2016, by Reynolds American Inc., Brown & Williamson Holdings, Inc. and Louisville Securities Limited.
99.1		Earnings  Release of Reynolds American Inc., dated July 26, 2016.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

 

Date: July 25, 2016

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INDEX TO EXHIBITS

 

Number		Exhibit
10.1		Share Repurchase Agreement, dated July 25, 2016, by Reynolds American Inc., Brown & Williamson Holdings, Inc. and Louisville Securities Limited.
99.1		Earnings Release of Reynolds American Inc., dated July 26, 2016.

Exhibit 10.1

EXECUTION COPY

SHARE REPURCHASE AGREEMENT

THIS SHARE REPURCHASE AGREEMENT (this “Agreement”) is entered into on July 25, 2016, by REYNOLDS AMERICAN INC. (the “Company”), BROWN & WILLIAMSON HOLDINGS, INC. (“B&W”) and LOUISVILLE SECURITIES LIMITED, a U.K. corporation (“LSL”).

RECITALS

 

I.

The Company’s Board of Directors has authorized a share repurchase program (the “Share Repurchase Program”) for the purchase of outstanding shares of common stock of the Company, par value $0.0001 per share (the “Shares”), pursuant to which the Company may spend up to $2 billion by December 31, 2018 to repurchase Shares.

 

II.

Pursuant to the Governance Agreement dated as of July 30, 2004, as amended (the “Governance Agreement”), the Company, British American Tobacco p.l.c. (“BAT”), and B&W established certain terms and conditions concerning the corporate governance of the Company and other matters. All capitalized terms used but not defined herein shall have the meanings set forth in the Governance Agreement.

 

III.

The purpose of this Agreement is to permit and require BAT and its affiliates (the “BAT Group”) to participate in the Share Repurchase Program, except to the extent purchases under the Share Repurchase Program are Excluded Compensation Buybacks, subject to the conditions herein, on a basis approximately proportionate with the BAT Group’s percentage ownership of the equity of the Company and in a manner in which the repurchases from LSL shall qualify for the Intended Tax Treatment (as defined below).

 

IV.	This Agreement is being entered into in good faith and not as part of a plan or scheme to evade the prohibitions of Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the “1934 Act”).

IN CONSIDERATION OF the mutual promises contained in this Agreement, the parties hereto hereby agree:

 

A.	Calculations; Purchase and Sale.

 

1.

For purposes of this Agreement,

(i) a “Buyback Week” means a Calendar Week (as defined below) during which the Company repurchases any Shares pursuant to the Share Repurchase Program from any Person other than a member of the BAT Group;

(ii) a “Calculation Period” means a period that begins on the day immediately after the end of the preceding Calculation Period (or in the case of the first Calculation Period, on the first day of the month that includes the date of this Agreement) and ends on the earlier of (i) the next Friday that is the last day of a Buyback Week or (ii) the next Friday that is the last Friday of a calendar month;

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(iii) “Calendar Week” means each seven-day period ending on a Friday;

(iv) “Excluded Compensation Buyback” means a buyback of Shares by the Company designated by the Company in a notice to B&W as being made pursuant to Section 2.04(d) of the Governance Agreement;

(v) the “BAT Seller” means LSL or, if LSL provides notice to the Company no later than the first business day after the BAT Group Buyback Number (as defined below) has been determined, one or more members of the BAT Group, which may include LSL, as designated in such notice; and

(vi) for purposes of the provisions of this Agreement relating to the BAT Group’s participation in the Share Repurchase Program (including, for example, the definition of “Buyback Week” and the calculation of the BAT Group Buyback Number as defined below), any Excluded Compensation Buyback shall be treated as not made pursuant to the Share Repurchase Program (and the BAT Group will not participate in any Excluded Compensation Buyback).

 

2.

The Company will promptly notify B&W if a Calendar Week is or is expected to be a Buyback Week.

 

3.

On or before the third business day following the end of each Calculation Period, the Company will deliver to B&W and LSL a certificate (a “Calculation Certificate”), signed on behalf of the Company by any of its Chief Financial Officer, Chief Accounting Officer, Treasurer or Secretary, substantially in the form attached hereto as Exhibit A, as the same (including the schedues thereto) may hereafter be amended by the mutual agreement of the parties hereto, which agreement may be evidenced by email. If the Calculation Period includes a Buyback Week, then the Calculation Certificate shall set forth the number of Shares that the Company proposes to buy back from the BAT Group with respect to such Buyback Week (the “BAT Group Buyback Number”). The BAT Group Buyback Number shall be calculated in the Calculation Certificate based on the principles referred to in Paragraphs A.5 and A.6.

 

4.

LSL, on or before the third business day following receipt by B&W of a Calculation Certificate with respect to a Calculation Period which includes a Buyback Week, shall deliver a notice (the “LSL Notice”) to the Company substantially in the form attached hereto as Exhibit B. The LSL Notice shall state whether LSL agrees with the Company’s calculation of the applicable BAT Group Buyback Number, and if not, it shall state LSL’s proposal for the BAT

 

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Group Buyback Number and its calculation thereof. If the Company does not agree with LSL’s proposal, then B&W and the Company will negotiate in good faith to determine the appropriate BAT Group Buyback Number, subject to final approval of LSL. However, if the parties cannot agree on the BAT Group Buyback Number within three business days following delivery of the LSL Notice to the Company, then the BAT Group Buyback Number proposed in the LSL Notice, with revisions approved by LSL in connection with the negotiation between the parties, shall be the number of Shares the Company will repurchase from the BAT Group with respect to the relevant Buyback Week.

 

5.

The BAT Group Buyback Number with respect to a Buyback Week shall be the lowest of:

(i) the number of Shares such that, after the purchase of such Shares from the BAT Group by the Company, the net total number of Shares sold by the BAT Group to the Company under this Agreement shall be equal to the total number of Shares purchased by the Company from shareholders other than members of the BAT Group (and other than Excluded Compensation Buybacks) for all periods through such Buyback Week pursuant to the Share Repurchase Program multiplied by the ratio of (x) the BAT Group’s percentage ownership of the equity of the Company on the date of this Agreement, to (y) 1.0 minus the BAT Group’s percentage ownership of the equity of the Company on the date of this Agreement;

(ii) the maximum number of Shares that the BAT Group can sell to the Company without decreasing the BAT Group’s percentage ownership of the equity of the Company from the date of this Agreement to the end of such Buyback Week; and

(iii) the maximum number of Shares, reasonably determined by LSL upon advice of its outside tax counsel after consultation with the Company, that the BAT Group can sell to the Company without putting at risk the Intended Tax Treatment.

If there is a change in the BAT Group’s Percentage Interest after the date of this Agreement that does not occur as part of the same plan as the purchases under the Share Repurchase Program or this Agreement, then (a) Paragraph A.5(i) shall be modified so as to apply separately on a cumulative basis for periods before and after such change in Percentage Interest, (b) the base BAT Group percentage ownership in Paragraph A.5(ii) shall be adjusted to reflect any acquisitions or dispositions of Shares by the BAT Group causing such change in Percentage Interest, (c) LSL or B&W, as applicable, shall promptly notify the other party concerning any such change within its control, and (d) any such change shall be effective for purposes of Paragraphs A.5(i) and A.5(ii) at the beginning of the Calculation Period following the Calculation Period in which the change occurs.

 

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6.

The following rules shall apply for purposes of Paragraph A.5(ii) but shall not limit the discretion of LSL under Paragraph A.5(iii):

(i) any Sale (as defined below) of Shares to the Company under this Agreement with respect to any Buyback Week (current or prior) shall be treated as having occurred or as occurring on the last day of such Buyback Week,

(ii) unless reasonably determined otherwise by LSL after consultation by B&W with the Company, such calculation shall take into account any increase or decrease in the outstanding equity of the Company since the date of this Agreement for any reason, and

(iii) LSL shall be entitled, after prior consultation by B&W with the Company, to reduce the number of Shares otherwise determined under Paragraph A.5(ii) so as to assure LSL that the BAT Group’s percentage ownership of the equity of the Company will not decrease as a result of future events that may reasonably be expected to occur in the future, including, without limitation, issuances of new equity by the Company pursuant to the exercise of stock options or the vesting of performance shares, the issuance or vesting of restricted stock, or the issuance of any other equity to any third party reasonably expected to occur after the end of the applicable Buyback Week. Without limiting the generality of the foregoing, for purposes of Paragraph A.5(ii), (i) LSL will take into account, in considering possible future issuances of Shares by the Company, the Company’s obligation pursuant to Section 2.04(d) of the Governance Agreement to make Excluded Compensation Buybacks, and (ii) the BAT Group’s percentage ownership in the Company at any time shall be determined by treating as not outstanding the number of Shares with respect to which the Company then has an outstanding obligation to make Excluded Compensation Buybacks.

 

7.

For purposes of this Agreement, the determination of the number of outstanding Shares or other equity of the Company shall be based on Shares or equity considered outstanding for U.S. Securities and Exchange Commission reporting purposes. Any assumptions made for the purposes of determining the number of outstanding Shares shall be described in the Calculation Certificate.

 

8.

The BAT Seller shall deliver and sell to the Company, and the Company shall buy from the BAT Seller (each such transaction, a “Sale”), at or before 12:00 p.m. Eastern Time on the second business day following the date the BAT Group Buyback Number for the applicable Buyback Week becomes final (a “Closing Date”) a number of Shares (the “Sale Shares”) equal to such BAT Group Buyback Number. On each Closing Date, (a) B&W or the BAT Seller shall deliver to the Company’s transfer agent instructions to transfer the Sale Shares to the Company, together with such stock powers and other instruments from the BAT Seller as may be necessary to give effect to such instructions, and (b) upon confirmation from the Company’s transfer agent of receipt of such instructions, the Company

 

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shall pay the purchase price specified in Paragraph A.9 for the Sale Shares, net of applicable withholding taxes as provided in Paragraph C.2, in immediately available funds to such account of the BAT Seller as B&W has designated in writing.

 

9.

The price per Share to be paid by the Company under a Sale with respect to a Buyback Week shall be the volume weighted average price (“VWAP”) paid by the Company for the Shares purchased from shareholders other than members of the BAT Group (the “Prior Period Shares”) with respect to such Buyback Week. For purposes of this Agreement, VWAP is calculated by dividing the total consideration paid, without taking commissions into account, for the Prior Period Shares by the aggregate number of Prior Period Shares.

 

10.

The Company shall not be obligated to deliver a proposed BAT Group Buyback Number and neither the Company nor the BAT Group shall be required to effect a Sale if the performance of their respective obligations would violate applicable law. Other than for the purposes of correcting any error, only one Calculation Certificate may be delivered and one Sale may be effected with respect to each Buyback Week.

 

11.

Any fractional amounts of Shares required to be sold to the Company under any LSL Notice, as the same may be amended, shall be rounded down to the nearest whole number.

 

12.

For purposes of this agreement, “business day” means a day which is not a Federal Reserve Bank holiday or a United Kingdom bank holiday and on which the New York Stock Exchange is open for trading.

 

13.

If at any time the Company becomes aware that any statement previously made in a Calculation Certificate is wrong or misleading, or if the Company decides to issue equity not contemplated by the assumptions set forth in a Calculation Certificate, it shall promptly notify B&W in writing. If at any time B&W or LSL becomes aware that any statement previously made in a Calculation Certificate or LSL Notice is wrong or misleading, it shall promptly notify the Company in writing.

 

14.

In the event Paragraph A.13 applies, or if LSL reasonably determines after prior consultation by B&W with the Company that its calculation of a BAT Group Buyback Number was incorrect, then the Company shall take remedial steps reasonably requested by LSL in order to permit LSL to assure itself of the satisfaction of Paragraph A.5, including if necessary, rescinding prior Sales under this Agreement.

 

15.

During the term of this Agreement, the Company shall satisfy its obligations under Section 2.04(d) of the Governance Agreement by making Excluded

 

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Compensation Buybacks pursuant to the Share Repurchase Program, and to the extent there are unsatisfied obligations under such Section 2.04(d), purchases pursuant to the Share Repurchase Program shall be designated by the Company as Excluded Compensation Buybacks.

 

B.

Term. The term of this Agreement shall commence on the date hereof and shall terminate as of the earlier of the date stated in the first Recital hereto and the date of the expenditure of the aggregate amount stated in the first Recital hereto pursuant to this Share Repurchase Agreement and the Share Repurchase Program, collectively. In addition: (a) LSL may terminate this Agreement at any time upon written notice to the Company, if LSL determines in good faith, upon advice of its outside tax counsel and after consultation by B&W with the Company, that based on the facts existing at such time, there is a reasonable risk that it is not possible to achieve the results contemplated in Paragraph A.5 for sales of Shares by any member of the BAT Group to the Company pursuant to this Agreement (including through the exercise by LSL of its rights under Paragraph J of this Agreement) and (b) the Company may terminate this Agreement, upon written notice to B&W, following public announcement by the Company of the termination of the Share Repurchase Program by the Board of Directors of the Company, provided that (i) no such termination shall be effective with respect to any Buyback Week, and (ii) Paragraphs A.13, A.14, I, J and L shall survive such termination. If LSL determines in good faith, upon advice of its outside tax counsel and after consultation with the Company, that any circumstance has arisen that could reasonably be expected to cause it in the future to invoke its right to terminate the Agreement under clause (a) of the preceding sentence, it shall promptly notify the Company, and the parties shall use their reasonable best efforts to avoid the need for such termination.

 

C.	Tax Treatment.

 

1.

The parties intend for the proceeds of any Sales pursuant to this Agreement paid to a BAT Seller from the Company to be treated as a dividend pursuant to Sections 302(d) and 301(c)(1) of the Internal Revenue Code of 1986, as amended (the “Code”), as such Sections are in effect on the date of this Agreement. Subject to Paragraph C.2, the Company may withhold on any such Sale proceeds paid to a BAT Seller that is not a U.S. person as required by law on the assumption that such Sale proceeds are so treated as a dividend. The Company shall pay any such withheld amounts to the appropriate taxing authority on behalf of the BAT Seller in a timely manner, and the Company shall give timely notice to the BAT Seller of the amount so withheld. Any amount so withheld and so paid to a taxing authority shall be treated as paid to the BAT Seller for all purposes of this Agreement.

 

2.

If it is legally able to do so, LSL shall, at least 5 and not more than 10 business days before the first purchase of Shares under this Agreement, and when required by law or reasonably requested by the Company thereafter, provide the Company with a completed IRS Form W-8BEN-E (the “IRS Tax Form”) claiming

 

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eligibility for the 5% withholding tax rate on dividends from the Company pursuant to Article 10(2)(a) of the United States-United Kingdom Income Tax Convention and exemption from any withholding under the Foreign Account Tax Compliance Act. LSL shall promptly notify the Company if it determines that the IRS Tax Form is no longer valid or if it cannot legally renew such form with such claim. To the extent that the BAT Seller is LSL and the Company reasonably believes the IRS Tax Form is correct and valid, the Company agrees that in reliance on such Form, it shall withhold 5%, and no more than 5%, of the gross purchase price otherwise payable to LSL and pay such withholding tax on a timely basis to the Internal Revenue Service on behalf of LSL. The Company shall promptly notify LSL if it comes to believe that the IRS Tax Form is not correct and valid or that proceeds of any Sales paid to LSL are for any reason not eligible for 5% withholding tax.

 

3.

If the BAT Seller is LSL, the “Intended Tax Treatment” is (i) withholding tax of no more than 5% on the gross purchase price for Shares otherwise payable to LSL, and (ii) no additional material adverse U.S. or United Kingdom tax effects to the BATGroup from the sale of Shares pursuant to this Agreement. LSL may, upon advice of its outside tax counsel and after consultation with the Company, reasonably determine that pending, proposed or enacted tax legislation or a tax treaty would or will adversely affect the Intended Tax Treatment, even if (in the case of pending or proposed legislation or tax treaty) such legislation or tax treaty has not yet been enacted or ratified but might be enacted or ratified with a retroactive effective date, but (i) any such determination by LSL shall be effective only with respect to Buyback Weeks that begin after LSL has provided notice to the Company of such determination, and (ii) LSL may not rely on pending, proposed or enacted tax legislation or tax treaty as a basis for repurchasing Shares from the Company pursuant to Paragraph J (or otherwise pursuant to this Agreement) that it previously sold to the Company pursuant to this Agreement.

 

4.

If the Intended Tax Treatment would be available to LSL if it completed the IRS Tax Form as provided in Paragraph C.2, and it is legally able to so complete such Form, but it does not provide such completed Form or elects to have the BAT Seller be a different entity, then the Intended Tax Treatment shall be deemed to be satisfied for all purposes of this Agreement.

 

5.

If the Intended Tax Treatment is not available to LSL, then the parties shall negotiate in good faith to determine if the they can carry out the purposes of this Agreement with tax results to the BAT Group no more burdensome than the Intended Tax Treatment, without other adverse tax or nontax effects to the BAT Group or to the Company, by structuring sales of Shares to the Company in a different manner.    Each party shall determine in good faith, but in its sole discretion, whether any such alternative approach is acceptable to it. If both parties find an alternative approach acceptable, this Agreement shall be applied in the manner so determined by the parties.

 

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D.	Representations and Warranties.

 

1.

LSL represents and warrants to the Company that (i) the execution, delivery and performance of this Agreement have been duly authorized by the Boards of Directors of LSL and B&W, (ii) no Sale will contravene, or require any consent, notice or filing which has not been obtained, given or made, under (a) any law applicable to the BAT Seller, (b) the organizational documents of the BAT Seller, or (c) any judgment, order or decree or any contract or agreement to which the BAT Seller is subject, (iii) the BAT Seller has or will have valid title to the Shares to be sold to the Company and the legal right and power to sell, transfer and deliver such Shares, (iv) the delivery of the Shares under each Sale will, upon payment of the purchase price therefor, pass valid title to the Company to such Shares free and clear of any security interests, claims, liens, equities, and other encumbrances, (v) any LSL Notice delivered under this Agreement will be accurate in all material respects, (vi) absent a change in law, it currently expects to be able to deliver the IRS Tax Form and to achieve the Intended Tax Treatment if it is the BAT Seller, and (vii) LSL is an indirect wholly owned subsidiary of BAT, and B&W is an indirect wholly owned subsidiary of LSL.

 

2.

The Company represents and warrants to LSL that (i) the execution, delivery and performance of this Agreement have been duly authorized by the Board of Directors of the Company, (ii) no Sale will contravene, or require any consent, notice or filing which has not been obtained, given or made, under (a) any law applicable to the Company, (b) the organizational documents of the Company or (c) any judgment, order or decree or any contract or agreement to which the Company is subject, (iii) any Calculation Certificate delivered under this Agreement will be accurate in all material respects, (iv) the Company has sufficient earnings and profits for the gross proceeds of all Sales under this Agreement to be treated as dividends within the meaning of Section 316 of the Code, and (v) the Company has delivered to B&W a certificate signed on behalf of the Company by the Chief Financial Officer, Chief Accounting Officer, Treasurer or Secretary of the Company setting forth the applicable information otherwise required pursuant to Exhibit A, treating for the purposes of this Paragraph D.2(v) the calendar month ending prior to the date of this Agreement as the Calculation Period thereunder.

 

E.

Assignment; Third-Party Beneficiaries. This Agreement is intended solely for the benefit of the Company, B&W and LSL and may not be assigned, in whole or in part, except that (1) with respect to Sales hereunder by any BAT Seller other than LSL, LSL shall assign its rights, interests and obligations under this Agreement to such BAT Seller with respect to such Sales, provided that such assignment shall not relieve LSL of its obligations hereunder and, provided, further that any BAT Seller agrees in writing to be bound by the provisions hereof, and (2) upon notice to the Company from time to time, B&W may assign its duties under this Agreement to any member of the BAT Group, provided that such assignment shall not relieve B&W of its obligations hereunder. This Agreement,

 

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except for Paragraph I, is not intended to confer any rights or remedies upon any Person other than the Company, B&W, LSL or any BAT Seller referred to in the first sentence of this Paragraph E.

 

F.	Sales Plan. It is the intent of the parties that this Agreement comply with the requirements of Rule 10b5-1(c) under the 1934 Act and this Agreement shall be interpreted to comply with the requirements of Rule 10b5-1(c) under the 1934 Act.

 

G.	Complete Agreement. This Agreement constitutes the entire agreement between the parties with respect to its subject matter and supersedes all prior agreements, oral or written, with respect to such subject matter.

 

H.

Governing Law; Jurisdiction. Except to the extent specifically required by the North Carolina Business Corporation Act, this Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware, regardless of the laws that might otherwise govern under applicable principles of conflicts of laws thereof. The parties declare that it is their intention that this Agreement be regarded as made under the laws of the State of Delaware and that the laws of the State of Delaware be applied in interpreting its provisions in all cases where interpretation shall be required, except to the extent the North Carolina Business Corporation Act is specifically required by such act to govern the interpretation of this Agreement.

The parties agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions of this Agreement in any Federal court located in the State of Delaware or in the Chancery Court of the State of Delaware, this being in addition to any other remedy to which they are entitled at law or in equity. In addition, each of the parties (a) consents to submit itself to the personal jurisdiction of any Federal court located in the State of Delaware or Chancery Court of the State of Delaware in the event any dispute arises out of this Agreement, (b) agrees that it will not attempt to deny or defeat such personal jurisdiction by motion or other request for leave from any such court, (c) irrevocably and unconditionally waives (and agrees not to plead or claim) any objection to the laying of venue in Delaware of any action, suit or proceeding arising out of this Agreement, (d) agrees that it will not bring any action relating to this Agreement in any court other than any Federal court sitting in the State of Delaware or Chancery Court of the State of Delaware, (e) waives any right to trial by jury with respect to any action related to or arising out of this Agreement, and (f) agrees that this Agreement involves at least $100,000 and has been entered into by the parties in express reliance upon 6 Del. C. § 2708. Without limiting the agreement of the parties set forth in this Paragraph H, in the event that any dispute arising under this Agreement is subject to, or adjudicated by, the courts of the State of North Carolina, the parties agree that any such dispute will be adjudicated by the North Carolina Business Court (with any references in this Paragraph H to Delaware courts being deemed to be references to North Carolina courts and any references in this Paragraph H to the Chancery Court of the State of Delaware being deemed to be references to the North Carolina Business Court).

 

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I.	Indemnity.

 

1.

The Company agrees to indemnify and hold members of the BAT Group harmless, on an after-tax basis, from and against any loss, liability, claim, cost, damage or expense (including reasonable legal fees and expenses) suffered or incurred by them arising from or relating to their failure to obtain the Intended Tax Treatment resulting from the inaccuracy in any respect of information set forth in any Calculation Certificate delivered pursuant to this Agreement including but not limited to any increase in tax liability resulting from the Sales and arising from or relating to any such inaccuracy. Notwithstanding the foregoing, members of the BAT Group shall not be entitled to indemnification hereunder to the extent their remedies under Paragraph B or J are adequate to assure the Intended Tax Treatment and the Company (a) confirms that the member of the BAT Group is entitled to exercise its remedies under such Paragraph B or J, as applicable, and (b) complies with such Paragraph B or J, as applicable.

 

2.

LSL agrees to indemnify and hold the Company harmless, on an after-tax basis, from and against any loss, liability, claim, cost, damage or expense (including reasonable legal fees and expenses) suffered or incurred by it arising from or relating to its failure to withhold the required amount on any Sales proceeds paid to a BAT Seller under this Agreement, unless such underwithholding is due to any inaccuracy in any respect of information set forth in any Calculation Certificate delivered by the Company pursuant to this Agreement. If any tax authority claims that any such additional amount was required to be withheld by the Company, and LSL would be liable for such amount under the preceding sentence, the Company shall afford LSL the ability to contest such claim at its own expense and shall not settle such claim without the consent of LSL.

 

J.	LSL Purchase Right

 

1.

If LSL reasonably determines, after consultation by B&W with the Company, that there is a reasonable risk that it is not possible to achieve the results in Paragraph A.5 because of equity issued or to be issued by the Company after the date hereof which reduces the BAT Group’s percentage ownership of the equity of the Company, and such risk cannot be avoided by reducing the BAT Group Buyback Number for future Buyback Weeks, then LSL may deliver to the Company a written notice (a “Primary Purchase Notice”) stating that LSL (or another specified member of the BAT Group) wishes to repurchase from the Company (a “Primary Purchase”) a stated number of Shares (the “Purchase Number”) that the BAT Group previously sold to the Company pursuant to this Agreement. The Purchase Number shall be reasonably determined by LSL, after consultation by

 

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B&W with the Company, and shall not exceed the number of Shares that, if purchased, would eliminate the identified risk. LSL shall provide the Company with the method of calculation of the Purchase Number. The prices per Share (the “Purchase Price”) for such a purchase shall be the prices previously paid by the Company to the BAT Group to purchase the equivalent number of Shares from the BAT Group, determined on a “last in first out” basis.

 

2.

If LSL properly delivers a Primary Purchase Notice, the Company will be obligated to sell, and the designated member of the BAT Group shall be obligated to buy, a number of Shares equal to the Purchase Number for the Purchase Price at or before 12:00 p.m. Eastern Time on the second business day after the delivery of the Primary Purchase Notice.

 

K.	[reserved]

 

L.	Company Repurchases of Shares.

 

1.

The parties understand that certain expected future issuances of Shares to third parties by the Company could reduce the number of Shares purchased by the Company from the BAT Group under this Agreement, and that the actual issuance of such Shares by the Company would be expected to reduce the BAT Group’s Percentage Interest. If, contrary to such expectations, the Company determines in good faith that such expected issuance will not take place and if the operation of Paragraph A.5(i) would not otherwise result in putting the parties in a position similar to the position they would be in if there had never been an expectation that the Company would issue the additional Shares, then the parties agree to comply with the procedures set forth in this Paragraph L in order to put the parties in such similar position.

 

2.

(i) If (a) the Company determines in good faith that such expected issuance of additional Shares will not take place, (b) the operation of Paragraph A.5(i) would not otherwise result in putting the parties in a position similar to the position they would be in if there had never been an expectation that the Company would issue the additional Shares, and (c) the BAT Group had previously reduced, pursuant to Paragraph A.6(iii), the amount determined under Paragraph A.5(ii) or purchased Shares from the Company under Paragraph J to permit the BAT Group to assure itself that the BAT Group’s percentage ownership of the equity of the Company did not decrease as a result of such expected issuance of additional Shares, then the Company shall deliver to B&W a certificate (a “Purchase Certificate”) identifying the expected issuance which will not take place (a “Canceled Issuance”) and setting forth the number of Shares (the “Repurchase Number”) that the Company shall purchase from the BAT Group as a result of such Canceled Issuance. The Repurchase Number in respect of a Canceled Issuance shall be equal to the lesser of (a) the sum of (i) the number of additional Shares that the BAT Group would have sold to the Company under this Agreement

 

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previously if there had never been an expectation to issue additional Shares in such Canceled Issuance, and (ii) the number of Shares that the BAT Group purchased from the Company under Paragraph J on the account of such Canceled Issuance, and (b) the maximum number of Shares that the BAT Group may sell to the Company consistent with Paragraphs A.5(i), A.5(ii) and A.5(iii) as if such Shares were being sold to the Company for a Buyback Week. The price per Share (the “Repurchase Price”) for a purchase in respect of a Canceled Issuance shall be the volume weighted average price paid by the Company for the Shares purchased from shareholders other than members of the BAT Group in all prior Buyback Weeks pursuant to the Share Repurchase Program. If LSL does not agree with the Company’s calculation of the Repurchase Number or Repurchase Price, then B&W and the Company will negotiate in good faith to determine the appropriate Repurchase Number or Repurchase Price, as applicable, subject to the approval of LSL.

(ii) If the Company properly delivers a Purchase Certificate, then the BAT Seller will be obligated to sell, and the Company shall be obligated to buy, a number of Shares equal to such Repurchase Number for such Repurchase Price at or before 12:00 p.m. Eastern Time on the second business day after the determination of the Repurchase Number and Repurchase Price in accordance with Paragraph L.2(i) above.

 

3.

(i) If (a) the BAT Group has previously reduced, pursuant to Paragraph A.5(iii), the number of shares to be sold to the Company, (b) the Company or the BAT Group determines in good faith that any facts or assumptions relied upon by the BAT Group in making the determination under Paragraph A.5(iii) are no longer correct or applicable, and (c) the operation of Paragraph A.5(i) would not otherwise result in putting the parties in a position similar to the position they would be in if such facts or assumptions had not been relied upon, then either the Company or LSL may deliver to the other party a certificate (a “Modification Certificate”) identifying the facts or assumptions that such party reasonably believes are no longer correct or applicable and setting forth the number of Shares (the “Additional Number”) that such party believes the Company can purchase from the BAT Group consistent with such subsequent determination and Paragraph A.5. If LSL provides the Modification Certificate, and the Company reasonably agrees with the calculations therein, then the BAT Seller shall sell the Additional Number to the Company. If the Company provides the Modification Certificate, then LSL shall reasonably consider, after consultation by B&W with the Company, whether it agrees with the calculations and whether selling such Additional Number to the Company would put the results in Paragraph A.5 at risk. If the reasonable determination of LSL in accordance with the preceding sentence is that such calculations are incorrect or such a purchase would put the results in Paragraph A.5 at risk, then to such extent the BAT Group will have no obligation to sell such Shares to the Company. If, however, LSL reasonably determines that the calculations are correct and the sale of the Additional Number

 

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or an adjusted Additional Number would not put the results in Paragraph A.5 at risk, then the BAT Seller will consummate the sale contemplated by the Modification Certificate, as so adjusted. The price per Share for a purchase under this Paragraph L.3 shall be the volume weighted average price paid by the Company for the Shares purchased from shareholders other than members of the BAT Group in all prior Buyback Weeks pursuant to the Share Repurchase Program (the “Modification Repurchase Price”).

(ii) Without limiting the generality of Paragraph L.2(i), either LSL or the Company may invoke the procedures of that Paragraph immediately following the end of the Share Repurchase Program, to the extent that the number of Shares that have been purchased from the BAT Group has been reduced on account of Paragraphs A.5(ii) and A.6(iii). If such procedures are invoked by the Company at such time, LSL shall reasonably consider, after consultation by B&W with the Company, the extent to which the prior reduction in sales of Shares to the Company pursuant to Paragraph A.6(iii) is still appropriate in order to not put the results in Paragraph A.5 at risk, based on all the facts and circumstances existing at that time. To the extent that LSL determines that the sale of an additional number of Shares to the Company at that time, in order to offset all or part of the prior reduction in sales as a result of Paragraph A.6(iii), is consistent with Paragraphs A.5, then LSL shall accept a Modification Certificate from the Company providing an Additional Number equal to such additional number.

(iii) If either the Company or LSL properly delivers a Modification Certificate, then, subject to Paragraphs L.3(i) and (ii), the BAT Seller will be obligated to sell, and the Company shall be obligated to buy, a number of Shares equal to such Additional Number for such Modification Repurchase Price at or before 12:00 p.m. Eastern Time on the second business day after such determination of the Additional Number, if any, and Modification Repurchase Price in accordance with Paragraphs L.3(i) and (ii) above.

 

M.

Role of B&W. The parties understand and agree that the only role of B&W under this Agreement, except to the extent it may be designated as a BAT Seller, is to administer the Agreement on behalf of the BAT Group in accordance with its terms. Without limiting the generality of the foregoing, except as expressly provided in this Agreement, B&W shall have no authority to enter into any binding agreement under this Agreement on behalf of any BAT Seller or any other member of the BAT Group.

 

N.

Amendments; Waivers. No provision of this Agreement may be amended or waived unless such amendment or waiver is in writing and signed, in the case of an amendment, by the parties hereto, or in the case of a waiver, by the party against whom the waiver is to be effective. The failure of any party to this Agreement to assert any of its rights under this Agreement or otherwise shall not constitute a waiver of such rights nor shall any single or partial exercise by any party to this Agreement of any of its rights under this Agreement preclude any other or further exercise of such rights or any other rights under this Agreement.

 

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O.	Notices. All notices, requests, claims, demands and other communications under this Agreement shall be given by email and shall be deemed given upon receipt by the parties at the following email addresses (or at such other email address for a party as shall be specified by like notice):

if to B&W, to

Andrew Panaccione

Corporate Secretary

Email: [email protected]

with copies to:

L. Brent Cotton

President

Louisville Corporate Services, Inc.

Email: [email protected]

Philip Gelston

Cravath, Swaine & Moore LLP

Email: [email protected]

if to LSL, to:

Steve Dale

Director

Email: [email protected]

with copies to:

Philip Gelston

Cravath, Swaine & Moore LLP

Email: [email protected]

if to the Company, to

Martin L. Holton III

General Counsel

Email: [email protected]

with a copy to:

Randi C. Lesnick

Jones Day

Email: [email protected]

 

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written.

 

		LOUISVILLE SECURITIES LIMITED
				by		/s/ Steve Dale
				Name:		Steve Dale
				Title:		Director
		BROWN & WILLIAMSON HOLDINGS, INC.,
				by		/s/ Timothy J. Hazlett
				Name:		Timothy J. Hazlett
				Title:		President
		REYNOLDS AMERICAN INC.,
				by		/s/ Daniel A. Fawley
				Name:		Daniel A. Fawley
				Title:		Senior Vice President and Treasurer

 

[Signature Page to the Share Repurchase Agreement]

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EXHIBIT A¹

REYNOLDS AMERICAN INC. CALCULATION CERTIFICATE

Date:                     

Calculation Period: beginning date                      ending date                     

Proposed BAT Group Buyback Number:                     

Note: Unless otherwise indicated, all statements of outstanding shares, shares issued, shares acquired, percentage interest, etc. are to be based on the meaning of those terms as defined in the Share Repurchase Agreement and will be calculated in accordance with the Share Repurchase Agreement.

Part A: Schedules

The following schedules are attached hereto (as applicable).

Schedule 1: General information and calculation of BAT Group Buyback Number.

Schedule 2: Schedule of all outstanding restricted stock, employee stock options, performance shares and other deferred issuances of shares as compensation, including grant, vesting, expiration and issuance dates, all as of the end of the Calculation Period.

Schedule 3: Details of purchases made under the Program from parties other than the BAT Group during the Calculation Period, including Excluded Compensation Buybacks.

Part B: Assumptions and Additional Information

 

Item 1.

State any assumptions made in arriving at the numbers provided in this exhibit and schedules hereto other than those explicitly mentioned in the Share Repurchase Agreement including, without limitation, treatment and number of shares held by corporate affiliates.

 

Item 2.

Describe any issuance of or reacquisition by the Company of equity of the Company (including but not limited to Shares) during the Calculation Period that has been made except made with respect to restricted stock or employee stock options.

 

Item 3.

Response to any additional information requested by tax counsel to LSL for purposes of its determinations pursuant to this Agreement.

 

 

1	Capitalized terms used but not defined herein shall have the meaning assigned thereto in the Share Repurchase Agreement among Reynolds American Inc., Brown & Williamson Holdings, Inc., and Louisville Securities Limited, dated July 25, 2016 (the “Share Repurchase Agreement”).

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Part C: Representations

The Company represents that, except as otherwise expressly noted below or elsewhere in this Exhibit A, (i) the Board of Directors of the Company has not been informed of and has not publicly announced or approved any intent, plan or arrangement directly or indirectly to issue or acquire any of its equity, other than the purchase of Shares pursuant to the Share Repurchase Program (including Excluded Compensation Buybacks) or pursuant to employee stock option or restricted stock plans, (ii) previously issued Calculation Certificates remain true, correct and complete as of their dates of issuance, (iii) if the Calculation Period includes a Buyback Week, it will have sufficient earnings and profits to permit the entire purchase price of all the Shares to be purchased pursuant to this Certificate to be treated as a dividend within the meaning of Section 316 of the Code, (iv) it does not have a Rabbi Trust or a similar arrangement holding shares, and (v) if the BAT Seller is LSL, it will withhold on the proceeds of the Sale paid to LSL at a rate of 5% of the gross purchase price for Shares otherwise payable to LSL and it has no reason to believe that such withholding rate is incorrect.

Exceptions:

The undersigned hereby certifies on behalf of Reynolds American Inc. that the statements contained herein and on schedules attached hereto are true, correct and complete.

 

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EXHIBIT B²

LSL NOTICE

Date:                     

 

To:	REYNOLDS AMERICAN INC.

Attn: Steven Holland

Sent by email to: [email protected]

Calculation Period ending:                     

Date of Calculation Certificate                     

                     We agree with the BAT Group Buyback Number stated in such Calculation Certificate

                     We DO NOT agree with the BAT Group Buyback Number stated in such Calculation Certificate.

BAT Group Buyback Number proposed by LSL:

[Explanation]

BAT Seller, if other than LSL:                     

 

 

 

2	Capitalized terms used but not defined herein shall have the meaning assigned thereto in the Share Repurchase Agreement among Reynolds American Inc., Brown & Williamson Holdings, Inc., and Louisville Securities Limited, dated July 25, 2016 (the “Share Repurchase Agreement”).

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SCHEDULE 1 TO CALCULATION CERTIFICATE

Start date of calculation period:

End date of calculation period:

Includes buyback week (Y/N):

 

ROW		DESCRIPTION		FORMULA/NOTES
A		Status As of Date of Agreement: xx/xx/201x
A1		Shares owned by LSL		input
A2		Shares owned by B&W		input
A3		Other shares owned by BAT Group		0 unless input
A4		Total shares owned by BAT Group		A1+A2+A3
A5		Total outstanding shares (SEC)		input
A6		Outstanding shares subject to Excluded Compensation Buyback (ECB)		input
A7		Net outstanding shares (SEC)		A5-A6
A8		LSL percentage ownership		A1/A7
A9		B&W percentage ownership		A2/A7
A10		Other BAT Group percentage ownership		A3/A7
A11		Total BAT Group percentage ownership		A4/A7
A12		Ratio of BAT to non-BAT shares		A4/(A7-A4)
B		Beginning of Period
B1		Total outstanding shares (SEC)		input
B2		Shares outstanding after all actual and pending buybacks, excluding future required ECBs		prior H1
B3		Outstanding shares subject to ECB		input first period, then prior D5
B4		Net outstanding shares		B2-B3
B5		Shares owned by LSL reduced by pending buybacks		prior H8
B6		Shares owned by B&W reduced by pending buybacks		A2 unless new input
B7		Other shares owned by BAT Group reduced by pending buybacks		0 unless input
B8		Total shares owned by BAT Group reduced by pending buybacks		B5+B6+B7
B9		LSL percentage ownership		B5/B4
B10		B&W percentage ownership		B6/B4
B11		Other BAT Group percentage ownership		B7/B4
B12		Total BAT Group percentage ownership		B8/B4
C		Events during Period
C1		New issuances of employee compensatory shares (e.g., EIAP/LTIP/Performance Shares/exercise of options) treated as outstanding for SEC purposes, net of tax shares withheld, including shares repurchased during current period under ECB		input
C2		Other new issuances of shares by RAI		input
C3		Completed purchases for prior periods from third parties, excluding ECB purchases		prior D2
C4		Completed ECB purchases for prior periods from third parties		prior D3

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C5		Completed purchases for prior periods from BAT Group		prior G2
C6		Restricted shares (outstanding for SEC purposes) forfeited or canceled		Input
C7		Non-ECB shares bought back from third parties during current period under buyback plan		Input
C8		ECB shares bought back during current period		Input
C9		Other reacquisitions of shares by RAI (SEC)		Input
C10		Purchases by BAT Group during period unrelated to buyback plan		Input
C11		Sales by BAT Group during period unrelated to buyback plan		input
D		Status At End of Period
D1		Pending purchases from BAT Group for prior periods		input
D2		Pending purchases from third parties for current and prior periods, excluding ECBs		input
D3		Pending ECB purchases from third parties for current and prior periods		input
D4		Net shares outstanding on last day of period before buyback from BAT, without regard to future ECB purchases		B1+C1+C2-C3-C4-C5-C6-C7-C8-C9-D1-D2-D3
D5		Required future ECB purchases		input
D6		Net shares outstanding on last day of period before buyback from BAT, reduced by required future ECB purchases		D4-D5
E		Calculation of Buyback Number Under A.5(i)
E1		Cumulative non-ECB buybacks from third parties for all periods, including current period		C3 cumulative to current period + C7 cumulative to current period + D2
E2		BAT Group percentage ownership on first day of agreement		A11
E3		Increase (decrease) to BAT Group percentage ownership under A.5(i)		0 unless input
E4		Adjusted BAT Group percentage ownership under A.5(i)		E2+E3
E5		Cumulative limit on purchases from BAT Group (further adjustment needed to reflect any changes in E3 over time)		E1*E4/(1-E4)
E6		All purchases from BAT Group for prior periods (even if not yet made)		G2 cumulative to preceding period
E7		Buyback number under A.5(i)		E5-E6
F		Calculation of Buyback Number under A.5(ii)
F1		Net shares owned by BAT Group on last day of period, before BAT buyback		B8+C10-C11-D1
F2		Net outstanding shares		D6
F3		Assumed future issuances not subject to ECB		0 unless input
F4		Net outstanding shares including assumed future issuances		F2+F3
F5		Buyback number based on (F1-F5)/(F4-F5)=A11		(F1-(A11*F4))/(1-A11)
G		Proposed B&W Buyback Number
G1		Unrounded (lower of E7 and F5)		lower (E7, F5)
G2		Rounded down (not negative)		G1 rounded down
H		BAT Status At End of Period under Proposed B&W Buyback Number
H1		Shares outstanding on last day of period after all actual and pending buybacks, disregarding future required ECBs		D4-G2
H2		Shares outstanding on last day of period after all actual and pending buybacks, reduced by future required ECBs		D6-G2

 

2

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H3		Same as H2, but including assumed future issuances		H2+F3
H4		Total BAT Group share ownership		B8+C10-C11-G2
H5		BAT Group percentage ownership based on H1		H4/H1
H6		BAT Group percentage ownership based on H2		H4/H2
H7		BAT Group percentage ownership based on H3		H4/H3
H8		LSL share ownership, assuming for H8-H14 that all buybacks are from LSL and there are no other purchases/sales during period		B5-G2
H9		LSL percentage ownership based on H1		H8/H1
H10		LSL percentage ownership based on H2		H8/H2
H11		LSL percentage ownership based on H3		H8/H3
H12		B&W percentage ownership based on H1		A2/H1
H13		B&W percentage ownership based on H2		A2/H2
H14		B&W percentage ownership based on H3		A2/H3
H15		BAT portion of total non-ECBs for period		G2/(G2+C7+D2)
I		Reserved
J		Payment to BAT Seller
J1		Total dollars paid to third parties for purchases (including ECBs) during this period (before commissions)		input
J2		Volume weighted average price paid per share to third parties		J1/(C7+C8+D2+D3)
J3		Settlement date		input
J4		Amount payable to BAT Seller		G2*J2
J5		U.S. withholding tax if BAT Seller is LSL		.05*J4
J6		Net amount payable to LSL		J4-J5
K		Summary
K1		Total dollars of buybacks, other than ECBs, for period		J1*((C7+D2)/(C7+C8+D2+D3))+J4
K2		Total dollars of buybacks, other than ECBs, cumulative		K1 cumulative
K3		Total dollars of ECB buybacks, for period		J1+J4-K1
K4		Total dollars of ECB buybacks, cumulative		K3 cumulative
K5		Total dollars of buybacks, including ECBs, for period		J1+J4
K6		Total dollars of buybacks, including ECBs, cumulative		K5 cumulative
K7		Total amount payable to BAT Sellers before withholding, cumulative		J4 cumulative
K8		U.S. withholding tax if BAT Seller is LSL, cumulative		J5 cumulative
K9		Net amount payable to LSL, cumulative		J6 cumulative

The parties acknowledge that certain adjustments will be required if any buyback for a period is not completed by the end of the immediately following period.

 

3

Exhibit 99.1

 

Reynolds American Inc.

P.O. Box 2990

Winston-Salem, NC 27102-2990

 

 

Contact:		Investor Relations: Bob Bannon (336) 741-3359		Media: Jane Seccombe (336) 741-5068		RAI 2016-22

RAI reports strong 2Q16 performance

and positive outlook;

Accelerates returns to shareholders

 

•		Reported EPS: Second quarter at $0.56, down 66.9 percent from prior-year quarter; first half at $3.05, up 45.2 percent from prior-year period
•		Adjusted EPS: Second quarter at $0.58, up 13.7 percent from prior-year quarter; first half at $1.08, up 14.9 percent from prior-year period
		o		Reflects the impact of adjustments as detailed in Schedule 2
•		RAI narrows 2016 guidance to adjusted EPS range of $2.26 to $2.34, up 14.1 percent to 18.2 percent from 2015
•		Newport manufacturing integration successfully completed in June
•		RAI increases dividend payout target from 75 percent to 80 percent, resulting in 9.5 percent increase in quarterly cash dividend
•		RAI announces $2.0 billion share repurchase program
WINSTON-SALEM, N.C. – July 26, 2016 – Reynolds American Inc. (NYSE: RAI) today announced second-quarter 2016 reported EPS of $0.56, down 66.9 percent from the prior-year quarter, driven primarily by the gain on divestiture related to the Lorillard, Inc. acquisition in June 2015. Second-quarter adjusted EPS was $0.58, up 13.7 percent, including the impact of adjustments as detailed in Schedule 2.   For the first half of 2016, reported EPS was $3.05, up 45.2 percent from the prior-year period. First-half adjusted EPS was $1.08, up 14.9 percent, including the impact of adjustments as detailed in Schedule 2.   RAI narrowed its 2016 adjusted EPS guidance to a range of $2.26 to $2.34, up 14.1 percent to 18.2 percent from the company’s 2015 adjusted EPS of $1.98.

 

1

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MANAGEMENT’S PERSPECTIVE

Overview

“Strong market share gains across our operating companies’ premium cigarette portfolio, in combination with higher pricing in both cigarettes and moist snuff, drove excellent operating performance in the second quarter,” said Susan M. Cameron, president and chief executive officer of RAI. “The achievements by our operating companies through the first half of 2016 have significantly strengthened Reynolds American, and I’m pleased to announce further steps supporting our commitment to returning value to RAI’s shareholders.”

Cameron said that RAI’s board approved an increase in the company’s dividend payout target to 80 percent of adjusted net income — resulting in the second dividend increase this year — and authorized a $2.0 billion share repurchase program. “In addition, RAI is tightening its full-year adjusted earnings guidance range, which now reflects annual growth of about 14 percent to 18 percent,” she said.

A key highlight of the quarter was finalizing the transition of the Newport brand’s manufacturing to R.J. Reynolds Tobacco Company, following RAI’s acquisition of Lorillard in June 2015.

“Completing this complex integration six months ahead of schedule is a major achievement, and positions the company well to capture the savings associated with R.J. Reynolds’ more efficient manufacturing process,” Cameron said. “Of course, we continue to be extremely pleased with Newport’s performance – the brand gained one-half point of market share during the quarter.”

 

2

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In addition to impressive growth in each of its reportable business segments, Cameron said that RAI’s operating companies continued to advance their transforming-tobacco objectives in the second quarter, particularly in innovative smoke-free products. “VUSE Digital Vapor Cigarettes remain the category leader with a market share of 29 percent in traditional retail channels,” she said, “and the national expansion of ZONNIC’s nicotine replacement therapy gum is also progressing smoothly.”

RAI USE OF ADJUSTED (NON-GAAP) FINANCIAL MEASURES

Reynolds American reports its financial results in accordance with generally accepted accounting principles (GAAP). GAAP measures within this press release are referred to as “reported,” and Non-GAAP measures are identified as “adjusted.”

RAI management uses adjusted measurements, which exclude certain income and expense items in its reported results that management believes are not part of RAI’s underlying business operations, to set performance goals and as a means to measure the performance of RAI and its operating companies. RAI management believes that these adjusted metrics provide useful insight into RAI and its operating companies’ ongoing businesses, and that investors’ understanding of the underlying performance of the companies’ continuing operations is enhanced through their disclosure.

Adjusted results are not consistent with reported results and may be calculated differently from similar financial measures used by other companies. RAI’s use of adjusted results are intended to be supplemental in nature, and should not be viewed as a substitute for reported results.

RAI’s full-year adjusted EPS guidance reflects the impact of certain income and expense items, including those items noted in the reconciliation tables provided in Schedule 2 of this press release. RAI’s management cannot estimate on a forward-looking basis the impact of these items on its reported EPS because these items, which could be significant, are difficult to predict and may be highly variable. As a result, RAI does not provide a corresponding reported measure for, or reconciliation to, its adjusted EPS guidance.

Reconciliations of reported (GAAP) results to adjusted (Non-GAAP) results are detailed in Schedule 2 and Schedule 3 of this press release.

COMBUSTIBLES

Total second-quarter domestic cigarette volumes for RAI’s operating companies increased 24.6 percent from the prior-year quarter, and increased 29.0 percent for the first half of 2016 — with comparisons largely driven by the addition of the Newport brand in June 2015.

Industry cigarette volume fell 3.9 percent in the second quarter, which was negatively impacted by changes to wholesale inventory levels. When adjusted for wholesale inventory changes, industry shipments were down approximately 1.7 percent in the second quarter of 2016 compared to the prior-year quarter, and were down approximately 0.9 percent for the first half of 2016 versus the comparable period of 2015.

In the second quarter of 2016, total RAI operating companies’ retail cigarette market share increased 0.4 percentage points from the prior-year quarter, to 34.5 percent, and also increased 0.4 percentage points for the first half of 2016 versus the prior-year period.

Total retail cigarette market share for RAI operating companies’ combined drive brands (Newport, Camel, Pall Mall and Natural American Spirit) increased 0.6 percentage points to 32.1 percent in the second quarter, and increased 0.6 percentage points to 32.1 percent for the first half of 2016. These brands currently make up 93 percent of RAI operating companies’ total cigarette retail market share.

 

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RJR Tobacco

RJR Tobacco’s second-quarter 2016 reported operating income benefitted from the addition of the Newport brand and higher cigarette net pricing, increasing 67.3 percent from the prior-year quarter, to $1.22 billion.

Second-quarter adjusted operating income was $1.27 billion, up 52.1 percent. These results reflect the impact of adjustments as detailed in Schedule 3.

For the first half, RJR Tobacco’s reported operating income was $2.32 billion, up 76.7 percent from the prior-year period. First-half adjusted operating income was $2.39 billion, up 61.6 percent, reflecting the impact of adjustments as detailed in Schedule 3.

Second-quarter adjusted operating margin increased 3.4 percentage points from the prior-year quarter, to 47.8 percent, reflecting RJR Tobacco’s improved mix of premium cigarette volume, which increased 9.6 percentage points to 70.9 percent over the same period. For the first half, adjusted operating margin was 47.2 percent.

RJR Tobacco’s second-quarter cigarette shipments increased 25.7 percent from the prior-year quarter, driven by the addition of Newport.

Second-quarter retail market share, which is reflected on a pro-forma basis for the company’s new brand portfolio following the Lorillard acquisition and the divestiture to ITG Brands, LLC (ITG), was up 0.1 percentage points from the prior-year quarter, at 32.2 percent.

The combined second-quarter retail market share of RJR Tobacco’s cigarette drive brands — Newport, Camel and Pall Mall — increased 0.3 percentage points from the prior-year quarter, to 29.8 percent.

R.J. Reynolds’ flagship Newport brand continued to demonstrate outstanding momentum, benefiting from increased national visibility resulting from the brand’s inclusion in the company’s new retail contracts. The brand’s second-quarter retail market share increased by 0.5 percentage points from the prior-year quarter, to 13.9 percent, with growth primarily driven by its core menthol styles.

The Camel brand also benefitted from an improved national presence resulting from expanded R.J. Reynolds retail contracts. The brand’s second-quarter cigarette retail market share was in line with the prior-year quarter, at 8.3 percent, and it was up 0.1 percentage points when compared with the first quarter of 2016.

In an environment where adult smokers are willing to trade up into premium brands, the company continues to balance profitability and market share for its value brand, Pall Mall. As a result, Pall Mall’s retail market share was down 0.2 percentage points from the prior-year quarter, at 7.7 percent.

Santa Fe

Santa Fe posted another quarter of solid fundamental performance, increasing second-quarter operating income by 7.1 percent compared to the prior-year quarter, to $133 million. During the quarter, the company benefited from higher pricing and volumes from its flagship brand, Natural American Spirit, offset by higher costs associated with the timing of marketing expenditures. First-half operating income was $256 million, up 18.2 percent from the prior-year period.

 

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Santa Fe’s second-quarter operating margin decreased 3.1 percentage points from the prior-year quarter, to 54.1 percent – driven by changes to the timing of marketing expenditures. That brought first-half operating margin to 55.2 percent.

Natural American Spirit continued its strong marketplace momentum in the second quarter. The nation’s No. 1 super-premium cigarette brand gained 0.4 percentage points of retail market share from the prior-year quarter, to 2.2 percent, on volume growth of 10.8 percent.

MOIST SNUFF

American Snuff

Higher pricing benefited American Snuff in the second quarter, with operating income increasing by 7.4 percent from the prior-year quarter, to $138 million. For the first half, operating income was $271 million, up 9.5 percent from the prior-year period.

The company’s second-quarter operating margin of 60.0 percent was up 0.6 percentage points from the prior-year quarter, bringing first-half operating margin to 60.6 percent.

In the second quarter, the company’s flagship Grizzly brand’s retail market share declined 0.7 percentage points to 30.6 percent versus the prior-year quarter, when the company expanded its Grizzly Dark product line. Grizzly’s second-quarter volume declined by 0.4 percent from the prior-year quarter, compared to industry volume growth of about 3.2 percent.

Grizzly market share comparisons in the second quarter were impacted by the national expansion of its Grizzly Dark products in the second quarter of last year, as well as by expansions of competitive line extensions during the second quarter of 2016. Grizzly continues to be the clear leader in the wintergreen category – the largest flavor segment in the industry, as well as in the pouch category, which now makes up almost 20 percent of the total moist-snuff industry.

FINANCIAL UPDATE

Reynolds American’s second-quarter reported EPS of $0.56 decreased 66.9 percent from the prior-year quarter, impacted primarily by the gain on divesture related to the Lorillard acquisition in June 2015.

Second-quarter adjusted EPS was $0.58, up 13.7 percent from the prior-year quarter, benefitting from the addition of the Newport brand and higher cigarette and moist-snuff pricing. Second-quarter adjusted EPS excludes a charge of $0.02 per share related to Engle progeny lawsuits.

For the first half, the company’s reported EPS was $3.05, up 45.2 percent from the prior-year period. First-half adjusted EPS was $1.08, up 14.9 percent, excluding the charge related to Engle progeny lawsuits, as well as a $2.11 per share gain on divestiture related to the sale of Natural American Spirit’s international rights, and charges of $0.12 per share for debt and financing costs and implementation costs.

RAI’s second-quarter adjusted operating margin increased 3.8 percentage points from the prior-year quarter, to 45.9 percent. That brought first-half adjusted operating margin to 45.6 percent, up 5.8 percentage points from the first half of last year.

RAI ended the quarter with cash balances of $1.9 billion, which reflected R.J. Reynolds Tobacco Company’s MSA payment of $2.3 billion in mid-April.

RAI intends to repay the company’s outstanding $500 million bond that matures on August 4, 2016, with available cash on-hand. The resulting reduction in total outstanding debt, as well as the continued growth in RAI’s operating companies’ businesses, is now expected to place RAI within its stated long-term debt leverage range in the third quarter of 2016.

 

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As previously stated, the company pledged to consider additional opportunities to return value to RAI shareholders once it moved within this targeted leverage range. Accordingly, RAI announced today that its board has approved an increase in its dividend payout target to 80 percent of adjusted net income, and has authorized a new share repurchase program.

In line with the company’s new dividend payout target, RAI’s board approved a 9.5 percent increase in its quarterly cash dividend to $0.46 per share, or an annualized $1.84 per share. The dividend will be paid on Oct. 3, 2016, to shareholders of record as of Sept. 12, 2016.

RAI’s board also approved a new $2.0 billion share repurchase program that is intended to be completed by year-end 2018. This is the first share repurchase program authorized by RAI’s board since the announcement of the Lorillard acquisition in July 2014.

“Today’s increased dividend announcement follows the 16.7 percent increase that we announced in February, and reflects the increase in our target dividend payout ratio from 75 percent to 80 percent,” said Andrew Gilchrist, RAI’s chief financial officer.

“In combination with the new $2 billion share repurchase program, these actions demonstrate RAI’s deep commitment to returning tangible value to our shareholders, and reflect the confidence that both RAI’s management and its board have in our operating companies’ business strategies,” Gilchrist said.

Based on the strong second-quarter and first-half performance, as well as expectations for the rest of the year, RAI has narrowed its 2016 adjusted EPS guidance range. RAI adjusted EPS guidance for 2016 now stands at a range of $2.26 to $2.34, which represents growth of 14.1 percent to 18.2 percent over last year’s adjusted EPS of $1.98.

CONFERENCE CALL WEBCAST TODAY

Reynolds American will webcast a conference call to discuss second-quarter 2016 results at 9:00 a.m. Eastern Time on July 26, 2016. The call will be available live online on a listen-only basis. To register for the call, please go to the Investors Events and Presentations section on our website. A replay of the call will be available on the site. Investors, analysts and members of the news media can also listen to the live call by phone, by dialing (877) 201-0168 (toll free) or (647) 788-4901 (international). Remarks made during the conference call will be current at the time of the call and will not be updated to reflect subsequent material developments. Although news media representatives will not be permitted to ask questions during the call, they are welcome to monitor the remarks on a listen-only basis. Following the call, media representatives may direct inquiries to Jane Seccombe at (336) 741-5068.

 

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Web and Social Media Disclosure

RAI’s website, www.reynoldsamerican.com, is the primary source of publicly disclosed news, including our quarterly earnings, about RAI and its operating companies. RAI also uses Twitter to publicly disseminate company news via @RAI News. It is possible that the information we post could be deemed to be material information. We encourage investors and others to register at www.reynoldsamerican.com to receive alerts when news about the company has been posted, and to follow RAI on Twitter at @RAI News.

Forward-looking and Cautionary Statements

Statements included in this press release that are not historical in nature are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. When used in this document and in documents incorporated by reference, forward-looking statements include, without limitation, statements regarding financial forecasts or projections, and RAI and its subsidiaries’ expectations, beliefs, intentions or future strategies that are signified by the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “objective,” “outlook,” “plan,” “project,” “possible,” “potential,” “should” and similar expressions. These statements regarding future events or the future performance or results of RAI and its subsidiaries inherently are subject to a variety of risks, contingencies and other uncertainties that could cause actual results, performance or achievements to differ materially from those described in or implied by the forward-looking statements. These risks, contingencies and other uncertainties include:

 

•

the effect of unfavorable litigation relating to the sale, distribution, manufacture, development, advertising, marketing and claimed health effects of tobacco products (including smokeless tobacco products and electronic cigarettes) that is pending or may be instituted against RAI or its subsidiaries, including, the Engle Progeny cases;

 

•

the effect of adverse governmental developments on RAI’s subsidiaries’ sales of products that contain menthol, including the possibility that the U.S. Food and Drug Administration (FDA) will issue regulations prohibiting menthol, or restricting the use of menthol, in cigarettes;

 

•

the adverse effects (including damage to RAI’s reputation, recall costs and decreased sales) arising from an order of the Center for Tobacco Products established within the FDA (CTP) (1) finding that a provisional product sold by an RAI subsidiary is not substantially equivalent to a predicate product, and (2) as a result, requiring that the provisional product be removed from the market;

 

•

the possibility that the CTP fails to grant a marketing order allowing an RAI subsidiary to launch a new tobacco product or modify an existing product;

 

•

the adverse effects arising out of (1) the FDA’s issuance of a warning letter to Santa Fe Natural Tobacco Company, Inc. regarding the company’s use of the terms “natural” and “additive free” in the product labeling and advertising for Natural American Spirit cigarettes without a modified risk product authorization order from the agency, or (2) other FDA actions related to product labeling and advertising, in each case potentially resulting in damage to RAI’s reputation, fines and related costs and decreased sales;

 

•

the adverse effects arising from the FDA’s issuance in May 2016 of a regulation extending the agency’s control and authority over tobacco products to e-cigarettes, (1) subjecting e-cigarettes to restrictions on, among other things, the manufacturing, marketing and sale of such products, and (2) requiring FDA clearance of e-cigarettes introduced to the market after February 15, 2007;

 

•

the possibility that the FDA will issue regulations further controlling constituents in cigarettes, including requiring the reduction of nicotine levels or the reduction or elimination of other constituents;

 

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•

the substantial payment obligations based on cigarette sales, coupled with the substantial limitations on the sale, advertising and marketing of cigarettes (and of RJR Tobacco’s smoke-free tobacco products) under the State Settlement Agreements and the possibility that NPM Adjustment awards could be vacated or otherwise modified;

 

•

the continued decline in U.S. cigarette consumption or the possible transition of consumers away from premium brands to lower-cost brands, considering RAI’s and its subsidiaries’ dependence on the U.S. cigarette industry and premium and super-premium cigarette brands;

 

•

the success or failure of new products (including vapor category product offerings and other non-traditional tobacco products), marketing strategies and promotional programs;

 

•

competitive actions and pricing pressures from other manufacturers, including manufacturers of deep-discount cigarette brands;

 

•

significant current and anticipated federal, state and local governmental regulation of tobacco products, including limitations on advertising, sale and use of tobacco products;

 

•

substantial and increasing taxation of tobacco products;

 

•

fluctuations in the availability, quality and price of raw materials and commodities, including tobacco leaf, used in the products of RAI’s subsidiaries;

 

•

the reliance on a few significant manufacturing facilities and single source suppliers for certain key raw materials;

 

•

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

 

•

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

 

•

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

 

•

security breaches or disruptions in critical information technology systems, many of which are managed by third party service providers;

 

•

the impact of the health and social issues associated with the tobacco industry on attracting and retaining qualified professionals;

 

•

the inability to adequately protect intellectual property rights;

 

•

indemnification obligations for specified matters and retention of certain liabilities related to assets transferred in transactions with ITG and JT International Holding BV;

 

•

the success or failure of acquisitions or dispositions, which RAI or its subsidiaries may engage in from time to time;

 

•

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

 

•

the substantial amount of RAI and RJR Tobacco debt, including the additional debt assumed and incurred in connection with the acquisition of Lorillard Inc., and failure to comply with debt covenants;

 

•

the impact of a potential decrease in RAI’s credit ratings on RAI’s ability to access the debt capital markets and on RAI’s borrowing costs;

 

•

the possibility of changes in RAI’s dividend policy;

 

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•

the significant collective ownership interest in RAI of British American Tobacco p.l.c. (BAT) and its subsidiaries, and their associated rights under the Governance Agreement, which if terminated, in whole or in part, in accordance with its terms, could eliminate the board composition and share transfer restrictions placed on BAT and its subsidiaries; and

 

•

the absence of significant anti-takeover measures, following the expiration of the standstill provision in the Governance Agreement and the RAI shareholder rights plan, together with the effects of the recent declassification of the board of directors.

Due to these risks, contingencies and other uncertainties, you are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this press release. Except as provided by federal securities laws, RAI is not required to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

ABOUT US

Reynolds American Inc. (NYSE: RAI) is the parent company of R.J. Reynolds Tobacco Company; Santa Fe Natural Tobacco Company, Inc.; American Snuff Company, LLC; Niconovum USA, Inc.; Niconovum AB; and R.J. Reynolds Vapor Company.

 

•

R.J. Reynolds Tobacco Company is the second-largest U.S. tobacco company. R.J. Reynolds’ brands include Newport, Camel and Pall Mall.

 

•

Santa Fe Natural Tobacco Company, Inc. manufactures and markets Natural American Spirit products.

 

•

American Snuff Company, LLC is the nation’s second-largest manufacturer of smokeless tobacco products. Its leading brands are Grizzly and Kodiak.

 

•

Niconovum USA, Inc. and Niconovum AB market innovative nicotine replacement therapy products in the United States and Sweden, respectively, under the ZONNIC brand name.

 

•

R.J. Reynolds Vapor Company is a marketer of digital vapor cigarettes, manufactured on its behalf by R.J. Reynolds, under the VUSE brand name in the United States.

Copies of RAI’s news releases, annual reports, SEC filings and other financial materials, including risk factors containing forward-looking information, are available at www.reynoldsamerican.com. To learn more about how Reynolds American and its operating companies are transforming the tobacco industry, visit Transforming Tobacco.

(financial and volume schedules follow)

 

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Schedule 1

REYNOLDS AMERICAN INC.

Condensed Consolidated Statements of Income - GAAP

(Dollars in Millions, Except Per Share Amounts)

(Unaudited)

 

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2016				2015				2016				2015
Net sales, external		$	3,141			$	2,349			$	6,003			$	4,324
Net sales, related party			54				54				109				136
Net sales			3,195				2,403				6,112				4,460
Cost of products sold			1,275				1,084				2,440				1,934
Selling, general and administrative expenses			499				451				964				962
Gain on divestitures			-				(3,499	)			(4,861	)			(3,499	)
Amortization expense			6				3				12				6
Operating income			1,415				4,364				7,557				5,057
Interest and debt expense			152				105				326				196
Interest income			(2	)			-				(5	)			(1	)
Other (income) expense, net			(1	)			20				251				3
Income from continuing operations before income taxes			1,266				4,239				6,985				4,859
Provision for income taxes			470				2,311				2,624				2,542
Net income		$	796			$	1,928			$	4,361			$	2,317
Basic net income per share:
Net Income		$	0.56			$	1.70			$	3.06			$	2.11
Diluted net income per share:
Net Income		$	0.56			$	1.69			$	3.05			$	2.10
Basic weighted average shares, in thousands			1,427,413				1,136,354				1,427,430				1,099,704
Diluted weighted average shares, in thousands			1,429,967				1,139,356				1,430,518				1,103,201
Segment data:
Net sales:
RJR Tobacco		$	2,646			$	1,876			$	5,057			$	3,484
Santa Fe			247				218				465				389
American Snuff			232				218				448				419
All Other			70				91				142				168
		$	3,195			$	2,403			$	6,112			$	4,460
Operating income (loss):
RJR Tobacco		$	1,216			$	727			$	2,323			$	1,315
Santa Fe			133				125				256				217
American Snuff			138				130				271				248
All Other			(43	)			(35	)			(77	)			(96	)
Gain on Divestiture			-				3,499				4,861				3,499
Corporate			(29	)			(82	)			(77	)			(126	)
		$	1,415			$	4,364			$	7,557			$	5,057
Supplemental information:
Excise tax expense		$	1,120			$	987			$	2,150			$	1,827
Master Settlement Agreement and other state settlement expense		$	719			$	571			$	1,349			$	965
FDA fees		$	49			$	38			$	99			$	73

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Schedule 2

REYNOLDS AMERICAN INC.

Reconciliation of Reported (GAAP) to Adjusted (Non-GAAP) Results

(Dollars in Millions, Except Per Share Amounts)

(Unaudited)

RAI management uses “adjusted” (Non-GAAP) measurements to set performance goals and as a means to measure the performance of the overall company, and believes that investors’ understanding of the underlying performance of the company’s continuing operations is enhanced through the disclosure of these metrics. “Adjusted” (Non-GAAP) results are not, and should not be viewed as, substitutes for “reported” (GAAP) results.

 

		Three Months Ended June 30,
		2016												2015
		Operating Income				Net Income				Diluted EPS				Operating Income				Net Income				Diluted EPS
Reported (GAAP) results		$	1,415			$	796			$	0.56			$	4,364			$	1,928			$	1.69
Reported (GAAP) results include the following:
Gain on divestiture			-				-				-				(3,499	)			(1,466	)			(1.29	)
Implementation costs			3				2				-				104				66				0.06
Engle Progeny cases			48				30				0.02				3				2				-
Debt and financing costs (2)			-				-				-				-				18				0.02
Transaction-related costs			-				-				-				39				31				0.03
Total adjustments			51				32				0.02				(3,353	)			(1,349	)			(1.18	)
Adjusted (Non-GAAP) results		$	1,466			$	828			$	0.58			$	1,011			$	579			$	0.51
		Six Months Ended June 30,
		2016												2015
		Operating Income				Net Income				Diluted EPS				Operating Income				Net Income				Diluted EPS
Reported (GAAP) results		$	7,557			$	4,361			$	3.05			$	5,057			$	2,317			$	2.10
Reported (GAAP) results include the following:
Gain on divestitures			(4,861	)			(3,023	)			(2.11	)			(3,499	)			(1,466	)			(1.33	)
Implementation costs			28				18				0.01				104				66				0.06
Engle Progeny cases			61				38				0.02				111				70				0.06
Debt and financing costs (1)(2)			-				155				0.11				-				38				0.04
2003 NPM Adjustment Claim			-				-				-				(70)				(43)				(0.04)
Tobacco Related and Other Litigation			-				-				-				19				11				0.01
Transaction-related costs			-				-				-				54				43				0.04
Total adjustments			(4,772	)			(2,812	)			(1.97	)			(3,281	)			(1,281	)			(1.16	)
Adjusted (Non-GAAP) results		$	2,785			$	1,549			$	1.08			$	1,776			$	1,036			$	0.94

 

(1)	For the six months ended June 30, 2016, debt and financing costs of $155 million are presented net of an income tax benefit of $88 million.

(2)	For the three and six months ended June 30, 2015, debt and financing costs of $18 million and $38 million, respectively, are presented net of an income tax benefit of $11 million and $22 million, respectively.

Condensed Consolidated Balance Sheets

(Dollars in Millions)

(Unaudited)

 

		Jun. 30, 2016						Dec. 31, 2015
Assets
Cash and cash equivalents		$	1,918					$	2,567
Other current assets			2,987						3,620
Trademarks and other intangible assets, net			29,455						29,467
Goodwill			15,993						15,993
Other noncurrent assets			1,419						1,485
		$	51,772					$	53,132
Liabilities and shareholders’ equity
Tobacco settlement accruals		$	1,696					$	2,816
Other current liabilities			3,082						2,475
Long-term debt (less current maturities)			13,192						16,849
Deferred income taxes, net			10,366						10,236
Long-term retirement benefits (less current portion)			1,813						2,265
Other noncurrent liabilities			223						239
Shareholders’ equity			21,400						18,252
		$	51,772					$	53,132

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Schedule 3

REYNOLDS AMERICAN INC.

Reconciliation of Reported (GAAP) to Adjusted (Non-GAAP) Operating Income by Segment

(Dollars in Millions)

(Unaudited)

The RJR Tobacco segment consists of the primary operations of R.J. Reynolds Tobacco Company, the second-largest tobacco company in the United States and which also manages a contract manufacturing business.

The Santa Fe segment consists of the primary operations of Santa Fe Natural Tobacco Company, Inc., which manufactures Natural American Spirit cigarettes and other additive-free tobacco products.

The American Snuff segment consists of the primary operations of American Snuff Company, LLC, the second-largest smokeless tobacco products manufacturer in the United States.

Management uses “adjusted” (Non-GAAP) measurements to set performance goals and as a means to measure the performance of the company, and believes that investors’ understanding of the underlying performance of the company’s continuing operations is enhanced through the disclosure of these metrics.

 

		Three Months Ended June 30,
		2016												2015
		RJR Tobacco				Santa Fe				American Snuff				RJR Tobacco				Santa Fe				American Snuff
Reported (GAAP) operating income		$	1,216			$	133			$	138			$	727			$	125			$	130
Reported (GAAP) results include the following:
Implementation costs (1)(2)			2				-				-				102				-				-
Engle Progeny cases			48				-				-				3				-				-
Total adjustments (3)			50				-				-				105				-				-
Adjusted (Non-GAAP) operating income		$	1,266			$	133			$	138			$	832			$	125			$	130
		Six Months Ended June 30,
		2016												2015
		RJR Tobacco				Santa Fe				American Snuff				RJR Tobacco				Santa Fe				American Snuff
Reported (GAAP) operating income		$	2,323			$	256			$	271			$	1,315			$	217			$	248
Reported (GAAP) results include the following:
Implementation costs (1)(2)			3				-				-				102				-				-
Engle Progeny cases			61				-				-				111				-				-
2003 NPM Adjustment Claim			-				-				-				(70	)			-				-
Tobacco Related and Other Litigation			-				-				-				19				-				-
Total adjustments (3)			64				-				-				162				-				-
Adjusted (Non-GAAP) operating income		$	2,387			$	256			$	271			$	1,477			$	217			$	248

 

(1)	For the three and six months ended June 30, 2016, RAI and its operating companies recorded aggregate implementation cost adjustments of $3 million and $28 million, respectively, respectively, including $1 million and $25 million, respectively, in the corporate and all other segment.

(2)	For the three and six months ended June 30, 2015, RAI and its operating companies recorded aggregate implementation cost adjustments of $104 million, including $2 million in the all other segment.

(3)	For the three and six months ended June 30, 2015, RAI and its operating companies recorded aggregate transaction related cost adjustments of $39 million and $54 million, respectively, in the corporate segment.

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Schedule 4

RAI OPERATING COMPANIES’ U.S. CIGARETTE VOLUMES AND RETAIL SHARE OF MARKET

 

VOLUME (in billions):		Three Months Ended																Six Months Ended
		June 30,								Change								June 30,								Change
RJR Tobacco		2016				2015				Units				%				2016				2015				Units				%
Newport			8.8				1.4				7.3				NM				16.9				1.4				15.4				NM
Camel			5.3				5.4				(0.2	)			-2.8	%			10.0				10.3				(0.3	)			-2.8	%
Pall Mall			4.9				5.2				(0.3	)			-5.4	%			9.4				9.9				(0.5	)			-5.1	%
Total RJR Tobacco drive brands			18.9				12.0				6.9				57.3	%			36.4				21.7				14.6				67.5	%
Other			1.5				4.3				(2.7	)			-63.8	%			3.0				8.5				(5.6	)			-65.1	%
Total RJR Tobacco			20.5				16.3				4.2				25.7	%			39.3				30.2				9.1				30.0	%
Santa Fe
Natural American Spirit			1.4				1.3				0.1				10.8	%			2.6				2.3				0.4				15.8	%
Total RAI operating companies			21.9				17.6				4.3				24.6	%			42.0				32.5				9.4				29.0	%
Total RJR Tobacco:
Total premium			14.5				10.0				4.5				45.3	%			27.8				18.2				9.7				53.1	%
Total value			6.0				6.3				(0.3	)			-5.4	%			11.5				12.1				(0.6	)			-4.8	%
Premium/total mix			70.9	%			61.3	%			9.6								70.8	%			60.1	%			10.7
Industry			66.2				68.8				(2.7	)			-3.9	%			127.7				130.1				(2.4	)			-1.9	%
Premium			48.0				49.8				(1.8	)			-3.7	%			92.8				94.0				(1.2	)			-1.3	%
Value			18.2				19.0				(0.8	)			-4.3	%			34.9				36.1				(1.2	)			-3.4	%
Premium/total mix			72.6	%			72.4	%			0.1								72.7	%			72.2	%			0.4
RETAIL SHARE OF MARKET*:		Three Months Ended																Six Months Ended
		June 30,																June 30,
RJR Tobacco:		2016				2015				Change								2016				2015				Change
Newport			13.9	%			13.4	%			0.5								13.9	%			13.4	%			0.6
Camel			8.3	%			8.3	%			(0.0	)							8.2	%			8.3	%			(0.1	)
Pall Mall			7.7	%			7.9	%			(0.2	)							7.8	%			8.0	%			(0.3	)
Total RJR Tobacco drive brands			29.8	%			29.6	%			0.3								29.9	%			29.7	%			0.2
Other			2.4	%			2.6	%			(0.2	)							2.4	%			2.6	%			(0.2	)
Total RJR Tobacco			32.2	%			32.2	%			0.1								32.4	%			32.4	%			0.0
Santa Fe
Natural American Spirit			2.2	%			1.8	%			0.4								2.1	%			1.8	%			0.4
Total RAI operating companies			34.5	%			34.0	%			0.4								34.5	%			34.1	%			0.4

Amounts are rounded on an individual basis and, accordingly, may not sum in the aggregate.

 

*

Market share information is included for RJR Tobacco and Santa Fe to provide enhanced analysis of their brands performance. For brands that were acquired in the Lorillard Merger, share information is displayed as if the brands were part of the portfolio for all time periods shown. Brands that were part of the Divestiture to ITG Brands have been removed for all presented time periods. Accordingly, these pro forma results are presented for informational purposes only and are not necessarily indicative of what the actual results of operations of the combined company would have been if the Merger and Divestiture had occurred at the beginning of the periods presented, nor are they indicative of future results of operations.

 

*

The universe of industry participants that MSAi uses to estimate RJR Tobacco’s and Santa Fe’s cigarette shipments to retail market shares has been revised to reflect the new universe of direct customers as a result of the Merger. The revision results in higher absolute share levels in 2015 on some of RJR Tobacco’s and Santa Fe’s brands, but does not affect overall share trends. Prior-year market share data has been restated on this basis for comparison purposes.

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Schedule 5

AMERICAN SNUFF MOIST-SNUFF VOLUMES

AND RETAIL SHARE OF MARKET

VOLUME (in millions of cans):

 

		Three Months Ended																Six Months Ended
		June 30,								Change								June 30,								Change
		2016				2015				Units				%				2016				2015				Units				%
Grizzly			116.8				117.2				(0.4	)			-0.4	%			228.1				224.3				3.8				1.7	%
Other			11.0				11.3				(0.3	)			-2.4	%			21.1				21.7				(0.7	)			-3.0	%
Total moist snuff cans			127.8				128.5				(0.7	)			-0.5	%			249.1				246.0				3.1				1.3	%
RETAIL SHARE OF MARKET*:
		Three Months Ended																Six Months Ended
		June 30,																June 30,
		2016				2015				Change								2016				2015				Change
Grizzly			30.6	%			31.3	%			(0.7	)							30.7	%			30.8	%			(0.1	)
Other			2.6	%			2.8	%			(0.1	)							2.6	%			2.8	%			(0.2	)
Total retail share of market			33.2	%			34.0	%			(0.8	)							33.3	%			33.6	%			(0.3	)

Amounts are rounded on an individual basis and, accordingly, may not sum in the aggregate.

 

*

The universe of industry participants that MSAi uses to estimate American Snuff’s moist snuff shipments to retail market shares has been revised to reflect the new universe of direct customers as a result of the Merger. The revision results in higher absolute share levels in 2015 on some of American Snuff’s brands, but does not affect overall share trends. Prior-year market share data has been restated on this basis for comparison purposes.