-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, R0u33XFmjGuLUiRBucVbJhf3Nw0gWtpwz3FKBU7Vg10ORA06JJsYjNfsUI7N5tPt MJWxoe5gA7g+qnw3Y20/WA== 0000950144-06-007359.txt : 20060804 0000950144-06-007359.hdr.sgml : 20060804 20060804144327 ACCESSION NUMBER: 0000950144-06-007359 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20060531 ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20060804 DATE AS OF CHANGE: 20060804 FILER: COMPANY DATA: COMPANY CONFORMED NAME: REYNOLDS AMERICAN INC CENTRAL INDEX KEY: 0001275283 STANDARD INDUSTRIAL CLASSIFICATION: CIGARETTES [2111] IRS NUMBER: 200546644 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-32258 FILM NUMBER: 061005443 BUSINESS ADDRESS: STREET 1: 401 NORTH MAIN ST CITY: WINSTON SALEM STATE: NC ZIP: 27102 BUSINESS PHONE: 3367412000 MAIL ADDRESS: STREET 1: 401 NORTH MAIN ST CITY: WINSTON SALEM STATE: NC ZIP: 27102 8-K/A 1 g02724e8vkza.htm REYNOLDS AMERICAN INC. Reynolds American Inc.
 

 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) May 31, 2006
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):
o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17CFR 240.14d-2(b))
o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
 
 

 


 

ITEM 9.01 Financial Statements and Exhibits.
(a) Financial Statements of Businesses Acquired; (b) Pro Forma Financial Information
     On May 31, 2006, Reynolds American Inc., through a wholly owned subsidiary, completed the acquisition of Conwood Company, L.P., Conwood Sales Co., L.P., Rosswil LLC, Scott Tobacco LLC, Conwood LLC, Conwood-1 LLC, and Conwood-2 LLC pursuant to the Purchase Agreement, dated April 24, 2006, and amended on May 31, 2006. This amendment to the Reynolds American Inc. Current Report on Form 8-K, filed on May 31, 2006, is being filed to provide the financial statements required by Item 9.01(a) of Form 8-K (which financial statements are filed as Exhibits 99.1 and 99.2 to this Report and are incorporated herein by reference) and the pro forma financial information required by Item 9.01(b) of Form 8-K (which financial information is filed as Exhibit 99.3 to this Report and is incorporated herein by reference).
(c) Exhibits.
     
Number   Exhibit
 
   
23.1
  Consent of Independent Registered Public Accounting Firm.
 
   
99.1
  Conwood Company, L.P., Conwood Sales Co., L.P., Rosswil LLC, Scott Tobacco LLC, Conwood LLC, Conwood-1 LLC, and Conwood-2 LLC, Combined Financial Statements (Audited) as of and for the year ended December 31, 2005.
 
   
99.2
  Conwood Company, L.P., Conwood Sales Co., L.P., Rosswil LLC, Scott Tobacco LLC, Conwood LLC, Conwood-1 LLC, and Conwood-2 LLC, Combined Financial Statements (Unaudited) as of March 31, 2006, and for the three months ended March 31, 2006 and 2005.
 
   
99.3
  Unaudited proforma financial information.

 


 

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.
         
  REYNOLDS AMERICAN INC.
 
 
  By:   /s/ Michael S. Desmond    
    Name:   Michael S. Desmond   
    Title:   Senior Vice President and Chief Accounting Officer   
 
Date: August 4, 2006

 


 

INDEX TO EXHIBITS
     
Number   Exhibit
 
   
23.1
  Consent of Independent Registered Public Accounting Firm.
 
   
99.1
  Conwood Company, L.P., Conwood Sales Co., L.P., Rosswil LLC, Scott Tobacco LLC, Conwood LLC, Conwood-1 LLC, and Conwood-2 LLC, Combined Financial Statements (Audited) as of and for the year ended December 31, 2005.
 
   
99.2
  Conwood Company, L.P., Conwood Sales Co., L.P., Rosswil LLC, Scott Tobacco LLC, Conwood LLC, Conwood-1 LLC, and Conwood-2 LLC, Combined Financial Statements (Unaudited) as of March 31, 2006, and for the three months ended March 31, 2006 and 2005.
 
   
99.3
  Unaudited proforma financial information.

 

EX-23.1 2 g02724exv23w1.htm EX-23.1 Ex-23.1
 

Exhibit 23.1
Consent of Independent Auditors
The Members:
Conwood Company, L.P., Conwood Sales Co., L.P.,
Scott Tobacco LLC, Rosswil LLC, Conwood LLC,
Conwood-1 LLC, and Conwood-2 LLC
We consent to the incorporation by reference in the registration statements on Form S-8 (Nos. 333-117813, 333-117814, and 333-117815) and in the registration statement on Form S-3 (No. 333-132419) of Reynolds American, Inc. of our report dated April 18, 2006, except for note 12, which is dated April 25, 2006, with respect to the combined balance sheet of Conwood Company, L.P., Conwood Sales Co., L.P., Scott Tobacco LLC, Rosswil LLC, Conwood LLC, Conwood-1 LLC, and Conwood-2 LLC as of December 31, 2005 and the related combined statements of income, members’ capital and comprehensive income and cash flows for the year then ended, which report appears in the Form 8-K/A of Reynolds American, Inc. dated August 4, 2006.
/s/ KPMG LLP
Memphis, Tennessee
August 3, 2006

EX-99.1 3 g02724exv99w1.htm EX-99.1 Ex-99.1
 

Exhibit 99.1
CONWOOD COMPANY, L.P., CONWOOD SALES CO., L. P.,
SCOTT TOBACCO LLC, ROSSWIL LLC, CONWOOD LLC,
CONWOOD–1 LLC, AND CONWOOD–2 LLC
Combined Financial Statements
December 31, 2005
(With Independent Auditors’ Report Thereon)

 


 

Independent Auditors’ Report
The Members
     Conwood Company, L.P., Conwood Sales Co., L. P.,
     Scott Tobacco LLC, Rosswil LLC, Conwood LLC,
     Conwood–1 LLC, and Conwood–2 LLC:
We have audited the combined balance sheet of Conwood Company, L.P., Conwood Sales Co., L.P., Scott Tobacco LLC, Rosswil LLC, Conwood LLC, Conwood–1 LLC, and Conwood–2 LLC (collectively the Company) as of December 31, 2005, and the related combined statements of income, members’ capital and comprehensive income and cash flows for the year then ended. These combined financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these combined financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of Conwood Company, L.P., Conwood Sales Co., L.P., Scott Tobacco LLC, Rosswil LLC, Conwood LLC, Conwood–1 LLC, and Conwood–2 LLC as of December 31, 2005, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
KPMG LLP
April 18, 2006, except for note 12,
which is dated April 25, 2006


 

CONWOOD COMPANY, L.P., CONWOOD SALES CO., L. P.,
SCOTT TOBACCO LLC, ROSSWIL LLC, CONWOOD LLC,
CONWOOD-1 LLC, AND CONWOOD-2 LLC
Combined Balance Sheet
December 31, 2005
(Thousands)
         
Assets
       
 
       
Current assets:
       
Cash and cash equivalents
  $ 112,343  
Accounts receivable, less allowance of $283
    8,308  
Inventories
    142,711  
Other current assets
    4,502  
 
     
Total current assets
    267,864  
 
       
Property, plant, and equipment, net
    29,410  
Goodwill
    16,357  
Other intangible assets, net
    50,935  
Deferred tax assets, net
    926  
Other assets
    1,202  
 
     
 
  $ 366,694  
 
     
 
       
Liabilities and Members’ Capital
       
 
       
Current liabilities:
       
Accounts payable
  $ 18,469  
Accrued compensation
    19,887  
Accrued expenses
    248  
Accrued state income taxes
    22,766  
 
     
Total current liabilities
    61,370  
 
       
Deferred compensation
    2,657  
Benefit obligations
    32,702  
 
     
Total liabilities
    96,729  
 
     
 
       
Commitments and contingencies (notes 10 and 11)
       
 
       
Members’ capital
    269,965  
 
     
 
  $ 366,694  
 
     
See accompanying notes to combined financial statements.

2


 

CONWOOD COMPANY, L.P., CONWOOD SALES CO., L. P.,
SCOTT TOBACCO LLC, ROSSWIL LLC, CONWOOD LLC,
CONWOOD-1 LLC, AND CONWOOD-2 LLC
Combined Statement of Income
Year ended December 31, 2005
(Thousands)
         
Net sales
  $ 453,229  
 
       
Operating expenses:
       
Cost of sales
    94,912  
Selling, administrative, and general expense
    110,432  
 
     
Total operating income
    247,885  
 
       
Interest expense
    (5 )
Interest income
    5,401  
Other expense, net
    (73 )
 
     
Income before taxes
    253,208  
 
       
Income tax expense
    5,714  
 
     
Net income
  $ 247,494  
 
     
See accompanying notes to combined financial statements.

3


 

CONWOOD COMPANY, L.P., CONWOOD SALES CO., L. P.,
SCOTT TOBACCO LLC, ROSSWIL LLC, CONWOOD LLC,
CONWOOD-1 LLC, AND CONWOOD-2 LLC
Combined Statement of Members’ Capital and Comprehensive Income
Year ended December 31, 2005
(Thousands)
                         
    Accumulated              
    other              
    comprehensive     Members’        
    loss     capital     Total  
Balance at December 31, 2004
  $ (364 )     332,921       332,557  
Net income
          247,494       247,494  
Additional minimum pension liability
    (86 )           (86 )
 
                     
Comprehensive income
                    247,408  
Distributions to members
          (310,000 )     (310,000 )
 
                 
Balance at December 31, 2005
  $ (450 )     270,415       269,965  
 
                 
See accompanying notes to combined financial statements.

4


 

CONWOOD COMPANY, L.P., CONWOOD SALES CO., L. P.,
SCOTT TOBACCO LLC, ROSSWIL LLC, CONWOOD LLC,
CONWOOD-1 LLC, AND CONWOOD-2 LLC
Combined Statement of Cash Flows
Year ended December 31, 2005
(Thousands)
         
Cash flows from operating activities:
       
Net income
  $ 247,494  
Adjustments to reconcile net income to net cash provided by operating activities:
       
Depreciation
    3,787  
Amortization of intangible assets
    6,616  
Provision for cash discounts
    17,926  
Deferred income tax benefit
    (39 )
Changes in assets and liabilities:
       
Accounts receivable
    (12,606 )
Inventories
    (14,344 )
Other assets
    1,025  
Accounts payable
    965  
Accrued state income taxes
    5,260  
Accrued expenses and long-term liabilities
    5,220  
 
     
Net cash provided by operating activities
    261,304  
 
     
 
       
Cash flows from investing activities:
       
Capital expenditures
    (9,167 )
 
     
Net cash used in investing activities
    (9,167 )
 
     
 
       
Cash flows from financing activities:
       
Distributions to members
    (310,000 )
 
     
 
       
Net cash used in financing activities
    (310,000 )
 
     
Net decrease in cash and cash equivalents
    (57,863 )
 
       
Cash and cash equivalents at beginning of year
    170,206  
 
     
Cash and cash equivalents at end of year
  $ 112,343  
 
     
 
       
Noncash item – additional minimum pension liability
  $ (86 )
 
       
Supplemental cash flow disclosure:
       
Income taxes paid
  $ 1,482  
See accompanying notes to combined financial statements.

5


 

CONWOOD COMPANY, L.P., CONWOOD SALES CO., L. P.,
SCOTT TOBACCO LLC, ROSSWIL LLC, CONWOOD LLC,
CONWOOD-1 LLC, AND CONWOOD-2 LLC
Notes to Combined Financial Statements
December 31, 2005
(Dollars in thousands, unless otherwise noted)
(1)   Organization and Nature of Operations
 
    Conwood Company, L.P. (Conwood) was formed as a limited partnership under the Revised Uniform Limited Partnership Act of the State of Delaware on June 20, 1985. Effective November 1, 1996, Conwood divested itself of its sales function and created Conwood Sales Co., L. P. (Sales), a limited partnership, to operate the sales function. Ownership of Conwood and Sales was restructured on December 31, 1996 and April 30, 1997 such that Asworth Corporation now beneficially owns 100% of Conwood LLC, the general partner of Conwood and Sales.
 
    Effective January 1, 2000, HTF LLC, a wholly owned subsidiary of Asworth Corporation and the limited partner of Conwood and Sales, became the sole member of the newly formed Scott Tobacco LLC (Scott) and Rosswil LLC (Rosswil) through capital contributions of $200 and $500, respectively. Formerly a division of Conwood, Scott continues to manufacture twist tobacco for Conwood. The majority of Conwood’s intangible assets were transferred to Rosswil, which, in addition to Sales, is now involved in the sales function.
 
    Conwood and Scott manufacture and sell smokeless tobacco products to Rosswil, which sells to Sales, which in turn sells the tobacco products primarily to a large number of widely dispersed wholesalers and chain stores. Conwood LLC, Conwood–1 LLC, and Conwood–2 LLC are companies that hold primarily cash. The financial statements of Conwood, Sales, Scott, Rosswil, Conwood LLC, Conwood–1 LLC, and Conwood–2 LLC (collectively the Company) are presented on a combined basis because of common ownership. All significant intercompany balances and transactions have been eliminated. Asworth Corporation owns 100% of Conwood–1 LLC and Conwood–2 LLC.
 
    The Company funds its operations from cash flows from operating activities and maintains its own administrative functions. Asworth does not perform any services for or on behalf of the Company.
 
(2)   Summary of Significant Accounting Policies
  (a)   Use of Estimates
 
      The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include the carrying amount of intangible assets, income tax assets and liabilities, and assets and obligations related to employee benefits. Actual results could differ from those estimates.
         
    6   (Continued)

 


 

CONWOOD COMPANY, L.P., CONWOOD SALES CO., L. P.,
SCOTT TOBACCO LLC, ROSSWIL LLC, CONWOOD LLC,
CONWOOD-1 LLC, AND CONWOOD-2 LLC
Notes to Combined Financial Statements
December 31, 2005
(Dollars in thousands, unless otherwise noted)
  (b)   Inventories
 
      Inventories are stated at the lower of cost (principally average cost) or market (net realizable value). Cost is determined using the average cost method. Leaf tobacco inventories are classified as current assets, the treatment of which is a generally accepted industry practice, although it is necessary to hold the leaf tobacco longer than one year in the curing process.
 
  (c)   Property, Plant, and Equipment
 
      Property, plant, and equipment are stated at cost less accumulated depreciation. Depreciation of plant and equipment is provided over the estimated useful lives (3-39 years) of the respective assets, principally on the straight-line basis.
 
  (d)   Goodwill and Other Intangible Assets
 
      Goodwill represents the excess of costs over fair value of assets of businesses acquired. The Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, as of January 1, 2002. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. This statement also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets.
 
      Acquired brand/product lines are amortized on a straight-line basis over their estimated useful lives of 15 – 28 years.
 
  (e)   Impairment of Long-Lived Assets
 
      In accordance with SFAS No. 144, long-lived assets, such as property, plant, and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset. No impairment losses have been recognized in 2005.
 
      Goodwill is tested annually for impairment, and is tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. This determination is made at the reporting unit level and consists of two steps. First, the Company determines the fair value of a reporting unit and compares it to its carrying amount. Second, if the carrying amount of a reporting
         
    7   (Continued)

 


 

CONWOOD COMPANY, L.P., CONWOOD SALES CO., L. P.,
SCOTT TOBACCO LLC, ROSSWIL LLC, CONWOOD LLC,
CONWOOD-1 LLC, AND CONWOOD-2 LLC
Notes to Combined Financial Statements
December 31, 2005
(Dollars in thousands, unless otherwise noted)
      unit exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of the goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit to its assets and liabilities in a manner similar to a purchase price allocation, in accordance with SFAS No. 141, Business Combinations. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill.
 
      The Company’s annual impairment analysis on goodwill did not require the Company to recognize an impairment loss in 2005.
 
  (f)   Income Taxes
 
      Effective January 1, 2002, Asworth Corporation, the Company’s ultimate parent, elected to be treated as a small business corporation (S Corporation) under Section 1362 of the Internal Revenue Code. Conwood, Sales, and Conwood LLC elected to be treated as Qualified Subchapter S Subsidiaries effective January 1, 2002. Under the S Corporation provisions, the Company is treated as a division of Asworth. As an S Corporation, all items of the Company’s income, loss, deductions and credits pass through to the shareholders of Asworth. The shareholders of Asworth will be taxed on their respective distributive share of such pass-through items. As a result, the Company will generally not incur a federal income tax liability. However, for ten years after the effective date of the S Corporation election, the Company will annually incur federal income tax in the event it recognizes built-in gain imbedded in assets existing at December 31, 2001. In addition, Asworth would incur federal income tax in future years in the event its “passive” income exceeds certain levels. The Company has entered into a tax sharing arrangement with Asworth whereby the Company pays (receives) funds to (from) Asworth for the Company’s share of tax liabilities (assets). State income tax will continue to be imposed on the Company by certain states that do not recognize Asworth and the Company’s status as an S Corporation.
 
      With the exception of deferred tax assets pertaining to states where the Company continues to be taxed as a corporation, deferred tax assets were reduced to zero on January 1, 2002, in connection with the S Corporation election.
 
  (g)   Cash Equivalents
 
      Cash equivalents consist primarily of money market mutual funds and funds deposited with Diversified Capital, LLC (Diversified). Diversified is an affiliate of the Company whose purpose is to provide treasury management services for the Company, Asworth Corporation, and other related entities. The Company deposits its excess cash with Diversified and receives a market interest rate on the Company’s average cash balances held by Diversified. The Company includes the cash deposited with Diversified as a cash equivalent as such deposits are readily available to the Company and such deposits and withdrawals represent a portion of the Company’s cash management activities. At December 31, 2005, Diversified held $77,711 in cash equivalents of the Company and the Company earned approximately $5 million in interest income from Diversified during the year ended
         
    8   (Continued)

 


 

CONWOOD COMPANY, L.P., CONWOOD SALES CO., L. P.,
SCOTT TOBACCO LLC, ROSSWIL LLC, CONWOOD LLC,
CONWOOD-1 LLC, AND CONWOOD-2 LLC
Notes to Combined Financial Statements
December 31, 2005
(Dollars in thousands, unless otherwise noted)
      December 31, 2005. The interest rate paid by Diversified is based on the Federal Short-Term Rate as adjusted on a monthly basis (AFR). At December 31, 2005, the AFR was 4.34%.
 
  (h)   Revenue Recognition
 
      The Company recognizes revenue when products are shipped and the customer takes ownership and assumes risk of loss, collection of the relevant receivable is probable, persuasive evidence of an arrangement exists and the sales price is fixed or determinable.
(3)   Inventories
 
    A summary of inventories as of December 31 follows:
         
Leaf tobacco
  $ 121,378  
Raw materials and supplies
    4,898  
Work-in-process
    13,903  
Finished products
    2,532  
 
     
 
  $ 142,711  
 
     
(4)   Property, Plant, and Equipment
 
    A summary of property, plant, and equipment as of December 31 follows:
         
Land and land improvements
  $ 2,498  
Buildings
    24,738  
Machinery and equipment
    31,164  
Furniture and fixtures
    14,069  
Construction in progress
    7,850  
 
     
 
    80,319  
 
       
Less accumulated depreciation
    (50,909 )
 
     
 
       
Property, plant, and equipment, net
  $ 29,410  
 
     
    Depreciation expense totaled $3,787 for the year ended December 31, 2005.
 
(5)   Intangible Assets
 
    The Company has intangible assets recorded in the accompanying combined financial statements primarily relating to acquired brand/product lines with an original carrying value of $173,902 as of December 31, 2005, and accumulated amortization of $122,967 as of December 31, 2005.
         
    9   (Continued)

 


 

CONWOOD COMPANY, L.P., CONWOOD SALES CO., L. P.,
SCOTT TOBACCO LLC, ROSSWIL LLC, CONWOOD LLC,
CONWOOD-1 LLC, AND CONWOOD-2 LLC
Notes to Combined Financial Statements
December 31, 2005
(Dollars in thousands, unless otherwise noted)
    Aggregate amortization expense for amortizing intangible assets was $6,616 for the year ended December 31, 2005. Estimated amortization expense for the next five years is: $6,616 in each of 2006 and 2007, and $6,272 in each of 2008, 2009, and 2010.
 
(6)   Income Tax Expense
 
    Effective January 1, 2002, certain of the entities comprising the Company elected to be taxed as Qualified Subchapter S Subsidiaries (QSSSs) due to their parent’s (Asworth Corporation) election to be treated as an S Corporation. As QSSSs, all items of income, loss, deductions and credits pass through to the shareholders of Asworth Corporation. The entities comprising the Company will continue to be taxed in certain states which do not recognize the S Corporation/QSSS status. In addition, the entities comprising the Company may incur federal income taxes (benefits) for ten years after the effective date of the S Corporation election to the extent built-in gains (losses) imbedded in assets existing at December 31, 2001 are recognized.
 
    The Company analyzes tax exposure items, and as a result of this analysis, records a provision or benefit related to any tax exposure items as determined necessary by this analysis.
 
    The components of income tax expense (benefit) for the year ended December 31, 2005 are as follows:
         
    State  
Current
  $ 5,753  
Deferred
    (39 )
 
     
 
  $ 5,714  
 
     
         
    10   (Continued)

 


 

CONWOOD COMPANY, L.P., CONWOOD SALES CO., L. P.,
SCOTT TOBACCO LLC, ROSSWIL LLC, CONWOOD LLC,
CONWOOD-1 LLC, AND CONWOOD-2 LLC
Notes to Combined Financial Statements
December 31, 2005
(Dollars in thousands, unless otherwise noted)
    The tax effects of the temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 2005 are as follows:
         
Deferred tax assets:
       
Accrued post-retirement and other benefits
  $ 954  
Other
    33  
 
     
 
       
Total gross deferred tax assets
    987  
 
     
 
       
Deferred tax liabilities:
       
Property, plant, and equipment, principally due to differences in depreciation
    70  
 
     
 
       
Total gross deferred tax liabilities
    70  
 
     
 
       
Net deferred tax assets
    917  
 
       
Less current portion, included in other current assets
    (9 )
 
     
 
       
Net deferred tax assets, noncurrent
  $ 926  
 
     
    In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the period which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences.
 
(7)   Employee Benefit Plans
 
    The Company has two defined benefit pension plans, the Conwood Plan and The Taylor Brothers Plan, which cover substantially all employees. Taylor Brothers is an operating division of Conwood. Benefits are based on years of service and the employee’s compensation. The Company’s funding policy is to contribute no more than the amount allowable for tax purposes and not less than the required minimum contribution.
         
    11   (Continued)

 


 

CONWOOD COMPANY, L.P., CONWOOD SALES CO., L. P.,
SCOTT TOBACCO LLC, ROSSWIL LLC, CONWOOD LLC,
CONWOOD-1 LLC, AND CONWOOD-2 LLC
Notes to Combined Financial Statements
December 31, 2005
(Dollars in thousands, unless otherwise noted)
In addition to the pension plans, the Company sponsors an unfunded defined benefit health care and life insurance plan that provides post-retirement medical and life insurance benefits to full-time employees (who meet minimum age and service requirements for retirement) and their dependents. The plan is contributory, with retiree contributions adjusted annually, and contains other cost-sharing features such as deductibles and coinsurance. The Company’s policy is to pay the cost of medical and life insurance benefits in amounts determined at the discretion of management. The retiree contribution rate will be allocated consistently with the premium rates and costs that have emerged from health care and life insurance expenses and plan experience. The measurement date used to determine pension and other post-retirement benefit measures for the pension plans and the post-retirement plan is December 31.
The following table sets forth the plans’ benefit obligations, fair value of plan assets, and funded status at December 31, 2005:
                 
            Post-  
    Pension     retirement  
    benefits     benefits  
Benefit obligation
  $ 46,636       36,211  
Fair value of plan assets
    34,592        
 
           
Funded status
  $ 12,044       36,211  
 
           
Accrued benefit cost
  $ (1,627 )     (31,075 )
Minimum pension liability adjustment
    450        
 
           
Net amounts recognized in the combined balance sheet
  $ (1,177 )     (31,075 )
 
           
The accumulated benefit obligation for the pension plans was $33,707 at December 31, 2005.
The following information is for the Taylor Brothers Plan, which had plan assets less than the accumulated benefit obligation.
         
    Taylor
    Brothers
    Plan
Projected benefit obligation
  $ 1,144  
Accumulated benefit obligation
    1,144  
Fair value of plan assets
    1,105  
(Continued)

12


 

CONWOOD COMPANY, L.P., CONWOOD SALES CO., L. P.,
SCOTT TOBACCO LLC, ROSSWIL LLC, CONWOOD LLC,
CONWOOD-1 LLC, AND CONWOOD-2 LLC
Notes to Combined Financial Statements
December 31, 2005
(Dollars in thousands, unless otherwise noted)
Weighted average assumptions used to determine benefit obligations at December 31, 2005 were as follows:
                 
            Post-
    Pension   retirement
    benefits   benefits
Discount rate
    5.75 %     5.75 %
Rate of compensation increase
    5.00        
Weighted average assumptions used to determine net cost for the year ended December 31, 2005 were as follows:
                 
            Post-
    Pension   retirement
    benefits   benefits
Discount rate
    6.00 %     6.00 %
Expected long-term rate of return on plan assets
    7.99        
Rate of compensation increase
    5.00        
The Company’s overall expected long-term rate of return on assets is 7.99%. The expected long-term rate of return is based on the portfolio as a whole and not on the sum of the returns on individual asset categories. The return is based exclusively on historical returns, without adjustments.
For measurement purposes, an 11.0% annual rate of increase in the per capita cost of covered benefits (i.e., health care cost trend rate) was assumed for December 31, 2005; the rate was assumed to decrease gradually to 5.50% by the year 2011 and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. For example, increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated post-retirement benefit obligation at December 31, 2005 by $6,019 and the aggregate of the service and interest cost components of net periodic post-retirement benefit cost for 2005 by $612.
(Continued)

13


 

CONWOOD COMPANY, L.P., CONWOOD SALES CO., L. P.,
SCOTT TOBACCO LLC, ROSSWIL LLC, CONWOOD LLC,
CONWOOD-1 LLC, AND CONWOOD-2 LLC
Notes to Combined Financial Statements
December 31, 2005
(Dollars in thousands, unless otherwise noted)
Other amounts for the year ended December 31, 2005 are as follows:
                 
            Post-
    Pension   retirement
    benefits   benefits
Benefit cost
  $ 2,110       3,159  
Employer contribution
    2,225        
Plan participants’ contributions
          388  
Benefits paid
    1,053       1,402  
Plan Assets
The weighted average asset allocation of the Company’s pension plans’ assets at December 31, 2005 were as follows:
         
Asset category   Plan assets
Equity securities
    51 %
Fixed income
    37  
Real estate
    12  
 
       
Total
    100 %
 
       
The Company’s investment policies and strategies for the pension plans do not use target allocations for the individual asset categories. The Company’s investment goals are to maximize returns subject to specific risk management policies. Its risk management policies permit investments in mutual funds, and prohibit direct investments in debt and equity securities and derivative financial instruments. The Company addresses diversification by the use of mutual fund investments whose underlying investments are in domestic and international fixed income securities and domestic and international equity securities. These mutual funds are readily marketable and can be sold to fund benefit payment obligations as they become payable.
Cash Flows
The Company expects to contribute $1,360 to its pension plans in 2006.
The benefits expected to be paid in each year 2006-2010 are $2,219, $2,431, $2,707, $2,988, and $3,233, respectively. The aggregate benefits expected to be paid in the five years from 2011-2015 are $22,480. The expected benefits are based on the same assumptions used to measure the Company’s benefit obligation at December 31 and include estimated future employee service.
(Continued)

14


 

CONWOOD COMPANY, L.P., CONWOOD SALES CO., L. P.,
SCOTT TOBACCO LLC, ROSSWIL LLC, CONWOOD LLC,
CONWOOD-1 LLC, AND CONWOOD-2 LLC
Notes to Combined Financial Statements
December 31, 2005
(Dollars in thousands, unless otherwise noted)
    Other Employee Benefit Plans
 
    The Company has a savings plan covering substantially all employees other than those of Scott which provides for employee contributions (up to 6% of compensation) with the Company’s contributions being based upon a percentage of employee contributions. For the year ended December 31, 2005, the Company contributed to the plan $4,180 representing 200% of employee contributions, the maximum allowable under terms of the plan.
 
    The Company also has a defined contribution plan covering substantially all employees of Scott who have completed one-half year of continuous service and have attained the age of twenty-one. The Company has voluntarily agreed to make annual contributions to the plan in amounts equal to 5% of each participant’s gross earnings. Total expense related to the plan for the year ended December 31, 2005 was $52.
 
    The Company has a management incentive plan which provides compensation to senior management whose decisions and actions are instrumental in influencing and affecting the performance of the Company. Under the provisions of the plan, the Company pays into a bonus pool an amount based upon minimum earnings goals. The contribution for the year ended December 31, 2005 was $13,261.
 
(8)   Sales to Significant Customer
 
    During the year ended December 31, 2005, sales to one customer accounted for approximately 15% of the Company’s sales. Accounts receivable from this customer were $1,269 at December 31, 2005.
 
(9)   Disclosures about the Fair Value of Financial Instruments
 
    The carrying amount of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximates fair value because of the short maturity of these instruments.
 
(10)   Commitments
 
    The Company occupies certain manufacturing and storage facilities and uses certain equipment under operating leases. Total rent expense for the year ended December 31, 2005 was $2,450. Approximate minimum annual rentals under noncancelable operating leases are as follows:
         
Year ending December 31:        
2006
  $ 2,296  
2007
    1,658  
2008
    789  
2009
    57  
Thereafter
     
 
     
 
  $ 4,800  
 
     
(Continued)

15


 

CONWOOD COMPANY, L.P., CONWOOD SALES CO., L. P.,
SCOTT TOBACCO LLC, ROSSWIL LLC, CONWOOD LLC,
CONWOOD-1 LLC, AND CONWOOD-2 LLC
Notes to Combined Financial Statements
December 31, 2005
(Dollars in thousands, unless otherwise noted)
(11)   Litigation Contingencies
 
    On January 2, 2003, the Company, along with other major manufacturers of smokeless tobacco and certain other organizations, was served with a summons and class action complaint brought by six individual plaintiffs alleging negligence, personal injury and other charges. On September 8, 2003, the United States District Court for the Southern District of Florida granted plaintiffs’ motion to remand this action to the Eleventh Circuit Court in Miami-Dade County, Florida. In July 2005, a plaintiff filed an amended complaint in this action, the effect of which was to drop the class action allegations and to assert an individual claim on behalf of the one plaintiff. An order of dismissal of the remaining plaintiffs was entered in October, 2005. In November, 2005, the Company filed a motion to dismiss certain plaintiff complaints. No trial date has been set for this proceeding.
 
    The Company, along with other tobacco manufacturers and distributors, was sued on October 1, 1998 in Kanawha County, West Virginia. The lawsuit, which involves approximately 1,200 individual actions, was consolidated and referred to the Mass Litigation Panel in 1999. Products manufactured by the Company have been identified as being used in 14 of those cases. On December 3, 2001, an order was entered severing any claims against the Company and the other smokeless tobacco manufacturing companies from the principal action.
 
    In the event that any further action is pursued against the Company in the above proceedings, the Company would vigorously defend such actions. Counsel is unable to evaluate the likelihood of an unfavorable outcome or to estimate the Company’s potential loss, if any, resulting from such actions. Management does not believe that such suits would have a material adverse effect on the Company’s financial position.
 
    The Company is involved in various other claims and legal actions arising in the ordinary course of business. In the opinion of counsel and management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s financial position.
 
(12)   Subsequent Event
 
    On April 25, 2006, Reynolds American Inc. (RAI) entered into an agreement whereby RAI would acquire Conwood, Sales, Scott and Rosswil as well as Conwood LLC, Conwood–1 LLC and Conwood–2 LLC via a stock acquisition of the ultimate parent company of these entities.

16

EX-99.2 4 g02724exv99w2.htm EX-99.2 Ex-99.2
 

Exhibit 99.2
CONWOOD COMPANY, L.P., CONWOOD SALES CO., L. P.,
SCOTT TOBACCO LLC, ROSSWIL LLC, CONWOOD LLC,
CONWOOD–1 LLC, AND CONWOOD–2 LLC
Combined Financial Statements
March 31, 2006

 


 

CONWOOD COMPANY, L.P., CONWOOD SALES CO., L. P.,
SCOTT TOBACCO LLC, ROSSWIL LLC, CONWOOD LLC,
CONWOOD-1 LLC, AND CONWOOD-2 LLC
Combined Balance Sheet
(Thousands)
(Unaudited)
         
    March 31,  
    2006  
Assets
       
Current assets:
       
Cash and cash equivalents
  $ 147,800  
Accounts receivable, less allowance of $283
    8,790  
Inventories
    147,986  
Other current assets
    4,645  
 
     
Total current assets
    309,221  
 
       
Property, plant, and equipment, net
    29,644  
Goodwill
    16,357  
Other intangible assets, net
    49,281  
Deferred tax assets, net
    926  
Other assets
    1,202  
 
       
 
     
 
  $ 406,631  
 
     
Liabilities and Members’ Capital
       
Current liabilities:
       
Accounts payable
  $ 2,616  
Accrued compensation
    7,800  
Accrued expenses
    248  
Accrued state income taxes
    23,832  
 
     
Total current liabilities
    34,496  
 
       
Deferred compensation
    2,695  
Benefit obligations
    33,517  
 
     
Total liabilities
    70,708  
 
     
Members’ capital
    335,923  
 
     
 
  $ 406,631  
 
     
See accompanying notes to combined financial statements (unaudited).

2


 

CONWOOD COMPANY, L.P., CONWOOD SALES CO., L. P.,
SCOTT TOBACCO LLC, ROSSWIL LLC, CONWOOD LLC,
CONWOOD-1 LLC, AND CONWOOD-2 LLC
Combined Statements of Income
(Thousands)
(Unaudited)
                 
    Quarter ended  
    March 31,     March 31,  
    2006     2005  
Net sales
  $ 118,272       104,175  
 
Operating expenses:
               
Cost of sales
    24,136       20,977  
Selling, administrative, and general expense
    27,947       27,657  
 
           
Total operating income
    66,189       55,541  
 
               
Interest expense
    (1 )      
Interest income
    1,068       926  
Other expense, net
    (68 )     (5 )
 
           
Income before taxes
    67,188       56,462  
 
               
Income tax expense
    1,230       1,274  
 
           
Net income
  $ 65,958       55,188  
 
           
See accompanying notes to combined financial statements (unaudited).

3


 

CONWOOD COMPANY, L.P., CONWOOD SALES CO., L. P.,
SCOTT TOBACCO LLC, ROSSWIL LLC, CONWOOD LLC,
CONWOOD-1 LLC, AND CONWOOD-2 LLC
Combined Statements of Cash Flows
(Thousands)
(Unaudited)
                 
    Quarter ended  
    March 31,     March 31,  
    2006     2005  
Cash flows from operating activities:
               
Net income
  $ 65,958       55,188  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation
    984       921  
Amortization of intangible assets
    1,654       1,654  
Provision for cash discounts
    4,708       4,026  
Deferred income tax benefit
           
Loss on sale of equipment
    3        
Changes in assets and liabilities:
               
Accounts receivable
    (5,190 )     (3,693 )
Inventories
    (5,275 )     (13,167 )
Other assets
    (143 )     (344 )
Accounts payable
    (15,853 )     (11,759 )
Accrued state income taxes
    1,066       1,005  
Accrued expenses and long-term liabilities
    (11,234 )     (11,137 )
 
           
Net cash provided by operating activities
    36,678       22,694  
 
           
Cash flows from investing activities:
               
Capital expenditures
    (1,221 )     (4,372 )
 
           
Net cash used in investing activities
    (1,221 )     (4,372 )
 
           
Cash flows from financing activities:
               
Distributions to members
          (90,000 )
 
           
Net cash used in financing activities
          (90,000 )
 
           
Net increase (decrease) in cash and cash equivalents
    35,457       (71,678 )
Cash and cash equivalents at beginning of period
    112,343       170,206  
 
           
Cash and cash equivalents at end of period
  $ 147,800       98,528  
 
           
Supplemental cash flow disclosure:
               
Income taxes paid
  $ 187       167  
See accompanying notes to combined financial statements (unaudited).

4


 

CONWOOD COMPANY, L.P., CONWOOD SALES CO., L. P.,
SCOTT TOBACCO LLC, ROSSWIL LLC, CONWOOD LLC,
CONWOOD-1 LLC, AND CONWOOD-2 LLC
Notes to Combined Financial Statements (Unaudited)
March 31, 2006
(Dollars in thousands, unless otherwise noted)
(1)   Organization and Nature of Operations
 
    Conwood Company, L.P. (Conwood) was formed as a limited partnership under the Revised Uniform Limited Partnership Act of the State of Delaware on June 20, 1985. Effective November 1, 1996, Conwood divested itself of its sales function and created Conwood Sales Co., L. P. (Sales), a limited partnership, to operate the sales function. Ownership of Conwood and Sales was restructured on December 31, 1996 and April 30, 1997 such that Asworth Corporation now beneficially owns 100% of Conwood LLC, the general partner of Conwood and Sales.
 
    Effective January 1, 2000, HTF LLC, a wholly owned subsidiary of Asworth Corporation and the limited partner of Conwood and Sales, became the sole member of the newly formed Scott Tobacco LLC (Scott) and Rosswil LLC (Rosswil) through capital contributions of $200 and $500, respectively. Formerly a division of Conwood, Scott continues to manufacture twist tobacco for Conwood. The majority of Conwood’s intangible assets were transferred to Rosswil, which, in addition to Sales, is now involved in the sales function.
 
    Conwood and Scott manufacture and sell smokeless tobacco products to Rosswil, which sells to Sales, which in turn sells the tobacco products primarily to a large number of widely dispersed wholesalers and chain stores. Conwood LLC, Conwood–1 LLC, and Conwood–2 LLC are companies that hold primarily cash. The financial statements of Conwood, Sales, Scott, Rosswil, Conwood LLC, Conwood–1 LLC, and Conwood–2 LLC (collectively the Company) are presented on a combined basis because of common ownership. All significant intercompany balances and transactions have been eliminated.
 
(2)   Basis of Presentation
 
    In the opinion of management, the accompanying combined financial statements contain all adjustments, consisting of only normal recurring adjustments, necessary for the fair presentation of the Company’s financial position as of March 31, 2006 and the results of operations and cash flows for the quarterly periods ended March 31, 2006 and 2005.
 
    Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) have been condensed or omitted. These combined financial statements should be read in conjunction with the combined financial statements and notes included in the Company’s Annual Combined Financial Statements for the fiscal year ended December 31, 2005. The results of operations for the quarterly periods ended March 31, 2006 and 2005 are not necessarily indicative of the operating results for the operations for the full year.
 
    The Company funds its operations from cash flows from operating activities and maintains its own administrative functions. Asworth does not perform any services for or on behalf of the Company.
(Continued)

5


 

CONWOOD COMPANY, L.P., CONWOOD SALES CO., L. P.,
SCOTT TOBACCO LLC, ROSSWIL LLC, CONWOOD LLC,
CONWOOD-1 LLC, AND CONWOOD-2 LLC
Notes to Combined Financial Statements (Unaudited)
March 31, 2006
(Dollars in thousands, unless otherwise noted)
(3)   Cash Equivalents
 
    Cash equivalents consist primarily of money market mutual funds and funds deposited with Diversified Capital, LLC (Diversified). Diversified is an affiliate of the Company whose purpose is to provide treasury management services for the Company, Asworth Corporation, and other related entities. The Company deposits its excess cash with Diversified and receives a market interest rate on the Company’s average cash balances held by Diversified. The Company includes the cash deposited with Diversified as a cash equivalent as such deposits are readily available to the Company and such deposits and withdrawals represent a portion of the Company’s cash management activities. At March 31, 2006, Diversified held $44,000 in cash equivalents of the Company and the Company earned approximately $900 in interest income from Diversified during each of the quarters ended March 31, 2006 and 2005. The interest rate paid by Diversified is based on the Federal Short-Term Rate as adjusted on a monthly basis (AFR). At March 31, 2006, the AFR was 4.58%.
 
(4)   Inventories
 
    A summary of inventories as of March 31, 2006 follows:
         
Leaf tobacco
  $ 124,327  
Raw materials and supplies
    5,365  
Work-in-process
    15,605  
Finished products
    2,689  
 
     
 
  $ 147,986  
 
     
(5)   Property, Plant, and Equipment
 
    A summary of property, plant, and equipment as of March 31, 2006 follows:
         
Land and land improvements
  $ 2,498  
Buildings
    24,732  
Machinery and equipment
    34,740  
Furniture and fixtures
    14,137  
Construction in progress
    5,430  
 
     
 
    81,537  
 
Less accumulated depreciation
    (51,893 )
 
     
Property, plant, and equipment, net
  $ 29,644  
 
     
Depreciation expense totaled $984 and $921 for the quarters ended March 31, 2006 and 2005, respectively.
(Continued)

6


 

CONWOOD COMPANY, L.P., CONWOOD SALES CO., L. P.,
SCOTT TOBACCO LLC, ROSSWIL LLC, CONWOOD LLC,
CONWOOD-1 LLC, AND CONWOOD-2 LLC
Notes to Combined Financial Statements (Unaudited)
March 31, 2006
(Dollars in thousands, unless otherwise noted)
(6)   Income Tax Expense
 
    Effective January 1, 2002, certain of the entities comprising the Company elected to be taxed as Qualified SubChapter S Subsidiaries (QSSSs) due to their parent’s (Asworth Corporation) election to be treated as an S Corporation. As QSSSs, all items of income, loss, deductions and credits pass through to the shareholders of Asworth Corporation. The entities comprising the Company will continue to be taxed in certain states which do not recognize the S Corporation/QSSS status. In addition, the entities comprising the Company may incur federal income taxes (benefits) for ten years after the effective date of the S Corporation election to the extent built-in gains (losses) imbedded in assets existing at December 31, 2001 are recognized.
 
    The Company analyzes tax exposure items, and as a result of this analysis, records a provision or benefit related to any tax exposure items as determined necessary by this analysis.
 
    In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the period which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences.
 
(7)   Litigation Contingencies
 
    On January 2, 2003, the Company, along with other major manufacturers of smokeless tobacco and certain other organizations, was served with a summons and class action complaint brought by six individual plaintiffs alleging negligence, personal injury and other charges. On September 8, 2003, the United States District Court for the Southern District of Florida granted plaintiffs’ motion to remand this action to the Eleventh Circuit Court in Miami-Dade County, Florida. In July 2005, a plaintiff filed an amended complaint in this action, the effect of which was to drop the class action allegations and to assert an individual claim on behalf of the one plaintiff. An order of dismissal of the remaining plaintiffs was entered in October, 2005. In November, 2005, the Company filed a motion to dismiss certain plaintiff complaints. No trial date has been set for this proceeding.
(Continued)

7


 

CONWOOD COMPANY, L.P., CONWOOD SALES CO., L. P.,
SCOTT TOBACCO LLC, ROSSWIL LLC, CONWOOD LLC,
CONWOOD-1 LLC, AND CONWOOD-2 LLC
Notes to Combined Financial Statements (Unaudited)
March 31, 2006
(Dollars in thousands, unless otherwise noted)
    The Company, along with other tobacco manufacturers and distributors, was sued on October 1, 1998 in Kanawha County, West Virginia. The lawsuit, which involves approximately 1,200 individual actions, was consolidated and referred to the Mass Litigation Panel in 1999. Products manufactured by the Company have been identified as being used in 14 of those cases. On December 3, 2001, an order was entered severing any claims against the Company and the other smokeless tobacco manufacturing companies from the principal action.
 
    In the event that any further action is pursued against the Company in the above proceedings, the Company would vigorously defend such actions. Counsel is unable to evaluate the likelihood of an unfavorable outcome or to estimate the Company’s potential loss, if any, resulting from such actions. Management does not believe that such suits would have a material adverse effect on the Company’s financial position.
 
    The Company is involved in various other claims and legal actions arising in the ordinary course of business. In the opinion of counsel and management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s financial position.
 
(8)   Subsequent Event
 
    On April 25, 2006, Reynolds American Inc. (RAI) entered into an agreement whereby RAI would acquire Conwood, Sales, Scott and Rosswil as well as Conwood LLC, Conwood–1 LLC and Conwood–2 LLC via a stock acquisition of the ultimate parent company of these entities. On May 31, 2006, RAI closed the purchase transaction of the ultimate parent company after receiving required regulatory approvals.

8

EX-99.3 5 g02724exv99w3.htm EX-99.3 Ex-99.3
 

Exhibit 99.3
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
     The following unaudited pro forma condensed combined financial information gives effect to the acquisition of Conwood Company, L.P., Conwood Sales Co., L.P., Rosswil LLC, Scott Tobacco LLC, Conwood LLC, Conwood-1 LLC, and Conwood-2 LLC, collectively referred to as Conwood, by Reynolds American Inc., referred to as RAI, as if the acquisition transactions had been completed at the beginning of each period presented.
     This unaudited pro forma condensed combined financial information should be read in conjunction with the consolidated financial statements and notes thereto in RAI’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005, RAI’s Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2006 and June 30, 2006, and the historical financial statements of the Conwood companies included in this Current Report on Form 8-K/A.
     This unaudited pro forma condensed combined financial information has been prepared using the purchase method of accounting for business combinations and is based upon the historical financial statements of RAI and Conwood, which have been prepared in accordance with Regulation S-X promulgated by the SEC. The pro forma financial information is based on certain assumptions and adjustments as discussed in the accompanying notes to Unaudited Pro Forma Condensed Combined Financial Statements. The Conwood acquisition occurred on May 31, 2006, and the combined condensed consolidated balance sheet (unaudited) as of June 30, 2006, is included in RAI’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2006, with the purchase price allocated to certain assets acquired and liabilities assumed based on their historical book values as of the acquisition date. Due to the limited amount of information concerning Conwood’s operations prior to the completion of the acquisition, the fair value of assets acquired and liabilities assumed, including trademarks and other intangibles, has not yet been determined. Accordingly, the excess of the amount paid over net assets acquired has been allocated to goodwill in RAI’s condensed consolidated balance sheet (unaudited) as of June 30, 2006.
     The adjustments in this unaudited pro forma condensed combined financial information reflect adjustments necessary to account for the Conwood transactions as described herein. The unaudited pro forma financial information will require further adjustment pending allocation of the purchase price resulting from the determination of fair value of assets acquired and liabilities assumed. The final determination of the fair market value of the assets acquired and liabilities assumed and the final allocation of the consideration will be finalized when all information is received, but not later than one year from the date of the completion of the Conwood transactions, and will be reflected in SEC filings for periods presented after the completion of the Conwood transactions.
     This unaudited pro forma condensed combined financial information does not reflect operating efficiencies, if any, that may result from the completion of the Conwood acquisition and does not include any transition costs. Therefore, this unaudited pro forma condensed combined financial information is not necessarily indicative of results of operations or financial position that would have been achieved if the businesses had been combined as of the beginning of each period presented, or the results of operations or financial position that RAI will experience after the Conwood transactions are completed. In addition, the preparation of financial statements in conformity with generally accepted accounting principles, in the United State of America (GAAP), requires management to make certain estimates and assumptions. These estimates and assumptions are preliminary and have been made solely for the purpose of developing this unaudited pro forma condensed combined financial information. Actual results could differ materially from these estimates and assumptions.

 


 

Reynolds American Inc.
Unaudited Pro Forma Condensed Combined Statements of Income
(Dollars in millions, Except Per Share Amounts)
                                 
    For the three months ended March 31, 2006  
    Historical     Historical     Pro Forma     Pro Forma  
    RAI     Conwood     Adjustments     Combined  
Net sales
  $ 1,960     $ 118     $     $ 2,078  
Costs and expenses:
                               
Cost of products sold
    1,165       24             1,189  
Selling, general and administrative expenses
    342       26             368  
Amortization expense
    7       2       (2 ) (A)     7  
 
                       
Operating income
    446       66       2       514  
Interest and debt expense
    35             59 (B)        
 
                    2 (B)     96  
Interest income
    (36 )     (1 )     1 (A)        
 
                  3 (C)     (33 )
 
                       
Income from continuing operations before tax
    447       67       (63 )     451  
Provision for income taxes
    167       1       (1 ) (A)        
 
                    2 (D)     169  
 
                       
Income from continuing operations
  $ 280     $ 66     $ (64 )   $ 282  
 
                       
 
                               
Basic income per share from continuing operations
  $ 1.90                     $ 1.91  
 
                               
Diluted income per share from continuing operations
  $ 1.90                     $ 1.91  
 
                               
Basic average shares outstanding, in thousands
    147,477                       147,477  
 
                               
Diluted average shares outstanding, in thousands
    147,642                       147,642  

 


 

Reynolds American Inc.
Unaudited Pro Forma Condensed Combined Statements of Income
(Dollars in millions, Except Per Share Amounts)
                                 
    For the Year Ended December 31, 2005  
    Historical     Historical     Pro Forma     Pro Forma  
    RAI     Conwood     Adjustments     Combined  
Net sales
  $ 8,256     $ 453     $     $ 8,709  
Costs and expenses:
                               
Cost of products sold
    4,919       95             5,014  
Selling, general and administrative expenses
    1,611       103             1,714  
Amortization expense
    41       7       (7 ) (A)     41  
Loss on sale of assets
    24                   24  
Restructuring and impairment charges
    2                   2  
Goodwill and trademark impairment charges
    200                   200  
 
                       
Operating income
    1,459       248       7       1,714  
Interest and debt expense
    113             236 (B)        
 
                    8 (B)     357  
Interest income
    (85 )     (5 )     5 (A)        
 
                    12 (C)     (73 )
Other (income) expense, net
    15                   15  
 
                       
Income from continuing operations before tax
    1,416       253       (254 )     1,415  
Provision for income taxes
    431       6       (6 ) (A)        
 
                    (D)     431  
 
                       
Income from continuing operations
  $ 985     $ 247     $ (248 )   $ 984  
 
                       
 
                               
Basic income per share from continuing operations
  $ 6.68                     $ 6.68  
 
                               
Diluted income per share from continuing operations
  $ 6.67                     $ 6.67  
 
                               
Basic average shares outstanding, in thousands
    147,395                       147,395  
 
                               
Diluted average shares outstanding, in thousands
    147,586                       147,586  

 


 

Note A – Elimination of Historical Conwood items
          Pro-forma adjustments include the elimination of Conwood’s historical amortization expense due to applying the purchase method of accounting for the Conwood transactions, Conwood’s historical interest income due to the exclusion of the historical cash balances, and Conwood’s historical provision for income taxes due to the application of the new expected effective rate. Prior to the acquisition, Conwood was an S-Corporation for federal income tax purposes.
Note B – Increase in Interest and Debt Expense
          Interest expense increased based on the assumed $3.2 billion of additional debt at interest rates ranging from 7.1875% to 7.750%. An additional debt expense relates to the $52 million of debt issuance costs to be amortized over five to twelve years.
Note C — Reduction in Interest Income due to Acquisition
          Interest income has been reduced to reflect an average cash balance reduced by $370 million, which is the amount of cash paid in connection with the Conwood acquisition.
Note D — Income taxes
          The pro forma adjustment to provision for income taxes represents the application of the expected effective rate of 39.0% to the Conwood historical earnings and pro forma adjustments.

 

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