EXHIBIT 10.1

EXECUTION VERSION

 

 

 

BRIDGE CREDIT AGREEMENT

dated as of

September 23, 2014

among

REYNOLDS AMERICAN INC.,

as Borrower,

The Lenders Party Hereto

and

JPMORGAN CHASE BANK, N.A.,

as Administrative Agent

 

 

 

CITIBANK, N.A.,

as Syndication Agent,

and

J.P. MORGAN SECURITIES LLC,

and

CITIGROUP GLOBAL MARKETS INC.,

as Joint Lead Arrangers and Joint Bookrunners

 

 

 

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TABLE OF CONTENTS

 

         Page   ARTICLE I    Definitions    SECTION 1.01.  

Defined Terms

     1    SECTION 1.02.  

Classification of Loans and Borrowings

     25    SECTION 1.03.  

Terms Generally

     25    SECTION 1.04.  

Accounting Terms; GAAP

     26    ARTICLE II    The Credits    SECTION 2.01.  

Commitments

     26    SECTION 2.02.  

Loans and Borrowings

     26    SECTION 2.03.  

Requests for Borrowings

     27    SECTION 2.04.  

Reserved

     27    SECTION 2.05.  

Reserved

     28    SECTION 2.06.  

Funding of Borrowings

     28    SECTION 2.07.  

Interest Elections

     28    SECTION 2.08.  

Termination and Reduction of Commitments

     29    SECTION 2.09.  

Repayment of Loans; Evidence of Debt

     30    SECTION 2.10.  

Prepayment of Loans

     31    SECTION 2.11.  

Fees

     32    SECTION 2.12.  

Interest

     32    SECTION 2.13.  

Alternate Rate of Interest

     33    SECTION 2.14.  

Increased Costs

     33    SECTION 2.15.  

Break Funding Payments

     34    SECTION 2.16.  

Withholding of Taxes; Gross-Up

     35    SECTION 2.17.  

Payments Generally; Pro Rata Treatment; Sharing of Set-offs

     37    SECTION 2.18.  

Mitigation Obligations; Replacement of Lenders

     39    SECTION 2.19.  

Defaulting Lenders

     39    ARTICLE III    Representations and Warranties    SECTION 3.01.  

Organization; Powers

     40    SECTION 3.02.  

Authorization; Enforceability

     40    SECTION 3.03.  

Governmental Approvals; No Conflicts

     40    SECTION 3.04.  

Financial Condition; No Material Adverse Effect

     40    SECTION 3.05.  

Properties

     40    SECTION 3.06.  

Litigation and Environmental Matters

     41    SECTION 3.07.  

Compliance with Laws and Contractual Obligations

     41    SECTION 3.08.  

Use of Proceeds; Margin Regulations; Investment Company Status

     41    SECTION 3.09.  

Taxes

     41    SECTION 3.10.  

ERISA

     42   

 

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TABLE OF CONTENTS

(continued)

 

         Page   SECTION 3.11.  

Disclosure

     42    SECTION 3.12.  

Subsidiaries

     42    SECTION 3.13.  

Anti-Terrorism Law; Anti-Corruption

     42    ARTICLE IV    Conditions    SECTION 4.01.  

Effective Date

     43    SECTION 4.02.  

Conditions to Borrowing

     43    ARTICLE V    Affirmative Covenants    SECTION 5.01.  

Financial Statements; Ratings Change and Other Information

     47    SECTION 5.02.  

Notices of Material Events

     48    SECTION 5.03.  

Existence; Conduct of Business

     48    SECTION 5.04.  

Payment of Obligations

     48    SECTION 5.05.  

Maintenance of Properties; Insurance

     49    SECTION 5.06.  

Books and Records; Inspection Rights

     49    SECTION 5.07.  

Compliance with Laws and Contractual Obligations

     49    SECTION 5.08.  

Use of Proceeds and Letters of Credit

     49    SECTION 5.09.  

Subsidiary Guarantee Agreement; Further Assurances

     50    ARTICLE VI    Negative Covenants    SECTION 6.01.  

Liens

     50    SECTION 6.02.  

Sale and Leaseback Transactions

     52    SECTION 6.03.  

Fundamental Changes

     52    SECTION 6.04.  

Financial Condition Covenants

     53    SECTION 6.05.  

Restricted Payments

     53    SECTION 6.06.  

Transactions with Affiliates

     54    SECTION 6.07.  

Restrictive Agreements

     54    SECTION 6.08.  

Subsidiary Indebtedness

     55    SECTION 6.09.  

End of Fiscal Years; Fiscal Quarters

     56   

 

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TABLE OF CONTENTS

(continued)

 

         Page   ARTICLE VII    Events of Default    ARTICLE VIII    The Agents
   ARTICLE IX    Miscellaneous    SECTION 9.01.  

Notices

     60    SECTION 9.02.  

Waivers; Amendments

     61    SECTION 9.03.  

Expenses; Indemnity; Damage Waiver

     61    SECTION 9.04.  

Successors and Assigns

     64    SECTION 9.05.  

Survival

     66    SECTION 9.06.  

Counterparts; Integration; Effectiveness

     66    SECTION 9.07.  

Severability

     67    SECTION 9.08.  

Right of Setoff

     67    SECTION 9.09.  

Governing Law; Jurisdiction; Consent to Service of Process

     67    SECTION 9.10.  

WAIVER OF JURY TRIAL

     68    SECTION 9.11.  

Headings

     68    SECTION 9.12.  

Confidentiality

     68    SECTION 9.13.  

Interest Rate Limitation

     69    SECTION 9.14.  

USA PATRIOT Act

     70    SECTION 9.15.  

No Fiduciary Duty

     70    SECTION 9.16.  

[Reserved]

     70    SECTION 9.17.  

Release of Subsidiary Guarantors from Subsidiary Guarantee Agreement

     70   

SCHEDULES:

 

Schedule 2.01    —    Commitments Schedule 3.06    —    Disclosed Matters
Schedule 3.12    —    Subsidiaries Schedule 6.01    —    Existing Liens

EXHIBITS:

 

Exhibit A    —    Form of Assignment and Assumption Exhibit B    —    Form of
Subsidiary Guarantee Agreement Exhibit C-1    —    Form of U.S. Tax Certificate
(For Non-U.S. Lenders That Are Not Partnerships For U.S. Federal Income Tax
Purposes) Exhibit C-2    —    Form of U.S. Tax Certificate (For Non-U.S. Lenders
That Are Partnerships For U.S. Federal Income Tax Purposes) Exhibit C-3    —   
Form of U.S. Tax Certificate (For Non-U.S. Participants That Are Not
Partnerships For U.S. Federal Income Tax Purposes)

 

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Exhibit C-4    —    Form of U.S. Tax Certificate (For Non-U.S. Participants That
Are Partnerships For U.S. Federal Income Tax Purposes) Exhibit D    —    Form of
Compliance Certificate Exhibit E    —    Form of Solvency Certificate

 

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BRIDGE CREDIT AGREEMENT dated as of September 23, 2014, among REYNOLDS AMERICAN
INC. (the “Borrower”), the LENDERS party hereto, and JPMORGAN CHASE BANK, N.A.,
as Administrative Agent.

The parties hereto agree as follows:

ARTICLE I

Definitions

SECTION 1.01. Defined Terms. As used in this Agreement, the following terms have
the meanings specified below:

“ABR,” when used in reference to any Loan or Borrowing, refers to whether such
Loan, or the Loans comprising such Borrowing, are bearing interest at a rate
determined by reference to the Alternate Base Rate.

“Acquisition” means the acquisition by the Borrower, directly or indirectly
through one or more of its Subsidiaries, of all of the equity interests of
Lorillard pursuant to the Acquisition Agreement.

“Acquisition Agreement” means the Agreement and Plan of Merger, dated as of
July 15, 2014 (together with all exhibits, annexes, schedules and other
disclosure letters thereto, collectively as modified, amended, supplemented,
consented to or waived in accordance with Section 4.02(a)) by and among
Lorillard, the Borrower and Merger Sub.

“Acquisition Agreement Representations” means such representations and
warranties made by Lorillard in the Acquisition Agreement as are material to the
interests of the Lenders, but only to the extent that the Borrower (or Merger
Sub) has the right (taking into account applicable cure periods) to terminate
its (or Merger Sub’s) obligations under the Acquisition Agreement or to refuse
to consummate the Acquisition (in each case, in accordance with the terms
thereof) as a result of a breach of such representations and warranties in the
Acquisition Agreement (determined without regard to whether any notice is
required to be delivered by the Borrower).

“Adjusted LIBO Rate” means, with respect to any Eurodollar Borrowing for any
Interest Period, an interest rate per annum (rounded upwards, if necessary, to
the next 1/100 of 1%) equal to (a) the LIBO Rate for such Interest Period
multiplied by (b) the Statutory Reserve Rate.

“Administrative Agent” means JPMorgan Chase Bank, N.A. in its capacity as
administrative agent for the Lenders under this Agreement and the other Loan
Documents and its successors in such capacity.

“Administrative Questionnaire” means an Administrative Questionnaire in a form
supplied by the Administrative Agent.

“Affiliate” means, with respect to a specified Person, another Person that
directly, or indirectly through one or more intermediaries, Controls or is
Controlled by or is under common Control with the Person specified.

“Agreement” means this Bridge Credit Agreement, as modified, supplemented,
amended, restated (including any amendment and restatement hereof), extended or
renewed from time to time.

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“Alternate Base Rate” means, for any day, a rate per annum equal to the greatest
of (a) the Prime Rate in effect on such day, (b) the Federal Funds Effective
Rate in effect on such day plus  1⁄2 of 1% and (c) the Adjusted LIBO Rate for a
one month Interest Period on such day (or if such day is not a Business Day, the
immediately preceding Business Day) plus 1%, provided that, for the avoidance of
doubt, the Adjusted LIBO Rate for any day shall be based on the rate appearing
on the Reuters Page LIBOR01 (or on any successor or substitute page of such
page) at approximately 11:00 a.m. London time on such day. Any change in the
Alternate Base Rate due to a change in the Prime Rate, the Federal Funds
Effective Rate or the Adjusted LIBO Rate shall be effective from and including
the effective date of such change in the Prime Rate, the Federal Funds Effective
Rate or the Adjusted LIBO Rate, respectively. Each change in the Prime Rate
shall be effective as of the opening of business on the day such change in such
Prime Rate occurs.

“Ancillary Agreements” has the meaning assigned to such term in the Imperial
Purchase Agreement.

“Anti-Corruption Laws” means all laws, rules, and regulations of any
jurisdiction applicable to the Borrower or its Subsidiaries from time to time
concerning or relating to bribery or corruption.

“Anti-Terrorism Laws” has the meaning assigned to such term in Section 3.13(a).

“Applicable Percentage” means, with respect to any Lender, the percentage of the
total Commitments represented by such Lender’s Commitment or, after the Closing
Date, the percentage of the Outstanding Amount represented by such Lender’s
Loans, as applicable, at such time.

“Applicable Rate” means, for any day, with respect to any ABR Loan or Eurodollar
Loan, as the case may be, the applicable rate per annum set forth below under
the caption “ABR Spread” or “Eurodollar Spread,” as the case may be, based upon
the ratings by Moody’s and S&P, respectively, applicable on such date to the
Index Debt:

 

          Applicable Rate           Closing Date through 89 days
after Closing Date    90 days after Closing Date
through 179 days after
Closing Date    180 days after Closing Date
through 269 days after
Closing Date    270 days after Closing Date
and thereafter

Index Debt Rating
Levels

  

“ABR Spread”

   “Eurodollar
Spread”    “ABR
Spread”    “Eurodollar
Spread”    “ABR
Spread”    “Eurodollar
Spread”    “ABR
Spread”    “Eurodollar
Spread”

Category 1

Baa2 and BBB or higher

     50 bps    150 bps      75 bps    175 bps    100 bps    200 bps    125 bps
   225 bps

Category 2

Baa3 and BBB-

     75 bps    175 bps    100 bps    200 bps    125 bps    225 bps    150 bps   
250 bps

Category 3

Lower than Baa3 and BBB- (or no Index Debt Rating is available from either
Rating Agency)

   100 bps    200 bps    125 bps    225 bps    150 bps    250 bps    175 bps   
275 bps

For purposes of the foregoing, (a) if the ratings established or deemed to have
been established by Moody’s or S&P for any Index Debt shall fall within
different Categories, the Applicable Rate shall be based on the Category
corresponding to the higher (the highest Category being Category 1) of such
ratings, unless one of the two ratings is two or more Categories lower than the
other, in which case the Applicable Rate shall be determined by reference to the
Category next below that of the higher of the two ratings; (b) if any rating for
any Index Debt established or deemed to have been established by Moody’s or S&P
shall be changed (other than as a result of a change in the rating system of
Moody’s or S&P), such change shall be effective as of the date on which it is
first announced by the applicable rating agency, irrespective of when notice of
such change shall have been furnished by the Borrower to the Administrative
Agent and the Lenders pursuant to Section 5.01 or otherwise and (c) at all times
during which

 

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there shall exist any Event of Default, the Applicable Rate shall be determined
by reference to the Category 3. Each change in the Applicable Rate shall apply
during the period commencing on the effective date of such change and ending on
the date immediately preceding the effective date of the next such change. If
the rating system of Moody’s or S&P shall change, or if any such rating agency
shall cease to be in the business of rating corporate debt obligations, the
Borrower and the Lenders shall negotiate in good faith to amend the references
to specific ratings to reflect such changed rating system or the
non-availability of ratings from such rating agency, and pending the
effectiveness of any such amendment, the ratings of such rating agency most
recently in effect prior to such change or cessation shall be employed in
determining the Applicable Rate.

“Approved Fund” means any Person (other than a natural person) that is engaged
in making, purchasing, holding or investing in bank loans and similar extensions
of credit in the ordinary course of its business and that is administered or
managed by (a) a Lender, (b) an Affiliate of a Lender or (c) an entity or an
Affiliate of an entity that administers or manages a Lender.

“Asset Sale” means any Disposition of property or series of related Dispositions
of property (including as a result of casualty or condemnation) that yields Net
Cash Proceeds to the Borrower or any of its Subsidiaries, except for (i) the
sale of inventory, receivables or other assets, in each case, in the ordinary
course of business, (ii) the Specified Asset Dispositions, (iii) dispositions in
the ordinary course of business of the Borrower or any of its Subsidiaries of
obsolete equipment and other assets unfit for use or sale and (iv) other asset
sales and dispositions having Net Cash Proceeds up to $25,000,000 in the
aggregate.

“Assignment and Assumption” means an assignment and assumption agreement entered
into by a Lender and an assignee (with the consent of any party whose consent is
required by Section 9.04), and accepted by the Administrative Agent, in the form
of Exhibit A or any other form approved by the Administrative Agent.

“Attributable Debt” means, when used in connection with a sale and lease-back
transaction, at any date as of which the amount thereof is to be determined, the
product of (a) the net proceeds from such sale and lease-back transaction
multiplied by (b) a fraction, the numerator of which is the number of full years
of the term of the lease relating to the property involved in such sale and
lease-back transaction (without regard to any options to renew or extend such
term) remaining at the date of the making of such computation and the
denominator of which is the number of full years of the term of such lease
measured from the first day of such term.

“Availability End Date” means the first to occur of (i) the consummation of all
components of the Acquisition without the funding of the Loans hereunder,
(ii) the termination of the Acquisition Agreement in accordance with its terms
in the event that the Acquisition is not consummated, and (iii) 11:59 p.m. (New
York City time) on July 15, 2015, subject to automatic extension, without
further action by or consent of any parties hereto, for (x) an additional six
months to the extent the End Date (as such term is defined in the Acquisition
Agreement as in effect on the date hereof) is extended or deemed extended by six
months pursuant to the terms of the Acquisition Agreement or (y) up to 10
Business Days to the extent the End Date is extended or deemed extended pursuant
to the terms of the Acquisition Agreement as in effect on the date hereof.

“B&W Parent” means, collectively, (a) British American Tobacco p.l.c. and
(b) Brown & Williamson Holdings, Inc. (f/k/a Brown & Williamson Tobacco
Corporation), a Delaware corporation and an indirect, wholly owned subsidiary,
of British American Tobacco p.l.c.

 

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“BAT” means British American Tobacco p.l.c., a public limited company
incorporated under the laws of England and Wales, and any successor thereto.

“BAT Equity Issuance” means the issuance by the Borrower of additional shares of
its common stock to BAT (or one or more of its wholly owned subsidiaries) and
payment of the related purchase price therefor pursuant to the BAT Subscription
Agreement, which purchase price will in any event be in an aggregate amount of
approximately $4,700,000,000.

“BAT Subscription Agreement” means that certain Subscription and Support
Agreement dated as of July 15, 2014, among the Borrower, BAT and Brown &
Williamson Holdings Inc., as may be amended, restated, supplemented or otherwise
modified from time to time, pursuant to which BAT has agreed, directly or
indirectly through one or more of its wholly owned subsidiaries, to subscribe
for and purchase simultaneously with the consummation of the Acquisition, shares
of the Borrower’s common stock.

“Board” means the Board of Governors of the Federal Reserve System of the United
States of America.

“Board of Directors” means the board of directors of the Borrower or any duly
authorized committee of that board or any director or directors and/or officer
or officers of the Borrower to whom that board or committee shall have duly
delegated its authority.

“Borrower” has the meaning assigned to such term in the first paragraph of this
Agreement.

“Borrowing” means the borrowing of simultaneous Loans of the Type and, in the
case of Eurodollar Loans, having the same Interest Period made by each of the
Lenders pursuant to Section 2.01.

“Borrowing Request” means a request by the Borrower for a Borrowing in
accordance with Section 2.03.

“Business Day” means any day that is not a Saturday, Sunday or other day on
which commercial banks in New York City are authorized or required by law to
remain closed; provided that, when used in connection with a Eurodollar Loan,
the term “Business Day” shall also exclude any day on which banks are not open
for general business in London.

“Capital Lease Obligations” means, as to any Person, the obligations of such
Person to pay rent or other amounts under any lease of (or other arrangement
conveying the right to use) real or personal property, or a combination thereof,
which obligations are required to be classified and accounted for as capital
leases on a balance sheet of such Person under GAAP, and, for the purposes of
this Agreement, the amount of such obligations at any time shall be the
capitalized amount thereof at such time determined in accordance with GAAP.

“Change in Control” means the occurrence of any of the following events: (a) at
any time Continuing Directors shall not constitute a majority of the Board of
Directors, (b) any Person or “group” (within the meaning of Rule 13d-3 and 13d-5
of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) (other
than B&W Parent), shall acquire, directly or indirectly, beneficial ownership
(within the meaning of Rule 13d-3 and 13d-5 of the Exchange Act) of 30.0% or
more, on a fully diluted basis, of the economic or voting interest in the
Borrower’s capital stock, (c) B&W Parent and/or any other Person or “group”
(within the meaning of Rules 13d-3 and 13d-5 of the Exchange Act) shall have
obtained and exercised the power to elect or designate a majority of the Board
of Directors and (d) any “change of control” event under any Material
Indebtedness of the Borrower or any Material Subsidiary.

 

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“Change in Law” means (a) the adoption of any law, rule or regulation or treaty
after the Effective Date, (b) any change in any law, rule or regulation or
treaty or in the administration, interpretation or application thereof by any
Governmental Authority after the Effective Date or (c) compliance by any Lender
(or, for purposes of Section 2.14(b), by any lending office of such Lender or by
such Lender’s holding company, if any) with any request, guideline or directive
(whether or not having the force of law) of any Governmental Authority made or
issued after the Effective Date; provided, however, that notwithstanding
anything herein to the contrary, (i) the Dodd-Frank Wall Street Reform and
Consumer Protection Act and all requests, rules, guidelines, requirements and
directives thereunder, issued in connection therewith or in implementation
thereof, and (ii) all requests, rules, guidelines, requirements and directives
promulgated by the Bank for International Settlements, the Basel Committee on
Banking Supervision (or any successor or similar authority) or the United States
or foreign regulatory authorities, in each case pursuant to Basel III, shall in
each case be deemed to be a “Change in Law” regardless of the date enacted,
adopted, issued or implemented.

“Charges” has the meaning assigned to such term in Section 9.13.

“Citibank” means Citibank, N.A. and any successor corporation thereto by merger,
consolidation or otherwise.

“Closing Date” means the Business Day on or prior to the Availability End Date
on which all the conditions precedent in Section 4.02 are satisfied (or waived
in accordance with Section 9.02) and on which the Borrowings are made.

“Code” means the Internal Revenue Code of 1986, as amended from time to time.

“Commitment” means, with respect to each Lender, the commitment of such Lender
to make Loans hereunder pursuant to Section 2.01, as such commitment may be
increased or reduced from time to time pursuant to this Agreement. The initial
amount of each Lender’s Commitment is set forth on Schedule 2.01, or in the
Assignment and Assumption pursuant to which such Lender shall have assumed its
Commitment, as applicable. The initial aggregate amount of the Lenders’
Commitments is $9,000,000,000.

“Consolidated Debt” means, at any date, the aggregate principal amount of all
Indebtedness of the Borrower and its Subsidiaries at such date, determined on a
consolidated basis in accordance with GAAP; provided that the aggregate amount
available to be drawn (i.e., unfunded amounts) under all letters of credit,
acceptances and similar arrangements and all surety, appeal and litigation bonds
and similar obligations issued for the account of the Borrower or any of its
Subsidiaries (but excluding, for avoidance of doubt, all unpaid drawings or
other matured monetary obligations or reimbursement obligations owing in respect
of thereof) shall not be included in any determination of “Consolidated Debt.”

“Consolidated EBITDA” means, for any period, Consolidated Net Income for such
period plus, without duplication and (other than with respect to clause (I)(n)
below) to the extent reflected as a charge in the statement of such Consolidated
Net Income for such period, the sum of:

(I)(a) provision for all income taxes and foreign withholding taxes,
(b) interest expense, amortization or write-off of debt discount and debt
issuance costs and commissions, discounts and other fees and charges associated
with Indebtedness (including the Loans), (c) depreciation and amortization
expense, (d) amortization of intangibles (including, but not limited to,

 

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goodwill) and organization costs, (e) any extraordinary losses, (f) any non-cash
expenses or losses, (g) any losses on sales of assets outside of the ordinary
course of business (whether or not otherwise includable as a separate item in
the statement of such Consolidated Net Income for such period), (h) any cash
payment received during such period in respect of any non-cash item described in
clause (II)(a)(i) or (ii) below subsequent to the fiscal quarter in which the
relevant non-cash item was reflected as a gain or income in the statement of
Consolidated Net Income, (i) the amount of all cash payments received during
such period in respect of any settlement with respect to tobacco litigation
related liability which otherwise did not increase Consolidated Net Income for
such period or a prior period, (j) any losses for such period attributable to
early extinguishment of Indebtedness or net realized loss obligations under any
Swap Agreement, (k) non-recurring transaction fees, costs, expenses and charges
(including but not limited to investment banker, consulting, advisory and legal
fees) incurred in connection with the Transactions; provided that the aggregate
amount for all such items under this clause (k) shall not exceed $400,000,000 in
the aggregate during the term of this Agreement, (l) business optimization,
restructuring and transition expenses, costs, charges, accruals or reserves
incurred after the Closing Date in connection with any of the Transactions,
which for the avoidance of doubt shall include severance payments and costs,
legal defense and settlement costs (including any costs paid in satisfaction of
judgments), relocation costs, costs related to the closure, opening, curtailment
and/or consolidation of facilities, retention charges, systems establishment
costs, spin-off costs, integration costs, signing costs, retention and
completion bonuses, amortization of signing bonuses, inventory optimization
expenses, contract termination costs, transaction costs, costs related to entry
into new markets, consulting fees, recruiter fees, provided that the aggregate
amount for all such items under this clause (l) shall not exceed $500,000,000 in
the aggregate during the term of this Agreement, (m) any expenses, costs,
charges, accruals or reserves incurred in connection with any of the
Transactions pursuant to or in connection with any management or employee
benefit plan, including but not limited to curtailments or modifications to
pension and post-retirement employee benefit plans, and conversion costs and
excess pension charges, provided that the aggregate amount for all such items
under this clause (m) shall not exceed $100,000,000 in the aggregate during the
term of this Agreement, and (n) the amount of cost savings and synergies
projected by the Borrower in good faith to be reasonably anticipated to be
realized from actions taken prior to or during such period in connection with
any of the Transactions (calculated on a pro forma basis as though such cost
savings had been realized on the first day of such period, net of the amount of
actual benefits realized prior to or during such period from such actions);
provided that the aggregate amount under this clause (n) shall not exceed
$200,000,000 in the aggregate during any four fiscal quarter period (prior to
giving effect to such amount), all as determined on a consolidated basis for the
Borrower and its Subsidiaries for such period, minus

(II)(a) to the extent included in the statement of such Consolidated Net Income
for such period, the sum of (i) any extraordinary gain, (ii) any non-cash income
or gains, (iii) any gain on sales of assets outside of the ordinary course of
business (whether or not otherwise includable as a separate item in the
statement of such Consolidated Net Income for such period), and (iv) income tax
credits (to the extent not netted from income tax expense), (b) any cash
payments made during such period in respect of any non-cash items described in
clause (I)(d), (e) or (f) above subsequent to the fiscal quarter in which the
relevant non-cash item was reflected as a charge in the statement of
Consolidated Net Income, (c) the amount of all cash payments made by the
Borrower and its Subsidiaries during such period pursuant to any settlement with
respect to tobacco litigation related liability which otherwise did not reduce
Consolidated Net Income for such period or a prior period, all as determined on
a consolidated basis for the Borrower and its Subsidiaries for such period and
(d) net realized income or gains from obligations under Swap Agreements.

 

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For the purposes of calculating Consolidated EBITDA for any period of four
consecutive fiscal quarters (each, a “Reference Period”) pursuant to any
determination of the Consolidated Leverage Ratio or the Consolidated Interest
Coverage Ratio, (i) if at any time during such Reference Period (or, for
purposes of Section 6.05(c) only, during the period commencing on the first day
of such Reference Period and ending on or prior to such date of determination),
the Borrower or any Subsidiary shall have made any Material Disposition, the
Consolidated EBITDA for such Reference Period shall be reduced by an amount
equal to the Consolidated EBITDA (if positive) attributable to the property that
is the subject of such Material Disposition for such Reference Period or
increased by an amount equal to the Consolidated EBITDA (if negative)
attributable thereto for such Reference Period and (ii) if during such Reference
Period (or, for purposes of Section 6.05(c) only, during the period commencing
on the first day of such Reference Period and ending on or prior to such date of
determination), the Borrower or any Subsidiary shall have made a Material
Acquisition, Consolidated EBITDA for such Reference Period shall be calculated
after giving pro forma effect thereto (including for purposes of calculating
Consolidated EBITDA as if such Material Acquisition occurred on the first day of
such Reference Period, which pro forma calculation may include, among other
things, a reduction in costs and expenses (and a resulting increase in
Consolidated EBITDA) as a result of any transfer, disposition or sale of any
employees, assets or business or any other cost reducing measures undertaken by
the target of such Material Acquisition and/or any of its Subsidiaries during
the applicable Reference Period. As used in this definition, “Material
Acquisition” means any acquisition of property or series of related acquisitions
of property that (a) constitutes assets comprising all or substantially all of
an operating unit of a business or constitutes all or substantially all of the
Equity Interests of a Person and (b) involves the payment of consideration by
the Borrower and its Subsidiaries in excess of $250,000,000; and “Material
Disposition” means any disposition of property or series of related dispositions
of property that yields gross proceeds to the Borrower or any of its
Subsidiaries in excess of $250,000,000.

“Consolidated Interest Coverage Ratio” means, for any period, the ratio of
(a) Consolidated EBITDA for such period to (b) Consolidated Interest Expense for
such period.

“Consolidated Interest Expense” means, for any period, total cash interest
expense (including that attributable to Capital Lease Obligations) of the
Borrower and its Subsidiaries calculated on a consolidated basis for such period
with respect to all outstanding Indebtedness of the Borrower and its
Subsidiaries (including all commissions, discounts and other fees and charges
owed with respect to letters of credit and bankers’ acceptance financing and net
costs under Swap Agreements in respect of interest rates to the extent such net
costs are allocable to such period in accordance with GAAP). For the purposes of
calculating Consolidated Interest Expense for any Reference Period pursuant to
any determination of the Consolidated Interest Coverage Ratio, (i) all
Indebtedness incurred or issued during the relevant Reference Period (or, for
purposes of Section 6.05(c) only, during the period commencing on the first day
of such Reference Period and ending on or prior to such date of determination)
shall be deemed to have been incurred or issued (and the proceeds thereof
applied) on the first day of such Reference Period and remain outstanding
through such Reference Period, (ii) all Indebtedness (other than revolving
Indebtedness, except to the extent accompanied by a corresponding permanent
commitment reduction) permanently retired or redeemed during the relevant
Reference Period (or, for purposes of Section 6.05(c) only, during the period
commencing on the first day of such Reference Period and ending on or prior to
such date of determination) shall be deemed to have been retired or redeemed on
the first day of such Reference Period and remain retired through the entirety
of such Reference Period, and (iii) all Indebtedness assumed to be outstanding
pursuant to preceding clause (i) shall be deemed to have borne interest at
(x) the rate applicable thereto, in the case of fixed rate indebtedness, or
(y) the rates which would have been applicable thereto during the respective
Reference Period when same was deemed outstanding (for this purpose, using the
floating rate applicable thereto at the time of determination), in the case of
floating rate Indebtedness; provided that interest expense with respect to any
Indebtedness for periods while the same was actually outstanding during the
respective period shall be calculated using the actual rates applicable thereto
while same was actually outstanding.

 

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“Consolidated Leverage Ratio” means, as at the last day of any period, the ratio
of (a) Consolidated Debt on such day to (b) Consolidated EBITDA for such period.

“Consolidated Net Income” means, for any period, the consolidated net income (or
loss) of the Borrower and its Subsidiaries, determined on a consolidated basis
in accordance with GAAP; provided that there shall be excluded (i) the income
(or deficit) of any Person accrued prior to the date it becomes a Subsidiary of
the Borrower or is merged into or consolidated with the Borrower or any of its
Subsidiaries, subject to the second sentence of the definition of “Consolidated
EBITDA,” (ii) the income (or deficit) of any Person (other than a Subsidiary of
the Borrower) in which the Borrower or any of its Subsidiaries has an ownership
interest, except to the extent that any such income is actually received by the
Borrower or such Subsidiary in the form of dividends or similar distributions
and (iii) the undistributed earnings of any Subsidiary of the Borrower to the
extent that the declaration or payment of dividends or similar distributions by
such Subsidiary is not at the time permitted by the terms of any Contractual
Obligation or Requirement of Law applicable to such Subsidiary.

“Consolidated Net Worth” means, at any date of determination, the consolidated
shareholders’ equity of the Borrower, as set forth on the then most recently
available consolidated balance sheet of the Borrower and its consolidated
Subsidiaries delivered pursuant to Section 5.01(a) or (b).

“Continuing Director” means, at any date, an individual (a) who is a member of
the Board of Directors on the Effective Date, (b) who, as at such date, has been
a member of the Board of Directors for at least the twelve preceding months, or
(c) who has been nominated for election, elected, designated or appointed to be
a member of the Board of Directors by either (i) B&W Parent pursuant to any
governance agreement, including, without limitation, the Governance Agreement,
or (ii) a majority of the other “Continuing Directors” then in office.

“Contractual Obligation” means, as to any Person, any provision of any security
issued by such Person or of any agreement, instrument or other undertaking to
which such Person is a party or by which it or any of its property is bound.

“Control” means the possession, directly or indirectly, of the power to direct
or cause the direction of the management or policies of a Person, whether
through the ability to exercise voting power, by contract or otherwise.
“Controlling” and “Controlled” have meanings correlative thereto.

“Default” means any event or condition which constitutes an Event of Default or
which upon notice, lapse of time or both would, unless cured or waived, become
an Event of Default.

“Defaulting Lender” means any Lender that has (a) failed (i) on the date
required to be funded or paid, to fund any portion of its Loans or (ii) within
three Business Days of the date required to be funded or paid, to pay over to
the Administrative Agent or any other Lender any other amount required to be
paid by it hereunder, unless (A) in the case of clause (i) above, such Lender
notifies the Administrative Agent and the Borrower in writing that such failure
is the result of such Lender’s good faith determination that a condition
precedent to funding (specifically identified and including the particular
default, if any) has not been satisfied or (B) in the case of clause (ii) above,
such Lender notifies the Administrative Agent and the Borrower in writing that
the failure to pay such other amount is the subject of a good faith dispute,
(b) notified the Borrower, the Administrative Agent or any Lender in writing
that it does not intend to comply with any of its funding obligations under this
Agreement or has made a public statement to the effect that it does not intend
to comply with its funding obligations under this Agreement or generally

 

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under other agreements in which it commits to extend credit (unless such writing
or public statement indicates that such position is based on such Lender’s good
faith determination that a condition precedent (specifically identified and
including the particular default, if any) to funding a Loan under this Agreement
cannot be satisfied), (c) failed, within three Business Days after a good faith
request by the Borrower or the Administrative Agent to provide a certification
in writing from such Lender’s chief financial officer that it will comply with
the terms of this Agreement relating to its obligations to fund prospective
Loans; provided that such Lender shall cease to be a Defaulting Lender pursuant
to this clause (c) upon the Borrower’s or the Administrative Agent’s, as the
case may be, receipt of such certification in form and substance satisfactory to
such Person, or (d) become the subject of a bankruptcy or insolvency proceeding,
or has had a receiver, conservator, trustee, administrator, assignee for the
benefit of creditors or similar Person charged with reorganization or
liquidation of its business or custodian, appointed for it, or has taken any
action in furtherance of, or indicating its consent to, approval of or
acquiescence in any such proceeding or appointment or has a parent company that
has become the subject of a bankruptcy or insolvency proceeding, or has had a
receiver, conservator, trustee, administrator, assignee for the benefit of
creditors or similar Person charged with reorganization or liquidation of its
business or custodian appointed for it, or has taken any action in furtherance
of, or indicating its consent to, approval of or acquiescence in any such
proceeding or appointment; provided that a Lender shall not be a Defaulting
Lender solely by virtue of the ownership, or the acquisition of any ownership,
interest in such Lender or a parent company thereof or the exercise of control
over such Lender or parent company thereof by a Governmental Authority or
instrumentality thereof.

“Designated Person” means (a) a Person that is listed in the annex to, or is
otherwise subject to the provisions of, the Executive Order; (b) a Person owned
or controlled by, or acting for or on behalf of, any Person that is listed in
the annex to, or is otherwise subject to the provisions of, the Executive Order;
(c) a Person with which any Lender is prohibited from dealing or otherwise
engaging in any transaction by any Anti-Terrorism Law; (d) a Person that
commits, threatens or conspires to commit or supports “terrorism” as defined in
the Executive Order; (e) a Person that is named as a “specially designated
national and blocked person” on the most current list published by OFAC at its
official website or any replacement website or other replacement official
publication of such list, (f) any Person listed in any Sanctions-related list of
designated Persons maintained by the U.S. Department of State, the United
Nations Security Council, the European Union or any European Union member state,
(g) any Person operating, organized or resident in a Sanctioned Country or
(h) any Person owned or controlled by any such Person or Persons described in
the foregoing clauses (e), (f) or (g).

“Disclosed Matters” means the actions, suits and proceedings disclosed in
Schedule 3.06.

“Disposition” means the sale, transfer, license (excluding any license of
intellectual property in the ordinary course of business), lease or other
disposition (including any sale and leaseback transaction) of any property by
any Person, including any sale, assignment, transfer or other disposal, with or
without recourse, of any notes or accounts receivable or any rights and claims
associated therewith but excluding any (a) equity issuances by the Borrower or
any Subsidiary thereof, (b) dividends or distributions to any holders of Equity
Interests of the Borrower or any Subsidiary thereof, (c) transfers of cash or
cash equivalents, (d) intercompany transfers of assets (including Equity
Interests) by and between Borrower and any Subsidiary thereof or between any
Subsidiary of Borrower and another Subsidiary of Borrower permitted under
Section 6.03; and (e) Restricted Payments permitted under Section 6.05.

“Domestic Subsidiary” of any Person means any Subsidiary of such Person
incorporated or organized in the United States of America or any State or
territory thereof, or the District of Columbia.

 

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“Duration Fee” has the meaning assigned to such term in Section 2.11(c).

“Duration Fee Rate” shall mean a rate determined in accordance with the table
set forth below:

 

Duration Fees

90 days after the

Closing Date

  

180 days after the

Closing Date

  

270 days after the

Closing Date

0.50%    0.75%    1.00%

“Effective Date” means the date on which the conditions specified in
Section 4.01 are satisfied (or waived in accordance with Section 9.02).

“EMU Legislation” means the legislative measures of the European Council for the
introduction of, changeover to or operation of a single or unified European
currency.

“Environmental Laws” means all laws, rules, regulations, codes, ordinances,
orders, decrees, judgments, injunctions, notices or binding agreements issued,
promulgated or entered into by any Governmental Authority, relating in any way
to the environment, preservation or reclamation of natural resources, the
management, release or threatened release of any Hazardous Material or to health
and safety matters.

“Environmental Liability” means any liability, contingent or otherwise
(including any liability for damages, costs of environmental remediation, fines,
penalties or indemnities), of the Borrower or any Subsidiary directly or
indirectly resulting from or based upon (a) violation of any Environmental Law,
(b) the generation, use, handling, transportation, storage, treatment or
disposal of any Hazardous Materials, (c) exposure to any Hazardous Materials,
(d) the release or threatened release of any Hazardous Materials into the
environment or (e) any contract, agreement or other consensual arrangement
pursuant to which liability is assumed or imposed with respect to any of the
foregoing.

“Equity Consideration” has the meaning assigned to such term in the definition
of “Transactions”.

“Equity Interests” means shares of capital stock, partnership interests,
membership interests in a limited liability company, beneficial interests in a
trust or other equity ownership interests in a Person, and any warrants, options
or other rights entitling the holder thereof to purchase or acquire any such
equity interest.

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended
from time to time.

“ERISA Affiliate” means any trade or business (whether or not incorporated)
that, together with the Borrower, is treated as a single employer under
Section 414(b) or (c) of the Code or, solely for purposes of Section 302 of
ERISA and Section 412 of the Code, is treated as a single employer under
Section 414 of the Code.

“ERISA Event” means (a) any “reportable event,” as defined in Section 4043 of
ERISA or the regulations issued thereunder with respect to a Plan (other than an
event for which the 30-day notice period is waived); (b) the existence with
respect to any Multiemployer Plan of an “accumulated funding deficiency” (as
defined in Section 431 of the Code or Section 304 of ERISA), whether or not
waived;

 

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(c) a determination is made that any Plan is, or is reasonably expected to be,
considered an at-risk plan within the meaning of Section 430 of the Code or
Section 303 of ERISA; (d) the receipt by the Borrower or an ERISA Affiliate of
any notice, or the receipt by a Multiemployer Plan from the Borrower or an ERISA
Affiliate of any notice, that a Multiemployer Plan is in endangered or critical
status under Section 305 of ERISA; (e) the filing pursuant to Section 412(c) of
the Code or Section 302(c) of ERISA of an application for a waiver of the
minimum funding standard with respect to any Plan; (f) the incurrence by the
Borrower or any of its ERISA Affiliates of any liability under Title IV of ERISA
with respect to the termination of any Plan; (g) the receipt by the Borrower or
any of its ERISA Affiliates from the PBGC or a plan administrator of any notice
relating to an intention to terminate any Plan or Plans or to appoint a trustee
to administer any Plan; (h) the incurrence by the Borrower or any of its ERISA
Affiliates of any liability with respect to the withdrawal or partial withdrawal
from any Plan or Multiemployer Plan; or (i) the receipt by the Borrower or any
of its ERISA Affiliates of any notice, or the receipt by any Multiemployer Plan
from the Borrower or any of its ERISA Affiliates of any notice, concerning the
imposition of Withdrawal Liability or a determination that a Multiemployer Plan
is, or is expected to be, insolvent or in reorganization, within the meaning of
Title IV of ERISA.

“Eurodollar,” when used in reference to any Loan or Borrowing, refers to whether
such Loan, or the Loans comprising such Borrowing, are bearing interest at a
rate determined by reference to the Adjusted LIBO Rate.

“Event of Default” has the meaning assigned to such term in Article VII.

“Excluded Indebtedness” means (i) intercompany Indebtedness among the Borrower
and/or its Subsidiaries, (ii) borrowings under the Existing Credit Agreement for
ordinary course working capital purposes, and borrowings under the Existing
Credit Agreement to finance up to $500,000,000 of the Acquisition (including any
fees and expenses incurred in connection therewith), (iii) Indebtedness incurred
for the purpose of refinancing of existing Indebtedness of the Borrower and its
Subsidiaries, including but not limited to the refinancing of existing notes or
bonds (other than the Notes), and (iv) other Indebtedness (other than the Notes)
in an aggregate principal amount up to $300,000,000.

“Excluded Taxes” means, with respect to any payment made by any Loan Party under
this Agreement or any other Loan Document, any of the following Taxes imposed on
or with respect to a Recipient: (a) income, franchise or other Taxes imposed on
(or measured by) its net income, profits, overall gross income or receipts by
the United States of America (or any political subdivision thereof), or by the
jurisdiction under the laws of which such Recipient is organized or in which its
principal office is located or, in the case of any Lender, in which its
applicable lending office is located, (b) any branch profits Taxes imposed by
the United States of America or any similar Taxes imposed by any other
jurisdiction listed in clause (a), (c) in the case of a Non-U.S. Lender (other
than an assignee pursuant to a request by the Borrower under Section 2.18(b)),
any U.S. Federal withholding Taxes resulting from any law in effect on the date
such Non-U.S. Lender becomes a party to this Agreement (or designates a new
lending office) or is attributable to such Non-U.S. Lender’s failure to comply
with Section 2.16(f)(i)-(ii), except to the extent that such Non-U.S. Lender (or
its assignor, if any) was entitled, at the time of designation of a new lending
office (or assignment), to receive additional amounts from the Borrower with
respect to such withholding Taxes pursuant to Section 2.16(a), and (d) any
withholding tax imposed under FATCA.

“Executive Order” has the meaning assigned to such term in Section 3.13(a).

“Exempted Debt” means the sum, without duplication, of the following items
outstanding as of the date Exempted Debt is being determined: (a) Indebtedness
of the Borrower and its Subsidiaries incurred after the date hereof and secured
by Liens created, assumed or otherwise incurred or permitted to exist pursuant
to Section 6.01(b); and (b) Attributable Debt of the Borrower and its
Subsidiaries in respect of all sale and lease-back transactions with regard to
any Principal Property entered into pursuant to Section 6.02(b).

 

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“Existing Credit Agreement” means the credit facility evidenced by the Credit
Agreement, dated as of October 8, 2013, among the Borrower, various lending
institutions and JPMCB, as Administrative Agent, as in effect on the Effective
Date and any amendments, supplements, restatements, modifications, replacements,
refinancings, refundings, renewals or extensions thereof.

“Existing Liens” means the Liens on the assets and properties of the Borrower
and its Subsidiaries (including Liens on the assets and properties of Lorillard
and its Subsidiaries) outstanding on the Effective Date and set forth in
Schedule 6.01; provided that to the extent any change occurs between the
Effective Date and the Closing Date solely with respect to Liens that are
specifically permitted to be incurred by Lorillard or its Subsidiaries pursuant
to the terms of the Acquisition Agreement (as in effect on the date hereof)
which would make the contents of such Schedule 6.01 incomplete as of the Closing
Date as a result thereof, the Borrower may deliver to the Administrative Agent
an updated version of such schedule on or prior to the Closing Date to reflect
such additional Liens, which updated version shall replace the version of such
schedule delivered on the Effective Date without any requirement for any
amendment or any consent by the Administrative Agent or any Lender.

“Existing Senior Notes Indentures” means that certain Indenture, dated as of
May 31, 2006, by and among the Borrower, as issuer, certain Subsidiaries of the
Borrower, as guarantors, and The Bank of New York Trust Company, N.A., as
trustee, as in effect on the Effective Date and as the same may be amended,
modified and/or supplemented from time to time.

“Facility” means the credit facility evidenced by this Agreement.

“FATCA” means Sections 1471 through 1474 of the Code, as of the date of this
Agreement and any regulations or official interpretations thereof.

“Federal Funds Effective Rate” means, for any day, the weighted average (rounded
upwards, if necessary, to the next 1/100 of 1%) of the rates on overnight
Federal funds transactions with members of the Federal Reserve System arranged
by Federal funds brokers, as published on the next succeeding Business Day by
the Federal Reserve Bank of New York, or, if such rate is not so published for
any day that is a Business Day, the average (rounded upwards, if necessary, to
the next 1/100 of 1%) of the quotations for such day for such transactions
received by the Administrative Agent from three Federal funds brokers of
recognized standing selected by it.

“Fee Letters” means, collectively, (a) the letter agreement dated July 15, 2014
among the Borrower, JPMCB, J.P. Morgan Securities LLC and Citigroup Global
Markets Inc. and (b) schedule I of each Designation of Additional Lenders, dated
August 6, 2014, among the Borrower, JPMCB, J.P. Morgan Securities LLC, Citigroup
Global Markets Inc. and the other Lenders parties thereto.

“Financial Officer” means the chief financial officer, principal accounting
officer, treasurer or controller of the Borrower.

“Fitch” means Fitch Ratings.

“Foreign Subsidiary” of any Person means any Subsidiary of such Person that is
not a Domestic Subsidiary.

 

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“Funded Debt” means all Indebtedness for borrowed money, including purchase
money indebtedness, having a maturity of more than one year from the date of its
creation or having a maturity of less than one year but by its terms being
renewable or extendible, at the option of the obligor in respect thereof, beyond
one year from its creation.

“Funding Fee” has the meaning assigned to such term in Section 2.11(b).

“GAAP” means generally accepted accounting principles in the United States of
America as in effect from time to time; provided that determinations in
accordance with GAAP shall be subject to the requirements of Section 1.04.

“Governance Agreement” means that certain Governance Agreement, dated as of
July 30, 2004, by and among the Borrower, Brown & Williamson Holdings, Inc. and
British American Tobacco p.l.c., as amended, supplemented or otherwise modified
from time to time.

“Governmental Authority” means the government of the United States of America,
any other nation or any political subdivision thereof, whether state or local,
and any agency, authority, administration, instrumentality, regulatory body,
court, central bank or other entity exercising executive, legislative, judicial,
taxing, regulatory or administrative powers or functions of or pertaining to
government (including any supra-national bodies such as the European Union or
the European Central Bank) and any group or body charged with setting financial
accounting or regulatory capital rules or standards.

“Guarantee” of or by any Person (the “guarantor”) means any obligation,
contingent or otherwise, of the guarantor guaranteeing or having the economic
effect of guaranteeing any Indebtedness or other obligation (the “primary
obligation”) of any other Person (the “primary obligor”) in any manner, whether
directly or indirectly, and including any obligation of the guarantor, direct or
indirect, (a) to purchase or pay (or advance or supply funds for the purchase or
payment of) such primary obligation or to purchase (or to advance or supply
funds for the purchase of) any security for the payment thereof, (b) to purchase
or lease property, securities or services for the purpose of assuring the owner
of such primary obligation of the payment thereof, (c) to maintain working
capital, equity capital or any other financial statement condition or liquidity
of the primary obligor so as to enable the primary obligor to pay such primary
obligation or (d) as an account party in respect of any letter of credit or
letter of guaranty issued to support such primary obligation; provided, that the
term Guarantee shall not include endorsements for collection or deposit in the
ordinary course of business. The amount of any Guarantee shall be deemed to be
an amount equal to the lesser of (x) the maximum stated or determinable amount
of such Guarantee and (y) the stated or determinable amount of the primary
obligation in respect of which such Guarantee is made or, if not stated or
determinable, the maximum reasonably anticipated liability in respect thereof
(assuming such Person is required to perform thereunder) as determined by such
Person in good faith.

“Hazardous Materials” means all explosive or radioactive substances or wastes
and all hazardous or toxic substances, wastes or other pollutants, including
petroleum or petroleum distillates, asbestos or asbestos containing materials,
polychlorinated biphenyls, radon gas, infectious or medical wastes and all other
substances or wastes of any nature regulated pursuant to any Environmental Law.

“Impacted Interest Period” has the meaning assigned to such term in the
definition of “LIBO Rate.”

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

 

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“Imperial Divestiture Documents” means the Imperial Purchase Agreement, the
Imperial Transfer Agreement, and each other agreement, instrument or other
document heretofore, now or hereafter entered into in connection therewith, in
each case as may be amended, restated, supplemented or otherwise modified from
time to time.

“Imperial Purchase Agreement” means that certain Asset Purchase Agreement, dated
as of July 15, 2014 (together with all exhibits, annexes, schedules and other
disclosure letters thereto, collectively as modified, amended, supplemented,
consent to or waived) by and among the Borrower, Lignum-2, L.L.C., and Imperial,
as may be amended, restated, supplemented, consented to or otherwise modified
from time to time.

“Imperial Transfer Agreement” means that certain Transfer Agreement, dated as of
July 15, 2014, by and between Lignum-2, L.L.C. and Lorillard, as may be amended,
restated, supplemented or otherwise modified from time to time.

“Indebtedness” means, of any Person at any date, without duplication, (a) all
indebtedness of such Person for borrowed money or with respect to deposits or
advances of any kind, (b) all obligations of such Person for the deferred
purchase price of property or services (other than current trade payables and
accrued expenses incurred in the ordinary course of such Person’s business and
any obligation of the Borrower or any Subsidiary thereof to purchase tobacco
and/or other products, services and produce utilized in its business pursuant to
agreements entered into in the ordinary course of business on a basis consistent
with the Borrower’s or such Subsidiary’s past practices or then current industry
practices), (c) all obligations of such Person evidenced by notes, bonds,
debentures or other similar instruments, (d) all indebtedness created or arising
under any conditional sale or other title retention agreement with respect to
property acquired by such Person (even though the rights and remedies of the
seller or lender under such agreement in the event of default are limited to
repossession or sale of such property), (e) all Capital Lease Obligations of
such Person, (f) all obligations of such Person, contingent or otherwise, as an
account party or applicant under or in respect of acceptances, letters of credit
or similar arrangements, (g) the maximum amount available to be drawn or paid
under all surety, appeal and litigation bonds and similar obligations issued for
the account of such Person and all unreimbursed payments in respect of such
surety, appeal and litigation bonds and similar obligations, (h) all Guarantees
by such Person in respect of obligations of the kind referred to in clauses
(a) through (g) above, and (i) all obligations of the kind referred to in
clauses (a) through (h) above secured by (or for which the holder of such
obligation has an existing right, contingent or otherwise, to be secured by) any
Lien on property (including accounts and contract rights) owned by such Person,
whether or not such Person has assumed or become liable for the payment of such
obligation. The Indebtedness of any Person shall include the Indebtedness of any
other entity (including any partnership in which such Person is a general
partner) to the extent such Person is liable therefor as a result of such
Person’s ownership interest in or other relationship with such entity, except to
the extent the terms of such Indebtedness expressly provide that such Person is
not liable therefor.

“Indemnified Taxes” means (a) Taxes, other than Excluded Taxes, imposed on or
with respect to any payment made by any Loan Party under this Agreement or any
other Loan Document and (b) Other Taxes.

“Indemnitee” has the meaning assigned to such term in Section 9.03(b).

“Index Debt” means senior, unsecured, long-term Indebtedness for borrowed money
of the Borrower that is not guaranteed by any other Person (other than a
Subsidiary Guarantor) or subject to any other credit enhancement.

 

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“Information” has the meaning assigned to such term in Section 9.12(a).

“Interest Election Request” means a request by the Borrower to convert or
continue a Borrowing in accordance with Section 2.07.

“Interest Payment Date” means (a) with respect to any ABR Loan, the last day of
each March, June, September and December and (b) with respect to any Eurodollar
Loan, the last day of the Interest Period applicable to the Borrowing of which
such Loan is a part and, in the case of a Eurodollar Borrowing with an Interest
Period of more than three months’ duration, each day prior to the last day of
such Interest Period that occurs at intervals of three months’ duration after
the first day of such Interest Period.

“Interest Period” means with respect to any Eurodollar Borrowing, the period
commencing on the date of such Borrowing and ending on the numerically
corresponding day in the calendar month that is one, two, three or six months
thereafter (or, if agreed to by the Administrative Agent and each Lender, such
other day occurring less than one month after such Borrowing date), as the
Borrower may elect; provided, that (i) if any Interest Period would end on a day
other than a Business Day, such Interest Period shall be extended to the next
succeeding Business Day unless, in the case of a Eurodollar Borrowing only, such
next succeeding Business Day would fall in the next calendar month, in which
case such Interest Period shall end on the next preceding Business Day and
(ii) any Interest Period pertaining to a Eurodollar Borrowing that commences on
the last Business Day of a calendar month (or on a day for which there is no
numerically corresponding day in the last calendar month of such Interest
Period) shall end on the last Business Day of the last calendar month of such
Interest Period. For purposes hereof, the date of a Borrowing initially shall be
the date on which such Borrowing is made and, thereafter, shall be the effective
date of the most recent conversion or continuation of such Borrowing.

“Interpolated Rate” means, at any time, for any Interest Period, the rate per
annum (rounded to the same number of decimal places as the relevant LIBOR Screen
Rates) determined by the Administrative Agent (which determination shall be
conclusive and binding absent manifest error) to be equal to the rate that
results from interpolating on a linear basis between: (a) the LIBOR Screen Rate
(for the longest period for which the LIBOR Screen Rate is available) that is
shorter than the Impacted Interest Period and (b) the LIBOR Screen Rate for the
shortest period (for which such LIBOR Screen Rate is available) that exceeds the
Impacted Interest Period, in each case, as of approximately 11:00 a.m., London
time, two Business Days prior to the commencement of such Interest Period.

“Investment Bank” means, collectively, those investment banks party to that
certain Engagement Letter, dated July 15, 2014, among the Company and the other
parties thereto.

“JPMCB” means JPMorgan Chase Bank, N.A. and any successor corporation thereto by
merger, consolidation or otherwise.

“Lead Agents” means the Administrative Agent and the Syndication Agent.

“Lenders” means the Persons listed on Schedule 2.01 and any other Person that
shall have become a party hereto pursuant to an Assignment and Assumption, other
than any such Person that ceases to be a party hereto pursuant to an Assignment
and Assumption.

“LIBO Rate” means, with respect to any Eurodollar Borrowing for any applicable
Interest Period, the LIBOR Screen Rate, as determined by the Administrative
Agent from time to time for purposes of providing quotations of interest rates
applicable to U.S. Dollar deposits in the London interbank market at
approximately 11:00 a.m., London time, two Business Days prior to the
commencement of such

 

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Interest Period; provided that if the LIBOR Screen Rate shall not be available
at such time for such Interest Period (an “Impacted Interest Period”) then the
LIBO Rate shall be the Interpolated Rate; provided that if any Interpolated Rate
shall be less than zero, such rate shall be deemed to be zero for purposes of
this Agreement.

“LIBOR Screen Rate” means the London interbank offered rate administered by ICE
Benchmark Administration Limited (or any other Person that takes over the
administration of such rate) for U.S. Dollar deposits for a period equal in
length to such Interest Period as displayed on pages LIBOR01 or LIBOR02 of the
Reuters screen that displays such rate (or, in the event such rate does not
appear on a Reuters page or screen, on any successor or substitute page on such
screen that displays such rate, or on the appropriate page of such other
information service that publishes such rate as shall be selected by the
Administrative Agent from time to time in its reasonable discretion) at
approximately 11:00 a.m., London time, two Business Days prior to the
commencement of such Interest Period; provided, that, if any LIBOR Screen Rate
shall be less than zero, such rate shall be deemed to be zero for purposes of
this Agreement.

“Lien” means, with respect to any asset, (a) any mortgage, deed of trust, lien,
pledge, hypothecation, encumbrance, charge or security interest in, on or of
such asset and (b) the interest of a vendor or a lessor under any conditional
sale agreement, capital lease or title retention agreement (or any financing
lease having substantially the same economic effect as any of the foregoing)
relating to such asset.

“Litigation Bond” means any surety bond, supersedeas bond, judgment bond or
other bond or insurance policy issued for bonding litigation judgments for
appeal.

“Loan” means a loan made pursuant to Section 2.01.

“Loan Documents” means this Agreement, any promissory note of the Borrower
issued as described in Section 2.09(f) and, upon the execution and delivery
thereof, the Subsidiary Guarantee Agreement and the Fee Letters.

“Loan Parties” means the Borrower and each Subsidiary Guarantor.

“Loans” means the loans made by the Lenders to the Borrower pursuant to this
Agreement.

“Lorillard” means Lorillard, Inc., a Delaware corporation, and any successor
thereto.

“Lorillard Disclosure Letter” means the “Company Disclosure Letter” as defined
in the Acquisition Agreement (as in effect on the date hereof and as such
agreement may otherwise be amended or modified from time to time subject to
Section 4.02(a) hereof).

“Lorillard Material Adverse Effect” means a “Company Material Adverse Effect” as
defined in the Acquisition Agreement (as in effect on the date hereof and as
such agreement may otherwise be amended or modified from time to time subject to
Section 4.02(a) hereof).

“Lorillard SEC Documents” means the “Company SEC Documents” as defined in the
Acquisition Agreement (as in effect on the date hereof and as such agreement may
otherwise be amended or modified from time to time subject to Section 4.02(a)
hereof).

“Margin Stock” has the meaning assigned to such term in Regulation U.

 

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“Marketable Investments” means, as to any Person, (a) securities issued or
directly and fully guaranteed or insured by the United States or any agency or
instrumentality thereof having maturities of not more than two years from the
date of acquisition, (b) marketable direct obligations issued by any state of
the United States or any political subdivision of any such state or any public
instrumentality thereof maturing within two years from the date of acquisition
thereof and, at the time of acquisition, having one of the two highest ratings
obtainable from S&P, Moody’s or Fitch, (c) U.S. Dollar denominated domestic and
Eurodollar time deposits, domestic and Yankee certificates of deposit and bank
obligations and bankers acceptances of any Lender or any commercial bank having,
or which is the principal banking subsidiary of a bank holding company having, a
long-term unsecured debt rating of at least “A” or the equivalent thereof from
S&P or Fitch or “A2” or the equivalent thereof from Moody’s with maturities of
not more than two years from the date of acquisition by such Person,
(d) repurchase obligations with a term of not more than one year and
collateralized with U.S. Treasury, U.S. government agency or other permitted
investments consistent with the Borrower’s corporate guidelines and which have a
collateral margin of at least 102.0%, marked to market daily, (e) commercial
paper, extendable commercial notes and master notes issued by any Person
incorporated in the United States and euro-commercial paper of domestic and
foreign companies rated at least A-1 or the equivalent thereof by S&P or at
least P-1 or the equivalent thereof by Moody’s or at least F-1 by Fitch and in
each case maturing not more than 397 days after the date of acquisition by such
Person, (f) U.S. Dollar denominated commercial paper or Canadian dollar
commercial paper of Canadian companies and government obligations of Canada
whose commercial paper is rated R-1 by Dominion Bond Rating Service,
(g) investments in 2a-7 money market funds, (h) corporate bonds and medium term
notes rated at least “A” by S&P and/or Fitch and/or “A2” by Moody’s with
maturities of not more than two years from the date of acquisition by such
Person, (i) asset-backed securities and mortgage-backed securities rated “A” or
better by any of S&P, Moody’s or Fitch with maturities or rate reset dates of
not more than two years from the date of acquisition by such Person, (j) taxable
money market preferred (including but not limited to taxable auction debt)
instruments rated at least “A” by S&P and/or Moody’s and/or Fitch and redeemable
at par with a rollover period no longer than six months, (k) tax exempt debt and
par value preferred instruments rated at least “A” or the equivalent by S&P
and/or Moody’s and/or Fitch and redeemable at par with a rollover period no
longer than six months, (l) domestic and international equity and bond funds
(including indexed funds) with a “market capitalization” or “assets under
management” of not less than $500,000,000, (m) separate account portfolios
managed by registered investment advisors with guidelines adhering substantially
to the securities above (it being understood, however, that, for purposes of
clause (h) above, a bond portfolio that holds corporate bonds and medium term
notes rated at least “BBB” by S&P and/or Fitch and/or “Baa2” by Moody’s (and
with maturities of not more than two years from the date of acquisition) shall
be considered to adhere “substantially to the guidelines” in clause (h) above,
so long as such bond portfolio holds securities that (on a blended basis)
satisfy the rating requirements for securities of the type described in clause
(h) above), and (n) separate account portfolios which (i) constitute “current
assets” within the meaning of GAAP, (ii) are managed by a registered investment
advisor and (iii) invest in securities of the type described in clauses (a) and
(b) above, except that the underlying securities may have maturities in excess
of two years, so long as the underlying securities held in such account
portfolio have an average duration of not more than five years; provided that
the fair market value of all funds of the type described in this clause
(n) owned or held by the Borrower and its Subsidiaries shall not exceed
$500,000,000.

“Master Settlement Agreement” means (a) that certain Master Settlement
Agreement, entered into on November 23, 1998, by the major U.S. cigarette
manufacturers, including R.J. Reynolds Tobacco Company and Brown & Williamson
Holdings, Inc. (f/k/a Brown & Williamson Tobacco Corporation), with attorneys
general representing the remaining 46 states, the District of Columbia, Puerto
Rico, Guam, the Virgin Islands, American Samoa and the Northern Marianas, and
(b) the prior settlement agreements by the major U.S. cigarette manufacturers,
including R.J. Reynolds Tobacco Company and B&W Parent, with attorneys general
representing Florida, Mississippi, Minnesota and Texas.

 

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“Material Adverse Effect” means a material adverse effect on (a) the operations,
business, property, assets or financial condition of the Borrower and its
Subsidiaries, taken as a whole, and/or (b) the rights or remedies of the
Administrative Agent and the Lenders or the ability of any Loan Party to perform
its obligations to the Administrative Agent or the Lenders hereunder or under
any other Loan Document to which it is party.

“Material Indebtedness” means Indebtedness (other than the Loans), or
obligations in respect of one or more Swap Agreements, of any one or more of the
Borrower and its Subsidiaries in an aggregate principal amount exceeding
$200,000,000. For purposes of determining Material Indebtedness, the “principal
amount” of the obligations of the Borrower or any Subsidiary in respect of any
Swap Agreement at any time shall be the maximum aggregate amount (giving effect
to any netting agreements) that the Borrower or such Subsidiary would be
required to pay if such Swap Agreement were terminated at such time.

“Material Subsidiary” means, as of any date of determination on and after the
Effective Date, any Subsidiary that has (a) consolidated total revenues for the
then most recent fiscal year for which financial statements have been (or are
required to be) furnished pursuant to Section 5.01(a) (and, upon written notice
by the Administrative Agent to the Borrower, for the period of four consecutive
fiscal quarters ended prior to the date on which financial statements have been
(or are required to be) furnished pursuant to Section 5.01(b) for the fiscal
quarter ended June 30) which equal or exceed 10.0% of the consolidated total
revenues of the Borrower and its Subsidiaries for such period or
(b) consolidated total assets at the last day of the then most recent fiscal
year for which financial statements have been (or are required to be) furnished
pursuant to Section 5.01(a) (and, upon written notice by the Administrative
Agent to the Borrower, at the last day of the period of four consecutive fiscal
quarters ended prior to the date on which financial statements have been (or are
required to be) furnished pursuant to Section 5.01(b) for the fiscal quarter
ended June 30) which equal or exceed 10.0% of the consolidated total assets of
the Borrower and its Subsidiaries at such date; provided, however, that if
(i) consolidated total revenues of all Subsidiaries which are not Material
Subsidiaries (as then determined in accordance with this definition) for the
then most recent fiscal year for which financial statements have been (or are
required to be) furnished pursuant to Section 5.01(a) (and, upon written notice
by the Administrative Agent to the Borrower, for the period of four consecutive
fiscal quarters ended prior to the date on which financial statements have been
(or are required to be) furnished pursuant to Section 5.01(b) for the fiscal
quarter ended June 30) equal or exceed 15.0% of the consolidated total revenues
of the Borrower and its Subsidiaries for such period or (ii) the consolidated
total assets of all Subsidiaries which are not Material Subsidiaries (as then
determined in accordance with this definition) at the last day of the then most
recent fiscal year for which financial statements have been (or are required to
be) furnished pursuant to Section 5.01(a) (and, upon written notice by the
Administrative Agent to the Borrower, at the last day of the period of four
consecutive fiscal quarters ended prior to the date on which financial
statements have been (or are required to be) furnished pursuant to
Section 5.01(b) for the fiscal quarter ended June 30) equal or exceed 15.0% of
the consolidated total assets of the Borrower and its Subsidiaries at such date,
then the Borrower shall promptly (and in any event within ten Business Days
after the date such financial statements are so delivered or required to be so
delivered) designate one or more additional Subsidiaries (the identity of such
Subsidiaries to be determined by the Borrower in its discretion), in writing to
the Administrative Agent as “Material Subsidiaries,” whereupon each such
Subsidiary shall be a “Material Subsidiary” for all purposes of this Agreement
until such Subsidiary is redesignated as an “Immaterial Subsidiary” as provided
below; provided, further that, if no Default has occurred and is continuing, the
Borrower may, at any time, by written notice to the Administrative Agent,
redesignate any such Material Subsidiary so designated pursuant to the
immediately preceding proviso as an “Immaterial Subsidiary” if (and only if) the
consolidated total revenues and consolidated total assets of Subsidiaries that
are not Material Subsidiaries at such time (determined after giving effect to
such redesignation) would not exceed the limits set forth in clause (i) or
(ii) above, whereupon such Subsidiary shall cease to be a “Material Subsidiary”
for all purposes of this Agreement

 

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until such Subsidiary is required to be treated (or redesignated as) a “Material
Subsidiary” pursuant to the foregoing requirements of this definition. Upon the
acquisition of a new Subsidiary or the merger or consolidation of any Person
with or into an existing Subsidiary (or the acquisition of other assets by an
existing Subsidiary), the qualification of the affected Subsidiary as a
“Material Subsidiary” pursuant to the foregoing requirements of this definition
shall be determined on a pro forma basis as if such Subsidiary had been acquired
or such merger, consolidation or other acquisition had occurred, as applicable,
at the beginning of the relevant period of four consecutive fiscal quarters. In
the event any Subsidiary becomes a Material Subsidiary after the Effective Date
(including as a result of a designation pursuant to the second preceding
sentence), the Borrower shall cause such Material Subsidiary to comply with
Section 5.09, to the extent applicable. As of the Effective Date, the
Subsidiaries identified on Schedule 3.12 as “Material Subsidiaries” are the
Material Subsidiaries determined in accordance with the requirements of this
definition as of such date.

“Maturity Date” means the date that is 364 days after the Closing Date.

“Maximum Rate” has the meaning assigned to such term in Section 9.13.

“Merger Sub” means Lantern Acquisition Co., a Delaware corporation and a
wholly-owned Subsidiary of the Borrower.

“Moody’s” means Moody’s Investors Service, Inc.

“Multiemployer Plan” means a multiemployer plan as defined in Section 4001(a)(3)
of ERISA, which is contributed to by (or to which there is or may be an
obligation to contribute of) the Borrower or an ERISA Affiliate.

“Net Cash Proceeds” means, (a) in connection with an Asset Sale, the excess, if
any, of (i) the cash received in connection therewith (including any cash
received by way of deferred payment pursuant to, or by monetization of, a note
receivable or otherwise, but only as and when so received) over (ii) the sum of
(A) payments made to retire any Indebtedness that is secured by any asset which
is the subject of such Asset Sale and that is required to be repaid in
connection with the sale thereof, (B) the reasonable costs, fees and expenses
incurred by the Borrower or any of its Subsidiaries in connection therewith,
(C) taxes reasonably estimated to be payable in connection with such
transaction, and (D) the amount of reserves established by the Borrower or any
of its Subsidiaries in good faith and pursuant to commercially reasonable
practices for adjustment in respect of the sale price of such asset or assets in
accordance with GAAP, provided that if the amount of such reserves exceeds the
amounts charged against such reserve, then such excess, upon the determination
thereof, shall then constitute Net Cash Proceeds; (b) with respect to the
incurrence of any Indebtedness for borrowed money, the excess, if any, of
(i) cash received by the Borrower or any of its Subsidiaries in connection with
such issuance over (ii) the sum of (A) payments made to retire any Indebtedness
that is required to be repaid in connection with such issuance (other than
Loans), and (B) the underwriting discounts and commissions and other reasonable
costs, fees and expenses incurred by the Borrower or any of its Subsidiaries in
connection with such issuance; and (c) with respect to the issuance or sale of
Equity Interests, the excess of (i) the cash received in connection with such
issuance over (ii) the underwriting discounts and commissions and other
reasonable costs, fees and expenses incurred by the Borrower in connection with
such issuance.

“Non-Declared Restricted Payment” means, as to any Person, (a) the redemption,
retirement, purchase, or other acquisition, directly or indirectly, for a
consideration, of any shares of any class of its capital stock or of any other
Equity Interests of such Person outstanding on the Closing Date or thereafter
(or any warrants for or options or stock or similar appreciation rights in
respect of any such shares or Equity Interests but not including any convertible
debt) or the setting aside of any funds for any

 

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of the foregoing purposes and (b) the making or payment of any other Restricted
Payment on or after the Closing Date by such Person which, in the case of either
clause (a) or (b), does not require or involve a declaration or authorization by
such Person.

“Non-Guarantor Subsidiary” means, at any time, any Subsidiary of the Borrower
that is not at such time a Subsidiary Guarantor. Schedule 3.12 sets forth the
name of each Subsidiary that is a “Non-Guarantor Subsidiary” on the Effective
Date.

“Non-U.S. Lender” means a Lender that is not a U.S. Person.

“Notes” has the meaning set forth in the definition of “Transactions”.

“Obligations” means all amounts, direct or indirect, contingent or absolute, of
every type or description, and at any time existing, owing to any Lead Agent or
any Lender pursuant to the terms of this Agreement or any other Loan Document
(including monetary obligations incurred during the pendency of any bankruptcy,
insolvency, receivership or other similar proceeding, regardless of whether
allowed or allowable in such proceeding).

“OFAC” means the U.S. Treasury Department Office of Foreign Assets Control.

“Officer’s Certificate” means a certificate signed by any Financial Officer of
the Borrower.

“Other Connection Taxes” means, with respect to any Recipient, Taxes imposed as
a result of a present or former connection between such Recipient and the
jurisdiction imposing such Taxes (other than a connection arising from such
Recipient having executed, delivered, enforced, become a party to, performed its
obligations under, received payments under, received or perfected a security
interest under, or engaged in any other transaction pursuant to, or enforced,
any Loan Document, or sold or assigned an interest in any Loan Document).

“Other Taxes” means any present or future stamp, court, documentary, intangible,
recording, filing or similar excise or property Taxes that arise from any
payment made under, from the execution, delivery, performance, enforcement or
registration of, or from the registration, receipt or perfection of a security
interest under, or otherwise with respect to, any Loan Document, except any such
Taxes that are Other Connection Taxes imposed with respect to an assignment
(other than an assignment under Section 2.18(b)).

“Outstanding Amount” means, on any date, the outstanding principal amount of
Loans after giving effect to any Borrowings and prepayments or repayments of
such Loans occurring on such date.

“Participant” has the meaning assigned to such term in Section 9.04.

“PATRIOT Act” has the meaning assigned to such term in Section 9.14.

“PBGC” means the Pension Benefit Guaranty Corporation referred to and defined in
ERISA and any successor entity performing similar functions.

“Permitted Obligations” means obligations (a) to pay taxes, (b) to pay import
duties, to post customs bonds and otherwise make payments in connection with
customs and trade laws, (c) to purchase equipment or fixtures and otherwise make
capital expenditures, (d) to make payments in connection

 

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with the importation or purchase of tobacco or other products or goods for use
in the day-to-day operations of the Borrower and any Subsidiary of the Borrower
consistent with the practices of the Borrower and its Subsidiaries in effect
prior to the Effective Date or with then current practices in the industry,
(e) to make utility payments, (f) in connection with worker’s compensation
obligations or other employee disability obligations, (g) to provide credit
support for any of the foregoing, (h) in respect of employee loans made in
connection with transfers and (i) to provide credit support for suppliers and
distributors in the ordinary course of business.

“Person” means any natural person, corporation, limited liability company,
trust, joint venture, association, company, partnership, Governmental Authority
or other entity.

“Plan” means any employee pension benefit plan (other than a Multiemployer Plan)
subject to the provisions of Title IV of ERISA or Section 412 of the Code or
Section 302 of ERISA, and in respect of which the Borrower or any ERISA
Affiliate is (or, if such plan were terminated, would under Section 4069 of
ERISA be deemed to be) an “employer” as defined in Section 3(5) of ERISA.

“Prime Rate” means the rate of interest per annum publicly announced from time
to time by JPMCB as its prime rate in effect at its office located at 270 Park
Avenue, New York, New York; each change in the Prime Rate shall be effective
from and including the date such change is publicly announced as being
effective.

“Principal Property” means land, land improvements, buildings and associated
factory and laboratory equipment owned or leased pursuant to a capital lease and
used by the Borrower or a Subsidiary primarily for processing, producing,
packaging or storing its products, raw materials, inventories, or other
materials and supplies and located within the United States of America and
having an acquisition cost plus capitalized improvements in excess of 2.0% of
Consolidated Net Worth, but not including any such property financed through the
issuance of tax exempt governmental obligations, or any such property that has
been determined by a resolution adopted by the Board of Directors not to be of
material importance to the respective businesses conducted by the Borrower or
such Subsidiary effective as of the date such resolution is adopted.

“Qualifying Settlement” means, at any time, any settlement of the payment terms
of a judgment pursuant to a valid, binding and enforceable settlement agreement
(a) which (i) has been approved by a court of competent jurisdiction in a final
decision, which decision remains in full force and effect and has not then been
appealed, (ii) approval thereof is not required to be obtained by a court of
competent jurisdiction in order to be valid, binding and enforceable under
applicable law or by the terms of such settlement agreement, or (iii) has been
or will be submitted for approval by a court of competent jurisdiction within
any time period prescribed by applicable law or such settlement agreement and
the terms of such settlement otherwise remain subject to a valid, binding and
enforceable settlement agreement pending such court approval (unless and until
such court has decided not to approve such settlement agreement), and (b) under
which the Borrower and its Subsidiaries, as applicable, have complied with all
payment and other obligations.

“Recipient” means, as applicable, (a) the Administrative Agent and (b) any
Lender.

“Reference Period” has the meaning assigned to such term in the definition of
“Consolidated EBITDA.”

“Register” has the meaning assigned to such term in Section 9.04.

 

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“Regulation D” means Regulation D of the Board as from time to time in effect
and any successor to all or a portion thereof establishing reserve requirements.

“Regulation T” means Regulation T of the Board as from time to time in effect
and any successor to all or a portion thereof.

“Regulation U” means Regulation U of the Board as from time to time in effect
and any successor to all or a portion thereof establishing margin requirements.

“Regulation X” means Regulation X of the Board as from time to time in effect
and any successor to all or a portion thereof.

“Reinvestment Deferred Amount” means, with respect to any Reinvestment Event,
the aggregate Net Cash Proceeds received by the Borrower and its Subsidiaries in
connection therewith that are not applied to prepay the Loans or reduce the
Commitments in connection with the delivery of a Reinvestment Notice.

“Reinvestment Event” means any Asset Sale in respect of which the Borrower has
delivered a Reinvestment Notice.

“Reinvestment Notice” means, with respect to any Asset Sale, a written notice
executed by a Responsible Officer stating (i) that no Default or Event of
Default has occurred and is continuing (provided that this statement need only
be made if the receipt of the Net Cash Proceeds of an Asset Sale occurs after
the funding of the Loans on the Closing Date) and (ii) that the Borrower
(directly or indirectly through a Subsidiary) intends and expects to use (or to
commit to use) all or a specified portion of the Net Cash Proceeds of such Asset
Sale within nine months of such Asset Sale to reinvest in its or any of its
Subsidiaries’ business.

“Reinvestment Prepayment Amount” means, with respect to any Reinvestment Event,
the Reinvestment Deferred Amount relating thereto less any amount expended or
committed to be reinvested prior to the relevant Reinvestment Prepayment Date to
reinvest in the Borrower’s or any of its Subsidiaries’ business.

“Reinvestment Prepayment Date” means, with respect to any Reinvestment Event,
the earlier of (a) the date occurring nine months after the applicable Asset
Sale and (b) the date on which the Borrower shall have determined not to, or
shall have otherwise ceased to, reinvest in the Borrower’s or any of its
Subsidiaries’ business all or any portion of the relevant Reinvestment Deferred
Amount.

“Related Parties” means, with respect to any specified Person, such Person’s
Affiliates and the respective directors, officers, employees, agents and
advisors of such Person and such Person’s Affiliates.

“Required Lenders” means, at any time, Lenders having Loans or Commitments, as
the case may be, representing more than 50.0% of the sum of the total Loans or
total Commitments, as the case may be, at such time.

“Requirement of Law” means, as to any Person, the Certificate of Incorporation
and By-Laws or other organizational or governing documents of such Person, and
any law, treaty, rule or regulation or determination of an arbitrator or a court
or other Governmental Authority, in each case applicable to or binding upon such
Person or any of its property or to which such Person or any of its property is
subject.

 

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“Responsible Officer” means the chief executive officer, president or any
Financial Officer of the Borrower.

“Restricted Payment” means any dividend or other distribution (whether in cash,
securities or other property) with respect to any Equity Interests in the
Borrower or any Subsidiary, or any payment (whether in cash, securities or other
property), including any sinking fund or similar deposit, on account of the
purchase, redemption, retirement, acquisition, cancellation or termination of
any such Equity Interests in the Borrower or any option, warrant or other right
to acquire any such Equity Interests in the Borrower.

“RJRTH” means R.J. Reynolds Tobacco Holdings, Inc., a Delaware corporation and a
wholly-owned Subsidiary of the Borrower.

“S&P” means Standard & Poor’s.

“Sanctions” means economic or financial sanctions or trade embargoes imposed,
administered or enforced from time to time by (a) the U.S. government, including
those administered by OFAC or the U.S. Department of State, or (b) the United
Nations Security Council, the European Union, any European Union member state or
Her Majesty’s Treasury of the United Kingdom.

“Sanctioned Country” means, at any time, a country or territory which is itself
the subject or target of any Sanctions (at the time of this Agreement, Cuba,
Iran, North Korea, Sudan and Syria).

“SEC” means the Securities and Exchange Commission and any successor thereto.

“Specified Asset Dispositions” means consummation of (a) the asset dispositions
(which may include Equity Interests of one or more Subsidiaries of the Borrower
or Lorillard) specified in the Imperial Divestiture Documents, as in effect on
the date hereof, including, but not limited to, the asset dispositions made to
Imperial (or one or more affiliates or assignees thereof) of cigarette brands
“Winston”, “Kool” and “Salem” and, under certain circumstances, “Doral”, certain
assets related to the “e-vapor” brand “blu” and the cigarette brand “Maverick”,
and the disposition of certain factories, headquarters and employees of
Lorillard or its Subsidiaries and the transfer of certain associated liabilities
as specified in the Imperial Divestiture Documents, and (b) any other asset
dispositions (which may include Equity Interests of one or more Subsidiaries of
the Borrower or Lorillard) by the Borrower and/or its Subsidiaries in connection
with the consummation of the Acquisition made pursuant to any modifications,
amendments, supplements, replacements or substitutions (in each case, in whole
or in part), waivers, consents or requests (including the effects of any such
requests) under the Imperial Divestiture Documents that do not result in
(i) additional assets exceeding in the aggregate $250,000,000 becoming part of
the Specified Asset Dispositions or (ii) a Substantial Detriment (as defined in
the Acquisition Agreement on the date hereof) unless either such addition of
assets or Substantial Detriment is consented to in writing by the Administrative
Agent (which consent shall not be unreasonably withheld or delayed).

“Specified Representations” means each of the representations and warranties of
the Borrower contained in Section 3.01 (solely as to organization, power and
authority), Section 3.02, Sections 3.03(b) (solely as it relates to the charter,
by-laws or other organizational documents), 3.03(c), Sections 3.08(b)-(c) and
Sections 3.13(a), (c) and (d).

“Statutory Reserve Rate” means a fraction (expressed as a decimal), the
numerator of which is the number one and the denominator of which is the number
one minus the aggregate of the maximum reserve percentage (including any
marginal, special, emergency or supplemental reserves) expressed as a decimal
established by the Board to which the Administrative Agent is subject with
respect

 

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to the Adjusted LIBO Rate, for eurocurrency funding (currently referred to as
“Eurocurrency Liabilities” in Regulation D of the Board). Such reserve
percentage shall include those imposed pursuant to such Regulation D. Eurodollar
Loans shall be deemed to constitute eurocurrency funding and to be subject to
such reserve requirements without benefit of or credit for proration, exemptions
or offsets that may be available from time to time to any Lender under such
Regulation D or any comparable regulation. The Statutory Reserve Rate shall be
adjusted automatically on and as of the effective date of any change in any
reserve percentage.

“Subsidiary” means, with respect to any Person (the “parent”) at any date,
(a) any corporation, limited liability company, partnership, association or
other entity the accounts of which would be consolidated with those of the
parent in the parent’s consolidated financial statements if such financial
statements were prepared in accordance with GAAP as of such date, and (b) any
other corporation, limited liability company, partnership, association or other
entity of which securities or other ownership interests representing more than
50.0% of the equity or more than 50.0% of the ordinary voting power or, in the
case of a partnership, more than 50.0% of the general partnership interests are,
as of such date, owned, controlled or held. Unless otherwise expressly provided,
all references herein to “Subsidiary” shall mean a Subsidiary of the Borrower.

“Subsidiary Guarantor” means (a) each Material Subsidiary of the Borrower as of
the Effective Date and as of the Closing Date (after giving effect to the
Acquisition) and (b) each other Subsidiary of the Borrower which executes and
delivers the Subsidiary Guarantee Agreement, in each case under the immediately
preceding clauses (a) and (b), unless and until such time as the respective
Subsidiary ceases to constitute a Subsidiary or is released from all of its
obligations under the Subsidiary Guarantee Agreement in accordance with the
terms and provisions hereof and thereof.

“Subsidiary Guarantee Agreement” means the Subsidiary Guarantee Agreement
substantially in the form of Exhibit B entered into (or to be entered into) by
one or more Subsidiaries.

“Substantial Detriment” has the meaning provided to such term in the Acquisition
Agreement (as in effect on the date hereof).

“Swap Agreement” means any agreement with respect to any swap, forward, future
or derivative transaction or option or similar agreement involving, or settled
by reference to, one or more rates, currencies, commodities, equity or debt
instruments or securities, or economic, financial or pricing indices or measures
of economic, financial or pricing risk or value or any similar transaction or
any combination of these transactions (including, without limitation,
transactions to hedge or mitigate interest rate risk); provided that no phantom
stock or similar plan providing for payments only on account of services
provided by current or former directors, officers, employees or consultants of
the Borrower or the Subsidiaries shall be a Swap Agreement.

“Syndication Agent” means Citibank, in its capacity as syndication agent for the
Facility.

“Taxes” means any present or future taxes, levies, imposts, duties, deductions,
withholdings, assessments, or other charges of a similar nature imposed by any
Governmental Authority, including any interest, additions to tax or penalties
applicable thereto.

“Ticking Fee” has the meaning assigned to such term in Section 2.11(a).

“Ticking Fee Start Date” has the meaning assigned to such term in
Section 2.11(a).

 

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“Total Commitment” means, at any time, the sum of the Commitments of each of the
Lenders at such time.

“Transactions” means the execution, delivery and performance by each Loan Party
of the applicable Loan Documents, the borrowing of Loans and the use of the
proceeds thereof, the Ancillary Agreements, the Acquisition, the BAT Equity
Issuance, the issuance by the Borrower of common equity to the shareholders of
Lorillard pursuant to the terms of the Acquisition Agreement (the “Equity
Consideration”), the issuance and sale of any senior unsecured notes (the
“Notes”) in a public offering or, if appropriate, a Rule 144A or other private
placement, the proceeds of which are used to finance in whole or in part the
Acquisition or to refinance any portion of the Loans, and the Specified Asset
Dispositions.

“Type,” when used in reference to any Loan or Borrowing, refers to whether the
rate of interest on such Loan, or on the Loans comprising such Borrowing, is
determined by reference to the Adjusted LIBO Rate or the Alternate Base Rate.

“Unrestricted” means, when referring to cash or Marketable Investments of the
Borrower or any Subsidiary, that such cash or Marketable Investments (a) do not
appear (and are not required to appear) as “restricted” on a consolidated
balance sheet of the Borrower, (b) are not subject to any Lien in favor of any
Person (other than Liens constituting customary set-off rights in favor of
banks, custodians and other financial institutions on cash management and
operating accounts maintained by the Borrower and its Subsidiaries in the
ordinary course of business) and (c) are otherwise generally available for use
by the Borrower or such Subsidiary.

“Unsettled” means, with respect to any judgment, that such judgment is not
subject to a Qualifying Settlement.

“U.S. Dollars” and the sign “$” each mean the freely transferrable lawful
currency of the United States of America.

“U.S. Person” means a “United States person” within the meaning of
Section 7701(a)(30) of the Code.

“U.S. Tax Certificate” has the meaning assigned to such term in
Section 2.16(f)(ii)(D)(2).

“Withdrawal Liability” means liability to a Multiemployer Plan as a result of a
complete or partial withdrawal from such Multiemployer Plan, as such terms are
defined in Part I of Subtitle E of Title IV of ERISA.

“Withholding Agent” means any Loan Party, the Administrative Agent and any other
applicable withholding agent.

SECTION 1.02. Classification of Loans and Borrowings. For purposes of this
Agreement, Loans may be classified and referred to by Type (e.g., a “Eurodollar
Loan”). Borrowings also may be classified and referred to by Type (e.g., a
“Eurodollar Borrowing”).

SECTION 1.03. Terms Generally. The definitions of terms herein shall apply
equally to the singular and plural forms of the terms defined. Whenever the
context may require, any pronoun shall include the corresponding masculine,
feminine and neuter forms. The words “include,” “includes” and “including” shall
be deemed to be followed by the phrase “without limitation.” The word “will”
shall be construed to have the same meaning and effect as the word “shall.”
Unless the context requires otherwise, (a) any definition of or reference to any
agreement, instrument or other document herein shall be

 

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construed as referring to such agreement, instrument or other document as from
time to time amended, supplemented or otherwise modified (subject to any
restrictions on such amendments, supplements or modifications set forth herein),
(b) any reference herein to any Person shall be construed to include such
Person’s successors and assigns, (c) the words “herein,” “hereof” and
“hereunder,” and words of similar import, shall be construed to refer to this
Agreement in its entirety and not to any particular provision hereof, (d) all
references herein to Articles, Sections, Exhibits and Schedules shall be
construed to refer to Articles and Sections of, and Exhibits and Schedules to,
this Agreement and (e) the words “asset” and “property” shall be construed to
have the same meaning and effect and to refer to any and all tangible and
intangible assets and properties, including cash, securities, accounts and
contract rights.

SECTION 1.04. Accounting Terms; GAAP.

(a) The financial statements to be furnished to the Administrative Agent (for
the benefit of the Lenders) pursuant hereto shall be made and prepared in
accordance with GAAP consistently applied throughout the periods involved
(except as set forth in the notes thereto or as otherwise disclosed in writing
by the Borrower to the Administrative Agent). Except as otherwise expressly
provided herein, all terms of an accounting or financial nature (including all
computations determining compliance with Section 6 (and the definitions used
therein) shall be construed in accordance with GAAP, as in effect from time to
time; provided that, if the Borrower notifies the Administrative Agent that the
Borrower requests an amendment to any provision hereof to eliminate the effect
of any change occurring after the date hereof in GAAP or in the application
thereof on the operation of such provision (or if the Administrative Agent
notifies the Borrower that the Required Lenders request an amendment to any
provision hereof for such purpose), regardless of whether any such notice is
given before or after such change in GAAP or in the application thereof, then
such provision shall be interpreted on the basis of GAAP as in effect and
applied immediately before such change shall have become effective until such
notice shall have been withdrawn or such provision amended in accordance
herewith.

(b) Notwithstanding any other provision contained herein, (i) all terms of an
accounting or financial nature used herein shall be construed, and all
computations of amounts and ratios referred to herein shall be made, without
giving effect to any election under Statement of Financial Accounting
Standards 159 (or any other Financial Accounting Standard having a similar
result or effect) to value any Indebtedness or other liabilities of the Borrower
or any of its Subsidiaries at “fair value,” as defined therein and (ii) for
purposes of the computations determining compliance with Section 6, all expenses
and other charges arising from any settlement of liability with respect to
tobacco litigation which are required by GAAP to be retroactively applied to a
previous fiscal quarter of the Borrower shall instead be accrued in the fiscal
quarter in which such expenses and charges occur.

ARTICLE II

The Credits

SECTION 2.01. Commitments. Subject to the terms and conditions set forth herein,
each Lender severally agrees to make Loans in U.S. Dollars to the Borrower in a
single draw on the Closing Date in an aggregate principal amount that will not
result in such Lender’s outstanding Loans hereunder exceeding such Lender’s
Commitment. Loans borrowed under this Section 2.01 and prepaid or repaid may not
be reborrowed. Loans may be ABR Loans or Eurodollar Loans, as further provided
herein.

SECTION 2.02. Loans and Borrowings.

(a) The Loans on the Closing Date shall be made as part of a Borrowing
consisting of Loans made by the Lenders ratably in accordance with their
respective Commitments. The failure of

 

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any Lender to make any Loan required to be made by it shall not relieve any
other Lender of its obligations hereunder; provided that the Commitments of the
Lenders are several and no Lender shall be responsible for any other Lender’s
failure to make Loans as required.

(b) Subject to Section 2.13, each Borrowing shall be comprised entirely of ABR
Loans or Eurodollar Loans as the Borrower may request in accordance herewith.
Each Lender at its option may make any Eurodollar Loan by causing any domestic
or foreign branch or Affiliate of such Lender to make such Loan; provided that
any exercise of such option shall not affect the obligation of the Borrower to
repay such Loan in accordance with the terms of this Agreement.

(c) At the commencement of each Interest Period for any Eurodollar Borrowing,
such Borrowing shall be in an aggregate amount that is an integral multiple of
$1,000,000 and not less than $5,000,000. At the time that each ABR Borrowing is
made, such Borrowing shall be in an aggregate amount that is an integral
multiple of $1,000,000 and not less than $5,000,000. Borrowings of more than one
Type may be outstanding at the same time; provided that there shall not at any
time be more than a total of 10 Eurodollar Borrowings outstanding.

(d) Notwithstanding any other provision of this Agreement, the Borrower shall
not be entitled to request, or to elect to convert or continue, any Borrowing if
the Interest Period requested with respect thereto would end after the Maturity
Date.

SECTION 2.03. Requests for Borrowings. To request a Borrowing, the Borrower
shall notify the Administrative Agent of such request by telephone (a) in the
case of a Eurodollar Borrowing, not later than 11:00 a.m., New York City time,
three Business Days before the date of the proposed Borrowing or (b) in the case
of an ABR Borrowing, not later than 11:00 a.m., New York City time, one Business
Day before the date of the proposed Borrowing. Each such telephonic Borrowing
Request shall be irrevocable and shall be confirmed promptly by hand delivery or
telecopy to the Administrative Agent of a written Borrowing Request in a form
approved by the Administrative Agent and signed by the Borrower. Each such
telephonic and written Borrowing Request shall specify the following information
in compliance with Section 2.02:

(i) the aggregate amount of the requested Borrowing;

(ii) the date of such Borrowing, which shall be a Business Day;

(iii) whether such Borrowing is to be an ABR Borrowing or a Eurodollar
Borrowing;

(iv) in the case of a Eurodollar Borrowing, the initial Interest Period to be
applicable thereto, which shall be a period contemplated by the definition of
the term “Interest Period”; and

(v) the location and number of the Borrower’s account to which funds are to be
disbursed, which shall comply with the requirements of Section 2.06.

If no election as to the Type of Borrowing is specified, then the requested
Borrowing shall be an ABR Borrowing. If no Interest Period is specified with
respect to any requested Eurodollar Borrowing, then the Borrower shall be deemed
to have selected an Interest Period of one month’s duration. Promptly following
receipt of a Borrowing Request in accordance with this Section, the
Administrative Agent shall advise each Lender of the details thereof and of the
amount of such Lender’s Loan to be made as part of the requested Borrowing.

SECTION 2.04. Reserved.

 

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SECTION 2.05. Reserved.

SECTION 2.06. Funding of Borrowings.

(a) Each Lender shall make each Loan to be made by it hereunder on the proposed
date thereof by wire transfer of immediately available funds by 12:00 noon, New
York City time, to the account of the Administrative Agent most recently
designated by it for such purpose by notice to the Lenders. The Administrative
Agent will make such Loans available to the Borrower by promptly crediting the
amounts so received, in like funds, to an account of the Borrower maintained
with the Administrative Agent in New York City and designated by the Borrower in
the applicable Borrowing Request.

(b) Unless the Administrative Agent shall have received notice from a Lender
prior to the proposed date of any Borrowing that such Lender will not make
available to the Administrative Agent such Lender’s share of such Borrowing, the
Administrative Agent may assume that such Lender has made such share available
on such date in accordance with Section 2.06(a) and may, in reliance upon such
assumption, make available to the Borrower a corresponding amount. In such
event, if a Lender has not in fact made its share of the applicable Borrowing
available to the Administrative Agent, then the applicable Lender and the
Borrower severally agree to pay to the Administrative Agent forthwith on demand
such corresponding amount with interest thereon, for each day from and including
the date such amount is made available to the Borrower to but excluding the date
of payment to the Administrative Agent, at (i) in the case of such Lender, the
greater of the Federal Funds Effective Rate and a rate determined by the
Administrative Agent in accordance with banking industry rules on interbank
compensation or (ii) in the case of the Borrower, the interest rate applicable
to ABR Loans. If such Lender pays such amount to the Administrative Agent, then
such amount shall constitute such Lender’s Loan included in such Borrowing.

SECTION 2.07. Interest Elections.

(a) Each Borrowing initially shall be of the Type specified in the applicable
Borrowing Request and, in the case of a Eurodollar Borrowing, shall have an
initial Interest Period as specified in such Borrowing Request. Thereafter, the
Borrower may elect to convert such Borrowing to a different Type or to continue
such Borrowing and, in the case of a Eurodollar Borrowing, may elect Interest
Periods therefor, all as provided in this Section. The Borrower may elect
different options with respect to different portions of the affected Borrowing,
in which case each such portion shall be allocated ratably among the Lenders
holding the Loans comprising such Borrowing, and the Loans comprising each such
portion shall be considered a separate Borrowing.

(b) To make an election pursuant to this Section, the Borrower shall notify the
Administrative Agent of such election by telephone by the time that a Borrowing
Request would be required under Section 2.03 if the Borrower were requesting a
Borrowing of the Type resulting from such election to be made on the effective
date of such election. Each such telephonic Interest Election Request shall be
irrevocable and shall be confirmed promptly by hand delivery or telecopy to the
Administrative Agent of a written Interest Election Request in a form approved
by the Administrative Agent and signed by the Borrower.

(c) Each telephonic and written Interest Election Request shall specify the
following information in compliance with Section 2.02:

(i) the Borrowing to which such Interest Election Request applies and, if
different options are being elected with respect to different portions thereof,
the portions thereof to be allocated to each resulting Borrowing (in which case
the information to be specified pursuant to clauses (iii) and (iv) below shall
be specified for each resulting Borrowing);

 

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(ii) the effective date of the election made pursuant to such Interest Election
Request, which shall be a Business Day;

(iii) whether the resulting Borrowing is to be an ABR Borrowing or a Eurodollar
Borrowing; and

(iv) if the resulting Borrowing is a Eurodollar Borrowing, the Interest Period
to be applicable thereto after giving effect to such election, which shall be a
period contemplated by the definition of the term “Interest Period.”

If any such Interest Election Request requests a Eurodollar Borrowing but does
not specify an Interest Period, then the Borrower shall be deemed to have
selected an Interest Period of one month’s duration.

(d) Promptly following receipt of an Interest Election Request, the
Administrative Agent shall advise each Lender of the details thereof and of such
Lender’s portion of each resulting Borrowing.

(e) If the Borrower fails to deliver a timely Interest Election Request with
respect to a Eurodollar Borrowing prior to the end of the Interest Period
applicable thereto, then, unless such Borrowing is repaid as provided herein, at
the end of such Interest Period such Borrowing shall be converted to an ABR
Borrowing. Notwithstanding any contrary provision hereof, if an Event of Default
has occurred and is continuing and the Administrative Agent, at the request of
the Required Lenders, so notifies the Borrower, then, so long as an Event of
Default is continuing (i) no outstanding Borrowing may be converted to or
continued as a Eurodollar Borrowing and (ii) unless repaid, each Eurodollar
Borrowing shall be converted to an ABR Borrowing at the end of the Interest
Period applicable thereto.

SECTION 2.08. Termination and Reduction of Commitments.

(a) Unless previously terminated, the Total Commitment shall terminate at
5:00 p.m. on the Closing Date.

(b) The aggregate Commitments shall automatically terminate on the Availability
End Date unless funded on or prior to the Availability End Date.

(c) The aggregate Commitments shall be automatically and permanently reduced by
the amount of commitments obtained by the Borrower or any of its Subsidiaries
upon entering into a committed but unfunded term loan or similar agreement in
connection with the financing of the Transactions, to the extent that the
conditions to availability thereof are no more restrictive than the conditions
set forth in Article IV.

(d) The aggregate Commitments shall be automatically and permanently reduced by
an amount equal to 100% of any Net Cash Proceeds actually received by the
Borrower or any of its Subsidiaries on or after the Effective Date and prior to
the Closing Date from (x) the issuance by the Borrower of Equity Interests
(other than (i) issuances pursuant to employee stock plans or other benefit or
employee or director incentive arrangements, issuances or similar compensation
arrangements, (ii) the BAT Equity Issuance, (iii) the Equity Consideration, or
(iv) upon conversion or exercise of outstanding securities or options) or
(y) the issuance by the Borrower or any of its Subsidiaries of Funded Debt
(other than any Excluded Indebtedness but including equity-linked securities and
debt securities convertible to equity).

 

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(e) The aggregate Commitments shall be automatically and permanently reduced by
an amount equal to 100% of any Net Cash Proceeds actually received by the
Borrower or any of its Subsidiaries from any Asset Sale consummated on or after
July 15, 2014, unless a Reinvestment Notice shall be delivered in respect
thereof; provided, that, notwithstanding the foregoing, on each Reinvestment
Prepayment Date that occurs prior to the Closing Date, an amount equal to the
Reinvestment Prepayment Amount with respect to the relevant Reinvestment Event
shall be applied to permanently reduce the aggregate Commitments in accordance
with the terms of this Agreement.

(f) The Borrower may at any time terminate, or from time to time reduce, the
Commitments; provided that each reduction of the Commitments shall be in an
amount that is an integral multiple of $1,000,000 and not less than $5,000,000.

(g) The Borrower shall notify the Administrative Agent of any election to
terminate or reduce the Commitments under Section 2.08(f) at least three
Business Days prior to the effective date of such termination or reduction,
specifying such election and the effective date thereof. Promptly following
receipt of any notice, the Administrative Agent shall advise the Lenders of the
contents thereof. Each notice delivered by the Borrower pursuant to this Section
shall be irrevocable; provided that a notice of termination of the Commitments
delivered by the Borrower may state that such notice is conditioned upon the
effectiveness of other credit facilities, in which case such notice may be
revoked by the Borrower (by notice to the Administrative Agent on or prior to
the specified effective date) if such condition is not satisfied. Any
termination or reduction of the Commitments shall be permanent. Each reduction
of the Commitments pursuant to Section 2.08 shall be made ratably among the
Lenders in accordance with their respective Commitments.

SECTION 2.09. Repayment of Loans; Evidence of Debt.

(a) The Borrower hereby unconditionally promises to pay to the Administrative
Agent for the account of each Lender the then unpaid principal amount of each
Loan made by such Lender on the Maturity Date.

(b) [Reserved].

(c) Each Lender shall maintain in accordance with its usual practice an account
or accounts evidencing the indebtedness of the Borrower to such Lender resulting
from each Loan made by such Lender, including the amounts of principal and
interest payable and paid to such Lender from time to time hereunder.

(d) The Administrative Agent shall maintain accounts in which it shall record
(i) the amount of each Loan made hereunder, the Type thereof and the Interest
Period applicable thereto, (ii) the amount of any principal or interest due and
payable or to become due and payable from the Borrower to each Lender hereunder
and (iii) the amount of any sum received by the Administrative Agent hereunder
for the account of the Lenders and each Lender’s share thereof.

(e) The entries made in the accounts maintained pursuant to Section 2.09(c) or
(d) shall be prima facie evidence of the existence and amounts of the
obligations recorded therein; provided that the failure of any Lender or the
Administrative Agent to maintain such accounts or any error therein shall not in
any manner affect the obligation of the Borrower to repay the Loans in
accordance with the terms of this Agreement.

 

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(f) Any Lender may request that Loans made by it be evidenced by a promissory
note. In such event, the Borrower shall prepare, execute and deliver to such
Lender a promissory note payable to such Lender (or, if requested by such
Lender, to such Lender and its registered assigns) and in a form approved by the
Administrative Agent. Thereafter, the Loans evidenced by such promissory note
and interest thereon shall at all times (including after assignment pursuant to
Section 9.04) be represented by one or more promissory notes in such form
payable to the payee named therein (or to such payee and its registered
assigns).

SECTION 2.10. Prepayment of Loans.

(a) The Borrower shall have the right at any time and from time to time to
prepay any Borrowing in whole or in part and without penalty or premium, subject
to prior notice in accordance with Section 2.10(b) and, in the case of a
Eurodollar Borrowing, payment in full of any applicable breakage costs pursuant
to Section 2.15. Amounts prepaid pursuant to this Section 2.10 may not be
reborrowed.

(b) The Borrower shall notify the Administrative Agent by telephone (confirmed
by telecopy) of any prepayment hereunder (i) in the case of prepayment of a
Eurodollar Borrowing, not later than 11:00 a.m., New York City time, three
Business Days before the date of prepayment or (ii) in the case of prepayment of
an ABR Borrowing, not later than 11:00 a.m., New York City time, one Business
Day before the date of prepayment. Each such notice shall be irrevocable and
shall specify the prepayment date and the principal amount of each Borrowing or
portion thereof to be prepaid; provided that, if a notice of prepayment is given
in connection with a conditional notice of termination of the Commitments as
contemplated by Section 2.08, then such notice of prepayment may be revoked if
such notice of termination is revoked in accordance with Section 2.08. Promptly
following receipt of any such notice relating to a Borrowing, the Administrative
Agent shall advise the Lenders of the contents thereof. Each partial prepayment
of any Borrowing shall be in an amount that would be permitted in the case of an
advance of a Borrowing of the same Type as provided in Section 2.02. Each
prepayment of a Borrowing shall be applied ratably to the Loans included in the
prepaid Borrowing. Amounts prepaid pursuant to this Section 2.10 may not be
reborrowed. Prepayments shall be accompanied by accrued interest to the extent
required by Section 2.12.

(c) If after the Closing Date any (x) Equity Interests shall be issued by the
Borrower (other than (i) issuances pursuant to employee stock plans or other
benefit or employee or director incentive arrangements, issuances or similar
compensation arrangements, (ii) the BAT Equity Issuance, (iii) the Equity
Consideration, or (iv) upon conversion or exercise of outstanding securities or
options) or (y) Funded Debt (other than any Excluded Indebtedness but including
equity-linked securities and debt securities convertible to equity) shall be
issued by the Borrower or any of its Subsidiaries, an amount equal to 100% of
the Net Cash Proceeds thereof actually received by the Borrower or any of its
Subsidiaries, in each case, shall be applied no later than the Business Day
following receipt thereof toward the prepayment of the Loans in accordance with
the terms of this Agreement. Each prepayment of a Borrowing shall be applied
ratably to the Loans included in the prepaid Borrowing. Amounts prepaid pursuant
to this Section 2.10(c) may not be reborrowed.

(d) If on any date the Borrower or any of its Subsidiaries shall receive Net
Cash Proceeds from any Asset Sale then consummated on or after July 15, 2014,
unless previously applied to reduce Commitments in accordance with Section 2.08
or a Reinvestment Notice shall be delivered in respect thereof, 100% of such Net
Cash Proceeds shall be applied no later than the Business Day following such
receipt toward the prepayment of the Loans in accordance with the terms of this
Agreement; provided, that, notwithstanding the foregoing, on each Reinvestment
Prepayment Date that occurs after the Closing Date, an amount equal to the
Reinvestment Prepayment Amount with respect to the relevant Re-

 

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investment Event shall be applied toward the prepayment of the Loans in
accordance with the terms of this Agreement. Each prepayment of a Borrowing
shall be applied ratably to the Loans included in the prepaid Borrowing. Amounts
prepaid pursuant to this Section 2.10(d) may not be reborrowed.

SECTION 2.11. Fees.

(a) Commencing on September 13, 2014 (the “Ticking Fee Start Date”), the
Borrower shall pay to the Administrative Agent, for the account of each Lender
in accordance with its Applicable Percentage, a ticking fee (the “Ticking Fee”)
in an amount per annum equal to 0.20% of the actual daily aggregate amount of
the undrawn Commitments as in effect from the Ticking Fee Start Date and from
time to time through and excluding the earlier of (i) the date of termination of
all Commitments hereunder and (ii) the Closing Date. The Ticking Fee shall be
earned and shall be due and payable on the earlier of (y) the date of
termination of all Commitments hereunder and (z) the Closing Date. All Ticking
Fees shall be computed on the basis of a year of 360 days and shall be payable
for the actual number of days elapsed (including the first day but excluding the
last day). For the avoidance of doubt, the Borrower’s payment of the Ticking Fee
satisfies the requirements under the Fee Letter as to payment of a “ticking fee”
thereunder and is not in addition to the “ticking fee” required to be paid by
the Borrower pursuant to the Fee Letter.

(b) The Borrower shall pay to the Administrative Agent, for the account of each
Lender in accordance with its Applicable Percentage, a funding fee (the “Funding
Fee”), equal to 0.50% of the aggregate principal amount of the Loans funded on
the Closing Date. The Funding Fee shall be earned and shall be due and payable
on the Closing Date. For the avoidance of doubt, the Borrower’s payment of the
Funding Fee satisfies the requirements under the Fee Letter as to payment of
“commitment fees” thereunder and is not in addition to the “commitment fees”
required to be paid by the Borrower pursuant to the Fee Letter.

(c) The Borrower shall pay to the Administrative Agent, for the account of each
Lender in accordance with its Applicable Percentage, a non-refundable duration
fee (the “Duration Fee”) on each of the 90th, 180th and 270th day after the
Closing Date in an amount equal to the product of (i) the applicable Duration
Fee Rate and (ii) the aggregate principal amount of the Loans outstanding on
such date.

(d) The Borrower agrees to pay to the Administrative Agent, for its own account
and to the extent applicable, for the account of each Lender, fees payable in
the amounts and at the times separately agreed upon between the Borrower, the
Administrative Agent and the Lenders (including, without limitation, pursuant to
the Fee Letters).

(e) All fees payable hereunder shall be paid on the dates due, in immediately
available funds, to the Administrative Agent for distribution, in the case of
Ticking Fees, Funding Fees and Duration Fees, to the Lenders. Fees paid shall
not be refundable under any circumstances.

SECTION 2.12. Interest.

(a) The Loans comprising each ABR Borrowing shall bear interest at the Alternate
Base Rate plus the Applicable Rate.

(b) The Loans comprising each Eurodollar Borrowing shall bear interest at the
Adjusted LIBO Rate for the Interest Period in effect for such Borrowing plus the
Applicable Rate.

 

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(c) Notwithstanding the foregoing, if any principal of or interest on any Loan
or any fee or other amount payable by the Borrower hereunder is not paid when
due, whether at stated maturity, upon acceleration or otherwise, such overdue
amount shall bear interest, after as well as before judgment, at a rate per
annum equal to (i) in the case of overdue principal of any Loan, 2.0% plus the
rate otherwise applicable to such Loan as provided in the preceding clauses of
this Section or (ii) in the case of any other amount, 2.0% plus the rate
applicable to ABR Loans as provided in Section 2.12(a).

(d) Accrued interest on each Loan shall be payable in arrears on each Interest
Payment Date for such Loan and upon termination of the Commitment of any Lender
which has made such Loan; provided that (i) interest accrued pursuant to
Section 2.12(c) shall be payable on demand, (ii) in the event of any repayment
or prepayment of any Loan (other than a prepayment of an ABR Loan prior to the
Maturity Date), accrued interest on the principal amount repaid or prepaid shall
be payable on the date of such repayment or prepayment and (iii) in the event of
any conversion of any Eurodollar Loan prior to the end of the current Interest
Period therefor, accrued interest on such Loan shall be payable on the effective
date of such conversion.

(e) All interest hereunder shall be computed on the basis of a year of 360 days,
except that interest computed by reference to the Alternate Base Rate at times
when the Alternate Base Rate is based on the Prime Rate shall be computed on the
basis of a year of 365 days (or 366 days in a leap year), and in each case shall
be payable for the actual number of days elapsed (including the first day but
excluding the last day). The applicable Alternate Base Rate, Adjusted LIBO Rate
or LIBO Rate shall be determined by the Administrative Agent, and such
determination shall be conclusive absent manifest error.

SECTION 2.13. Alternate Rate of Interest. If prior to the commencement of any
Interest Period for a Eurodollar Borrowing:

(a) the Administrative Agent determines (which determination shall be conclusive
absent manifest error) that adequate and reasonable means do not exist for
ascertaining the Adjusted LIBO Rate or the LIBO Rate, as applicable, for such
Interest Period; or

(b) the Administrative Agent is advised by the Required Lenders that the
Adjusted LIBO Rate or the LIBO Rate, as applicable, for such Interest Period
will not adequately and fairly reflect the cost to such Lenders (or Lender) of
making or maintaining their Loans (or its Loan) included in such Borrowing for
such Interest Period;

then the Administrative Agent shall give notice thereof to the Borrower and the
Lenders by telephone or telecopy as promptly as practicable thereafter and,
until the Administrative Agent notifies the Borrower and the Lenders that the
circumstances giving rise to such notice no longer exist, (i) any Interest
Election Request that requests the conversion of any Borrowing to, or
continuation of any Borrowing as, a Eurodollar Borrowing shall be ineffective
and (ii) if any Borrowing Request requests a Eurodollar Borrowing, such
Borrowing shall be made as an ABR Borrowing; provided that if the circumstances
giving rise to such notice affect only one Type of Borrowings, then the other
Type of Borrowings shall be permitted.

SECTION 2.14. Increased Costs.

(a) If any Change in Law shall:

(i) impose, modify or deem applicable any reserve, special deposit or similar
requirement against assets of, deposits with or for the account of, or credit
extended by, any Lender (except any such reserve requirement reflected in the
Adjusted LIBO Rate); or

 

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(ii) impose on any Lender or the London interbank market any other condition
affecting this Agreement or Eurodollar Loans made by such Lender; or

(iii) subject any Recipient to any Taxes on its loans, loan principal, letters
of credit, commitments, or other obligations, or its deposits, reserves, other
liabilities or capital attributable thereto (other than (A) Indemnified Taxes
and (B) Other Connection Taxes on gross or net income, profits or revenue
(including value-added or similar Taxes));

and the result of any of the foregoing shall be to increase the cost to such
Lender or such other Recipient of making or maintaining any Eurodollar Loan (or
of maintaining its obligation to make any such Loan) or to reduce the amount of
any sum received or receivable by such Lender or such other Recipient hereunder
(whether of principal, interest or otherwise), then the Borrower will pay to
such Lender or such other Recipient, as the case may be, such additional amount
or amounts as will compensate such Lender or such other Recipient, as the case
may be, for such additional costs incurred or reduction suffered.

(b) If any Lender determines that any Change in Law regarding capital or
liquidity requirements has or would have the effect of reducing the rate of
return on such Lender’s capital or liquidity or on the capital or liquidity of
such Lender’s holding company, if any, as a consequence of this Agreement or the
Loans made by, such Lender, to a level below that which such Lender or such
Lender’s holding company could have achieved but for such Change in Law (taking
into consideration such Lender’s policies and the policies of such Lender’s
holding company with respect to capital or liquidity adequacy), then from time
to time the Borrower will pay to such Lender such additional amount or amounts
as will compensate such Lender or such Lender’s holding company for any such
reduction suffered.

(c) A certificate of a Lender setting forth the amount or amounts necessary to
compensate such Lender or its holding company, as the case may be, as specified
in Section 2.14(a) or (b) shall be delivered to the Borrower and shall be
conclusive absent manifest error. The Borrower shall pay such Lender the amount
shown as due on any such certificate within 10 days after receipt thereof.

(d) Failure or delay on the part of any Lender to demand compensation pursuant
to this Section shall not constitute a waiver of such Lender’s right to demand
such compensation; provided that the Borrower shall not be required to
compensate a Lender pursuant to this Section for any increased costs or
reductions incurred more than 270 days prior to the date that such Lender
notifies the Borrower of the Change in Law giving rise to such increased costs
or reductions and of such Lender’s intention to claim compensation therefor;
provided further that, if the Change in Law giving rise to such increased costs
or reductions is retroactive, then the 270-day period referred to above shall be
extended to include the period of retroactive effect thereof.

SECTION 2.15. Break Funding Payments. In the event of (a) the payment of any
principal of any Eurodollar Loan other than on the last day of an Interest
Period applicable thereto (including as a result of an Event of Default),
(b) the conversion of any Eurodollar Loan other than on the last day of the
Interest Period applicable thereto, (c) the failure to borrow, convert, continue
or prepay any Eurodollar Loan on the date specified in any notice delivered
pursuant hereto (regardless of whether such notice may be revoked under
Section 2.10(b) and is revoked in accordance therewith) or (d) the assignment of
any Eurodollar Loan other than on the last day of the Interest Period applicable
thereto as a result of a request by the Borrower pursuant to Section 2.18, then,
in any such event, the Borrower shall compensate each Lender for the loss, cost
and expense attributable to such event. In the case of a Eurodollar Loan, such
loss, cost or expense to any Lender shall be deemed to include an amount
determined by such Lender to be the excess, if any, of (i) the amount of
interest which would have accrued on the principal amount of such Loan had such
event not occurred, at the Adjusted LIBO Rate that would have been applicable to
such Loan, for the period from the date of such event to the last day of the
then current Interest

 

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Period therefor (or, in the case of a failure to borrow, convert or continue,
for the period that would have been the Interest Period for such Loan), over
(ii) the amount of interest which would accrue on such principal amount for such
period at the interest rate which such Lender would bid were it to bid, at the
commencement of such period, for U.S. Dollar deposits of a comparable amount and
period from other banks in the eurodollar market. A certificate of any Lender
setting forth any amount or amounts that such Lender is entitled to receive
pursuant to this Section shall be delivered to the Borrower and shall be
conclusive absent manifest error. The Borrower shall pay such Lender the amount
shown as due on any such certificate within 10 days after receipt thereof.

SECTION 2.16. Withholding of Taxes; Gross-Up.

(a) Each payment by any Loan Party under any Loan Document shall be made without
withholding for any Taxes, unless such withholding is required by any law. If
any Withholding Agent determines, in its sole discretion exercised in good
faith, that it is so required to withhold Taxes, then such Withholding Agent may
so withhold and shall timely pay the full amount of withheld Taxes to the
relevant Governmental Authority in accordance with applicable law. If such Taxes
are Indemnified Taxes, then the amount payable by such Loan Party shall be
increased as necessary so that, net of such withholding (including such
withholding applicable to additional amounts payable under this Section), the
applicable Recipient receives the amount it would have received had no such
withholding been made.

(b) Payment of Other Taxes by the Borrower. The Borrower shall timely pay any
Other Taxes to the relevant Governmental Authority in accordance with applicable
law.

(c) Evidence of Payments. As soon as practicable after any payment of
Indemnified Taxes by any Loan Party to a Governmental Authority, such Loan Party
shall deliver to the Administrative Agent the original or a certified copy of a
receipt issued by such Governmental Authority evidencing such payment, a copy of
the return reporting such payment or other evidence of such payment reasonably
satisfactory to the Administrative Agent.

(d) Indemnification by the Borrower. The Loan Parties shall jointly and
severally indemnify each Recipient for any Indemnified Taxes that are paid or
payable by such Recipient in connection with any Loan Document (including
amounts paid or payable under this Section 2.16(d)) and any reasonable expenses
arising therefrom or with respect thereto, whether or not such Indemnified Taxes
were correctly or legally imposed or asserted by the relevant Governmental
Authority. The indemnity under this Section 2.16(d) shall be paid within 10 days
after the Recipient delivers to any Loan Party a certificate stating the amount
of any Indemnified Taxes so paid or payable by such Recipient and describing in
reasonable detail the basis for the indemnification claim. Such certificate
shall be conclusive of the amount so paid or payable absent manifest error. Such
Recipient shall deliver a copy of such certificate to the Administrative Agent.

(e) Indemnification by the Lenders. Each Lender shall severally indemnify the
Administrative Agent for any Taxes (but, in the case of any Indemnified Taxes,
only to the extent that any Loan Party has not already indemnified the
Administrative Agent for such Indemnified Taxes and without limiting the
obligation of the Loan Parties to do so) attributable to such Lender that are
paid or payable by the Administrative Agent in connection with any Loan Document
and any reasonable expenses arising therefrom or with respect thereto, whether
or not such Taxes were correctly or legally imposed or asserted by the relevant
Governmental Authority. The indemnity under this Section 2.16(e) shall be paid
within 10 days after the Administrative Agent delivers to the applicable Lender
a certificate stating the amount of Taxes so paid or payable by the
Administrative Agent. Such certificate shall be conclusive of the amount so paid
or payable absent manifest error.

 

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(f) Status of Lenders. (i) Any Lender that is entitled to an exemption from, or
reduction of, any applicable withholding Tax with respect to any payments under
any Loan Document shall deliver to the Borrower and the Administrative Agent, at
the time or times reasonably requested by the Borrower or the Administrative
Agent, such properly completed and executed documentation required by law as
will permit such payments to be made without, or at a reduced rate of,
withholding. In addition, any Lender, if requested by the Borrower or the
Administrative Agent, shall deliver such other documentation prescribed by law
or reasonably requested by the Borrower or the Administrative Agent as will
enable the Borrower or the Administrative Agent to determine whether or not such
Lender is subject to any withholding (including backup withholding) or
information reporting requirements. Notwithstanding anything to the contrary in
the preceding two sentences, the completion, execution and submission of any
documentation described in Section 2.16(f)(iii) shall not be required if in the
Lender’s judgment such completion, execution or submission would subject such
Lender to any material unreimbursed cost or expense or would materially
prejudice the legal or commercial position of such Lender. Upon the reasonable
request of the Borrower or the Administrative Agent, any Lender shall update any
form or certification previously delivered pursuant to this Section 2.16(f). If
any form or certification previously delivered pursuant to this Section 2.16
expires or becomes obsolete or inaccurate in any respect with respect to a
Lender, such Lender shall promptly (and in any event within 10 days after such
expiration, obsolescence or inaccuracy) notify the Borrower and the
Administrative Agent in writing of such expiration, obsolescence or inaccuracy
and update the form or certification if it is legally eligible to do so.

(ii) Without limiting the generality of the foregoing, any Lender with respect
to the Borrower shall, if it is legally eligible to do so, deliver to the
Borrower and the Administrative Agent except, in the case of
Section 2.16(f)(ii)(E) below with respect to a participating Lender, only to the
relevant Lender (in such number of copies reasonably requested by the Borrower
and the Administrative Agent) on or prior to the date on which such Lender
becomes a party hereto, duly completed and executed copies of whichever of the
following is applicable:

(A) in the case of a Lender that is a U.S. Person, IRS Form W-9 certifying that
such Lender is exempt from U.S. Federal backup withholding tax;

(B) in the case of a Non-U.S. Lender claiming the benefits of an income tax
treaty to which the United States is a party (1) with respect to payments of
interest under any Loan Document, IRS Form W-8BEN or W-8BEN-E establishing an
exemption from, or reduction of, U.S. Federal withholding Tax pursuant to the
“interest” article of such tax treaty and (2) with respect to any other
applicable payments under this Agreement, IRS Form W-8BEN or W-8BEN-E
establishing an exemption from, or reduction of, U.S. Federal withholding Tax
pursuant to the “business profits” or “other income” article of such tax treaty;

(C) in the case of a Non-U.S. Lender for whom payments under this Agreement
constitute income that is effectively connected with such Lender’s conduct of a
trade or business in the United States, IRS Form W-8ECI;

(D) in the case of a Non-U.S. Lender claiming the benefits of the exemption for
“portfolio interest” under Section 881(c) of the Code both (1) IRS Form W-8BEN
or W-8BEN-E and (2) a certificate substantially in the form of Exhibit C (a
“U.S. Tax Certificate”) certifying that such Lender is not (a) a “bank” within
the meaning of Section 881(c)(3)(A) of the Code, (b) a “10-percent shareholder”
of the Borrower within the meaning of Section 881(c)(3)(B) of the Code or (c) a
“controlled foreign corporation” described in Section 881(c)(3)(C) of the Code;
or

(E) in the case of a Non-U.S. Lender that is not the beneficial owner of
payments made under this Agreement (including a partnership or a participating
Lender) (1) an IRS Form

 

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W-8IMY on behalf of itself and (2) the relevant forms prescribed in clauses (A),
(B), (C), (D) and (F) of this Section 2.16(f)(ii) that would be required of each
such beneficial owner or partner of such partnership if such beneficial owner or
partner were a Lender; provided, however, that if the Lender is a partnership
and one or more of its partners are claiming the exemption for portfolio
interest under Section 881(c) of the Code, such Lender may provide a U.S. Tax
Certificate on behalf of such partners.

(iii) If a payment made to a Lender under any Loan Document would be subject to
U.S. Federal withholding Tax imposed by FATCA if such Lender were to fail to
comply with the applicable reporting requirements of FATCA, such Lender shall
deliver to the Withholding Agent, at the time or times prescribed by law such
documentation prescribed by applicable law. Solely for purposes of this
Section 2.16(f)(iii), “FATCA” shall include any amendments made to FATCA after
the date of this Agreement.

(g) Treatment of Certain Refunds. If any Recipient determines, in its sole
discretion exercised in good faith, that it has received a refund of any Taxes
as to which it has been indemnified pursuant to this Section 2.16 (including
additional amounts paid pursuant to this Section 2.16), it shall pay to the
indemnifying party an amount equal to such refund (but only to the extent of
indemnity payments made under this Section with respect to the Taxes giving rise
to such refund), net of all out-of-pocket expenses (including any Taxes) of such
indemnified party and without interest (other than any interest paid by the
relevant Governmental Authority with respect to such refund). Such indemnifying
party, upon the request of such indemnified party, shall repay to such
indemnified party the amount paid to such indemnified party pursuant to the
previous sentence (plus any penalties, interest or other charges imposed by the
relevant Governmental Authority) in the event such indemnified party is required
to repay such refund to such Governmental Authority. Notwithstanding anything to
the contrary in this Section 2.16(g), in no event will any indemnified party be
required to pay any amount to any indemnifying party pursuant to this
Section 2.16(g) if such payment would place such indemnified party in a less
favorable position (on a net after-Tax basis) than such indemnified party would
have been in if the indemnification payments or additional amounts giving rise
to such refund had never been paid and no indemnified party shall be required to
pay any amounts pursuant to this Section 2.16(g) at any time when a Default
exists. This Section 2.16(g) shall not be construed to require any indemnified
party to make available its Tax returns (or any other information relating to
its Taxes which it deems confidential) to the indemnifying party or any other
Person.

(h) Survival. Each party’s obligations under this Section 2.16 shall survive any
assignment of rights by, or the replacement of, a Lender, the termination of the
Commitments and the repayment, satisfaction or discharge of all other Loans and
obligations under any Loan Document.

SECTION 2.17. Payments Generally; Pro Rata Treatment; Sharing of Set-offs.

(a) The Borrower shall make each payment required to be made by it hereunder
(whether of principal, interest or fees, or of amounts payable under
Section 2.14, 2.15 or 2.16, or otherwise) prior to 12:00 noon, New York City
time, on the date when due, in immediately available funds, without set-off or
counterclaim. Any amounts received after such time on any date may, in the
discretion of the Administrative Agent, be deemed to have been received on the
next succeeding Business Day for purposes of calculating interest thereon. All
such payments shall be made to the Administrative Agent at its offices at 270
Park Avenue, New York, New York and except that payments pursuant to Sections
2.14, 2.15, 2.16 and 9.03 shall be made directly to the Persons entitled
thereto. The Administrative Agent shall distribute any such payments received by
it for the account of any other Person to the appropriate recipient promptly
following receipt thereof. If any payment hereunder shall be due on a day that
is not a Business Day, the date for payment shall be extended to the next
succeeding Business Day, and, in the case of

 

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any payment accruing interest, interest thereon shall be payable for the period
of such extension; provided that if the Maturity Date is not a Business Day,
payments due thereon will be payable on the next succeeding Business Day. All
payments hereunder shall be made in U.S. Dollars.

(b) If at any time insufficient funds are received by and available to the
Administrative Agent to pay fully all amounts of principal, interest and fees
then due hereunder, such funds shall be applied (i) first, towards payment of
interest and fees then due hereunder, ratably among the parties entitled thereto
in accordance with the amounts of interest and fees then due to such parties,
and (ii) second, towards payment of principal then due hereunder, ratably among
the parties entitled thereto in accordance with the amounts of principal then
due to such parties.

(c) If any Lender shall, by exercising any right of set-off or counterclaim or
otherwise, obtain payment in respect of any principal of or interest on any of
its Loans resulting in such Lender receiving payment of a greater proportion of
the aggregate amount of its Loans and accrued interest thereon than the
proportion received by any other Lender, then the Lender receiving such greater
proportion shall purchase (in U.S. Dollars) (for cash at face value)
participations in the Loans of other Lenders to the extent necessary so that the
benefit of all such payments shall be shared by the Lenders ratably in
accordance with the aggregate amount of principal of and accrued interest on
their respective Loans; provided that (i) if any such participations are
purchased and all or any portion of the payment giving rise thereto is
recovered, such participations shall be rescinded and the purchase price
restored to the extent of such recovery, without interest, and (ii) the
provisions of this Section 2.17(c) shall not be construed to apply to any
payment made by the Borrower pursuant to and in accordance with the express
terms of this Agreement (including any payment obtained by a Lender as
consideration for the assignment of or sale of a participation in any of its
Loans to any assignee or participant, other than to the Borrower or any
Subsidiary or Affiliate thereof (as to which the provisions of this
Section 2.17(c) shall apply)). The Borrower consents to the foregoing and
agrees, to the extent it may effectively do so under applicable law, that any
Lender acquiring a participation pursuant to the foregoing arrangements may
exercise against the Borrower rights of set-off and counterclaim with respect to
such participation as fully as if such Lender were a direct creditor of the
Borrower in the amount of such participation.

(d) Unless the Administrative Agent shall have received notice from the Borrower
prior to the date on which any payment is due to the Administrative Agent for
the account of the Lenders hereunder that the Borrower will not make such
payment, the Administrative Agent may assume that the Borrower has made such
payment on such date in accordance herewith and may, in reliance upon such
assumption, distribute to the Lenders the amount due. In such event, if the
Borrower has not in fact made such payment, then each of the Lenders severally
agrees to repay to the Administrative Agent forthwith on demand the amount so
distributed to such Lender with interest thereon, for each day from and
including the date such amount is distributed to it to but excluding the date of
payment to the Administrative Agent, at the greater of the Federal Funds
Effective Rate and a rate determined by the Administrative Agent in accordance
with banking industry rules on interbank compensation.

(e) If any Lender shall fail to make any payment required to be made by it
pursuant to 2.06(b), 2.17(d) or 9.03(d), then the Administrative Agent may, in
its discretion and notwithstanding any contrary provision hereof, (i) apply any
amounts thereafter received by the Administrative Agent for the account of such
Lender and for the benefit of the Administrative Agent to satisfy such Lender’s
obligations under such Sections until all such unsatisfied obligations are fully
paid, and/or (ii) hold any such amounts in a segregated account as cash
collateral for, and application to, any future funding obligations of such
Lender under such Sections. In the case of each of (i) and (ii) above, in any
order as determined by the Administrative Agent in its discretion.

 

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SECTION 2.18. Mitigation Obligations; Replacement of Lenders.

(a) If any Lender requests compensation under Section 2.14, or if the Borrower
is required to pay any additional amount to any Lender or any Governmental
Authority for the account of any Lender pursuant to Section 2.16, then such
Lender shall use reasonable efforts to designate a different lending office for
funding or booking its Loans hereunder or to assign its rights and obligations
hereunder to another of its offices, branches or affiliates, if, in the judgment
of such Lender, such designation or assignment (i) would eliminate or reduce
amounts payable pursuant to Section 2.14 or 2.16, as the case may be, in the
future and (ii) would not subject such Lender to any unreimbursed cost or
expense and would not otherwise be disadvantageous to such Lender. The Borrower
hereby agrees to pay all reasonable costs and expenses incurred by any Lender in
connection with any such designation or assignment.

(b) If (x) any Lender requests compensation under Section 2.14, (y) the Borrower
is required to pay any additional amount to any Lender or any Governmental
Authority for the account of any Lender pursuant to Section 2.16, or (z) any
Lender becomes a Defaulting Lender, then the Borrower may, at its sole expense
and effort, upon notice to such Lender and the Administrative Agent, require
such Lender to assign and delegate, without recourse (in accordance with and
subject to the restrictions contained in Section 9.04), all its interests,
rights and obligations under this Agreement to an assignee that shall assume
such obligations (which assignee may be another Lender, if a Lender accepts such
assignment); provided that (i) the Borrower shall have received the prior
written consent of the Administrative Agent, which consent shall not
unreasonably be withheld or delayed, (ii) such Lender shall have received
payment (in U.S. Dollars) of an amount equal to the outstanding principal of its
Loans accrued interest thereon, accrued fees and all other amounts payable to it
hereunder, from the assignee (to the extent of such outstanding principal and
accrued interest and fees) or the Borrower (in the case of all other amounts)
and (iii) in the case of any such assignment resulting from a claim for
compensation under Section 2.14 or payments required to be made pursuant to
Section 2.16, such assignment will result in a reduction in such compensation or
payments. A Lender shall not be required to make any such assignment and
delegation if, prior thereto, as a result of a waiver by such Lender or
otherwise, the circumstances entitling the Borrower to require such assignment
and delegation cease to apply.

SECTION 2.19. Defaulting Lenders. Notwithstanding any provision of this
Agreement to the contrary, if any Lender becomes a Defaulting Lender, then the
following provisions shall apply for so long as such Lender is a Defaulting
Lender:

(a) fees shall cease to accrue on the unfunded portion of the Commitment of such
Defaulting Lender pursuant to Section 2.11; and

(b) the Commitment or outstanding Loans of such Defaulting Lender shall not be
included in determining whether all Lenders or the Required Lenders have taken
or may take any action hereunder (including any consent to any amendment or
waiver pursuant to Section 9.02), provided that any waiver, amendment or
modification requiring the consent of all Lenders or each affected Lender shall
require the consent of such Defaulting Lender.

ARTICLE III

Representations and Warranties

The Borrower represents and warrants to the Administrative Agent and the Lenders
as of the date hereof and as of the Closing Date and after giving effect to the
Transactions that:

 

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SECTION 3.01. Organization; Powers. Each Loan Party and its Material
Subsidiaries is duly organized, validly existing and in good standing under the
laws of the jurisdiction of its organization, has all requisite power and
authority to carry on its business as now conducted and, except where the
failure to do so, individually or in the aggregate, could not reasonably be
expected to result in a Material Adverse Effect, is qualified to do business in,
and is in good standing in, every jurisdiction where such qualification is
required.

SECTION 3.02. Authorization; Enforceability. The Transactions are within each
Loan Party’s corporate powers and have been duly authorized by all necessary
corporate and, if required, shareholder action. Each Loan Document has been duly
executed and delivered by each Loan Party party thereto, and constitutes a
legal, valid and binding obligation of each Loan Party, enforceable in
accordance with its terms, subject to applicable bankruptcy, insolvency,
reorganization, moratorium or other laws affecting creditors’ rights generally
and subject to general principles of equity, regardless of whether considered in
a proceeding in equity or at law.

SECTION 3.03. Governmental Approvals; No Conflicts. The Transactions (a) do not
require any consent or approval of, registration or filing with, or any other
action by, any Governmental Authority, except such as have been obtained or made
and are in full force and effect or that will be obtained or made and be in full
force and effect on the Closing Date, (b) will not violate any material
applicable law or regulation or the charter, by-laws or other organizational
documents of any Loan Party or any order of any Governmental Authority, (c) will
not violate or result in a default under any indenture or other material
agreement or instrument binding upon the Borrower or any of its Subsidiaries or
its assets, or give rise to a right thereunder to require any payment to be made
by the Borrower or any of its Subsidiaries, and (d) will not result in the
creation or imposition of any Lien on any asset of the Borrower or any of its
Subsidiaries.

SECTION 3.04. Financial Condition; No Material Adverse Effect.

(a) The Borrower has heretofore furnished to the Lenders its consolidated
balance sheet and statements of income, shareholders’ equity and cash flows
(i) as of and for the fiscal year ended December 31, 2013, reported on by KPMG
LLP, independent public accountants, and (ii) as of and for the fiscal quarter
and the portion of the fiscal year ended June 30, 2014 certified by its chief
financial officer. Such financial statements and any financial statements
delivered after the Effective Date pursuant to Section 4.02(d) (other than pro
forma financial statements, to the extent delivered) present fairly, in all
material respects, the financial condition and results of operations and cash
flows of the Borrower and its consolidated Subsidiaries as of such dates and for
such periods in accordance with GAAP, subject to year-end audit adjustments and
the absence of footnotes in the case of the statements referred to in clause
(ii) above.

(b) Since December 31, 2013, there has been no event, occurrence or development
that, individually or in the aggregate, has had a Material Adverse Effect.

SECTION 3.05. Properties.

(a) Each Loan Party and its Material Subsidiaries has good title to, or valid
leasehold interests in, all its real and personal property material to its
business, except for minor defects in title that do not interfere in any
material respect with its ability to conduct its business as currently conducted
or to utilize such properties for their intended purposes.

(b) Each of the Borrower and its Subsidiaries owns, or is licensed to use, all
trademarks, tradenames, copyrights, patents and other intellectual property
material to its business, and the use thereof by the Borrower and its
Subsidiaries does not infringe upon the rights of any other Person, except for
any such infringements that, individually or in the aggregate, could not
reasonably be expected to result in a Material Adverse Effect.

 

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SECTION 3.06. Litigation and Environmental Matters.

(a) There are no actions, suits or proceedings by or before any arbitrator or
Governmental Authority pending against or, to the knowledge of the Borrower,
threatened against or affecting the Borrower or any of its Subsidiaries or the
Transactions (i) that could reasonably be expected, individually or in the
aggregate, to result in a Material Adverse Effect (other than the Disclosed
Matters) or (ii) that involve this Agreement or the other Loan Documents.

(b) Except with respect to any other matters that, individually or in the
aggregate, could not reasonably be expected to result in a Material Adverse
Effect, neither the Borrower nor any of its Subsidiaries (i) has failed to
comply with any Environmental Law or to obtain, maintain or comply with any
permit, license or other approval required under any Environmental Law, (ii) has
become subject to any Environmental Liability, (iii) has received notice of any
claim with respect to any Environmental Liability or (iv) knows of any basis for
any Environmental Liability.

(c) Since the Effective Date, there has been no change in the status of the
Disclosed Matters that, individually or in the aggregate, has had a Material
Adverse Effect.

SECTION 3.07. Compliance with Laws and Contractual Obligations. Each of the
Borrower and its Subsidiaries is in compliance with all laws, regulations and
orders of any Governmental Authority applicable to it or its property and all
Contractual Obligations binding upon it or its property, except where the
failure to do so, individually or in the aggregate, could not reasonably be
expected to result in a Material Adverse Effect. No Default has occurred and is
continuing.

SECTION 3.08. Use of Proceeds; Margin Regulations; Investment Company Status.

(a) All proceeds of the Loans shall be utilized to finance, in part, a portion
of the purchase price for the Acquisition, and fees and expenses in connection
with the Transactions.

(b) Neither the making of any Loan hereunder nor the use of the proceeds
thereof, will violate or be inconsistent with the provisions of regulations of
the Board, including Regulations T, U and X, and no part of the proceeds of any
Loan will be used to purchase or carry any Margin Stock or to extend credit for
the purpose of purchasing or carrying any Margin Stock in violation of
Regulations T, U or X. Not more than 25.0% of the value of the assets of the
Borrower and their respective Subsidiaries is represented by Margin Stock.

(c) Neither of the Borrower nor any of its Subsidiaries is an “investment
company,” or a company “controlled” by an “investment company,” within the
meaning of the Investment Company Act of 1940, as amended. Neither the Borrower
nor any of its Subsidiaries is subject to regulation under any Requirement of
Law (other than Regulation X of the Board) that limits its ability to incur
Indebtedness.

SECTION 3.09. Taxes. Each of the Borrower and its Material Subsidiaries has
timely filed or caused to be filed all material Tax returns and reports required
to have been filed (after giving effect to all valid filing extensions) and has
paid or caused to be paid all material Taxes required to have been paid by it,
except Taxes that are being contested in good faith by appropriate proceedings
and for which the Borrower or such Subsidiary, as applicable, has set aside on
its books adequate reserves.

 

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SECTION 3.10. ERISA. No ERISA Event has occurred or is reasonably expected to
occur that, when taken together with all other such ERISA Events for which
liability is reasonably expected to occur, could reasonably be expected to
result in a Material Adverse Effect.

SECTION 3.11. Disclosure. As of the Effective Date, the Borrower has disclosed
to the Lenders all material agreements, instruments and corporate or other
restrictions to which it or any of its Subsidiaries is subject. None of the
reports, financial statements, certificates or other information furnished by or
on behalf of the Borrower in writing to the Administrative Agent or any Lender
in connection with the negotiation of this Agreement or delivered hereunder (as
modified or supplemented by other information so furnished) (in each case, taken
as a whole) contains any material misstatement of fact or omits to state any
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided that, with
respect to projected or pro forma financial information, the Borrower represents
only that such information was prepared in good faith based upon assumptions
believed to be reasonable at the time, it being recognized by the Administrative
Agent and the Lenders that such projected or pro forma financial information
should not be viewed as facts, and that actual results will differ from such
projected or pro forma financial information and such differences may be
material.

SECTION 3.12. Subsidiaries. On and as of the Effective Date, the Borrower has no
Subsidiaries other than those Subsidiaries listed on Schedule 3.12. Schedule
3.12 correctly sets forth, as of the Effective Date, (x) the percentage
ownership (direct and indirect) of the Borrower in each class of capital stock
or other Equity Interests of each of its Subsidiaries and also identified the
direct owner thereof and (y) the name of each Material Subsidiary, each
Subsidiary which is not a Material Subsidiary and each Non-Guarantor Subsidiary.
All outstanding shares of Equity Interests of each Subsidiary of the Borrower
have been duly and validly issued, are fully paid and non-assessable and have
been issued free of preemptive rights.

SECTION 3.13. Anti-Terrorism Law; Anti-Corruption.

(a) Neither the Borrower nor any of its Subsidiaries is in violation of any
legal requirement relating to any laws with respect to terrorism or money
laundering (“Anti-Terrorism Laws”), including Executive Order No. 13224 on
Terrorist Financing effective September 24, 2001 (the “Executive Order”) and the
PATRIOT Act. None of (i) the Borrower or any of its Subsidiaries, (ii) to the
knowledge of the Borrower, any officer, director or employee of the Borrower or
any of its Subsidiaries or (iii) to the knowledge of the Borrower, any agent of
the Borrower or any of its Subsidiaries that will act in any capacity in
connection with or benefit from the credit facility established hereby, as the
case may be, is a Designated Person or in violation of any Anti-Corruption Laws
or applicable Sanctions.

(b) None of (i) the Borrower or any of its Subsidiaries, (ii) to the knowledge
of the Borrower, any officer, director or employee of the Borrower or any of its
Subsidiaries or (iii) to the knowledge of the Borrower, any agent of the
Borrower or any of its Subsidiaries that will act in any capacity in connection
with or benefit from the credit facility established hereby, as the case may be,
(x) conducts any business or engages in making or receiving any contribution of
funds, goods or services to or for the benefit of a Designated Person, (y) deals
in, or otherwise engages in any transaction relating to, any property or
interests in property blocked pursuant to the Executive Order, or (z) engages in
or conspires to engage in any transaction that violates any of the prohibitions
set forth in any Anti-Terrorism Law.

(c) The Borrower has implemented and maintains in effect policies and procedures
designed to ensure compliance by the Borrower, its Subsidiaries and their
respective directors, officers, employees and agents in connection with their
services for or on behalf of the Borrower with Anti-Corruption Laws and
applicable Sanctions.

 

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ARTICLE IV

Conditions

SECTION 4.01. Effective Date. This Agreement shall not become effective until
the date on which each of the following conditions is satisfied (or waived in
accordance with Section 9.02):

(a) The Administrative Agent (or its counsel) shall have received from each
party hereto either (i) a counterpart of this Agreement signed on behalf of such
party or (ii) written evidence satisfactory to the Administrative Agent (which
may include telecopy transmission or electronic transmission in .pdf format of a
signed signature page of this Agreement) that such party has signed a
counterpart of this Agreement.

(b) The Administrative Agent shall have received written opinions (each
addressed to the Administrative Agent and the Lenders and dated the Effective
Date) of (i) Kilpatrick Townsend & Stockton LLP, counsel for the Borrower and
(ii) the Deputy General Counsel of the Borrower, each in form and substance
reasonably satisfactory to the Administrative Agent and its counsel.

(c) The Administrative Agent shall have received such documents and certificates
as the Administrative Agent or its counsel may reasonably request relating to
the organization, existence and good standing of each Loan Party, the
authorization of the Transactions and any other legal matters relating to each
Loan Party in its respective jurisdiction of organization, this Agreement or the
Transactions, all in form and substance reasonably satisfactory to the
Administrative Agent and its counsel.

(d) The Administrative Agent and each Lender shall have received all fees and
other amounts due and payable to the Administrative Agent and such Lender,
respectively, on or prior to the Effective Date, including, to the extent
invoiced a reasonable time prior to the Effective Date, reimbursement or payment
of all out-of-pocket expenses of the Administrative Agent required to be
reimbursed or paid by the Borrower on or prior to the Effective Date.

(e) The Lead Agents shall have received at least three Business Days before the
Effective Date all documentation and other information requested in writing by
the Lead Agents at least 10 Business Days prior to the Effective Date and
required by bank regulatory authorities under applicable “know your customer”
and anti-money laundering rules and regulations, including, without limitation,
the PATRIOT Act.

SECTION 4.02. Conditions to Borrowing. The obligation of each Lender to make a
Loan is subject to the satisfaction of the following conditions on or before the
Availability End Date:

(a) The Administrative Agent shall have received reasonably satisfactory
evidence (which may be provided by a certificate of a Responsible Officer) that
(X) the Acquisition has been consummated (or shall be consummated substantially
concurrently with the funding of the Loans on the Closing Date) in all material
respects in accordance with the terms of the Acquisition Agreement; provided
that no amendment, modification or waiver of any term thereof or any condition
to the Borrower’s obligation to consummate the Acquisition thereunder or consent
granted thereunder will be made or granted that is materially adverse to the
interests of the Lead

 

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Agents or the Lenders, as the case may be, without the prior written consent of
the Lead Agents, which consent shall not be unreasonably withheld or delayed (it
being understood that any (i) modification, amendment, supplement, consent,
waiver or request under the Acquisition Agreement that results in a decrease in
the purchase price shall not be deemed to be materially adverse to the interests
of the Lead Agents or the Lenders; provided that, any such reduction shall be
allocated entirely to reduce the Commitments under this Agreement or ratably to
reduce (x) the Commitments under this Agreement and (y) the requirement of cash
on hand and the BAT Equity Issuance (so long as BAT’s percentage ownership of
the Borrower’s common equity after giving effect to the Transactions is
42.17832%) intended to be used to finance the Acquisition and (ii) amendment,
waiver or modification to the definition of “Company Material Adverse Effect” or
the “lender protection provisions” in Sections 8.02(g), 8.03, 8.04, 9.07,
9.08(c) and 9.11 of the Acquisition Agreement shall be deemed to be materially
adverse to the interests of the Lead Agents and the Lenders, (Y) the Specified
Asset Dispositions have been consummated (or shall be consummated substantially
concurrently) with the funding of the Loans on the Closing Date and the
consummation of the Acquisition in accordance with the terms of the Imperial
Divestiture Documents as in effect on the date hereof and after giving effect to
any modifications, amendments, supplements, replacements or substitutions (in
each case, in whole or in part), consents, waivers or requests thereto, other
than those modifications, amendments, supplements, replacements, substitutions,
consents, waivers or requests (including the effects of any such requests) that
result in (a) additional assets exceeding in the aggregate $250,000,000 becoming
part of the Specified Asset Dispositions or (b) a Substantial Detriment unless
either such addition of assets or Substantial Detriment is consented to in
writing by the Lead Agents (which consent shall not be unreasonably withheld or
delayed), and (Z) the BAT Equity Issuance has been consummated (or shall be
consummated substantially concurrently) with the funding of the Loans on the
Closing Date.

(b) The Administrative Agent shall have received reasonably satisfactory
evidence certifying that except (x) as set forth in the Lorillard Disclosure
Letter delivered by Lorillard to the Borrower on July 15, 2014, (y) with respect
to any information set forth in one section or subsection of the Lorillard
Disclosure Letter to the extent that it is reasonably apparent from the wording
of such disclosure that such disclosure applies to the foregoing or (z) as set
forth in the Lorillard SEC Documents filed since January 1, 2014, but prior to
the date of the Acquisition Agreement (excluding all disclosures in any “Risk
Factor” sections and any disclosures included in any such Lorillard SEC
Documents that are cautionary, predictive or forward looking in nature, from
January 1, 2014 to the date of the Acquisition Agreement) there has not occurred
any fact, circumstance, effect, change, event or development that, individually
or in the aggregate, has had or could reasonably be expected to have a Lorillard
Material Adverse Effect.

(c) Since July 15, 2014, a Lorillard Material Adverse Effect shall not have
occurred and the Administrative Agent shall have received a certificate to such
effect, dated the Closing Date and signed by a Responsible Officer.

(d) At least 5 Business Days prior to the Closing Date, the Lead Agents shall
have received (i) audited consolidated balance sheets and related statements of
income (or, in the case of Lorillard, consolidated statements of operations and
comprehensive income), shareholders’ equity (or, in the case of Lorillard,
stockholders’ equity) and cash flows for Lorillard and the Borrower for the
fiscal years ended December 31, 2011, 2012, 2013 and (in the event that the
Closing Date occurs on a date that is more than 90 days following December 31,
2014) 2014, (ii) unaudited consolidated balance sheets and related statements of
income (or, in the case of Lorillard, statements of operations and comprehensive
income), shareholders’ equity (in the case of the Borrower) (or, in the case of
Lorillard, stockholders’ equity) and cash flows for each of Lorillard

 

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and the Borrower for each fiscal quarter ended on a date that is not a fiscal
year end and that is at least 45 days before the Closing Date, in each case
prepared in accordance with generally accepted accounting principles and (iii) a
pro forma consolidated balance sheet and related pro forma consolidated
statement of income of the Borrower as of and for the twelve-month period ending
on the last day of the most recently ended four-fiscal quarter period for which
financial statements have been delivered pursuant to clauses (i) and (ii) above,
prepared after giving effect to the Transactions as if the Transactions had
occurred as of such date (in the case of the balance sheet) or at the beginning
of such period (in the case of such income statements). The Borrower’s or
Lorillard’s, as applicable, filing of the historical and pro forma financial
statements required by applicable federal securities laws and rules, at the
times and in the filings required by such laws and rules will satisfy the
requirements under clauses (i), (ii) and (iii) of this Section 4.02(d). The Lead
Agents hereby acknowledge that they have received each of the financial
statements described in clause (i) of the first sentence of this Section 4.02(d)
for the fiscal years ended December 31, 2011, 2012 and 2013 and described in
clause (ii) of the first sentence of this Section 4.02(d) for the fiscal
quarters ended March 31 and June 30, 2014.

(e) To the extent not delivered on or prior to the Effective Date, the Borrower
and each Guarantor shall have executed and delivered or caused to be executed
and delivered the Loan Documents, including the Subsidiary Guarantee Agreement
executed and delivered by each Subsidiary of the Borrower that guarantees the
Existing Credit Agreement on the Effective Date; provided, however, that with
respect to any Subsidiary Guarantee Agreement to be provided by Lorillard or any
of its Material Subsidiaries, if such guarantee cannot be provided as a
condition precedent solely because the directors or managers of Lorillard or
such Subsidiary have not authorized such guarantee and the election of new
directors or managers to authorize such guarantee has not taken place prior to
the funding of the Loans (such guarantee, “Duly Authorized Guarantee”), such
election shall take place and such Duly Authorized Guarantee shall be executed
and delivered to the Administrative Agent no later than 5:00 p.m., New York City
time on the Business Day following the Closing Date.

(f) The Administrative Agent shall have received an executed Borrowing Request.

(g) The Administrative Agent shall have received written opinions (each
addressed to the Administrative Agent and the Lenders and dated the Closing
Date) of (i) Kilpatrick Townsend & Stockton LLP, counsel for the Borrower and
(ii) the Deputy General Counsel of the Borrower, each in form and substance
reasonably satisfactory to the Administrative Agent and its counsel.

(h) The Administrative Agent shall have received such customary documents and
certificates as the Administrative Agent or its counsel may reasonably request
relating to the organization, existence and good standing of each Loan Party in
its jurisdiction of organization or formation, as applicable, the authorization
of the Transactions and incumbency, all in form and substance reasonably
satisfactory to the Administrative Agent and its counsel.

(i) The Administrative Agent shall have received a solvency certificate, dated
the Closing Date, in the form of Exhibit E, executed by the chief financial
officer of the Borrower certifying that the Borrower and its Subsidiaries, on a
consolidated basis after giving effect to the Transactions and the other
transactions contemplated hereby and by the Acquisition Agreement, are solvent.

(j) As of the Closing Date, the Acquisition Agreement Representations and the
Specified Representations shall be true and correct in all material respects
(except to the extent

 

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expressly made as of an earlier date, in which case such representation shall
have been accurate in all material respects as of such earlier date) and the
Administrative Agent shall have received a certificate to such effect, dated the
Closing Date and signed by a Responsible Officer.

(k) The Lead Agents shall have received at least three Business Days before the
Closing Date all documentation and other information requested in writing by the
Lead Agents at least 10 Business Days prior to the Closing Date and required by
bank regulatory authorities under applicable “know your customer” and anti-money
laundering rules and regulations, including, without limitation, the PATRIOT
Act.

(l) The Administrative Agent and each Lender shall have received all fees and
other amounts due and payable to the Administrative Agent and such Lender,
respectively, on or prior to the Closing Date, including, to the extent invoiced
a reasonable time prior to the Closing Date, reimbursement or payment of all
out-of-pocket expenses of the Administrative Agent required to be reimbursed or
paid by the Borrower on or prior to the Closing Date.

(m) The Borrower will have used commercially reasonable efforts to assist the
Investment Bank with a timely (relative to the Closing Date) marketing of the
Notes and to provide the Lead Agents and the Investment Bank with a complete
printed preliminary prospectus or preliminary offering memorandum or preliminary
private placement memorandum (collectively, an “Offering Document”) suitable for
use in a customary “road show” relating to the Notes, which contains all
financial statements and other data to be included therein (including all
audited financial statements, all unaudited financial statements (which shall
have been reviewed by the independent accountants for Lorillard and the
Borrower, as applicable, as provided in the procedures specified by the Public
Company Accounting Oversight Board in AU 722) and all appropriate pro forma
financial statements, in each case, required by, prepared in accordance with, or
reconciled to, GAAP and prepared in accordance with Regulation S-X under the
Securities Act of 1933, as amended), and such other data (including selected
financial data) that the Securities and Exchange Commission would require in a
registered offering of the Notes or that would be necessary for the Investment
Bank to receive customary “comfort” (including “negative assurance” comfort)
from independent accountants in connection with the offering of the Notes and
the Investment Bank shall have received a customary comfort letter (which shall
provide “negative assurance” comfort), which may be in draft form if any such
Notes are then proposed to be issued but have not yet been issued, from the
independent accountants for Lorillard and the Borrower (and any predecessor
accountant or acquired company accountant to the extent financial statements of
Lorillard or the Borrower or any acquired company audited or reviewed by such
accountants are or would be included in any Offering Document).

(n) The loans under the Existing Credit Agreement that are used to finance the
Acquisition (including any fees and expenses incurred in connection therewith)
shall not exceed $500,000,000.

ARTICLE V

Affirmative Covenants

From and after the Closing Date and until the principal of and interest on each
Loan and all fees payable hereunder shall have been paid in full, the Borrower
covenants and agrees with the Administrative Agent and the Lenders that:

 

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SECTION 5.01. Financial Statements; Ratings Change and Other Information. The
Borrower will furnish to the Administrative Agent and each Lender:

(a) within 100 days after the end of each fiscal year of the Borrower, its
audited consolidated balance sheet and related statements of income,
shareholders’ equity and cash flows as of the end of and for such year, setting
forth in each case in comparative form the figures for the previous fiscal year,
all reported on by KPMG LLP or other independent public accountants of
recognized national standing (without a “going concern” or like qualification or
exception and without any qualification or exception as to the scope of such
audit) to the effect that such consolidated financial statements present fairly
in all material respects the financial condition and results of operations of
the Borrower and its consolidated Subsidiaries on a consolidated basis in
accordance with GAAP consistently applied;

(b) within 55 days after the end of each of the first three fiscal quarters of
each fiscal year of the Borrower, its consolidated balance sheet and related
statements of income, shareholders’ equity and cash flows as of the end of and
for such fiscal quarter and the then elapsed portion of the fiscal year, setting
forth in each case in comparative form the figures for the corresponding period
or periods of (or, in the case of the balance sheet, as of the end of) the
previous fiscal year, all certified by one of its Financial Officers as
presenting fairly in all material respects the financial condition and results
of operations of the Borrower and its consolidated Subsidiaries on a
consolidated basis in accordance with GAAP consistently applied, subject to
normal year-end audit adjustments and the absence of footnotes;

(c) concurrently with any delivery of financial statements under clause (a) or
(b) above, a compliance certificate of a Financial Officer of the Borrower in
the form of Exhibit D (i) certifying as to whether a Default has occurred and,
if a Default has occurred, specifying the details thereof and any action taken
or proposed to be taken with respect thereto, (ii) certifying compliance with
Section 6.04 for the applicable period and setting forth reasonably detailed
calculations demonstrating such compliance, (iii) stating whether any material
change in GAAP or in the application thereof has occurred since the date of the
audited financial statements referred to in Section 3.04 and, if any such change
has occurred, specifying the effect of such change on the financial statements
accompanying such certificate and attaching appropriate reconciliation
work-sheets, and (iv) in the case of the delivery of financial statements under
clause (a) above (and, if requested by the Administrative Agent, under clause
(b) above for any fiscal quarter ended on June 30 of any fiscal year),
identifying the legal names of all Material Subsidiaries;

(d) concurrently with any delivery of financial statements under clause
(a) above, a certificate of the accounting firm that reported on such financial
statements stating whether they obtained knowledge during the course of their
examination of such financial statements of any Default (which certificate may
be limited to the extent required by accounting rules or guidelines);

(e) promptly after the same become publicly available, copies of all periodic
and other reports, proxy statements and other materials filed by the Borrower or
any Subsidiary with the SEC, or any Governmental Authority succeeding to any or
all of the functions of the SEC, or distributed by the Borrower or any
Subsidiary to its shareholders generally, as the case may be;

(f) promptly after Moody’s or S&P shall have announced a change in the rating
established or deemed to have been established for the Index Debt, written
notice of such rating change;

 

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(g) promptly following any request therefor, such other information regarding
the operations, business affairs and financial condition of the Borrower or any
Subsidiary, or compliance with the terms of this Agreement, as the
Administrative Agent or any Lender (through the Administrative Agent) may
reasonably request; and

(h) promptly upon becoming available (or in the case of any agreements that no
Loan Party is a party to, promptly upon receipt by any Loan Party), copies of
all amendments, consents, or waivers to the Existing Credit Agreement, the
Acquisition Agreement, the BAT Subscription Agreement, the Imperial Purchase
Agreement, the Ancillary Agreements and the Imperial Transfer Agreement and, if
the Administrative Agent so requests, identical copies of such other
information, reports, and notices delivered (x) to the administrative agent
and/or the lenders under the Existing Credit Agreement or (y) under the
Acquisition Agreement, the BAT Subscription Agreement, the Imperial Purchase
Agreement, the Ancillary Agreements or the Imperial Transfer Agreement.

Notwithstanding the foregoing, to the extent the Borrower files the information
and reports referred to in clause (e) above with the SEC and such information is
publicly available on the Internet, the Borrower shall be deemed to be in
compliance with its obligations to furnish such information and reports to the
Administrative Agent pursuant to clause (e).

SECTION 5.02. Notices of Material Events. The Borrower will furnish to the
Administrative Agent and each Lender prompt written notice of the following
(promptly upon a Responsible Officer obtaining knowledge thereof):

(a) the occurrence of any Default;

(b) the filing or commencement of any action, suit or proceeding by or before
any arbitrator or Governmental Authority against or affecting the Borrower or
any Affiliate thereof that could reasonably be expected to result in a Material
Adverse Effect;

(c) the occurrence of any ERISA Event that, alone or together with any other
ERISA Events that have occurred, could reasonably be expected to result in a
Material Adverse Effect; and

(d) any other development that results in, or could reasonably be expected to
result in, a Material Adverse Effect.

Each notice delivered under this Section 5.02 shall be accompanied by a
statement of a Financial Officer or other executive officer of the Borrower
setting forth the details of the event or development requiring such notice and
any action taken or proposed to be taken with respect thereto.

SECTION 5.03. Existence; Conduct of Business. The Borrower will, and will cause
each of its Material Subsidiaries to, do or cause to be done all things
necessary to preserve, renew and keep in full force and effect its legal
existence and the rights, licenses, permits, privileges and franchises material
to the conduct of its business; provided that the foregoing shall not prohibit
any merger, consolidation, liquidation or dissolution permitted under
Section 6.03.

SECTION 5.04. Payment of Obligations. The Borrower will, and will cause each of
its Subsidiaries to, pay its material obligations, including material Tax
liabilities, except where (a) the validity or amount thereof is being contested
in good faith by appropriate proceedings, (b) the Borrower or such Subsidiary
has set aside on its books adequate reserves with respect thereto in accordance
with GAAP and (c) the failure to make payment pending such contest could not
reasonably be expected to result in a Material Adverse Effect.

 

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SECTION 5.05. Maintenance of Properties; Insurance. The Borrower will, and will
cause each of its Material Subsidiaries to, (a) keep and maintain all property
material to the conduct of its business in good working order and condition,
ordinary wear and tear excepted, and subject to the occurrence of casualty
events, and (b) maintain, with financially sound and reputable insurance
companies, insurance in such amounts and against such risks as are customarily
maintained by companies engaged in the same or similar businesses operating in
the same or similar locations.

SECTION 5.06. Books and Records; Inspection Rights. The Borrower will, and will
cause each of its Material Subsidiaries to, keep proper books of record and
account in which entries that are full, true and correct in all material
respects are made of all dealings and transactions in relation to its business
and activities. The Borrower will, and will cause each of its Subsidiaries to,
permit any representatives designated by the Administrative Agent or any Lender,
upon reasonable prior notice, to visit and inspect its properties, to examine
and make extracts from its books and records, and to discuss its affairs,
finances and condition with its officers and independent accountants, all at
such reasonable times and as often as reasonably requested.

SECTION 5.07. Compliance with Laws and Contractual Obligations. The Borrower
will, and will cause each of its Subsidiaries to, comply with all laws
(including Environmental Laws and the applicable provisions of ERISA), rules,
regulations and orders of any Governmental Authority applicable to it or its
property and all Contractual Obligations binding upon it or its property, except
where the failure to do so, individually or in the aggregate, could not
reasonably be expected to result in a Material Adverse Effect. The Borrower will
maintain in effect and enforce policies and procedures designed to ensure
compliance by the Borrower, its Subsidiaries and their respective directors,
officers, employees and agents in connection with their services for or on
behalf of the Borrower with Anti-Corruption Laws and applicable Sanctions.

SECTION 5.08. Use of Proceeds and Letters of Credit.

(a) The proceeds of the Loans will be used only to finance, in part, a portion
of the purchase price for the Acquisition, and fees and expenses in connection
with the Transactions. No part of the proceeds of any Loan will be used, whether
directly or indirectly, for any purpose that entails a violation of any of the
regulations of the Board, including Regulations T, U and X, including to
purchase or carry any Margin Stock or to extend credit for the purpose of
purchasing or carrying any Margin Stock, in each case, in violation of
Regulations T, U or X. After application of the proceeds of any Loan, not more
than 25.0% of the value of the assets of the Borrower and its Subsidiaries will
be represented by Margin Stock.

(b) Neither the making of any Loan hereunder nor the use of the proceeds
thereof, will directly or, to the Borrower’s knowledge, indirectly, fund any
activities or business of or with any Designated Person or in any country or
territory that at the time of such funding is itself the subject of any
sanctions under any Anti-Terrorism Laws or any sanctions program administered by
OFAC or will result in a violation by any party to this Agreement of any
Anti-Terrorism Laws or applicable Sanctions.

(c) No part of the proceeds of the Loans or any other part of the Transactions
shall be used directly or, to the Borrower’s knowledge, indirectly, for any
payments to any governmental official or employee, political party, official of
a political party, candidate for political office, or anyone else acting in an
official capacity, in order to obtain, retain or direct business or obtain any
improper advantage, in violation of any Anti-Corruption Laws.

 

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SECTION 5.09. Subsidiary Guarantee Agreement; Further Assurances.

(a) The Borrower agrees to (i) cause each Material Subsidiary of the Borrower
established, created or acquired on or after the Closing Date to execute and
deliver a counterpart to the Subsidiary Guarantee Agreement (and/or an
assumption agreement in form and substance reasonably satisfactory to the
Administrative Agent pursuant to which such Subsidiary shall become a party to
the Subsidiary Guarantee Agreement) and thereby guaranty all Obligations and
(ii) cause to be delivered to the Administrative Agent opinions of counsel and
such certificates, resolutions and other documents as may be reasonably
requested by the Administrative Agent in connection with the execution and
delivery of the documentation described in preceding clause (i). The actions
required above by this Section 5.09(a) shall be completed not later than 30 days
after the establishment, creation or acquisition of the applicable Material
Subsidiary (or such later date as agreed by the Administrative Agent in its sole
discretion).

(b) In the event that (i) any Subsidiary that is not then a Subsidiary Guarantor
constitutes a “Material Subsidiary” in accordance with the definition thereof on
the last day of the then most recent fiscal year for which financial statements
have been (or are required to be) furnished pursuant to Section 5.01(a) (and,
upon written notice by the Administrative Agent to the Borrower, at the last day
of the period of four consecutive fiscal quarters ended prior to the date on
which financial statements have been (or are required to be) furnished pursuant
to Section 5.01(b) for the fiscal quarter ended June 30) or (ii) the Borrower is
obligated to designate one or more additional Subsidiaries as “Material
Subsidiaries” as a result of the operation of the first proviso in the first
sentence of the definition of “Material Subsidiary,” then the Borrower shall
promptly (and in any event within ten Business Days after the date such
financial statements are so delivered or required to be so delivered) cause such
Subsidiary to take the actions described in Section 5.09(a) as if such
Subsidiary had been newly created by the Borrower at such time.

(c) Notwithstanding anything to the contrary contained in Section 5.09(a) or
(b), in no event shall any Foreign Subsidiary which becomes a Material
Subsidiary after the Closing Date be required to comply with the requirements of
Section 5.09(a) or (b), unless either (i) such Foreign Subsidiary would
constitute a “Material Subsidiary” pursuant to clause (a) or (b) of the first
sentence of the definition thereof (but, for this purpose only, assuming each
percentage set forth therein was 15.0% instead of 10.0%) or (ii) such Foreign
Subsidiary would otherwise be required to be designated by the Borrower as a
“Material Subsidiary” pursuant to the first proviso appearing in the first
sentence of the definition thereof, (but, for this purpose only, (x) assuming
that each percentage set forth in such proviso was 20.0% instead of 15.0% and
(y) after giving effect to any prior or concurrent designation by the Borrower
of any Domestic Subsidiary as a “Material Subsidiary”).

ARTICLE VI

Negative Covenants

From and after the Closing Date and until the principal of and interest on each
Loan and all fees payable hereunder have been paid in full, the Borrower
covenants and agrees with the Administrative Agent and the Lenders that:

SECTION 6.01. Liens.

(a) The Borrower will not, and will not permit any of its Subsidiaries to:

(i) mortgage or pledge as security for any Indebtedness any Principal Property
of the Borrower or any of its Subsidiaries, whether such Principal Property is
owned on the Effective Date or hereafter acquired, unless the Borrower secures
or causes such Subsidiary to secure the Obligations equally and ratably with all
Indebtedness secured by such mortgage or pledge, so long as such Indebtedness
shall be so secured; and

 

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(ii) mortgage or pledge as security for any Indebtedness any shares of stock,
Indebtedness or other obligations of a Subsidiary of the Borrower held by or
owed to any of the Borrower or such Subsidiary, whether such shares of stock,
Indebtedness or other obligations are owned on the Effective Date or hereafter
acquired, unless the Borrower secures or causes such Subsidiary to secure the
Obligations equally and ratably with all such Indebtedness secured by such
mortgage or pledge, so long as such Indebtedness shall be so secured; provided,
however, that this covenant shall not apply in the case of:

(A) the creation of any mortgage, pledge or other Lien on any shares of stock,
Indebtedness or other obligations of a Subsidiary or any Principal Property
hereafter acquired (including acquisitions by way of merger or consolidation) by
the Borrower or a Subsidiary contemporaneously with such acquisition, or within
120 days thereafter, to secure or provide for the payment or financing of any
part of the purchase price thereof, or the assumption of any mortgage, pledge or
other Lien upon any shares of stock, Indebtedness or other obligations of a
Subsidiary or any Principal Property acquired hereafter existing at the time of
such acquisition, or the acquisition of any shares of stock, Indebtedness or
other obligations of a Subsidiary or any Principal Property subject to any
mortgage, pledge or other Lien without the assumption thereof, provided that
every such mortgage, pledge or Lien referred to in this clause (A) shall attach
only to the shares of stock, Indebtedness or other obligations of a Subsidiary
or any Principal Property so acquired and fixed improvements thereon;

(B) the Existing Liens;

(C) any mortgage, pledge or other Lien on any shares of stock, Indebtedness or
other obligations of a Subsidiary or any Principal Property in favor of the
Borrower or any Subsidiary;

(D) any mortgage, pledge or other Lien on Principal Property being constructed
or improved securing loans to finance such construction or improvements;

(E) any mortgage, pledge or other Lien on shares of stock, Indebtedness or other
obligations of a Subsidiary or any Principal Property incurred in connection
with the issuance of tax-exempt governmental obligations; or

(F) any renewal of or substitution for any mortgage, pledge or other Lien
permitted by any of the preceding clauses (A) through (E), provided, that in the
case of a mortgage, pledge or other Lien permitted under clause (B), (C) or (E),
the debt secured is not increased nor the Lien extended to any additional
assets.

(b) Notwithstanding the provisions of Section 6.01(a), the Borrower or any
Subsidiary may create or assume Liens in addition to those permitted by
Section 6.01(a), and renew, extend or replace such Liens, provided, that at the
time of such creation, assumption, renewal, extension or replacement, and after
giving effect thereto, Exempted Debt does not exceed 10.0% of Consolidated Net
Worth.

 

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SECTION 6.02. Sale and Leaseback Transactions.

(a) The Borrower will not, and will not permit any Subsidiary to, sell or
transfer, directly or indirectly, except to the Borrower or a Subsidiary, any
Principal Property as an entirety, or any substantial portion thereof, with the
intention of taking back a lease of such property, except a lease for a period
of three years or less at the end of which it is intended that the use of such
property by the lessee will be discontinued; provided, that the Borrower or any
Subsidiary may sell any such Principal Property and lease it back for a longer
period if (i) the Borrower or such Subsidiary would be entitled, pursuant to the
provisions of Section 6.01(a), to create a mortgage on the property to be leased
securing Funded Debt in an amount equal to the Attributable Debt with respect to
such sale and lease-back transaction without equally and ratably securing the
Obligations or (ii) (A) the Borrower promptly informs the Administrative Agent
of such transaction, (B) the net proceeds of such transaction are at least equal
to the fair value (as determined by the Board of Directors) of such property and
(C) the Borrower causes an amount equal to the net proceeds of the sale to be
applied to the retirement, within 120 days after receipt of such proceeds, of
Funded Debt incurred or assumed by the Borrower or a Subsidiary and/or the
Obligations; provided further, that in the case of Funded Debt in the form of
debentures or notes issued under an indenture, in lieu of applying all of or any
part of such net proceeds to such retirement, the Borrower may, within 75 days
after such sale, deliver or cause to be delivered to the applicable trustee for
cancellation either debentures or notes evidencing Funded Debt of the Borrower
or of a Subsidiary previously authenticated and delivered by the applicable
trustee, and not theretofore tendered for sinking fund purposes or called for a
sinking fund or otherwise applied as a credit against an obligation to redeem or
retire such notes or debentures, and an Officer’s Certificate (which certificate
shall be delivered to the Administrative Agent) stating that the Borrower elects
to deliver or cause to be delivered such debentures or notes in lieu of retiring
Funded Debt as hereinabove provided. If the Borrower shall so deliver debentures
or notes to the applicable trustee and the Borrower shall duly deliver such
Officer’s Certificate, the amount of cash which the Borrower shall be required
to apply to the retirement of Funded Debt under this Section 6.02(a) shall be
reduced by an amount equal to the aggregate of the then applicable optional
redemption prices (not including any optional sinking fund redemption prices) of
such debentures or notes, or, if there are no such redemption prices, the
principal amount of such debentures or notes; provided, that in the case of
debentures or notes which provide for an amount less than the principal amount
thereof to be due and payable upon a declaration of the maturity thereof, such
amount of cash shall be reduced by the amount of principal of such debentures or
notes that would be due and payable as of the date of such application upon a
declaration of acceleration of the maturity thereof pursuant to the terms of the
indenture pursuant to which such debentures or notes were issued.

(b) Notwithstanding the provisions of Section 6.02(a), the Borrower or any
Subsidiary may enter into sale and lease-back transactions in addition to those
permitted by Section 6.02(a) and without any obligation to retire any
Obligations or other Funded Debt, provided, that at the time of entering into
such sale and lease-back transactions and after giving effect thereto, Exempted
Debt does not exceed 10.0% of Consolidated Net Worth.

SECTION 6.03. Fundamental Changes. The Borrower will not, and will not permit
any Material Subsidiary to, merge into or consolidate with any other Person, or
permit any other Person to merge into or consolidate with it, or sell, convey,
transfer, lease or otherwise dispose of (in one transaction or in a series of
transactions) all or substantially all of its assets, or all or substantially
all of the stock or other Equity Interests of any of its Material Subsidiaries
(in each case, whether now owned or hereafter acquired), or liquidate or
dissolve, except that, if at the time thereof and immediately after giving
effect thereto no Default shall have occurred and be continuing (i) any Person
may merge into the Borrower in a transaction in which the Borrower is the
surviving corporation, (ii) any Person (including, without limitation, any
Material Subsidiary) may merge into any Subsidiary in a transaction in which the
surviving entity is a Subsidiary Guarantor, (iii) any Material Subsidiary may
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dispose of its assets to the Borrower or to another Subsidiary Guarantor and
(iv) the Borrower and/or one or more of its Subsidiaries may consummate the
Specified Asset Dispositions that by their terms are to occur on or after the
Closing Date in connection with the consummation of the Acquisition.

SECTION 6.04. Financial Condition Covenants.

(a) Consolidated Leverage Ratio. The Borrower will not permit the Consolidated
Leverage Ratio as of the last day of any period of four consecutive fiscal
quarters of the Borrower to exceed (i) 4.50:1.00, as of the last day of any such
period ending in the fiscal quarter in which the Closing Date occurs through and
including the next two immediately succeeding fiscal quarters and
(ii) 4.25:1.00, thereafter.

(b) Consolidated Interest Coverage Ratio. The Borrower will not permit the
Consolidated Interest Coverage Ratio for any period of four consecutive fiscal
quarters of the Borrower ending on the last day of a fiscal quarter of the
Borrower to be less than 3.00:1.00.

SECTION 6.05. Restricted Payments. The Borrower will not, and will not permit
any of its Subsidiaries to, declare or make, or agree to pay or make, directly
or indirectly, any Restricted Payment (other than Restricted Payments payable
solely in non-redeemable common stock or comparable common Equity Interests of
the Borrower or any such Subsidiary), except:

(a) any Subsidiary of the Borrower may make Restricted Payments to the Borrower
or any wholly-owned Subsidiary of the Borrower, and any non-wholly-owned
Subsidiary of the Borrower may make cash Restricted Payments to its shareholders
generally so long as the Borrower or its respective Subsidiary which owns the
Equity Interest in the Subsidiary making such Restricted Payment receives at
least its proportionate share thereof (based upon its relative holding of the
Equity Interests in the Subsidiary making such Restricted Payments and taking
into account the relative preferences, if any, of the various classes of Equity
Interests of such Subsidiary);

(b) the Borrower may issue shares of its common stock (i) in settlement of its
obligations under stock-based compensation plans, and (ii) upon the exercise of
any warrants or options or upon the conversion or redemption of any convertible
or redeemable preferred or preference stock, and in connection with any such
exercise, conversion or redemption, the Borrower may, so long as no Event of
Default then exists or would result therefrom, pay cash in lieu of issuing
fractional shares of its common stock;

(c) the Borrower may declare and pay, or otherwise pay or make, any other
Restricted Payment (including, without limitation, any share repurchases,
dividends and other distributions in respect of its Equity Interests), so long
as (i) no Event of Default then exists or would result therefrom, (ii) on the
date such Restricted Payment is (x) paid or made (in the case of a Non-Declared
Restricted Payment) or (y) (I) declared or otherwise authorized and (II) paid or
made (in the case of any other Restricted Payment), the Borrower is in
compliance with the covenants contained in Section 6.04 for the period of four
consecutive fiscal quarters of the Borrower most recently ended prior to such
date for which financial statements have been delivered pursuant to
Section 5.01, on a pro forma basis, as if the respective Restricted Payment
made, declared or authorized had been paid (and any Indebtedness incurred (or to
be incurred) to finance the same had been incurred) on the first day of such
period and (iii) in the case of any Restricted Payment in the form of a
repurchase of Equity Interests of the Borrower and made with all or any portion
of the proceeds of Loans, all of such Equity Interests so repurchased are
immediately cancelled;

 

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(d) the Borrower may issue and exchange shares of any class or series of its
common stock now or hereafter outstanding for shares of any other class or
series of its common stock now or hereafter outstanding;

(e) the Borrower may, in connection with any reclassification of its common
stock and any exchange permitted by clause (d) above, pay cash in lieu of
issuing fractional shares of any class or series of its common stock; and

(f) the Borrower may make any and all payments and distributions required to be
made pursuant to the Acquisition Agreement as in effect on the date hereof.

SECTION 6.06. Transactions with Affiliates. The Borrower will not, and will not
permit any of its Subsidiaries to, sell, lease or otherwise transfer any
property or assets to, or purchase, lease or otherwise acquire any property or
assets from, or otherwise engage in any other transactions with, any of its
Affiliates, except (a) in the ordinary course of business at prices and on terms
and conditions not less favorable to the Borrower or such Subsidiary than could
be obtained on an arm’s-length basis from unrelated third parties,
(b) transactions between or among the Borrower and its wholly owned Subsidiaries
not involving any other Affiliate, (c) Restricted Payments permitted by
Section 6.05, (d) customary fees paid to members of the board of directors of
the Borrower and of its Subsidiaries (and to British American Tobacco p.l.c. in
respect of services of its employees acting as members of the Board of Directors
of the Borrower as contemplated by the Governance Agreement), (e) the entering
into, and making of payments under bonus plans, employment agreements, employee
benefits plans, stock option plans, indemnification provisions, severance
arrangements, and other similar compensatory arrangements with officers,
employees and directors of the Borrower and its Subsidiaries in the ordinary
course of business, (f) charitable contributions made by the Borrower or any of
its Subsidiaries to Santa Fe Natural Tobacco Company Foundation, Reynolds
American Foundation, American Snuff Charitable Trust or any other charitable
foundation, trust or similar charitable organization that is, at the time of
such contribution, an Affiliate of the Borrower or any Subsidiary thereof, in
each case consistent with past practices of the Borrower and its Subsidiaries as
in effect on the Effective Date and (g) any transactions entered into pursuant
to the BAT Subscription Agreement, the Imperial Divestiture Documents or the
Acquisition Agreement.

SECTION 6.07. Restrictive Agreements.

(a) The Borrower will not permit any of its Subsidiaries to, directly or
indirectly, enter into, incur or permit to exist any agreement or other
arrangement that prohibits, restricts or imposes any condition upon the ability
of any such Subsidiary (x) to pay dividends or other distributions with respect
to any of its Equity Interests or to make or repay loans or advances to the
Borrower or any other Loan Party, (y) to Guarantee Indebtedness of the Borrower
or any other Loan Party or (z) transfer any of its properties or assets to the
Borrower or any other Loan Party; provided that (i) the foregoing shall not
apply to restrictions and conditions imposed by law or by this Agreement or any
other Loan Document or by the Existing Credit Agreement (and any extension,
renewal, replacement, amendment or modification thereof so long as such
extension, renewal, replacement, amendment or modification is no more
restrictive with respect to such restrictions and conditions taken as a whole
than those contained in the Existing Credit Agreement); (ii) the foregoing shall
not apply to restrictions and conditions existing on the date hereof or any
extension, renewal, amendment or modification of any such restriction or
condition (in each case, as long as such extension, renewal, amendment or
modification is no more restrictive with respect to such restrictions and
conditions taken as a whole than those contained in the restrictions and
conditions prior to such extension, renewal, amendment or modification);
(iii) the foregoing shall not apply to customary restrictions and conditions
contained in agreements relating to the sale of assets (including Equity
Interests) pending such sale, provided such restrictions and conditions apply
only to the assets that are to be sold and such sale is not prohibited
hereunder; (iv) the foregoing shall not apply to any agreement or

 

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other instrument of a Person acquired by the Borrower or any Subsidiary that was
in existence at the time of such acquisition (but not created in contemplation
thereof or to provide all or any portion of the funds or credit support utilized
to consummate such acquisition), which restriction or condition is not
applicable to any Person, or the properties or assets of any Person, other than
the Person or its Subsidiaries, or the property or assets of the Person or its
Subsidiaries so acquired; (v) clause (z) of the foregoing shall not apply to
Indebtedness secured by a Lien not otherwise prohibited hereunder that limits
the right of the debtor to dispose of the assets securing such Indebtedness;
(vi) the foregoing shall not apply to customary provisions in joint venture
agreements and other similar agreements relating solely to such joint venture
entered into in the ordinary course of business; (vii) the foregoing shall not
apply to customary provisions contained in leases, licenses and other similar
agreements entered into in the ordinary course of business that impose
restrictions of the type described in clause (z) above on the property subject
to such lease; (viii) clauses (x) and (y) of the foregoing shall not apply to
restrictions in the Existing Senior Notes Indentures or any other indenture or
loan agreement, so long as the restrictions in the Existing Senior Notes
Indentures or such other indenture or loan agreement are no more burdensome than
those appearing in the Existing Senior Notes Indentures as in effect on the
Effective Date; (ix) clause (z) of the foregoing shall not apply to customary
restrictions contained in any documentation governing any sale and leaseback
transaction not prohibited by this Agreement, so long as such restriction is
applicable only to the assets pledged pursuant to such sale and leaseback
transaction; and (x) clause (z) of the foregoing shall not apply to any
agreements governing any purchase money Liens or Capital Lease Obligations
incurred in the ordinary course of business and not otherwise prohibited hereby
(in which case, any prohibition or limitation shall only be effective against
the assets financed thereby).

(b) The Borrower will not, and will not permit any of its Subsidiaries to,
directly or indirectly, enter into, incur or permit to exist any agreement or
other arrangement that prohibits, restricts or imposes any condition upon the
ability of the Borrower or any Subsidiary to create, incur, assume or suffer to
exist any Lien upon any of its property or assets, whether now owned or
hereafter acquired, to secure the Obligations or, in the case of any Subsidiary
Guarantor, its obligations under the Subsidiary Guarantee Agreement, other than
(x) this Agreement and the other Loan Documents, or the Existing Credit
Agreement (and any extension, renewal, replacement, amendment or modification
thereof so long as such extension, renewal, replacement, amendment or
modification is no more restrictive with respect to such restrictions and
conditions taken as a whole than those contained in the Existing Credit
Agreement), (y) any agreement described in (and permitted by) clauses (ii),
(iii), (iv), (v), (vi), (vii), (viii), (ix) and (x) of the first proviso in
Section 6.07(a), and (z) agreements containing negative pledges and restrictions
on Liens in favor of any holder of Indebtedness not prohibited by this Agreement
but only if such negative pledge or restriction expressly permits Liens for the
benefit of the Administrative Agent and the Lenders with respect to the Facility
and the Obligations under the Loan Documents on a senior basis (in an aggregate
principal amount equal to at least the sum of the Commitments or Loans on the
date of the incurrence thereof) and without a requirement that such holders of
such Indebtedness be secured by such Liens equally and ratably or on a junior
basis.

SECTION 6.08. Subsidiary Indebtedness. The Borrower will not permit the
aggregate principal amount of Indebtedness of its Non-Guarantor Subsidiaries
(excluding any Indebtedness of a Subsidiary of the Borrower owed to the Borrower
or another Subsidiary of the Borrower, but including any Guarantee by a
Non-Guarantor Subsidiary of Indebtedness of the Borrower) to exceed: (a) the
Indebtedness of Lorillard and its Subsidiaries outstanding on the Closing Date
after giving effect to the Transactions, during the period commencing on the
Closing Date and ending on the earlier of (x) the date Lorillard and its
Material Subsidiaries enter into Subsidiary Guarantee Agreements to the extent
required pursuant to Section 5.09 hereof, and, if applicable, guarantees of the
Existing Credit Agreement, and (y) the tenth (10th) day after the Closing Date
or such later date as agreed to by the Administrative Agent in its sole
discretion, and (b) $300,000,000, on and at all times after the expiration of
the period described in the immediately preceding clause (a).

 

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SECTION 6.09. End of Fiscal Years; Fiscal Quarters. The Borrower will not, and
will not permit any of its Subsidiaries to, cause (i) its or any of its
Subsidiaries’ fiscal years to end on any day other than December 31 of each
calendar year and (ii) its or any of its Subsidiaries’ fiscal quarters to end on
any day other than March 31, June 30, September 30 and December 31 of each
calendar year.

ARTICLE VII

Events of Default

If any of the following events (each, an “Event of Default”) shall occur:

(a) the Borrower shall fail to pay any principal of any Loan when and as the
same shall become due and payable, whether at the due date thereof or at a date
fixed for prepayment thereof or otherwise;

(b) the Borrower shall fail to pay any interest on any Loan or any fee or any
other amount (other than an amount referred to in clause (a) of this Article
VII) payable under this Agreement or any other Loan Document, when and as the
same shall become due and payable, and such failure shall continue unremedied
for a period of five Business Days;

(c) any representation or warranty made or deemed made by any Loan Party in or
pursuant to this Agreement or any other Loan Document or any amendment or
modification hereof or waiver hereunder or thereunder, or in any written report,
certificate or financial statement furnished pursuant to or in connection with
this Agreement or any other Loan Document or any amendment or modification
hereof or waiver hereunder or thereunder, shall prove to have been incorrect in
any material respect when made or deemed made;

(d) the Borrower shall fail to observe or perform any covenant, condition or
agreement contained in Section 5.02, 5.03 (with respect to the Borrower’s
existence only) or 5.08 or in Article VI;

(e) the Borrower shall fail to observe or perform any covenant, condition or
agreement contained in this Agreement (other than those specified in clause (a),
(b) or (d) of this Article VII), and such failure shall continue unremedied for
a period of 30 days after notice thereof from the Administrative Agent to the
Borrower (which notice will be given at the request of any Lender);

(f) the Borrower or any Subsidiary shall fail to make any payment (whether of
principal or interest and regardless of amount) in respect of any Material
Indebtedness, when and as the same shall become due and payable (after giving
effect to any applicable grace or cure period);

(g) any event or condition occurs that results in any Material Indebtedness
becoming due prior to its scheduled maturity or that enables or permits (after
giving effect to any applicable grace or cure period) the holder or holders of
any Material Indebtedness or any trustee or agent on its or their behalf to
cause any Material Indebtedness to become due, or to require the prepayment,
repurchase, redemption or defeasance thereof, prior to its scheduled maturity;
provided that this clause (g) shall not apply to (i) secured Indebtedness that
becomes due as a result of the voluntary sale or transfer of the property or
assets securing such Indebtedness or (ii) Indebtedness that becomes due as a
result of the delivery of a notice of a voluntary prepayment or redemption;

 

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(h) an involuntary proceeding shall be commenced or an involuntary petition
shall be filed seeking (i) liquidation, reorganization or other relief in
respect of the Borrower or any Material Subsidiary or its debts, or of a
substantial part of its assets, under any Federal, state or foreign bankruptcy,
insolvency, receivership or similar law now or hereafter in effect or (ii) the
appointment of a receiver, trustee, custodian, sequestrator, conservator or
similar official for the Borrower or any Material Subsidiary or for a
substantial part of its assets, and, in any such case, such proceeding or
petition shall continue undismissed for 60 days or an order or decree approving
or ordering any of the foregoing shall be entered;

(i) the Borrower or any Material Subsidiary shall (i) voluntarily commence any
proceeding or file any petition seeking liquidation, reorganization or other
relief under any Federal, state or foreign bankruptcy, insolvency, receivership
or similar law now or hereafter in effect, (ii) consent to the institution of,
or fail to contest in a timely and appropriate manner, any proceeding or
petition described in clause (h) of this Article VII, (iii) apply for or consent
to the appointment of a receiver, trustee, custodian, sequestrator, conservator
or similar official for the Borrower or any Material Subsidiary or for a
substantial part of its assets, (iv) file an answer admitting the material
allegations of a petition filed against it in any such proceeding, (v) make a
general assignment for the benefit of creditors or (vi) take any action for the
purpose of effecting any of the foregoing;

(j) the Borrower or any Material Subsidiary shall become unable, admit in
writing its inability or fail generally to pay its debts as they become due;

(k) one or more judgments for the payment of money (to the extent not covered by
insurance from a reputable third-party insurer which has been notified of such
judgment and has not denied coverage) in an aggregate amount in excess of
$200,000,000 shall be rendered against the Borrower, any Material Subsidiary or
any combination thereof and one or more of the following shall have occurred
with respect thereto: (i) such judgment shall continue to remain undischarged,
unpaid or Unsettled for a period of 60 consecutive days during which execution
shall not be effectively stayed (by reason of a court proceeding or a valid,
binding and enforceable written agreement with the beneficiary of such
judgment), vacated or bonded by reason of a pending appeal, (ii) at the time of
(and after giving effect to) the payment or satisfaction of such judgment (or
the deposit or pledge of cash or other assets, or the issuance of any letter of
credit or similar instrument, for the purpose of bonding or securing in any
manner such judgment or securing any appeal thereof), the sum of (x) the
aggregate amount of Unrestricted cash and Marketable Investments held by the
Borrower and its Subsidiaries plus (y) the aggregate Unused Availability (under
and as defined in the Existing Credit Agreement) plus (z) the aggregate amount
of any undrawn term loan commitments in effect at any time under any term loan
agreement (and any extension, renewal, replacement, amendment or modification
thereof) actually available to be drawn at such time thereunder, is less than
$200,000,000, or (iii) any action shall be legally taken by a judgment creditor
to attach or levy upon any assets of the Borrower or any Material Subsidiary to
enforce any such judgment;

(l) an ERISA Event shall have occurred that, in the opinion of the Required
Lenders, when taken together with all other ERISA Events that have occurred,
could reasonably be expected to result in a Material Adverse Effect;

(m) a Change in Control shall occur; or

(n) the Subsidiary Guarantee Agreement or any provision thereof shall cease to
be in full force or effect as to any Subsidiary Guarantor (except, in any such
case, where such Subsidi-

 

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ary Guarantor has been released from the Subsidiary Guarantee Agreement in
accordance with the terms thereof), or any Subsidiary Guarantor or any Person
acting for or on behalf of any Subsidiary Guarantor shall deny or disaffirm such
Subsidiary Guarantor’s obligations under the Subsidiary Guarantee Agreement or
any Subsidiary Guarantor shall default in the due performance or observance of
any term, covenant or agreement on its part to be performed or observed pursuant
to the Subsidiary Guarantee Agreement;

then, and in every such event (other than an event with respect to the Borrower
described in clause (h) or (i) of this Article VII), and at any time thereafter
during the continuance of such event, the Administrative Agent may, and at the
request of the Required Lenders shall, by notice to the Borrower, take any of
the following actions, at the same or different times: (i) terminate the
Commitments, and thereupon the Commitments shall terminate immediately,
(ii) declare the Loans then outstanding to be due and payable in whole (or in
part, in which case any principal not so declared to be due and payable may
thereafter be declared to be due and payable), and thereupon the principal of
the Loans so declared to be due and payable, together with accrued interest
thereon and all fees and other obligations of the Borrower accrued hereunder,
shall become due and payable immediately, without presentment, demand, protest
or other notice of any kind, all of which are hereby waived by the Borrower and
(iii) enforce the Subsidiary Guarantee Agreement; and in case of any event with
respect to the Borrower described in clause (h) or (i) of this Article VII, the
Commitments shall automatically terminate and the principal of the Loans then
outstanding, together with accrued interest thereon and all fees and other
obligations of the Borrower accrued hereunder, shall automatically become due
and payable, without presentment, demand, protest or other notice of any kind,
all of which are hereby waived by the Borrower.

ARTICLE VIII

The Agents

Each of the Lenders hereby irrevocably appoints the Administrative Agent as its
agent and authorizes the Administrative Agent to take such actions on its behalf
and to exercise such powers as are delegated to the Administrative Agent by the
terms of this Agreement or any other Loan Document, together with such actions
and powers as are reasonably incidental thereto.

The bank serving as the Administrative Agent hereunder shall have the same
rights and powers in its capacity as a Lender as any other Lender and may
exercise the same as though it were not the Administrative Agent, and such bank
and its Affiliates may accept deposits from, lend money to and generally engage
in any kind of business with the Borrower or any Subsidiary or other Affiliate
thereof as if it were not the Administrative Agent hereunder.

The Administrative Agent shall not have any duties or obligations except those
expressly set forth herein. Without limiting the generality of the foregoing,
(a) the Administrative Agent shall not be subject to any fiduciary or other
implied duties, regardless of whether a Default has occurred and is continuing,
(b) the Administrative Agent shall not have any duty to take any discretionary
action or exercise any discretionary powers, except discretionary rights and
powers expressly contemplated hereby that the Administrative Agent is required
to exercise in writing as directed by the Required Lenders (or such other number
or percentage of the Lenders as shall be necessary under the circumstances as
provided in Section 9.02), and (c) except as expressly set forth herein, the
Administrative Agent shall not have any duty to disclose, and shall not be
liable for the failure to disclose, any information relating to the Borrower or
any of its Subsidiaries that is communicated to or obtained by the bank serving
as Administrative Agent or any of its Affiliates in any capacity. The
Administrative Agent shall not be liable for any action taken or not taken by it
with the consent or at the request of the Required Lenders (or such other number
or percentage of the Lenders as shall be necessary under the circumstances as
provided in Section 9.02) or

 

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in the absence of its own gross negligence or willful misconduct. The
Administrative Agent shall be deemed not to have knowledge of any Default unless
and until written notice thereof is given to the Administrative Agent by the
Borrower or a Lender, and the Administrative Agent shall not be responsible for
or have any duty to ascertain or inquire into (i) any statement, warranty or
representation made in or in connection with any Loan Document, (ii) the
contents of any certificate, report or other document delivered hereunder or in
connection herewith, (iii) the performance or observance of any of the
covenants, agreements or other terms or conditions set forth in any Loan
Document, (iv) the validity, enforceability, effectiveness or genuineness of
this Agreement or any other Loan Document, or (v) the satisfaction of any
condition set forth in Article IV or elsewhere in any Loan Document, other than
to confirm receipt of items expressly required to be delivered to the
Administrative Agent.

The Administrative Agent shall be entitled to rely upon, and shall not incur any
liability for relying upon, any notice, request, certificate, consent,
statement, instrument, document or other writing believed by it to be genuine
and to have been signed or sent by the proper Person. The Administrative Agent
also may rely upon any statement made to it orally or by telephone and believed
by it to be made by the proper Person, and shall not incur any liability for
relying thereon. The Administrative Agent may consult with legal counsel (who
may be counsel for the Borrower), independent accountants and other experts
selected by it, and shall not be liable for any action taken or not taken by it
in accordance with the advice of any such counsel, accountants or experts.

The Administrative Agent may perform any and all its duties and exercise its
rights and powers by or through any one or more sub-agents appointed by the
Administrative Agent. The Administrative Agent and any such sub-agent may
perform any and all its duties and exercise its rights and powers through their
respective Related Parties. The exculpatory provisions of the preceding
paragraphs shall apply to any such sub-agent and to the Related Parties of the
Administrative Agent and any such sub-agent, and shall apply to their respective
activities in connection with the syndication of the credit facilities provided
for herein as well as activities as Administrative Agent.

Subject to the appointment and acceptance of a successor Administrative Agent as
provided in this paragraph, the Administrative Agent may resign at any time by
notifying the Lenders and the Borrower. Upon any such resignation, the Required
Lenders shall have the right, with (if no Default then exists) the consent of
the Borrower (not to be unreasonably withheld, delayed or conditioned), to
appoint a successor. If no successor shall have been so appointed by the
Required Lenders and shall have accepted such appointment within 30 days after
the retiring Administrative Agent gives notice of its resignation, then the
retiring Administrative Agent may, on behalf of the Lenders, with the consent of
the Borrower (not to be unreasonably withheld, delayed or conditioned) if no
Default then exists, appoint a successor Administrative Agent, which shall be a
bank with an office in New York, New York, or an Affiliate of any such bank.
Upon the acceptance of its appointment as Administrative Agent hereunder by a
successor, such successor shall succeed to and become vested with all the
rights, powers, privileges and duties of the retiring Administrative Agent, and
the retiring Administrative Agent shall be discharged from its duties and
obligations hereunder. The fees payable by the Borrower to a successor
Administrative Agent shall be the same as those payable to its predecessor
unless otherwise agreed between the Borrower and such successor. After the
Administrative Agent’s resignation hereunder, the provisions of this Article
VIII and Section 9.03 shall continue in effect for the benefit of such retiring
Administrative Agent, its sub-agents and their respective Related Parties in
respect of any actions taken or omitted to be taken by any of them while it was
acting as Administrative Agent.

Each Lender acknowledges that it has, independently and without reliance upon
the Administrative Agent or any other Lender and based on such documents and
information as it has deemed appropriate, made its own credit analysis and
decision to enter into this Agreement. Each Lender also acknowledges that it
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Lender and based on such documents and information as it shall from time to time
deem appropriate, continue to make its own decisions in taking or not taking
action under or based upon this Agreement, any other Loan Document, any related
agreement or any document furnished hereunder or thereunder.

Notwithstanding any other provision of this Agreement, each of the financial
institutions named as “Syndication Agent,” “Joint Bookrunner” and “Joint Lead
Arranger” on the cover page of this Agreement is named as such for recognition
purposes only, and in its capacity as such shall have no powers, duties,
responsibilities or liabilities with respect to this Agreement or the
transactions contemplated hereby; it being understood and agreed that each such
financial institution in its stated capacity shall be entitled to all
indemnification and reimbursement rights in favor of the Administrative Agent
as, and to the extent, provided for under this Article VIII and Section 9.03.
Without limitation of the foregoing, no such financial institution shall, solely
by reason of this Agreement or any other Loan Document, have any fiduciary
relationship in respect of any Lender or any other Person.

ARTICLE IX

Miscellaneous

SECTION 9.01. Notices.

(a) Except in the case of notices and other communications expressly permitted
to be given by telephone (and subject to Section 9.01(b) below), all notices and
other communications provided for herein shall be in writing and shall be
delivered by hand or overnight courier service, mailed by certified or
registered mail or sent by telecopy, as follows:

(i) if to the Borrower, to it at P.O. Box 2990, 401 N. Main Street,
Winston-Salem, NC, 27102, Attention of Treasurer (Telecopy No. (336) 741-2998),
with a copy to it at P.O. Box 2990, 401 N. Main Street, Winston-Salem, NC,
27102, Attention of Corporate Secretary (Telecopy No. (336) 741-2998);

(ii) if to the Administrative Agent, to JPMorgan Chase Bank, N.A., 500 Stanton
Christiana Road, Ops 2, Floor 03, Newark, DE 19713, Attention of Amanda Collins
(email: amanda.collins@jpmorgan.com; Telecopy No. (302) 634-8459), with a copy
to JPMorgan Chase Bank, N.A., 500 Stanton Christiana Road, Ops 2, Floor 03,
Newark, DE 19713, Attention of Sue Coplin (email: sue.a.coplin@jpmorgan.com;
Telecopy No. (201) 244-3577); and

(iii) if to any other Lender, to it at its address (or telecopy number) set
forth in its Administrative Questionnaire.

(b) Notices and other communications to the Lenders hereunder may be delivered
or furnished by electronic communications pursuant to procedures approved by the
Administrative Agent; provided that the foregoing shall not apply to notices
pursuant to Article II unless otherwise agreed by the Administrative Agent and
the applicable Lender. Each of the Administrative Agent or the Borrower may, in
its discretion, agree to accept notices and other communications to it hereunder
by electronic communications pursuant to procedures approved by it; provided
that approval of such procedures may be limited to particular notices or
communications.

(c) Any party hereto may change its address or telecopy number for notices and
other communications hereunder by written notice to the other parties hereto.
All notices and other communications given to any party hereto in accordance
with the provisions of this Agreement shall be deemed to have been given on the
date of receipt.

 

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SECTION 9.02. Waivers; Amendments.

(a) No failure or delay by the Administrative Agent or any Lender in exercising
any right or power hereunder or under any other Loan Document shall operate as a
waiver thereof, nor shall any single or partial exercise of any such right or
power, or any abandonment or discontinuance of steps to enforce such a right or
power, preclude any other or further exercise thereof or the exercise of any
other right or power. The rights and remedies of the Administrative Agent and
the Lenders hereunder or under any other Loan Document are cumulative and are
not exclusive of any rights or remedies that they would otherwise have. No
waiver of any provision of any Loan Document or consent to any departure by the
Borrower therefrom shall in any event be effective unless the same shall be
permitted by Section 9.02(b), and then such waiver or consent shall be effective
only in the specific instance and for the purpose for which given. Without
limiting the generality of the foregoing, the making of a Loan shall not be
construed as a waiver of any Default, regardless of whether the Administrative
Agent or any Lender may have had notice or knowledge of such Default at the
time.

(b) Neither this Agreement nor any other Loan Document nor any provision hereof
or thereof may be waived, amended or modified except pursuant to an agreement or
agreements in writing entered into by the Borrower and the Required Lenders or
by the Borrower and the Administrative Agent with the consent of the Required
Lenders; provided that no such agreement shall (i) increase the Commitment of
any Lender without the written consent of such Lender, (ii) reduce (or forgive)
the principal amount of any Loan or reduce the rate of interest thereon, or
reduce any fees payable hereunder (including, without limitation, by changing
the specific rating levels in any Category in the definition of Applicable Rate
that would result in a reduction of any interest rate on any Loan or any fee
payable hereunder), without the written consent of each Lender directly affected
thereby, (iii) postpone the scheduled date of payment of the principal amount of
any Loan or any interest thereon, or any fees or other amounts payable
hereunder, or reduce the amount of, waive or excuse any such payment, or
postpone the scheduled date of expiration of any Commitment, without the written
consent of each Lender directly affected thereby; provided, however, that only
the consent of the Required Lenders shall be necessary to waive the
applicability of any post-default increase in interest rates, (iv) change
(x) Section 2.10(b) or Section 2.17(b) or (c) in a manner that would alter the
pro rata sharing of payments required thereby and (y) Section 2.08(g) in a
manner that would alter the pro rata termination or reduction of commitments
required thereby, without the written consent of each Lender directly affected
thereby, (v) change any of the provisions of this Section 9.02(b) or the
definition of “Required Lenders” or any other provision hereof specifying the
number or percentage of Lenders required to waive, amend or modify any rights
hereunder or make any determination or grant any consent hereunder, without the
prior written consent of each Lender or (vi) release all or substantially all of
the Subsidiary Guarantors from their obligations under the Subsidiary Guarantee
Agreement (except as expressly permitted by the terms hereof and thereof),
without the prior written consent of each Lender; provided further that (i) no
such agreement shall amend, modify or otherwise affect the rights or duties of
the Administrative Agent hereunder or waive, amend or modify Section 2.19,
without the prior written consent of the Administrative Agent and (ii) each Fee
Letter may be amended, or rights or privileges thereunder waived, in a writing
executed only by the parties thereto.

SECTION 9.03. Expenses; Indemnity; Damage Waiver.

(a) The Borrower shall pay promptly on demand (i) all documented reasonable
out-of-pocket expenses incurred by each Lead Agent and its Affiliates, including
invoiced reasonable out-of-pocket due diligence expenses, syndication expenses
and appropriately invoiced reasonable and actual fees, charges and disbursements
of one counsel for the Lead Agents (and, if advisable in the judgment of the
Lead Agents, of one local counsel in any relevant jurisdiction), in connection
with the syndication of the Facility, the preparation and administration of this
Agreement and the other Loan Documents or any amendments, modifications or
waivers of the provisions hereof or thereof (whether or not the transactions

 

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contemplated hereby or thereby shall be consummated) and (ii) all documented
reasonable out-of-pocket expenses incurred by the Administrative Agent or any
Lender, including the fees, charges and disbursements of any counsel for the
Administrative Agent or any Lender, incurred in connection with investigating,
defending or preparing to defend any action, suit, proceeding (including any
inquiry or investigation) or claim (with respect to any action, suit, proceeding
or claim, subject to Section 9.03(b)) with regard to the enforcement or
protection of its rights in connection with this Agreement and the other Loan
Documents, including its rights under this Section 9.03 (whether or not the
Administrative Agent, the Lead Agents, any other Agent, any Lender or any other
Indemnitee (as defined below) is party to any action, suit, proceeding or claim
out of which any such expense arises), or in connection with the Loans made
hereunder, including all such out-of-pocket expenses incurred during any
workout, restructuring or negotiations in respect of such Loans.

(b) The Borrower shall indemnify each Lead Agent and each Lender, and each
Related Party of any of the foregoing Persons (each such Person being called an
“Indemnitee”) against, and hold each Indemnitee harmless from, any and all
losses, claims, damages, liabilities or expenses, joint or several, of any kind
or nature whatsoever, including the fees, charges and disbursements of counsel
for any Indemnitee (limited, however, in the case of fees, charges and
disbursements of counsel, to those of (x) one counsel for all Indemnitees in
connection with indemnification losses, claims, damages and liabilities arising
out of the same facts or circumstances, (y) if reasonably necessary or advisable
in the judgment of primary counsel to the Indemnitees, a single local counsel to
the Indemnitees in each relevant jurisdiction and (z) solely in the case of an
actual or perceived conflict of interest, if necessary or advisable in the
judgment of primary counsel of such affected Indemnitee in each applicable
jurisdiction, of which the Borrower is notified in writing, one additional
counsel to such affected Indemnitee in each applicable jurisdiction), that may
be brought by the Borrower, any of its respective Affiliates or any other Person
or entity and which may be incurred by or asserted against any Indemnitee
arising out of, in connection with, or as a result of (i) the execution or
delivery of this Agreement or any other Loan Document, the performance by the
parties hereto of their respective obligations hereunder or the consummation of
the Transactions or any other transactions contemplated hereby, subject in all
cases to the further limitations in Section 9.03(a)(i) relating to fees,
disbursements and charges of counsel, (ii) any Loan or any use or intended use
of the proceeds therefrom, (iii) any actual or alleged presence or release of
Hazardous Materials on or from any property owned or operated by the Borrower or
any of its Subsidiaries, or any Environmental Liability related in any way to
the Borrower or any of its Subsidiaries or (iv) any actual or prospective claim,
litigation, investigation or proceeding relating to any of the foregoing,
whether based on contract, tort or any other theory and whether or not any
Indemnitee is a party thereto and whether or not such claim, litigation,
investigation or proceeding is brought by or on behalf of any Loan Party;
provided that such indemnity shall not, as to any Indemnitee, be available to
the extent that such losses, claims, damages, liabilities or related expenses
are determined by a court of competent jurisdiction by final and non-appealable
judgment to have resulted from (x) the bad faith, gross negligence or willful
misconduct of such Indemnitee or any of its Related Parties, (y) a material
breach of any Loan Document by such Indemnitee or any of its Related Parties or
(z) disputes solely among or between Indemnitees not relating to any acts or
omissions by the Borrower (other than disputes against any Lead Agent in its
capacity or in fulfilling its role as the Administrative Agent or Syndication
Agent or any similar role under the Facility); provided further that each
Indemnitee will repay to the Borrower any such reimbursement to the extent that
it is determined that such Indemnitee is not entitled to indemnification by
virtue of the immediately preceding proviso. This Section 9.03(b) shall not
apply with respect to Taxes other than any Taxes that represent losses, claims,
damages, etc. arising from any non-Tax claim to which such Indemnitee is
entitled to indemnification hereunder. Notwithstanding any other provision of
this Agreement, none of the Lead Agents, any other Agent, any Lender or any
other Indemnitee shall be responsible or liable to the Borrower or any other
person or entity for damages arising from the use by others of any information
or other materials obtained through internet, electronic, telecommunications or
other information transmission systems except to the extent that such damages
resulted from (A) the gross negligence or willful misconduct of the respective
Indemnitee or (B) a material breach by such Indemnitee of this Agreement (in
each case, to the extent determined by a court of competent jurisdiction in a
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(c) If any suit, action or proceeding is instituted involving any Indemnitee for
which indemnification is to be sought hereunder by such Indemnitee, then such
Indemnitee will promptly notify the Borrower in writing of the commencement of
any such suit, action or proceeding, provided, however, that the failure to
notify the Borrower will not relieve the Borrower from any liability that it may
have to such Indemnitee hereunder or from any liability that it may have to such
Indemnitee, except to the extent that the Borrower has been materially
prejudiced by such failure. Following such notification, the Borrower may elect
in writing to assume the defense or control the settlement of such suit, action
or proceeding, and upon such election, it will not be liable for any legal costs
subsequently incurred by such Indemnitee (other than reasonable costs of
investigation and providing evidence) in connection therewith, unless (i) it has
failed to provide counsel reasonably satisfactory to such Indemnitee in a timely
manner after notice of the commencement of such action, suit proceeding or
claim, or (ii) either the Indemnitee or counsel provided by the Borrower
reasonably determines that its representation of such Indemnitee would present
it with a conflict of interest. The Borrower shall not be liable for any
settlement by any Indemnitee of any suit, action, claim or other proceeding for
which indemnification is to be sought hereunder by such Indemnitee if such
settlement is effected without the Borrower’s prior written consent, which
consent will not be unreasonably withheld, but if settled with the Borrower’s
written consent, or if there is a final judgment against an Indemnitee in any
such proceeding, the Borrower agrees to indemnify and hold harmless each
Indemnitee to the extent and in the manner set forth above. Notwithstanding the
immediately preceding sentence, if at any time an Indemnitee shall have
requested in accordance with this Agreement that the Borrower reimburse such
Indemnitee for reasonable, documented legal expenses or other reasonable
out-of-pocket expenses in connection with investigating or defending any
proceeding, the Borrower shall be liable for any settlement of any proceeding
effected without the Borrower’s written consent if (i) the Borrower has been
notified promptly (and in any event at least 5 Business Days in advance) of such
proposed settlement and such settlement is entered into at least 30 days after
receipt by the Borrower of such request for reimbursement and (ii) the Borrower
shall not have reimbursed such Indemnitee in accordance with such request prior
to the date of such settlement for all requested reimbursement amounts for which
such Indemnitee is entitled in accordance with and subject to the terms and
conditions of this Agreement. The Borrower shall not, without the prior written
consent of the affected Indemnitee (such consent not to be unreasonably
withheld, conditioned or delayed), settle, compromise, consent to the entry of
any judgment in or otherwise seek to terminate any claim, action or threatened
proceeding against such Indemnitee in respect of which indemnity has been sought
hereunder by such Indemnitee, whether or not any Indemnitee is an actual or
potential party thereto, unless such settlement, compromise, consent or
termination (i) includes an unconditional release of such Indemnitee in form and
substance reasonably satisfactory to such Indemnitee from any liabilities
arising out of such claim, action or proceeding and (ii) does not include any
statement as to or any admission of fault, culpability, wrongdoing or a failure
to act by or on behalf of any Indemnitee.

(d) To the extent that the Borrower fails to pay any amount required to be paid
by it to a Lead Agent under Section 9.03(a), (b) or (c), each Lender severally
agrees to pay to such Lead Agent such Lender’s Applicable Percentage (determined
as of the time that the applicable unreimbursed expense or indemnity payment is
sought) of such unpaid amount; provided that the unreimbursed expense or
indemnified loss, claim, damage, liability or related expense, as the case may
be, was incurred by or asserted against such Lead Agent in its capacity as such.

(e) To the extent permitted by applicable law, the Borrower shall not assert,
and hereby waives, any claim against any Indemnitee, on any theory of liability,
for special, indirect, consequential or punitive damages (as opposed to direct
or actual damages) which may be alleged in connection with or as a result of,
this Agreement or any other Loan Document, the Transactions or any Loan or the
use of the proceeds thereof.

 

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(f) All amounts due under this Section 9.03 shall be payable not later than
30 days after the receipt of a reasonably detailed invoice therefor.

(g) The indemnity and reimbursement obligations of the Borrower under this
Section 9.03 shall be binding upon and inure to the benefit of any successors,
assigns, heirs and personal representatives of the Borrower and the Indemnitees.

SECTION 9.04. Successors and Assigns.

(a) The provisions of this Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and assigns
permitted hereby, except that (i) the Borrower may not assign or otherwise
transfer any of its rights or obligations hereunder without the prior written
consent of each Lender (and any attempted assignment or transfer by the Borrower
without such consent shall be null and void) and (ii) no Lender may assign or
otherwise transfer its rights or obligations hereunder except in accordance with
this Section 9.04. Nothing in this Agreement, expressed or implied, shall be
construed to confer upon any Person (other than the parties hereto, their
respective successors and assigns permitted hereby, Participants (to the extent
provided in Section 9.04(c)) and, to the extent expressly contemplated hereby,
the Related Parties of each of the Administrative Agent and the Lenders) any
legal or equitable right, remedy or claim under or by reason of this Agreement.

(b)(i) Subject to the conditions set forth in Section 9.04(b)(ii) below, any
Lender may assign to one or more assignees all or a portion of its rights and
obligations under this Agreement (including all or a portion of its Commitment
and the Loans at the time owing to it) with the prior written consent (such
consent not to be unreasonably withheld or delayed) of:

(A) the Borrower, provided that no consent of the Borrower shall be required for
an assignment to a Lender, an Affiliate of a Lender, (solely with respect to an
assignment made after the Closing Date, an Approved Fund) or, if an Event of
Default has occurred and is continuing, any other assignee; and provided,
further, that the Borrower shall be deemed to have consented to any such
assignment unless it shall object thereto by written notice to the
Administrative Agent within 10 Business Days after having received written
notice thereof; and

(B) the Administrative Agent, provided that no consent of the Administrative
Agent shall be required for an assignment of a Commitment to an assignee that is
an existing Lender immediately prior to giving effect to such assignment an
Affiliate of a Lender or, solely with respect to an assignment made after the
Closing Date, an Approved Fund.

(ii) Assignments shall be subject to the following additional conditions:

(A) except in the case of an assignment to a Lender or an Affiliate of a Lender
or an assignment of the entire remaining amount of the assigning Lender’s
Commitment or Loans, the amount of the Commitment or Loans of the assigning
Lender subject to each such assignment (determined as of the date the Assignment
and Assumption with respect to such assignment is delivered to the
Administrative Agent) shall not be less than $5,000,000 unless each of the
Borrower and the Administrative Agent otherwise consent, provided that no such
consent of the Borrower shall be required if an Event of Default has occurred
and is continuing;

 

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(B) each partial assignment shall be made as an assignment of a proportionate
part of all the assigning Lender’s rights and obligations under this Agreement;

(C) the parties to each assignment shall execute and deliver to the
Administrative Agent an Assignment and Assumption, together with a processing
and recordation fee of $3,500;

(D) the assignee, if it shall not be a Lender, shall deliver to the
Administrative Agent an Administrative Questionnaire in which the assignee
designates one or more “Credit Contacts” to whom all syndicate-level information
(which may contain material non-public information about the Loan Parties and
their related parties or their respective securities) will be made available and
who may receive such information in accordance with the assignee’s compliance
procedures and applicable laws, including Federal and state securities laws; and

(E) notwithstanding anything else in this Section 9.04 to the contrary, none of
the Borrower, its Subsidiaries or any natural person shall be an assignee
hereunder.

(iii) Subject to acceptance and recording thereof pursuant to this
Section 9.04(b)(iii), from and after the effective date specified in each
Assignment and Assumption the assignee thereunder shall be a party hereto and,
to the extent of the interest assigned by such Assignment and Assumption, have
the rights and obligations of a Lender under this Agreement, and the assigning
Lender thereunder shall, to the extent of the interest assigned by such
Assignment and Assumption, be released from its obligations under this Agreement
(and, in the case of an Assignment and Assumption covering all of the assigning
Lender’s rights and obligations under this Agreement, such Lender shall cease to
be a party hereto but shall continue to be entitled to the benefits of
Sections 2.14, 2.15, 2.16 and 9.03). Any assignment or transfer by a Lender of
rights or obligations under this Agreement that does not comply with this
Section 9.04 shall be treated for purposes of this Agreement as a sale by such
Lender of a participation in such rights and obligations in accordance with
Section 9.04(c).

(iv) The Administrative Agent, acting for this purpose as an agent of the
Borrower, shall maintain at one of its offices a copy of each Assignment and
Assumption delivered to it and a register for the recordation of the names and
addresses of the Lenders, and the Commitment of, and principal amount of the
Loans owing to, each Lender pursuant to the terms hereof from time to time (the
“Register”). The entries in the Register shall be conclusive absent manifest
error, and the Borrower, the Administrative Agent and the Lenders shall treat
each Person whose name is recorded in the Register pursuant to the terms hereof
as a Lender hereunder for all purposes of this Agreement, notwithstanding notice
to the contrary. The Register shall be available for inspection by the Borrower
and any Lender, at any reasonable time and from time to time upon reasonable
prior notice.

(v) Upon its receipt of a duly completed Assignment and Assumption executed by
an assigning Lender and an assignee, the assignee’s completed Administrative
Questionnaire (unless the assignee shall already be a Lender hereunder), the
processing and recordation fee referred to in this Section 9.04(b) and any
written consent to such assignment required by this Section 9.04(b), the
Administrative Agent shall accept such Assignment and Assumption and record the
information contained therein in the Register; provided that if either the
assigning Lender or the assignee shall have failed to make any payment required
to be made by it pursuant to Section 2.06(b), 2.17(d) or 9.03(d), the
Administrative Agent shall have no obligation to accept such Assignment and
Assumption and record the information therein in the Register unless and until
such payment shall have been made in full, together with all accrued interest
thereon. No assignment shall be effective for purposes of this Agreement unless
it has been recorded in the Register as provided in this paragraph.

 

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(c) Any Lender may, without the consent of the Borrower or the Administrative
Agent, sell participations to one or more banks or other entities (each, a
“Participant”) in all or a portion of such Lender’s rights and obligations under
this Agreement (including all or a portion of its Commitment and the Loans owing
to it); provided that (A) such Lender’s obligations under this Agreement shall
remain unchanged, (B) such Lender shall remain solely responsible to the other
parties hereto for the performance of such obligations and (C) the Borrower, the
Administrative Agent and the other Lenders shall continue to deal solely and
directly with such Lender in connection with such Lender’s rights and
obligations under this Agreement. Any agreement or instrument pursuant to which
a Lender sells such a participation shall provide that such Lender shall retain
the sole right to enforce this Agreement and to approve any amendment,
modification or waiver of any provision of this Agreement; provided that such
agreement or instrument may provide that such Lender will not, without the
consent of the Participant, agree to any amendment, modification or waiver
described in the first proviso to Section 9.02(b) that requires the affirmative
consent of such Lender. The Borrower agrees that each Participant shall be
entitled to the benefits of Sections 2.14, 2.15 and 2.16 (subject to the
requirements and limitations therein, including the requirements under
Section 2.16(f) (it being understood that the documentation required under
Section 2.16(f) shall be delivered to the participating Lender)) to the same
extent as if it were a Lender and had acquired its interest by assignment
pursuant to Section 9.04(b); provided that such Participant (A) agrees to be
subject to the provisions of Sections 2.17 and 2.18 as if it were an assignee
under Section 9.04(b); and (B) shall not be entitled to receive any greater
payment under Sections 2.14 or 2.16, with respect to any participation, than its
participating Lender would have been entitled to receive, except to the extent
such entitlement to receive a greater payment results from a Change in Law that
occurs after the Participant acquired the applicable participation. To the
extent permitted by law, each Participant also shall be entitled to the benefits
of Section 9.08 as though it were a Lender, provided such Participant agrees to
be subject to Section 2.17(c) as though it were a Lender.

(d) Any Lender may at any time pledge or assign a security interest in all or
any portion of its rights under this Agreement to secure obligations of such
Lender, including without limitation any pledge or assignment to secure
obligations to a Federal Reserve Bank, and this Section shall not apply to any
such pledge or assignment of a security interest; provided that no such pledge
or assignment of a security interest shall release a Lender from any of its
obligations hereunder or substitute any such pledgee or assignee for such Lender
as a party hereto.

SECTION 9.05. Survival. All covenants, agreements, representations and
warranties made by the Borrower herein and in the certificates or other
instruments delivered in connection with or pursuant to this Agreement or any
other Loan Document shall be considered to have been relied upon by the other
parties hereto and shall survive the execution and delivery of this Agreement
and the other Loan Documents and the making of any Loans, regardless of any
investigation made by any such other party or on its behalf and notwithstanding
that the Administrative Agent or any Lender may have had notice or knowledge of
any Default or incorrect representation or warranty at the time any credit is
extended hereunder, and shall continue in full force and effect as long as the
principal of or any accrued interest on any Loan or any fee or any other amount
payable under this Agreement is outstanding and unpaid and so long as the
Commitments have not expired or terminated. The provisions of Sections 2.14,
2.15 and 9.03 and Article VIII shall survive and remain in full force and effect
regardless of the consummation of the transactions contemplated hereby, the
repayment of the Loans, the expiration or termination of the Commitments or the
termination of this Agreement or any provision hereof.

SECTION 9.06. Counterparts; Integration; Effectiveness. This Agreement may be
executed in counterparts (and by different parties hereto on different
counterparts), each of which shall constitute an original, but all of which when
taken together shall constitute a single contract. This Agreement, the other
Loan Documents and any separate letter agreements with respect to fees payable
to the Administrative Agent or the Lenders (including, without limitation, the
Fee Letters) constitute the entire

 

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contract among the parties relating to the subject matter hereof and supersede
any and all previous agreements and understandings, oral or written, relating to
the subject matter hereof. Except as provided in Section 4.01, this Agreement
shall become effective when it shall have been executed by the Administrative
Agent and when the Administrative Agent shall have received counterparts hereof
which, when taken together, bear the signatures of each of the other parties
hereto, and thereafter shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and assigns. Delivery of an
executed counterpart of a signature page of this Agreement by telecopy shall be
effective as delivery of a manually executed counterpart of this Agreement.

SECTION 9.07. Severability. Any provision of any Loan Document held to be
invalid, illegal or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such invalidity, illegality or
unenforceability without affecting the validity, legality and enforceability of
the remaining provisions of such Loan Document; and the invalidity of a
particular provision in a particular jurisdiction shall not invalidate such
provision in any other jurisdiction.

SECTION 9.08. Right of Setoff. If an Event of Default shall have occurred and be
continuing, each Lender and each of its Affiliates is hereby authorized at any
time and from time to time, to the fullest extent permitted by law, to set off
and apply any and all deposits (general or special, time or demand, provisional
or final) at any time held and other obligations at any time owing by such
Lender or Affiliate to or for the credit or the account of the Borrower against
any of and all the obligations of the Borrower now or hereafter existing under
this Agreement held by such Lender, irrespective of whether or not such Lender
shall have made any demand under this Agreement and although such obligations
may be unmatured or denominated in a currency different from that of the
applicable deposit or other obligations. The rights of each Lender under this
Section are in addition to other rights and remedies (including other rights of
setoff) which such Lender may have.

SECTION 9.09. Governing Law; Jurisdiction; Consent to Service of Process.

(a) This Agreement shall be construed in accordance with and governed by the law
of the State of New York, provided, however, that (I) the laws of the state of
Delaware shall govern in determining (a) the interpretation of the definition of
Lorillard Material Adverse Effect and whether or not a Lorillard Material
Adverse Effect has occurred, (b) the accuracy of any Acquisition Agreement
Representation and whether as a result of any inaccuracy thereof the Borrower or
Merger Sub has the right (without regard to any notice requirement and taking
into account any applicable cure provisions) to terminate the Borrower’s or
Merger Sub’s obligations under the Acquisition Agreement or to refuse to
consummate the Acquisition and (c) whether the Acquisition has been consummated
in accordance with the terms of the Acquisition Agreement (in each case without
regard to conflict of law principles that would result in the application of any
law other than the law of the state of Delaware) and (II) the laws of the state
of North Carolina shall govern in determining any matters related to approvals
and related actions by the Borrower or its Board of Directors or shareholders or
the conduct of the Borrower’s Board of Directors or officers (without regard to
conflict of law principles that would result in the application of any law other
than the law of the state of North Carolina).

(b) Each of the parties hereto hereby irrevocably and unconditionally
(a) submits, for itself and its property, to the exclusive jurisdiction of any
New York State court or Federal court of the United States of America sitting in
the County of New York, and any appellate court from any thereof, in any action
or proceeding arising out of or relating to any Loan Document, or the
transactions contemplated hereby or thereby, or for recognition or enforcement
of any judgment, and each of the parties hereto hereby irrevocably and
unconditionally agrees that all claims in respect of any such action or
proceeding shall be heard and determined in such courts located within the
County of New York; provided, however, that the Administrative Agent and the
Lenders shall be entitled to assert jurisdiction over the Borrower

 

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and its property in any court in which jurisdiction may be laid over the
Borrower or its property. Each of the parties hereto agrees that a final
judgment in any such action or proceeding shall be conclusive and may be
enforced in other jurisdictions by suit on the judgment or in any other manner
provided by law. Nothing in this Agreement or any other Loan Document shall
affect any right that the Administrative Agent or any Lender may otherwise have
to bring any action or proceeding relating to this Agreement or any other Loan
Document against the Borrower, any of its Subsidiaries or its or their
respective properties in the courts of any jurisdiction.

(c) The Borrower hereby irrevocably and unconditionally waives, to the fullest
extent it may legally and effectively do so, any objection which it may now or
hereafter have to the laying of venue of any suit, action or proceeding arising
out of or relating to this Agreement or any other Loan Document in any court
referred to in Section 9.09(b). Each of the parties hereto hereby irrevocably
waives, to the fullest extent permitted by law, the defense of an inconvenient
forum to the maintenance of such action or proceeding in any such court.

(d) Each party to this Agreement irrevocably consents to service of process in
the manner provided for notices in Section 9.01. Nothing in this Agreement or
any other Loan Document will affect the right of any party hereto or thereto to
serve process in any other manner permitted by law.

SECTION 9.10. WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES, TO THE
FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY
JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING
TO THIS AGREEMENT, ANY OTHER LOAN DOCUMENT OR THE TRANSACTIONS CONTEMPLATED
HEREBY OR THEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH
PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY
OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD
NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND
(B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER
INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND
CERTIFICATIONS IN THIS SECTION 9.10.

SECTION 9.11. Headings. Article and Section headings and the Table of Contents
used herein are for convenience of reference only, are not part of this
Agreement and shall not affect the construction of, or be taken into
consideration in interpreting, this Agreement.

SECTION 9.12. Confidentiality.

(a) Each of the Administrative Agent and the Lenders agrees to maintain the
confidentiality of the Information (as defined below), except that Information
may be disclosed (i) to its and its Affiliates’ directors, officers, employees
and agents, including accountants, legal counsel and other advisors solely on a
need-to-know basis in connection with this Agreement and the transactions
contemplated hereby (it being understood that the Persons to whom such
disclosure is made will be informed of the confidential nature of such
Information and instructed to keep such Information confidential), for whom the
applicable Administrative Agent or the Lender shall be responsible for any
breach by any such Person to whom such disclosure is made of this
confidentiality undertaking, (ii) to the extent requested by any regulatory
authority, (iii) to the extent required by applicable laws or regulations or by
any subpoena or similar legal process, (iv) to any other party to this
Agreement, (v) in connection with the exercise of any remedies hereunder or any
suit, action or proceeding relating to this Agreement or any other Loan Document
or the enforcement of rights hereunder or thereunder, (vi) subject to an
agreement containing provisions substantially the same as those of this
Section 9.12, to (A) any assignee of or Participant in, or any

 

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prospective assignee of or Participant in, any of its rights or obligations
under this Agreement or (B) any actual or prospective counterparty (or its
advisors) to any swap or derivative transaction relating to the Borrower and its
obligations, (vii) with the written consent of the Borrower or (viii) to the
extent such Information (A) becomes publicly available other than as a result of
a breach of this Section 9.12 or (B) becomes available to the Administrative
Agent or any Lender on a nonconfidential basis from a source other than the
Borrower. For the purposes of this Section 9.12, “Information” means all
information received from or on behalf of the Borrower (including, without
limitation, any information received from representatives of the Borrower)
relating to the Transactions, Borrower, Lorillard or any Subsidiary thereof, or
the business of the Borrower, Lorillard or any Subsidiary thereof, other than
any such information that is available to the Administrative Agent or any Lender
on a nonconfidential basis prior to disclosure by the Borrower or such
Subsidiary. Any Person required to maintain the confidentiality of Information
as provided in this Section shall be considered to have complied with its
obligation to do so if such Person has exercised the same degree of care to
maintain the confidentiality of such Information as such Person would accord to
its own confidential information. Unless specifically prohibited by applicable
law or court order, each of the Lenders and the Administrative Agent shall,
prior to disclosure thereof, make reasonable efforts to notify the Borrower of
any request for disclosure of any such non-public information by any
governmental agency or representative thereof (other than any such request in
connection with an examination of the financial condition of such Lender by such
governmental agency) or pursuant to legal process. In addition, the
Administrative Agent and each Joint Lead Arranger, Syndication Agent and Lender
may disclose the existence of this Agreement and the publicly available
information about this Agreement to market data collectors, similar services
providers to the lending industry, and service providers to the Administrative
Agent and the Lenders in connection with the administration and management of
this Agreement and the other Loan Documents.

(b) EACH LENDER ACKNOWLEDGES THAT INFORMATION AS DEFINED IN SECTION 9.12(a)
FURNISHED TO IT PURSUANT TO THIS AGREEMENT MAY INCLUDE MATERIAL NON-PUBLIC
INFORMATION CONCERNING THE BORROWER AND ITS RELATED PARTIES OR THEIR RESPECTIVE
SECURITIES, AND CONFIRMS THAT IT HAS DEVELOPED COMPLIANCE PROCEDURES REGARDING
THE USE OF MATERIAL NON-PUBLIC INFORMATION AND THAT IT WILL HANDLE SUCH MATERIAL
NON-PUBLIC INFORMATION IN ACCORDANCE WITH THOSE PROCEDURES AND APPLICABLE LAW,
INCLUDING FEDERAL AND STATE SECURITIES LAWS.

(c) ALL INFORMATION, INCLUDING REQUESTS FOR WAIVERS AND AMENDMENTS, FURNISHED BY
THE BORROWER OR THE ADMINISTRATIVE AGENT PURSUANT TO, OR IN THE COURSE OF
ADMINISTERING, THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT WILL BE SYNDICATE-LEVEL
INFORMATION, WHICH MAY CONTAIN MATERIAL NON-PUBLIC INFORMATION ABOUT THE
BORROWER, ITS SUBSIDIARIES AND THEIR RELATED PARTIES OR THEIR RESPECTIVE
SECURITIES. ACCORDINGLY, EACH LENDER REPRESENTS TO THE BORROWER AND THE
ADMINISTRATIVE AGENT THAT IT HAS IDENTIFIED IN ITS ADMINISTRATIVE QUESTIONNAIRE
A CREDIT CONTACT WHO MAY RECEIVE INFORMATION THAT MAY CONTAIN MATERIAL
NON-PUBLIC INFORMATION IN ACCORDANCE WITH ITS COMPLIANCE PROCEDURES AND
APPLICABLE LAW.

SECTION 9.13. Interest Rate Limitation. Notwithstanding anything herein to the
contrary, if at any time the interest rate applicable to any Loan, together with
all fees, charges and other amounts which are treated as interest on such Loan
under applicable law (collectively the “Charges”), shall exceed the maximum
lawful rate (the “Maximum Rate”) which may be contracted for, charged, taken,
received or reserved by the Lender holding such Loan in accordance with
applicable law, the rate of interest payable in respect of such Loan hereunder,
together with all Charges payable in respect thereof, shall be limited to the
Maximum Rate and, to the extent lawful, the interest and Charges that would have

 

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been payable in respect of such Loan but were not payable as a result of the
operation of this Section shall be cumulated and the interest and Charges
payable to such Lender in respect of other Loans or periods shall be increased
(but not above the Maximum Rate therefor) until such cumulated amount, together
with interest thereon at the Federal Funds Effective Rate to the date of
repayment, shall have been received by such Lender.

SECTION 9.14. USA PATRIOT Act. Each Lender subject to the USA PATRIOT ACT
(Title III of Pub. Law 107-56 (signed into law October 26, 2001)) (as amended
from time to time, the “PATRIOT Act”) hereby notifies the Borrower that pursuant
to the requirements of the PATRIOT Act, it is required to obtain, verify and
record information that identifies the Borrower and any other obligor under this
Agreement and any related Loan Documents and other information that will allow
such Lender to identify the Borrower and any other obligor in accordance with
the PATRIOT Act. This notice is given in accordance with the requirements of the
PATRIOT Act and is effective as to the Administrative Agent and each Lender. The
Borrower hereby acknowledges and agrees that the Administrative Agent shall be
permitted to share any or all such information with the Lenders.

SECTION 9.15. No Fiduciary Duty. The Administrative Agent, each Lead Agent, each
Lender and their Affiliates (collectively, solely for purposes of this
Section 9.15, the “Lenders”), may have economic interests that conflict with
those of the Borrower, its shareholders and/or its affiliates. The Borrower
agrees that nothing in the Loan Documents or otherwise will be deemed to create
an advisory, fiduciary or agency relationship or fiduciary or other implied duty
between any Lender, on the one hand, and the Borrower, its shareholders or its
affiliates, on the other. The Loan Parties acknowledge and agree that (i) the
transactions contemplated by the Loan Documents (including the exercise of
rights and remedies hereunder and thereunder) are arm’s-length commercial
transactions between the Lenders, on the one hand, and the Borrower, on the
other, and (ii) in connection therewith and with the process leading thereto,
(x) no Lender has assumed an advisory or fiduciary responsibility in favor of
the Borrower, its shareholders or its affiliates with respect to the
transactions contemplated hereby (or the exercise of rights or remedies with
respect thereto) or the process leading thereto (irrespective of whether any
Lender has advised, is currently advising or will advise the Borrower, its
shareholders or its affiliates on other matters) or any other obligation to the
Borrower except the obligations expressly set forth in the Loan Documents and
(y) each Lender is acting solely as principal and not as the agent or fiduciary
of the Borrower, its management, shareholders, creditors or any other Person.
The Borrower acknowledges and agrees that the Borrower has consulted its own
legal and financial advisors to the extent it deemed appropriate and that it is
responsible for making its own independent judgment with respect to such
transactions and the process leading thereto. The Borrower agrees that it will
not claim that any Lender has rendered advisory services of any nature or
respect, or owes a fiduciary or similar duty to the Borrower, in connection with
such transaction or the process leading thereto.

SECTION 9.16. [Reserved].

SECTION 9.17. Release of Subsidiary Guarantors from Subsidiary Guarantee
Agreement.

(a) Notwithstanding anything to the contrary contained herein or in any other
Loan Document, the Administrative Agent is hereby irrevocably authorized by each
Lender (without requirement of notice to or consent of any Lender except as
expressly required by Section 9.02) to take any action requested by the Borrower
having the effect of releasing the guarantee obligations of any Subsidiary under
the Subsidiary Guarantee Agreement (i) if such Person ceases to be a Subsidiary
as a result of a transaction permitted by this Agreement or that has been
consented to in accordance with Section 9.02, (ii) if such Subsidiary ceases to
be a Material Subsidiary in accordance with the requirements of the definition
of “Material Subsidiary” (including as a result of a designation pursuant to the
second proviso ap-

 

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pearing in the first sentence of such definition) or (iii) under the
circumstances described in Section 9.17(b) below; provided, except in the case
of preceding clause (iii), that (x) no such release shall occur if such
Subsidiary continues to be a guarantor in respect of any Indebtedness of the
Borrower or any other Subsidiary in an aggregate principal amount equal to or
greater than $50,000,000, unless and until such Subsidiary is (or is being
simultaneously) released from its guarantee with respect to such Indebtedness
and (y) no such release shall occur if a Default has then occurred and is
continuing.

(b) At such time as the Loans and all Obligations shall have been paid in full,
the Subsidiary Guarantors shall be released from their obligations under the
Subsidiary Guarantee Agreement, all without delivery of any instrument or
performance of any act by any Person.

(c) Upon request by the Administrative Agent at any time, the Required Lenders
will confirm in writing the Administrative Agent’s authority to release any
Subsidiary Guarantor from its obligations under the Subsidiary Guarantee
Agreement pursuant to this Section 9.17.

[Remainder of page intentionally blank; next page is signature page]

 

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

 

REYNOLDS AMERICAN INC., as the Borrower By:   /s/    Daniel A. Fawley          
Name:   Daniel A. Fawley   Title:   Senior Vice President and Treasurer

 

 

(Signature Page – Reynolds American Inc. – Bridge Credit Agreement)

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JPMORGAN CHASE BANK, N.A., individually and as Administrative Agent By:  
/s/    Tony Yung           Name:   Tony Yung   Title:   Executive Director

 

(Signature Page – Reynolds American Inc. – Bridge Credit Agreement)

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CITIBANK, N.A. By:   /s/    Michael Vondriska           Name:   Michael
Vondriska   Title:   Vice President

 

(Signature Page – Reynolds American Inc. – Bridge Credit Agreement)

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CREDIT SUISSE AG, CAYMAN ISLANDS BRANCH, By:   /s/    Michael Spaight          
Name:   Michael Spaight   Title:   Authorized Signatory By:   /s/    Lingzi
Huang           Name:   Lingzi Huang   Title:   Authorized Signatory

 

(Signature Page – Reynolds American Inc. – Bridge Credit Agreement)

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FIFTH THIRD BANK By:   /s/    Mary Ramsey           Name:   Mary Ramsey   Title:
  Vice President

 

(Signature Page – Reynolds American Inc. – Bridge Credit Agreement)

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GOLDMAN SACHS BANK USA By:   /s/    Mark Walton           Name:   Mark Walton  
Title:   Authorized Signatory

 

(Signature Page – Reynolds American Inc. – Bridge Credit Agreement)

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MIZUHO BANK, LTD. By:   /s/    James Fayen           Name:   James Fayen  
Title:   Deputy General Manager

 

(Signature Page – Reynolds American Inc. – Bridge Credit Agreement)

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ROYAL BANK OF CANADA By:   /s/    Simone G. Vinocour McKeever           Name:  
Simone G. Vinocour McKeever   Title:   Authorized Signatory

 

(Signature Page – Reynolds American Inc. – Bridge Credit Agreement)

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THE BANK OF NOVA SCOTIA By:   /s/    Michael Grad           Name:   Michael Grad
  Title:   Director

 

(Signature Page – Reynolds American Inc. – Bridge Credit Agreement)

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WELLS FARGO BANK, NATIONAL ASSOCIATION By:   /s/    Caroline Boyd
Olzinski           Name:   Caroline Boyd Olzinski   Title:   Vice President

 

(Signature Page – Reynolds American Inc. – Bridge Credit Agreement)

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THE BANK OF NEW YORK MELLON By:   /s/    Jeffrey Dears           Name:   Jeffrey
Dears   Title:   Vice President

 

(Signature Page – Reynolds American Inc. – Bridge Credit Agreement)

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NORTHERN TRUST COMPANY By:   /s/    John Canty           Name:   John Canty  
Title:   Senior Vice President

 

(Signature Page – Reynolds American Inc. – Bridge Credit Agreement)

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PNC BANK, NATIONAL ASSOCIATION By:   /s/    John F. Broeren           Name:  
John F. Broeren   Title:   Senior Vice President

 

(Signature Page – Reynolds American Inc. – Bridge Credit Agreement)

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Schedule 2.01

Commitments

 

Lender

   Commitment  

JPMorgan Chase Bank, N.A.

   $ 2,205,000,000.00   

Citibank, N.A.

   $ 2,205,000,000.00   

Credit Suisse AG, Cayman Islands Branch

   $ 720,000,000.00   

Goldman Sachs Bank USA

   $ 720,000,000.00   

Mizuho Bank, Ltd.

   $ 720,000,000.00   

Royal Bank of Canada

   $ 720,000,000.00   

The Bank of Nova Scotia

   $ 720,000,000.00   

Fifth Third Bank

   $ 292,500,000.00   

Wells Fargo Bank, National Association

   $ 252,000,000.00   

PNC Bank, National Association

   $ 198,000,000.00   

The Bank of New York Mellon

   $ 180,000,000.00   

Northern Trust Company

   $ 67,500,000.00      

 

 

 

Total

   $ 9,000,000,000.00      

 

 

 

--------------------------------------------------------------------------------

Schedule 3.06

Disclosed Matters

See attached description.

--------------------------------------------------------------------------------

Tobacco Litigation — General

 

  —   Introduction

Various legal proceedings or claims, including litigation claiming that cancer
and other diseases, as well as addiction, have resulted from the use of, or
exposure to, RAI’s operating subsidiaries’ products, are pending or may be
instituted against RJR Tobacco, American Snuff Co. or their affiliates,
including RAI and RJR, or indemnitees, including B&W. These pending legal
proceedings include claims relating to cigarette products manufactured by RJR
Tobacco or certain of its affiliates and indemnitees, as well as claims relating
to smokeless tobacco products manufactured by American Snuff Co. A discussion of
the legal proceedings relating to cigarette products is set forth below under
the heading “— Litigation Affecting the Cigarette Industry.” All of the
references under that heading to tobacco-related litigation, smoking and health
litigation and other similar references are references to legal proceedings
relating to cigarette products and are not references to legal proceedings
involving smokeless tobacco products, and case numbers under that heading
include only cases involving cigarette products. The legal proceedings relating
to the smokeless tobacco products manufactured by American Snuff Co. are
discussed separately under the heading “— Smokeless Tobacco Litigation” below.

In connection with the B&W business combination, RJR Tobacco has agreed to
indemnify B&W and its affiliates, including its indirect parent, BAT, against
certain liabilities, costs and expenses incurred by B&W or its affiliates
arising out of the U.S. cigarette and tobacco business of B&W. As a result of
this indemnity, RJR Tobacco has assumed the defense of pending B&W-specific
tobacco-related litigation, has paid the judgments and costs related to certain
pre-business combination tobacco-related litigation of B&W, and has posted bonds
on behalf of B&W, where necessary, in connection with cases decided since the
B&W business combination.

 

  —   Certain Terms and Phrases

Certain terms and phrases used in this disclosure may require some explanation.
The term “judgment” or “final judgment” refers to the final decision of the
court resolving the dispute and determining the rights and obligations of the
parties. At the trial court level, for example, a final judgment generally is
entered by the court after a jury verdict and after post-verdict motions have
been decided. In most cases, the losing party can appeal a verdict only after a
final judgment has been entered by the trial court.

The term “damages” refers to the amount of money sought by a plaintiff in a
complaint, or awarded to a party by a jury or, in some cases, by a judge.
“Compensatory damages” are awarded to compensate the prevailing party for actual
losses suffered, if liability is proved. In cases in which there is a finding
that a defendant has acted willfully, maliciously or fraudulently, generally
based on a higher burden of proof than is required for a finding of liability
for compensatory damages, a plaintiff also may be awarded “punitive damages.”
Although damages may be awarded at the trial court stage, a losing party
generally may be protected from paying any damages until all appellate avenues
have been exhausted by posting a supersedeas bond. The amount of such a bond is
governed by the law of the relevant jurisdiction and generally is set at the
amount of damages plus some measure of statutory interest, modified at the
discretion of the appropriate court or subject to limits set by court or
statute.

The term “per curiam” refers to an opinion entered by a court. In most cases, it
is used to indicate that the opinion entered is a brief announcement of the
court’s decision and is not accompanied by a written opinion.

The term “settlement” refers to certain types of cases in which cigarette
manufacturers, including RJR Tobacco and B&W, have agreed to resolve disputes
with certain plaintiffs without resolving the case through trial. The principal
terms of certain settlements entered into by RJR Tobacco and B&W are explained
below under “— Accounting for Tobacco-Related Litigation Contingencies.”

 

  —   Theories of Recovery

The plaintiffs seek recovery on a variety of legal theories, including
negligence, strict liability in tort, design defect, failure to warn, fraud,
misrepresentation, unfair trade practices, conspiracy, medical monitoring and
violations of state and federal antitrust laws. In certain of these cases, the
plaintiffs claim that cigarette smoking exacerbated injuries caused by exposure
to asbestos.

--------------------------------------------------------------------------------

The plaintiffs seek various forms of relief, including compensatory and, where
available, punitive damages, treble or multiple damages and statutory damages
and penalties, creation of medical monitoring and smoking cessation funds,
disgorgement of profits, and injunctive and other equitable relief. Although
alleged damages often are not determinable from a complaint, and the law
governing the pleading and calculation of damages varies from jurisdiction to
jurisdiction, compensatory and punitive damages have been specifically pleaded
in a number of cases, sometimes in amounts ranging into the hundreds of millions
and even billions of dollars.

 

  —   Defenses

The defenses raised by RJR Tobacco, American Snuff Co. and their affiliates and
indemnitees include, where applicable and otherwise appropriate, preemption by
the Federal Cigarette Labeling and Advertising Act of some or all claims arising
after 1969, or by the Comprehensive Smokeless Tobacco Health Education Act for
claims arising after 1986, the lack of any defect in the product, assumption of
the risk, contributory or comparative fault, lack of proximate cause,
remoteness, lack of standing and statutes of limitations or repose. RAI and RJR
have asserted additional defenses, including jurisdictional defenses, in many of
the cases in which they are named.

 

  —   Accounting for Tobacco-Related Litigation Contingencies

In accordance with GAAP, RAI and its subsidiaries, including RJR Tobacco,
American Snuff Co. and SFNTC, as applicable, record any loss concerning
litigation at such time as an unfavorable outcome becomes probable and the
amount can be reasonably estimated on an individual case-by-case basis.

On September 30, 2014, RJR Tobacco will make a payment of $11.9 million ($10
million for compensatory and punitive damages and $1.9 million for attorneys’
fees and statutory interest) in satisfaction of the adverse judgment in the
Crawford case, described below.

It is the policy of RJR Tobacco and its affiliates to vigorously defend all
tobacco-related litigation claims. Generally, RJR Tobacco and its affiliates and
indemnitees have not settled any smoking and health tobacco litigation claims.
Other than actions taken pursuant to “offer of judgment” statutes, as described
below in “— Litigation Affecting the Cigarette Industry,” RJR Tobacco and its
affiliates do not intend to settle such claims.

With respect to smoking and health tobacco litigation claims, the only
significant settlements reached by RJR Tobacco and B&W involved:

 

  •   the State Settlement Agreements and the funding by various tobacco
companies of a $5.2 billion trust fund contemplated by the MSA to benefit
tobacco growers; and

 

  •   the original Broin flight attendant case discussed below under
“— Litigation Affecting the Cigarette Industry — Broin II Cases.”

The circumstances surrounding the State Settlement Agreements and the funding of
a trust fund to benefit the tobacco growers are readily distinguishable from the
current categories of smoking and health cases involving RJR Tobacco or its
affiliates and indemnitees. The claims underlying the State Settlement
Agreements were brought on behalf of the states to recover funds paid for health
care and medical and other assistance to state citizens suffering from diseases
and conditions allegedly related to tobacco use. The State Settlement Agreements
settled all the health-care cost recovery actions brought by, or on behalf of,
the settling jurisdictions and contain releases of various additional present
and future claims. In accordance with the MSA, various tobacco companies agreed
to fund a $5.2 billion trust fund to be used to address the possible adverse
economic impact of the MSA on tobacco growers. A discussion of the State
Settlement Agreements, and a table depicting the related payment schedule, is
set forth below under
“— Litigation Affecting the Cigarette Industry — Health-Care Cost Recovery
Cases.”

The states were a unique set of plaintiffs and are not involved in any of the
smoking and health cases remaining against RJR Tobacco or its affiliates and
indemnitees. Although RJR Tobacco and certain of its affiliates and indemnitees
continue to be defendants in health-care cost recovery cases similar in theory
to the state cases but involving other plaintiffs, such as Native American
tribes and foreign governments, the vast majority of such cases have been
dismissed on legal grounds. RJR Tobacco and its affiliates, including RAI,
believe that the same legal principles that have resulted in dismissal of
health-care cost recovery cases either at the trial court level or on appeal
should compel dismissal of the similar pending cases.

--------------------------------------------------------------------------------

As with claims that were resolved by the State Settlement Agreements, the other
cases settled by RJR Tobacco can be distinguished from existing cases pending
against RJR Tobacco and its affiliates and indemnitees. The original Broin case,
discussed below under “— Litigation Affecting the Cigarette Industry — Broin II
Cases,” was settled in the middle of trial during negotiations concerning a
possible nation-wide settlement of claims similar to those underlying the State
Settlement Agreements.

In 2010, RJR Tobacco entered into a comprehensive agreement with the Canadian
federal, provincial and territorial governments, which resolved all civil claims
related to the movement of contraband tobacco products in Canada during the
period 1985 through 1999 that the Canadian governments could assert against RJR
Tobacco and its affiliates. These claims were separate from any smoking and
health tobacco litigation.

Likewise, in 2004, RJR Tobacco and B&W separately settled the antitrust case
DeLoach v. Philip Morris Cos., Inc., which was brought by a unique class of
plaintiffs: a class of all tobacco growers and tobacco allotment holders. The
plaintiffs asserted that the defendants conspired to fix the price of tobacco
leaf and to destroy the federal government’s tobacco quota and price support
program. Despite legal defenses they believed to be valid, RJR Tobacco and B&W
separately settled this case to avoid a long and contentious trial with the
tobacco growers. The DeLoach case and the antitrust case currently pending
against RJR Tobacco and B&W involve different types of plaintiffs and different
theories of recovery under the antitrust laws than the smoking and health cases
pending against RJR Tobacco and its affiliates and indemnitees.

Finally, as discussed under “— Litigation Affecting the Cigarette Industry —
State Settlement Agreements—Enforcement and Validity; Adjustments,” RJR Tobacco
and B&W each has settled certain cases brought by states concerning the
enforcement of State Settlement Agreements. Despite legal defenses believed to
be valid, these cases were settled to avoid further contentious litigation with
the states involved. These enforcement actions involve alleged breaches of State
Settlement Agreements based on specific actions taken by particular defendants.
Accordingly, any future enforcement actions involving State Settlement
Agreements will be reviewed by RJR Tobacco on the merits and should not be
affected by the settlement of prior enforcement cases.

 

  —   Cautionary Statement

The possibility of material losses related to pending smoking and health tobacco
litigation claims against RJR Tobacco or its affiliates or indemnitees, or cases
concerning the use of smokeless tobacco against American Snuff Co. is more than
remote. Litigation is subject to many uncertainties, and generally, it is not
possible to predict the outcome of any particular litigation pending against RJR
Tobacco, American Snuff Co. or their affiliates or indemnitees, or to reasonably
estimate the amount or range of any possible loss.

It is possible that there could be further adverse developments in pending
cases, and that additional cases could be decided unfavorably against RAI, RJR
Tobacco or their affiliates or indemnitees. Determinations of liability or
adverse rulings in such cases or in similar cases involving other cigarette
manufacturers as defendants, even if such judgments are not final, could have a
material adverse effect on the litigation against RJR Tobacco or its affiliates
or indemnitees and could encourage the commencement of additional
tobacco-related litigation. In addition, a number of political, legislative,
regulatory and other developments relating to the tobacco industry and cigarette
smoking have received wide media attention. These developments may negatively
affect the outcomes of tobacco-related legal actions and encourage the
commencement of additional similar litigation.

Although it is impossible to predict the outcome of such events on pending
litigation and the rate new lawsuits are filed against RJR Tobacco or its
affiliates or indemnitees, a significant increase in litigation or in adverse
outcomes for tobacco defendants, or difficulties in obtaining the bonding
required to stay execution of judgments on appeal, could have a material adverse
effect on any or all of these entities. Moreover, notwithstanding the quality of
defenses available to RJR Tobacco and its affiliates and indemnitees in
litigation matters, it is possible that RAI’s results of operations, cash flows
or financial position could be materially adversely affected by the ultimate
outcome of certain pending litigation matters against RJR Tobacco or its
affiliates or indemnitees.

--------------------------------------------------------------------------------

Similarly, smokeless tobacco litigation is subject to many uncertainties.
Notwithstanding the quality of defenses available to American Snuff Co., it is
possible that RAI’s results of operations, cash flows or financial position
could be materially adversely affected by the ultimate outcome of certain
pending litigation matters against American Snuff Co.

Litigation Affecting the Cigarette Industry

 

  —   Overview

— Introduction. In connection with the B&W business combination, RJR Tobacco
agreed to indemnify B&W and its affiliates against, among other things, certain
litigation liabilities, costs and expenses incurred by B&W or its affiliates
arising out of the U.S. cigarette and tobacco business of B&W. Accordingly, the
cases discussed below include cases brought solely against RJR Tobacco and its
affiliates, including RAI and RJR; cases brought against both RJR Tobacco, its
affiliates and B&W; and cases brought solely against B&W and assumed by RJR
Tobacco in the B&W business combination.

From the beginning of the third quarter of 2014 through September 17, 2014, 11
tobacco-related cases, including one Engle Progeny case, were served against RJR
Tobacco or its affiliates or indemnitees. On September 17, 2014, there were 176
cases pending against RJR Tobacco or its affiliates or indemnitees: 160 in the
United States and 16 in Canada, as compared with 165 total cases on
September 30, 2013. The U.S. case number does not include the approximately 564
individual smoker cases pending in West Virginia state court as a consolidated
action, 4,071 Engle Progeny cases, involving approximately 5,172 individual
plaintiffs, and 2,570 Broin II cases (as hereinafter defined), pending in the
United States against RJR Tobacco or its affiliates or indemnitees. Of the U.S.
cases pending on September 17, 2014, 16 are pending in federal court, 143 in
state court and 1 in tribal court, primarily in the following states: Maryland
(28 cases); Florida (25 cases); Missouri (18 cases); and New York (14 cases).

The following table lists the categories of the U.S. tobacco-related cases
pending against RJR Tobacco or its affiliates or indemnitees as of September 17,
2014, compared with the number of cases pending against RJR Tobacco, its
affiliates or indemnitees as of June 30, 2014, as reported in RAI’s Quarterly
Report on Form 10-Q for the fiscal quarter ended June 30, 2014, filed with the
SEC on July 29, 2014, and a cross-reference to the discussion of each case type.

 

Case Type

   RJR Tobacco’s
U.S. Case Numbers as
of September 17, 2014    Change in
Number of
Cases Since
June 30, 2014
Increase/(Decrease)    Page
Reference

Individual Smoking and Health

   95    (5)    9

West Virginia IPIC (Number of Plaintiffs)*

   1 (approx. 564)    No change    10

Engle Progeny (Number of Plaintiffs)**

   4,071 (app. 5,172)    (794) (801)    11

Broin II

   2,570    (2)    23

Class Action

   17    9    23

Health-Care Cost Recovery

   2    No change    26

State Settlement Agreements—Enforcement and Validity; Adjustments

   30    No change    32

Antitrust

   1    No change    37

Other Litigation and Developments

   14    1    37

 

* Includes as one case the approximately 564 cases pending as a consolidated
action In Re: Tobacco Litigation Individual Personal Injury Cases, sometimes
referred to as West Virginia IPIC cases, described below. The West Virginia IPIC
cases have been separated from the Individual Smoking and Health cases for
reporting purposes.

** The Engle Progeny cases have been separated from the Individual Smoking and
Health cases for reporting purposes. The number of cases has decreased as the
result of many of the federal and state court cases being dismissed or duplicate
actions being consolidated.

The following cases against RJR Tobacco and B&W have attracted significant
attention: the Florida state court class-action case, Engle v. R. J. Reynolds
Tobacco Co. and the related Engle Progeny cases; and the case brought by the
U.S. Department of Justice under the federal Racketeer Influenced and Corrupt
Organizations Act, referred to as RICO.

--------------------------------------------------------------------------------

In 2000, a jury in Engle v. Liggett Group, a class action brought against the
major U.S. cigarette manufacturers by Florida smokers allegedly harmed by their
addiction to nicotine, rendered a $145 billion punitive damages verdict in favor
of the class. In 2006, the Florida Supreme Court set aside that award,
prospectively decertified the class, and preserved several of the Engle jury
findings for use in subsequent individual actions to be filed within one year of
its decision. The preserved findings include jury determinations that smoking
causes various diseases, that nicotine is addictive, and that each defendant
sold cigarettes that were defective and unreasonably dangerous, committed
unspecified acts of negligence and individually and jointly concealed
unspecified information about the health risks of smoking.

In the wake of Engle, thousands of individual progeny actions were filed in
federal and state courts in Florida. Such actions are commonly referred to as
“Engle Progeny” cases. As of September 17, 2014, 947 Engle Progeny cases were
pending in federal court, and 3,124 of them were pending in state court. These
cases include approximately 5,172 plaintiffs. In addition, as of September 17,
2014, RJR Tobacco was aware of 16 additional Engle Progeny cases that had been
filed but not served. One hundred nine Engle Progeny cases have been tried in
Florida state and federal courts since 2011 through September 17, 2014, and
numerous state court trials are scheduled for 2014. The number of pending cases
fluctuates for a variety of reasons, including voluntary and involuntary
dismissals. Voluntary dismissals include cases in which a plaintiff accepts an
“offer of judgment,” referred to in Florida statutes as “proposals for
settlement,” from RJR Tobacco and/or its affiliates. An offer of judgment, if
rejected by the plaintiff, preserves RJR Tobacco’s right to recover attorneys’
fees under Florida law in the event of a verdict favorable to RJR Tobacco. Such
offers are sometimes made through court-ordered mediations.

In Engle Progeny cases tried to date, a central issue has been the proper use of
the preserved Engle findings. RJR Tobacco has argued that use of the Engle
findings to establish individual elements of progeny claims (such as defect,
negligence and concealment) is a violation of federal due process. In 2013,
however, both the Florida Supreme Court and the U.S. Court of Appeals for the
Eleventh Circuit, referred to as the Eleventh Circuit, rejected that argument.
In addition to this global due process argument, RJR Tobacco raises many other
factual and legal defenses as appropriate in each case. These defenses may
include, among other things, arguing that the plaintiff is not a proper member
of the Engle class, that the plaintiff did not rely on any statements by any
tobacco company, that the trial was conducted unfairly, that some or all claims
are barred by applicable statutes of limitation or statutes of repose, or that
any injury was caused by the smoker’s own conduct.

Twenty-four Engle Progeny cases have become final through September 17, 2014.
These cases resulted in aggregate payments by RJR Tobacco of $186.4 million
($140.1 million for compensatory and punitive damages and $46.3 million for
attorneys’ fees and statutory interest). On October 3, 2014, a payment of $11.9
million ($10 million for compensatory and punitive damages and $1.9 million for
attorneys’ fees and statutory interest) will be made in satisfaction of the
adverse judgment in the Crawford case, described below.

The following chart reflects verdicts in all individual Engle Progeny cases,
pending as of September 17, 2014, in which a verdict has been returned against
RJR Tobacco or B&W, or both, and has not been set aside on appeal. This chart
does not include the mistrials or verdicts returned in favor of RJR Tobacco or
B&W, or both.

 

Plaintiff Case

Name

   RJR Tobacco
Allocation of
Fault     Compensatory
Damages (as
adjusted)(1)      Punitive
Damages     

Appeal Status

Cohen

     33.3 %    $ 3,300,000       $ —         Punitive damages set aside;
remanded for partial new trial; notice to invoke jurisdiction of Florida Supreme
Court pending; stayed pending resolution of Hess v. Philip Morris USA Inc.

Putney

     30 %      —           —         Reversed and remanded for further
proceedings; notice to invoke jurisdiction of Florida Supreme Court pending;
stayed pending resolution of Hess v. Philip Morris USA Inc.

--------------------------------------------------------------------------------

Buonomo

     77.5 %      4,060,000        —         Punitive damages set aside; remanded
for new trial; notice to invoke jurisdiction of Florida Supreme Court pending;
stayed pending resolution of Hess v. Philip Morris USA Inc.

Webb

     90 %      —        —         Reversed and remanded for new trial on
damages; new trial scheduled for November 3, 2014

Soffer

     40 %      2,000,000        —         Pending – Florida Supreme Court

Ciccone

     30 %      1,000,000        —         Pending – Florida Supreme Court

Hallgren

     25 %      500,000        750,000       Notice to invoke jurisdiction of
Florida Supreme Court pending; stayed

Calloway

     27 %      16,100,000 (2)      17,250,000       Pending – Fourth DCA

Hiott

     40 %    $ 730,000      $ —         Notice to invoke jurisdiction of Florida
Supreme Court pending; stayed pending resolution of Hess v. Philip Morris USA
Inc.

Hancock

     5 %      700        —         Pending – Fourth DCA

Sikes

     51 %      3,520,000        2,000,000       Notice to invoke jurisdiction of
Florida Supreme Court pending; stayed pending resolution of Hess v. Philip
Morris USA Inc.

James Smith

     55 %      600,000 (2)      20,000       Pending – Eleventh Circuit

Schlenther

     50 %      5,030,000 (2)      2,500,000       Pending – Second DCA

Ballard

     55 %      5,000,000        —         Pending – Third DCA

Williams

     85 %      4,250,000        —         Third DCA affirmed; deadline to file
notice to invoke the discretionary jurisdiction of the Florida Supreme Court is
October 20, 2014

Evers

     60 %      1,938,000        —         Punitive damages reversed; pending –
Second DCA

Schoeff

     75 %      7,875,000        30,000,000       Pending – Fourth DCA

Marotta

     58 %      3,480,000        —         Pending – Fourth DCA

Searcy

     30 %      1,000,000 (2)      1,670,000       Pending – Eleventh Circuit

Aycock

     72.5 %      4,277,000        —         Pending – Eleventh Circuit

Graham

     20 %      550,000        —         Pending – Eleventh Circuit

Starr-Blundell

     10 %      50,000        —         Pending – First DCA     

 

 

   

 

 

    

Odum

     50 %      100,000        —         Pending – First DCA

Skolnick

     30 %      767,000        —         Pending – Fourth DCA

Thibault

     70 %      1,750,000 (2)      1,275,000       Pending – First DCA

Grossman

     75 %      15,350,000 (2)      22,500,000       Pending – Fourth DCA

Gafney

     33 %      1,914,000        —         Pending – Fourth DCA

Crawford

     70 %      9,000,000        1,000,000       Third DCA affirmed; payment will
be made October 3, 2014

Harford

     18 %      59,000        —         Post-trial motions are pending(3)

Cheeley

     50 %      1,500,000        2,000,000       Pending – Fourth DCA

Goveia

     35 %      297,500        2,250,000       Pending – Fifth DCA

Clayton

     10 %      60,000        —         Pending – First DCA

Bowden

     30 %      1,500,000        —         Pending – First DCA

Burkhart

     25 %      2,500,000 (2)      1,250,000       Post-trial motions denied;
deadline to file notice of appeal is October 16, 2014

Bakst

     75 %      4,503,000        14,000,000       Post-trial motions denied;
deadline to file notice of appeal is October 14, 2014

Robinson

     70.5 %      16,900,000        23,600,000,000       Post-trial motions are
pending(3)

--------------------------------------------------------------------------------

Harris

     15 %      239,000          Post-trial motions are pending(3)

Wilcox

     70 %      4,900,000         8,500,000       Post-trial motions are
pending(3)

Irimi

     14.5 %      453,000         —         Post-trial motions are pending(3)   
    

 

 

    

Hubbird

     50 %      3,000,000         25,000,000       Post-trial motions are
pending(3)     

 

 

    

 

 

    

Totals

     $ 130,013,200         23,731,965,000           

 

 

    

 

 

    

 

(1)  Unless otherwise noted, compensatory damages in these cases are adjusted to
reflect the jury’s allocation of comparative fault. Punitive damages are not so
adjusted. The amounts listed above do not include attorneys’ fees or statutory
interest that may apply to the judgments.

(2)  The court did not apply comparative fault in the final judgment.

(3)  Should the pending post-trial motions be denied, RJR Tobacco will likely
file a notice of appeal with the appropriate appellate court.

As of September 17, 2014, outstanding judgments in favor of the Engle Progeny
plaintiffs have been entered and remain outstanding against RJR Tobacco in the
amount of $130,013,200 in compensatory damages (as adjusted) and in the amount
of $23,731,965,000 in punitive damages, for a total of $23,861,978,200.
Excluding the Robinson case, where a jury awarded $16.9 million in compensatory
damages and $23.6 billion in punitive damages and where post-trial motions are
pending before the trial court, outstanding judgments in favor of the Engle
Progeny plaintiffs have been entered and remain outstanding against RJR Tobacco
in the amount of $113,113,200 in compensatory damages (as adjusted) and in the
amount of $131,965,000 in punitive damages, for a total of $245,078,200. All of
these verdicts are at various stages in the appellate process. RJR Tobacco
continues to believe that it has valid defenses in these cases, including
case-specific issues beyond the due process issue discussed above. It is the
policy of RJR Tobacco and its affiliates to vigorously defend all smoking and
health claims, including in Engle Progeny cases.

Should RJR Tobacco not prevail in any particular individual Engle Progeny case
or determine that in any individual Engle Progeny case an unfavorable outcome
has become probable and the amount can be reasonably estimated, a loss would be
recognized, which could have a material adverse effect on earnings and cash
flows of RAI in a particular quarter or year. This position on loss recognition
for Engle Progeny cases as of September 17, 2014, is consistent with RAI’s and
RJR Tobacco’s historic position on loss recognition for other smoking and health
litigation. It is also the policy of RJR Tobacco to record any loss concerning
litigation at such time as an unfavorable outcome becomes probable and the
amount can be reasonably estimated on an individual case-by-case basis.

In the U.S. Department of Justice case, brought in 1999 in the U.S. District
Court for the District of Columbia, the government sought, among other forms of
relief, the disgorgement of profits pursuant to the civil provisions of RICO.
The U.S. Court of Appeals for the District of Columbia ruled in 2005 that
disgorgement is not an available remedy in the case. The bench trial ended in
June 2005, and the court, in August 2006, issued its ruling, among other things,
finding certain defendants, including RJR Tobacco and B&W, liable for the RICO
claims, imposing no direct financial penalties on the defendants, but ordering
the defendants to make certain “corrective communications” in a variety of media
and enjoining the defendants from using certain brand descriptors. Both sides
appealed to the U.S. Court of Appeals for the District of Columbia. In May 2009,
the U.S. Court of Appeals largely affirmed the findings against the tobacco
company defendants and remanded to the trial court for further proceedings. The
U.S. Supreme Court denied the parties’ petitions for writ of certiorari in June
2010. In June 2014, the district court issued an implementation order for the
corrective-statements remedy. That order stays implementation until the
exhaustion of the defendants’ appeal challenging the constitutionality of the
corrective statements. Additional remand proceedings remain ongoing.

For a detailed description of these cases, see “— Engle and Engle Progeny Cases”
and “— Health-Care Cost Recovery Cases — U.S. Department of Justice Case” below.

In November 1998, the major U.S. cigarette manufacturers, including RJR Tobacco
and B&W, entered into the MSA with 46 U.S. states, Washington, D.C. and certain
U.S. territories and possessions. These cigarette manufacturers previously
settled four other cases, brought on behalf of Mississippi, Florida, Texas and
Minnesota, by separate agreements with each state. These State Settlement
Agreements:

 

  •   settled all health-care cost recovery actions brought by, or on behalf of,
the settling jurisdictions;

 

  •   released the major U.S. cigarette manufacturers from various additional
present and potential future claims;

--------------------------------------------------------------------------------

  •   imposed future payment obligations in perpetuity on RJR Tobacco, B&W and
other major U.S. cigarette manufacturers; and

 

  •   placed significant restrictions on their ability to market and sell
cigarettes and smokeless tobacco products.

Payments under the State Settlement Agreements are subject to various
adjustments for, among other things, the volume of cigarettes sold, relevant
market share and inflation. See “— Health-Care Cost Recovery Cases — State
Settlement Agreements” below for a detailed discussion of the State Settlement
Agreements, including RAI’s operating subsidiaries’ monetary obligations under
these agreements. RJR Tobacco records the allocation of settlement charges as
products are shipped.

— Scheduled Trials. Trial schedules are subject to change, and many cases are
dismissed before trial. It is likely that RJR Tobacco and other cigarette
manufacturers will have an increased number of tobacco-related trials in 2014.
There are six cases, exclusive of Engle Progeny cases, scheduled for trial as of
September 17, 2014 through September 17, 2015, for RJR Tobacco or its affiliates
and indemnitees: one non-smoking and health case, four individual smoking and
health cases and one class action. There are 58 Engle Progeny cases against RJR
Tobacco and/or B&W set for trial through September 17, 2015, but it is not known
how many of these cases will actually be tried.

— Trial Results. From January 1, 2011 through September 17, 2014, 114 smoking
and health, Engle Progeny and health-care cost recovery cases in which RJR
Tobacco or B&W were defendants were tried, including six trials for cases where
mistrials were declared in the original proceedings. Verdicts in favor of RJR
Tobacco, B&W and, in some cases, RJR Tobacco, B&W and other defendants, were
returned in 58 cases, including 16 mistrials, tried in Florida (55), Missouri
(1) and West Virginia (2). Verdicts in favor of the plaintiffs were returned in
52 cases tried in Florida and one in New York. Three cases in Florida were
dismissed during trial.

In the third quarter of 2014 (through September 17, 2014), nine Engle Progeny
cases in which RJR Tobacco was a defendant were tried:

 

  •   In Robinson v. R. J. Reynolds Tobacco Co., the jury returned a verdict in
favor of the plaintiff, found the decedent, Michael Johnson, Sr., to be 29.5% at
fault and RJR Tobacco to be 70.5% at fault and awarded $16.9 million in
compensatory damages and $23.6 billion in punitive damages.

 

  •   In Harris v. R. J. Reynolds Tobacco Co., the jury returned a verdict in
favor of the plaintiff. The jury allocated fault: (1) for the survival claim as
follows: decedent – 60%, RJR Tobacco – 15%, and the remaining defendants
(collectively) – 25%; and (2) for the wrongful death claim as follows: decedent
– 70%, RJR Tobacco – 10%, and the remaining defendants (collectively) – 20%. The
jury awarded $400,000 in compensatory damages for the wrongful death claim and
$1.3 million in compensatory damages for the survival claim. Punitive damages
were not awarded.

 

  •   In Gore v. R. J. Reynolds Tobacco Co., the court declared a mistrial
because the jury returned a potentially inconsistent verdict. The jury found for
the plaintiff on liability, but awarded no compensatory damages and determined
that the plaintiff was entitled to punitive damages.

 

  •   In Wilcox v. R. J. Reynolds Tobacco Co., the jury returned a verdict in
favor of the plaintiff, found the decedent, Cleston Wilcox, to be 30% at fault
and RJR Tobacco to be 70% at fault, and awarded $7 million in compensatory
damages and $8.5 million in punitive damages.

 

  •   In Irimi v. R. J. Reynolds Tobacco Co., the jury returned a verdict in
favor of the plaintiff, found the decedent, Dale Moyer, to be 70% at fault, RJR
Tobacco to be 14.5% at fault, and the remaining defendants collectively to be
15.5% at fault, and awarded approximately $3.1 million in compensatory damages.
Punitive damages were not awarded.

--------------------------------------------------------------------------------

  •   In Hubbird v. R. J. Reynolds Tobacco Co., the jury returned a verdict in
favor of the plaintiff, found the decedent, David Ellsworth, to be 50% at fault
and RJR Tobacco to be 50% at fault, and awarded $3 million in compensatory
damages and $25 million in punitive damages.

 

  •   In Cooper v. R. J. Reynolds Tobacco Co., the court declared a mistrial
because the jury was unable to reach a verdict.

 

  •   In Baum v. R. J. Reynolds Tobacco Co., the jury returned a verdict in
favor of the defendants, including RJR Tobacco.

 

  •   In Ellis v. R. J. Reynolds Tobacco Co., the jury returned a verdict in
favor of RJR Tobacco.

For a detailed description of the above-described cases, see “— Engle and Engle
Progeny Cases” below.

As of September 17 2014, no non-Engle Progeny individual smoking and health
cases in which RJR Tobacco was a defendant had been tried in the third quarter.

The following chart reflects the verdicts in the smoking and health cases or
health-care cost recovery cases that have been tried and remain pending as of
September 17, 2014, in which verdicts have been returned against RJR Tobacco or
B&W, or both. For information on the verdicts in the Engle Progeny cases that
have been tried and remain pending as of September 17, 2014, in which verdicts
have been returned against RJR Tobacco or B&W, or both, see the Engle Progeny
cases chart above. For information on the post-trial status of individual
smoking and health cases and the governmental health-care cost recovery case,
see “— Individual Smoking and Health Cases,” and “—Health-Care Cost Recovery
Cases – U.S. Department of Justice Case,” respectively, below:

 

Date of

Verdict

    

Case Name/Type

    

Jurisdiction

    

Verdict

August 17, 2006

    

United States v. Philip Morris USA, Inc.

[Governmental Health-Care Cost Recovery]

     U.S. District Court, District of Columbia (Washington, DC)      RJR Tobacco
and B&W were found liable for civil RICO claims; were enjoined from using
certain brand descriptors and from making certain misrepresentations; and were
ordered to make corrective communications on five subjects, including smoking
and health and addiction, to reimburse the U.S. Department of Justice
appropriate costs associated with the lawsuit, and to maintain document web
sites.

May 26, 2010

    

Izzarelli v. R. J. Reynolds Tobacco Co.

[Individual]

    

U.S. District Court,

District of Connecticut,

(Bridgeport, CT)

     $13.9 million in compensatory damages; 58% of fault assigned to
RJR Tobacco, which reduced the award to $8.08 million against RJR Tobacco; $3.97
million in punitive damages.

 

  —   Individual Smoking and Health Cases

As of September 17, 2014, 95 individual cases were pending in the United States
against RJR Tobacco, B&W, as its indemnitee, or both. This category of cases
includes smoking and health cases alleging personal injury brought by or on
behalf of individual plaintiffs, but does not include the Broin II, Engle
Progeny or West Virginia IPIC cases discussed below. A total of 93 of the
individual cases are brought by or on behalf of individual smokers or their
survivors, while the remaining two cases are brought by or on behalf of
individuals or their survivors alleging personal injury as a result of exposure
to environmental tobacco smoke, referred to as ETS.

Below is a description of the individual smoking and health cases against RJR
Tobacco or B&W, or both, which went to trial or were decided during the period
from January 1, 2014 to September 17, 2014, or remained on appeal as of
September 17, 2014.

--------------------------------------------------------------------------------

On May 26, 2010, the jury returned a verdict in favor of the plaintiff in
Izzarelli v. R. J. Reynolds Tobacco Co., a case filed in December 1999 in the
U.S. District Court for the District of Connecticut. The plaintiff sought to
recover damages for personal injuries that the plaintiff alleges she sustained
as a result of unsafe and unreasonably dangerous cigarette products and for
economic losses she sustained as a result of unfair trade practices of the
defendant. The jury found RJR Tobacco to be 58% at fault and the plaintiff to be
42% at fault, awarded $13.9 million in compensatory damages and found the
plaintiff to be entitled to punitive damages. In December 2010, the court
awarded the plaintiff $3.97 million in punitive damages. Final judgment was
entered in December 2010, in the amount of $11.95 million. The court granted the
plaintiff’s motion for offer of judgment interest, and awarded the plaintiff
$15.8 million for the period of December 6, 1999 up to and including December 5,
2010, and approximately $4,000 per day thereafter until an amended judgment was
entered. The amended judgment was entered in the amount of approximately $28.1
million in March 2011. RJR Tobacco filed a notice of appeal in September 2011,
and the plaintiff thereafter cross appealed with respect to the punitive damages
award. In September 2013, the U.S. Court of Appeals for the Second Circuit
issued an opinion that certified the following question to the Connecticut
Supreme Court: “Does Comment i to section 402A of the Restatement (Second) of
Torts preclude a suit premised on strict products liability against a cigarette
manufacturer based on evidence that the defendant purposefully manufactured
cigarettes to increase daily consumption without regard to the resultant
increase in exposure to carcinogens, but in the absence of evidence of any
adulteration or contamination?” Subsequently, the plaintiff submitted a motion
to the U.S. Court of Appeals for the Second Circuit to amend the certification
order to add a second question to the Connecticut Supreme Court: “Does Comment i
to section 402A of the Restatement (Second) of Torts preclude a claim under the
[Connecticut Products Liability Act] against a cigarette manufacturer for
negligence (in the design of its cigarette products)?” The Second Circuit denied
the plaintiff’s motion. The Connecticut Supreme Court accepted the certified
question and denied the plaintiff’s request to amend the question with the same
additional question that the plaintiff proposed to the Second Circuit. The
plaintiff submitted her brief on July 31, 2014. RJR Tobacco’s brief is due on
October 2, 2014. The Second Circuit has retained jurisdiction over the parties’
appeals and will decide the case after the Connecticut Supreme Court has
completed its proceedings.

On June 19, 2013, in Whitney v. R. J. Reynolds Tobacco Co., the jury returned a
verdict in favor of the defendants, including RJR Tobacco. The case was filed in
January 2011, in the Circuit Court, Alachua County, Florida. The plaintiff
alleged that as a result of using the defendants’ products, she suffers from
lung cancer and emphysema. Final judgment was entered in July 2013. The
plaintiff filed a notice of appeal to the First District Court of Appeal, and
the defendants filed a notice of cross appeal in August 2013. Oral argument is
scheduled for October 14, 2014.

 

  —   West Virginia IPIC

In re: Tobacco Litigation Individual Personal Injury Cases began in 1999, in
West Virginia state court, as a series of roughly 1,200 individual plaintiff
cases making claims with respect to cigarettes manufactured by Philip Morris,
Lorillard, RJR Tobacco, B&W and The American Tobacco Company. The cases were
consolidated for a Phase I trial on various defense conduct issues, to be
followed in Phase II by individual trials of any claims left standing. Over the
years, approximately 600 individual plaintiff claims were dismissed for failure
to comply with the case management order, leaving 564 individual cases pending
as of April 2013. On April 15, 2013, the Phase I jury trial began and ended with
a virtually complete defense verdict on May 15, 2013. The jury found that
cigarettes were not defectively designed, were not defective due to a failure to
warn prior to July 1, 1969, that defendants were not negligent, did not breach
warranties and did not engage in conduct which would warrant punitive damages.
The only claim remaining after the verdict was the jury’s finding that all
ventilated filter cigarettes manufactured and sold between 1964 and July 1, 1969
were defective for a failure to instruct. The defendants believe that there are
only 30 plaintiffs remaining who arguably claim to have smoked a ventilated
filter cigarette during the relevant period. The court initially entered
judgment on the verdict identifying the 30 plaintiffs remaining, but vacated
those orders as premature (leaving to a later day the task of identifying the
plaintiffs who might be able to assert a ventilated filter failure to instruct
claim during the narrow relevant period). The court entered a new judgment in
October 2013, dismissing all claims lost by the plaintiffs and purporting to
make those claims and all of the jury rulings immediately subject to appeal. The
plaintiffs filed a notice of appeal to the West Virginia Supreme Court of
Appeals in November 2013. Briefing is complete. The defendants reserved the
right to challenge the ventilated filter claim in the event any plaintiff
pursues and succeeds on such a claim.

--------------------------------------------------------------------------------

  —   Engle and Engle Progeny Cases

Trial began in July 1998 in Engle v. R. J. Reynolds Tobacco Co., a class action
filed in Circuit Court, Miami-Dade County, Florida. The Engle class consisted of
Florida citizens and residents, and their survivors, who suffer from or have
died from diseases or medical conditions caused by an addiction to smoking. The
action was brought against the major U.S. cigarette manufacturers, including RJR
Tobacco and B&W. In July 1999, the Engle jury found against RJR Tobacco, B&W and
the other defendants in the initial phase of the trial, which addressed alleged
common issues related to the defendants’ conduct, general causation, the
addictiveness of cigarettes, and potential entitlement to punitive damages.

On July 14, 2000, in the second phase of the trial, the jury returned a punitive
damages verdict in favor of the class of approximately $145 billion, including
verdicts of $36.3 billion and $17.6 billion against RJR Tobacco and B&W,
respectively.

On appeal, the Florida Supreme Court prospectively decertified the class, and it
set aside the punitive damages award as both premature and excessive. However,
the court preserved a number of findings from Phase I of the trial, including
findings that cigarettes can cause certain diseases, that nicotine is addictive,
and that defendants placed defective cigarettes on the market, breached duties
of care, and concealed health-related information about cigarettes. The court
authorized former class members to file individual lawsuits within one year, and
it stated that the preserved findings would have res judicata effect in those
actions.

In the wake of the Florida Supreme Court ruling, thousands of individuals filed
separate lawsuits seeking to benefit from the Engle findings. As of
September 17, 2014, RJR Tobacco was a defendant in 4,071 Engle Progeny cases in
both state and federal courts in Florida. These cases include approximately
5,172 plaintiffs. Many of these cases are in active discovery or nearing trial.

In Engle Progeny cases tried to date, a central issue is the proper use of the
preserved Engle findings. RJR Tobacco has argued that use of the Engle findings
to establish individual elements of progeny claims (such as defect, negligence
and concealment) is a violation of federal due process. In 2013, however, both
the Florida Supreme Court and the Eleventh Circuit rejected that argument.

In June 2009, Florida amended its existing bond cap statute by adding a $200
million bond cap that applied to all Engle Progeny cases in the aggregate. In
May 2011, Florida removed the provision that would have allowed it to expire on
December 31, 2012. The bond cap for any given individual Engle Progeny case
varies depending on the number of judgments in effect at a given time, but never
exceeds $5 million per case. The legislation, which became effective in June
2009 and 2011, applies to judgments entered after the original 2009 effective
date.

Below is a description of the Engle Progeny cases against RJR Tobacco or B&W, or
both, which went to trial or were decided during the period from January 1, 2014
to September 17, 2014, or remained on appeal as of September 17, 2014.

On February 25, 2010, in Grossman v. R. J. Reynolds Tobacco Co., a case filed in
December 2007 in the Circuit Court, Broward County, Florida, the court declared
a mistrial due to the jury’s inability to reach a decision. The plaintiff
alleged that as a result of an addiction to cigarettes, the decedent, Laura
Grossman, developed lung cancer and died. The plaintiff sought damages in excess
of $15,000 and all taxable costs and interest. Retrial began in March 2010. In
April 2010, the jury returned a verdict in favor of the plaintiff in Phase I,
and in Phase II awarded $1.9 million in compensatory damages and no punitive
damages. The jury also found RJR Tobacco to be 25% at fault, the decedent to be
70% at fault and the decedent’s spouse to be 5% at fault. Final judgment was
entered in June 2010, in the amount of $483,682. RJR Tobacco filed a notice of
appeal to the Fourth DCA, and posted a supersedeas bond in the amount of
approximately $484,000. The plaintiff filed a notice of cross appeal. In June
2012, the Fourth DCA entered an opinion that affirmed the trial court’s
judgment, but remanded the case for a new trial on all Phase II issues. In
October 2012, RJR Tobacco filed a notice to invoke the discretionary
jurisdiction of the Florida Supreme Court. In February 2014, the Florida Supreme
Court declined to accept jurisdiction of the appeal of the original verdict.
Retrial began on July 11, 2013. On July 31, 2013, the jury returned a verdict in
favor of the plaintiff, found the decedent to be 25% at fault and RJR Tobacco to
be 75% at fault, and awarded $15.35 million in compensatory damages and $22.5
million in punitive damages. Final judgment was entered in August 2013 and did
not include a reduction for comparative fault. RJR Tobacco filed a notice of
appeal to the Fourth DCA and the plaintiff filed a notice of cross appeal in
October 2013. RJR Tobacco’s original bond was returned, and RJR Tobacco posted a
new bond in the amount of $5 million. Briefing is underway.

--------------------------------------------------------------------------------

On March 10, 2010, in Cohen v. R. J. Reynolds Tobacco Co., a case filed in May
2007 in the Circuit Court, Broward County, Florida, a jury returned a verdict in
favor of the plaintiff. The plaintiff alleged that the decedent, Nathan Cohen,
developed lung cancer as a result of using the defendants’ products, and sought
in excess of $15,000 compensatory damages and unspecified punitive damages. On
March 24, 2010, the jury awarded the plaintiff $10 million in compensatory
damages, and found the decedent to be 33.3% at fault, RJR Tobacco to be 33.3% at
fault and the remaining defendant to be 33.3% at fault. The jury also awarded
$20 million in punitive damages, of which $10 million was assigned to RJR
Tobacco. In July 2010, the court entered final judgment against RJR Tobacco in
the amount of $3.33 million in compensatory damages and $10 million in punitive
damages. The court entered an amended judgment in September 2010 to include
interest from the date of the verdict. RJR Tobacco filed a notice of appeal to
the Fourth DCA and posted a supersedeas bond in the amount of $2.5 million. In
September 2012, the Fourth DCA affirmed the liability finding and the
compensatory damages award, but reversed the finding of entitlement to punitive
damages, and remanded the case for a retrial limited to the issue of liability
for concealment and conspiracy. The defendants and the plaintiff filed separate
notices to invoke the discretionary jurisdiction of the Florida Supreme Court in
January 2013. In February 2014, the Florida Supreme Court, on its own motion,
consolidated the petitions for review filed by the plaintiff and RJR Tobacco and
stayed the petitions pending disposition by the court of Hess v. Philip Morris
USA, Inc., which deals with the application of the statute of repose as an
affirmative defense to claims of fraudulent concealment and conspiracy to commit
fraudulent concealment.

On April 26, 2010, in Putney v. R. J. Reynolds Tobacco Co., a case filed in
December 2007 in the Circuit Court, Broward County, Florida, a jury returned a
verdict in favor of the plaintiff, found the decedent, Margot Putney, to be 35%
at fault, RJR Tobacco to be 30% at fault and the remaining defendants to be 35%
at fault, and awarded $15.1 million in compensatory damages and $2.5 million in
punitive damages each against RJR Tobacco and the remaining defendants. The
plaintiff alleged that the decedent suffered from nicotine addiction and lung
cancer as a result of using the defendants’ products and sought an unspecified
amount of compensatory and punitive damages. In August 2010, final judgment was
entered against RJR Tobacco in the amount of $4.5 million in compensatory
damages, and $2.5 million in punitive damages. RJR Tobacco filed a notice of
appeal and the plaintiff filed a notice of cross appeal. In December 2010, the
court entered an amended final judgment to provide that interest would run from
April 26, 2010. The defendants filed a joint notice of appeal to the Fourth DCA
of the amended final judgment, and RJR Tobacco posted a supersedeas bond in the
amount of approximately $2.4 million. In June 2013, the Fourth DCA held that the
court erred in denying the defendants’ motion for remittitur of the compensatory
damages for loss of consortium and in striking the defendants’ statute of repose
affirmative defenses. As a result, the verdict was reversed, and the case was
remanded for further proceedings. The plaintiff’s motion for rehearing, written
opinion on one issue, or certification of conflict to the Florida Supreme Court
was denied in August 2013. The defendants and the plaintiff filed separate
notices to invoke the discretionary jurisdiction of the Florida Supreme Court in
September 2013. In December 2013, the Florida Supreme Court consolidated the
petitions for review filed by the plaintiff and the defendants and stayed the
petitions pending disposition of Hess v. Philip Morris USA Inc., described
above.

On May 20, 2010, in Buonomo v. R. J. Reynolds Tobacco Co., a case filed in
October 2007 in the Circuit Court, Broward County, Florida, a jury returned a
verdict in favor of the plaintiff, found RJR Tobacco to be 77.5% at fault and
the decedent, Matthew Buonomo, to be 22.5% at fault, and awarded $5.2 million in
compensatory damages and $25 million in punitive damages. The plaintiff alleged
that the decedent was addicted to cigarettes and, as a result, developed one or
more smoking-related medical conditions and/or diseases and sought an
unspecified amount of compensatory and punitive damages. Post-trial motions were
denied, but the court, in accordance with the Florida statutory limitation on
punitive damage awards, ordered the punitive damage award of $25 million be
reduced to $15.7 million – three times the compensatory damages award of $5.2
million. In August 2010, the court entered final judgment in the amount of $4.06
million in compensatory damages and $15.7 million in punitive damages. RJR
Tobacco filed a notice of appeal to the Fourth DCA and posted a supersedeas bond
in the amount of $5 million. The plaintiff also filed a notice of appeal. In
September 2013, the Fourth DCA affirmed the final judgment and damages award to
the plaintiff on strict liability and negligence. However, the court reversed
the judgment entered for the plaintiff on the claims for fraudulent concealment
and conspiracy to commit fraud by concealment due to the erroneous striking of
RJR Tobacco’s statute of repose defense. As a result, the punitive damages award
was set aside and remanded for a new trial. In December 2013, the Fourth DCA
denied RJR Tobacco’s motion for rehearing. In January 2014, RJR Tobacco and the
plaintiff filed notices to invoke the discretionary jurisdiction of the Florida
Supreme Court. In June 2014, the Florida Supreme Court stayed the petitions for
review pending disposition by the court of Hess v. Philip Morris USA Inc.,
described above.

--------------------------------------------------------------------------------

On October 15, 2010, in Frazier v. Philip Morris USA Inc., now known as Russo v.
Philip Morris USA Inc., a case filed in December 2007 in the Circuit Court,
Miami-Dade County, Florida, the jury returned a verdict in favor of the
defendants. The plaintiff alleged that as a result of smoking defendants’,
including RJR Tobacco’s, products she developed chronic obstructive pulmonary
disease, and sought in excess of $15,000 in compensatory damages and unspecified
punitive damages. Final judgment was entered in February 2011. The plaintiff
filed a notice of appeal to the Third DCA, and the defendants filed a notice of
cross appeal. In April 2012, the Third DCA reversed the trial court’s judgment,
directed entry of judgment in the plaintiff’s favor and ordered a new trial. In
July 2012, the defendants filed a notice to invoke the discretionary
jurisdiction of the Florida Supreme Court. The Florida Supreme Court accepted
jurisdiction of the case in September 2013. Oral argument in the Florida Supreme
Court occurred on April 30, 2014. A decision is pending. The new trial is
scheduled for October 13, 2014.

On November 15, 2010, in Webb v. R. J. Reynolds Tobacco Co., a case filed in
December 2007, in the Circuit Court, Levy County, Florida, a jury returned a
verdict in favor of the plaintiff, found RJR Tobacco to be 90% at fault and the
decedent, James Horner, to be 10% at fault, and awarded $8 million in
compensatory damages and $72 million in punitive damages. The plaintiff alleged
that as a result of smoking the defendant’s products, the decedent developed one
or more smoking-related diseases, and sought in excess of $15,000 in
compensatory and unspecified punitive damages. The court entered judgment, and
RJR Tobacco appealed to the First DCA and posted a supersedeas bond in the
amount of $5 million. That court affirmed the liability verdict, but ordered a
remittitur or a new trial on damages. On remand, the trial court remitted the
compensatory damages award to $4 million and the punitive damages award to $25
million. The plaintiff consented to the remitted judgment, and RJR Tobacco
rejected the remittitur and demanded a new trial on damages. Nonetheless, the
trial court entered the remitted judgment. RJR Tobacco again appealed to the
First DCA. In the second appeal, the First DCA found that the trial court erred
in concluding that only the plaintiff had the right to choose between accepting
the remittitur and proceeding with a new trial. The First DCA thus ordered a new
trial on damages. The new trial on damages is scheduled for November 3, 2014.

On April 26, 2011, in Andy Allen v. R. J. Reynolds Tobacco Co., a case filed in
September 2007, in the Circuit Court, Duval County, Florida, a jury returned a
verdict in favor of the plaintiff, found RJR Tobacco to be 45% at fault, the
decedent, Patricia Allen, to be 40% at fault and the remaining defendant to be
15% at fault, and awarded $6 million in compensatory damages and $17 million in
punitive damages against each defendant. The plaintiff alleged that as a result
of smoking the defendants’ products, the decedent developed chronic obstructive
pulmonary disease, and sought in excess of $15,000 in compensatory damages.
Final judgment was entered against RJR Tobacco in the amount of $19.7 million in
May 2011. In October 2011, the trial court entered a remittitur of the punitive
damages to $8.1 million and denied all other post-trial motions. The defendants
filed a joint notice of appeal, RJR Tobacco posted a supersedeas bond in the
amount of $3.75 million, and the plaintiff filed a notice of cross appeal in
November 2011. In May 2013, the First DCA reversed the trial court’s judgment
and remanded the case for a new trial. In August 2013, the plaintiff filed a
notice to invoke the discretionary jurisdiction of the Florida Supreme Court. In
February 2014, the Florida Supreme Court declined to accept jurisdiction.
Retrial has tentatively been scheduled for November 3, 2014.

On May 20, 2011, in Jewett v. R. J. Reynolds Tobacco Co., a case filed in
December 2007, in the Circuit Court, Duval County, Florida, a jury returned a
verdict in favor of the plaintiff, found RJR Tobacco to be 20% at fault, the
decedent, Barbara Jewett, to be 70% at fault and the remaining defendant to be
10% at fault, and awarded $1.1 million in compensatory damages and no punitive
damages. The plaintiff alleged that the decedent, Barbara Jewett, was addicted
to cigarettes and as a result of her addiction, developed chronic obstructive
pulmonary disease, emphysema and respiratory failure, and sought in excess of
$15,000 in compensatory damages. Final judgment was entered in June 2011. RJR
Tobacco filed a notice of appeal to the First DCA and posted a supersedeas bond
in the amount of $218,600. In November 2012, the First DCA reversed the judgment
and remanded the case for a new trial. The plaintiff and the defendants filed
separate notices to invoke the discretionary jurisdiction of the Florida Supreme
Court in March 2013. In February 2014, the Florida Supreme Court declined to
accept jurisdiction. The new trial has not been scheduled.

--------------------------------------------------------------------------------

On June 16, 2011, in Soffer v. R. J. Reynolds Tobacco Co., a case filed in
December 2007, in the Circuit Court, Alachua County, Florida, a jury returned a
verdict in favor of the plaintiff, found RJR Tobacco to be 40% at fault, the
decedent, Maurice Soffer, to be 60% at fault, and awarded $5 million in
compensatory damages and no punitive damages. The plaintiff alleged that the
decedent was addicted to cigarettes and, as a result, developed lung cancer and
other smoking-related conditions and/or diseases, and sought in excess of
$15,000 in compensatory damages. Final judgment was entered against RJR Tobacco
in the amount of $2 million. The plaintiff filed a notice of appeal to the First
DCA in July 2011. RJR Tobacco filed a notice of cross appeal and posted a
supersedeas bond in the amount of $2 million. In October 2012, the First DCA
affirmed the trial court’s ruling in full. On the direct appeal, the court held
that only intentional torts could support a punitive damages claim and held that
Engle Progeny plaintiffs may not seek punitive damages for negligence or strict
liability because the original Engle class did not seek punitive damages for
those claims. The First DCA certified the question to the Florida Supreme Court
as one of great public importance. On the cross appeal, the court rejected RJR
Tobacco’s arguments about the use of the Engle findings and the statute of
limitations. RJR Tobacco filed a motion for rehearing or for certification to
the Florida Supreme Court and the plaintiff filed a motion for rehearing or
rehearing en banc. In January 2013, the First DCA granted rehearing on RJR
Tobacco’s cross appeal to clarify that the trial court’s application of Engle
findings did not violate RJR Tobacco’s due process rights. Otherwise, rehearing,
rehearing en banc and certification were denied. RJR Tobacco and the plaintiff
both filed notices to invoke the discretionary jurisdiction of the Florida
Supreme Court. In February 2014, the Florida Supreme Court declined to accept
jurisdiction of RJR Tobacco’s petition for review and accepted the plaintiff’s
petition for review requesting the Florida Supreme Court review the decision of
the First DCA. Oral argument is scheduled for December 4, 2014.

On July 15, 2011, in Ciccone v. R. J. Reynolds Tobacco Co., a case filed in
August 2004, in the Circuit Court, Broward County, Florida, a jury returned a
verdict finding the plaintiff is a member of the Engle class. The plaintiff
alleged that as a result of the use of the defendant’s tobacco products, the
decedent, George Ciccone, suffered from nicotine addiction and one or more
smoking-related diseases and/or medical conditions, and sought an unspecified
amount of compensatory and punitive damages. On July 21, 2011, the jury awarded
approximately $3.2 million in compensatory damages and $50,000 in punitive
damages. The jury found the decedent to be 70% at fault and RJR Tobacco to be
30% at fault. Final judgment was entered in September 2011, and RJR Tobacco
filed a notice of appeal to the Fourth DCA. RJR Tobacco posted a supersedeas
bond in the amount of approximately $1 million on October 17, 2011. In August
2013, the Fourth DCA affirmed the judgment of the trial court, but reversed the
punitive damages award and remanded the case to the trial court for entry of a
final judgment that eliminates the punitive damages award. RJR Tobacco’s motion
for rehearing or rehearing en banc was denied in November 2013. The Florida
Supreme Court accepted jurisdiction of the case in June 2014. Oral argument is
scheduled for December 4, 2014.

On September 15, 2011, in Ojeda v. R. J. Reynolds Tobacco Co., a case filed in
October 2007, in the Circuit Court, Miami-Dade County, Florida, a jury returned
a verdict in favor of RJR Tobacco. The plaintiff alleged that as a result of the
use of the defendant’s products, the decedent, Juan Ojeda, suffered from one or
more smoking-related medical conditions and/or diseases, and sought an
unspecified amount of damages. Final judgment was entered September 26, 2011.
The plaintiff filed a notice of appeal to the Third DCA in October 2012. In July
2014, the Third DCA affirmed, per curiam, the trial court’s final judgment. It
is unknown if the plaintiff will seek further review at this time.

On January 24, 2012, in Hallgren v. R. J. Reynolds Tobacco Co., a case filed in
April 2007, in the Circuit Court, Highlands County, Florida, a jury returned a
verdict in favor of the plaintiff, found the decedent, Claire Hallgren, to be
50% at fault, RJR Tobacco to be 25% at fault, and the remaining defendant to be
25% at fault, and awarded $2 million in compensatory damages and $750,000 in
punitive damages against each defendant. The plaintiff alleged that the decedent
was addicted to the defendants’ products, and as a result, suffered from lung
cancer, and sought in excess of $15,000 in compensatory damages and unspecified
punitive damages. In March 2012, the court entered final judgment in the amount
of approximately $1 million for which RJR Tobacco and the other defendant are
jointly and severally liable; and $750,000 in punitive damages against each
defendant. The defendants filed a joint notice of appeal to the Second DCA, and
RJR Tobacco posted a supersedeas bond in the amount of approximately $1.3
million in May 2012. The plaintiff filed a notice of cross appeal. In October
2013, the Second DCA affirmed the trial court’s ruling that punitive damages can
be awarded for negligence and strict liability claims as well as for the
intentional tort claims brought under Engle. The court certified a conflict with
the First DCA’s decision in Soffer and the Fourth DCA’s decision in Ciccone. The
court also certified the following question to be of great public im-

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portance – “Are members of the Engle class who pursue individual damages actions
in accordance with the decision in Engle v. Liggett Group, Inc., entitled to
pursue punitive damages under claims for strict liability and negligence?” In
November 2013, the defendants filed a notice to invoke the discretionary
jurisdiction of the Florida Supreme Court. In June 2014, the Florida Supreme
Court stayed the petition pending disposition of Russo v. Philip Morris USA
Inc., described above.

On February 29, 2012, in Marotta v. R. J. Reynolds Tobacco Co., a case filed in
December 2007, in the Circuit Court, Broward County, Florida, the court declared
a mistrial during jury prequalification. The plaintiff alleged that the
decedent, Phil Marotta, was addicted to cigarettes and, as a result, suffered
from lung cancer. The plaintiff sought compensatory damages in excess of
$75,000, including compensatory and punitive damages, costs and pre-judgment
interest. Retrial began on March 7, 2013. On March 20, 2013, a jury returned a
verdict in favor of the plaintiff, found the decedent to be 42% at fault and RJR
Tobacco to be 58% at fault and awarded $6 million in compensatory damages and no
punitive damages. Final judgment was entered against RJR Tobacco in the amount
of $3.48 million, and RJR Tobacco filed a notice of appeal to the Fourth DCA in
April 2013. The plaintiff filed a notice of cross appeal in May 2013. Briefing
is underway.

On March 19, 2012, in McCray v. R. J. Reynolds Tobacco Co., a case filed in
January 2008, in the U.S. District Court for the Middle District of Florida, a
jury returned a verdict in favor of the defendants, including RJR Tobacco. The
plaintiff alleged that the decedent, Mercedia Walker, was addicted to the
defendants’ tobacco products, and as a result, suffered from one or more
smoking-related diseases and/or medical conditions. The plaintiff sought
compensatory damages for all injuries and losses, all recoverable costs of the
case, and all legally recoverable interest. Final judgment was entered in March
2012. The plaintiff filed a notice of appeal to the Eleventh Circuit in July
2012. On September 16, 2014, the Eleventh Circuit affirmed the trial court’s
judgment. At this time, it is unknown if the plaintiff will seek further review.

On May 17, 2012, in Calloway v. R. J. Reynolds Tobacco Co., a case filed in
December 2007, in the Circuit Court, Broward County, Florida, a jury returned a
verdict in favor of the plaintiff, found the decedent, Johnnie Calloway, to be
20.5% at fault, RJR Tobacco to be 27% at fault, and the remaining defendants
collectively to be 52.5% at fault, and awarded $20.5 million in compensatory
damages and $17.25 million in punitive damages against RJR Tobacco and $37.6
million collectively against the remaining defendants. The plaintiff alleged
that as a result of using the defendants’ products, the decedent became addicted
and developed smoking-related diseases and/or conditions. The plaintiff sought
compensatory and punitive damages, including costs and interest. In its ruling
on the post-trial motions, the court determined that the jury’s apportionment of
comparative fault did not apply to the compensatory damages award. Final
judgment was entered in August 2012. In September 2012, the defendants filed a
notice of appeal to the Fourth DCA, and RJR Tobacco posted a supersedeas bond in
the amount of $1.5 million. The plaintiff filed a notice of cross appeal.
Briefing is underway.

On August 1, 2012, in Hiott v. R. J. Reynolds Tobacco Co., a case filed in
January 2008, in the Circuit Court, Duval County, Florida, a jury returned a
verdict in favor of the plaintiff, found the decedent, Kenneth Hiott, to be 60%
at fault and RJR Tobacco to be 40% at fault, and awarded $1.83 million in
compensatory damages and no punitive damages. The plaintiff alleged that as a
result of using the defendant’s product, the decedent suffered from addiction
and smoking-related diseases and/or conditions. The plaintiff sought an
unspecified amount of compensatory and punitive damages. In November 2012, final
judgment was entered against RJR Tobacco in the amount of $730,000 in
compensatory damages. RJR Tobacco filed a notice of appeal to the First DCA and
posted a supersedeas bond in the amount of $730,000 in December 2012. In January
2014, the First DCA affirmed the trial court’s decision. RJR Tobacco filed a
notice to invoke the discretionary jurisdiction of the Florida Supreme Court in
January 2014. In June 2014, the Florida Supreme Court stayed the petition
pending the court’s disposition of Hess v. Philip Morris USA Inc., described
above.

On August 10, 2012, in Hancock v. Philip Morris USA, Inc., a case filed in
January 2008, in the Circuit Court, Miami-Dade County, Florida, a jury returned
a verdict in favor of the plaintiff, found the decedent, Edna Siwieck, to be 90%
at fault, RJR Tobacco to be 5% at fault and the remaining defendant to be 5% at
fault. However, the jury did not award compensatory damages and found that the
plaintiff was not entitled to punitive damages. The court determined that the
jury verdict was inconsistent due to the parties previously stipulating to
$110,200 in medical expenses, which is subject to the allocation of fault. The
defendants agreed to an additur for that amount. The plaintiff alleged that as a
result of using the defendants’ products, the decedent suffered from chronic
obstructive

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pulmonary disease. The plaintiff sought an unspecified amount of compensatory
and punitive damages, costs and interest. Final judgment was entered against RJR
Tobacco in the amount of $705 in October 2012. The stipulated amount was reduced
by the defendants’ motion to reduce economic damages by collateral sources. The
plaintiff filed a notice of appeal to the Fourth DCA, and the defendants filed a
notice of cross appeal in November 2012. Briefing is complete. Oral argument has
not been scheduled.

On September 19, 2012, in Baker v. R. J. Reynolds Tobacco Co., a case filed in
November 2007, in the Circuit Court, Palm Beach County, Florida, a jury returned
a verdict in favor of the defendant, RJR Tobacco. The plaintiff alleged that as
a result of using the defendant’s products, the decedent, Elmer Baker, suffered
from lung cancer. The plaintiff sought compensatory damages in excess of
$15,000, costs and interest. Final judgment was entered in January 2013, in
favor of RJR Tobacco. The plaintiff filed a notice of appeal to the Fourth DCA,
and RJR Tobacco filed a notice of cross appeal in February 2013. Briefing is
complete. Oral argument has not been scheduled.

On September 20, 2012, in Sikes v. R. J. Reynolds Tobacco Co., a case filed in
December 2007, in the Circuit Court, Duval County, Florida, a jury returned a
verdict in favor of the plaintiff, found the decedent, Jimmie Sikes, to be 49%
at fault and RJR Tobacco to be 51% at fault, and awarded $4.1 million in
compensatory damages and $2 million in punitive damages. The plaintiff alleged
that as a result of using the defendant’s product, the decedent suffered from
chronic obstructive pulmonary disease, and sought in excess of $15,000 of
compensatory damages. Final judgment was entered against RJR Tobacco in the
amount of $6.1 million on June 3, 2013. The court entered a corrected final
judgment against RJR Tobacco in the amount of $5.5 million and vacated the
June 3, 2013 final judgment. RJR Tobacco filed a notice of appeal to the First
DCA, and posted a supersedeas bond in the amount of $5 million in July 2013. In
July 2014, the First DCA affirmed the trial court’s decision, per curiam, but
following the Hiott case, certified a conflict to the Florida Supreme Court with
Hess v. Philip Morris USA Inc., both cases are described above. In August 2014,
RJR Tobacco filed a notice to invoke the discretionary jurisdiction of the
Florida Supreme Court. The Florida Supreme Court stayed the case pending
disposition of Hess v. Philip Morris USA, Inc.

On October 17, 2012, in James Smith v. R. J. Reynolds Tobacco Co., a case filed
in August 2007, in the U.S. District Court for the Middle District of Florida, a
jury returned a verdict in favor of the plaintiff, found the decedent, Wanette
Smith, to be 45% at fault and RJR Tobacco to be 55% at fault, and awarded
$600,000 in compensatory damages and $20,000 in punitive damages. The plaintiff
alleged that as a result of using the defendant’s products, the decedent
suffered from lung cancer and chronic obstructive pulmonary disease. The
plaintiff sought compensatory and punitive damages, costs and interest. Final
judgment was entered against RJR Tobacco in the amount of $620,000. RJR Tobacco
filed a notice of appeal to the Eleventh Circuit and posted a supersedeas bond
in the amount of approximately $620,000 in September 2013. Oral argument is
scheduled for October 17, 2014.

On October 18, 2012, in Schlenther v. R. J. Reynolds Tobacco Co., a case filed
in January 2008, in the Circuit Court, Hillsborough County, Florida, a jury
returned a verdict in favor of the plaintiff, found the decedent, Beverly
Schlenther, to be 50% at fault and RJR Tobacco to be 50% at fault, and awarded
$5 million in compensatory damages and $2.5 million in punitive damages. The
plaintiff alleged that as a result of using the defendant’s products, the
decedent suffered from chronic obstructive pulmonary disease and heart disease.
The plaintiff sought compensatory and punitive damages, costs and interest. In
April 2013, the court vacated the punitive damage award, granted a new trial on
entitlement to punitive damages and the amount of any such damages and abated
the new trial pending the Florida Supreme Court decision in Soffer v. R. J.
Reynolds Tobacco Co., described above. The plaintiff filed a notice of appeal to
the Second DCA of the order granting RJR Tobacco’s motion for a new trial, and
RJR Tobacco filed a notice of cross appeal of the same order. In October 2013,
the trial court entered a partial final judgment against RJR Tobacco in the
amount of $5.03 million in compensatory damages with no reduction for
comparative fault. RJR Tobacco filed a notice of appeal of the partial final
judgment. In November 2013, the plaintiff filed a motion to temporarily
relinquish jurisdiction to the trial court to permit the trial court to enter a
final judgment based on the decision in Hallgren, described above. The Second
DCA granted the plaintiff’s motion, and jurisdiction was relinquished for 45
days. In December 2013, the trial court denied the defendant’s post-trial
motions, including RJR Tobacco’s motion for a new trial, and entered final
judgment against RJR Tobacco in the amount of $5 million for compensatory
damages, $29,705 for funeral expenses and $2.5 million in punitive damages. Both
parties filed voluntary dismissals of their prior appeals. RJR Tobacco
subsequently filed a notice of appeal in December 2013 to the Second DCA of the
final judgment and posted a supersedeas bond in the amount of $5 million in
January 2014. On September 12, 2014, the Second DCA affirmed the trial court’s
judgment, per curiam.

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On October 19, 2012, in Ballard v. R. J. Reynolds Tobacco Co., a case filed in
September 2007 in the Circuit Court, Miami-Dade County, Florida, a jury returned
a verdict in favor of the plaintiff, found the plaintiff to be 45% at fault and
RJR Tobacco to be 55% at fault, and awarded $8.55 million in compensatory
damages. Punitive damages were not at issue. The plaintiff alleged that as a
result of using the defendant’s products, he suffers from bladder cancer and
emphysema, and sought an unspecified amount of compensatory and punitive
damages. The court entered final judgment against RJR Tobacco in the amount of
$4.7 million in October 2012, and in August 2013, the court entered an amended
final judgment against RJR Tobacco in the amount of $5 million. RJR Tobacco
filed a notice of appeal to the Third DCA and posted a supersedeas bond in the
amount of $5 million in October 2013. Oral argument occurred on September 3,
2014. A decision is pending.

On December 12, 2012, in Virginia Williams v. R. J. Reynolds Tobacco Co., a case
filed in December 2007, in the Circuit Court, Miami-Dade County, Florida, a jury
returned a verdict in favor of the plaintiff, found the decedent, Milton
Williams, to be 15% at fault and RJR Tobacco to be 85% at fault, and awarded $5
million in compensatory damages. Punitive damages were not sought. The plaintiff
alleged that as a result of using the defendant’s products, the decedent
suffered from pharyngeal cancer, and sought an unspecified amount of damages.
Final judgment was entered against RJR Tobacco in the amount of $4.25 million in
compensatory damages in January 2013. RJR Tobacco filed a notice of appeal to
the Third DCA and posted a supersedeas bond in the amount of $4.25 million, and
the plaintiff filed a notice of cross appeal in August 2013. In September 2014,
the Third DCA affirmed the trial court’s judgment. The deadline to file a motion
for rehearing, clarification, certification to the Florida Supreme Court or
motion for rehearing en banc is September 18, 2014. The deadline to file a
notice to invoke the discretionary jurisdiction of the Florida Supreme Court is
October 20, 2014.

On February 11, 2013, in Evers v. R. J. Reynolds Tobacco Co., a case filed in
November 2007, in the Circuit Court, Hillsborough County, Florida, a jury
returned a verdict in favor of the plaintiff, found the decedent, Jacqueline
Loyd, to be 31% at fault, RJR Tobacco to be 60% at fault, and the remaining
defendant to be 9% at fault, and awarded $3.23 million in compensatory damages
and $12.36 million in punitive damages against RJR Tobacco only. The plaintiff
alleged that as a result of using the defendants’ products, the decedent became
addicted and suffered from smoking-related diseases and/or conditions, and
sought an unspecified amount of damages. In March 2013, the court granted the
defendants’ post-trial motions for directed verdict on fraudulent concealment,
conspiracy and punitive damages. As a result, the $12.36 million punitive
damages award was set aside. The plaintiff’s motion to reconsider directed
verdict as to concealment, conspiracy and punitive damages was denied on
April 8, 2013. The plaintiff filed a notice of appeal to the Second DCA, the
defendants filed a notice of cross appeal, and RJR Tobacco posted a supersedeas
bond in the amount of $1.77 million in May 2013. Briefing is complete. Oral
argument has not been scheduled.

On February 13, 2013, in Schoeff v. R. J. Reynolds Tobacco Co., a case filed in
November 2007, in the Circuit Court, Broward County, Florida, a jury returned a
verdict in favor of the plaintiff, found the decedent, James Schoeff, to be 25%
at fault, RJR Tobacco to be 75% at fault, and awarded $10.5 million in
compensatory damages and $30 million in punitive damages. The plaintiff alleged
that as a result of using the defendant’s products, the decedent suffered from
addiction and one or more smoking-related diseases and/or conditions, including
lung cancer, and sought in excess of $15,000 in damages. In April 2013, final
judgment was entered against RJR Tobacco in the amount of $7.88 million in
compensatory damages and $30 million in punitive damages. RJR Tobacco filed a
notice of appeal to the Fourth DCA, and the plaintiff filed a notice of cross
appeal in May 2013. Briefing is complete. Oral argument has not been scheduled.

On April 1, 2013, in Searcy v. R. J. Reynolds Tobacco Co., a case filed in
January 2008, in the U.S. District Court for the Middle District of Florida, a
jury returned a verdict in favor of the plaintiff, found the decedent, Carol
LaSard, to be 40% at fault, RJR Tobacco to be 30% at fault and the remaining
defendant to be 30% at fault, and awarded $6 million in compensatory damages and
$10 million in punitive damages against each defendant. The plaintiff alleged
that as a result of using the defendants’ products, the decedent suffered from
lung cancer, and sought an unspecified amount of compensatory and punitive
damages. Final judgment was entered against RJR Tobacco in the amount of $6
million in compensatory damages and $10 million in punitive damages. In
September 2013, the trial court granted the defendants’ motion for a new trial,
or in the alternative, reduction or remittitur of the damages awarded to the
extent it sought remittitur of the damages. The compensatory damage award was
remitted to $1 million, and the punitive damage award was remitted to $1.67
million against each defendant. The remaining post-trial motions were denied.
The plaintiff’s motion to reconsider the trial court’s order granting in part
the de-

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fendants’ motion for remittitur of the damages award was denied in October 2013.
The plaintiff filed a notice of acceptance of remittitur in November 2013, and
the court issued an amended final judgment. The defendants filed a joint notice
of appeal to the Eleventh Circuit, and RJR Tobacco posted a supersedeas bond in
the amount of approximately $2.2 million in November 2013. Oral argument is
scheduled for October 17, 2014.

On April 18, 2013, in Aycock v. R. J. Reynolds Tobacco Co., a case filed in
January 2008, in the U.S. District Court for the Middle District of Florida, a
jury returned a verdict in favor of the plaintiff, found the decedent, Richard
Aycock, to be 27.5% at fault and RJR Tobacco to be 72.5% at fault, and awarded
$5.9 million in compensatory damages. Punitive damages were not awarded. The
plaintiff alleged that the decedent was addicted to cigarettes manufactured by
the defendant and, as a result, suffered from lung cancer, and sought an
unspecified amount of compensatory and punitive damages. Final judgment was
entered against RJR Tobacco in the amount of $4.28 million in April 2013. RJR
Tobacco filed a notice of appeal to the Eleventh Circuit in September 2013, and
posted a supersedeas bond in the amount of $4.32 million in October 2013. Oral
argument occurred on June 5, 2014. A decision is pending.

On May 2, 2013, in David Cohen v. R. J. Reynolds Tobacco Co., a case filed in
December 2007, in the Circuit Court, Palm Beach County, Florida, a jury returned
a verdict in favor of the plaintiff, found the decedent, Helen Cohen, to be 40%
at fault, RJR Tobacco to be 30% at fault, and the remaining defendants
collectively to be 30% at fault, and awarded $2.06 million in compensatory
damages. The plaintiff alleged that as a result of using the defendants’
products, the decedent became addicted and suffered from one or more
smoking-related diseases and/or conditions, and sought in excess of $15,000 in
compensatory damages and unspecified punitive damages. Final judgment was
entered against RJR Tobacco in the amount of $617,000 in May 2013. In July 2013,
the court granted the defendants’ motion for a new trial due to the plaintiff’s
improper arguments during closing. The new trial date has not been scheduled.
The plaintiff filed a notice of appeal to the Fourth DCA, and the defendants
filed a notice of cross appeal. Briefing is underway.

On May 22, 2013, in John Campbell v. R. J. Reynolds Tobacco Co., a case pending
in Polk County, Florida, a jury returned a verdict in favor of the defendants,
including RJR Tobacco. The plaintiff alleged that as a result of smoking the
defendants’ products, the decedent, Judy Campbell, became addicted to smoking
cigarettes and suffered from unspecified smoking-related conditions and/or
diseases, and sought an unspecified amount of damages. The plaintiff’s motion
for a new trial was denied and the court entered final judgment in July 2013.
The plaintiff filed a notice of appeal to the Second DCA, and the defendants
filed a notice of cross appeal in August 2013. Briefing is complete. Oral
argument has not been scheduled.

On May 23, 2013, in Earl Graham v. R. J. Reynolds Tobacco Co., a case filed in
January 2008, in the U.S. District Court for the Middle District of Florida, a
jury returned a verdict in favor of the plaintiff, found the decedent, Faye
Graham, to be 70% at fault, RJR Tobacco to be 20% at fault and the remaining
defendant to be 10% at fault, and awarded $2.75 million in compensatory damages.
The plaintiff alleged that as a result of smoking the defendants’ products, the
decedent became addicted to smoking cigarettes which resulted in her death, and
sought an unspecified amount of damages. Final judgment was entered against RJR
Tobacco in the amount of $550,000 in May 2013. The defendants filed a joint
notice of appeal to the Eleventh Circuit, and RJR Tobacco posted a supersedeas
bond in the amount of approximately $556,000 in October 2013. Oral argument has
tentatively been scheduled for the week of November 17, 2014.

On June 4, 2013, in Starr-Blundell v. R. J. Reynolds Tobacco Co., a case filed
in December 2007, in the Circuit Court, Duval County, Florida, a jury returned a
verdict in favor of the plaintiff, found the decedent, Lucy Mae Starr, to be 80%
at fault, RJR Tobacco to be 10% at fault and the remaining defendant to be 10%
at fault, and awarded $500,000 in compensatory damages. The plaintiff alleged
that as a result of smoking the defendants’ products, the decedent suffered from
lung cancer and other smoking relating diseases and/or conditions, and sought in
excess of $15,000 in damages. The court entered final judgment in the amount of
$50,000 against each defendant in November 2013. The plaintiff filed a notice of
appeal to the First DCA, and the defendants filed a notice of cross appeal in
December 2013. RJR Tobacco posted a supersedeas bond in the amount of $50,000 in
December 2013. Briefing is underway.

On June 7, 2013, in Odum v. R. J. Reynolds Tobacco Co., a case filed in November
2007, in the Circuit Court, Duval County, Florida, a jury returned a verdict in
favor of the plaintiff, found the decedent, Ethelene Hazouri, to be

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50% at fault and RJR Tobacco to be 50% at fault, and awarded $200,000 in
compensatory damages. The plaintiff alleged that as a result of smoking the
defendant’s products, the decedent suffered from lung cancer, and sought an
unspecified amount of damages. Final judgment was entered against RJR Tobacco in
the amount of $264,000, for damages and taxable costs, in November 2013. RJR
Tobacco filed a notice of appeal to the First DCA and posted a supersedeas bond
in the amount of approximately $264,000 in December 2013. Oral argument is
scheduled for October 14, 2014.

On June 14, 2013, in Skolnick v. R. J. Reynolds Tobacco Co., a case filed in
December 2007, in the Circuit Court, Palm Beach County, Florida, a jury returned
a verdict in favor of the plaintiff, found the decedent, Leo Skolnick, to be 40%
at fault, RJR Tobacco to be 30% at fault and the remaining defendant to be 30%
at fault, and awarded $2.56 million in compensatory damages. The plaintiff
alleged that as a result of using the defendants’ products, the decedent
suffered from lung cancer, and sought in excess of $15,000 in compensatory
damages and unspecified punitive damages. The court entered final judgment
against RJR Tobacco in the amount of $766,500 in July 2013. The defendants filed
a joint notice of appeal to the Fourth DCA, and the plaintiff filed a notice of
cross appeal in December 2013. RJR Tobacco posted a supersedeas bond in the
amount of $767,000 in March 2014. Briefing is underway.

On June 19, 2013, in Thibault v. R. J. Reynolds Tobacco Co., a case pending in
the Circuit Court, Escambia County, Florida, the jury returned a verdict in
favor of the plaintiff, found the decedent, Evelyn Thibault, to be 30% at fault
and RJR Tobacco to be 70% at fault, and awarded $1.75 million in compensatory
damages and $1.28 million in punitive damages. The plaintiff alleged that as a
result of using the defendant’s products, the decedent suffered from chronic
obstructive pulmonary disease, and sought an unspecified amount of compensatory
and punitive damages. The court determined that comparative fault did not apply
to reduce the amount of the verdict. In June 2013, the court entered final
judgment against RJR Tobacco in the amount of $3.03 million. RJR Tobacco filed a
notice of appeal to the First DCA in August 2013. RJR Tobacco posted a
supersedeas bond in the amount of $3.03 million in September 2013. Oral argument
occurred on September 16, 2014. A decision is pending.

On September 20, 2013, in Gafney v. R. J. Reynolds Tobacco Co., a case pending
in Palm Beach County, Florida, a jury returned a verdict in favor of the
plaintiff, found the decedent, Frank Gafney, to be 34% at fault, RJR Tobacco to
be 33% at fault and the remaining defendant to be 33% at fault, and awarded $5.8
million in compensatory damages. Punitive damages were not awarded. The
plaintiff alleged that as a result of smoking the defendants’ products, the
decedent developed chronic obstructive pulmonary disease, and sought in excess
of $15,000 in compensatory damages. Final judgment was entered against RJR
Tobacco in the amount of $1.9 million in September 2013. The defendants filed a
joint notice of appeal to the Fourth DCA, and RJR Tobacco posted a supersedeas
bond in the amount of $1.9 million in November 2013. The plaintiff filed a
notice of cross appeal. Briefing is underway.

On September 30, 2013, in Crawford v. R. J. Reynolds Tobacco Co., a case pending
in Miami-Dade County, Florida, a jury returned a verdict in favor of the
plaintiff, found the plaintiff to be 30% at fault and RJR Tobacco to be 70% at
fault, and awarded $9 million in compensatory damages and $1 million in punitive
damages. The plaintiff alleged that as a result of smoking the defendant’s
products, he suffered from addiction and one or more smoking-related conditions
and/or diseases, and sought an unspecified amount of damages. Final judgment was
entered against RJR Tobacco in the amount of $9 million in compensatory damages
and $1 million in punitive damages in October 2013. RJR Tobacco filed a notice
of appeal to the Third DCA and posted a supersedeas bond in the amount of $5
million in November 2013. In July 2014, the Third DCA affirmed the trial court’s
judgment, per curiam. After evaluation of the case, RJR Tobacco will pay, on
October 3, 2014, $11.9 million in satisfaction of the judgment.

On November 15, 2013, in Chamberlain v. R. J. Reynolds Tobacco Co., a case filed
in January 2008, in the U.S. District Court for the Middle District of Florida,
a jury returned a verdict in favor of the defendants, including RJR Tobacco. The
plaintiff alleged that as a result of smoking the defendants’ products, he
suffers from chronic obstructive pulmonary disease and lung cancer, and sought
an unspecified amount of compensatory and punitive damages. Final judgment was
entered in favor of the defendants in November 2013. The plaintiff’s motion for
a new trial was denied in April 2014. The plaintiff filed a notice of appeal to
the Eleventh Circuit on June 27, 2014. Briefing is underway.

On January 9, 2014, in Bush v. R. J. Reynolds Tobacco Co., a case filed in
December 2007, in the Circuit Court, Escambia County, Florida, the court
declared a mistrial due to the inability to seat a jury. The plaintiff alleged
that as a result of his use of the defendants’ products, he suffers from
nicotine addiction and one or more smoking-related diseases and/or conditions,
and sought an unspecified amount of compensatory damages. A new trial will be
scheduled at a later date.

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On January 27, 2014, in Harford v. R. J. Reynolds Tobacco Co., a case filed in
January 2008, in the U.S. District Court for the Middle District of Florida, a
jury returned a verdict in favor of the plaintiff, found the plaintiff to be 82%
at fault and RJR Tobacco to be 18% at fault, and awarded $330,000 in
compensatory damages. The plaintiff alleged that as a result of his use of the
defendant’s products, he suffers from addiction and lung cancer, and sought an
unspecified amount of compensatory and punitive damages. The plaintiff filed a
motion for a new trial in February 2014. A decision is pending.

On January 31, 2014, in Cheeley v. R. J. Reynolds Tobacco Co., a case filed in
November 2007, in the Circuit Court, Broward County, Florida, a jury returned a
verdict in favor of the plaintiff, found the decedent, Georgia Cheeley, to be
50% at fault and RJR Tobacco to be 50% at fault, and awarded $3 million in
compensatory damages and $2 million in punitive damages. The plaintiff alleged
that as a result of smoking the defendant’s products, the decedent suffered from
one or more smoking-related conditions or diseases, and sought in excess of
$15,000 in compensatory damages. The court entered final judgment against RJR
Tobacco in the amount of $1.5 million in compensatory damages and $2 million in
punitive damages. RJR Tobacco filed a notice of appeal to the Fourth DCA and
posted a supersedeas bond in the amount of $3.5 million in April 2014. The
plaintiff filed a notice of cross appeal in May 2014. Briefing is underway.

On February 3, 2014, in Deshaies v. R. J. Reynolds Tobacco Co., a case filed in
January 2008, in the U.S. District Court for the Middle District of Florida, a
jury returned a verdict in favor of RJR Tobacco. The plaintiff alleged that as a
result of smoking the defendant’s products, he suffers from one or more
smoking-related conditions or diseases, and sought an unspecified amount of
compensatory and punitive damages. Final judgment was entered in February 2014.
Post-trial motions are pending.

On February 18, 2014, in Goveia v. R. J. Reynolds Tobacco Co., a case filed in
January 2008, in the Circuit Court, Orange County, Florida, a jury returned a
verdict in favor of the plaintiff, found the decedent, Mary Goveia, to be 30% at
fault, RJR Tobacco to be 35% at fault, and the remaining defendant to be 35% at
fault, and awarded $850,000 in compensatory damages and $2.25 million in
punitive damages against each defendant. The plaintiff alleged that as a result
of smoking the defendants’ products, the decedent became addicted and suffered
from one or more smoking-related diseases and/or conditions, and sought an
unspecified amount of compensatory and punitive damages. Post-trial motions were
denied in April 2014. Final judgment was entered in the amount of $297,500 in
compensatory damages and $2.25 million in punitive damages against each
defendant in April 2014. The defendants filed a joint notice of appeal to the
Fifth DCA, and RJR Tobacco posted a supersedeas bond in the amount of $2.5
million in April 2014. Briefing is underway.

On February 27, 2014, in Banks v. R. J. Reynolds Tobacco Co., a case filed in
December 2007, in the Circuit Court, Broward County, Florida, a jury returned a
verdict in favor of the defendants, including RJR Tobacco. The plaintiff alleged
that as a result of using the defendants’ products, the decedent, George Banks,
developed one or more smoking-related diseases and/or conditions, and sought in
excess of $15,000 in compensatory damages. The plaintiff’s motion for a new
trial was denied, and the court entered final judgment in favor of RJR Tobacco
and the other defendant in May 2014. The plaintiff filed a notice of appeal to
the Fourth DCA, and the defendants filed a notice of cross appeal in June 2014.
Briefing is underway.

On March 17, 2014, in Clayton v. R. J. Reynolds Tobacco Co., a case filed in
November 2007, in the Circuit Court, Duval County, Florida, a jury returned a
verdict in favor of the plaintiff, found the decedent, David Clayton, to be 90%
at fault and RJR Tobacco to be 10% at fault and awarded $600,000 in compensatory
damages. Punitive damages were not awarded. The plaintiff alleged that as a
result of smoking the defendant’s products, the decedent suffered from bodily
injury and died, and sought an unspecified amount of damages. In July 2014,
final judgment was entered against RJR Tobacco in the amount of $60,000 in
compensatory damages, together with $163,469 in taxable costs, for a total of
$223,469. RJR Tobacco filed a notice of appeal to the First DCA in August 2014.
The plaintiff filed a notice of cross appeal in September 2014. Briefing is
underway.

On March 26, 2014, in Bowden v. R. J. Reynolds Tobacco Co., a case filed in
January 2008, in the Circuit Court, Duval County, Florida, a jury returned a
verdict in favor of the plaintiff, found the decedent, William Bowden, to be

--------------------------------------------------------------------------------

40% at fault, RJR Tobacco to be 30% at fault and the remaining defendant to be
30% at fault, and awarded $5 million in compensatory damages. Punitive damages
were not awarded. The plaintiff alleged that as a result of smoking the
defendants’ products, the decedent suffered from unspecified injuries which
resulted in his death, and sought an unspecified amount of compensatory and
punitive damages. Final judgment was entered against each defendant in the
amount of $1.5 million in compensatory damages in March 2014. Post-trial motions
were denied in May 2014. The defendants filed a joint notice of appeal to the
First DCA, the plaintiff filed a notice of cross appeal and RJR Tobacco posted a
supersedeas bond in the amount of $1.5 million in June 2014. Briefing is
underway.

On April 29, 2014, in Dupre v. Philip Morris USA Inc., a case filed in December
2007, in the Circuit Court, Manatee County, Florida, the court declared a
mistrial because the jury was unable to reach a unanimous verdict. The plaintiff
alleged that the decedent, Richard Dupre, was addicted to cigarettes
manufactured by the defendant, and as a result, developed one or more
smoking-related diseases and/or conditions. The plaintiff is seeking
compensatory and punitive damages, costs and interest. Retrial is scheduled to
commence on April 27, 2015.

On May 16, 2014, in Burkhart v. R. J. Reynolds Tobacco Co., a case filed in
January 2008, in the U.S. District Court for the Middle District of Florida, a
jury returned a verdict in favor of the plaintiff, found the plaintiff to be 50%
at fault, RJR Tobacco to be 25% at fault, and the remaining defendants to
collectively be 25% at fault, and awarded $5 million in compensatory damages and
$1.25 million in punitive damages against RJR Tobacco and $1.25 million in
punitive damages collectively against the remaining defendants. The plaintiff
alleged that she became addicted to smoking cigarettes manufactured by the
defendants and suffers from one or more smoking-related diseases and/or
conditions. The plaintiff sought an unspecified amount of compensatory and
punitive damages, costs and interest. Final judgment was entered on June 11,
2014, and did not include a reduction for comparative fault. On September 16,
2014, the court denied the defendants’ post-trial motions. The deadline to file
a notice of appeal is October 16, 2014.

On May 19, 2014, in Starbuck v. R. J. Reynolds Tobacco Co., a case filed in
January 2008, in the U.S. District Court for the Middle District of Florida, the
court declared a mistrial because the jury was unable to reach a unanimous
verdict. The plaintiff alleged that he suffers from addiction and one or more
smoking-related diseases or conditions. The plaintiff is seeking an unspecified
amount of compensatory damages. Retrial is scheduled to commence on December 1,
2014.

On June 23, 2014, in Bakst v. R. J. Reynolds Tobacco Co., a case filed in
December 2007, in the Circuit Court, Palm Beach County, Florida, a jury returned
a verdict in favor of the plaintiff, found the decedent, Juanita Thurston, to be
25% at fault and RJR Tobacco to be 75% at fault, and awarded $6 million in
compensatory damages plus $4,209 for funeral expenses and $14 million in
punitive damages. The plaintiff alleged that as a result of using the
defendant’s products, the decedent suffered from nicotine addiction and one or
more smoking-related diseases and/or conditions, including lung cancer. The
plaintiff sought in excess of $15,000 in compensatory damages, punitive damages,
recoverable costs and interest. RJR Tobacco’s post-trial motions were denied,
and final judgment was entered against RJR Tobacco in the amount of $4.5 million
in compensatory damages and $14 million in punitive damages. The deadline to
file a notice of appeal is October 14, 2014.

On June 25, 2014, in Davis v. R. J. Reynolds Tobacco Co., a case filed in
January 2008, in the U.S. District Court for the Middle District of Florida, a
jury returned a verdict in favor of the defendants, including RJR Tobacco. The
plaintiff alleged that as a result of smoking the defendants’ products, she
suffers from nicotine addiction and one or more smoking-related diseases and/or
conditions. The plaintiff sought an unspecified amount of compensatory damages,
costs and interest. Final judgment was entered on June 27, 2014. In July 2014,
the plaintiff filed a motion for a new trial. A decision is pending.

On July 17, 2014, in Robinson v. R. J. Reynolds Tobacco Co., a case filed in
January 2008, in the Circuit Court, Escambia County, Florida, a jury returned a
verdict in favor of the plaintiff, found the decedent, Michael Johnson, Sr., to
be 29.5% at fault and RJR Tobacco to be 70.5% at fault, and awarded $16.9
million in compensatory damages and determined that the plaintiff is entitled to
punitive damages. The plaintiff alleged that as a result of using the
defendant’s products, the decedent suffered from lung cancer. The plaintiff
sought an unspecified amount of damages, costs and interest. On July 18, 2014,
the jury awarded $23.6 billion in punitivie damages. Post-trial motions are
pending.

--------------------------------------------------------------------------------

On July 31, 2014, in Harris v. R. J. Reynolds Tobacco Co., a case filed in
January 2008, in the U.S. District Court for the Middle District of Florida, a
jury returned a verdict in favor of the plaintiff. The jury allocated fault:
(1) for the survival claim as follows: decedent – 60%, RJR Tobacco – 15%, and
the remaining defendants (collectively) – 25%; and (2) for the wrongful death
claim as follows: decedent – 70%, RJR Tobacco – 10%, and the remaining
defendants (collectively) – 20%. The jury awarded $400,000 in compensatory
damages for the wrongful death claim and $1.3 million in compensatory damages
for the survival claim. The jury declined to award punitive damages. The
plaintiff alleged that as a result of smoking cigarettes manufacturered by the
defendants, the decedent, Gerald Harris, became addicted and suffered from
unspecified smoking-related diseases and/or conditions. The plaintiff sought an
unspecified amount of compensatory damages, costs and interest. Post-trial
motions are pending.

On August 27, 2014, in Gore v. R. J. Reynolds Tobacco Co., a case filed in
January 2008, in the Circuit Court, Indian River County, Florida, the court
declared a mistrial because the jury returned a potentially inconsistent
verdict. The jury found for the plaintiff on liability, but awarded no
compensatory damages and determined that the plaintiff was entitled to punitive
damages. The plaintiff alleged that as a result of using the defendants’
products, the decedent, Gloria Gore, suffered from addiction and one or more
smoking-related diseases and/or conditions. The plaintiff sought an unspecified
amount of damages. Retrial is scheduled to commence on February 10, 2015.

On August 28, 2014, in Wilcox v. R. J. Reynolds Tobacco Co., a case filed in
January 2008, in the Circuit Court, Miami-Dade County, Florida, a jury returned
a verdict in favor of the plaintiff, found the decedent, Cleston Wilcox, to be
30% at fault and RJR Tobacco to be 70% at fault, and awarded $7 million in
compensatory damages and $8.5 million in punitive damages. The plaintiff alleged
that as a result of using the defendant’s products, the decedent suffered from
addiction and one or more smoking-related diseases and/or conditions. The
plaintiff sought in excess of $15,000, taxable costs and interest. Post-trial
motions are pending.

On August 28, 2014, in Irimi v. R. J. Reynolds Tobacco Co., a case filed in
December 2007, in the Circuit Court, Broward County, Florida, a jury returned a
verdict in favor of the plaintiff, found the decedent, Dale Moyer, to be 70% at
fault and RJR Tobacco to be 14.5% at fault, and the remaining defendants
collectively to be 15.5% at fault, and awarded approximately $3.1 million in
compensatory damages. The jury did not find entitlement to punitive damages. The
plaintiff alleged that as a result of using the defendants’ products, the
decedent suffered from one or more smoking-related illnesses or diseases. The
plaintiff sought an unspecified amount of compensatory damages. Post-trial
motions are pending.

On August 29, 2014, in Hubbird v. R. J. Reynolds Tobacco Co., a case filed in
January 2008, in the Circuit Court, Miami-Dade County, Florida, a jury returned
a verdict in favor of the plaintiff, found the decedent, David Ellsworth, to be
50% at fault and RJR Tobacco to be 50% at fault, and awarded $3 million in
compensatory damages and $25 million in punitive damages. The plaintiff alleged
that as a result of using the defendant’s products, the decedent suffered from
smoking-related diseases and or conditions. The plaintiff sought an unspecified
amount of damages. Post-trial motions are pending.

On August 29, 2014, in Cooper v. R. J. Reynolds Tobacco Co., a case filed in
December 2007, in the Circuit Court, Broward County, Florida, the court declared
a mistrial because the jury was unable to reach a verdict. The plaintiff alleged
that as a result of using the defendants’ products, she suffers from addiction
and developed one or more smoking-related diseases and/or conditions. The
plaintiff sought an unspecified amount of compensatory and punitive damages,
recoverable costs and interest. Retrial is scheduled to commence on January 12,
2015.

On September 5, 2014, in Baum v. R. J. Reynolds Tobacco Co., a case filed in
January 2008, in the Circuit Court, Miami-Dade County, Florida, a jury returned
a verdict in favor of the defendants, including RJR Tobacco. The plaintiff
alleged that as a result of using the defendants’ products, the decedent, Paul
Baum, suffered from one or more smoking-related diseases and/or conditions. The
plaintiff sought an unspecified amount of compensatory damages, costs and
interest. At this time, it is unknown if the plaintiff will file post-trial
motions or an appeal.

On September 11, 2014, in Ellis v. R. J. Reynolds Tobacco Co., a case filed in
November 2007, in the Circuit Court, Duval County, Florida, a jury returned a
verdict in favor of RJR Tobacco. The plaintiff alleged that as a result of using
the defendant’s products, the decedent, Betty Owens, suffered bodily injury and
died. The plaintiff sought an unspecified amount of damages. At this time, it is
unknown if the plaintiff will file post-trial motions or an appeal.

--------------------------------------------------------------------------------

  —   Broin II Cases

RJR Tobacco, B&W and other cigarette manufacturer defendants settled Broin v.
Philip Morris, Inc. in October 1997. This case had been brought in Florida state
court on behalf of flight attendants alleged to have suffered from diseases or
ailments caused by exposure to ETS in airplane cabins. The settlement agreement
required the participating tobacco companies to pay a total of $300 million in
three annual $100 million installments, allocated among the companies by market
share, to fund research on the early detection and cure of diseases associated
with tobacco smoke. It also required those companies to pay a total of
$49 million for the plaintiffs’ counsel’s fees and expenses. RJR Tobacco’s
portion of these payments was approximately $86 million; B&W’s portion of these
payments was approximately $57 million. The settlement agreement bars class
members from bringing aggregate claims or obtaining punitive damages and also
bars individual claims to the extent that they are based on fraud,
misrepresentation, conspiracy to commit fraud or misrepresentation, RICO,
suppression, concealment or any other alleged intentional or willful conduct.
The defendants agreed that, in any individual case brought by a class member,
the defendant will bear the burden of proof with respect to whether ETS can
cause certain specifically enumerated diseases, referred to as “general
causation.” With respect to all other issues relating to liability, including
whether an individual plaintiff’s disease was caused by his or her exposure to
ETS in airplane cabins, referred to as “specific causation,” the individual
plaintiff will have the burden of proof. On September 7, 1999, the Florida
Supreme Court approved the settlement. The Broin II cases arose out of the
settlement of this case.

On October 5, 2000, the Broin court entered an order applicable to all Broin II
cases that the terms of the Broin settlement agreement do not require the
individual Broin II plaintiffs to prove the elements of strict liability, breach
of warranty or negligence. Under this order, there is a rebuttable presumption
in the plaintiffs’ favor on those elements, and the plaintiffs bear the burden
of proving that their alleged adverse health effects actually were caused by
exposure to ETS in airplane cabins, that is, specific causation.

As of September 17, 2014, there were 2,570 Broin II lawsuits pending in Florida.
There have been no Broin II trials since 2007.

 

  —   Class-Action Suits

— Overview. As of September 17, 2014, eight class-action cases were pending in
the United States against RJR Tobacco or its affiliates or indemnitees. In 1996,
the Fifth Circuit Court of Appeals in Castano v. American Tobacco Co. overturned
the certification of a nation-wide class of persons whose claims related to
alleged addiction to tobacco products. Since this ruling by the Fifth Circuit,
most class-action suits have sought certification of state-wide, rather than
nation-wide, classes. Class-action suits based on claims similar to those
asserted in Castano or claims that class members are at a greater risk of injury
or injured by the use of tobacco or exposure to ETS are pending against RJR
Tobacco and its affiliates and indemnitees in state or federal courts in
California, Illinois, Louisiana, Missouri, and West Virginia. All pending
class-action cases are discussed below.

The pending class actions against RJR Tobacco or its affiliates or indemnitees
include four cases alleging that the use of the term “lights” constitutes unfair
and deceptive trade practices under state law or violates the federal RICO
statute. Such suits are pending in state or federal courts in Illinois and
Missouri and are discussed below under “— ‘Lights’ Cases.”

Finally, certain third-party payers have filed health-care cost recovery actions
in the form of class actions. These cases are discussed below under
“— Health-Care Cost Recovery Cases.”

Few smoker class-action complaints have been certified or, if certified, have
survived on appeal. Eighteen federal courts, including two courts of appeals,
and most state courts that have considered the issue have rejected class
certification in such cases. Apart from the Castano case discussed above, only
two smoker class actions have been certified by a federal court — In re Simon
(II) Litigation, and Schwab [McLaughlin] v. Philip Morris USA, Inc., both of
which were filed in the U.S. District Court for the Eastern District of New York
and ultimately decertified.

— California Business and Professions Code Case. In Sateriale v. R. J. Reynolds
Tobacco Co., a class action filed in November 2009 in the U.S. District Court
for the Central District of California, the plain-

--------------------------------------------------------------------------------

tiffs brought the case on behalf of all persons who tried unsuccessfully to
redeem Camel Cash certificates from 1991 through March 31, 2007, or who held
Camel Cash certificates as of March 31, 2007. The plaintiffs allege that in
response to the defendants’ action to discontinue redemption of Camel Cash as of
March 31, 2007, customers, like the plaintiffs, attempted to exchange their
Camel Cash for merchandise and that the defendants, however, did not have any
merchandise to exchange for Camel Cash. The plaintiffs allege unfair business
practices, deceptive practices, breach of contract and promissory estoppel. The
plaintiffs seek injunctive relief, actual damages, costs and expenses. In
January 2010, the defendants filed a motion to dismiss, which prompted the
plaintiffs to file an amended complaint in February 2010. The class definition
changed to a class consisting of all persons who reside in the U.S. and tried
unsuccessfully to redeem Camel Cash certificates, from October 1, 2006 (six
months before the defendant ended the Camel Cash program) or who held Camel Cash
certificates as of March 31, 2007. The plaintiffs also brought the class on
behalf of a proposed California subclass, consisting of all California residents
meeting the same criteria. In May 2010, RJR Tobacco’s motion to dismiss the
amended complaint for lack of jurisdiction over subject matter and,
alternatively, for failure to state a claim was granted with leave to amend. The
plaintiffs filed a second amended complaint. In July 2010, RJR Tobacco’s motion
to dismiss the second amended complaint was granted with leave to amend. The
plaintiffs filed a third amended complaint, and RJR Tobacco filed a motion to
dismiss in September 2010. In December 2010, the court granted RJR Tobacco’s
motion to dismiss with prejudice. Final judgment was entered by the court, and
the plaintiffs filed a notice of appeal, in January 2011. In July 2012, the
appellate court affirmed the dismissal of the plaintiffs’ claims under the
Unfair Competition Law and the Consumer Legal Remedies Acts and reversed the
dismissal of the plaintiffs’ claims for promissory estoppel and breach of
contract. RJR Tobacco’s motion for rehearing or rehearing en banc was denied in
October 2012. RJR Tobacco filed its answer to the plaintiffs’ third amended
complaint in December 2012. Trial is scheduled for November 4, 2014.

— “Lights” Cases. As noted above, “lights” class-action cases are pending
against RJR Tobacco or B&W in Illinois (2) and Missouri (2). The classes in
these cases generally seek to recover $50,000 to $75,000 per class member for
compensatory and punitive damages, injunctive and other forms of relief, and
attorneys’ fees and costs from RJR Tobacco and/or B&W. In general, the
plaintiffs allege that RJR Tobacco or B&W made false and misleading claims that
“lights” cigarettes were lower in tar and nicotine and/or were less hazardous or
less mutagenic than other cigarettes. The cases typically are filed pursuant to
state consumer protection and related statutes.

Many of these “lights” cases were stayed pending review of the Good v. Altria
Group, Inc. case by the U.S. Supreme Court. In that “lights” class-action case
against Altria Group, Inc. and Philip Morris USA, the U.S. Supreme Court decided
that these claims are not preempted by the Federal Cigarette Labeling and
Advertising Act or by the Federal Trade Commission’s, referred to as FTC,
historic regulation of the industry. Since this decision in December 2008, a
number of the stayed cases have become active again.

The seminal “lights” class-action case involves RJR Tobacco’s competitor, Philip
Morris, Inc. Trial began in Price v. Philip Morris, Inc. in January 2003. In
March 2003, the trial judge entered judgment against Philip Morris in the amount
of $7.1 billion in compensatory damages and $3 billion in punitive damages.
Based on Illinois law, the bond required to stay execution of the judgment was
set initially at $12 billion. Philip Morris pursued various avenues of relief
from the $12 billion bond requirement. On December 15, 2005, the Illinois
Supreme Court reversed the lower court’s decision and sent the case back to the
trial court with instructions to dismiss the case. On December 5, 2006, the
trial court granted the defendant’s motion to dismiss and for entry of final
judgment. The case was dismissed with prejudice the same day. In December 2008,
the plaintiffs filed a petition for relief from judgment, stating that the
U.S. Supreme Court’s decision in Good v. Altria Group, Inc. rejected the basis
for the reversal. The trial court granted the defendant’s motion to dismiss the
plaintiffs’ petition for relief from judgment in February 2009. In March 2009,
the plaintiffs filed a notice of appeal to the Illinois Appellate Court, Fifth
Judicial District, requesting a reversal of the February 2009 order and remand
to the circuit court. On February 24, 2011, the appellate court entered an
order, concluding that the two-year time limit for filing a petition for relief
from a final judgment began to run when the trial court dismissed the
plaintiffs’ lawsuit on December 18, 2006. The appellate court therefore found
that the petition was timely, reversed the order of the trial court, and
remanded the case for further proceedings. Philip Morris filed a petition for
leave to appeal to the Illinois Supreme Court. On September 28, 2011, the
Illinois Supreme Court denied Philip Morris’s petition for leave to appeal and
returned the case to the trial court for further proceedings. In December 2012,
the trial court denied the plaintiffs’ petition for relief from the judgment.
The plaintiffs filed a notice of appeal to the Illinois Appellate Court, Fifth
Judicial District. In April

--------------------------------------------------------------------------------

2014, the appellate court reinstated the 2003 verdict. In May 2014, Philip
Morris filed a petition for leave to appeal to the Illinois Supreme Court and a
motion for supervisory order. Philip Morris has requested the Illinois Supreme
Court to direct the Fifth Judicial District to vacate its April 2014 judgment
and to order the Fifth Judicial District to affirm the trial court’s denial of
the plaintiff’s petition for relief from the judgment, or in the alternative,
grant its petition for leave to appeal. A decision is pending.

In Turner v. R. J. Reynolds Tobacco Co., a case filed in February 2000 in
Circuit Court, Madison County, Illinois, a judge certified a class in
November 2001. In June 2003, RJR Tobacco filed a motion to stay the case pending
Philip Morris’s appeal of the Price v. Philip Morris, Inc. case mentioned above,
which the judge denied in July 2003. In October 2003, the Illinois Fifth
District Court of Appeals denied RJR Tobacco’s emergency stay/supremacy order
request. In November 2003, the Illinois Supreme Court granted RJR Tobacco’s
motion for a stay pending the court’s final appeal decision in Price. On
October 11, 2007, the Illinois Fifth District Court of Appeals dismissed RJR
Tobacco’s appeal of the court’s denial of its emergency stay/supremacy order
request and remanded the case to the Circuit Court. A status conference is
scheduled for November 19, 2014.

In Howard v. Brown & Williamson Tobacco Corp., another case filed in February
2000 in Circuit Court, Madison County, Illinois, a judge certified a class in
December 2001. In June 2003, the trial judge issued an order staying all
proceedings pending resolution of the Price v. Philip Morris, Inc. case
mentioned above. The plaintiffs appealed this stay order to the Illinois Fifth
District Court of Appeals, which affirmed the Circuit Court’s stay order in
August 2005. There is currently no activity in the case.

A “lights” class-action case is pending against each of RJR Tobacco and B&W in
Missouri. In Collora v. R. J. Reynolds Tobacco Co., a case filed in May 2000 in
Circuit Court, St. Louis County, Missouri, a judge in St. Louis certified a
class in December 2003. In April 2007, the court granted the plaintiffs’ motion
to reassign Collora and the following cases to a single general division:
Craft v. Philip Morris Companies, Inc. and Black v. Brown & Williamson Tobacco
Corp., discussed below. In April 2008, the court stayed the case pending
U.S. Supreme Court review in Good v. Altria Group, Inc. A nominal trial date of
January 10, 2011 was scheduled, but it did not proceed at that time. A status
conference is scheduled for February 2, 2015.

Finally, in Black v. Brown & Williamson Tobacco Corp., a case filed in November
2000 in Circuit Court, City of St. Louis, Missouri, B&W removed the case to the
U.S. District Court for the Eastern District of Missouri. The plaintiffs filed a
motion to remand, which was granted in March 2006. In April 2008, the court
stayed the case pending U.S. Supreme Court review in Good v. Altria Group, Inc.
A nominal trial date of January 10, 2011, was scheduled, but it did not proceed
at that time. A status conference is scheduled for February 2, 2015.

In the event RJR Tobacco and its affiliates or indemnitees lose one or more of
the pending “lights” class-action suits, RJR Tobacco, depending upon the amount
of any damages ordered, could face difficulties in its ability to pay the
judgment or obtain any bond required to stay execution of the judgment which
could have a material adverse effect on RJR Tobacco’s, and consequently RAI’s,
results of operations, cash flows or financial position.

Other Class Actions. In Young v. American Tobacco Co., Inc., a case filed in
November 1997 in Circuit Court, Orleans Parish, Louisiana, the plaintiffs
brought an ETS class action against U.S. cigarette manufacturers, including RJR
Tobacco and B&W, and parent companies of U.S. cigarette manufacturers, including
RJR, on behalf of all residents of Louisiana who, though not themselves
cigarette smokers, have been exposed to secondhand smoke from cigarettes which
were manufactured by the defendants, and who allegedly suffered injury as a
result of that exposure. The plaintiffs seek to recover an unspecified amount of
compensatory and punitive damages. In March 2013, the court entered an order
staying the case, including all discovery, pending the implementation of the
smoking cessation program ordered by the court in Scott v. The American Tobacco
Co.

In Parsons v. A C & S, Inc., a case filed in February 1998 in Circuit Court,
Ohio County, West Virginia, the plaintiff sued asbestos manufacturers,
U.S. cigarette manufacturers, including RJR Tobacco and B&W, and parent
companies of U.S. cigarette manufacturers, including RJR, seeking to recover
$1 million in compensatory and punitive damages individually and an unspecified
amount for the class in both compensatory and punitive damages. The class was
brought on behalf of persons who allegedly have personal injury claims arising
from their exposure to respirable asbestos fibers and cigarette smoke. The
plaintiffs allege that Mrs. Parsons’ use of tobacco products and exposure to
asbestos products caused her to develop lung cancer and to become addicted to
tobacco. In December 2000, three defendants, Nitral Liquidators, Inc., Desseaux
Corporation of North America and Armstrong World Industries, filed bankruptcy
petitions in the U.S. Bankruptcy Court for the District of Delaware, In re
Armstrong World Industries, Inc. Pursuant to section 362(a) of the Bankruptcy
Code, Parsons is automatically stayed with respect to all defendants.

--------------------------------------------------------------------------------

Finally, in Jones v. American Tobacco Co., Inc., a case filed in December 1998
in Circuit Court, Jackson County, Missouri, the defendants removed the case to
the U.S. District Court for the Western District of Missouri in February 1999.
The action was brought against the major U.S. cigarette manufacturers, including
RJR Tobacco and B&W, and parent companies of U.S. cigarette manufacturers,
including RJR, by tobacco product users and purchasers on behalf of all
similarly situated Missouri consumers. The plaintiffs allege that their use of
the defendants’ tobacco products has caused them to become addicted to nicotine.
The plaintiffs seek to recover an unspecified amount of compensatory and
punitive damages. The case was remanded to the Circuit Court in February 1999.
There is currently no activity in this case.

 

  —   Health-Care Cost Recovery Cases

Health-care cost recovery cases have been brought by a variety of plaintiffs.
Other than certain governmental actions, these cases largely have been
unsuccessful on remoteness grounds, which means that one who pays an injured
person’s medical expenses is legally too remote to maintain an action against
the person allegedly responsible for the injury.

As of September 17, 2014, two health-care cost recovery cases were pending in
the United States against RJR Tobacco, B&W, as its indemnitee, or both, as
discussed below after the discussion of the State Settlement Agreements. A
limited number of claimants have filed suit against RJR Tobacco, its current or
former affiliates, B&W and other tobacco industry defendants to recover funds
for health care, medical and other assistance paid by foreign provincial
governments in treating their citizens. For additional information on these
cases, see “— International Cases” below.

— State Settlement Agreements. In June 1994, the Mississippi Attorney General
brought an action, Moore v. American Tobacco Co., against various industry
members, including RJR Tobacco and B&W. This case was brought on behalf of the
state to recover state funds paid for health care and other assistance to state
citizens suffering from diseases and conditions allegedly related to tobacco
use. Most other states, through their attorneys general or other state agencies,
sued RJR Tobacco, B&W and other U.S. cigarette manufacturers based on similar
theories. The cigarette manufacturer defendants, including RJR Tobacco and B&W,
settled the first four of these cases scheduled for trial — Mississippi,
Florida, Texas and Minnesota — by separate agreements with each such state.

On November 23, 1998, the major U.S. cigarette manufacturers, including RJR
Tobacco and B&W, entered into the Master Settlement Agreement with attorneys
general representing the remaining 46 states, the District of Columbia, Puerto
Rico, Guam, the Virgin Islands, American Samoa and the Northern Marianas.
Effective on November 12, 1999, the MSA settled all the health-care cost
recovery actions brought by, or on behalf of, the settling jurisdictions and
released various additional present and future claims.

In the settling jurisdictions, the MSA released RJR Tobacco, B&W, and their
affiliates and indemnitees, including RAI, from:

 

  •   all claims of the settling states and their respective political
subdivisions and other recipients of state health-care funds, relating to past
conduct arising out of the use, sale, distribution, manufacture, development,
advertising, marketing or health effects of, the exposure to, or research,
statements or warnings about, tobacco products; and

 

  •   all monetary claims of the settling states and their respective political
subdivisions and other recipients of state health-care funds, relating to future
conduct arising out of the use of or exposure to, tobacco products that have
been manufactured in the ordinary course of business.

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Set forth below is the unadjusted tobacco industry settlement payment schedule
for 2012 and beyond:

 

     2012      2013      2014      2015      2016      2017      Thereafter  

First Four States’ Settlements:(1)

                    

Mississippi Annual Payment

   $ 136       $ 136       $ 136       $ 136       $ 136       $ 136       $ 136
  

Florida Annual Payment

     440         440         440         440         440         440         440
  

Texas Annual Payment

     580         580         580         580         580         580         580
  

Minnesota Annual Payment

     204         204         204         204         204         204         204
  

Remaining Jurisdictions’ Settlement:

                    

Annual Payments(1)

     8,004         8,004         8,004         8,004         8,004         8,004
        8,004      

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 9,364       $ 9,364       $ 9,364       $ 9,364       $ 9,364       $ 9,364
      $ 9,364      

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)  Subject to adjustments for changes in sales volume, inflation and other
factors. All payments are to be allocated among the companies on the basis of
relative market share. For further information, see “— State Settlement
Agreements—Enforcement and Validity; Adjustments” below.

RAI’s operating subsidiaries expenses and payments under the State Settlement
Agreements for 2012 and 2013, and the projected expenses and payments for 2014
and 2015 are set forth below (2).

 

     2012      2013      2014      2015  

Settlement expenses

   $ 2,370       $ 1,819         —           —     

Settlement cash payments

   $ 2,414       $ 2,582         —           —     

Projected settlement expenses

         $ >1,800       $ >1,900   

Projected settlement cash payments

         $ >1,900       $ >1,900   

 

(2) Amounts beginning in 2013 reflect the impact of the Term Sheet described
below under “—State Settlement Agreements – Enforcement and Validity;
Adjustments – Partial Settlement of Certain NPM Adjustment Claims” .

The State Settlement Agreements also contain provisions restricting the
marketing of tobacco products. Among these provisions are restrictions or
prohibitions on the use of cartoon characters, brand-name sponsorships, apparel
and other merchandise, outdoor and transit advertising, payments for product
placement, free sampling and lobbying. Furthermore, the State Settlement
Agreements required the dissolution of three industry-sponsored research and
trade organizations.

The State Settlement Agreements have materially adversely affected RJR Tobacco’s
shipment volumes. RAI believes that these settlement obligations may materially
adversely affect the results of operations, cash flows or financial position of
RAI and RJR Tobacco in future periods. The degree of the adverse impact will
depend, among other things, on the rate of decline in U.S. cigarette sales in
the premium and value categories, RJR Tobacco’s share of the domestic premium
and value cigarette categories, and the effect of any resulting cost advantage
of manufacturers not subject to the State Settlement Agreements.

— U.S. Department of Justice Case. On September 22, 1999, in United States v.
Philip Morris USA Inc., the U.S. Department of Justice brought an action against
RJR Tobacco, B&W and other tobacco companies in the U.S. District Court for the
District of Columbia. The government initially sought to recover federal funds
expended by the federal government in providing health care to smokers who
developed diseases and injuries alleged to be smoking-related, based on several
federal statutes. In addition, the government sought, pursuant to the civil
provisions of RICO, disgorgement of profits the government contends were earned
as a consequence of a RICO racketeering “enterprise.” In September 2000, the
court dismissed the government’s claims asserted under the Medical Care Recovery
Act as well as those under the Medicare Secondary Payer provisions of the Social
Security Act, but did not dismiss the RICO claims. In February 2005, the
U.S. Court of Appeals for the District of Columbia ruled that disgorgement is
not an available remedy in this case. The government’s petition for writ of
certiorari with the U.S. Supreme Court was denied in October 2005. The non-jury,
bench trial began in September 2004, and closing arguments concluded in
June 2005.

On August 17, 2006, the court found certain defendants, including RJR Tobacco
and B&W, liable for the RICO claims, but did not impose any direct financial
penalties. The court instead enjoined the defendants from committing future
racketeering acts, participating in certain trade organizations, making
misrepresentations concerning smoking and health and youth marketing, and using
certain brand descriptors such as “low tar,” “light,” “ultra light,” “mild” and
“natural.” The court also ordered defendants to issue “corrective
communications” on five subjects, including smoking and health and addiction,
and to comply with further undertakings, including maintaining web sites of his-

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torical corporate documents and disseminating certain marketing information on a
confidential basis to the government. In addition, the court placed restrictions
on the ability of the defendants to dispose of certain assets for use in the
United States, unless the transferee agrees to abide by the terms of the court’s
order, and ordered the defendants to reimburse the U.S. Department of Justice
its taxable costs incurred in connection with the case.

Certain defendants, including RJR Tobacco, filed notices of appeal to the
U.S. Court of Appeals for the District of Columbia in September 2006. The
government filed its notice of appeal in October 2006. In addition, the
defendants, including RJR Tobacco, filed joint motions asking the district court
to clarify and to stay its order pending the defendants’ appeal. On
September 28, 2006, the district court denied the defendants’ motion to stay. On
September 29, 2006, the defendants, including RJR Tobacco, filed a motion asking
the court of appeals to stay the district court’s order pending the defendants’
appeal. The court granted the motion in October 2006.

In November 2006, the court of appeals stayed the appeals pending the trial
court’s ruling on the defendants’ motion for clarification. The defendants’
motion was granted in part and denied in part. The defendants’ motion as to the
meaning and applicability of the general injunctive relief of the August 2006
order was denied. The request for clarification as to the scope of the
provisions in the order prohibiting the use of descriptors and requiring
corrective statements at retail point of sale was granted. The court also ruled
that the provisions prohibiting the use of express or implied health messages or
descriptors do apply to the actions of the defendants taken outside of the
United States.

In May 2009, the U.S. Court of Appeals largely affirmed the finding of liability
against the tobacco defendants and remanded to the trial court for dismissal of
the trade organizations. The court also largely affirmed the remedial order,
including the denial of additional remedies, but vacated the order and remanded
for further proceedings as to the following four discrete issues:

 

  •   the issue of the extent of Brown & Williamson Holdings, Inc.’s control
over tobacco operations was remanded for further fact finding and clarification;

 

  •   the remedial order was vacated to the extent that it binds all defendants’
subsidiaries and was remanded to the lower court for determination as to whether
inclusion of the subsidiaries and which of the subsidiaries satisfy Rule 65(d)
of the Federal Rules of Civil Procedure;

 

  •   the court held that the provision found in paragraph four of the
injunction, concerning the use of any express or implied health message or
health descriptor for any cigarette brand, should not be read to govern overseas
sales. The issue was remanded to the lower court with instructions to
reformulate it so as to exempt foreign activities that have no substantial,
direct and foreseeable domestic effects; and

 

  •   the remedial order was vacated regarding “point of sale” displays and
remanded for the district court to evaluate and make due provisions for the
rights of innocent persons, either by abandoning this part of the remedial order
or re-crafting a new version reflecting the rights of third parties.

RJR Tobacco and the other defendants, as well as the Department of Justice,
filed petitions for writ of certiorari to the U.S. Supreme Court in February
2010. In June 2010, the U.S. Supreme Court denied the parties’ petitions for
writ of certiorari.

Post-remand proceedings are underway to determine the extent to which the
original order will be implemented. On December 22, 2010, the trial court
dismissed Brown & Williamson Holdings, Inc. from the litigation. On March 3,
2011, the defendants filed a motion for vacatur, in which they moved to vacate
the trial court’s injunctions and factual findings and dismiss the case in its
entirety. The court denied the motion on June 1, 2011. The defendants filed a
notice of appeal. In addition, the parties to the lawsuit entered into an
agreement concerning certain technical obligations regarding their public
websites. Pursuant to this agreement, RJR Tobacco agreed to deposit $3.125
million over three years into the registry of the district court. In July 2012,
the Court of Appeals for the D.C. Circuit affirmed the trial court’s denial of
the defendants’ motion to vacate the injunctions. In November 2012, the trial
court entered an order wherein the court determined the language to be included
in the text of the corrective statements and directed the parties to engage in
discussions with the Special Master to implement them. The defendants filed a
notice of appeal of that order on January 25, 2013. In February 2013, the
appellate court granted the defendants’ motion to hold the case in abeyance
pending the District Court’s resolution of corrective-statement implementation
issues. The mediation process on implementation issues has concluded, and the
trial court entered an imple-

--------------------------------------------------------------------------------

mentation order on June 2, 2014. The order stays implementation pending
exhaustion of appeals on the corrective-statements remedy. On June 25, 2014, the
defendants filed a notice of appeal from the implementation order. On August 8,
2014, the D.C. Circuit consolidated the appeal from the implementation order
with the appeal previously held in abeyance from the court order dictating the
language of the corrective statements. On August 28, 2014, the D.C. Circuit
issued a briefing schedule for the corrective-statements appeal; that schedule
calls for briefing to conclude in January 2015 and does not specify a date for
oral argument. In light of the corrective-statements implementation order, $10
million had been accrued (as of June 30, 2014) for the estimated costs of the
corrective communications.

— Native American Tribe Case. As of September 17, 2014, one Native American
tribe case was pending before a tribal court against RJR Tobacco and B&W, Crow
Creek Sioux Tribe v. American Tobacco Co., a case filed in September 1997 in
Tribal Court, Crow Creek Sioux, South Dakota. The plaintiffs seek to recover
actual and punitive damages, restitution, funding of a clinical cessation
program, funding of a corrective public education program, and disgorgement of
unjust profits from sales to minors. The plaintiffs claim that the defendants
are liable under the following theories: unlawful marketing and targeting of
minors, contributing to the delinquency of minors, unfair and deceptive acts or
practices, unreasonable restraint of trade and unfair method of competition,
negligence, negligence per se, conspiracy and restitution of unjust enrichment.
The case is dormant.

— International Cases. Nine health-care reimbursement cases have been filed
against RJR Tobacco, its current or former affiliates, or B&W outside the United
States, by nine Canadian provinces. The remaining Canadian province, the
Province of Nova Scotia, has indicated an intention to file a similar case. In
these actions, foreign governments are seeking to recover for health care,
medical and other assistance paid and to be paid in treating their citizens for
tobacco-related disease. No such actions are pending in the United States.
Pursuant to the terms of the 1999 sale of RJR Tobacco’s international tobacco
business, RJR Tobacco has tendered the defense of these actions to Japan Tobacco
Inc., referred to as JTI. Subject to a reservation of rights, JTI has assumed
the defense of RJR Tobacco and its current or former affiliates.

 

  •   British Columbia - In 1997, British Columbia enacted a statute,
subsequently amended, which created a civil cause of action for the government
to recover the costs of health-care benefits incurred for insured populations of
British Columbia residents resulting from tobacco-related disease. An action
brought on behalf of the Province of British Columbia pursuant to the statute
against Canadian and non-Canadian tobacco-related entities, including RJR
Tobacco and certain of its affiliates, was dismissed in February 2000 when the
British Columbia Supreme Court ruled that the legislation was unconstitutional
and set aside service ex juris against the foreign defendants for that reason.
British Columbia then enacted a revised statute, pursuant to which an action was
filed in January 2001 against many of the same defendants, including RJR Tobacco
and one of its affiliates, in Supreme Court, British Columbia. In that action,
the British Columbia government seeks to recover the present value of its total
expenditures for health-care benefits provided for insured persons resulting
from tobacco-related disease or the risk of tobacco-related disease caused by
alleged breaches of duty by the manufacturers, the present value of its
estimated total expenditures for health-care benefits that reasonably could be
expected to be provided for those insured persons resulting from tobacco-related
disease or the risk of tobacco-related disease in the future, court ordered
interest, and costs, or in the alternative, special or increased costs. The
government alleges that the defendants are liable under the British Columbia
statute by reason of their “tobacco related wrongs,” which are alleged to
include: selling defective products, failure to warn, sale of cigarettes to
children and adolescents, strict liability, deceit and misrepresentation,
violation of trade practice and competition acts, concerted action, and joint
liability. A jurisdictional challenge brought by RJR Tobacco and its affiliate
was dismissed. RJR Tobacco and its affiliate filed statements of defense in
January 2007. Pretrial discovery is ongoing.

 

  •   New Brunswick - In March 2008, a case was filed on behalf of Her Majesty
the Queen in Right of the Province of New Brunswick, Canada, against Canadian
and non-Canadian tobacco-related entities, including RJR Tobacco’s predecessor
and one of RJR Tobacco’s affiliates, in the Trial Division in the Court of
Queen’s Bench of New Brunswick. The claim is brought pursuant to New Brunswick
legislation enacted in 2008, which legislation is substantially similar to the
revised British Columbia statute described above. In this action, the New
Brunswick government seeks to recover essentially the same types of damages that
are being sought in the British Columbia action described above based on
analogous theories of liability. RJR Tobacco and its affiliate filed statements
of defense in March 2010. Pretrial discovery is ongoing.

--------------------------------------------------------------------------------

  •   Ontario - In September 2009, a case was filed on behalf of the Province of
Ontario, Canada, against Canadian and non-Canadian tobacco-related entities,
including RJR Tobacco and one of its affiliates, in the Ontario Superior Court
of Justice. The claim is brought pursuant to Ontario legislation enacted in
2009, which legislation is substantially similar to the revised British Columbia
statute described above. In this action, the Ontario government seeks to recover
essentially the same types of damages that are being sought in the British
Columbia and New Brunswick actions described above based on analogous theories
of liability, although the government also asserted claims based on the illegal
importation of cigarettes, which claims were deleted in an amended statement of
claim filed in August 2010. A jurisdictional challenge brought by RJR Tobacco
and its affiliate was dismissed. Preliminary motions are pending.

 

  •   Newfoundland and Labrador - In February 2011, a case was filed on behalf
of the Province of Newfoundland and Labrador, Canada against Canadian and
non-Canadian tobacco-related entities, including RJR Tobacco and one of its
affiliates, in the General Trial Division of the Supreme Court of Newfoundland
and Labrador. The claim is brought pursuant to legislation passed in
Newfoundland in 2001 and proclaimed in February 2011, which legislation is
substantially similar to the revised British Columbia statute described above.
In this action, the Newfoundland government seeks to recover essentially the
same types of damages that are being sought in the British Columbia and other
provincial actions described above based on analogous theories of liability. A
jurisdictional challenge brought by RJR Tobacco and its affiliate was dismissed.
Preliminary motions are pending.

 

  •   Quebec - In June 2012, a case was filed on behalf of the Province of
Quebec, Canada, against Canadian and non-Canadian tobacco-related entities,
including RJR Tobacco and one of its affiliates, in the Superior Court of the
Province of Quebec, District of Montreal. The claim is brought pursuant to
legislation enacted in Quebec in 2009, which legislation is substantially
similar to the revised British Columbia statute described above. In this action,
the Quebec government seeks to recover essentially the same types of damages
that are being sought in the British Columbia and other provincial actions
described above based on analogous theories of liability. RJR Tobacco and its
affiliate have brought a motion challenging the jurisdiction of the Quebec
court, which was dismissed. Pretrial discovery is ongoing. Separately, in August
2009, certain Canadian manufacturers filed a constitutional challenge to the
Quebec statute, which was dismissed on March 5, 2014. An appeal of that decision
has been filed.

 

  •   Manitoba - In May 2012, a case was filed on behalf of the Province of
Manitoba, Canada, against Canadian and non-Canadian tobacco-related entities,
including RJR Tobacco and one of its affiliates, in the Court of Queen’s Bench,
Winnipeg Judicial Centre, Manitoba. The claim is brought pursuant to legislation
assented to in 2006 and proclaimed in 2012, which legislation is substantially
similar to the revised British Columbia statute described above. In this action,
the Manitoba government seeks to recover essentially the same types of damages
that are being sought in the British Columbia and other provincial actions
described above based on analogous theories of liability. A jurisdictional
challenge brought by RJR Tobacco and its affiliate was dismissed. Preliminary
motions are pending.

 

  •   Saskatchewan - In June 2012, a case was filed on behalf of the Province of
Saskatchewan, Canada, against Canadian and non-Canadian tobacco-related
entities, including RJR Tobacco and one of its affiliates, in the Court of
Queen’s Bench, Judicial Centre of Saskatoon, Saskatchewan. The claim is brought
pursuant to legislation assented to in 2007 and proclaimed in 2012, which
legislation is substantially similar to the revised British Columbia statute
described above. In this action, the Saskatchewan government seeks to recover
essentially the same types of damages that are being sought in the British
Columbia and other provincial actions described above based on analogous
theories of liability. A jurisdictional challenge brought by RJR Tobacco and its
affiliate was dismissed. Preliminary motions are pending.

 

  •   Alberta - In June 2012, a case was filed on behalf of the Province of
Alberta, Canada, against Canadian and non-Canadian tobacco-related entities,
including RJR Tobacco and one of its affiliates, in the Court of Queen’s Bench
of Alberta Judicial Centre, Calgary, Alberta. The claim is brought pursuant to
legislation assented to in 2009 and proclaimed in 2012, which legislation is
substantially similar to the revised British Columbia statute described above.
In this action, the Alberta government seeks to recover essentially the same
types of damages that are being sought in the British Columbia and other
provincial actions described above based on analogous theories of liability. A
jurisdictional challenge brought by RJR Tobacco and its affiliate was dismissed.
Preliminary motions are pending.

--------------------------------------------------------------------------------

  •   Prince Edward Island - In September 2012, a case was filed on behalf of
the Province of Prince Edward Island, Canada, against Canadian and non-Canadian
tobacco-related entities, including RJR Tobacco and one of its affiliates, in
the Supreme Court of Prince Edward Island (General Section), Charlottetown,
Prince Edward Island. The claim is brought pursuant to legislation assented to
in 2009 and proclaimed in 2012, which legislation is substantially similar to
the revised British Columbia statute described above. In this action, the Prince
Edward Island government seeks to recover essentially the same types of damages
that are being sought in the British Columbia and other provincial actions
described above based on analogous theories of liability. A jurisdictional
challenge brought by RJR Tobacco and its affiliate was dismissed. Preliminary
motions are pending.

The following seven putative Canadian class actions were filed against various
Canadian and non-Canadian tobacco-related entities, including RJR Tobacco and
one of its affiliates, in courts in the Provinces of Alberta, British Columbia,
Manitoba, Nova Scotia, Ontario and Saskatchewan, although the plaintiffs’
counsel have been actively pursuing only the Bourassa action pending in British
Columbia at this time:

 

  •   In Adams v. Canadian Tobacco Manufacturers’ Council, a case filed in July
2009 in the Court of Queen’s Bench for Saskatchewan against Canadian and
non-Canadian tobacco-related entities, including RJR Tobacco and one of its
affiliates, the plaintiff, an individual smoker, alleging her own addiction and
chronic obstructive pulmonary disease resulting from the use of tobacco
products, is seeking compensatory and unspecified punitive damages on behalf of
a proposed class comprised of all individuals who were alive on July 10, 2009,
and who have suffered, or who currently suffer, from chronic obstructive
pulmonary disease, emphysema, heart disease or cancer, after having smoked a
minimum of 25,000 cigarettes designed, manufactured, imported, marketed or
distributed by the defendants, as well as disgorgement of revenues earned by the
defendants. RJR Tobacco and its affiliate have brought a motion challenging the
jurisdiction of the Saskatchewan court.

 

  •   In Dorion v. Canadian Tobacco Manufacturers’ Council, a case filed in June
2009, in the Court of Queen’s Bench of Alberta against Canadian and non-Canadian
tobacco-related entities, including RJR Tobacco and one of its affiliates, the
plaintiff, an individual smoker, alleging her own addiction and chronic
bronchitis resulting from the use of tobacco products, is seeking compensatory
and unspecified punitive damages on behalf of a proposed class comprised of all
individuals, including their estates, dependents and family members, who
purchased or smoked cigarettes designed, manufactured, marketed or distributed
by the defendants, as well as restitution of profits and reimbursement of
government expenditure for health-care benefits allegedly caused by the use of
tobacco products.

 

  •   In Kunka v. Canadian Tobacco Manufacturers’ Council, a case filed in 2009
in the Court of Queen’s Bench of Manitoba against Canadian and non-Canadian
tobacco-related entities, including RJR Tobacco and one of its affiliates, the
plaintiff, an individual smoker, alleging her own addiction and chronic
obstructive pulmonary disease, severe asthma and lung disease resulting from the
use of tobacco products, is seeking compensatory and unspecified punitive
damages on behalf of a proposed class comprised of all individuals, including
their estates, and their dependents and family members, who purchased or smoked
cigarettes manufactured by the defendants, as well as restitution of profits and
reimbursement of government expenditure for health-care benefits allegedly
caused by the use of tobacco products.

 

  •   In Semple v. Canadian Tobacco Manufacturers’ Council, a case filed in June
2009 in the Supreme Court of Nova Scotia against Canadian and non-Canadian
tobacco-related entities, including RJR Tobacco and one of its affiliates, the
plaintiff, an individual smoker, alleging his own addiction and chronic
obstructive pulmonary disease resulting from the use of tobacco products, is
seeking compensatory and unspecified punitive damages on behalf of a proposed
class comprised of all individuals, including their estates, dependents and
family members, who purchased or smoked cigarettes designed, manufactured,
marketed or distributed by the defendants for the period from January 1, 1954,
to the expiry of the opt-out period as set by the court, as well as restitution
of profits and reimbursement of government expenditure for health-care costs
allegedly caused by the use of tobacco products.

--------------------------------------------------------------------------------

  •   In Bourassa v. Imperial Tobacco Canada Limited, a case filed in June 2010
in the Supreme Court of British Columbia against Canadian and non-Canadian
tobacco-related entities, including RJR Tobacco and one of its affiliates, the
plaintiff, the heir to a deceased smoker, alleging that the deceased was
addicted to and suffered emphysema resulting from the use of tobacco products,
is seeking compensatory and unspecified punitive damages on behalf of a proposed
class comprised of all individuals, including their estates, who were alive on
June 12, 2007, and who have suffered, or who currently suffer from chronic
respiratory diseases, after having smoked a minimum of 25,000 cigarettes
designed, manufactured, imported, marketed, or distributed by the defendants, as
well as disgorgement of revenues earned by the defendants from January 1, 1954,
to the date the claim was filed. RJR Tobacco and its affiliate have filed a
challenge to the jurisdiction of the British Columbia court. The plaintiff filed
a motion for certification in April 2012, and filed affidavits in support in
August 2013.

 

  •   In McDermid v. Imperial Tobacco Canada Limited, a case filed in June 2010
in the Supreme Court of British Columbia against Canadian and non-Canadian
tobacco-related entities, including RJR Tobacco and one of its affiliates, the
plaintiff, an individual smoker, alleging his own addiction and heart disease
resulting from the use of tobacco products, is seeking compensatory and
unspecified punitive damages on behalf of a proposed class comprised of all
individuals, including their estates, who were alive on June 12, 2007, and who
have suffered, or who currently suffer from heart disease, after having smoked a
minimum of 25,000 cigarettes designed, manufactured, imported, marketed, or
distributed by the defendants, as well as disgorgement of revenues earned by the
defendants from January 1, 1954, to the date the claim was filed. RJR Tobacco
and its affiliate have filed a challenge to the jurisdiction of the British
Columbia court.

 

  •   In Jacklin v. Canadian Tobacco Manufacturers’ Council, a case filed in
June 2012 in the Ontario Superior Court of Justice against Canadian and
non-Canadian tobacco-related entities, including RJR Tobacco and one of its
affiliates, the plaintiff, an individual smoker, alleging her own addiction and
chronic obstructive pulmonary disease resulting from the use of tobacco
products, is seeking compensatory and unspecified punitive damages on behalf of
a proposed class comprised of all individuals, including their estates, who were
alive on June 12, 2007, and who have suffered, or who currently suffer from
chronic obstructive pulmonary disease, heart disease, or cancer, after having
smoked a minimum of 25,000 cigarettes designed, manufactured, imported,
marketed, or distributed by the defendants, as well as restitution of profits,
and reimbursement of government expenditure for health-care benefits allegedly
caused by the use of tobacco products.

In each of these seven cases, the plaintiffs allege fraud, fraudulent
concealment, breach of warranty, breach of warranty of merchantability and of
fitness for a particular purpose, failure to warn, design defects, negligence,
breach of a “special duty” to children and adolescents, conspiracy, concert of
action, unjust enrichment, market share liability, joint liability, and
violations of various trade practices and competition statutes. Pursuant to the
terms of the 1999 sale of RJR Tobacco’s international tobacco business, RJR
Tobacco has tendered the defense of these seven actions to JTI. Subject to a
reservation of rights, JTI has assumed the defense of RJR Tobacco and its
current or former affiliates in these actions.

 

  —   State Settlement Agreements—Enforcement and Validity; Adjustments

As of September 17, 2014, there were 30 cases concerning the enforcement,
validity or interpretation of the State Settlement Agreements in which RJR
Tobacco or B&W is a party. This number includes those cases, discussed below,
relating to disputed payments under the State Settlement Agreements.

In April 2005, the Mississippi Attorney General notified B&W of its intent to
seek approximately $3.9 million in additional payments under the Mississippi
Settlement Agreement. The Mississippi Attorney General asserts that B&W failed
to report in its net operating profit or its shipments, cigarettes manufactured
by B&W under contract for Star Tobacco or its parent, Star Scientific, Inc. B&W
advised the State that it did not owe the state any money. In August 2005, the
Mississippi Attorney General filed in the Chancery Court of Jackson County,
Mississippi, a Notice of Violation, Motion to Enforce Settlement Agreement, and
Request for an Accounting by Defendant Brown & Williamson Holdings, Inc.,
formerly known as Brown & Williamson Tobacco Corporation. In this filing,
Mississippi estimated that its damages exceeded $5.0 million. On August 24,
2011, the court entered an order finding in favor of the State on the Star
contract manufacturing issue, that the total amount of the underpayment from B&W
was ap-

--------------------------------------------------------------------------------

proximately $3.8 million and that interest on the underpayment was approximately
$4.3 million. The court also appointed a Special Master to undertake an
accounting of the benefit received by B&W for failure to include its profits
from Star contract manufacturing in its net operating profits reported to the
State. B&W filed a motion to certify the Star contract issue for interlocutory
appeal, pursuant to Rule 54 (b) of the Mississippi Rules of Civil Procedure. On
January 9, 2012, that motion was denied. A report from the Special Master on the
benefit received by B&W was issued on April 30, 2014. A hearing on the Special
Master’s Report and Recommendation was held before the court on July 2, 2014. A
ruling from the court is pending.

In February 2010, the Mississippi Attorney General filed a motion alleging that
RJR Tobacco had improperly failed to report shipments of certain categories of
cigarette volumes, and for certain years had improperly reported its net
operating profit. As a result, the State alleges that settlement payments to it
were improperly reduced. RJR Tobacco disputes these allegations and is
vigorously defending against them. Hearings on these issues were held on
January 24-25, 2012, and May 9, 2012. On May 15, 2012, the court entered an
order finding in favor of RJR Tobacco on the claim related to RJR Tobacco’s
reported net operating profits in the year used as a baseline for future
calculations of the State’s net operating profits payment. The State had sought
$3.8 million in damages for this issue, with an additional $2.7 million in
interest. On June 19, 2012, the court entered an order finding in favor of the
State on the remaining issues, holding that the total amount of the underpayment
was approximately $3.3 million and that interest on the underpayment was also
approximately $3.3 million, though the court also held that this amount should
be offset by additional payments previously made by Lorillard Tobacco Company on
some of these issues. The court further ordered RJR Tobacco to perform an
accounting of its profits and shipments from 1999-2011. On July 10, 2012, RJR
Tobacco filed a petition with the Mississippi Supreme Court requesting leave to
immediately appeal the court’s ordered accounting and its entry of judgment for
the State without first conducting an evidentiary hearing. On August 15, 2012,
the request was denied. An independent accountant acceptable to both the State
and RJR Tobacco was identified and retained. On August 8, 2013, the final report
of the independent accountant was filed with the court. The report generally
found that RJR Tobacco’s accounting and reporting of information in connection
with settlement payment calculations was correct. In some respects, the report
expressly disagreed with findings made earlier by the trial court. On
December 13, 2013, the State of Mississippi filed its report as to additional
damages due it from RJR Tobacco, challenging in various respects the findings
set forth in the final report of the independent accountant and seeking various
changes to the damages calculations. Also on December 13, 2013, RJR Tobacco
filed a motion to finalize remaining damages on third round issues, and/or
reconsider, the June 19, 2012, order requesting that the court implement the
findings of the independent accountant in a final order on the damage issues
and/or to revisit its earlier rulings “in light of the findings and
determinations in the independent accountant’s report.” A hearing on these
motions was held on July 2, 2014. A ruling from the court is pending.

Finally, in connection with the actions brought against RJR Tobacco and B&W, the
court awarded the State attorneys’ fees and expenses in an amount to be
determined. On May 1, 2013, a hearing on attorneys’ fees and expenses was held
before the Special Master appointed by the court. On November 19, 2013, the
Special Master issued a report and recommendations on application for award of
costs and attorneys’ fees. The Special Master ruled that attorneys’ fees are to
be paid with respect to the settlement payment claims against B&W and RJR
Tobacco at 25% of “total amounts” awarded to the State of Mississippi by the
court in its August 24, 2011, ruling. This recommendation would result in an
attorneys’ fee award of approximately $3.7 million, plus 25% of accumulated
interest. On December 13, 2013, the State of Mississippi filed a statement
seeking various clarifications of the Special Master’s ruling. Also on
December 13, 2013, B&W and RJR Tobacco filed their objections to the ruling. A
hearing on these issues was held on July 2, 2014. A ruling from the court is
pending.

In May 2006, the State of Florida filed a motion, in the Circuit Court of the
Fifteenth Judicial Circuit, in and for Palm Beach County, Florida, to enforce
the Florida Settlement Agreement, for an Accounting by Brown & Williamson
Holdings, Inc., and for an Order of Contempt, raising substantially the same
issues as raised by the Mississippi Attorney General and seeking approximately
$12.4 million in additional payments under the Florida Settlement Agreement, as
well as $17.0 million in interest payments. This matter is currently in the
discovery phase.

— NPM Adjustment Claims. The MSA includes an adjustment that potentially reduces
the annual payment obligations of RJR Tobacco and the other PMs. Certain
requirements, collectively referred to as the Adjustment Requirements, must be
satisfied before the NPM Adjustment for a given year is available:

--------------------------------------------------------------------------------

  •   an Independent Auditor must determine that the PMs have experienced a
market share loss beyond a triggering threshold to those manufacturers that do
not participate in the MSA, such non-participating manufacturers, referred to as
NPMs; and

 

  •   in a binding arbitration proceeding, a firm of independent economic
consultants must find that the disadvantages of the MSA were a significant
factor contributing to the loss. This finding is known as a significant factor
determination.

When the Adjustment Requirements are satisfied, the MSA provides that the NPM
Adjustment applies to reduce the annual payment obligation of the PMs. However,
an individual settling state may avoid its share of the NPM Adjustment if it had
in place and diligently enforced during the entirety of the relevant year a
“Qualifying Statute” that imposes escrow obligations on NPMs that are comparable
to what the NPMs would have owed if they had joined the MSA. In such event, the
state’s share of the NPM Adjustment is reallocated to other settling states, if
any, that did not have in place and diligently enforce a Qualifying Statute.

— NPM Adjustment Claim for 2003. For 2003, the Adjustment Requirements were
satisfied. As a result, in April 2006, RJR Tobacco placed approximately
$647 million of its MSA payment into a disputed payments account, in accordance
with a procedure established by the MSA. That amount represented RJR Tobacco’s
share of the 2003 NPM Adjustment as calculated by the Independent Auditor. In
March 2007, the Independent Auditor issued revised calculations that reduced RJR
Tobacco’s share of the NPM Adjustment for 2003 to approximately $615 million. As
a result, in April 2007, RJR Tobacco instructed the Independent Auditor to
release to the settling states approximately $32 million from the disputed
payments account.

Following RJR Tobacco’s payment of a portion of its 2006 MSA payment into the
disputed payments account, 37 of the settling states filed legal proceedings in
their respective MSA courts seeking declaratory orders that they diligently
enforced their Qualifying Statutes during 2003 and/or orders compelling RJR
Tobacco and the other PMs that placed money in the disputed payments account to
pay the disputed amounts to the settling states. In response, RJR Tobacco and
other PMs, pursuant to the MSA’s arbitration provisions, moved to compel
arbitration of the parties’ dispute concerning the 2003 NPM Adjustment,
including the states’ diligent enforcement claims, before an arbitration panel
consisting of three retired federal court judges. The settling states opposed
these motions, arguing, among other things, that the issue of diligent
enforcement must be resolved by MSA courts in each of the 52 settling states and
territories.

Forty-seven of the 48 courts that addressed the question whether the dispute
concerning the 2003 NPM Adjustment is arbitrable ruled that arbitration is
required under the MSA. The Montana Supreme Court ruled that the State of
Montana did not agree to arbitrate the question of whether it diligently
enforced a Qualifying Statute. Subsequently, Montana and the PMs reached an
agreement whereby the PMs agreed not to contest Montana’s claim that it
diligently enforced the Qualifying Statute during 2003.

In January 2009, RJR Tobacco and certain other PMs entered into an Agreement
Regarding Arbitration, referred to as the Arbitration Agreement, with 45 of the
MSA settling states (representing approximately 90% of the allocable share of
the settling states) pursuant to which those states agreed to participate in a
multistate arbitration of issues related to the 2003 NPM Adjustment. Under the
Arbitration Agreement, the signing states had their ultimate liability, if any,
with respect to the 2003 NPM Adjustment reduced by 20%, and RJR Tobacco and the
other PMs that placed their share of the disputed 2005 NPM Adjustment (discussed
below) into the disputed payments account, without releasing or waiving any
claims, authorized the release of those funds to the settling states.

The arbitration panel contemplated by the MSA and the Arbitration Agreement,
referred to as the Arbitration Panel, was selected, and proceedings before the
panel with respect to the 2003 NPM Adjustment claim began in July 2010.
Following the completion of document and deposition discovery, on November 3,
2011, RJR Tobacco and the other PMs advised the Arbitration Panel that they were
not contesting the “diligent enforcement” of 12 states and the four U.S.
territories with a combined allocable share of less than 14%. The “diligent
enforcement” of the remaining 33 settling states, the District of Columbia and
Puerto Rico was contested and became the subject of further proceedings. A
common issues hearing was held in April 2012, and state specific evidentiary
hearings with respect to the contested states were initiated.

--------------------------------------------------------------------------------

As a result of the partial settlement of certain NPM Adjustment claims, as
described in more detail below, as well as the earlier decisions not to contest
the diligent enforcement of 13 states, two of which are participants in the
partial settlement, and the four U.S. territories, only 15 contested settling
states required state specific diligent enforcement rulings. State specific
evidentiary hearings were completed as of the end of May 2013.

On September 11, 2013, the Arbitration Panel issued rulings with respect to the
15 remaining contested states. The Arbitration Panel ruled that six states
(representing approximately 14.68% allocable share) – Indiana, Kentucky,
Maryland, Missouri, New Mexico and Pennsylvania – had not diligently enforced
their Qualifying Statutes in 2003. At that time, RJR Tobacco estimated that as a
result of these rulings, it was entitled to the maximum remaining amount with
respect to its 2003 NPM Adjustment claim – approximately $266 million, plus
interest and earnings. All six states that were found “non-diligent” by the
Arbitration Panel filed motions to vacate and/or modify the diligent enforcement
rulings on the 2003 NPM Adjustment claim. To date, only the state courts in
Pennsylvania and Missouri have entered orders affecting the settlement payment
calculations. Both courts modified the judgment reduction method that had been
adopted by the Arbitration Panel, the effect of which was to reduce RJR
Tobacco’s recovery from these two states by a total of $75 million. Similar
motions filed by Maryland were denied by its state court. The orders in
Pennsylvania and Missouri are being appealed.

Separately, two of the states found to be “non-diligent”, Kentucky and Indiana,
have joined the Term Sheet on financial terms more favorable to the industry
than those received by the original signatory states. That brings the total
number of jurisdictions that have joined the Term Sheet to 24, representing
49.87% allocable share. As a result of these two states joining the Term Sheet,
RJR Tobacco now estimates that the maximum remaining amount of its claim with
respect to the 2003 NPM Adjustment claim is $197 million, plus interest and
earnings, and before reduction for the impact of the Pennsylvania and Missouri
court orders.

Until such time as the various remaining state motions challenging the rulings
of the Arbitration Panel have been resolved, including any necessary appeals,
uncertainty exists as to the timing, process and amount of RJR Tobacco’s
ultimate recovery with respect to its remaining share of the 2003 NPM Adjustment
claim.

— NPM Adjustment Claims for 2004-2013. From 2006 to 2008, proceedings (including
significant factor arbitrations before an independent economic consulting firm)
were initiated with respect to the NPM Adjustment for 2004, 2005 and 2006.
Ultimately, the Adjustment Requirements were satisfied with respect to each of
these NPM Adjustments.

In June 2009, RJR Tobacco, certain other PMs and the settling states entered
into an agreement with respect to the 2007, 2008 and 2009 significant factor
determinations. This agreement provided that the settling states would not
contest that the disadvantages of the MSA were “a significant factor
contributing to” the market share loss experienced by the PMs in those years.
The stipulation pertaining to each of the three years covered by the agreement
became effective in February of the year a final determination by the firm of
independent economic consultants would otherwise have been expected (2010, 2011
and 2012, respectively), if the issue had been arbitrated on the merits. RJR
Tobacco and the PMs paid a total amount of $5 million into the States’
Antitrust/Consumer Protection Tobacco Enforcement Fund established under Section
VIII(c) of the MSA for each year covered by that agreement, with RJR Tobacco
paying approximately 47% of such amounts. On January 9, 2012, a new agreement
with respect to significant factor determinations pertaining to 2010, 2011 and
2012 was entered into on terms essentially identical to the earlier agreement.

Based on the payment calculations of the Independent Auditor and the agreement
described above regarding the 2007, 2008 and 2009 significant factor
determinations, the Adjustment Requirements have been satisfied with respect to
the NPM Adjustments for 2007, 2008 and 2009. In addition, based on the payment
calculations of the Independent Auditor and the agreement described above
regarding the 2010, 2011 and 2012 significant factor determinations, the
Adjustment Requirements have been satisfied with respect to the NPM Adjustment
for 2010 and 2011.

--------------------------------------------------------------------------------

The approximate maximum principal amounts of RJR Tobacco’s share of the disputed
NPM Adjustments for the years 2004 through 2011, as currently calculated by the
Independent Auditor, are as follows (the amounts shown below do not include the
interest or earnings thereon to which RJR Tobacco believes it would be entitled
under the MSA and do not reflect any reduction as a result of the Term Sheet
described below):

 

Year for which NPM Adjustment calculated

     2004         2005         2006         2007         2008         2009      
  2010         2011   

Year in which deduction for NPM Adjustment was taken

     2007         2008         2009         2010         2011         2012      
  2013         2014   

RJR Tobacco’s approximate share of disputed NPM Adjustment (millions)

   $ 562       $ 445       $ 419       $ 435       $ 468       $ 472       $ 470
      $ 421   

In addition to the NPM Adjustment claims described above, RJR Tobacco has filed
dispute notices with respect to its 2012 and 2013 annual MSA payments relating
to the NPM Adjustments potentially applicable to those years. The amount at
issue for those two years is approximately $880 million in the aggregate.

Preliminary discussions are currently underway with the jurisdictions that have
not joined the Term Sheet for the partial settlement of certain NPM Adjustment
claims, described below, to initiate arbitration proceedings with respect to the
2004 NPM Adjustment.

Due to the uncertainty over the final resolution of the 2004-2013 NPM Adjustment
claims asserted by RJR Tobacco, no assurances can be made related to the
amounts, if any, that will be realized or any amounts (including interest) that
will be owed, except as described below related to the partial settlement of
certain NPM Adjustment claims.

— Partial Settlement of Certain NPM Adjustment Claims. On November 14, 2012, RJR
Tobacco, certain other PMs and certain settling states entered into a Term Sheet
that set forth terms on which accrued and potential NPM Adjustment claims for
2003 through 2014 could be resolved. The Term Sheet also set forth a
restructured NPM Adjustment process to be applied on a going-forward basis,
starting with the 2013 volume year. The Term Sheet was provided to all of the
MSA settling states for their review and consideration. A total of 17 states,
the District of Columbia and Puerto Rico, together representing just under 42%
allocable share, determined to join the proposed settlement. RJR Tobacco and the
other PMs indicated that they were prepared to go forward with the proposed
settlement with that level of jurisdictional participation.

The Term Sheet provided that the Arbitration Panel in place to deal with the
2003 NPM Adjustment (and other NPM Adjustment-related matters) must review the
proposed settlement and enter an appropriate order to confirm for the
Independent Auditor that it should implement, as necessary, the terms of the
settlement agreement.

On March 12, 2013, the Arbitration Panel entered a Stipulated Partial Settlement
and Award, referred to as the Award, reflecting the financial terms of the Term
Sheet. On March 29, 2013, the Independent Auditor issued a notice indicating
that it intended to implement the financial provisions of the Term Sheet, and
also issued various revised payment calculations pertaining to payment years
2009 through 2012 and final calculations pertaining to payment year 2013 that
reflected implementation of the financial provisions of the Term Sheet.

On April 12, 2013, Oklahoma joined the Term Sheet, bringing to 20 the total
number of jurisdictions that have joined the settlement, representing
approximately 43% allocable share, and the Independent Auditor issued revised
payment calculations reflecting the financial impact of Oklahoma’s decision to
join the settlement. Subsequently, on May 24, 2013, Connecticut and South
Carolina also joined the Term Sheet bringing to 22 the total number of
jurisdictions that have joined the settlement, representing approximately 46%
allocable share. Efforts by two states, Colorado and Ohio, to obtain injunctions
to prevent implementation of the Award were unsuccessful.

On June 10, 2014, Kentucky, and on June 26, 2014, Indiana, joined the Term
Sheet, bringing to 24 the total number of jurisdictions that have joined the
settlement, representing approximately 49.87% allocable share. These states,
both of which were among the states found “non-diligent” by the Arbitration
Panel, joined the Term Sheet on financial terms more favorable to the industry
than those received by the original signatory states.

--------------------------------------------------------------------------------

As of September 17, 2014, 10 non-settling states have motions pending, in their
respective MSA courts, to vacate and/or modify the Award. The motions filed by
Idaho and Colorado have been denied.

— Other NPM Matters. Separately, on August 19, 2011, Idaho sent a letter on
behalf of itself and 31 other states, stating their intent to initiate
arbitration with respect to whether amounts used to measure the domestic
cigarette market and to calculate PM payment obligations under the MSA should be
the adjusted gross or the net number of cigarettes on which federal excise tax
(including arbitrios de cigarillos) is paid. The parties also agreed to
arbitrate the Independent Auditor’s calculation of the volume adjustment with
respect to the treatment of “roll your own,” referred to as RYO, tobacco. On
January 21, 2013, the panel ruled that adjusted gross figures should be used in
payment calculations and that, in the calculation of the volume adjustment, the
Independent Auditor should use 0.0325 ounces of RYO tobacco to be the equivalent
of one cigarette.

 

  —   Antitrust Case

A number of tobacco wholesalers and consumers have sued U.S. cigarette
manufacturers, including RJR Tobacco and B&W, in federal and state courts,
alleging that cigarette manufacturers combined and conspired to set the price of
cigarettes in violation of antitrust statutes and various state unfair business
practices statutes. In these cases, the plaintiffs asked the court to certify
the lawsuits as class actions on behalf of other persons who purchased
cigarettes directly or indirectly from one or more of the defendants. As of
September 17, 2014, all of the federal and state court cases on behalf of
indirect purchasers had been dismissed.

In Smith v. Philip Morris Cos., Inc., a case filed in February 2000, and pending
in District Court, Seward County, Kansas, the court granted class certification
in November 2001, in an action brought against the major U.S. cigarette
manufacturers, including RJR Tobacco and B&W, and the parent companies of the
major U.S. cigarette manufacturers, including RJR, seeking to recover an
unspecified amount in actual and punitive damages. The plaintiffs allege that
the defendants participated in a conspiracy to fix or maintain the price of
cigarettes sold in the United States. In an opinion dated March 23, 2012, the
court granted summary judgment in favor of RJR Tobacco and B&W on the
plaintiffs’ claims. On July 18, 2014, the Court of Appeals of the State of
Kansas affirmed the grant of summary judgment. On August 18, 2014, the
plaintiffs filed a petition for review with the Supreme Court of the State of
Kansas.

 

  —   Other Litigation and Developments

JTI Claims for Indemnification. By purchase agreement dated March 9, 1999,
amended and restated as of May 11, 1999, referred to as the 1999 Purchase
Agreement, RJR and RJR Tobacco sold the international tobacco business to JTI.
Under the 1999 Purchase Agreement, RJR and RJR Tobacco retained certain
liabilities relating to the international tobacco business sold to JTI. Under
its reading of the indemnification provisions of the 1999 Purchase Agreement,
JTI has requested indemnification for damages allegedly arising out of these
retained liabilities. As previously reported, a number of the indemnification
claims between the parties relating to the activities of Northern Brands in
Canada have been resolved. The other matters for which JTI has requested
indemnification for damages under the indemnification provisions of the 1999
Purchase Agreement are described below:

 

  •   In a letter dated March 31, 2006, counsel for JTI stated that JTI would be
seeking indemnification under the 1999 Purchase Agreement for any damages it may
incur or may have incurred arising out of a Southern District of New York grand
jury investigation, a now-terminated Eastern District of North Carolina grand
jury investigation, and various actions filed by the European Community and
others in the U.S. District Court for the Eastern District of New York, referred
to as the EDNY, against RJR Tobacco and certain of its affiliates on November 3,
2000, August 6, 2001, and (as discussed in greater detail below) October 30,
2002, and against JTI on January 11, 2002.

 

  •  

JTI also has sought indemnification relating to a Statement of Claim filed on
April 23, 2010, against JTI Macdonald Corp., referred to as JTI-MC, by the
Ontario Flue-Cured Tobacco Growers’ Marketing Board, referred to as the Board,
Andy J. Jacko, Brian Baswick, Ron Kichler, and Aprad Dobrenty, proceeding on
their own behalf and on behalf of a putative class of Ontario tobacco producers
that sold tobacco to JTI-MC during the period between January 1, 1986, and
December 31, 1996, referred to as the Class Period, through the Board pursuant
to certain agreements. The Statement of Claim seeks recovery for damages
allegedly incurred by the

--------------------------------------------------------------------------------

 

class representatives and the putative class for tobacco sales during the Class
Period made at the contract price for duty free or export cigarettes with
respect to cigarettes that, rather than being sold duty free or for export,
purportedly were sold in Canada, which allegedly breached one or more of a
series of contracts dated between June 4, 1986, and July 3, 1996. A motion to
dismiss on the basis of statute of limitations was denied. An application
requesting leave to appeal that decision has been filed.

 

  •   Finally, JTI has advised RJR and RJR Tobacco of its view that, under the
terms of the 1999 Purchase Agreement, RJR and RJR Tobacco are liable for a
roughly $1.7 million judgment entered in 1998, plus interest and costs, in an
action filed in Brazil by Lutz Hanneman, a former employee of a former RJR
Tobacco subsidiary. RJR and RJR Tobacco deny that they are liable for this
judgment under the terms of the 1999 Purchase Agreement.

Although RJR and RJR Tobacco recognize that, under certain circumstances, they
may have these and other unresolved indemnification obligations to JTI under the
1999 Purchase Agreement, RJR and RJR Tobacco disagree with JTI as to (1) what
circumstances relating to any such matters may give rise to indemnification
obligations by RJR and RJR Tobacco, and (2) the nature and extent of any such
obligation. RJR and RJR Tobacco have conveyed their position to JTI, and the
parties have agreed to resolve their differences at a later time.

— European Community. On October 30, 2002, the European Community and ten of its
member states filed a complaint in the EDNY against RJR, RJR Tobacco and several
currently and formerly related companies. The complaint contains many of the
same or similar allegations found in an earlier complaint, now dismissed, filed
in August 2001 and also alleges that the defendants, together with certain
identified and unidentified persons, engaged in money laundering and other
conduct violating civil RICO and a variety of common laws. The complaint also
alleges that the defendants manufactured cigarettes that were eventually sold in
Iraq in violation of U.S. sanctions. The plaintiffs seek compensatory, punitive
and treble damages among other types of relief. This matter had been stayed and
largely inactive until November 24, 2009, when, with the court’s permission, the
European Community and member states filed and served a second amended
complaint. The second amended complaint added 16 member states as plaintiffs and
RAI, RJR Tobacco and R. J. Reynolds Global Products Inc., referred to as GPI, as
defendants. The allegations contained in the second amended complaint are in
most respects either identical or similar to those found in the prior complaint,
but now add new allegations primarily regarding the activities of RAI, RJR
Tobacco and GPI following the B&W business combination. Pursuant to a
stipulation and order, the defendants filed a motion to dismiss the plaintiffs’
second amended complaint on February 15, 2010. Ruling on part of the defendants’
motion to dismiss, on March 8, 2011, the court dismissed the plaintiffs’ RICO
claims, and reserved decision as to dismissal of the plaintiffs’ state-law
claims. Thereafter, on May 13, 2011, the court granted the remaining portion of
the defendants’ motion and dismissed the plaintiffs’ state-law claims based on
the court’s lack of subject matter jurisdiction. On May 16, 2011, the clerk of
court entered a judgment dismissing the action in its entirety. On June 10,
2011, the plaintiffs filed a notice of appeal with the U.S. Court of Appeals for
the Second Circuit, appealing from the May 16, 2011, judgment, as well as the
March 8, 2011, and May 13, 2011, orders that respectively resulted in the
dismissal of their RICO and state-law claims. Oral argument occurred on
February 24, 2012.

On April 23, 2014, a three judge panel of the Second Circuit issued a decision
on the appeal, and on April 29, 2014, a corrected decision was issued. The
Second Circuit concluded that: (1) as pled, the RICO claims are within the scope
of the RICO statute, and (2) the federal court does have subject matter
jurisdiction over the state-law claims. Accordingly, the three judge panel of
the Second Circuit decided that the judgment of the district court should be
vacated, and the case remanded to the district court for further proceedings. On
May 7, 2014, the defendants filed in the Second Circuit a petition for panel
rehearing, or rehearing en banc, regarding the plaintiffs’ RICO claims. On
August 20, 2014, the three judge panel denied panel rehearing and issued an
amended opinion which holds that a civil RICO cause of action extends to
extraterritorial injuries. The amended opinion adhears to the three judge
panel’s April 23, 2014 ruling that the judgment of the district court should be
vacated, and the case remanded to the district court for further proceedings.
The parties are still awaiting a decision on the portions of the May 7, 2014
petition seeking rehearing en banc. If the Second Circuit denies further review,
it is expected that after remand the district court will consider the remaining
grounds for dismissal contained in the defendants’ February 15, 2010 motion to
dismiss which have not previously been addressed by the district court or the
Second Circuit.

--------------------------------------------------------------------------------

— FDA Litigation. On February 25, 2011, RJR Tobacco, Lorillard, Inc., and
Lorillard Tobacco Company jointly filed a lawsuit, Lorillard, Inc. v. U.S. Food
and Drug Administration, in the U.S. District Court for the District of
Columbia, challenging the composition of TPSAC which had been established by the
FDA under the FDA Tobacco Act. The complaint alleges that certain members of the
TPSAC and certain members of its Constituents Subcommittee have financial and
appearance conflicts of interest that are disqualifying under federal ethics law
and regulations, and that the TPSAC is not “fairly balanced,” as required by the
Federal Advisory Committee Act, referred to as FACA. In March 2011, the
plaintiffs filed an amended complaint, which added an additional claim, based on
a nonpublic meeting of members of the TPSAC, in violation of the FACA. The court
granted the plaintiffs’ unopposed motion to file a second amended complaint
adding a count addressing the FDA’s refusal to produce all documents generated
by the TPSAC and its subcommittee in preparation of the menthol report. On
August 1, 2012, the court denied the FDA’s motion to dismiss. The FDA filed its
answer to the complaint on October 12, 2012. The parties participated in a
status conference on April 22, 2013, with Lorillard and RJR Tobacco filing an
amended complaint the same day. Briefing for summary judgment motions was
completed on September 20, 2013. On July 21, 2014, the court granted the
plaintiffs’ summary judgment motions finding that three members of the TPSAC
Committee had impermissible conflicts of interest. As relief, the court ordered
the FDA to reconstitute the committee in conformance with the law and enjoined
the agency from using or relying on the TPSAC’s 2011 Menthol Report. The FDA has
the right to appeal to the U.S. Court of Appeals for the District of Columbia.

— Other Matters. In Richard Villarreal v. R. J. Reynolds Tobacco Co., a case
filed June 6, 2012, the plaintiff filed a collective action complaint against R.
J. Reynolds Tobacco Co., Pinstripe, Inc., and CareerBuilder, LLC, in the U.S.
District Court, Northern District of Georgia. The complaint alleges unlawful
discrimination with respect to the hiring of individuals to fill entry-level
regional sales positions in violation of the Age Discrimination in Employment
Act (29 U.S.C. §621, et seq.). Although the complaint is currently a single
plaintiff case, the complaint seeks collective/class-action status. RJR
Tobacco’s and Pinstripe’s motion for partial dismissal was granted on March 6,
2013, thereby eliminating the plaintiff’s disparate impact claim and limiting
the relevant time period for both the plaintiff’s claims and potential class
claims. RJR Tobacco and Pinstripe filed answers to the remaining disparate
treatment claim on March 20, 2013. Defendant CareerBuilder was dismissed with
prejudice on September 25, 2012. Discovery is currently proceeding. The
plaintiff’s Fed.R.Civ.P. 54(b) motion to certify for immediate appeal the trial
court’s prior dismissal of plaintiff’s disparate impact and time-barred claims
was granted on May 21, 2014. Final judgment as to certain claims (those claims
based on a disparate impact theory of relief and claims challenging hiring
decisions made before November 19, 2009) was entered on May 21, 2014. The
plaintiff filed a notice of appeal of the final judgment on June 18, 2014. The
defendants filed a motion to dismiss the plaintiff’s appeal on July 3, 2014.

 

  —   Smokeless Tobacco Litigation

As of September 17, 2014, American Snuff Co. was a defendant in six actions
brought by individual plaintiffs in West Virginia state court seeking damages in
connection with personal injuries allegedly sustained as a result of the usage
of American Snuff Co.’s smokeless tobacco products. These actions are pending
before the same West Virginia court as the 564 consolidated individual smoker
cases against RJR Tobacco, B&W, as RJR Tobacco’s indemnitee, or both. Pursuant
to the court’s December 3, 2001, order, the smokeless tobacco claims and
defendants remain severed.

Pursuant to a second amended complaint filed in September 2006, American Snuff
Co. is a defendant in Vassallo v. United States Tobacco Company, pending in the
Eleventh Circuit Court in Miami-Dade County, Florida. The individual plaintiff
alleges that he sustained personal injuries, including addiction and cancer, as
a result of his use of smokeless tobacco products, allegedly including products
manufactured by American Snuff Co. The plaintiff seeks unspecified compensatory
and consequential damages in an amount greater than $15,000. There is no
punitive damages demand in this case, though the plaintiff retains the right to
seek leave of court to add such a demand later. Discovery is underway. Pursuant
to the court’s scheduling order, trial is anticipated to begin in the fourth
quarter of 2015.

--------------------------------------------------------------------------------

  —   ERISA Litigation

In May 2002, in Tatum v. The R.J.R. Pension Investment Committee of the R. J.
Reynolds Tobacco Company Capital Investment Plan, an employee of RJR Tobacco
filed a class-action suit in the U.S. District Court for the Middle District of
North Carolina, alleging that the defendants, RJR, RJR Tobacco, the RJR Employee
Benefits Committee and the RJR Pension Investment Committee, violated the
Employee Retirement Income Security Act of 1974, referred to as ERISA. The
actions about which the plaintiff complains stem from a decision made in 1999 by
RJR Nabisco Holdings Corp., subsequently renamed Nabisco Group Holdings Corp.,
referred to as NGH, to spin off RJR, thereby separating NGH’s tobacco business
and food business. As part of the spin-off, the 401(k) plan for the previously
related entities had to be divided into two separate plans for the now separate
tobacco and food businesses. The plaintiff contends that the defendants breached
their fiduciary duties to participants of the RJR 401(k) plan when the
defendants removed the stock funds of the companies involved in the food
business, NGH and Nabisco Holdings Corp., referred to as Nabisco, as investment
options from the RJR 401(k) plan approximately six months after the spin-off.
The plaintiff asserts that a November 1999 amendment (the “1999 Amendment”) that
eliminated the NGH and Nabisco funds from the RJR 401(k) plan on January 31,
2000, contained sufficient discretion for the defendants to have retained the
NGH and Nabisco funds after January 31, 2000, and that the failure to exercise
such discretion was a breach of fiduciary duty. In his complaint, the plaintiff
requests, among other things, that the court require the defendants to pay as
damages to the RJR 401(k) plan an amount equal to the subsequent appreciation
that was purportedly lost as a result of the liquidation of the NGH and Nabisco
funds.

In July 2002, the defendants filed a motion to dismiss, which the court granted
in December 2003. In December 2004, the U.S. Court of Appeals for the Fourth
Circuit reversed the dismissal of the complaint, holding that the 1999 Amendment
did contain sufficient discretion for the defendants to have retained the NGH
and Nabisco funds as of February 1, 2000, and remanded the case for further
proceedings. The court granted the plaintiff leave to file an amended complaint
and denied all pending motions as moot. In April 2007, the defendants moved to
dismiss the amended complaint. The court granted the motion in part and denied
it in part, dismissing all claims against the RJR Employee Benefits Committee
and the RJR Pension Investment Committee. The remaining defendants, RJR and RJR
Tobacco, filed their answer and affirmative defenses in June 2007. The plaintiff
filed a motion for class certification, which the court granted in
September 2008. The district court ordered mediation, but no resolution of the
case was reached. In September 2008, each of the plaintiffs and the defendants
filed motions for summary judgment, and in January 2009, the defendants filed a
motion to decertify the class. A second mediation occurred in June 2009, but
again no resolution of the case was reached. The district court overruled the
motions for summary judgment and the motion to decertify the class.

A non-jury trial was held in January and February 2010. During closing
arguments, the plaintiff argued for the first time that certain facts arising at
trial showed that the 1999 Amendment was not validly adopted, and then moved to
amend his complaint to conform to this evidence at trial. On June 1, 2011, the
court granted the plaintiff’s motion to amend his complaint and found that the
1999 Amendment was invalid.

The parties filed their findings of fact and conclusions of law on February 4,
2011. On February 25, 2013, the district court dismissed the case with
prejudice. On March 8, 2013, the plaintiffs filed a notice of appeal. Oral
argument occurred on March 18, 2014.

On August 4, 2014, a divided panel reversed the district court’s judgment in
part. Judge Motz, writing for the majority and joined by Judge Diaz, held that
the district court applied the wrong standard when it held that the defendants
did not cause any loss to the plan. Judge Wilkinson dissented, arguing that the
district court applied the correct causation standard. The defendants petitioned
the court for rehearing en banc on August 18, 2014, which the court denied on
September 2, 2014. On September 8, 2014, the defendants filed a motion to stay
the court’s mandate pending the filing of a petition for certiorari with the
U.S. Supreme Court. That motion is currently pending.

 

  —   Environmental Matters

RAI and its subsidiaries are subject to federal, state and local environmental
laws and regulations concerning the discharge, storage, handling and disposal of
hazardous or toxic substances. Such laws and regulations provide for significant
fines, penalties and liabilities, sometimes without regard to whether the owner
or operator of the property knew of, or was responsible for, the release or
presence of hazardous or toxic substances. In addition, third parties

--------------------------------------------------------------------------------

may make claims against owners or operators of properties for personal injuries
and property damage associated with releases of hazardous or toxic substances.
In the past, RJR Tobacco has been named a potentially responsible party with
third parties under the Comprehensive Environmental Response, Compensation and
Liability Act with respect to several superfund sites. RAI and its subsidiaries
are not aware of any current environmental matters that are expected to have a
material adverse effect on the business, results of operations or financial
position of RAI or its subsidiaries.

RAI and its operating subsidiaries believe that climate change is an
environmental issue primarily driven by carbon dioxide emissions from the use of
energy. RAI’s operating subsidiaries are working to reduce carbon dioxide
emissions by minimizing the use of energy where cost effective, minimizing waste
to landfills and increasing recycling. Climate change is not viewed by RAI’s
operating subsidiaries as a significant direct economic risk to their
businesses, but rather an indirect risk involving the potential for a
longer-term general increase in the cost of doing business. Regulatory changes
are difficult to predict, but the current regulatory risks to the business of
RAI’s operating subsidiaries with respect to climate change are relatively low.
Financial impacts will be driven more by the cost of natural gas and
electricity. Efforts are made to anticipate the effect of increases in fuel
costs directly impacting RAI’s operating subsidiaries by evaluating natural gas
usage and market conditions. Occasionally forward contracts are purchased,
limited to a two-year period, for natural gas. In addition, RAI’s operating
subsidiaries are continually evaluating energy conservation measures and energy
efficient equipment to mitigate impacts of increases in energy costs.

Regulations promulgated by the EPA and other governmental agencies under various
statutes have resulted in, and likely will continue to result in, substantial
expenditures for pollution control, waste treatment, facility modification and
similar activities. RAI and its subsidiaries are engaged in a continuing program
to comply with federal, state and local environmental laws and regulations, and
dependent upon the probability of occurrence and reasonable estimation of cost,
accrue or disclose any material liability. Although it is difficult to
reasonably estimate the portion of capital expenditures or other costs
attributable to compliance with environmental laws and regulations, RAI does not
expect such expenditures or other costs to have a material adverse effect on the
business, results of operations, cash flows or financial position of RAI or its
subsidiaries.

Shareholder Cases

Delaware. In the third quarter of 2014, 11 alleged class action lawsuits were
filed in the Chancery Court of the State of Delaware regarding RAI’s proposed
acquisition of Lorillard, Inc. The plaintiffs allege that Lorillard’s Board of
Directors breached its fiduciary duties to Lorillard’s shareholders by approving
the transaction with RAI and that RAI and BAT allegedly aided and abetted the
breach of fiduciary duties. Plaintiffs seek to enjoin the transaction with
Lorillard and seek the recovery of unspecified money damages. Plaintiffs’counsel
has indicated that, once RAI’s proxy statement is filed in connection with the
proposed acquisition, they will likely file one or more amended complaints.
Plaintiffs’ counsel in several of the cases has moved to consolidate all 11
actions.

North Carolina. In the third quarter of 2014, Corwin v. British American Tobacco
PLC, an alleged class action lawsuit, was filed in the Superior Court, Guilford
County, North Carolina against RAI and its Board of Directors. The plaintiff
alleges that RAI’s Board of Directors breached its fiduciary duties to RAI’s
shareholders by agreeing to the proposed sale of shares of RAI common stock to
BAT in connection with the proposed Lorillard acquisition, and to a proposed
technology sharing agreement with BAT. The plaintiff also alleges that BAT
breached its fiduciary duties to RAI’s other shareholders. The plaintiff seeks
to enjoin the transaction and seeks the recovery of unspecified money damages.
The plaintiff’s counsel has indicated that, once RAI’s proxy statement is filed
in connection with the proposed acquisition, they will likely file an amended
complaint.

 

  —   Other Contingencies

In connection with the sale of the international tobacco business to JTI,
pursuant to the 1999 Purchase Agreement, RJR and RJR Tobacco agreed to indemnify
JTI against:

 

  •   any liabilities, costs and expenses arising out of the imposition or
assessment of any tax with respect to the international tobacco business arising
prior to the sale, other than as reflected on the closing balance sheet;

--------------------------------------------------------------------------------

  •   any liabilities, costs and expenses that JTI or any of its affiliates,
including the acquired entities, may incur after the sale with respect to any of
RJR’s or RJR Tobacco’s employee benefit and welfare plans; and

 

  •   any liabilities, costs and expenses incurred by JTI or any of its
affiliates arising out of certain activities of Northern Brands.

As described above in “— Litigation Affecting the Cigarette Industry — Other
Litigation and Developments — JTI Claims for Indemnification,” RJR Tobacco has
received claims for indemnification from JTI, and several of these have been
resolved. Although RJR and RJR Tobacco recognize that, under certain
circumstances, they may have other unresolved indemnification obligations to JTI
under the 1999 Purchase Agreement, RJR and RJR Tobacco disagree what
circumstances described in such claims give rise to any indemnification
obligations by RJR and RJR Tobacco and the nature and extent of any such
obligation. RJR and RJR Tobacco have conveyed their position to JTI, and the
parties have agreed to resolve their differences at a later date.

RJR Tobacco, SFNTC and American Snuff Co. have entered into agreements to
indemnify certain distributors and retailers from liability and related defense
costs arising out of the sale or distribution of their products. Additionally,
SFNTC has entered into an agreement to indemnify a supplier from liability and
related defense costs arising out of the sale or use of SFNTC’s products. The
cost has been, and is expected to be, insignificant. RJR Tobacco, SFNTC and
American Snuff Co. believe that the indemnified claims are substantially similar
in nature and extent to the claims that they are already exposed to by virtue of
their having manufactured those products.

Except as otherwise noted above, RAI is not able to estimate the maximum
potential amount of future payments, if any, related to these indemnification
obligations.

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Schedule 3.12

Subsidiaries

Part A: Material Subsidiaries

 

Name of Subsidiary

  

State of

Incorporation/Formation

  

Borrower

Direct/Indirect

Ownership Interest

  

Direct Owner

1. American Snuff Company, LLC

   Delaware    100%    Conwood Holdings, Inc.

2. R. J. Reynolds Tobacco Company

   North Carolina    100%    R.J. Reynolds Tobacco Holdings, Inc.

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Part B: Subsidiary Guarantors

 

Name of Subsidiary

  

State of

Incorporation/Formation

  

Borrower

Direct/Indirect

Ownership Interest

  

Direct Owner

1. American Snuff Company, LLC

   Delaware    100%    Conwood Holdings, Inc.

2. Conwood Holdings, Inc.

   Delaware    100%    Reynolds American Inc.

3. RAI Services Company

   North Carolina    100%    Reynolds American Inc.

4. Reynolds Finance Company

   Delaware    100%    R. J. Reynolds Tobacco Company

5. Reynolds Innovations Inc.

   North Carolina    100%    Reynolds Finance Company

6. R. J. Reynolds Global Products, Inc.

   Delaware    100%    R.J. Reynolds Tobacco Holdings, Inc.

7. R.J. Reynolds Tobacco Co.

   Delaware    100%    R. J. Reynolds Tobacco Company

8. R. J. Reynolds Tobacco Company

   North Carolina    100%    R.J. Reynolds Tobacco Holdings, Inc.

9. R.J. Reynolds Tobacco Holdings, Inc.

   Delaware    100%    Reynolds American Inc.

10. Rosswil LLC

   Delaware    100%    Conwood Holdings, Inc.

11. Santa Fe Natural Tobacco Company, Inc.

   New Mexico    100%    Reynolds American Inc.

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Part C: Non-Guarantor Subsidiaries

 

Name of Subsidiary

  

Jurisdiction of

Incorporation/Formation

  

Borrower

Direct/Indirect

Ownership Interest

  

Direct Owner

KBP Acquisition, LLC

   North Carolina    100%    Reynolds American Inc.

Niconovum AB

   Sweden    100%    Reynolds International Holdings B.V.

Niconovum USA, Inc.

   North Carolina    100%    Reynolds American Inc.

Northern Brands International, Inc.

   Delaware    100%    R.J. Reynolds Tobacco Holdings, Inc.

RAI International, Inc.

   Delaware    100%    Reynolds American Inc.

Reynolds Asia-Pacific Limited

   Hong Kong    100%    RAI International, Inc.

Reynolds International Holdings B.V.

   Netherlands    100%    R.J. Reynolds Tobacco C.V.

Reynolds Technologies, Inc.

   Delaware    100%    R. J. Reynolds Tobacco Company

R.J. Reynolds Tobacco B.V.

   Netherlands    100%    R.J. Reynolds Tobacco C.V.

R.J. Reynolds Tobacco (CI), Co.

   Cayman Islands    100%    R.J. Reynolds Tobacco C.V.

R.J. Reynolds Tobacco C.V.

   Netherlands    100%    R. J. Reynolds Global Products, Inc.

R. J. Reynolds Tobacco International, Inc.

   Delaware    100%    R.J. Reynolds Tobacco Holdings, Inc.

RJR Realty Relocation Services, Inc.

   North Carolina    100%    R.J. Reynolds Tobacco Holdings, Inc.

R. J. Reynolds Vapor Company

   North Carolina    100%    Reynolds American Inc.

Santa Fe Natural Tobacco Company: Germany GmbH

   Germany    100%    Santa Fe Natural Tobacco Company, Inc.

Santa Fe Natural Tobacco Company Italy S.r.1

   Italy    100%    R. J. Reynolds Global Products, Inc.

Santa Fe Natural Tobacco Company Japan K.K.

   Japan    100%    R. J. Reynolds Global Products, Inc.

Santa Fe Natural Tobacco Company Spain S.R.L.

   Spain    100%    SFR Tobacco International GmbH

S.F. Imports, Inc.

   Delaware    100%    R .J. Reynolds Tobacco Company

SFR Tobacco International GmbH (SFRTI)

   Switzerland    100%    R.J. Reynolds Tobacco B.V.

--------------------------------------------------------------------------------

Schedule 6.01

Existing Liens

None.

--------------------------------------------------------------------------------

EXHIBIT A

ASSIGNMENT AND ASSUMPTION

This Assignment and Assumption (the “Assignment and Assumption”) is dated as of
the Effective Date set forth below and is entered into by and between [Insert
name of Assignor] (the “Assignor”) and [Insert name of Assignee] (the
“Assignee”). Capitalized terms used but not defined herein shall have the
meanings given to them in the Credit Agreement identified below (as amended,
restated, amended and restated, supplemented or otherwise modified, the “Credit
Agreement”), receipt of a copy of which is hereby acknowledged by the Assignee.
The Standard Terms and Conditions set forth in Annex 1 attached hereto are
hereby agreed to and incorporated herein by reference and made a part of this
Assignment and Assumption as if set forth herein in full.

For an agreed consideration, the Assignor hereby irrevocably sells and assigns
to the Assignee, and the Assignee hereby irrevocably purchases and assumes from
the Assignor, subject to and in accordance with the Standard Terms and
Conditions and the Credit Agreement, as of the Effective Date inserted by the
Administrative Agent as contemplated below (i) all of the Assignor’s rights and
obligations in its capacity as a Lender under the Credit Agreement and any other
documents or instruments delivered pursuant thereto to the extent related to the
amount and percentage interest identified below of all of such outstanding
rights and obligations of the Assignor under the Facility (including any
guarantees, included in the Facility) and (ii) to the extent permitted to be
assigned under applicable law, all claims, suits, causes of action and any other
right of the Assignor (in its capacity as a Lender) against any Person, whether
known or unknown, arising under or in connection with the Credit Agreement, any
other documents or instruments delivered pursuant thereto or the loan
transactions governed thereby or in any way based on or related to any of the
foregoing, including contract claims, tort claims, malpractice claims, statutory
claims and all other claims at law or in equity related to the rights and
obligations sold and assigned pursuant to clause (i) above (the rights and
obligations sold and assigned pursuant to clauses (i) and (ii) above being
referred to herein collectively as the “Assigned Interest”). Such sale and
assignment is without recourse to the Assignor and, except as expressly provided
in this Assignment and Assumption, without representation or warranty by the
Assignor.

 

1.    Assignor:   

 

   2.    Assignee:   

 

         [and is an Affiliate/Approved Fund of [identify Lender]1] 3.   
Borrower(s):    Reynolds American Inc. 4.    Administrative Agent:    JPMorgan
Chase Bank, N.A., as the administrative agent under the Credit Agreement 5.   
Credit Agreement:    The $9,000,000,000 Bridge Credit Agreement dated as of
September 23, 2014 among Reynolds American Inc., the Lenders party thereto,
JPMorgan Chase Bank, N.A., as Administrative Agent, and the other agents party
thereto

 

1  Select as applicable.

 

A-1

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6.    Assigned Interest:   

 

Aggregate Amount of
Commitment/ Loans for
all Lenders      Amount of Commitment/
Loans Assigned      Percentage Assigned of
Commitment/Loans2   $         $           %    $         $           %    $     
   $           %   

Effective Date:                     , 20     [TO BE INSERTED BY ADMINISTRATIVE
AGENT AND WHICH SHALL BE THE EFFECTIVE DATE OF RECORDATION OF TRANSFER IN THE
REGISTER THEREFOR.]

The Assignee agrees to deliver to the Administrative Agent a completed
Administrative Questionnaire in which the Assignee designates one or more Credit
Contacts to whom all syndicate-level information (which may contain material
non-public information about the Borrower, its Subsidiaries and its and their
Related Parties or their respective securities) will be made available and who
may receive such information in accordance with the Assignee’s compliance
procedures and applicable laws, including Federal and state securities laws.

 

2  Set forth, to at least 9 decimals, as a percentage of the Commitment/Loans of
all Lenders thereunder.

 

A-2

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The terms set forth in this Assignment and Assumption are hereby agreed to:

 

ASSIGNOR

[NAME OF ASSIGNOR]

By:

     

Title:

ASSIGNEE

[NAME OF ASSIGNEE]

By:

     

Title:

 

A-3

--------------------------------------------------------------------------------

[Consented to and]3 Accepted:

JPMORGAN CHASE BANK, N.A., as

Administrative Agent

By:       Title: [Consented to:]4 [NAME OF RELEVANT PARTY] By:       Title:

 

3  To be added only if the consent of the Administrative Agent is required by
the terms of the Credit Agreement.

4  To be added only if the consent of the Borrower and/or other parties is
required by the terms of Section 9.04 of the Credit Agreement.

 

A-4

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ANNEX 1

REYNOLDS AMERICAN INC. BRIDGE CREDIT AGREEMENT

STANDARD TERMS AND CONDITIONS FOR

ASSIGNMENT AND ASSUMPTION

1. Representations and Warranties.

1.1 Assignor. The Assignor (a) represents and warrants that (i) it is the legal
and beneficial owner of the Assigned Interest, (ii) the Assigned Interest is
free and clear of any lien, encumbrance or other adverse claim and (iii) it has
full power and authority, and has taken all action necessary, to execute and
deliver this Assignment and Assumption and to consummate the transactions
contemplated hereby; and (b) assumes no responsibility with respect to (i) any
statements, warranties or representations made in or in connection with the
Credit Agreement or any other Loan Document, (ii) the execution, legality,
validity, enforceability, genuineness, sufficiency or value of the Loan
Documents, (iii) the financial condition of the Borrower, any of its
Subsidiaries or Affiliates or any other Person obligated in respect of any Loan
Document or (iv) the performance or observance by the Borrower, any of its
Subsidiaries or Affiliates or any other Person of any of their respective
obligations under any Loan Document.

1.2 Assignee. The Assignee (a) represents and warrants that (i) it has full
power and authority, and has taken all action necessary, to execute and deliver
this Assignment and Assumption and to consummate the transactions contemplated
hereby and to become a Lender under the Credit Agreement, (ii) it satisfies the
requirements, if any, specified in the Credit Agreement that are required to be
satisfied by it in order to acquire the Assigned Interest and become a Lender,
(iii) from and after the Effective Date, it shall be bound by the provisions of
the Credit Agreement as a Lender thereunder and, to the extent of the Assigned
Interest, shall have the obligations of a Lender thereunder, (iv) it has
received a copy of the Credit Agreement, together with copies of the most recent
financial statements delivered pursuant to Section 5.01 thereof, as applicable,
and such other documents and information as it has deemed appropriate to make
its own credit analysis and decision to enter into this Assignment and
Assumption and to purchase the Assigned Interest on the basis of which it has
made such analysis and decision independently and without reliance on the
Administrative Agent or any other Lender, and (v) if it is a Non-U.S. Lender,
attached to the Assignment and Assumption is any documentation required to be
delivered by it pursuant to the terms of the Credit Agreement, duly completed
and executed by the Assignee; and (b) agrees that (i) it will, independently and
without reliance on the Administrative Agent, the Assignor or any other Lender,
and based on such documents and information as it shall deem appropriate at the
time, continue to make its own credit decisions in taking or not taking action
under the Loan Documents, and (ii) it will perform in accordance with their
terms all of the obligations which by the terms of the Loan Documents are
required to be performed by it as a Lender.

2. Payments. From and after the Effective Date, the Administrative Agent shall
make all payments in respect of the Assigned Interest (including payments of
principal, interest, fees and other amounts) to the Assignor for amounts which
have accrued to but excluding the Effective Date and to the Assignee for amounts
which have accrued from and after the Effective Date.

3. General Provisions. This Assignment and Assumption shall be binding upon, and
inure to the benefit of, the parties hereto and their respective successors and
assigns. This Assignment and Assumption may be executed in any number of
counterparts, which together shall constitute one instrument. Delivery of an
executed counterpart of a signature page of this Assignment and Assumption by
telecopy shall be effective as delivery of a manually executed counterpart of
this Assignment and Assumption. This Assignment and Assumption shall be governed
by, and construed in accordance with, the law of the State of New York.

 

Annex 1-1

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EXHIBIT B

[FORM OF]

SUBSIDIARY GUARANTEE AGREEMENT

SUBSIDIARY GUARANTEE (as amended, modified, restated and/or supplemented from
time to time, this “Guarantee”), dated as of [            ], 2014, made by and
among each of the undersigned guarantors (each, a “Guarantor” and, together with
any other entity that becomes a guarantor hereunder pursuant to Section 23
hereof, collectively, the “Guarantors”) in favor of JPMorgan Chase Bank, N.A.,
as Administrative Agent (together with any successor administrative agent, the
“Administrative Agent”), for the benefit of the Guaranteed Creditors (as defined
below). Except as otherwise defined herein, all capitalized terms used herein
and defined in the Credit Agreement (as defined below) shall be used herein as
therein defined.

W I T N E S S E T H :

WHEREAS, (i) Reynolds American Inc. (the “Borrower”), the lenders from time to
time party thereto (the “Lenders”) and the Administrative Agent have entered
into a Bridge Credit Agreement, dated as of September 23, 2014 (as amended,
modified, restated and/or supplemented from time to time, the “Credit
Agreement”), providing for the making of Loans to the Borrower, all as
contemplated therein (the Lenders, the Administrative Agent and their subsequent
permitted assigns are herein called the “Guaranteed Creditors”);

WHEREAS, each Guarantor is a direct or indirect Subsidiary of the Borrower;

WHEREAS, the Credit Agreement requires that this Guarantee be executed and
delivered; and

WHEREAS, each Guarantor will obtain benefits from the incurrence of Loans by the
Borrower and, accordingly, desires to execute this Guarantee in order to induce
the Lenders to make Loans to the Borrower;

NOW, THEREFORE, in consideration of the foregoing and other benefits accruing to
each Guarantor, the receipt and sufficiency of which are hereby acknowledged,
each Guarantor hereby makes the following representations and warranties to the
Administrative Agent for the benefit of the Guaranteed Creditors and hereby
covenants and agrees with each other Guarantor and the Administrative Agent for
the benefit of the Guaranteed Creditors as follows:

1. GUARANTEE.

(a) Each Guarantor, jointly and severally, irrevocably, absolutely and
unconditionally guarantees as a primary obligor and not merely as surety to the
Guaranteed Creditors the full and prompt payment when due (whether at the stated
maturity, by required prepayment, declaration, acceleration, demand or
otherwise) of (i) the principal of and interest on all Loans incurred by the
Borrower, together with all the other obligations (including obligations which,
but for the automatic stay under Section 362(a) of the Bankruptcy Code, would
become due) and liabilities and indebtedness (including, without limitation,
indemnities and fees (including any interest accruing after the commencement of
any bankruptcy, insolvency, receivership or similar proceeding at the rate
provided for in the Credit Agreement, whether or not such interest is an allowed
claim in any such proceeding)) owing by the Borrower to any Guaranteed Creditor,
whether now existing or hereafter incurred under, arising out of or in
connection with, the Credit Agreement, and (ii) the due performance and
compliance by the Borrower with all of the terms, conditions and agreements
contained in the Credit Agreement (all such principal, interest, liabilities,
indebtedness and obligations under this clause (a) being herein collectively
called the “Guaranteed Obligations”).

 

B-1

--------------------------------------------------------------------------------

Each Guarantor understands, agrees and confirms that the Guaranteed Creditors
may enforce this Guarantee up to the full amount of the Guaranteed Obligations
against such Guarantor without proceeding against any other Guarantor or the
Borrower or under any other guarantee covering all or a portion of the
Guaranteed Obligations. This Guarantee is a guarantee of prompt payment and
performance and not of collection.

(b) Additionally, each Guarantor, jointly and severally, unconditionally,
absolutely and irrevocably, guarantees the payment of any and all Guaranteed
Obligations whether or not due or payable by the Borrower upon the occurrence in
respect of the Borrower of any of the events specified in clauses (h), (i) and
(j) of Article VII of the Credit Agreement, and unconditionally, absolutely and
irrevocably, jointly and severally, promises to pay such Guaranteed Obligations
to the Guaranteed Creditors, or order, on demand.

2. LIABILITY OF GUARANTORS ABSOLUTE. The liability of each Guarantor hereunder
is primary, absolute, joint and several, and unconditional and is exclusive and
independent of any other guarantee of the indebtedness of the Borrower whether
executed by such Guarantor, any other Guarantor, any other guarantor or by any
other party, and the liability of each Guarantor hereunder shall not be affected
or impaired by any circumstance or occurrence whatsoever, including, without
limitation: (a) any direction as to application of payment by the Borrower or
any other party, (b) any other continuing or other guarantee, undertaking or
maximum liability of a Guarantor or of any other party as to the Guaranteed
Obligations, (c) any payment on or in reduction of any such other guarantee or
undertaking, (d) any dissolution, termination or increase, decrease or change in
personnel by the Borrower, (e) the failure of the Guarantor to receive any
benefit from or as a result of its execution, delivery and performance of this
Guarantee, (f) any payment made to any Guaranteed Creditor on the indebtedness
which any Guaranteed Creditor repays the Borrower pursuant to court order in any
bankruptcy, reorganization, arrangement, moratorium or other debtor relief
proceeding, and each Guarantor waives any right to the deferral or modification
of its obligations hereunder by reason of any such proceeding, (g) any action or
inaction by the Guaranteed Creditors as contemplated in Section 5 hereof or
(h) any invalidity, rescission, irregularity or unenforceability of all or any
part of the Guaranteed Obligations.

3. OBLIGATIONS OF GUARANTORS INDEPENDENT. The obligations of each Guarantor
hereunder are independent of the obligations of any other Guarantor, any other
guarantor or the Borrower, and a separate action or actions may be brought and
prosecuted against each Guarantor whether or not action is brought against any
other Guarantor, any other guarantor or the Borrower and whether or not any
other Guarantor, any other guarantor or the Borrower be joined in any such
action or actions. Each Guarantor waives (to the fullest extent permitted by
applicable law) the benefits of any statute of limitations affecting its
liability hereunder or the enforcement thereof. Any payment by the Borrower or
other circumstance which operates to toll any statute of limitations as to the
Borrower shall operate to toll the statute of limitations as to each Guarantor.

4. WAIVERS BY GUARANTORS.

(a) Each Guarantor hereby waives (to the fullest extent permitted by applicable
law) notice of acceptance of this Guarantee and notice of the existence,
creation or incurrence of any new or additional liability to which it may apply,
and waives promptness, diligence, presentment, demand of payment, demand for
performance, protest, notice of dishonor or nonpayment of any such liabilities,
suit or taking of other action by the Administrative Agent or any other
Guaranteed Creditor against, and any other notice to, any party liable thereon
(including such Guarantor, any other Guarantor, any other guarantor or the
Borrower) and each Guarantor further hereby waives any and all notice of the
creation, renewal, extension or accrual of any of the Guaranteed Obligations and
notice or proof of reliance by any Guaranteed Creditor upon this Guarantee, and
the Guaranteed Obligations shall conclusively be deemed to have been created,
contracted or incurred, or renewed, extended, amended, modified, supplemented or
waived, in reliance upon this Guarantee.

(b) Each Guarantor waives any right to require the Guaranteed Creditors to:
(i) proceed against the Borrower, any other Guarantor, any other guarantor of
the Guaranteed Obligations or any other party; or (ii) pursue any other remedy
in the Guaranteed Creditors’ power whatsoever. Each Guarantor waives any defense

 

B-2

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based on or arising out of any defense of the Borrower, any other Guarantor, any
other guarantor of the Guaranteed Obligations or any other party other than
payment in full in cash of the Guaranteed Obligations, including, without
limitation, any defense based on or arising out of the disability of the
Borrower, any other Guarantor, any other guarantor of the Guaranteed Obligations
or any other party, or the unenforceability of the Guaranteed Obligations or any
part thereof from any cause, or the cessation from any cause of the liability of
the Borrower other than payment in full in cash of the Guaranteed Obligations.
The Guaranteed Creditors may, at their election, exercise any right or remedy
the Guaranteed Creditors may have against the Borrower or any other party,
without affecting or impairing in any way the liability of any Guarantor
hereunder except to the extent the Guaranteed Obligations have been paid in full
in cash. Each Guarantor waives any defense arising out of any such election by
the Guaranteed Creditors, even though such election operates to impair or
extinguish any right of reimbursement, contribution, indemnification or
subrogation or other right or remedy of such Guarantor against the Borrower, any
other guarantor of the Guaranteed Obligations or any other party.

(c) Each Guarantor has knowledge and assumes all responsibility for being and
keeping itself informed of the Borrower’s and each other Guarantor’s financial
condition, affairs and assets, and of all other circumstances bearing upon the
risk of nonpayment of the Guaranteed Obligations and the nature, scope and
extent of the risks which such Guarantor assumes and incurs hereunder, and has
adequate means to obtain from the Borrower and each other Guarantor on an
ongoing basis information relating thereto and the Borrower’s and each other
Guarantor’s ability to pay and perform its respective Guaranteed Obligations,
and agrees to assume the responsibility for keeping, and to keep, so informed
for so long as this Guarantee is in effect. Each Guarantor acknowledges and
agrees that (i) the Guaranteed Creditors shall have no obligation to investigate
the financial condition or affairs of the Borrower or any other Guarantor for
the benefit of such Guarantor nor to advise such Guarantor of any fact
respecting, or any change in, the financial condition, assets or affairs of the
Borrower or any other Guarantor that might become known to any Guaranteed
Creditor at any time, whether or not such Guaranteed Creditor knows or believes
or has reason to know or believe that any such fact or change is unknown to such
Guarantor, or might (or does) increase the risk of such Guarantor as guarantor
hereunder, or might (or would) affect the willingness of such Guarantor to
continue as a guarantor of the Guaranteed Obligations hereunder and (ii) the
Guaranteed Creditors shall have no duty to advise any Guarantor of information
known to them regarding any of the aforementioned circumstances or risks.

(d) Each Guarantor hereby acknowledges and agrees that no Guaranteed Creditor
nor any other Person shall be under any obligation to pursue any remedy that
such Guarantor may or may not be able to pursue itself any right to which such
Guarantor hereby waives.

(e) Each Guarantor warrants and agrees that each of the waivers set forth in
Section 3 and in this Section 4 is made with full knowledge of its significance
and consequences and that if any of such waivers are determined to be contrary
to any applicable law or public policy, such waivers shall be effective only to
the maximum extent permitted by applicable law.

5. RIGHTS OF GUARANTEED CREDITORS. Subject to Section 4, any Guaranteed Creditor
may (except as shall be required by applicable statute and cannot be waived) at
any time and from time to time without the consent of, or notice to, any
Guarantor, without incurring responsibility to such Guarantor, without impairing
or releasing the obligations or liabilities of such Guarantor hereunder, upon or
without any terms or conditions and in whole or in part:

(a) change the manner, place or terms of payment of, and/or change, increase or
extend the time of payment of, renew, increase, accelerate or alter, any of the
Guaranteed Obligations (including, without limitation, any increase or decrease
in the rate of interest thereon or the principal amount thereof), or any
liability incurred directly or indirectly in respect thereof, and this Guarantee
shall apply to the Guaranteed Obligations as so changed, extended, increased,
accelerated, renewed or altered;

 

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(b) exercise or refrain from exercising any rights against the Borrower, any
other Loan Party, any other guarantor of the Borrower or others or otherwise act
or refrain from acting;

(c) release or substitute any one or more endorsers, Guarantors, other
guarantors, the Borrower or other obligors;

(d) settle or compromise any of the Guaranteed Obligations or any liability
(including any of those hereunder) incurred directly or indirectly in respect
thereof or hereof, and may subordinate the payment of all or any part thereof to
the payment of any liability (whether due or not) of the Borrower to the
respective creditors of the Borrower other than the Guaranteed Creditors;

(e) apply any sums by whomsoever paid or howsoever realized to any liability or
liabilities of the Borrower to the Guaranteed Creditors regardless of what
liabilities of the Borrower remain unpaid;

(f) consent to or waive any breach of, or any act, omission or default under,
any of the Loan Documents or any of the instruments or agreements referred to
therein, or otherwise amend, modify or supplement any of the Loan Documents or
any of such other instruments or agreements;

(g) act or fail to act in any manner which may deprive such Guarantor of its
right to subrogation against the Borrower to recover full indemnity for any
payments made pursuant to this Guarantee; and/or

(h) take any other action or omit to take any other action which would, under
otherwise applicable principles of common law, give rise to a legal or equitable
discharge of such Guarantor from its liabilities under this Guarantee
(including, without limitation, any action or omission whatsoever that might
otherwise vary the risk of such Guarantor or constitute a legal or equitable
defense to or discharge of the liabilities of a guarantor or surety that might
otherwise limit recourse against such Guarantor).

No invalidity, illegality, irregularity or unenforceability of all or any part
of the Guaranteed Obligations, the Loan Documents or any other agreement or
instrument relating to the Guaranteed Obligations or of any guarantee therefor
shall affect, impair or be a defense to this Guarantee, and this Guarantee shall
be primary, absolute and unconditional notwithstanding the occurrence of any
event or the existence of any other circumstances which might constitute a legal
or equitable discharge of a surety or guarantor except payment in full in cash
of the Guaranteed Obligations.

6. CONTINUING GUARANTEE. This Guarantee is a continuing one and all liabilities
to which it applies or may apply under the terms hereof shall be conclusively
presumed to have been created in reliance hereon. No failure or delay on the
part of any Guaranteed Creditor in exercising any right, power or privilege
hereunder shall operate as a waiver thereof, nor shall any single or partial
exercise of any right, power or privilege hereunder preclude any other or
further exercise thereof or the exercise of any other right, power or

 

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privilege. The rights and remedies herein expressly specified are cumulative and
not exclusive of any rights or remedies which any Guaranteed Creditor would
otherwise have. No notice to or demand on any Guarantor in any case shall
entitle such Guarantor to any other further notice or demand in similar or other
circumstances or constitute a waiver of the rights of any Guaranteed Creditor to
any other or further action in any circumstances without notice or demand. It is
not necessary for any Guaranteed Creditor to inquire into the capacity or powers
of the Borrower or the officers, directors, partners or agents acting or
purporting to act on its behalf, and any Guaranteed Obligations incurred in
reliance upon the professed exercise of such powers shall be guaranteed
hereunder.

7. SUBORDINATION OF INDEBTEDNESS HELD BY GUARANTORS. Any indebtedness of the
Borrower now or hereafter held by any Guarantor is hereby subordinated to the
indebtedness of the Borrower to the Guaranteed Creditors; and such indebtedness
of the Borrower to any Guarantor, if the Administrative Agent, after an Event of
Default has occurred and is continuing, so requests, shall be collected,
enforced and received by such Guarantor as trustee for the Guaranteed Creditors
and be paid over to the Guaranteed Creditors on account of the indebtedness of
the Borrower to the Guaranteed Creditors, but without affecting or impairing in
any manner the liability of such Guarantor under the other provisions of this
Guarantee. Prior to the transfer by any Guarantor of any note or negotiable
instrument evidencing any indebtedness of the Borrower to such Guarantor, such
Guarantor shall mark such note or negotiable instrument with a legend that the
same is subject to this subordination. Without limiting the generality of the
foregoing, each Guarantor hereby agrees with the Guaranteed Creditors that it
will not exercise any right of subrogation which it may at any time otherwise
have as a result of this Guarantee (whether contractual, under Section 509 of
the Bankruptcy Code or otherwise) until all Guaranteed Obligations have been
irrevocably paid in full in cash; provided, that if any amount shall be paid to
such Guarantor on account of such subrogation rights at any time prior to the
irrevocable payment in full in cash of all the Guaranteed Obligations, such
amount shall be held in trust for the benefit of the Guaranteed Creditors and
shall forthwith be paid to the Guaranteed Creditors to be credited and applied
upon the Guaranteed Obligations, whether matured or unmatured, in accordance
with the terms of the Loan Documents or, if the Loan Documents do not provide
for the application of such amount, to be held by the Guaranteed Creditors as
collateral security for any Guaranteed Obligations thereafter existing.

8. GUARANTEE ENFORCEABLE BY ADMINISTRATIVE AGENT. Notwithstanding anything to
the contrary contained elsewhere in this Guarantee, the Guaranteed Creditors
agree (by their acceptance of the benefits of this Guarantee) that this
Guarantee may be enforced only by the action of the Administrative Agent acting
upon the instructions of the Required Lenders and that no other Guaranteed
Creditor shall have any right individually to seek to enforce or to enforce this
Guarantee, it being understood and agreed that such rights and remedies may be
exercised by the Administrative Agent, for the benefit of the Guaranteed
Creditors upon the terms of this Guarantee. The Guaranteed Creditors further
agree that this Guarantee may not be enforced against any director, officer,
employee, partner, member or stockholder of any Guarantor (except to the extent
such partner, member or stockholder is also a Guarantor hereunder). It is
understood and agreed that the agreement in this Section 8 is among and solely
for the benefit of the Guaranteed Creditors and that, if the Required Lenders so
agree (without requiring the consent of any Guarantor), this Guarantee may be
directly enforced by any Guaranteed Creditor.

9. REPRESENTATIONS, WARRANTIES AND COVENANTS OF GUARANTORS. In order to induce
the Lenders to make Loans to the Borrower pursuant to the Credit Agreement, each
Guarantor represents, warrants and covenants that:

(a) such Guarantor is duly organized, validly existing and in good standing
under the laws of the jurisdiction of its organization, has all requisite power
and authority to carry on its business as now conducted and, except where the
failure to do so, individually or in the aggregate, would not reasonably be
expected to result in a Material Adverse Effect, is qualified to do business in,
and is in good standing in, every jurisdiction where such qualification is
required;

 

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(b) such Guarantor has the corporate, partnership or limited liability company
power and authority, as the case may be, to execute, deliver and perform the
terms and provisions of this Guarantee and each other Loan Document to which it
is a party and has taken all necessary corporate, partnership or limited
liability company action, as the case may be, and, if required, stockholder
action, to authorize the execution, delivery and performance by it of this
Guarantee and each such other Loan Document;

(c) such Guarantor has duly executed and delivered this Guarantee and each other
Loan Document to which it is a party, and this Guarantee and each such other
Loan Document constitutes the legal, valid and binding obligation of such
Guarantor enforceable in accordance with its terms, subject to applicable
bankruptcy, insolvency, reorganization, moratorium or other laws affecting
creditors’ rights generally and subject to general principles of equity,
regardless of whether considered in a proceeding in equity or at law;

(d) neither the execution, delivery or performance by such Guarantor of this
Guarantee or any other Loan Document to which it is a party, nor compliance by
it with the terms and provisions hereof and thereof, will (i) require any
consent or approval of, registration or filing with, or any other action by, any
Governmental Authority, except such as have been obtained or made and are in
full force and effect, (ii) violate the charter, by-laws or other organizational
documents of such Guarantor, (iii) violate any material applicable law or
regulation or order of any Governmental Authority in any material respect,
(iv) violate or result in a default under any material agreement or instrument
binding upon such Guarantor or any of its Subsidiaries or assets, or give rise
to a right thereunder to require any payment to be made by such Guarantor or any
of its Subsidiaries, and (v) result in the creation or imposition of any Lien on
any asset of such Guarantor or any of its Subsidiaries;

(e) no consent or approval of, registration or filing with, or any other action
by, any Governmental Authority, except such as have been obtained or made and
are in full force and effect, is required to authorize, or is required in
connection with, (i) the execution, delivery and performance of this Guarantee
by such Guarantor or any other Loan Document to which such Guarantor is a party
or (ii) the legality, validity, binding effect or enforceability of this
Guarantee or any other Loan Document to which such Guarantor is a party;

(f) there are no actions, suits or proceedings by or before any arbitrator or
Governmental Authority pending against or, to the knowledge of such Guarantor,
threatened against or affecting such Guarantor or any of its Subsidiaries or any
laws, regulations or orders enacted or implemented (whether or not currently
effective) by any Governmental Authority (i) that would reasonably be expected,
individually or in the aggregate, to result in a Material Adverse Effect (other
than the Disclosed Matters) or (ii) that involve this Guarantee or the other
Loan Documents;

(g) until the termination of all Commitments and all Guaranteed Obligations have
been paid in full (other than indemnities described in Section 9.03 of the
Credit Agreement which are not then due and payable), such Guarantor will
comply, and will cause each of its Subsidiaries to comply, with all of the
applicable provisions, covenants and agreements contained in Articles V and VI
of the Credit Agreement, and will take, or will refrain from taking, as the case
may be, all actions that are necessary to be taken or not taken so that no
violation of any provision, covenant or agreement contained in Articles V and VI
of the Credit Agreement, and so that no Default or Event of Default, is caused
by the actions of such Guarantor or any of its Subsidiaries; and

 

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(h) an executed (or conformed) copy of each of the Loan Documents has been made
available to a senior officer of such Guarantor and such officer is familiar
with the contents thereof.

10. EXPENSES. The Guarantors hereby jointly and severally agree to pay all
reasonable out-of-pocket costs and expenses of the Administrative Agent and each
other Guaranteed Creditor in connection with the enforcement of this Guarantee
and the protection of the Guaranteed Creditors’ rights hereunder and any
amendment, waiver or consent relating hereto (including, in each case, without
limitation, the reasonable fees and disbursements of counsel (including in-house
counsel) employed by the Administrative Agent and each other Guaranteed
Creditor).

11. [RESERVED].

12. BENEFIT AND BINDING EFFECT. This Guarantee shall be binding upon each
Guarantor and its successors and assigns and shall inure to the benefit of the
Guaranteed Creditors and their successors and assigns.

13. AMENDMENTS; WAIVERS. Neither this Guarantee nor any provision hereof may be
changed, waived, discharged or terminated except with the written consent of
each Guarantor directly affected thereby (it being understood that the addition
or release of any Guarantor hereunder shall not constitute a change, waiver,
discharge or termination affecting any Guarantor other than the Guarantor so
added or released) and with the written consent of the Required Lenders (or, to
the extent required by Section 9.02 of the Credit Agreement, with the written
consent of each Lender).

14. SET OFF. In addition to any rights now or hereafter granted under applicable
law (including, without limitation, Section 151 of the New York Debtor and
Creditor Law) and not by way of limitation of any such rights, upon the
occurrence and during the continuance of an Event of Default, each Guaranteed
Creditor is hereby authorized, at any time or from time to time, without notice
to any Guarantor or to any other Person, any such notice being expressly waived,
to set off and to appropriate and apply any and all deposits (general or
special) and any other indebtedness at any time held or owing by such Guaranteed
Creditor to or for the credit or the account of such Guarantor, against and on
account of the obligations and liabilities of such Guarantor to such Guaranteed
Creditor under this Guarantee, irrespective of whether or not such Guaranteed
Creditor shall have made any demand hereunder and although said obligations,
liabilities, deposits or claims, or any of them, shall be contingent or
unmatured. Each Guaranteed Creditor (by its acceptance of the benefits hereof)
acknowledges and agrees that the provisions of this Section 14 are subject to
the sharing provisions set forth in Section 2.17 of the Credit Agreement.

15. NOTICE. Except as otherwise specified herein, all notices, requests, demands
or other communications to or upon the respective parties hereto shall be sent
or delivered by hand or overnight courier service, mailed by certified or
registered mail or sent by telecopy and all such notices and communications
shall, when mailed, telecopied, or sent by courier, be effective when deposited
in the mails, delivered to the hand or overnight courier, as the case may be, or
sent by telecopier, except that notices and communications to the Administrative
Agent or any Guarantor shall not be effective until received by the
Administrative Agent or such Guarantor, as the case may be. All notices and
other communications shall be in writing and addressed to such party at (i) in
the case of any Guaranteed Creditor, as provided in the Credit Agreement and
(ii) in the case of any Guarantor, at its address set forth opposite its
signature page below; or in any case at such other address as any of the Persons
listed above may hereafter notify the others in writing.

16. REINSTATEMENT. If any claim is ever made upon any Guaranteed Creditor for
repayment or recovery of any amount or amounts received in payment or on account
of any of the Guaranteed Obligations and any of the aforesaid payees repays all
or part of said amount by reason of (i) any judgment, decree or order of any
court or administrative body having jurisdiction over such payee or any of its
property or (ii) any settlement or compromise of any such claim effected by such
payee with any such claimant (including, without limitation, the Borrower), then
and in such event each Guarantor agrees that any such judgment, decree, order,
settlement or compromise shall be binding upon such Guarantor, notwithstanding
any revocation hereof, the termination of the Credit Agreement or the
cancellation of any instrument evidencing any liability of the Borrower, and
such Guarantor shall be and remain liable to the aforesaid payees hereunder for
the amount so repaid or recovered to the same extent as if such amount had never
originally been received by any such payee.

 

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17. CONSENT TO JURISDICTION; SERVICE OF PROCESS; AND WAIVER OF TRIAL BY JURY.

(a) THIS GUARANTEE AND THE RIGHTS AND OBLIGATIONS OF THE GUARANTEED CREDITORS
AND OF THE UNDERSIGNED HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND
GOVERNED BY THE LAWS OF THE STATE OF NEW YORK. Each Guarantor hereby irrevocably
and unconditionally submits, for itself and its property, to the exclusive
jurisdiction of any New York State court or Federal court of the United States
of America sitting in the County of New York, and any appellate court from any
thereof, in any action or proceeding arising out of or relating to this
Guarantee or any other Loan Document, or for recognition or enforcement of any
judgment, and each of the parties hereto hereby irrevocably and unconditionally
agrees that all claims in respect of any such action or proceeding shall be
heard and determined in such courts located within the County of New York;
provided, however, that the Guaranteed Creditors shall be entitled to assert
jurisdiction over any Guarantor and its respective property in any court in
which jurisdiction may be laid over such Guarantor or its respective property.
Each of the parties hereto agrees that a final judgment in any such action or
proceeding shall be conclusive and may be enforced in other jurisdictions by
suit on the judgment or in any other manner provided by law.

(b) Each Guarantor hereby irrevocably and unconditionally waives, to the fullest
extent it may legally and effectively do so, any objection which it may now or
hereafter have to the laying of venue of any suit, action or proceeding arising
out of or relating to this Guarantee or any other Loan Document in any court
referred to in clause (a) of this Section 17. Each of the parties hereto hereby
irrevocably waives, to the fullest extent permitted by law, the defense of an
inconvenient forum to the maintenance of such action or proceeding in any such
court.

(c) Each party to this Guarantee irrevocably consents to service of process in
the manner provided for notices in Section 9.01 of the Credit Agreement. Nothing
in this Guarantee or any other Loan Document will affect the right of any party
hereto or thereto to serve process in any other manner permitted by law.

(d) EACH GUARANTOR AND EACH GUARANTEED CREDITOR (BY ITS ACCEPTANCE OF THE
BENEFITS OF THIS GUARANTEE) HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY
APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING
DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS GUARANTEE, ANY OTHER
LOAN DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY (WHETHER BASED
ON CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO
REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY
OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK
TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER
PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS GUARANTEE BY, AMONG OTHER
THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 17.

18. RELEASE OF LIABILITY OF GUARANTOR.

(a) This Guarantee shall, as to each Guarantor, be released (i) if such
Guarantor ceases to be a Subsidiary as a result of a transaction permitted by
the Credit Agreement or that has been consented to in accordance with
Section 9.02 of the Credit Agreement, (ii) if such Guarantor ceases to be a
Material Subsidiary in accordance with the requirements of the definition of
“Material Subsidiary” set forth in the Credit Agreement (including as a result
of a designation pursuant to the second proviso appearing in the first sentence
of such definition) or (iii) under the circumstances described in clause
(b) below;

 

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provided, except in the case of preceding clause (iii), that (x) no such release
shall occur if such Guarantor continues to be a guarantor in respect of any
Indebtedness of the Borrower or any other Subsidiary in an aggregate principal
amount equal to or greater than $50,000,000, unless and until such Subsidiary is
(or is being simultaneously) released from its guarantee with respect to such
Indebtedness and (y) no such release shall occur if a Default has then occurred
and is continuing.

(b) At such time as (i) the Loans and all Obligations of the type described in
clause (i) of the definition thereof as set forth in the Credit Agreement shall
have been paid in full and (ii) the Commitments have been terminated, the
Guarantors shall be released from their obligations under this Guarantee, all
without delivery of any instrument or performance of any act by any Person.

19. CONTRIBUTION. At any time a payment in respect of the Guaranteed Obligations
is made under this Guarantee, the right of contribution of each Guarantor
against each other Guarantor shall be determined as provided in the immediately
following sentence, with the right of contribution of each Guarantor to be
revised and restated as of each date on which a payment (a “Relevant Payment”)
is made on the Guaranteed Obligations under this Guarantee. At any time that a
Relevant Payment is made by a Guarantor that results in the aggregate payments
made by such Guarantor in respect of the Guaranteed Obligations to and including
the date of the Relevant Payment exceeding such Guarantor’s Contribution
Percentage (as defined below) of the aggregate payments made by all Guarantors
in respect of the Guaranteed Obligations to and including the date of the
Relevant Payment (such excess, the “Aggregate Excess Amount”), each such
Guarantor shall have a right of contribution against each other Guarantor who
has made payments in respect of the Guaranteed Obligations to and including the
date of the Relevant Payment in an aggregate amount less than such other
Guarantor’s Contribution Percentage of the aggregate payments made to and
including the date of the Relevant Payment by all Guarantors in respect of the
Guaranteed Obligations (the aggregate amount of such deficit, the “Aggregate
Deficit Amount”) in an amount equal to (x) a fraction the numerator of which is
the Aggregate Excess Amount of such Guarantor and the denominator of which is
the Aggregate Excess Amount of all Guarantors multiplied by (y) the Aggregate
Deficit Amount of such other Guarantor. A Guarantor’s right of contribution
pursuant to the preceding sentences shall arise at the time of each computation,
subject to adjustment to the time of each computation; provided that no
Guarantor may take any action to enforce such right until the Guaranteed
Obligations have been irrevocably paid in full in cash and all Commitments have
been terminated, it being expressly recognized and agreed by all parties hereto
that any Guarantor’s right of contribution arising pursuant to this Section 19
against any other Guarantor shall be expressly junior and subordinate to such
other Guarantor’s obligations and liabilities in respect of the Guaranteed
Obligations and any other obligations owing under this Guarantee. As used in
this Section 19: (i) each Guarantor’s “Contribution Percentage” shall mean the
percentage obtained by dividing (x) the Adjusted Net Worth (as defined below) of
such Guarantor by (y) the aggregate Adjusted Net Worth of all Guarantors;
(ii) the “Adjusted Net Worth” of each Guarantor shall mean the greater of
(x) the Net Worth (as defined below) of such Guarantor and (y) zero; and
(iii) the “Net Worth” of each Guarantor shall mean the amount by which the fair
saleable value of such Guarantor’s assets on the date of any Relevant Payment
exceeds its existing debts and other liabilities (including contingent
liabilities, but without giving effect to any Guaranteed Obligations arising
under this Guarantee) on such date. Notwithstanding anything to the contrary
contained above, any Guarantor that is released from this Guarantee pursuant to
Section 18 hereof shall thereafter have no contribution obligations, or rights,
pursuant to this Section 19, and at the time of any such release, if the
released Guarantor had an Aggregate Excess Amount or an Aggregate Deficit
Amount, same shall be deemed reduced to $0, and the contribution rights and
obligations of the remaining Guarantors shall be recalculated on the respective
date of release (as otherwise provided above) based on the payments made
hereunder by the remaining Guarantors. All parties hereto recognize and agree
that, except for any right of contribution arising pursuant to this Section 19,
each Guarantor who makes any payment in respect of the Guaranteed Obligations
shall have no right of contribution or subrogation against any other Guarantor
in respect of such payment until all of the Guaranteed Obligations have been
irrevocably paid in full in cash. Each of the Guarantors recognizes and
acknowledges that the

 

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rights to contribution arising hereunder shall constitute an asset in favor of
the party entitled to such contribution. In this connection, each Guarantor has
the right to waive its contribution right against any Guarantor to the extent
that after giving effect to such waiver such Guarantor would remain solvent, in
the determination of the Required Lenders.

20. LIMITATION ON GUARANTEED OBLIGATIONS. Each Guarantor and each Guaranteed
Creditor (by its acceptance of the benefits of this Guarantee) hereby confirms
that it is its intention that this Guarantee not constitute a fraudulent
transfer or conveyance for purposes of the Bankruptcy Code, the Uniform
Fraudulent Conveyance Act or any similar Federal or state law. To effectuate the
foregoing intention, each Guarantor and each Guaranteed Creditor (by its
acceptance of the benefits of this Guarantee) hereby irrevocably agrees that the
Guaranteed Obligations guaranteed by such Guarantor shall be limited to such
amount as will, after giving effect to such maximum amount and all other
(contingent or otherwise) liabilities of such Guarantor that are relevant under
such laws and after giving effect to any rights to contribution pursuant to any
agreement providing for an equitable contribution among such Guarantor and the
other Guarantors, result in the Guaranteed Obligations of such Guarantor in
respect of such maximum amount not constituting a fraudulent transfer or
conveyance.

21. COUNTERPARTS. This Guarantee may be executed in any number of counterparts
and by the different parties hereto on separate counterparts, each of which when
so executed and delivered shall be an original, but all of which shall together
constitute one and the same instrument. A set of counterparts executed by all
the parties hereto shall be lodged with the Borrower and the Administrative
Agent.

22. PAYMENTS. All payments made by any Guarantor hereunder will be made without
setoff, counterclaim or other defense and on the same basis as payments are made
by the Borrower under Sections 2.14, 2.15, 2.16 and 2.17 of the Credit
Agreement.

23. ADDITIONAL GUARANTORS. It is understood and agreed that any Subsidiary of
the Borrower that elects to execute a counterpart of this Guarantee after the
date hereof pursuant to the Credit Agreement shall become a Guarantor hereunder
by executing a joinder agreement in form and substance satisfactory to the
Administrative Agent and delivering same to the Administrative Agent, in each
case with all documents and actions required to be taken to the reasonable
satisfaction of the Administrative Agent.

24. HEADINGS DESCRIPTIVE. The headings of the several Sections of this Guarantee
are inserted for convenience only and shall not in any way affect the meaning or
construction of any provision of this Guarantee.

* * *

 

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IN WITNESS WHEREOF, each Guarantor has caused this Guarantee to be executed and
delivered as of the date first above written.

 

R. J. REYNOLDS TOBACCO HOLDINGS, INC.      R.J. REYNOLDS TOBACCO CO. By:    
     By:      Name:      Name: Title:      Title:

Address for Notices:

P.O. Box 2866

401 N. Main St.

Winston-Salem, NC 27102

Phone: 336-741-5500

Fax: 336-741-2998

    

Address for Notices:

401 N. Main St.

Winston-Salem, NC 27101

Phone: 336-741-5000

Fax: 336-741-7598

REYNOLDS FINANCE COMPANY      CONWOOD HOLDINGS, INC. By:          By:      Name:
     Name: Title:      Title:

Address for Notices:

1007 N. Orange Street, Suite 1402

Wilmington, DE 19801

Phone: 302-425-3550

Fax: 302-425-3554

    

Address for Notices:

401 N. Main St.

Winston-Salem, NC 27101

Phone: 336-741-2000

Fax: 336-741-2998

R. J. REYNOLDS GLOBAL PRODUCTS, INC.      AMERICAN SNUFF COMPANY, LLC By:    
     By:      Name:      Name: Title:      Title:

Address for Notices:

P.O. Box 688

401 N. Main St.

Winston-Salem, NC 27102

Phone: 336-741-5500

Fax: 336-741-2998

    

Address for Notices:

813 Ridge Lake Blvd.

Memphis, TN 38120

Phone: 901-761-2050

Fax: 901-682-1223

 

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ROSSWIL LLC      R. J. REYNOLDS TOBACCO COMPANY By:          By:      Name:     
Name: Title:      Title:

Address for Notices:

401 N. Main St.

Winston-Salem, NC 27101

Phone: 336-741-2000

Fax: 336-741-2998

    

Address for Notices:

P.O. Box 2959

401 N. Main St.

Winston-Salem, NC 27102

Phone: 336-741-5000

Fax: 336-741-7598

REYNOLDS INNOVATIONS INC.      RAI SERVICES COMPANY By:          By:       
Name:      Name:   Title:      Title:

Address for Notices:

P.O. Box 685

401 N. Main St.

Winston-Salem, NC 27102

Phone: 336-741-5700

Fax: 336-741-7598

    

Address for Notices:

P.O. Box 464

401 N. Main St.

Winston-Salem, NC 27102

Phone: 336-741-4500

Fax: 336-741-2998

SANTA FE NATURAL TOBACCO COMPANY, INC.      By:               Name:       
Title:     

Address for Notices:

One Plaza La Prensa

Santa Fe, NM 87507

Phone: 505-982-4257

Fax: 505-986-8445

    

 

B-12

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Accepted and Agreed to: JPMORGAN CHASE BANK, N.A., as Administrative Agent By:  
    Name:   Title:

 

B-13

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EXHIBIT C-1

[FORM OF]

U.S. TAX CERTIFICATE

(For Non-U.S. Lenders That Are Not Partnerships For U.S. Federal Income Tax
Purposes)

Reference is hereby made to the Bridge Credit Agreement, dated as of
September 23, 2014 (as amended, supplemented or otherwise modified from time to
time, the “Credit Agreement”), among Reynolds American Inc., as Borrower,
JPMorgan Chase Bank, N.A., as Administrative Agent, and each lender from time to
time party thereto.

Pursuant to the provisions of Section 2.16 of the Credit Agreement, the
undersigned hereby certifies that (i) it is the sole record and beneficial owner
of the Loan(s) (as well as any Note(s) evidencing such Loan(s)) in respect of
which it is providing this certificate, (ii) it is not a bank within the meaning
of Section 881(c)(3)(A) of the Code, (iii) it is not a ten percent shareholder
of the Borrower within the meaning of Section 871(h)(3)(B) of the Code, and
(iv) it is not a controlled foreign corporation related to the Borrower as
described in Section 881(c)(3)(C) of the Code.

The undersigned has furnished the Borrower and the Administrative Agent with a
certificate of its non-U.S. person status on IRS Form W-8BEN or W-8BEN-E. By
executing this certificate, the undersigned agrees that (1) if the information
provided on this certificate changes, the undersigned shall promptly so inform
the Borrower and the Administrative Agent and (2) the undersigned shall have at
all times furnished the Borrower and the Administrative Agent with a properly
completed and currently effective certificate in either the calendar year in
which each payment is to be made to the undersigned, or in either of the two
calendar years preceding such payments.

Unless otherwise defined herein, terms defined in the Credit Agreement and used
herein shall have the meanings given to them in the Credit Agreement.

 

[NAME OF LENDER] By:       Name:   Title:

Date:                      , 20[    ]

 

C-1-1

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EXHIBIT C-2

[FORM OF]

U.S. TAX CERTIFICATE

(For Non-U.S. Lenders That Are Partnerships For U.S. Federal Income Tax
Purposes)

Reference is hereby made to the Bridge Credit Agreement, dated as of
September 23, 2014 (as amended, supplemented or otherwise modified from time to
time, the “Credit Agreement”), among Reynolds American Inc., as Borrower,
JPMorgan Chase Bank, N.A., as Administrative Agent, and each lender from time to
time party thereto.

Pursuant to the provisions of Section 2.16 of the Credit Agreement, the
undersigned hereby certifies that (i) it is the sole record owner of the Loan(s)
(as well as any Note(s) evidencing such Loan(s)) in respect of which it is
providing this certificate, (ii) its direct or indirect partners/members are the
sole beneficial owners of such Loan(s) (as well as any Note(s) evidencing such
Loan(s)), (iii) with respect to the extension of credit pursuant to this Credit
Agreement, neither the undersigned nor any of its direct or indirect
partners/members is a bank extending credit pursuant to a loan agreement entered
into in the ordinary course of its trade or business within the meaning of
Section 881(c)(3)(A) of the Code, (iv) none of its direct or indirect
partners/members is a ten percent shareholder of the Borrower within the meaning
of Section 871(h)(3)(B) of the Code, and (v) none of its direct or indirect
partners/members is a controlled foreign corporation related to the Borrower as
described in Section 881(c)(3)(C) of the Code.

The undersigned has furnished the Borrower and the Administrative Agent with
IRS Form W-8IMY accompanied by one of the following forms from each of its
partners/members claiming the portfolio interest exemption: (i) an IRS
Form W-8BEN or W-8BEN-E or (ii) an IRS Form W-8IMY accompanied by an IRS
Form W-8BEN or W-8BEN-E from each of such partner’s/member’s beneficial owners
that is claiming the portfolio interest exemption. By executing this
certificate, the undersigned agrees that (1) if the information provided on this
certificate changes, the undersigned shall promptly so inform the Borrower and
the Administrative Agent and (2) the undersigned shall have at all times
furnished the Borrower and the Administrative Agent with a properly completed
and currently effective certificate in either the calendar year in which each
payment is to be made to the undersigned, or in either of the two calendar years
preceding such payments.

Unless otherwise defined herein, terms defined in the Credit Agreement and used
herein shall have the meanings given to them in the Credit Agreement.

 

[NAME OF LENDER] By:       Name:   Title:

Date:                      , 20[    ]

 

C-2-1

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EXHIBIT C-3

[FORM OF]

U.S. TAX CERTIFICATE

(For Non-U.S. Participants That Are Not Partnerships For U.S. Federal Income Tax
Purposes)

Reference is hereby made to the Bridge Credit Agreement, dated as of
September 23, 2014 (as amended, supplemented or otherwise modified from time to
time, the “Credit Agreement”), among Reynolds American Inc., as Borrower,
JPMorgan Chase Bank, N.A., as Administrative Agent, and each lender from time to
time party thereto.

Pursuant to the provisions of Section 2.16 of the Credit Agreement, the
undersigned hereby certifies that (i) it is the sole record and beneficial owner
of the participation in respect of which it is providing this certificate,
(ii) it is not a bank within the meaning of Section 881(c)(3)(A) of the Code,
(iii) it is not a ten percent shareholder of the Borrower within the meaning of
Section 871(h)(3)(B) of the Code, and (iv) it is not a controlled foreign
corporation related to the Borrower as described in Section 881(c)(3)(C) of the
Code.

The undersigned has furnished its participating Lender with a certificate of its
non-U.S. person status on IRS Form W-8BEN or W-8BEN-E. By executing this
certificate, the undersigned agrees that (1) if the information provided on this
certificate changes, the undersigned shall promptly so inform such Lender in
writing and (2) the undersigned shall have at all times furnished such Lender
with a properly completed and currently effective certificate in either the
calendar year in which each payment is to be made to the undersigned, or in
either of the two calendar years preceding such payments.

Unless otherwise defined herein, terms defined in the Credit Agreement and used
herein shall have the meanings given to them in the Credit Agreement.

 

[NAME OF LENDER] By:       Name:   Title:

Date:                      , 20[    ]

 

C-3-1

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EXHIBIT C-4

[FORM OF]

U.S. TAX CERTIFICATE

(For Non-U.S. Participants That Are Partnerships For U.S. Federal Income Tax
Purposes)

Reference is hereby made to the Bridge Credit Agreement, dated as of
September 23, 2014 (as amended, supplemented or otherwise modified from time to
time, the “Credit Agreement”), among Reynolds American Inc., as Borrower,
JPMorgan Chase Bank, N.A., as Administrative Agent, and each lender from time to
time party thereto.

Pursuant to the provisions of Section 2.16 of the Credit Agreement, the
undersigned hereby certifies that (i) it is the sole record owner of the
participation in respect of which it is providing this certificate, (ii) its
direct or indirect partners/members are the sole beneficial owners of such
participation, (iii) with respect such participation, neither the undersigned
nor any of its direct or indirect partners/members is a bank extending credit
pursuant to a loan agreement entered into in the ordinary course of its trade or
business within the meaning of Section 881(c)(3)(A) of the Code, (iv) none of
its direct or indirect partners/members is a ten percent shareholder of the
Borrower within the meaning of Section 871(h)(3)(B) of the Code, and (v) none of
its direct or indirect partners/members is a controlled foreign corporation
related to the Borrower as described in Section 881(c)(3)(C) of the Code.

The undersigned has furnished its participating Lender with IRS Form W-8IMY
accompanied by one of the following forms from each of its partners/members
claiming the portfolio interest exemption: (i) an IRS Form W-8BEN or W-8BEN-E or
(ii) an IRS Form W-8IMY accompanied by an IRS Form W-8BEN or W-8BEN-E from each
of such partner’s/member’s beneficial owners that is claiming the portfolio
interest exemption. By executing this certificate, the undersigned agrees that
(1) if the information provided on this certificate changes, the undersigned
shall promptly so inform such Lender and (2) the undersigned shall have at all
times furnished such Lender with a properly completed and currently effective
certificate in either the calendar year in which each payment is to be made to
the undersigned, or in either of the two calendar years preceding such payments.

Unless otherwise defined herein, terms defined in the Credit Agreement and used
herein shall have the meanings given to them in the Credit Agreement.

 

[NAME OF PARTICIPANT] By:       Name:   Title:

Date:                      , 20[    ]

 

C-4-1

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EXHIBIT D

[FORM OF]

COMPLIANCE CERTIFICATE

This Compliance Certificate is delivered to you pursuant to Section 5.01(c) of
the Bridge Credit Agreement, dated as of September 23, 2014 (as amended,
restated, supplemented or modified from time to time, the “Credit Agreement”),
among Reynolds American Inc., (the “Borrower”), the lenders party thereto from
time to time, and JPMorgan Chase Bank, N.A., as Administrative Agent. Terms
defined in the Credit Agreement and not otherwise defined herein are used herein
as therein defined.

1. I am the duly elected, qualified and acting [            ]5 of the Borrower.

2. I have reviewed and am familiar with the contents of this Compliance
Certificate. I am providing this Compliance Certificate solely in my capacity as
an officer of the Borrower. The matters set forth herein are true to the best of
my knowledge after due inquiry.

3. I have reviewed the terms of the Credit Agreement and the other Loan
Documents and have made or caused to be made under my supervision a review in
reasonable detail of the transactions and condition of the Borrower and its
Subsidiaries during the accounting period covered by the financial statements
attached hereto as ANNEX 1 (the “Financial Statements”). [Except as set forth on
Annex 1(a),] [S]uch review did not disclose the existence during or at the end
of the accounting period covered by the Financial Statements, and I have no
knowledge of the existence, as of the date of this Compliance Certificate, of
any condition or event which constitutes a Default.

4. [Except as set forth on Annex 1(b),] I have no knowledge of the existence, as
of the date of this Compliance Certificate, of any material change in GAAP or in
the application thereof since the date of the audited financial statements
referred to in Section 3.04 of the Credit Agreement.

5. The following represent true and accurate calculations, as of
[                     , 20    ], to be used to determine compliance with the
covenants set forth in Section 6.04 of the Credit Agreement:

(a) Consolidated Leverage Ratio:

 

Consolidated Debt (as at the last day of any period) =

   [                    ]

Consolidated EBITDA (for such period) =

   [                    ]

Actual Ratio =

   [            ] to 1.00

Required Ratio =

   [    ]6 to 1.00

 

5  Insert position of Financial Officer.

6  To be inserted pursuant to Section 6.04(a) of the Credit Agreement.

 

D-1

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Supporting detail showing the calculation of Consolidated Leverage Ratio is
attached hereto as Schedule 1.

(b) Consolidated Interest Coverage Ratio:

 

Consolidated EBITDA (for such period) =

   [                    ]

Consolidated Interest Expense (for such period) =

   [                    ]

Actual Ratio =

   [            ] to 1.00

Required Ratio =

   3.00 to 1.00

Supporting detail showing the calculation of Consolidated Interest Coverage
Ratio is attached hereto as Schedule 2.

 

D-2

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ANNEX I

[Applicable Financial Statements to Be Attached]

 

D-3

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SCHEDULE I

CONSOLIDATED LEVERAGE RATIO

(A) Consolidated Leverage Ratio: as at the last day of any period, the ratio of
(a) Consolidated Debt on such day to (b) Consolidated EBITDA for such period.

(a) Consolidated Debt as of [                     , 20    ]:

 

(I)   at any date, the aggregate principal amount of all Indebtedness of the
Borrower and its Subsidiaries at such date, determined on a consolidated basis
in accordance with GAAP; provided that the aggregate amount available to be
drawn (i.e., unfunded amounts) under all letters of credit, acceptances and
similar arrangements and all surety, appeal and litigation bonds and similar
obligations issued for the account of the Borrower or any of its Subsidiaries
(but excluding, for avoidance of doubt, all unpaid drawings or other matured
monetary obligations or reimbursement obligations owing in respect of thereof)
shall not be included in any determination of “Consolidated Debt”:     

(i)

   all indebtedness of such Person for borrowed money or with respect to
deposits or advances of any kind;           

 

  (ii)    all obligations of such Person for the deferred purchase price of
property or services (other than current trade payables and accrued expenses
incurred in the ordinary course of such Person’s business and any obligation of
the Borrower or any Subsidiary thereof to purchase tobacco and/or other
products, services and produce utilized in its business pursuant to agreements
entered into in the ordinary course of business on a basis consistent with the
Borrower’s or such Subsidiary’s past practices or then current industry
practices);           

 

  (iii)    all obligations of such Person evidenced by notes, bonds, debentures
or other similar instruments;           

 

  (iv)    all indebtedness created or arising under any conditional sale or
other title retention agreement with respect to property acquired by such Person
(even though the rights and remedies of the seller or lender under such
agreement in the event of default are limited to repossession or sale of such
property);           

 

  (v)    all Capital Lease Obligations of such Person;           

 

 

D-4

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  (vi)    all obligations of such Person, contingent or otherwise, as an account
party or applicant under or in respect of acceptances, letters of credit or
similar arrangements;           

 

  (vii)    the maximum amount available to be drawn or paid under all surety,
appeal and litigation bonds and similar obligations issued for the account of
such Person and all unreimbursed payments in respect of such surety, appeal and
litigation bonds and similar obligations;           

 

  (viii)    all Guarantees by such Person in respect of obligations of the kind
referred to in items (A)(a)(I)(i) through (vii) above;           

 

  (ix)    all obligations of the kind referred to in items (A)(a)(I)(i) through
(viii) above secured by (or for which the holder of such obligation has an
existing right, contingent or otherwise, to be secured by) any Lien on property
(including accounts and contract rights) owned by such Person, whether or not
such Person has assumed or become liable for the payment of such obligation.   
       

 

The Indebtedness of any Person shall include the Indebtedness of any other
entity (including any partnership in which such Person is a general partner) to
the extent such Person is liable therefor as a result of such Person’s ownership
interest in or other relationship with such entity, except to the extent the
terms of such Indebtedness expressly provide that such Person is not liable
therefor.             

Consolidated Debt

          

 

 

D-5

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(b) Consolidated EBITDA as of [                     , 20    ]:

 

(I)   Consolidated Net Income for such period                (i)   Consolidated
net income or loss of the Borrower and its Subsidiaries for such period,
determined on a consolidated basis in accordance with GAAP; provided that there
shall be excluded:             

 

  (ii)   the income (or deficit) of any Person accrued prior to the date it
becomes a Subsidiary of the Borrower or is merged into or consolidated with the
Borrower or any of its Subsidiaries, subject to the second sentence of the
definition of “Consolidated EBITDA”;             

 

  (iii)       the income (or deficit) of any Person (other than a Subsidiary of
the Borrower) in which the Borrower or any of its Subsidiaries has an ownership
interest, except to the extent that any such income is actually received by the
Borrower or such Subsidiary in the form of dividends or similar distributions;
and             

 

  (iv)   the undistributed earnings of any Subsidiary of the Borrower to the
extent that the declaration or payment of dividends or similar distributions by
such Subsidiary is not at the time permitted by the terms of any Contractual
Obligation or Requirement of Law applicable to such Subsidiary.             

 

plus; without duplication and to the extent reflected as a charge in the
statement of such Consolidated Net Income for such period, the sum of:   
(II)(a)   provision for all income taxes and foreign withholding taxes;       
     

 

(b)   interest expense, amortization or write-off of debt discount and debt
issuance costs and commissions, discounts and other fees and charges associated
with Indebtedness (including the Loans);             

 

(c)   depreciation and amortization expense;             

 

(d)   amortization of intangibles (including, but not limited to, goodwill) and
organization costs;             

 

(e)   any extraordinary losses;             

 

(f)   any non-cash expenses or losses;             

 

(g)   any losses on sales of assets outside of the ordinary course of business
(whether or not otherwise includable as a separate item in the statement of such
Consolidated Net Income for such period),             

 

 

D-6

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(h)   any cash payment received during such period in respect of any non-cash
item described in items (III)(a)(i) or (ii) below subsequent to the fiscal
quarter in which the relevant non-cash item was reflected as a gain or income in
the statement of Consolidated Net Income;             

 

(i)   the amount of all cash payments received during such period in respect of
any settlement with respect to tobacco litigation related liability which
otherwise did not increase Consolidated Net Income for such period or a prior
period;             

 

(j)   any losses for such period attributable to early extinguishment of
Indebtedness or net realized loss obligations under any Swap Agreement;       
     

 

(k)   non-recurring transaction fees, costs, expenses and charges (including but
not limited to investment banker, consulting, advisory and legal fees) incurred
in connection with the Transactions; provided that the aggregate amount for all
such items under this item (k) shall not exceed $400,000,000 in the aggregate
during the term of the Credit Agreement;             

 

(l)   business optimization, restructuring and transition expenses, costs,
charges, accruals or reserves incurred after the Closing Date in connection with
any of the Transactions, which for the avoidance of doubt shall include
severance payments and costs, legal defense and settlement costs (including any
costs paid in satisfaction of judgments), relocation costs, costs related to the
closure, opening, curtailment and/or consolidation of facilities, retention
charges, systems establishment costs, spin-off costs, integration costs, signing
costs, retention and completion bonuses, amortization of signing bonuses,
inventory optimization expenses, contract termination costs, transaction costs,
costs related to entry into new markets, consulting fees, recruiter fees,
provided that the aggregate amount for all such items under this item (l) shall
not exceed $500,000,000 in the aggregate during the term of the Credit
Agreement;             

 

                   

 

(m)   any expenses, costs, charges, accruals or reserves incurred in connection
with any of the Transactions pursuant to or in connection with any management or
employee benefit plan, including but not limited to curtailments or
modifications to pension and post-retirement employee benefit plans, and
conversion costs and excess pension charges, provided that the aggregate amount
for all such items under this item (m) shall not exceed $100,000,000 in the
aggregate during the term of the Credit Agreement; and             

 

 

D-7

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(n)   the amount of cost savings and synergies projected by the Borrower in good
faith to be reasonably anticipated to be realized from actions taken prior to or
during such period in connection with any of the Transactions (calculated on a
pro forma basis as though such cost savings had been realized on the first day
of such period, net of the amount of actual benefits realized prior to or during
such period from such actions); provided that the aggregate amount under this
item (n) shall not exceed $200,000,000 in the aggregate during any four fiscal
quarter period (prior to giving effect to such amount), all as determined on a
consolidated basis for the Borrower and its Subsidiaries for such period;       
     

 

minus:    (III)(a)   to the extent included in the statement of such
Consolidated Net Income for such period, the sum of             

 

    (i)    any extraordinary gain;             

 

    (ii)    any non-cash income or gains;             

 

    (iii)    any gain on sales of assets outside of the ordinary course of
business (whether or not otherwise includable as a separate item in the
statement of such Consolidated Net Income for such period); and             

 

    (iv)    income tax credits (to the extent not netted from income tax
expense);             

 

(b)   any cash payments made during such period in respect of any non-cash items
described in items (II)(d), (e) or (f) above subsequent to the fiscal quarter in
which the relevant non-cash item was reflected as a charge in the statement of
Consolidated Net Income;             

 

(c)  

the amount of all cash payments made by the Borrower and its Subsidiaries during
such period pursuant to any settlement with respect to tobacco litigation
related liability which otherwise did not reduce Consolidated Net Income for
such period or a prior period, all as determined on a consolidated basis for the
Borrower and its Subsidiaries for such period; and

            

 

(d)   net realized income or gains from obligations under Swap Agreements       
     

 

 

D-8

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For the purposes of calculating Consolidated EBITDA for any period of four
consecutive fiscal quarters (each, a “Reference Period”) pursuant to any
determination of the Consolidated Leverage Ratio or the Consolidated Interest
Coverage Ratio        (i) if at any time during such Reference Period (or, for
purposes of Section 6.05(c) of the Credit Agreement only, during the period
commencing on the first day of such Reference Period and ending on or prior to
such date of determination), the Borrower or any Subsidiary shall have made any
Material Disposition, the Consolidated EBITDA for such Reference Period shall be
reduced by an amount equal to the Consolidated EBITDA (if positive) attributable
to the property that is the subject of such Material Disposition for such
Reference Period or increased by an amount equal to the Consolidated EBITDA (if
negative) attributable thereto for such Reference Period and        (ii) if
during such Reference Period (or, for purposes of Section 6.05(c) of the Credit
Agreement only, during the period commencing on the first day of such Reference
Period and ending on or prior to such date of determination), the Borrower or
any Subsidiary shall have made a Material Acquisition, Consolidated EBITDA for
such Reference Period shall be calculated after giving pro forma effect thereto
(including for purposes of calculating Consolidated EBITDA as if such Material
Acquisition occurred on the first day of such Reference Period, which pro forma
calculation may include, among other things, a reduction in costs and expenses
(and a resulting increase in Consolidated EBITDA) as a result of any transfer,
disposition or sale of any employees, assets or business or any other cost
reducing measures undertaken by the target of such Material Acquisition and/or
any of its Subsidiaries during the applicable Reference Period.    “Material
Acquisition” means any acquisition of property or series of related acquisitions
of property that (a) constitutes assets comprising all or substantially all of
an operating unit of a business or constitutes all or substantially all of the
Equity Interests of a Person and (b) involves the payment of consideration by
the Borrower and its Subsidiaries in excess of $250,000,000; and “Material
Disposition” means any disposition of property or series of related dispositions
of property that yields gross proceeds to the Borrower or any of its
Subsidiaries in excess of $250,000,000.   

Consolidated EBITDA

            

 

Ratio of (a) Consolidated Debt to (b) Consolidated EBITDA

   [        ]:1.00

Required Ratio

   [    ]7:1.00

 

7  To be inserted pursuant to Section 6.04(a) of the Credit Agreement.

 

D-9

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SCHEDULE 2

CONSOLIDATED INTEREST COVERAGE RATIO

(A) Consolidated Interest Coverage Ratio: as at the last day of any period, the
ratio of (a) Consolidated EBITDA for such period to (b) Consolidated Interest
Expense for such period.

 

(a)   Consolidated EBITDA as of [                     , 20    ]:     
Consolidated EBITDA (See Schedule 1 for calculation)          

 

(b)   Consolidated Interest Expense for such period:          

 

 

(I)

  Total cash interest expense (including that attributable to Capital Lease
Obligations) of the Borrower and its Subsidiaries calculated on a consolidated
basis for such period with respect to all outstanding Indebtedness of the
Borrower and its Subsidiaries (including all commissions, discounts and other
fees and charges owed with respect to letters of credit and bankers’ acceptance
financing and net costs under Swap Agreements in respect of interest rates to
the extent such net costs are allocable to such period in accordance with GAAP).
         

 

For the purposes of calculating Consolidated Interest Expense for any Reference
Period pursuant to any determination of the Consolidated Interest Coverage
Ratio,        (i) all Indebtedness incurred or issued during the relevant
Reference Period (or, for purposes of Section 6.05(c) of the Credit Agreement
only, during the period commencing on the first day of such Reference Period and
ending on or prior to such date of determination) shall be deemed to have been
incurred or issued (and the proceeds thereof applied) on the first day of such
Reference Period and remain outstanding through such Reference Period,       
(ii) all Indebtedness (other than revolving Indebtedness, except to the extent
accompanied by a corresponding permanent commitment reduction) permanently
retired or redeemed during the relevant Reference Period (or, for purposes of
Section 6.05(c) of the Credit Agreement only, during the period commencing on
the first day of such Reference Period and ending on or prior to such date of
determination) shall be deemed to have been retired or redeemed on the first day
of such Reference Period and remain retired through the entirety of such
Reference Period, and        (iii) all Indebtedness assumed to be outstanding
pursuant to preceding item (i) shall be deemed to have borne interest at (x) the
rate applicable thereto, in the case of fixed rate indebtedness, or (y) the
rates which would have been applicable thereto during the respective Reference
Period when same was deemed outstanding (for this purpose, using the floating
rate applicable thereto at the time of determination), in the case of   

 

D-10

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    floating rate Indebtedness; provided that interest expense with respect to
any Indebtedness for periods while same was actually outstanding during the
respective period shall be calculated using the actual rates applicable thereto
while the same was actually outstanding.      Consolidated Interest Expense     
    

 

Ratio of (a) Consolidated EBITDA to (b) Consolidated Interest Expense   
[        ]:1.00 Required Ratio    3.00:1.00

 

D-11

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IN WITNESS WHEREOF, I have executed this Compliance Certificate solely in my
capacity as [            ] of the Borrower (and not in an individual capacity)
this          day of                     , 20    .

 

REYNOLDS AMERICAN INC. By:       Name:   Title:

 

D-12

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EXHIBIT E

[FORM OF]

SOLVENCY CERTIFICATE

This solvency certificate (this “Certificate”) is being delivered pursuant to
Section 4.02(i) of the Bridge Credit Agreement dated as of September 23, 2014
(the “Credit Agreement”), among Reynolds American Inc. (the “Borrower”), the
lenders from time to time party thereto and JPMorgan Chase Bank, N.A., as
administrative agent. Unless otherwise defined herein, terms used herein have
the meanings provided in the Credit Agreement.

[                    ] hereby certifies that he/she is the Chief Financial
Officer of the Borrower and that he/she is knowledgeable of the financial and
accounting matters of the Borrower and its Subsidiaries, the Credit Agreement
and the covenants and representations (financial and other) contained therein
and that, as such, he/she is authorized to execute and deliver this Certificate
on behalf of the Borrower.

The undersigned hereby further certifies, solely in his/her capacity as Chief
Financial Officer of the Borrower and not in an individual capacity, as follows:

 

  1. On the date hereof, immediately after giving effect to the Transactions to
occur on the Closing Date, including the making of each Loan to be made on the
Closing Date and the application of the proceeds thereof, the fair value of the
assets of the Borrower and its Subsidiaries, on a consolidated basis, at a fair
valuation, will exceed their debts and liabilities, subordinated, contingent or
otherwise.

 

  2. On the date hereof, immediately after giving effect to the Transactions to
occur on the Closing Date, including the making of each Loan to be made on the
Closing Date and the application of the proceeds thereof, the present fair
saleable value of the property of the Borrower and its Subsidiaries, on a
consolidated basis, will be greater than the amount that will be required to pay
the probable liabilities on their debts and other liabilities, subordinated,
contingent or otherwise, as such debts and other liabilities become absolute and
matured.

 

  3. On the date hereof, immediately after giving effect to the Transactions to
occur on the Closing Date, including the making of each Loan to be made on the
Closing Date and the application of the proceeds thereof, the Borrower and its
Subsidiaries, on a consolidated basis, will be able to pay their debts and
liabilities, subordinated, contingent or otherwise, as such debts and
liabilities become absolute and matured.

 

  4. On the date hereof, immediately after giving effect to the Transactions to
occur on the Closing Date, including the making of each Loan to be made on the
Closing Date and the application of the proceeds thereof, the Borrower and its
Subsidiaries, on a consolidated basis, will not have an unreasonably small
capital with which to conduct the businesses in which they are engaged as such
businesses are now conducted and proposed to be conducted following the date
hereof.

The financial information, projections and assumptions which underlie and form
the basis for the representations made in this Certificate were based upon good
faith estimates and assumptions believed to be reasonable to the management of
the Borrower at the time made, in light of the circumstances under which they
were made (it being understood that such financial information, projections or
forecasts as they relate to future events are not to be viewed as fact and that
actual results during the period or periods covered by such financial
information, projections or assumptions may differ from the projected results
set forth therein by a material amount).

In computing the amount of the contingent liabilities of the Borrower and its
Subsidiaries as of the date hereof, such liabilities have been computed at the
amount that, in light of all the facts and circumstances existing as of the date
hereof, represents the amount that can reasonably be expected to become an
actual or matured liability.

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IN WITNESS WHEREOF, the undersigned has executed this Certificate solely in
his/her capacity as Chief Financial Officer of the Borrower (and not in an
individual capacity) this [    ] day of [                    ], 20[    ].

 

REYNOLDS AMERICAN INC. By:       Name:   Title: Chief Financial Officer

 

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