EXHIBIT 10.1

[Execution Version]

 

 

 

CREDIT AGREEMENT

dated as of

July 29, 2011

among

REYNOLDS AMERICAN INC.,

as Borrower,

The Lenders Party Hereto

and

JPMORGAN CHASE BANK, N.A.,

as Administrative Agent

 

 

 

CITIGROUP GLOBAL MARKETS INC.,

as Syndication Agent,

MIZUHO CORPORATE BANK, LTD.,

MORGAN STANLEY SENIOR FUNDING, INC.

and

THE BANK OF NOVA SCOTIA

as Documentation Agents,

GOLDMAN SACHS BANK USA,

as Co-Documentation Agent,

and

J.P. MORGAN SECURITIES LLC,

CITIGROUP GLOBAL MARKETS INC.,

GOLDMAN SACHS BANK USA,

MIZUHO CORPORATE BANK, LTD.,

MORGAN STANLEY SENIOR FUNDING, INC.

and

THE BANK OF NOVA SCOTIA,

as Joint Lead Arrangers and Joint Bookrunners

 

 

 

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TABLE OF CONTENTS

 

     Page  

ARTICLE I Definitions

     1   

SECTION 1.01. Defined Terms

     1   

SECTION 1.02. Classification of Loans and Borrowings

     24   

SECTION 1.03. Terms Generally

     24   

SECTION 1.04. Accounting Terms; GAAP

     24   

SECTION 1.05. Exchange Rates; Change of Currency

     25   

ARTICLE II The Credits

     25   

SECTION 2.01. Commitments

     25   

SECTION 2.02. Loans and Borrowings

     25   

SECTION 2.03. Requests for Revolving Borrowings

     26   

SECTION 2.04. Swingline Loans

     27   

SECTION 2.05. Letters of Credit

     28   

SECTION 2.06. Funding of Borrowings

     32   

SECTION 2.07. Interest Elections

     32   

SECTION 2.08. Termination and Reduction of Commitments

     33   

SECTION 2.09. Repayment of Loans; Evidence of Debt

     34   

SECTION 2.10. Prepayment of Loans

     35   

SECTION 2.11. Fees

     36   

SECTION 2.12. Interest

     37   

SECTION 2.13. Alternate Rate of Interest

     37   

SECTION 2.14. Increased Costs

     38   

SECTION 2.15. Break Funding Payments

     39   

SECTION 2.16. Withholding of Taxes; Gross-Up

     39   

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

     42   

SECTION 2.18. Mitigation Obligations; Replacement of Lenders

     43   

SECTION 2.19. Defaulting Lenders

     44   

SECTION 2.20. Incremental Commitments

     45   

SECTION 2.21. Maturity Date Extensions

     46   

ARTICLE III Representations and Warranties

     47   

SECTION 3.01. Organization; Powers

     47   

SECTION 3.02. Authorization; Enforceability

     47   

SECTION 3.03. Governmental Approvals; No Conflicts

     47   

SECTION 3.04. Financial Condition; No Material Adverse Effect

     47   

SECTION 3.05. Properties

     48   

SECTION 3.06. Litigation and Environmental Matters

     48   

SECTION 3.07. Compliance with Laws and Contractual Obligations

     48   

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

     48   

SECTION 3.09. Taxes

     49   

SECTION 3.10. ERISA

     49   

SECTION 3.11. Disclosure

     49   

SECTION 3.12. Subsidiaries

     49   

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TABLE OF CONTENTS

(continued)

 

     Page  

ARTICLE IV Conditions

     49   

SECTION 4.01. Effective Date

     49   

SECTION 4.02. Each Credit Event

     51   

ARTICLE V Affirmative Covenants

     51   

SECTION 5.01. Financial Statements; Ratings Change and Other Information

     51   

SECTION 5.02. Notices of Material Events

     52   

SECTION 5.03. Existence; Conduct of Business

     53   

SECTION 5.04. Payment of Obligations

     53   

SECTION 5.05. Maintenance of Properties; Insurance

     53   

SECTION 5.06. Books and Records; Inspection Rights

     53   

SECTION 5.07. Compliance with Laws and Contractual Obligations

     53   

SECTION 5.08. Use of Proceeds and Letters of Credit

     54   

SECTION 5.09. Subsidiary Guarantee Agreement; Further Assurances

     54   

ARTICLE VI Negative Covenants

     55   

SECTION 6.01. Liens

     55   

SECTION 6.02. Sale and Leaseback Transactions

     56   

SECTION 6.03. Fundamental Changes

     57   

SECTION 6.04. Financial Condition Covenants

     57   

SECTION 6.05. Restricted Payments

     57   

SECTION 6.06. Transactions with Affiliates

     58   

SECTION 6.07. Restrictive Agreements

     58   

SECTION 6.08. Subsidiary Indebtedness

     59   

SECTION 6.09. End of Fiscal Years; Fiscal Quarters

     59   

ARTICLE VII Events of Default

     60   

ARTICLE VIII The Agents

     62   

ARTICLE IX Miscellaneous

     64   

SECTION 9.01. Notices

     64   

SECTION 9.02. Waivers; Amendments

     65   

SECTION 9.03. Expenses; Indemnity; Damage Waiver

     65   

SECTION 9.04. Successors and Assigns

     67   

SECTION 9.05. Survival

     70   

SECTION 9.06. Counterparts; Integration; Effectiveness

     70   

SECTION 9.07. Severability

     70   

SECTION 9.08. Right of Setoff

     71   

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

     71   

SECTION 9.10. WAIVER OF JURY TRIAL

     71   

 

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TABLE OF CONTENTS

(continued)

 

     Page  

SECTION 9.11. Headings

     72   

SECTION 9.12. Confidentiality

     72   

SECTION 9.13. Interest Rate Limitation

     73   

SECTION 9.14. USA PATRIOT Act

     73   

SECTION 9.15. No Fiduciary Duty

     73   

SECTION 9.16. Judgment Currency

     73   

SECTION 9.17. Release of Subsidiary Guarantors from Subsidiary Guarantee
Agreement

     74   

SCHEDULES:

 

Schedule 2.01 — Commitments

Schedule 2.05 — Existing Letters of Credit

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)

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

     —       Compliance Certificate

 

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CREDIT AGREEMENT dated as of July 29, 2011, 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.

“Additional Lender” has the meaning assigned to such term in Section 2.20(a).

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

“Agreement Currency” has the meaning assigned to such term in Section 9.16.

“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.

 

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“Applicable Percentage” means, with respect to any Lender, the percentage of the
total Commitments represented by such Lender’s Commitment; provided that (i) in
the case of Section 2.19 when a Defaulting Lender shall exist, “Applicable
Percentage” shall mean the percentage of the total Commitments (disregarding any
Defaulting Lender’s Commitment) represented by such Lender’s Commitment, and
(ii) if all of the Commitments have terminated or expired, the “Applicable
Percentage” shall be determined based upon the percentage of the aggregate
Revolving Credit Exposures (in the case of a determination pursuant to
Section 2.19 when a Defaulting Lender shall exist, disregarding any Defaulting
Lender’s Revolving Credit Exposure) represented by such Lender’s individual
Revolving Credit Exposure. On the date of (x) any termination of the Commitments
of one or more Lenders pursuant to Section 2.08(b) on a Maturity Date that is
not also the Final Maturity Date and (y) the termination of the Commitment of
any Non-Continuing Lender pursuant to Section 2.08(d), the Applicable
Percentages of the Lenders shall be automatically adjusted to give effect to the
termination of such Commitment(s); provided that, in the case of any termination
described in clause (x), if an Event of Default exists under clause (a), (b),
(h) or (i) of Article VII on such date of termination, no such adjustment shall
be made and the Applicable Percentage shall be determined as provided in clause
(ii) of the proviso contained in the immediately preceding sentence as if all
Commitments had then terminated.

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

 

Applicable Facility

Credit Ratings

Levels

   “Eurodollar
Spread”     “ABR Spread”     “Facility Fee
Rate”  

Category 1

      

Greater than or equal to Baa1 or BBB+

     1.30 %      0.30 %      0.20 % 

Category 2

      

Baa2 or BBB

     1.50 %      0.50 %      0.25 % 

Category 3

      

Baa3 or BBB-

     1.70 %      0.70 %      0.30 % 

Category 4

      

Ba1 or BB+

     1.90 %      0.90 %      0.35 % 

Category 5

      

Equal to or less than Ba2 or BB

     2.10 %      1.10 %      0.40 % 

 

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For purposes of the foregoing, (i) if either Moody’s or S&P shall not have in
effect a rating for the Facility (other than by reason of the circumstances
referred to in the last sentence of this definition), then such rating agency
shall be deemed to have established a rating in Category 5; (ii) if the ratings
established or deemed to have been established by Moody’s and S&P for the
Facility shall fall within different Categories, the Applicable Rate shall be
based on the higher (the highest category being Category 1) of the two 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; and (iii) if the ratings
established or deemed to have been established by Moody’s and S&P for the
Facility 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;
provided, however, that notwithstanding the foregoing, at all times during which
there shall exist any Event of Default, the “Applicable Rate” shall be
determined by reference to the ratings in Category 5. 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 either 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 this definition to reflect such changed rating system or the
unavailability of ratings from such rating agency and, pending the effectiveness
of any such amendment, the Applicable Rate shall be determined by reference to
the rating most recently in effect prior to such change or cessation.

“Approved Alternate Currency” means Euros, Pounds Sterling or any other currency
(other than U.S. Dollars) approved by the applicable Issuing Bank issuing a
Letter of Credit to be denominated in any such other currency; provided that, at
such time (i) such other currency is dealt with in the London interbank deposit
market, (ii) such other currency is freely transferable and convertible into
U.S. Dollars in the London foreign exchange market, and (iii) no central bank or
other governmental authorization in the country of issue of such other currency
is required to permit use of such other currency by any Lender for issuing any
Letter of Credit and/or to permit the Borrower to reimburse LC Disbursements
thereon and/or to pay any other amounts owing in respect of such Letter of
Credit (unless such authorization has been obtained and is in full force and
effect).

“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.

“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 Period” means, as to any Lender, the period from and including the
Effective Date to and including the earlier of the Maturity Date of such Lender
and any other date of termination of the Commitment of such Lender.

 

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“B&W Parent” means Brown & Williamson Holdings, Inc. (f/k/a Brown & Williamson
Tobacco Corporation), a Delaware corporation.

“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 (a) Revolving Loans of the same Type, made, converted or
continued on the same date and, in the case of Eurodollar Loans, as to which a
single Interest Period is in effect or (b) a Swingline Loan.

“Borrowing Request” means a request by the Borrower for a Revolving 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 dealings in dollar deposits in the London interbank market.

“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.

“CGMI” means Citigroup Global Markets Inc. and any successor corporation thereto
by merger, consolidation or otherwise.

“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% 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” (or similar event) under any Material
Indebtedness of the Borrower or any Material Subsidiary.

“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 any Issuing Bank (or, for purposes of Section 2.14(b), by any lending office
of such Lender or by such Lender’s or such Issuing Bank’s holding company, if
any) with any

 

4

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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.

“Class”, when used in reference to any Loan or Borrowing, refers to whether such
Loan, or the Loans comprising such Borrowing, are Revolving Loans or Swingline
Loans.

“Co-Documentation Agent” means Goldman Sachs Bank USA, acting in its capacity as
co-documentation agent for the Facility.

“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 Revolving Loans and to acquire participations in Letters of Credit and
Swingline Loans hereunder, the amount of which represents the maximum aggregate
amount of such Lender’s Revolving Credit Exposure hereunder, as such commitment
may be increased or reduced from time to time pursuant to Section 2.08, 2.18,
2.20, 9.04 or Article VII. 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 $750,000,000.

“Commitment Increase” has the meaning assigned to such term in Section 2.20(a).

“Commitment Increase Lender” has the meaning assigned to such term in
Section 2.20(a).

“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”.

 

5

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“Consolidated EBITDA” means, for any period, Consolidated Net Income for such
period 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:

(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,
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, and (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, 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, and (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.

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 as if such Material Acquisition occurred
on the first day of such 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.

 

6

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“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.

“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 (a) 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”, (b) 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 (c) 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.

 

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“Continuing Lender” means, at any time, (i) each Lender that has a Maturity Date
which is the Final Maturity Date and (ii) each Lender that has then consented to
the extension of its then Maturity Date to the newly proposed Final Maturity
Date pursuant to Section 2.21 on or prior to the applicable Extension Response
Date in circumstances where Continuing Lenders (as defined in preceding clause
(i)) holding at least a majority of the Commitments have not consented to an
extension of the Final Maturity Date on or prior to such date.

“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, within three Business
Days of the date required to be funded or paid, to (i) fund any portion of its
Loans, (ii) fund any portion of its participations in Letters of Credit or
Swingline Loans or (iii) pay over to the Administrative Agent, any Issuing Bank,
any Swingline Lender 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 (iii) 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, any Issuing Bank, any Swingline Lender
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 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, the
Administrative Agent, any Issuing Bank or any Swingline Lender 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 and participations in then outstanding Letters of Credit and
Swingline Loans; provided that such Lender shall cease to be a Defaulting Lender
pursuant to this clause (c) upon the Borrower’s, the Administrative Agent’s,
each Issuing Bank’s or each Swingline Lender’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.

 

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

“Documentation Agents” means, collectively, Mizuho Corporate Bank, Ltd., Morgan
Stanley Senior Funding, Inc. and The Bank of Nova Scotia, acting in their
capacity as documentation agents for the Facility.

“Dollar Equivalent” means, at any time, (a) with respect to any amount
denominated in U.S. Dollars, such amount, and (b) with respect to any amount
denominated in any Approved Alternate Currency, the equivalent amount thereof in
U.S. Dollars as determined by the Administrative Agent at such time on the basis
of the Spot Rate (determined in respect of the most recent Revaluation Date) for
the purchase of U.S. Dollars with such Approved Alternative Currency.

“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 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

 

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funding deficiency” (as defined in Section 431 of the Code or Section 304 of
ERISA), whether or not waived; (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.

“Euros” and the sign “€” each mean the lawful currency of the “participating
member states” (as described in the EMU Legislation) introduced in accordance
with the EMU Legislation.

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

“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.

“Exempted Debt” means the sum, without duplication, of the following items
outstanding as of the date Exempted Debt is being determined: (i) 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 (ii) 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 Fifth
Amended and Restated Credit Agreement, dated as of June 28, 2007, among the
Borrower, various lending institutions and JPMCB, as Administrative Agent, as in
effect on the Effective Date.

“Existing Letter of Credit” has the meaning assigned to such term in
Section 2.05(d).

“Existing Liens” means the Liens on the assets and properties of the
Subsidiaries of the Borrower outstanding on the Effective Date and set forth in
Schedule 6.01.

“Existing Senior Notes Indentures” means (i) 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, (ii) that certain Indenture,
dated as of May 20, 2002, among RJRTH, as issuer, the Borrower and 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, and (iii) that
certain Amended and Restated Indenture, dated as of July 24, 1995, between
RJRTH, as issuer, and The Bank of New York Trust Company, N.A., as successor
trustee, as in effect on the Effective Date and as the same may be amended,
modified and/or supplemented from time to time.

“Expected Total Commitment” means, at any time of determination with respect to
any future date, the Total Commitment in effect at such time of determination
less the aggregate Commitments of all Lenders with a Maturity Date prior to such
future date.

“Extension Date” means July 29, 2012 or July 29, 2013, as applicable; provided
that no Extension Date shall occur after July 29, 2013.

“Extension Response Date” has the meaning assigned to such term in Section 2.21.

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

“Facility Fee” has the meaning assigned to such term in Section 2.11.

“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.

“Final Maturity Date” means July 29, 2015, as such date may be extended pursuant
to Section 2.21.

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

“Fitch” means Fitch Ratings.

 

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“Foreign Subsidiary” of any Person means any Subsidiary of such Person not
incorporated or organized in the United States of America or any State or
territory thereof, or the District of Columbia.

“Funded Debt” means all Indebtedness for money borrowed, 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.

“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.

“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.

“Incremental Amendment” has the meaning assigned to such term in
Section 2.20(a).

“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

 

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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).

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

“Information Memorandum” means the Confidential Information Memorandum dated
June 22, 2011 relating to the Borrower and the Transactions.

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

“Interest Payment Date” means (a) with respect to any ABR Loan (other than a
Swingline Loan), the last day of each March, June, September and December,
(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
and (c) with respect to any Swingline Loan, the day that such Loan is required
to be repaid.

“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 thereafter), 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

 

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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, in the case of a Revolving Borrowing, thereafter
shall be the effective date of the most recent conversion or continuation of
such Borrowing.

“IRS” means the United States Internal Revenue Service.

“Issuing Bank” means (i) JPMCB, (ii) each other Lender requested by the Borrower
to issue Letters of Credit, to the extent consented to by such Lender and the
Administrative Agent and (iii) with respect to Existing Letters of Credit, the
Lender designated as the issuer thereof on Schedule 2.05, in each case in its
capacity as an issuer of Letters of Credit hereunder, and their respective
successors in such capacity as provided in Section 2.05(j). Each Issuing Bank
may, in its discretion, arrange for one or more Letters of Credit to be issued
by Affiliates of such Issuing Bank, in which case the term “Issuing Bank” shall
include any such Affiliate with respect to Letters of Credit issued by such
Affiliate.

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

“Judgment Currency” has the meaning assigned to such term in Section 9.16.

“LC Availability Period” means, as to any Issuing Bank, the period from and
including the Effective Date to and including the earlier of the LC Issuer
Maturity Date of such Issuing Bank and any other date of termination of the
Commitments of such Issuing Bank (in its capacity as a Lender).

“LC Disbursement” means a payment made by an Issuing Bank pursuant to a Letter
of Credit.

“LC Exposure” means, at any time, the sum of (a) the aggregate Stated Amount of
all outstanding Letters of Credit at such time plus (b) the aggregate amount of
all LC Disbursements (taking the Dollar Equivalent of any LC Disbursement made
in a currency other than U.S. Dollars) that have not yet been reimbursed by or
on behalf of the Borrower at such time. The LC Exposure of any Lender at any
time shall be its Applicable Percentage of the total LC Exposure at such time.

“LC Issuer Maturity Date” has the meaning assigned to such term in
Section 2.05(c).

“LC Termination Date” means the fifth Business Day preceding the Final Maturity
Date.

“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 or
Section 2.20, other than any such Person that ceases to be a party hereto
pursuant to an Assignment and Assumption. Unless the context otherwise requires,
the term “Lenders” includes the Issuing Banks and the Swingline Lenders.

“Letter of Credit” means any letter of credit issued pursuant to this Agreement.

 

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“LIBO Rate” means, with respect to any Eurodollar Borrowing for any Interest
Period, the rate appearing on the Reuters Page LIBOR01 (or on any successor or
substitute page of such page) providing rate quotations comparable to those
currently provided on such page (or successor or substitute page), as determined
by the Administrative Agent from time to time for purposes of providing
quotations of interest rates applicable to dollar deposits in the London
interbank market) at approximately 11:00 a.m., London time, two Business Days
prior to the commencement of such Interest Period, as the rate for dollar
deposits with a maturity comparable to such Interest Period. In the event that
such rate is not available at such time for any reason, then the “LIBO Rate”
with respect to such Eurodollar Borrowing for such Interest Period shall be the
rate at which dollar deposits of $5,000,000 and for a maturity comparable to
such Interest Period are offered by the principal London office of the
Administrative Agent in immediately available funds in the London interbank
market at approximately 11:00 a.m., London time, two Business Days prior to the
commencement of such Interest Period.

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

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

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

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

“Marketable Investments” shall mean, as to any Person, (i) 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, (ii) 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, (iii) 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,
(iv) repurchase obligations with a term of not more than one year and
collateralized with US Treasury, US Government Agency or other permitted
investments consistent with the Borrower’s corporate guidelines and which have a
collateral margin of at least 102%, marked to market daily, (v) 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, (vi) U.S. dollar denominated commercial

 

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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, (vii) investments in 2a-7 money market funds, (viii) 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, (ix) 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, (x) 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, (xi) 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, (xii) 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,
(xiii) 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 (viii) 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 (viii) 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 (viii) above), and (xiv) separate
account portfolios which (x) constitute “current assets” within the meaning of
GAAP, (y) are managed by a registered investment advisor and (z) invest in
securities of the type described in clauses (i) and (ii) 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 (xiv) owned or held by the Borrower and its
Subsidiaries shall not exceed $500,000,000.

“Master Settlement Agreement” means (i) 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 B&W Parent, 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 (ii) 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.

“Material Adverse Effect” means (A) as such term is used in any representation
or warranty to be made, any covenant to be undertaken, any condition to be
satisfied or any Default to be determined, in any such case on the Effective
Date, a material adverse effect on the business, financial condition, results of
operations, assets or liabilities of the Borrower and its Subsidiaries, taken as
a whole, and (B) as such term is used in any representation or warranty to be
made, any covenant to be undertaken, any condition to be satisfied or any
Default to be determined, in any such case at any time after the Effective Date,
a material adverse effect on (i) the operations, business, property, assets or
financial condition of the Borrower and its Subsidiaries taken as a whole,
(ii) 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,
and/or (iii) in the case of Section 3.06(a), on the prospects of the Borrower
and its Subsidiaries taken as a whole, provided that (x) the existence of, or
the rendering of any verdict or entry of any order, injunction or judgment in,
any action, suit, proceeding or inquiry listed on Schedule 3.06 will not result
in a “Material Adverse Effect” for purposes of Section 3.06(a) and (y)(I) the
existence of, or the rendering of, any verdict or entry of any order, injunction
or judgment that in each case can be stayed pending appeal (but only for so long
as such stay can still be obtained) or that is stayed pending appeal and (II)
the posting of a supersedeas or other appeal bond in respect of any verdict,
order or judgment shall not, in

 

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each case, in and of itself result in a “Material Adverse Effect” for purposes
of Section 3.04(b), even if such verdict, order, injunction or judgment could be
viewed as resulting in a material adverse effect on future litigation prospects,
unless such verdict, order, injunction or judgment results in an actual material
adverse effect on the operations, business, property, assets or financial
condition of the Borrower and its Subsidiaries taken as a whole.

“Material Indebtedness” means Indebtedness (other than the Loans and Letters of
Credit), 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 (i) 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
(ii) 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% of the consolidated total assets of the
Borrower and its Subsidiaries at such date; provided, however, that if
(x) 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 (y) 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% 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 (x) or
(y) above, whereupon such Subsidiary shall cease to be a “Material

 

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Subsidiary” for all purposes of this Agreement 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” of any Lender means July 29, 2015, as such date may be extended
for such Lender pursuant to Section 2.21.

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

“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.

“Non-Continuing Lender” means, at any time, each Lender which is not a
Continuing Lender at such time.

“Non-Declared Restricted Payment” means, as to any Person, (i) 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 Effective 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 of the foregoing purposes and
(ii) the making or payment of any other Restricted Payment on or after the
Effective Date by such Person which, in the case of either clause (i) or (ii),
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.

“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,
any Issuing Bank, any Swingline Lender 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).

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

 

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“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)).

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

“Patriot Act” has the meaning assigned to such term in Section 9.15.

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

“Permitted Litigation Bonding” means the making of deposits with the proceeds of
Loans and/or the issuance of Letters of Credit, in each case for the purposes of
bonding litigation judgments entered against any Loan Party on and after the
Effective Date.

“Permitted Obligations” means (i) to pay taxes, (ii) to pay import duties, to
post customs bonds and otherwise make payments in connection with customs and
trade laws, (iii) to purchase equipment or fixtures and otherwise make capital
expenditures, (iv) to make payments in connection 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, (v) to make
utility payments, (vi) in connection with worker’s compensation obligations or
other employee disability obligations, (vii) to provide credit support for any
of the foregoing, (viii) in respect of employee loans made in connection with
transfers, (ix) to provide credit support for suppliers and distributors in the
ordinary course of business, and (x) to support Indebtedness supported by
Existing Letters of Credit on the Effective Date.

“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.

“Pounds Sterling” and the sign “£” each mean the freely transferable lawful
money of the United Kingdom.

“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.

 

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“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% 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, (b) any Lender
and (c) any Issuing Bank.

“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.

“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.

“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 Revolving Credit Exposures
and Unused Availability representing more than 50% of the sum of the total
Revolving Credit Exposures and total Unused Availability 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.

“Revaluation Date” means (a) with respect to any Loan, each of the following:
(i) each date of a Borrowing, (ii) each date of a continuation or conversion of
a Loan pursuant to Section 2.07 and (iii) such additional dates as the
Administrative Agent shall determine or the Required Lenders shall require
(provided that, unless an Event of Default has occurred and is continuing, no
such additional date of determination shall be required more frequently than
weekly); and (b) with respect to any Letter of Credit, each of the following:
(i) each date of issuance of a Letter of Credit, (ii) each date of an amendment,
extension or renewal of any such Letter of Credit, (iii) each date of any LC
Disbursement by an Issuing Bank under any Letter of Credit denominated in an
Approved Alternate Currency and (iv) such additional dates as the Administrative
Agent shall determine or the Required Lenders shall require (provided that,
unless an Event of Default has occurred and is continuing, no such additional
date of determination shall be required more frequently than weekly); provided,
subject to the rights of the Administrative Agent and the Required Lenders
pursuant to preceding clauses (a)(iii) and (b)(iv), for purposes of determining
compliance with Sections 2.09(b) and calculating fees pursuant to
Section 2.11(a) or (b), the “Revaluation Date” shall be the first Business Day
of each calendar month.

“Revolving Credit Exposure” means, with respect to any Lender at any time, the
sum of the outstanding principal amount of such Lender’s Revolving Loans and its
LC Exposure and Swingline Exposure at such time.

“Revolving Loan” means a Loan made pursuant to Section 2.03.

“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.

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

“Spot Rate” means, for a currency, the rate determined by the Administrative
Agent to be the rate quoted by the Administrative Agent as the spot rate for the
purchase by the Administrative Agent of such currency with another currency
through its principal foreign exchange trading office at approximately 11:00
a.m. on the date two Business Days prior to the date as of which the foreign
exchange computation is made (or, if the Administrative Agent does not have as
of the date of determination a spot buying rate for any such currency, such spot
rate from another financial institution as may be designated by the
Administrative Agent), provided that for purposes of any calculation of LC
Exposure used in the determination of “Required Lenders” (or the component
definitions as used therein) or the Dollar Equivalent of any LC Disbursement
under a Letter of Credit denominated in an Approved Alternate Currency, the
Administrative Agent may use such spot rate quoted on the date as of which the
foreign exchange computation is made.

 

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“Stated Amount” means, as to any Letter of Credit at any time, the maximum
amount available to be drawn thereunder (in each case determined (i) without
regard to whether any conditions to drawing thereunder could then be met,
(ii) after giving effect to any step-up or increase in the maximum amount to be
made available under such Letter of Credit after the issuance thereof,
regardless of whether or not such step-up or increase has in fact occurred at
such time but (iii) after giving effect to all previous drawings made
thereunder); provided that the “Stated Amount” of each Letter of Credit
denominated in an Approved Alternate Currency shall be, on any date of
calculation, the Dollar Equivalent of the maximum amount available to be drawn
in the applicable Approved Alternate Currency thereunder (determined (i) without
regard to whether any conditions to drawing thereunder could then be met,
(ii) after giving effect to any step-up or increase in the maximum amount to be
made available under such Letter of Credit after the issuance thereof,
regardless of whether or not such step-up or increase has in fact occurred at
such time but (iii) after giving effect to all previous drawings made
thereunder).

“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 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% of the equity or more than 50% of the ordinary voting power or, in the case
of a partnership, more than 50% 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 (i) each Material Subsidiary of the Borrower as of
the Effective Date and (ii) each other Subsidiary of the Borrower which executes
and delivers the Subsidiary Guarantee Agreement, in each case under the
immediately preceding clauses (i) and (ii), 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.

“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; 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.

 

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“Swingline Availability Period” means, as to any Swingline Lender, the period
from and including the Effective Date to and including the earlier of the
Swingline Maturity Date of such Swingline Lender and any other date of
termination of its Swingline Commitment or the Commitments.

“Swingline Commitment” means, at any time, for each Swingline Lender, the
commitment of such Swingline Lender to make Swingline Loans in an aggregate
principal amount not to exceed the lesser of (x) the Commitment of such
Swingline Lender (in its capacity as a Lender) at such time and (y) $50,000,000,
as the same may be reduced and/or adjusted from time to time pursuant to
Section 2.08, Article VII and/or Section 9.04.

“Swingline Exposure” means, at any time, the aggregate principal amount of all
Swingline Loans outstanding at such time. The Swingline Exposure of any Lender
at any time shall be its Applicable Percentage of the total Swingline Exposure
at such time.

“Swingline Lender” means each of JPMCB and Citibank in its capacity as lender of
Swingline Loans hereunder.

“Swingline Loan” means a Loan made pursuant to Section 2.04.

“Swingline Maturity Date” means, as to any Swingline Lender, the date which is
five Business Days prior to the Maturity Date of such Swingline Lender (in its
capacity as a Lender).

“Syndication Agent” means CGMI, 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.

“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, the use of the
proceeds thereof and the issuance of Letters of Credit hereunder.

“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 (i) do not
appear (and are not required to appear) as “restricted” on a consolidated
balance sheet of the Borrower, (ii) 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 (iii) are otherwise generally available for use
by the Borrower or such Subsidiary.

 

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

“Unused Availability” means, at any time, an amount equal to the excess, if any,
of (i) the aggregate amount of the Commitments of all Lenders at such time over
(ii) the sum of the aggregate Revolving Credit Exposures of all Lenders at such
time.

“U.S. Dollars” and the sign “$” each mean the freely transferrable lawful money
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 and the Administrative Agent.

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

 

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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.

SECTION 1.05. Exchange Rates; Change of Currency. (a) The Administrative Agent
shall determine the Spot Rates as of each Revaluation Date to be used for
calculating the Dollar Equivalent of LC Exposure relating to Letters of Credit
denominated in Approved Alternate Currencies. Such Spot Rates shall become
effective as of such Revaluation Date and shall be the Spot Rates employed in
converting any amounts between the applicable currencies until the next
Revaluation Date to occur. Except for purposes of financial statements delivered
by Loan Parties hereunder or calculating financial covenants hereunder or except
as otherwise provided herein, the applicable amount of any currency (other than
U.S. Dollars) for purposes of the Loan Documents shall be such Dollar Equivalent
amount as so determined by the Administrative Agent.

(b) Each provision of this Agreement shall be subject to such reasonable changes
of construction as the Administrative Agent may from time to time specify to be
appropriate to reflect the (i) adoption of the Euro by any member state of the
European Union and any relevant market conventions or practices relating to the
Euro or (ii) a change in currency of any other country and any relevant market
conventions or practices relating to the change in currency.

ARTICLE II

The Credits

SECTION 2.01. Commitments. Subject to the terms and conditions set forth herein,
each Lender severally agrees to make Revolving Loans in U.S. Dollars to the
Borrower from time to time during its Availability Period in an aggregate
principal amount that will not result in (a) such Lender’s Revolving Credit
Exposure exceeding such Lender’s Commitment or (b) the total Revolving Credit
Exposures exceeding the Total Commitment. Within the foregoing limits and
subject to the terms and conditions set forth herein, the Borrower may borrow,
prepay and reborrow Revolving Loans.

SECTION 2.02. Loans and Borrowings. (a) Each Revolving Loan shall be made as
part of a Borrowing consisting of Revolving Loans made by the Lenders ratably in
accordance with their respective Commitments. The failure of 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.

 

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(b) Subject to Section 2.13, each Revolving Borrowing shall be comprised
entirely of ABR Loans or Eurodollar Loans as the Borrower may request in
accordance herewith. Each Swingline Loan shall be an ABR Loan. 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 Revolving
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
Revolving 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; provided
that an ABR Revolving Borrowing may be in an aggregate amount that is equal to
the entire Unused Availability or that is required to finance the reimbursement
of an LC Disbursement as contemplated by Section 2.05(f). Each Swingline Loan
shall be in an amount that is an integral multiple of $100,000 and not less than
$1,000,000. Borrowings of more than one Type and Class may be outstanding at the
same time; provided that there shall not at any time be more than a total of 15
Eurodollar Revolving 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 of any Lender.

SECTION 2.03. Requests for Revolving Borrowings. To request a Revolving
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;
provided that any such notice of an ABR Revolving Borrowing to finance the
reimbursement of an LC Disbursement as contemplated by Section 2.05(e) may be
given not later than 10:00 a.m., New York City time, on 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.

 

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If no election as to the Type of Revolving Borrowing is specified, then the
requested Revolving Borrowing shall be an ABR Borrowing. If no Interest Period
is specified with respect to any requested Eurodollar Revolving 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. Swingline Loans. (a) Subject to the terms and conditions set forth
herein, each Swingline Lender severally agrees to make Swingline Loans in U.S.
Dollars to the Borrower from time to time during its Swingline Availability
Period, in an aggregate principal amount at any time outstanding that will not
result in (i) the aggregate principal amount of outstanding Swingline Loans made
by such Swingline Lender exceeding the Swingline Commitment of such Swingline
Lender and (ii) the total Revolving Credit Exposures exceeding the Total
Commitment; provided that no Swingline Lender shall be required to make a
Swingline Loan to refinance an outstanding Swingline Loan. Within the foregoing
limits and subject to the terms and conditions set forth herein, the Borrower
may borrow, prepay and reborrow Swingline Loans. Each Swingline Loan shall be
made as part of a Borrowing consisting of Swingline Loans made by the Swingline
Lenders ratably in accordance with their respective Swingline Commitments. The
failure of any Lender to make any Swingline Loan required to be made by it shall
not relieve any other Swingline Lender of its obligations hereunder; provided
that the Swingline Commitments of the Swingline Lenders are several and no
Swingline Lender shall be responsible for any other Swingline Lender’s failure
to make Swingline Loans as required. Notwithstanding anything to the contrary
contained herein, no Swingline Lender shall make a Swingline Loan after it has
received written notice from the Borrower, any other Loan Party or the Required
Lenders stating that a Default or an Event of Default exists and is continuing
(or any other condition to the funding of a Swingline Loan in Section 4.02
cannot be satisfied) until such time as such Swingline Lender shall have
received written notice of (i) rescission of all such notices from the party or
parties originally delivering such notice or notices or (ii) the waiver of such
Default or Event of Default (or condition to such funding) by the Required
Lenders.

(b) To request a Swingline Loan, the Borrower shall notify the Administrative
Agent of such request by telephone (confirmed by telecopy), not later than 12:00
noon, New York City time, on the day of a proposed Swingline Loan. Each such
notice shall be irrevocable and shall specify the requested date (which shall be
a Business Day) and the amount of the requested Swingline Loan. The
Administrative Agent will promptly advise each Swingline Lender of any such
notice received from the Borrower and of the amount of such Swingline Lender’s
Swingline Loan to be made as part of the requested Borrowing. Each Swingline
Lender shall make each Swingline Loan available to the Borrower by means of a
credit to the general deposit account of the Borrower with such Swingline Lender
(or as otherwise agreed by such Swingline Lender and the Borrower or, in the
case of a Swingline Loan made to finance the reimbursement of an LC Disbursement
as provided in Section 2.05(e), by remittance to the applicable Issuing Bank) by
3:00 p.m., New York City time, on the requested date of such Swingline Loan.

(c) Each Swingline Lender may by written notice given to the Administrative
Agent not later than 10:00 a.m., New York City time, on any Business Day require
the Lenders to acquire participations on such Business Day in all or a portion
of the outstanding Swingline Loans made by such Swingline Lender. Such notice
shall specify the aggregate amount of Swingline Loans in which Lenders will
participate. Promptly upon receipt of such notice, the Administrative Agent will
give notice thereof to each Lender, specifying in such notice such Lender’s
Applicable Percentage of such Swingline Loan or Swingline Loans. Each Lender
hereby absolutely and unconditionally agrees, upon receipt of notice as provided
above, to pay to the Administrative Agent, for the account of the applicable
Swingline Lender, such Lender’s Applicable Percentage of such Swingline Loan or
Swingline Loans. Each Lender acknowledges and agrees that its obligation to
acquire participations in Swingline Loans pursuant to this Section 2.04(c) is
absolute and unconditional and shall not be affected by any circumstance
whatsoever, including the occurrence and continuance of a Default or reduction
or termination of the Commitments,

 

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and that each such payment shall be made without any offset, abatement,
withholding or reduction whatsoever. Each Lender shall comply with its
obligation under this Section 2.04(c) by wire transfer of immediately available
funds, in the same manner as provided in Section 2.06 with respect to Loans made
by such Lender (and Section 2.06 shall apply, mutatis mutandis, to the payment
obligations of the Lenders), and the Administrative Agent shall promptly pay to
the applicable Swingline Lender the amounts so received by it from the Lenders.
The Administrative Agent shall notify the Borrower of any participations in any
Swingline Loan acquired pursuant to this Section 2.04(c), and thereafter
payments in respect of such Swingline Loan shall be made to the Administrative
Agent and not to the applicable Swingline Lender. Any amounts received by the
applicable Swingline Lender from the Borrower (or other party on behalf of the
Borrower) in respect of a Swingline Loan after receipt by such Swingline Lender
of the proceeds of a sale of participations therein shall be promptly remitted
to the Administrative Agent; any such amounts received by the Administrative
Agent shall be promptly remitted by the Administrative Agent to the Lenders that
shall have made their payments pursuant to this Section 2.04(c) and to the
applicable Swingline Lender, as their interests may appear; provided that any
such payment so remitted shall be repaid to the applicable Swingline Lender or
to the Administrative Agent, as applicable, if and to the extent such payment is
required to be refunded to the Borrower for any reason. The purchase of
participations in a Swingline Loan pursuant to this Section 2.04(c) shall not
relieve the Borrower of any default in the payment thereof.

SECTION 2.05. Letters of Credit. (a) General. Subject to the terms and
conditions set forth herein, the Borrower may request the issuance of Letters of
Credit denominated in U.S. Dollars or an Approved Alternate Currency for its own
account, in a form reasonably acceptable to the Administrative Agent and the
applicable Issuing Bank, at any time and from time to time during the LC
Availability Period of such Issuing Bank. In the event of any inconsistency
between the terms and conditions of this Agreement and the terms and conditions
of any form of letter of credit application or other agreement submitted by the
Borrower to, or entered into by the Borrower with, the applicable Issuing Bank
relating to any Letter of Credit, the terms and conditions of this Agreement
shall control.

(b) Notice of Issuance, Amendment, Renewal, Extension; Certain Conditions. To
request the issuance of a Letter of Credit (or the amendment, renewal or
extension of an outstanding Letter of Credit), the Borrower shall hand deliver
or telecopy (or transmit by electronic communication, if arrangements for doing
so have been approved by the applicable Issuing Bank) to the applicable Issuing
Bank and the Administrative Agent (reasonably in advance of the requested date
of issuance, amendment, renewal or extension) a notice requesting the issuance
of a Letter of Credit, or identifying the Letter of Credit to be amended,
renewed or extended, and specifying the date of issuance, amendment, renewal or
extension (which shall be a Business Day), the date on which such Letter of
Credit is to expire (which shall comply with Section 2.05(c)), the amount of
such Letter of Credit, the currency in which such Letter of Credit is to be
denominated, the name and address of the beneficiary thereof and such other
information as shall be necessary to prepare, amend, renew or extend such Letter
of Credit. If requested by an Issuing Bank, the Borrower also shall submit a
letter of credit application on such Issuing Bank’s standard form in connection
with any request for a Letter of Credit. A Letter of Credit shall be issued,
amended, renewed or extended only if (and upon issuance, amendment, renewal or
extension of each Letter of Credit the Borrower shall be deemed to represent and
warrant that), after giving effect to such issuance, amendment, renewal or
extension (i) the total LC Exposure shall not exceed $200,000,000, (ii) the LC
Exposure with respect to all Letters of Credit issued by any individual Issuing
Bank shall not exceed $100,000,000 (or such greater amount as such Issuing Bank
shall agree to in its sole discretion) and (iii) the total Revolving Credit
Exposures shall not exceed the Total Commitment.

(c) Expiration Date. Each Letter of Credit shall expire at or prior to the close
of business on the earlier of (i) the date one year after the date of the
issuance of such Letter of Credit (or, in the case of any renewal or extension
thereof, one year after such renewal or extension) and (ii) the LC

 

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Termination Date; provided that, notwithstanding the foregoing, no Letter of
Credit shall be issued (x) with an expiration date beyond the then Maturity Date
of any Lender if after giving effect thereto the total Revolving Credit
Exposures would exceed the Expected Total Commitment in effect for each day on
which such Letter of Credit is to be outstanding that occurs beyond such
Maturity Date or (y) with an expiration date beyond the Business Day next
preceding the then Maturity Date of the Issuing Bank thereof (as to any Issuing
Bank, its “LC Issuer Maturity Date”), provided, however, that, at the request of
the Borrower, an Issuing Bank may in its sole discretion permit any Letter of
Credit to have an expiration date after the LC Termination Date by giving
written notice of such permission to the Borrower, so long as upon the date of
any request of the respective Issuing Bank the Borrower shall pay to the
respective Issuing Bank an amount of cash and/or cash equivalents acceptable to
such Issuing Bank (in U.S. Dollars or the applicable Approved Alternate Currency
as requested by such Issuing Bank) equal to 105% of the LC Exposure with respect
to such Letter of Credit, such cash and cash equivalents to be held as security
for the obligations of the Borrower in respect of such Letter of Credit in a
cash collateral account, and pursuant to cash collateral arrangements,
satisfactory to such Issuing Bank.

(d) Existing Letters of Credit. Schedule 2.05 contains a description of all
letters of credit issued by any lender for the account of the Borrower pursuant
to the Existing Credit Agreement and outstanding on the Effective Date (and
setting forth, with respect to each such letter of credit, (i) the name of the
issuing lender, (ii) the letter of credit number, (iii) the name(s) of the
account party or account parties, (iv) the stated amount (including the currency
in which such letter of credit is denominated), (v) the name of the beneficiary
and (vi) the expiry date). Each such letter of credit, including any extension
or renewal thereof (each, as amended from time to time in accordance with the
terms thereof and hereof, an “Existing Letter of Credit”) shall constitute a
“Letter of Credit” issued for the account of the Borrower for all purposes of
this Agreement, issued, for purposes of Section 2.05, on the Effective Date and
the respective issuer(s) thereof shall constitute “Issuing Bank(s)” with respect
to such Letter of Credit for all purposes of this Agreement.

(e) Participations. By the issuance or renewal of a Letter of Credit (or an
amendment to a Letter of Credit increasing the amount thereof) and without any
further action on the part of any Issuing Bank or the Lenders, each Issuing Bank
hereby grants to each Lender, and each Lender hereby acquires from such Issuing
Bank, a participation in such Letter of Credit equal to such Lender’s Applicable
Percentage of the Stated Amount of such Letter of Credit. In consideration and
in furtherance of the foregoing, each Lender hereby absolutely and
unconditionally agrees to pay to the Administrative Agent in U.S. Dollars, for
the account of such Issuing Bank, such Lender’s Applicable Percentage of each LC
Disbursement made by such Issuing Bank and not reimbursed by the Borrower on the
date due as provided in Section 2.05(f) or of any reimbursement payment required
to be refunded to the Borrower for any reason (for this purpose, taking the
Dollar Equivalent of any LC Disbursement or other reimbursement payment made in
an Approved Alternate Currency). Each Lender acknowledges and agrees that its
obligation to acquire participations pursuant to this Section 2.05(e) in respect
of Letters of Credit is absolute and unconditional and shall not be affected by
any circumstance whatsoever, including any amendment, renewal or extension of
any Letter of Credit or the occurrence and continuance of a Default or reduction
or termination of the Commitments, and that each such payment shall be made
without any offset, abatement, withholding or reduction whatsoever.

(f) Reimbursement. If any Issuing Bank shall make any LC Disbursement in respect
of a Letter of Credit, the Borrower shall reimburse such LC Disbursement by
paying to the Administrative Agent in U.S. Dollars an amount equal to such LC
Disbursement (for this purpose, taking the Dollar Equivalent of any LC
Disbursement made in an Approved Alternate Currency) not later than 12:00 noon,
New York City time, on the date that such LC Disbursement is made, if the
Borrower shall have received notice of such LC Disbursement prior to 10:00 a.m.,
New York City time, on such date, or, if such notice has not been received by
the Borrower prior to such time on such date, then not later than

 

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12:00 noon, New York City time, on (i) the Business Day that the Borrower
receives such notice, if such notice is received prior to 10:00 a.m., New York
City time, on the day of receipt, or (ii) the Business Day immediately following
the day that the Borrower receives such notice, if such notice is not received
prior to such time on the day of receipt; provided that the Borrower may,
subject to the conditions to borrowing set forth herein, request in accordance
with Section 2.03 or 2.04 that such payment be financed with an ABR Revolving
Borrowing or Swingline Loan in an equivalent amount and, to the extent so
financed, the Borrower’s obligation to make such payment shall be discharged and
replaced by the resulting ABR Revolving Borrowing or Swingline Loan. If the
Borrower fails to make such payment when due, the Administrative Agent shall
notify each Lender of the applicable LC Disbursement, the payment then due from
the Borrower in respect thereof and such Lender’s Applicable Percentage thereof.
Promptly following receipt of such notice, each Lender shall pay to the
Administrative Agent in U.S. Dollars its Applicable Percentage of the payment
then due from the Borrower, in the same manner as provided in Section 2.06 with
respect to Loans made by such Lender (and Section 2.06 shall apply, mutatis
mutandis, to the payment obligations of the Lenders), and the Administrative
Agent shall promptly pay to such Issuing Bank the amounts so received by it from
the Lenders. Promptly following receipt by the Administrative Agent of any
payment from the Borrower pursuant to this Section 2.05(f), the Administrative
Agent shall distribute such payment to the applicable Issuing Bank or, to the
extent that Lenders have made payments pursuant to this Section 2.05(f) to
reimburse the applicable Issuing Bank, then to such Lenders and such Issuing
Bank as their interests may appear. Any payment made by a Lender pursuant to
this Section 2.05(f) to reimburse an Issuing Bank for any LC Disbursement (other
than the funding of ABR Revolving Loans or a Swingline Loan as contemplated
above) shall not constitute a Loan and shall not relieve the Borrower of its
obligation to reimburse such LC Disbursement.

(g) Obligations Absolute. The Borrower’s obligation to reimburse LC
Disbursements as provided in Section 2.05(f) shall be absolute, unconditional
and irrevocable, and shall be performed strictly in accordance with the terms of
this Agreement under any and all circumstances whatsoever and irrespective of
(i) any lack of validity or enforceability of any Letter of Credit or this
Agreement, or any term or provision therein, (ii) any draft or other document
presented under a Letter of Credit proving to be forged, fraudulent or invalid
in any respect or any statement therein being untrue or inaccurate in any
respect, (iii) payment by any Issuing Bank under a Letter of Credit against
presentation of a draft or other document that does not comply with the terms of
such Letter of Credit, or (iv) any other event or circumstance whatsoever,
whether or not similar to any of the foregoing, that might, but for the
provisions of this Section 2.05, constitute a legal or equitable discharge of,
or provide a right of setoff against, the Borrower’s obligations hereunder. None
of the Administrative Agent, the Lenders or any Issuing Bank, or any of their
Related Parties, shall have any liability or responsibility by reason of or in
connection with the issuance or transfer of any Letter of Credit or any payment
or failure to make any payment thereunder (irrespective of any of the
circumstances referred to in the preceding sentence), or any error, omission,
interruption, loss or delay in transmission or delivery of any draft, notice or
other communication under or relating to any Letter of Credit (including any
document required to make a drawing thereunder), any error in interpretation of
technical terms or any consequence arising from causes beyond the control of any
Issuing Bank; provided that the foregoing shall not be construed to excuse any
Issuing Bank from liability to the Borrower to the extent of any direct damages
(as opposed to consequential damages, claims in respect of which are hereby
waived by the Borrower to the extent permitted by applicable law) suffered by
the Borrower that are caused by an Issuing Bank’s failure to exercise care when
determining whether drafts and other documents presented under a Letter of
Credit comply with the terms thereof. The parties hereto expressly agree that,
in the absence of gross negligence or willful misconduct on the part of the
relevant Issuing Bank (as finally determined by a court of competent
jurisdiction), such Issuing Bank shall be deemed to have exercised care in each
such determination. In furtherance of the foregoing and without limiting the
generality thereof, the parties agree that, with respect to documents presented
which appear on their face to be in substantial compliance with the terms of a
Letter of Credit, each Issuing Bank may, in its sole discretion, either accept
and make

 

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payment upon such documents without responsibility for further investigation,
regardless of any notice or information to the contrary, or refuse to accept and
make payment upon such documents if such documents are not in strict compliance
with the terms of such Letter of Credit.

(h) Disbursement Procedures. Each Issuing Bank shall, promptly following its
receipt thereof, examine all documents purporting to represent a demand for
payment under a Letter of Credit. Each Issuing Bank shall promptly notify the
Administrative Agent and the Borrower by telephone (confirmed by telecopy) of
such demand for payment and whether such Issuing Bank has made or will make an
LC Disbursement thereunder; provided that any failure to give or delay in giving
such notice shall not relieve the Borrower of its obligation to reimburse such
Issuing Bank and the Lenders with respect to any such LC Disbursement.

(i) Interim Interest. If any Issuing Bank shall make any LC Disbursement, then,
unless the Borrower shall reimburse such LC Disbursement in full on the date
such LC Disbursement is made, the unpaid amount thereof shall bear interest, for
each day from and including the date such LC Disbursement is made to but
excluding the date that the Borrower reimburses such LC Disbursement, at the
rate per annum then applicable to ABR Revolving Loans; provided that, if the
Borrower fails to reimburse such LC Disbursement when due pursuant to
Section 2.05(f), then Section 2.12(c) shall apply. Interest accrued pursuant to
this paragraph shall be for the account of the relevant Issuing Bank, except
that interest accrued on and after the date of payment by any Lender pursuant to
Section 2.05(f) to reimburse an Issuing Bank shall be for the account of such
Lender to the extent of such payment.

(j) Replacement of Issuing Bank. Any Issuing Bank may be replaced at any time by
written agreement among the Borrower, the Administrative Agent, the replaced
Issuing Bank and the successor Issuing Bank. The Administrative Agent shall
notify the Lenders of any such replacement of any Issuing Bank. At the time any
such replacement shall become effective, the Borrower shall pay all unpaid fees
accrued for the account of the replaced Issuing Bank pursuant to
Section 2.11(b). From and after the effective date of any such replacement,
(i) the successor Issuing Bank shall have all the rights and obligations of an
Issuing Bank under this Agreement with respect to Letters of Credit to be issued
thereafter and (ii) references herein to the term “Issuing Bank” shall be deemed
to refer to such successor or to any previous Issuing Bank, or to such successor
and all previous Issuing Banks, as the context shall require. After the
replacement of an Issuing Bank hereunder, the replaced Issuing Bank shall remain
a party hereto and shall continue to have all the rights and obligations of an
Issuing Bank under this Agreement with respect to Letters of Credit issued by it
prior to such replacement, but shall not be required to issue additional Letters
of Credit.

(k) Cash Collateralization. If any Event of Default shall occur and be
continuing, on the Business Day that the Borrower receives notice from the
Administrative Agent or the Required Lenders demanding the deposit of cash
collateral pursuant to this Section 2.05(k), the Borrower shall deposit in an
account with the Administrative Agent, in the name of the Administrative Agent
and for the benefit of the Lenders, an amount in cash (in U.S. Dollars or, if
requested by the Administrative Agent in the case of any Letter of Credit
denominated in an Approved Alternate Currency, such Approved Alternate Currency)
equal to the LC Exposure as of such date plus any accrued and unpaid interest
thereon; provided that the obligation to deposit such cash collateral shall
become effective immediately, and such deposit shall become immediately due and
payable, without demand or other notice of any kind, upon the occurrence of any
Event of Default with respect to the Borrower described in clause (h) or (i) of
Article VII. Such deposit shall be held by the Administrative Agent as
collateral for the payment and performance of the Obligations. The
Administrative Agent shall have exclusive dominion and control, including the
exclusive right of withdrawal, over such account. Such deposits shall not bear
interest except for any interest earned on the investment of such deposits,
provided that any such investments (x) shall be made at the option and sole
discretion of the Administrative Agent, (y) must be approved in

 

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writing in advance by the Borrower, and (z) shall be at the Borrower’s risk and
expense to the extent (and only to the extent) that such investments have been
approved in advance in writing by the Borrower. Interest or profits, if any, on
such investments shall accumulate in such account. Moneys in such account shall
be applied by the Administrative Agent to reimburse each Issuing Bank for LC
Disbursements for which it has not been reimbursed and, to the extent not so
applied, shall be held for the satisfaction of the reimbursement obligations of
the Borrower for the LC Exposure at such time or, if the maturity of the Loans
has been accelerated (but subject to the consent of the Required Lenders), be
applied to satisfy other Obligations. If the Borrower is required to provide an
amount of cash collateral hereunder as a result of the occurrence of an Event of
Default, such amount, together with interest or profits, if any, thereon, shall
(to the extent not applied as aforesaid) be returned to the Borrower within
three Business Days after all Events of Default have been cured or waived.

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; provided that Swingline Loans shall be made as provided
in Section 2.04. 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;
provided that ABR Revolving Loans made to finance the reimbursement of an LC
Disbursement as provided in Section 2.05(f) shall be remitted by the
Administrative Agent to the relevant Issuing Bank.

(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 Revolving Borrowing initially shall
be of the Type specified in the applicable Borrowing Request and, in the case of
a Eurodollar Revolving 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 Revolving 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. This Section shall not apply to
Swingline Borrowings, which may not be converted or continued.

(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
Revolving Borrowing of the Type resulting

 

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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 Revolving 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 Revolving
Borrowing (in which case the information to be specified pursuant to clauses
(iii) and (iv) below shall be specified for each resulting Revolving Borrowing);

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

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

(iv) if the resulting Revolving Borrowing is a Eurodollar Revolving 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 Revolving Borrowing.

(e) If the Borrower fails to deliver a timely Interest Election Request with
respect to a Eurodollar Revolving Borrowing prior to the end of the Interest
Period applicable thereto, then, unless such Revolving Borrowing is repaid as
provided herein, at the end of such Interest Period such Revolving Borrowing
shall be converted to an ABR Revolving 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
Revolving Borrowing may be converted to or continued as a Eurodollar Revolving
Borrowing and (ii) unless repaid, each Eurodollar Revolving Borrowing shall be
converted to an ABR Revolving 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 on the Final Maturity Date.

(b) Unless previously terminated, the Commitment of each Lender shall terminate
in its entirety on such Lender’s Maturity Date.

(c) Unless previously terminated, the Swingline Commitment of each Swingline
Lender shall terminate on the Swingline Maturity Date of such Swingline Lender.

 

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(d) The Borrower may at any time terminate, or from time to time reduce, the
Commitments; provided that (i) 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,
(ii) the Borrower shall not terminate or reduce the Commitments if, after giving
effect to any concurrent prepayment of the Loans in accordance with
Section 2.10, the Revolving Credit Exposures would exceed the Total Commitment
and (iii) at any time within the 30 days prior to the Maturity Date of any
Non-Continuing Lender and so long as no Event of Default then exists, the
Borrower may terminate the Commitment of such Non-Continuing Lender, provided
that (x) all Loans, together with unpaid accrued interest thereon and all
accrued but unpaid fees pursuant to Section 2.11, of such Non-Continuing Lender
are repaid or paid, as applicable, in full and (y) after giving effect to such
termination and repayment, the sum of the Revolving Credit Exposures does not
exceed the Total Commitment.

(e) The Borrower shall notify the Administrative Agent of any election to
terminate or reduce the Commitments under Section 2.08(d) 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 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 (i) to the Administrative Agent for the account
of each Lender the then unpaid principal amount of each Revolving Loan made by
such Lender on such Lender’s Maturity Date and (ii) to each Swingline Lender the
then unpaid principal amount of each Swingline Loan made by such Swingline
Lender on the Swingline Maturity Date of such Swingline Lender and the first
date after such Swingline Loan is made that is the 15th or last day of a
calendar month and is at least two Business Days after such Swingline Loan is
made; provided that on each date that a Revolving Borrowing is made, the
Borrower shall repay all Swingline Loans then outstanding.

(b) If on any date the sum of (x) the aggregate outstanding principal amount of
Revolving Loans and Swingline Loans (after giving effect to all other repayments
thereof on such date) and (y) the aggregate amount of LC Exposure on such date,
exceeds the Total Commitment as then in effect, the Borrower shall repay on such
date, the principal of Swingline Loans, and if no Swingline Loans are or remain
outstanding, the principal of Revolving Loans in an aggregate amount equal to
such excess. If, after giving effect to the prepayment of all outstanding
Swingline Loans and all outstanding Revolving Loans, the aggregate amount of LC
Exposure exceeds the Total Commitment as then in effect, the Borrower shall pay
to the Administrative Agent (at its office identified in Section 2.17) on such
date an amount in cash and/or cash equivalents (in U.S. Dollars or, if requested
by the Administrative Agent in the case of any LC Exposure with respect to a
Letter of Credit denominated in an Approved Alternate Currency, such Approved
Alternate Currency) equal to such excess (up to the aggregate amount of LC
Exposure at such time) and the Administrative Agent shall hold such payment as
security for the Obligations of the Borrower to the Lenders hereunder pursuant
to a cash collateral agreement to be entered into in form and substance
reasonably satisfactory to the Administrative Agent. If the Borrower is required
to provide an amount of cash collateral pursuant to this Section 2.09(b), such
amount, together with interest or profits, if any, thereon, shall (so long as no
Default has occurred and is continuing) be returned to the Borrower within five
Business Days after the date on which the requirements of the foregoing sentence
would cease to require such cash collateralization.

 

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(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 Class and 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.

(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, subject
to prior notice in accordance with Section 2.10(b).

(b) The Borrower shall notify the Administrative Agent (and, in the case of
prepayment of a Swingline Loan, each Swingline Lender) by telephone (confirmed
by telecopy) of any prepayment hereunder (i) in the case of prepayment of a
Eurodollar Revolving Borrowing, not later than 11:00 a.m., New York City time,
three Business Days before the date of prepayment, (ii) in the case of
prepayment of an ABR Revolving Borrowing, not later than 11:00 a.m., New York
City time, one Business Day before the date of prepayment or (iii) in the case
of prepayment of a Swingline Loan, not later than 12:00 noon, New York City
time, on 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 Revolving Borrowing, the
Administrative Agent shall advise the Lenders of the contents thereof. Each
partial prepayment of any Revolving Borrowing shall be in an amount that would
be permitted in the case of an advance of a Revolving Borrowing of the same Type
as provided in Section 2.02. Each prepayment of a Revolving Borrowing shall be
applied ratably to the Loans included in the prepaid Borrowing, provided that
(x) at the Borrower’s election in connection with any prepayment pursuant to
this Section 2.10(b), such prepayment shall not be applied to any Revolving Loan
of a Defaulting Lender and (y) the Borrower may repay the Revolving Loans of a
Non-Continuing Lender in connection with the termination of the Commitments of
such Non-Continuing Lender in accordance with the requirements of clause
(iii) of the proviso appearing in Section 2.08(d) without any accompanying
repayment of the Revolving Loans of the other Lenders, so long as all amounts,
if any, due and owing to such Lender (and any other Lenders) pursuant to Section
2.15 are paid at such time. Each prepayment of a Swingline Borrowing shall be
applied ratably to the Swingline Loans included in the prepaid Borrowing.
Prepayments shall be accompanied by accrued interest to the extent required by
Section 2.12.

 

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SECTION 2.11. Fees. (a) The Borrower agrees to pay to the Administrative Agent
for the account of each Lender a facility fee (a “Facility Fee”), which shall
accrue at the Applicable Rate on the daily amount of the Commitment of such
Lender (whether used or unused) during the period from and including the
Effective Date to but excluding the date on which such Commitment terminates;
provided that, if such Lender continues to have any Revolving Credit Exposure
after its Commitment terminates, then such Facility Fee shall continue to accrue
on the daily amount of such Lender’s Revolving Credit Exposure from and
including the date on which its Commitment terminates to but excluding the date
on which such Lender ceases to have any Revolving Credit Exposure. Accrued
Facility Fees shall be payable in U.S. Dollars in arrears on the third Business
Day after the last day of March, June, September and December of each year and
on the date on which the Commitment of the applicable Lender terminates,
commencing on the first such date to occur after the date hereof; provided that
any Facility Fees accruing after the date on which the Commitment of such Lender
terminates shall be payable on demand. All Facility 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).

(b) The Borrower agrees to pay (i) to the Administrative Agent for the account
of each Lender in U.S. Dollars a participation fee with respect to its
participations in Letters of Credit, which shall accrue at the same Applicable
Rate used to determine the interest rate applicable to Eurodollar Revolving
Loans on the average daily amount of such Lender’s LC Exposure (excluding any
portion thereof attributable to unreimbursed LC Disbursements) during the period
from and including the Effective Date to but excluding the later of the date on
which such Lender’s Commitment terminates and the date on which such Lender
ceases to have any LC Exposure, and (ii) to each Issuing Bank in U.S. Dollars a
fronting fee, which shall accrue at the rate or rates per annum separately
agreed upon between the Borrower and such Issuing Bank on the average daily
amount of the LC Exposure with respect to Letters of Credit issued by such
Issuing Bank (excluding any portion thereof attributable to unreimbursed LC
Disbursements) during the period from and including the Effective Date to but
excluding the later of the date of the termination of the Commitment of such
Issuing Bank and the date on which there ceases to be any LC Exposure with
respect to Letters of Credit issued by such Issuing Bank, as well as each
Issuing Bank’s standard fees with respect to the issuance, amendment, renewal or
extension of any Letter of Credit or processing of drawings thereunder.
Participation fees and fronting fees accrued through and including the last day
of March, June, September and December of each year shall be payable on the
third Business Day following such last day, commencing on the first such date to
occur after the Effective Date; provided that all such fees shall be payable on
the date on which the Commitment of such Lender or Issuing Bank, as the case may
be, terminates and any such fees accruing after the date on which such
Commitment terminates shall be payable on demand. Any other fees payable to any
Issuing Bank pursuant to this Section 2.11(b) shall be payable within 10 days
after demand. All participation fees and fronting 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).

(c) The Borrower agrees to pay to the Administrative Agent, for its own account,
fees payable in the amounts and at the times separately agreed upon between the
Borrower and the Administrative Agent.

(d) All fees payable hereunder shall be paid on the dates due, in immediately
available funds, to the Administrative Agent (or to any Issuing Bank, in the
case of fees payable to it) for distribution, in the case of Facility Fees and
Letters of Credit participation fees, to the Lenders. Fees paid shall not be
refundable under any circumstances.

 

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SECTION 2.12. Interest. (a) The Loans comprising each ABR Borrowing (including
each Swingline Loan) shall bear interest at the Alternate Base Rate plus the
Applicable Rate.

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

(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% 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% 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 (or, in the case of a Swingline Loan, the Swingline
Commitment of any Swingline Lender which made such Swingline 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 Revolving Loan prior to the end of the Availability
Period of the applicable Lenders), 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 Revolving 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 Revolving Borrowing to, or
continuation of any Revolving Borrowing as, a Eurodollar Borrowing shall be
ineffective and (ii) if any Borrowing Request requests a Eurodollar Revolving
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.

 

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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 any Issuing Bank; or

(ii) impose on any Lender or any Issuing Bank or the London interbank market any
other condition affecting this Agreement or Eurodollar Loans made by such Lender
or any Letter of Credit or participation therein; 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 increase the cost to
such Lender, such Issuing Bank or such other Recipient of participating in,
issuing or maintaining any Letter of Credit or to reduce the amount of any sum
received or receivable by such Lender, such Issuing Bank or such other Recipient
hereunder (whether of principal, interest or otherwise), then the Borrower will
pay to such Lender, such Issuing Bank or such other Recipient, as the case may
be, such additional amount or amounts as will compensate such Lender, such
Issuing Bank or such other Recipient, as the case may be, for such additional
costs incurred or reduction suffered.

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

(c) A certificate of a Lender or an Issuing Bank setting forth the amount or
amounts necessary to compensate such Lender or such Issuing Bank 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 or such Issuing Bank, as the case may be, 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 or any Issuing Bank to demand
compensation pursuant to this Section shall not constitute a waiver of such
Lender’s or such Issuing Bank’s right to demand such compensation; provided that
the Borrower shall not be required to compensate a Lender or an Issuing Bank
pursuant to this Section for any increased costs or reductions incurred more
than 270 days prior to the date that such Lender or such Issuing Bank, as the
case may be,

 

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notifies the Borrower of the Change in Law giving rise to such increased costs
or reductions and of such Lender’s or such Issuing Bank’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 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 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

 

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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.

(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 such 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 such 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 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 such 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;

 

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(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 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 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
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 and (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 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.

 

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(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
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, fees or reimbursement of LC Disbursements, 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, except payments to be made
directly to an Issuing Bank or a Swingline Lender as expressly provided herein
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 any
payment accruing interest, interest thereon shall be payable for the period of
such extension. 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, unreimbursed LC
Disbursements, 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
and unreimbursed LC Disbursements then due hereunder, ratably among the parties
entitled thereto in accordance with the amounts of principal and unreimbursed LC
Disbursements (for this purpose, taking the Dollar Equivalent of any LC
Disbursement made in an Approved Alternate Currency) 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 Revolving Loans or participations in LC Disbursements or Swingline Loans
resulting in such Lender receiving payment of a greater proportion of the
aggregate amount of its Revolving Loans and participations in LC Disbursements
and Swingline 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
Revolving Loans and participations in LC Disbursements (for purposes of any
participation in an LC Disbursement under a Letter of Credit denominated in an
Approved Alternate Currency, taking the Dollar equivalent of such LC
Disbursement) and Swingline 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 Revolving Loans and participations in LC Disbursements (for
purposes of any participation in an LC Disbursement made under a Letter of
Credit denominated in an Approved Alternate Currency, taking the Dollar
equivalent of such LC Disbursement) and Swingline 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

 

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non-pro rata payments expressly contemplated by Sections 2.10(b) and 2.09(a) (in
connection with the earlier Maturity Date of a given Lender) or any payment
obtained by a Lender as consideration for the assignment of or sale of a
participation in any of its Loans or participations in LC Disbursements 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 or the Issuing Banks 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 or the applicable Issuing Bank, as
the case may be, the amount due. In such event, if the Borrower has not in fact
made such payment, then each of the Lenders or the applicable Issuing Bank, as
the case may be, severally agrees to repay to the Administrative Agent forthwith
on demand the amount so distributed to such Lender or Issuing Bank 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 Section 2.04(c), 2.05(e) or (f), 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, each Swingline Lender or each Issuing Bank 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.

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 (w) any Lender becomes a Non-Continuing Lender at any time after the
applicable Extension Response Date occurring after the Effective Date, (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,

 

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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 and each Issuing Bank, 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 and participations in LC Disbursements (for purposes of
any participation in an LC Disbursement made under a Letter of Credit
denominated in an Approved Alternate Currency, taking the Dollar equivalent of
such LC Disbursement) and Swingline 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), (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 and (iv) in the case of
the replacement of any Lender that is a Non-Continuing Lender as contemplated by
clause (w) above, the Maturity Date applicable to the assignee’s Commitment
shall be the Final Maturity Date then in effect. 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;

(b) the Commitment and Revolving Credit Exposure 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;

(c) if any Swingline Exposure or LC Exposure exists at the time a Lender becomes
a Defaulting Lender then:

(i) all or any part of such Swingline Exposure and LC Exposure shall be
reallocated among the non-Defaulting Lenders in accordance with their respective
Applicable Percentages but only to the extent (x) the sum of all non-Defaulting
Lenders’ Revolving Credit Exposures plus such Defaulting Lender’s Swingline
Exposure and LC Exposure does not exceed the total of all non-Defaulting
Lenders’ Commitments and (y) the conditions set forth in Section 4.02 are
satisfied at such time; and

(ii) if the reallocation described in clause (i) above cannot, or can only
partially, be effected, the Borrower shall within one (1) Business Day following
notice by the Administrative Agent (x) first, prepay such Swingline Exposure and
(y) second, cash collateralize such Defaulting Lender’s LC Exposure (after
giving effect to any partial reallocation pursuant to clause (i) above) in
accordance with the procedures set forth in Section 2.05(k) for so long as such
LC Exposure is outstanding;

(iii) if the Borrower cash collateralizes any portion of such Defaulting
Lender’s LC Exposure pursuant to this Section 2.19(c), the Borrower shall not be
required to pay any fees to such Defaulting Lender pursuant to Section 2.11(b)
with respect to such Defaulting Lender’s LC Exposure during the period such
Defaulting Lender’s LC Exposure is cash collateralized;

 

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(iv) if the LC Exposure of the non-Defaulting Lenders is reallocated pursuant to
this Section 2.19(c), then the fees payable to the Lenders pursuant to
Section 2.11(b) shall be adjusted in accordance with such non-Defaulting
Lenders’ Applicable Percentages; or

(v) if any Defaulting Lender’s LC Exposure is neither cash collateralized nor
reallocated pursuant to this Section 2.19(c), then, without prejudice to any
rights or remedies of any Issuing Bank or any Lender hereunder, all Facility
Fees that otherwise would have been payable to such Defaulting Lender (solely
with respect to the portion of such Defaulting Lender’s Commitment that was
utilized by such LC Exposure) and letter of credit fees payable under
Section 2.11(b) with respect to such Defaulting Lender’s LC Exposure shall be
payable to the applicable Issuing Bank until such LC Exposure is cash
collateralized and/or reallocated; and

(d) so long as any Lender is a Defaulting Lender, no Swingline Lender shall be
required to fund any Swingline Loan and no Issuing Bank shall be required to
issue, amend, renew or increase any Letter of Credit, unless it is satisfied
that the related exposure will be 100% covered by the Commitments of the
non-Defaulting Lenders and/or cash collateral will be provided by the Borrower
in accordance with Section 2.19(c), and participating interests in any such
newly issued or increased Letter of Credit or newly made Swingline Loan shall be
allocated among non-Defaulting Lenders in a manner consistent with
Section 2.19(c)(i) (and Defaulting Lenders shall not participate therein).

In the event that the Administrative Agent, the Borrower, each Issuing Bank and
each Swingline Lender each agrees that a Defaulting Lender has adequately
remedied all matters that caused such Lender to be a Defaulting Lender, then the
Swingline Exposure and LC Exposure of the Lenders shall be readjusted to reflect
the inclusion of such Lender’s Commitment and on such date such Lender shall
purchase at par such of the Loans of the other Lenders (other than Swingline
Loans) as the Administrative Agent shall determine may be necessary in order for
such Lender to hold such Loans in accordance with its Applicable Percentage.

SECTION 2.20. Incremental Commitments. (a) The Borrower may at any time or from
time to time after the Effective Date, by notice to the Administrative Agent,
request one or more increases in the amount of the Commitments (each such
increase, a “Commitment Increase”), provided that (i) both at the time of any
such request and upon the effectiveness of any Incremental Amendment referred to
below, (x) no Default shall exist and (y) all representations and warranties in
this Agreement or any other Loan Document shall be true and correct in all
material respects and (ii) the aggregate amount of all Commitment Increases
pursuant to this Section 2.20, when added to the initial aggregate amount of the
Lenders’ Commitments on the Effective Date, shall not exceed $1,000,000,000.
Each Commitment Increase shall be in an aggregate principal amount that is not
less than $20,000,000 (provided that such amount may be less than $20,000,000 if
such amount represents all remaining availability under the limit set forth in
the next sentence). Each notice from the Borrower pursuant to this Section 2.20
shall set forth the requested amount of the relevant Commitment Increase.
Commitment Increases may be provided, by any existing Lender or by any other
bank or other financial institution (any such other bank or other financial
institution being called an “Additional Lender”), provided that the
Administrative Agent shall have consented (such consent not to be unreasonably
withheld or delayed) to such Lender’s or Additional Lender’s providing such
Commitment Increases if such consent would be required under Section 9.04 for an
assignment of Revolving Loans or Commitments, as applicable, to such Lender or
Additional Lender. Commitments in respect of Commitment Increases shall become
Commitments (or in the case of a Commitment Increase to be provided by an
existing Lender, an increase in such Lender’s Commitment) under this Agreement
pursuant to an amendment (an “Incremental Amendment”) to this Agreement,

 

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executed by the Borrower, each Lender agreeing to provide such Commitment
Increase, if any, each Additional Lender, if any, and the Administrative Agent.
The Incremental Amendment may, without the consent of any other Lenders, effect
such amendments to this Agreement as may be necessary or appropriate, in the
reasonable opinion of the Administrative Agent and the Borrower, to effect the
provisions of this Section 2.20. The effectiveness of any Incremental Amendment
shall be subject to the satisfaction on the date thereof of each of the
conditions set forth in Section 4.02 (it being understood that all references to
“the occasion of any Borrowing” or “issuance, amendment, renewal or extension of
a Letter of Credit” or similar language in such Section 4.02 shall be deemed to
refer to the effective date of such Incremental Amendment) and such other
conditions as the parties thereto shall agree. The Borrower will use the
proceeds of the Commitment Increases for any purpose not prohibited by this
Agreement. No Lender shall be obligated to provide any Commitment Increases,
unless it so agrees. Upon each increase in the Commitments pursuant to this
Section 2.20, (a) each Lender immediately prior to such increase will
automatically and without further act be deemed to have assigned to each Lender
providing a portion of the Commitment Increase (each, a “Commitment Increase
Lender”) in respect of such increase, and each such Commitment Increase Lender
will automatically and without further act be deemed to have assumed, a portion
of such Lender’s participations hereunder in outstanding Letters of Credit and
Swingline Loans such that, after giving effect to each such deemed assignment
and assumption of participations, the percentage of the aggregate outstanding
(i) participations hereunder in Letters of Credit and (ii) participations
hereunder in Swingline Loans held by each Lender (including each such Commitment
Increase Lender) will equal the percentage of the Total Commitment represented
by such Lender’s Commitment and (b) if, on the date of such increase, there are
any Revolving Loans outstanding, such Revolving Loans shall on or prior to the
effectiveness of such Commitment Increase be prepaid from the proceeds of
additional Revolving Loans made hereunder (reflecting such increase in
Commitments), which prepayment shall be accompanied by accrued interest on the
Revolving Loans being prepaid and any costs incurred by any Lender in accordance
with Section 2.15. The Administrative Agent and the Lenders hereby agree that
the minimum borrowing, pro rata borrowing and pro rata payment requirements
contained elsewhere in this Agreement shall not apply to the transactions
effected pursuant to the immediately preceding sentence.

(b) This Section 2.20 shall supersede any provisions in Section 2.17 or 9.02 to
the contrary.

SECTION 2.21. Maturity Date Extensions. Prior to (but not less than 60 days nor
more than 90 days prior to) the applicable Extension Date, the Borrower may make
a written request to the Administrative Agent, who shall forward a copy of each
such request to each of the Continuing Lenders, that the Final Maturity Date
then in effect be extended to the date occurring twelve (12) months after such
existing Final Maturity Date. Such request shall be accompanied by a certificate
of a Financial Officer of the Borrower stating that no Default has occurred and
is continuing. If, by the date (each, an “Extension Response Date”) which is 30
days prior to the applicable Extension Date, Continuing Lenders which are not
Defaulting Lenders holding at least a majority of the Commitments held by
Continuing Lenders which are not Defaulting Lenders agree thereto in writing,
the Final Maturity Date, and the Maturity Date of each Continuing Lender then
consenting, shall be automatically extended to the date occurring twelve
(12) months after the then existing Final Maturity Date. In the event that the
Borrower has not obtained the requisite percentage of Continuing Lenders to
permit an extension by the relevant Extension Response Date, the Borrower may
extend the deadline for obtaining such percentage to the 30th day following such
Extension Response Date in order to take such actions with respect to any Lender
that is a Non-Continuing Lender after giving effect to such Extension Response
Date in order to obtain the requisite percentage of Lenders constituting
Continuing Lenders to permit such extension (including actions contemplated by
Section 2.18). The Administrative Agent shall notify the Borrower and each
Lender of the effectiveness of any such extension. No Lender shall be obligated
to grant any extensions pursuant to this Section 2.21, and any such extension
shall be in the sole discretion of each of them. A Lender’s

 

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Maturity Date shall not be so extended pursuant to this Section 2.21 for (x) any
Lender that is a Non-Continuing Lender at the time such request for extension is
made and (y) any Continuing Lender at the time of such request that has not
consented in writing, within the time specified above, to any such request for
the extension thereof. It is understood and agreed that the Borrower shall have
a total of two (2) opportunities to request an extension pursuant to this
Section 2.21 and that each of such extension (if validly effected pursuant to
this Section 2.21) shall extend the Final Maturity Date then in effect by twelve
(12) months.

ARTICLE III

Representations and Warranties

The Borrower represents and warrants to the Lenders that:

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, (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, 2010, reported on by KPMG LLC, independent public
accountants, and (ii) as of and for the fiscal quarter and the portion of the
fiscal year ended March 31, 2011 certified by its chief financial officer. Such
financial statements 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, 2010, there has been no event, occurrence or development
that, individually or in the aggregate, has had a Material Adverse Effect.

 

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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.

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 (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,
the other Loan Documents or the Transactions.

(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 and Letters of Credit shall be utilized for the
general corporate and working capital purposes of the Borrower and its
Subsidiaries (including, without limitation, (i) to support Permitted
Obligations, (ii) to replace Existing Letters of Credit, (iii) to effect
Permitted Litigation Bonding, (iv) to pay, satisfy and/or otherwise discharge
judgments rendered against the Borrower or any other Subsidiary from time to
time, (v) to refinance Indebtedness and to back up commercial paper issued by
the Borrower, and (vi) to make payments under the Master Settlement Agreement
and under any other settlement agreement in respect of tobacco litigation that
the Borrower and/or any of its Subsidiaries is now or hereafter party to or
bound by).

(b) Neither the making of any Loan hereunder or issuance of any Letter of
Credit, 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 or any Letter of Credit will be used
to purchase or carry any Margin Stock or to extend credit for the purpose of
purchasing or carrying any Margin Stock. Not more than 25% of the value of the
assets of the Borrower and their respective Subsidiaries is represented by
Margin Stock.

 

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(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.

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. Neither the
Information Memorandum nor any of the other 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 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 financial information should not be viewed as facts,
and that actual results will differ from such projected 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.

ARTICLE IV

Conditions

SECTION 4.01. Effective Date. The obligations of the Lenders to make Loans and
of each Issuing Bank to issue Letters of Credit hereunder 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 of a signed signature page of this Agreement)
that such party has signed a counterpart of this Agreement.

 

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(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,
(ii) Betzer, Roybal & Eisenberg P.C., New Mexico counsel for the Borrower and
(iii) 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, this Agreement or the Transactions, all in form and substance
reasonably satisfactory to the Administrative Agent and its counsel.

(d) The Administrative Agent shall have received a certificate, dated the
Effective Date and signed by the President, a Vice President or a Financial
Officer of the Borrower, confirming compliance with the conditions set forth in
Sections 4.02(a) and (b).

(e) 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 hereunder.

(f) On or prior to the Effective Date, all material governmental, regulatory and
third party approvals necessary to consummate the financing transactions
contemplated by this Agreement and the other Loan Documents and for the
continuing operations of the Borrower and its Subsidiaries taken as a whole,
shall have been obtained and remain in full force and effect.

(g) On the Effective Date, (i) no litigation shall be pending or threatened in
writing with respect to this Agreement, any other Loan Document or the
Transactions and (ii) except for the Disclosed Matters, since December 31, 2010,
no litigation shall be pending or threatened in writing which has had, or could
reasonably be expected to result in, a Material Adverse Effect.

(h) No event, development or circumstance shall have occurred since December 31,
2010 that has had, or could reasonably be expected to result in, a Material
Adverse Effect.

(i) Each Material Subsidiary of the Borrower and each other Subsidiary of the
Borrower (other than a Subsidiary identified as a Non-Guarantor Subsidiary on
Schedule 3.12) shall have duly authorized, executed and delivered a Subsidiary
Guarantee Agreement substantially in the form of Exhibit B hereto, and the
Subsidiary Guarantee Agreement shall be in full force and effect.

(j) All loans and other obligations of the Borrower and its Subsidiaries with
respect to the Existing Credit Agreement shall have been paid in full and all
commitments, letters of credit and guarantees in connection therewith shall have
been terminated and/or released (or, in the case of Existing Letters of Credit,
incorporated hereunder as Letters of Credit as contemplated by Section 2.05(d)),
all to the reasonable satisfaction of the Administrative Agent. On the Effective
Date (immediately prior to giving effect thereto), no Default or Event of
Default under, and as defined in, the Existing Credit Agreement shall have
occurred and be continuing.

(k) Each Lender shall have received all documentation and other information
required by bank regulatory authorities under applicable “know your customer”
and anti-money laundering rules and regulations, including, without limitation,
the Patriot Act.

 

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The Administrative Agent shall notify the Borrower and the Lenders of the
Effective Date, and such notice shall be conclusive and binding. Notwithstanding
the foregoing, the obligations of the Lenders to make Loans and of each Issuing
Bank to issue Letters of Credit hereunder shall not become effective unless each
of the foregoing conditions is satisfied (or waived pursuant to Section 9.02) at
or prior to 3:00 p.m., New York City time, on July 29, 2011 (and, in the event
such conditions are not so satisfied or waived, the Commitments shall terminate
at such time).

SECTION 4.02. Each Credit Event. The obligation of each Lender to make a Loan on
the occasion of any Borrowing, and of each Issuing Bank to issue, amend, renew
or extend any Letter of Credit, is subject to the satisfaction of the following
conditions:

(a) The representations and warranties made by any Loan Party in or pursuant to
the Loan Documents shall be true and correct in all material respects on and as
of the date of such Borrowing or the date of issuance, amendment, renewal or
extension of such Letter of Credit, as applicable (except to the extent any such
representation or warranty speaks only as of a previous date, in which case it
was true and correct in all material respects on and as of such date); provided,
that, any representation and warranty that is qualified as to “materiality,”
“Material Adverse Effect” or similar language shall be true and correct in all
respects on such respective dates.

(b) At the time of and immediately after giving effect to such Borrowing or the
issuance, amendment, renewal or extension of such Letter of Credit, as
applicable, no Default shall have occurred and be continuing.

Each Borrowing and each issuance, amendment, renewal or extension of a Letter of
Credit shall be deemed to constitute a representation and warranty by the
Borrower on the date thereof as to the matters specified in Sections 4.02(a) and
(b).

ARTICLE V

Affirmative Covenants

Until the Commitments have expired or been terminated and the principal of and
interest on each Loan and all fees payable hereunder shall have been paid in
full and all Letters of Credit shall have expired or terminated (or been cash
collateralized or back-stopped on terms satisfactory to each Issuing Bank) and
all LC Disbursements shall have been reimbursed, the Borrower covenants and
agrees with the Lenders that:

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 LLC 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;

 

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(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 Facility, written notice
of such rating change; and

(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.

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;

 

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(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.

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.

 

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SECTION 5.08. Use of Proceeds and Letters of Credit. The proceeds of the Loans
and Letters of Credit will be used only for general corporate and working
capital purposes of the Borrower and its Subsidiaries (including, without
limitation, (i) to support Permitted Obligations, (ii) to replace Existing
Letters of Credit, (iii) to effect Permitted Litigation Bonding, (iv) to pay,
satisfy and/or otherwise discharge judgments rendered against the Borrower or
any other Subsidiary from time to time, (v) to refinance Indebtedness and to
back up commercial paper issued by the Borrower, and (vi) to make payments under
the Master Settlement Agreement and under any other settlement agreement in
respect of tobacco litigation that the Borrower and/or any of its Subsidiaries
is now or hereafter party to or bound by). No part of the proceeds of any Loan
or Letter of Credit 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. After application of the proceeds of any Loan
or Letter of Credit, not more than 25% of the value of the assets of the
Borrower and its Subsidiaries will be represented by Margin Stock.

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 after the Effective 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 Effective 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 (i) or (ii) 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% and
(y) after giving effect to any prior or concurrent designation by the Borrower
of any Domestic Subsidiary as a “Material Subsidiary”).

 

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ARTICLE VI

Negative Covenants

Until the Commitments have expired or terminated and the principal of and
interest on each Loan and all fees payable hereunder have been paid in full and
all Letters of Credit have expired or terminated (or been cash collateralized or
back-stopped on terms satisfactory to each Issuing Bank) and all LC
Disbursements shall have been reimbursed, the Borrower covenants and agrees with
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

(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) any mortgage, pledge or other Lien on any shares of stock, Indebtedness or
other obligations of a Subsidiary or any Principal Property existing on the
Effective Date and set forth on Schedule 6.01;

(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;

 

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(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% of Consolidated Net
Worth.

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 (including the
Obligations); provided further, that 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 Officers’ 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
Officers’ 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% of Consolidated Net Worth.

 

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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 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, and (iii) any Material Subsidiary may sell, convey, transfer, lease
or otherwise dispose of its assets to the Borrower or to another Subsidiary
Guarantor.

SECTION 6.04. Financial Condition Covenants.

(a) Consolidated Leverage Ratio. The Borrower will not permit the Consolidated
Leverage Ratio as at the last day of any period of four consecutive fiscal
quarters of the Borrower to exceed 3.00:1.00.

(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 4.00:1.00.

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 (ii) 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 paid or made (in the case of a Non-Declared
Restricted Payment) or declared or otherwise authorized (in the case of any
other

 

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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 (other than a Non-Declared Restricted Payment), such
Restricted Payment is paid within 90 days of the making of such declaration or
other authorization;

(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; and

(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.

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 Company 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, and (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.

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; (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

 

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shall not apply to any agreement or 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, (y) any agreement described in
(and permitted by) clauses (ii), (iii), (iv), (v), (viii), (ix) and (x) of
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, if
terminated, the Revolving Credit Exposures) 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) at any time to exceed
$200,000,000.

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.

 

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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 or any
reimbursement obligation in respect of any LC Disbursement 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
in connection with this Agreement or any other Loan Document or any amendment or
modification hereof or waiver hereunder or thereunder, or in any report,
certificate, financial statement or other document 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 (with or
without the giving of notice, the lapse of time or both) 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;

(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;

 

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(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 the aggregate
amount of Unrestricted cash and Marketable Investments held by the Borrower and
its Subsidiaries plus the aggregate Unused Availability 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 Subsidiary 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 either or
both of the following actions, at the same or different times: (i) terminate the
Commitments, and thereupon the Commitments shall terminate immediately, and
(ii) declare the Loans then outstanding to

 

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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 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 and each Issuing Bank 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 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.

 

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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, the Issuing Banks 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 and the Issuing Banks, 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
will, independently and without reliance upon the Administrative Agent or any
other 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”, “Joint Lead
Arranger”, “Documentation Agent” and “Co-Documentation Agent” 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

 

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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., Investment
Bank Loan Operations, 1111 Fannin Street, 10th Floor, Houston, TX 77002-6925,
Attention of Jeremy Jones (Telecopy No. (713) 750-3512), with a copy to JPMorgan
Chase Bank, N.A., 383 Madison Avenue, 24th Floor, New York, NY 10179, Attention
of Lauren Baker (Telecopy No. (212) 270-6637);

(iii) if to JPMorgan Chase Bank, N.A., in its capacity as an Issuing Bank, to it
at 10420 Highland Manor Drive, Floor 4, Tampa, FL 33610-9128, Attention of
Letter of Credit Department (Telecopy No. (813) 432-5162);

(iv) if to JPMCB in its capacity as a Swingline Lender, to JP Morgan Chase Bank,
N.A., Investment Bank Loan Operations, 1111 Fannin Street, 10th Floor, Houston,
TX 77002-6925, Attention of Jeremy Jones (Telecopy No. (713) 750-5312);

(v) if to Citibank in its capacity as a Swingline Lender, to Citibank N.A., 1615
Brett Road, Building III, New Castle, DE 19720, Attention of Loan Administration
(Telecopy No. (212) 994-0847); and

(vi) 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, any Issuing Bank 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, the Issuing Banks 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 or issuance of a Letter of
Credit shall not be construed as a waiver of any Default, regardless of whether
the Administrative Agent, any Lender or any Issuing Bank 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 LC Disbursement 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 LC Disbursement, 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 Section 2.17(b) or (c) in a
manner that would alter the pro rata sharing of payments 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 no such agreement
shall amend, modify or otherwise affect the rights or duties of the
Administrative Agent, any Issuing Bank or any Swingline Lender hereunder or
waive, amend or modify Section 2.19, without the prior written consent of the
Administrative Agent, such Issuing Bank or such Swingline Lender, as the case
may be.

SECTION 9.03. Expenses; Indemnity; Damage Waiver. (a) The Borrower shall pay
(i) all documented reasonable out-of-pocket expenses incurred by each Lead Agent
and its Affiliates, including the invoiced and reasonable 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 contemplated hereby or thereby shall be consummated), (ii) all
documented reasonable out-of-pocket expenses incurred by each Issuing Bank in
connection with the

 

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issuance, amendment, renewal or extension of any Letter of Credit or any demand
for payment thereunder and (iii) all documented reasonable out-of-pocket
expenses incurred by the Administrative Agent, any Issuing Bank or any Lender,
including the fees, charges and disbursements of any counsel for the
Administrative Agent, any Issuing Bank or any Lender, in connection with 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, or in
connection with the Loans made or Letters of Credit issued hereunder, including
all such out-of-pocket expenses incurred during any workout, restructuring or
negotiations in respect of such Loans or Letters of Credit.

(b) The Borrower shall indemnify each Lead Agent, each Issuing Bank 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 and related expenses, 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 necessary or advisable in the judgment of an Indemnitee, 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 such affected Indemnitee in each applicable jurisdiction, one
additional counsel to such affected Indemnitee in each applicable jurisdiction),
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 Letter of Credit or the use of the proceeds therefrom
(including any refusal by any Issuing Bank to honor a demand for payment under a
Letter of Credit if the documents presented in connection with such demand do
not strictly comply with the terms of such Letter of Credit), (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 nonappealable judgment to have resulted from the bad
faith, gross negligence or willful misconduct of such Indemnitee or a material
breach of any Loan Document by such Indemnitee. This Section 9.03(b) shall not
apply with respect to Taxes.

(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. Following such notification, the Borrower may elect in writing to
assume the defense 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, 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

 

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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 (a) 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 Borrower of such request for reimbursement and
(b) 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 (which consent
shall not be unreasonably withheld or delayed), effect any settlement of any
pending or threatened proceeding against such Indemnitee in respect of which
indemnity has been sought hereunder by such Indemnitee unless such settlement
(i) includes an unconditional release of such Indemnitee from all liability or
claims that are the subject matter of such proceeding and (ii) does not include
any statement as to any admission of fault.

(d) To the extent that the Borrower fails to pay any amount required to be paid
by it to a Lead Agent, an Issuing Bank or a Swingline Lender under
Section 9.03(a), (b) or (c), each Lender severally agrees to pay to such Lead
Agent, such Issuing Bank or such Swingline Lender, as the case may be, 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, such Issuing Bank or such Swingline Lender 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) arising out of, in connection with, or as a result of, this
Agreement or any other Loan Document, the Transactions, any Loan or Letter of
Credit or the use of the proceeds thereof.

(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.

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 (including any Affiliate of
any Issuing Bank that issues any Letter of Credit), 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 (including any Affiliate of any Issuing Bank that issues any
Letter of Credit), 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, the Issuing Banks and the Lenders) any legal or equitable
right, remedy or claim under or by reason of this Agreement.

 

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(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, 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 notice
thereof;

(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
a Lender with a Commitment immediately prior to giving effect to such
assignment;

(C) each Swingline Lender; and

(D) each Issuing Bank.

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

(A) except in the case of an assignment to a Lender, an Affiliate of a Lender or
an Approved Fund 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;

(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; and

(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.

 

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(iii) Subject to acceptance and recording thereof pursuant to
Section 9.04(b)(iv), 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 and LC Disbursements owing to, each Lender pursuant to the terms hereof
from time to time (the “Register”). The entries in the Register shall be
conclusive, and the Borrower, the Administrative Agent, the Issuing Banks 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, any Issuing Bank 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 2.04(c), 2.05(e) or (f), 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.

(c) Any Lender may, without the consent of the Borrower, the Administrative
Agent, any Issuing Bank or any Swingline Lender, 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, each Issuing
Bank 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

 

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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 and issuance of any
Letters of Credit, regardless of any investigation made by any such other party
or on its behalf and notwithstanding that the Administrative Agent, any Issuing
Bank 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 or any Letter of Credit is outstanding 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 Letters
of Credit and 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 constitute the entire 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.

 

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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.

(b) The Borrower hereby irrevocably and unconditionally submits, for itself and
its property, to the exclusive jurisdiction of the Supreme Court of the State of
New York sitting in New York County and of the United States District Court of
the Southern District 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 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 may be heard and determined in such New York State or,
to the extent permitted by law, in such Federal court. 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, any Issuing Bank
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.

 

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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, the Issuing
Banks 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 (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), (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 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, any Issuing Bank 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 Borrower, any Subsidiary thereof, or the business of
the Borrower or any Subsidiary thereof, other than any such information that is
available to the Administrative Agent, any Issuing Bank 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.

(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

 

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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
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 that is subject to the requirements
of the USA PATRIOT Act (Title III of Pub. L. 107-56 (signed into law October 26,
2001)) (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, which information includes the name
and address of the Borrower and other information that will allow such Lender to
identify the Borrower in accordance with the Patriot Act.

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. Judgment Currency. If, for the purposes of obtaining judgment in
any court, it is necessary to convert a sum due hereunder or any other Loan
Document in one currency into another currency, the rate of exchange used shall
be that at which in accordance with normal banking procedures the Administrative
Agent could purchase the first currency with such other currency on the

 

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Business Day preceding that on which final judgment is given. The obligation of
the Borrower in respect of any such sum due from it to the Administrative Agent
or the Lenders hereunder or under the other Loan Documents shall,
notwithstanding any judgment in a currency (the “Judgment Currency”) other than
that in which such sum is denominated in accordance with the applicable
provisions of this Agreement (the “Agreement Currency”), be discharged only to
the extent that on the Business Day following receipt by the Administrative
Agent of any sum adjudged to be so due in the Judgment Currency, the
Administrative Agent may in accordance with normal banking procedures purchase
the Agreement Currency with the Judgment Currency. If the amount of the
Agreement Currency so purchased is less than the sum originally due to the
Administrative Agent from the Borrower in the Agreement Currency, the Borrower
agrees, as a separate obligation and notwithstanding any such judgment, to
indemnify the Administrative Agent or the Person to whom such obligation was
owing against such loss. If the amount of the Agreement Currency so purchased is
greater than the sum originally due to the Administrative Agent in such
currency, the Administrative Agent agrees to return the amount of any excess to
the Borrower (or to any other Person who may be entitled thereto under
applicable law).

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 appearing 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 other Obligations shall have been paid in
full, the Commitments have been terminated and all Letters of Credit shall be
terminated (or cash collateralized or backstopped in a manner satisfactory to
each Issuing Bank), 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.

 

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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 (Credit Agreement)

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

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

Signature Page (Credit Agreement)

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CITIBANK, N.A., individually and as Swingline Lender By:   /s/ Shannon A.
Sweeney   Name:   Shannon A. Sweeney   Title:   Vice President

Signature Page (Credit Agreement)

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

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

Signature Page (Credit Agreement)

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

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

Signature Page (Credit Agreement)

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

MORGAN STANLEY BANK, N.A. By:   /s/ Sherrese Clarke   Name:   Sherrese Clarke  
Title:   Authorized Signatory

Signature Page (Credit Agreement)

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

THE BANK OF NOVA SCOTIA By:   /s/ David L. Mahmood   Name:   David L. Mahmood  
Title:   Managing Director

Signature Page (Credit Agreement)

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

AGFIRST FARM CREDIT BANK By:   /s/ Steven J. O’Shea   Name:   Steven J. O’Shea  
Title:   Vice President

Signature Page (Credit Agreement)

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

ROYAL BANK OF CANADA By:   /s/ Gordon MacArthur   Name:   Gordon MacArthur  
Title:   Authorized Signatory

Signature Page (Credit Agreement)

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

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

Signature Page (Credit Agreement)

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

WELLS FARGO BANK, NATIONAL ASSOCIATION By:   /s/ Andrea S. Chen   Name:   Andrea
S. Chen   Title:   Director

Signature Page (Credit Agreement)

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

FARM CREDIT BANK OF TEXAS By:   /s/ Alan Robinson   Name:   Alan Robinson  
Title:   Vice President

Signature Page (Credit Agreement)

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

CREDIT SUISSE AG CAYMAN ISLANDS BRANCH By:   /s/ Karl Studer   /s/ Claudia
Siffert Name:   Karl Studer  

Claudia Siffert

Title:   Director   Assistant Vice President

Signature Page (Credit Agreement)

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

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

Signature Page (Credit Agreement)

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

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

Signature Page (Credit Agreement)

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

UNITED FCS, PCA DBA FCS COMMERCIAL     FINANCE GROUP By:   /s/ Daniel J. Best  
Name:   Daniel J. Best   Title:   Vice President

Signature Page (Credit Agreement)

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Schedule 2.01

Commitments

$750,000,000 4-year Revolving Credit Facility Allocations:

 

Lender    Allocate  

JPMorgan Chase Bank, N.A.

   $ 67,000,000   

Citibank N.A.

   $ 67,000,000   

Goldman Sachs Bank USA

   $ 67,000,000   

Mizuho Corporate Bank, Ltd.

   $ 67,000,000   

Morgan Stanley Bank, N.A.

   $ 67,000,000   

The Bank of Nova Scotia

   $ 67,000,000   

AgFirst Farm Credit Bank

   $ 47,000,000   

Royal Bank of Canada

   $ 47,000,000   

The Bank of New York Mellon

   $ 47,000,000   

Wells Fargo Bank, National Association

   $ 47,000,000   

Farm Credit Bank of Texas

   $ 40,000,000   

Credit Suisse AG Cayman Islands Branch

   $ 35,000,000   

Fifth Third Bank

   $ 35,000,000   

Northern Trust Company

   $ 25,000,000   

United FCS, PCA dba FCS Commercial Finance Group

   $ 25,000,000   

Total

   $ 750,000,000   

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Schedule 2.05

Existing Letters of Credit

See attached description.

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

Issuing Lender

   L/C No.      Account Party    Amount O/S    Beneficiary    Expiry  
BNY Mellon      53822       R. J. Reynolds
Tobacco Holdings,
Inc.    $100,000.00    Old Republic
Insurance Co      8/12/2011    BNY Mellon      53824       R. J. Reynolds
Tobacco Company    $1,300,000.00    Zurich
American
Insurance      1/12/2012    BNY Mellon      53823       Reynolds American
Inc.    $5,679,181.00    ACE
American
Insurance Co.      6/14/2012            

 

               $7,079,181.00               

 

     

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Schedule 3.06

Disclosed Matters

See attached description.

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Note 9 — Commitments and Contingencies

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, British
American Tobacco p.l.c., referred to as 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.
In addition, pursuant to this indemnity, RJR Tobacco expensed less than
$1 million during the first six months of 2011 and 2010 for funds to be
reimbursed to BAT for costs and expenses incurred arising out of certain
tobacco-related litigation.

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 “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, special duty, voluntary
undertaking, breach of warranty, failure to warn, fraud, misrepresentation,
unfair trade practices, conspiracy, unjust enrichment, medical monitoring,
public nuisance 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.

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The plaintiffs seek various forms of relief, including compensatory and 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 state to state and 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 and
American Snuff Co., as applicable, record any loss concerning litigation at such
time as an unfavorable outcome becomes probable and the amount can be reasonably
estimated. For the reasons set forth below, RAI’s management continues to
conclude that the loss of any particular pending smoking and health tobacco
litigation claim against RJR Tobacco or its affiliates or indemnitees, or the
loss of any particular claim concerning the use of smokeless tobacco against
American Snuff Co., when viewed on an individual basis, is not probable.

RJR Tobacco and its affiliates believe that they have valid defenses to the
smoking and health tobacco litigation claims against them, as well as valid
bases for appeal of adverse verdicts against them. RAI, RJR Tobacco and their
affiliates and indemnitees have, through their counsel, filed pleadings and
memoranda in pending smoking and health tobacco litigation that set forth and
discuss a number of grounds and defenses that they and their counsel believe
have a valid basis in law and fact. With the exception of Engle Progeny cases,
described below, RJR Tobacco and its affiliates and indemnitees continue to win
the majority of smoking and health tobacco litigation claims that reach trial,
and a very high percentage of the tobacco-related litigation claims brought
against them continue to be dismissed at or before trial. Based on their
experience in the smoking and health tobacco litigation against them and the
strength of the defenses available to them in such litigation, RJR Tobacco and
its affiliates believe that their successful defense of smoking and health
tobacco litigation in the past will continue in the future.

Except for a $139 million accrual related to an unfavorable judgment in Scott v.
American Tobacco Co., a smoking cessation class action, described below, no
liability for pending smoking and health tobacco litigation was recorded in
RAI’s condensed consolidated balance sheet (unaudited) as of June 30, 2011.

Generally, RJR Tobacco and its affiliates and indemnitees have not settled, and
currently RJR Tobacco and its affiliates do not intend to settle, any smoking
and health tobacco litigation claims. It is the policy of RJR Tobacco and its
affiliates to vigorously defend all tobacco-related litigation claims.

The only smoking and health tobacco litigation claims settled 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 — Class-Action Suits.”

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

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 — State Settlement Agreements.”

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 —
Class-Action Suits,” 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.

RJR Tobacco’s Comprehensive Agreement with the Canadian federal, provincial and
territorial governments 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. A
discussion of the Canadian matters is set forth below under “— Other Litigation
and Developments – Claims for Indemnification,” and additional details regarding
the settlement are set forth in note 5.

Likewise, 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.

American Snuff Co. also believes that it has valid defenses to the smokeless
tobacco litigation against it. American Snuff Co. asserted and will continue to
assert some or all of these defenses in each case at the time and in the manner
deemed appropriate by American Snuff Co. and its counsel. No verdict or judgment
has been returned or entered against American Snuff Co. on any claim for
personal injuries allegedly resulting from the use of smokeless tobacco.
American Snuff Co. intends to defend vigorously all smokeless tobacco litigation
claims asserted against it. No liability for pending smokeless tobacco
litigation was recorded in RAI’s condensed consolidated balance sheet
(unaudited) as of June 30, 2011.

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

Cautionary Statement

Even though RAI’s management continues to conclude that the loss of any
particular pending smoking and health tobacco litigation claim against RJR
Tobacco or its affiliates or indemnitees, or the loss of any particular case
concerning the use of smokeless tobacco against American Snuff Co., when viewed
on an individual basis, is not probable, the possibility of material losses
related to such litigation 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.

Although RJR Tobacco believes that it has valid bases for appeals of adverse
verdicts in its pending cases, and RJR Tobacco and RAI believe they have valid
defenses to all actions, and intend to defend all actions vigorously, 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 materially adversely
affect 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.

During the second quarter of 2011, 37 tobacco-related cases were served against
RJR Tobacco or its affiliates or indemnitees. On June 30, 2011, there were 219
cases pending against RJR Tobacco or its affiliates or indemnitees: 208 in the
United States; 10 in Canada and one in Israel, as compared with 195 total cases
on June 30, 2010. The U.S. case number does not include the 600 individual
smoker cases pending in West Virginia state court as a consolidated action,
6,631 Engle Progeny cases (as hereinafter defined), involving approximately
7,963 individual plaintiffs, and 2,588 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 June 30, 2011, 24 are pending in
federal court, 184 in state court, primarily in the following states: Maryland
(53 cases); Florida (31 cases); Missouri (20 cases); New York (17 cases);
Louisiana (13 cases); and California (10 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 June 30,
2011, compared with the number of cases pending against RJR Tobacco, its
affiliates or indemnitees as of March 31, 2011, as reported in RAI’s Quarterly
Report on Form 10-Q for the fiscal quarter ended March 31, 2011, filed with the
SEC on April 29, 2011, and a cross-reference to the discussion of each case
type.

 

Case Type

   RJR Tobacco’s
Case Numbers  as
of June 30, 2011    Change in
Number of
Cases Since
March 31,  2011
Increase/(Decrease)    Page
Reference

Individual Smoking and Health

   139    23    25

West Virginia IPIC (Number of Plaintiffs)*

   1(600)    No Change    26

Engle Progeny (Number of Plaintiffs)**

   6,631(7,963)    -636 (-659)    27

Broin II

   2,588    (-1)    35

Class-Action

   15    No Change    34

Health-Care Cost Recovery

   3    No Change    39

State Settlement Agreements-Enforcement and Validity; Adjustments

   33    (-1)    45

Antitrust

   1    No Change    49

Other Litigation and Developments

   17    3    49

 

* Includes as one case the 600 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. Plaintiffs’ counsel are attempting to
include multiple plaintiffs in most of the cases filed. The number of cases may
decrease as the result of many of the multiple plaintiff federal court cases
either being dismissed or consolidated.

Three 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.,
the Louisiana state court class-action case, Scott v. American Tobacco Co., 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 rendered a punitive damages verdict in favor of the
“Florida class” of approximately $145 billion against all defendants. In
July 2006, the Florida Supreme Court, among other things, affirmed an appellate
court’s reversal of the punitive damages award, decertified the class going
forward, preserved several class-wide findings from the trial, including that
nicotine is addictive and cigarettes are defectively designed, and authorized
class members to avail themselves of these findings in individual lawsuits under
certain conditions. After subsequent motions were resolved, the Florida Supreme
Court issued its mandate on January 11, 2007, thus beginning a one-year period
in which former class members were permitted to file individual lawsuits. In
October 2007, the U.S. Supreme Court denied the defendants’ petition for writ of
certiorari. As of June 30, 2011, RJR Tobacco had been served in 6,631 Engle
Progeny cases in both state and federal courts in Florida. These cases include
approximately 7,963 plaintiffs. The number of cases will likely change due to
individual plaintiffs being severed from multi-plaintiff cases and
multi-plaintiff federal cases being dismissed or consolidated. In addition, as
of June 30, 2011, RJR Tobacco was aware of 29 additional cases that had been
filed but not served (with 302 plaintiffs). A number of the Engle Progeny cases
are scheduled for trial or are in trial.

In 2004, a jury in Scott returned a verdict in favor of the “Louisiana class”
for $591 million to establish a state-wide smoking cessation program. In 2007,
the Louisiana Court of Appeal upheld class certification, significantly reduced
the scope of recovery, and remanded the case for further proceedings. The
Louisiana and U.S. Supreme Courts denied the defendants’ applications for writ
of certiorari. In July 2008, the trial court entered an amended judgment in
favor of the class for approximately $263 million plus interest from June 30,
2004. In April 2010, the Louisiana Fourth Circuit Court of Appeal amended the
final judgment, and as amended, affirmed the judgment. Pursuant to the judgment,
the defendants were required to deposit with the court $242 million with
judicial interest from July 21, 2008, until paid. In September 2010, the
defendants’ application for writ of certiorari with the

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

Louisiana Supreme Court and emergency motion to stay execution of judgment in
the Supreme Court of Louisiana were denied. The U.S. Supreme Court also granted
the application to stay the judgment pending applicants’ timely filing, and the
Court’s disposition, of a petition for writ of certiorari. The defendants’
petition for writ of certiorari in the U.S. Supreme Court was denied on June 27,
2011. RJR Tobacco accrued $139 million, the portion of the judgment allocated to
RJR Tobacco and B&W, in the second quarter of 2011.

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. Post-remand proceedings are underway.

For a detailed description of these cases, see “— Engle and Engle Progeny
Cases,” “— Class-Action Suits — Medical Monitoring and Smoking Cessation Case”
and “— Health-Care Cost Recovery Cases — 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, however, that RJR Tobacco and other
cigarette manufacturers will face an increased number of tobacco-related trials
in 2011 compared to recent years. There are 9 cases, exclusive of Engle Progeny
cases, scheduled for trial as of June 30, 2011 through June 30, 2012, for RJR
Tobacco or its affiliates and indemnitees: West Virginia IPIC, five individual
smoking and health cases and three other non-smoking and health cases. There are
62 Engle Progeny cases against RJR Tobacco and/or B&W set for trial through
June 30, 2012, but it is not known how many of these cases will actually be
tried.

Trial Results. From January 1, 2008 through June 30, 2011, 55 smoking and health
and health-care cost recovery cases in which RJR Tobacco or B&W were defendants
were tried. Verdicts in favor of RJR Tobacco, B&W and, in some cases, RJR
Tobacco, B&W and other defendants, were returned in 30 cases, including 16
mistrials, tried in Florida (26), Missouri (2) and West Virginia (2). Verdicts
in favor of the plaintiffs were returned in 23 cases tried in Florida and one in
Connecticut.

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

In the second quarter of 2011, six Engle Progeny cases in which RJR Tobacco was
a defendant were tried:

 

  •  

In Betty Allen v. R. J. Reynolds Tobacco Co., the court declared a mistrial due
to the jury’s inability to reach a verdict.

 

  •  

In Andy Allen v. R. J. Reynolds Tobacco Co., the 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.

 

  •  

In Marraffino v. R. J. Reynolds Tobacco Co., the court declared a mistrial
during opening statements.

 

  •  

In Jewett v. R. J. Reynolds Tobacco Co., the 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.

 

  •  

In Reese v. R. J. Reynolds Tobacco Co., the jury returned a verdict in favor of
the plaintiff, found RJR Tobacco to be 30% at fault, and awarded $3.6 million in
compensatory damages and no punitive damages.

 

  •  

In Soffer v. R. J. Reynolds Tobacco Co., the jury returned a verdict in favor of
the plaintiff, found RJR Tobacco to be 40% at fault and the decedent, Maurice
Soffer, to be 60% at fault, and awarded $5 million in compensatory damages and
no punitive damages.

In addition, since the end of the second quarter of 2011, jurors returned a
verdict in two other Engle Progeny cases:

 

  •  

In Ciccone v. R. J. Reynolds Tobacco Co., the jury returned a verdict finding
that the plaintiff is an Engle class member. On July 21, 2011, the jury awarded
approximately $3.2 million in compensatory damages and $50,000 in punitive
damages. The jury found the plaintiff to be 70% at fault and RJR Tobacco to be
30% at fault.

 

  •  

In Weingart v. R. J. Reynolds Tobacco Co., the jury returned a verdict in favor
of the plaintiff, however they refused to award compensatory or punitive damages
and found the plaintiff to be 91% at fault.

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

In the second quarter of 2011, one non-Engle Progeny individual smoking and
health case in which RJR Tobacco was a defendant was tried. In Hargroves v. R.
J. Reynolds Tobacco Co., the jury returned a verdict in favor of RJR Tobacco.

In the second quarter of 2011, a verdict was entered in a health-care cost
recovery case. In April 2011, in City of St. Louis v. American Tobacco Co.,
Inc., the jury returned a verdict in favor of all defendants. For a detailed
description of the case, see “— Health-Care Cost Recovery Cases – Hospital
Cases” below.

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
June 30, 2011, in which verdicts have been returned in favor of the plaintiffs
and against RJR Tobacco or B&W, or both.

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

Date of Verdict

  

Case Name/Type

  

Jurisdiction

  

Verdict

  

Cross-Reference to

Post-Trial Status

December 18, 2003   

Frankson v. Brown & Williamson

Tobacco Corp. [Individual]

  

Supreme Court,

Kings County (Brooklyn, NY)

   $350,000 in compensatory damages; 50% fault assigned to B&W; $20 million in
punitive damages, of which $6 million was assigned to B&W, and $2 million to a
predecessor company.    See “— Individual Smoking and Health Cases” below.
February 2, 2005   

Smith v. Brown & Williamson Tobacco

Corp. [Individual]

  

Circuit Court,

Jackson County

(Independence, MO)

  

$2 million in compensatory damages,

which was reduced to $500,000 because of jury’s findings that the plaintiff was
75% at fault; $20 million in punitive damages.

   See “— Individual Smoking and Health Cases” below. 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.   

See “— Health-Care Cost Recovery

Cases – Department of Justice Case” below.

May 5, 2009   

Sherman v. R. J. Reynolds Tobacco

Co. [Engle Progeny]

  

Circuit Court, Broward County,

(Ft. Lauderdale, FL)

   $1.55 million in compensatory damages; 50% of fault assigned to RJR Tobacco,
which reduced the award to $775,000. No punitive damages awarded.    See
“— Engle and Engle Progeny Cases” below. May 22, 2009   

Brown v. R. J.

Reynolds Tobacco Co.

[Engle Progeny]

  

Circuit Court,

Broward County,

(Ft. Lauderdale, FL)

   $1.2 million in compensatory damages; 50% of fault assigned to RJR Tobacco,
which reduced the award to $600,000. No punitive damages awarded.    See
“— Engle and Engle Progeny Cases” below.

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

May 29, 2009   

Martin v. R. J.

Reynolds Tobacco Co. [Engle Progeny]

  

Circuit Court, Escambia County,

(Pensacola, FL)

   $5 million in compensatory damages; 66% of fault assigned to RJR Tobacco,
which reduced the award to $3.3 million; $25 million in punitive damages.    See
“— Engle and Engle Progeny Cases” below. August 19, 2009   

Campbell v. R. J. Reynolds Tobacco

Co. [Engle Progeny]

  

Circuit Court, Escambia County,

(Pensacola, FL)

   $7.8 million in compensatory damages; 39% of fault assigned to RJR Tobacco,
which reduced the award to $3.04 million. No punitive damages awarded.    See
“— Engle and Engle Progeny Cases” below. February 8, 2010   

Gray v. R. J.

Reynolds Tobacco Co. [Engle Progeny]

  

Circuit Court, Escambia County,

(Pensacola, FL)

   $7 million in compensatory damages; 60% of fault assigned to RJR Tobacco,
which reduced the award to $4.2 million; $2 million in punitive damages.    See
“— Engle and Engle Progeny Cases” below. March 10, 2010   

Douglas v. Philip Morris USA, Inc.

[Engle Progeny]

  

Circuit Court,

Hillsborough County,

(Tampa, FL)

   $5 million in compensatory damages; 5% of fault assigned to RJR Tobacco,
which reduced the award to $250,000. No punitive damages awarded.    See “—
Engle and Engle Progeny Cases” below. March 11, 2010    Hall v. R. J. Reynolds
Tobacco Co. [Engle Progeny]   

Circuit Court,

Alachua County,

(Gainesville, FL)

   $5 million in compensatory damages; 65% of fault assigned to RJR Tobacco,
which reduced the award to $3.25 million; $12.5 million in punitive damages.   
See “— Engle and Engle Progeny Cases” below. March 10, 2010    Cohen v. R. J.
Reynolds Tobacco Co. [Engle Progeny]   

Circuit Court,

Broward County,

(Ft. Lauderdale, FL)

   $10 million in compensatory damages; 33.3% of fault assigned to RJR Tobacco,
which reduced the award to $3.3 million; $20 million in punitive damages, of
which $10 million was assigned to RJR Tobacco.    See “— Engle and Engle Progeny
Cases” below. April 13, 2010    Clay v. R. J. Reynolds Tobacco Co. [Engle
Progeny]   

Circuit Court,

Escambia County,

(Pensacola, FL)

   $3.5 million in compensatory damages; 60% of fault assigned to RJR Tobacco,
which reduced the award to $2.1 million; $18 million in punitive damages, of
which $17 million was assigned to RJR Tobacco.    See “— Engle and Engle Progeny
Cases” below.

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

April 21, 2010    Townsend v. R. J. Reynolds Tobacco Co. [Engle Progeny]   

Circuit Court,

Alachua County,

(Gainesville, FL)

   $10.8 million in compensatory damages and $80 million punitive damages; 51%
of fault assigned to RJR Tobacco, which reduced the award to $5.5 million in
compensatory damages; $40.8 million in punitive damages.    See “— Engle and
Engle Progeny Cases” below. April 26, 2010    Putney v. R. J. Reynolds Tobacco
Co. [Engle Progeny]   

Circuit Court,

Broward County,

(Ft. Lauderdale, FL)

   $15.1 million in compensatory damages; 30% of fault assigned to RJR Tobacco,
which reduced the award to $4.5 million; $5 million in punitive damages, of
which $2.5 million was assigned to RJR Tobacco.    See “— Engle and Engle
Progeny Cases” below. April 29, 2010    Grossman v. R. J. Reynolds Tobacco Co.
[Engle Progeny]   

Circuit Court,

Broward County,

(Ft. Lauderdale, FL)

   $1.9 million in compensatory damages; 25% of fault assigned to RJR Tobacco,
which reduced the award to $483,682. No punitive damages awarded.    See “—
Engle and Engle Progeny Cases” below. May 20, 2010    Buonomo v. R. J. Reynolds
Tobacco Co. [Engle Progeny]   

Circuit Court,

Broward County,

(Ft. Lauderdale, FL)

   $5.2 million in compensatory damages; 77.5% of fault assigned to RJR Tobacco,
which reduced the award to $4.06 million; $25 million in punitive damages.   
See “— Engle and Engle Progeny Cases” below. May 26, 2010    Izzarelli v. R. J.
Reynolds Tobacco Co. [Individual S&H]   

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.    See “— Individual Smoking and Health Cases” below. June 18,
2010    Alexander v. R. J. Reynolds Tobacco Co. [Engle Progeny]   

Circuit Court,

Alachua County,

(Gainesville, FL)

   $2.5 million in compensatory damages; 51% of fault assigned to RJR Tobacco,
which reduced the award to $1.275 million; $2.5 million in punitive damages.   
See “— Engle and Engle Progeny Cases” below.

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

August 5, 2010    Piendle v. R. J. Reynolds Tobacco Co. [Engle Progeny]   

Circuit Court,

Palm Beach County,

(West Palm Beach, FL)

   $4 million in compensatory damages; 27.5% of fault assigned to RJR Tobacco,
which reduced the award to $1.1 million; $180,000 in punitive damages.    See “—
Engle and Engle Progeny Cases” below. November 15, 2010    Webb v. R. J.
Reynolds Tobacco Co. [Engle Progeny]   

Circuit Court,

Levy County,

(Bronson, FL)

   $8 million in compensatory damages; 90% of fault assigned to RJR Tobacco,
which reduced the award to $7.2 million; $72 million in punitive damages.    See
“— Engle and Engle Progeny Cases” below. February 10, 2011    Kirkland v. R. J.
Reynolds Tobacco Co. [Engle Progeny]   

Circuit Court,

Hillsborough County,

(Tampa, FL)

   $100,000 in compensatory damages; 10% of fault assigned to RJR Tobacco, which
reduced the award to $10,000; $250,000 in punitive damages.    See “— Engle and
Engle Progeny Cases” below. February 22, 2011    Huish v. R. J. Reynolds Tobacco
Co. [Engle Progeny]   

Circuit Court,

Alachua County,

(Gainesville, FL)

   $750,000 in compensatory damages; 25% of fault assigned to RJR Tobacco, which
reduced the award to $187,500; $1.5 million in punitive damages.    See “— Engle
and Engle Progeny Cases” below. March 18, 2011    Mack v. R. J. Reynolds Tobacco
Co. [Engle Progeny]   

Circuit Court,

Alachua County,

(Gainesville, FL)

   $1 million in compensatory damages; 51% of fault assigned to RJR Tobacco,
which reduced the award to $510,000; No punitive damages awarded.    See “—
Engle and Engle Progeny Cases” below. April 26, 2011    Andy Allen v. R. J.
Reynolds Tobacco Co. [Engle Progeny]   

Circuit Court,

Duval County,

(Jacksonville, FL)

   $6 million in compensatory damages; 45% of fault assigned to RJR Tobacco,
which reduced the award to $2.7 million; $17 million in punitive damages against
each defendant awarded.    See “— Engle and Engle Progeny Cases” below. May 20,
2011    Jewett v. R. J. Reynolds Tobacco Co. [Engle Progeny]   

Circuit Court,

Duval County,

(Jacksonville, FL)

   $1.1 million in compensatory damages; 20% of fault assigned to RJR Tobacco,
which reduced the award to $218,600. No punitive damages awarded.    See “—
Engle and Engle Progeny Cases” below.

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

May 20, 2011    Reese v. R. J. Reynolds Tobacco Co. [Engle Progeny]   

Circuit Court,

Miami-Dade County,

(Miami, FL)

   $3.6 million in compensatory damages; 30% of fault assigned to RJR Tobacco,
which reduced the award to $1.1 million; No punitive damages awarded.    See “—
Engle and Engle Progeny Cases” below. June 16, 2011    Soffer v. R. J. Reynolds
Tobacco Co. [Engle Progeny]   

Circuit Court,

Alachua County,

(Gainesville, FL)

   $5 million in compensatory damages; 40% of fault assigned to RJR Tobacco,
which reduced the award to $2 million; No punitive damages awarded.    See “—
Engle and Engle Progeny Cases” below. July 15, 2011    Ciccone v. R. J. Reynolds
Tobacco Co. [Engle Progeny]   

Circuit Court,

Broward County,

(Ft. Lauderdale, FL)

   $3.2 million in compensatory damages; 30% of fault assigned to RJR Tobacco,
which reduced the award to $1 million; $50,000 in punitive damages.    See “—
Engle and Engle Progeny Cases” below.

Individual Smoking and Health Cases

As of June 30, 2011, 139 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 136 of the
individual cases are brought by or on behalf of individual smokers or their
survivors, while the remaining three 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, 2011 to June 30, 2011, or remained on appeal as of June 30,
2011.

On August 15, 2003, the jury returned a verdict in favor of B&W in Eiser v.
Brown & Williamson Tobacco Corp., a case filed in March 1999 in the Court of
Common Pleas, Philadelphia County, Pennsylvania. The plaintiff, Lois Eiser,
sought compensatory and punitive damages in an amount in excess of $50,000,
together with interest, costs and attorneys’ fees in this wrongful death action
against B&W. In January 2006, the Superior Court of Pennsylvania affirmed the
verdict. The Pennsylvania Supreme Court granted the plaintiff’s petition to
appeal, and on December 28, 2007, remanded the case to the Superior Court for
further review of certain issues. In August 2010, the Superior Court of
Pennsylvania entered a memorandum affirming the final judgment. In November
2010, the plaintiff filed a petition for permission to appeal to the
Pennsylvania Supreme Court. A decision is pending.

On December 18, 2003, the jury returned a verdict in favor of the plaintiff in
Frankson v. Brown & Williamson Tobacco Corp., a case filed in August 2000 in
Supreme Court, Kings County, New York, awarded $350,000 in compensatory damages
and eventually returned a verdict of $20 million in punitive damages against the
defendants in an action brought against the major U.S. cigarette manufacturers,
including RJR Tobacco, who was dismissed prior to trial, and B&W. Other
manufacturers were dismissed before trial. The plaintiff, Gladys Frankson,
alleged that Mr. Frankson became addicted to nicotine, was unable to cease
smoking, developed lung cancer and died as a result. The defendants as a group
and the deceased smoker were each found to be 50% at fault. On January 9, 2004,
the jury awarded $20 million in punitive damages, assigning $6 million to B&W
and $2 million to American Tobacco, a predecessor company to B&W. In June 2004,
the parties’ post-trial motions were denied by the trial

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judge, except that the trial judge granted a new trial unless the parties
consented to an increase in compensatory damages to $500,000 and a decrease in
punitive damages to $5 million, of which $4 million would be assigned to B&W.
The plaintiff stipulated to the reduction in punitive damages in January 2005.
Defendants filed a notice of appeal of the orders on post-trial motions in
January 2005. In July 2006, the Appellate Division, New York Supreme Court,
Second Department, directed that the plaintiffs’ claims for design defect be
dismissed, but otherwise affirmed the orders denying defendants’ post-trial
motions. Following remand from this appellate decision, the plaintiff withdrew
her request for additur of the compensatory damages, and in December 2006, the
trial judge granted this request, and reinstated the original $350,000
compensatory jury verdict.

In June 2007, final judgment was entered against the defendants in the amount of
approximately $6.8 million, including interest and costs. The defendants filed a
notice of appeal to the Appellate Division, New York Supreme Court, Second
Department. Pursuant to its agreement to indemnify B&W, RJR Tobacco posted a
supersedeas bond in the amount of $8.018 million. In September 2009, the New
York Supreme Court, Appellate Division, affirmed the compensatory damages award,
set aside the punitive damages award and remanded the case to the Kings County
Supreme Court for a new trial on punitive damages. No date has been set for the
punitive damages retrial.

On February 1, 2005, the jury returned a split verdict in Smith v. Brown &
Williamson Tobacco Corp., a case filed in May 2003 in Circuit Court, Jackson
County, Missouri, finding in favor of B&W on two counts, fraudulent concealment
and conspiracy, and finding in favor of the plaintiffs on negligence, which
incorporates failure to warn and product defect claims. The plaintiff, Lincoln
Smith, claimed that the defendant’s tobacco products caused Mrs. Smith’s death
from lung cancer. The plaintiffs were awarded $2 million in compensatory damages
and $20 million in punitive damages; however, the jury found the plaintiff to be
75% at fault, and B&W 25% at fault, and thus the compensatory award was reduced
to $500,000. B&W appealed to the Missouri Court of Appeals, and in July 2007,
the court affirmed the compensatory damages and ordered a new trial on punitive
damages. In December 2008, the Missouri Court of Appeals issued an opinion that
affirmed in part, reversed in part, and remanded the case for further
proceedings on the issue of punitive damages. Trial on the issue of punitive
damages began in July 2009. On July 29, 2009, RJR Tobacco, on behalf of B&W,
paid the compensatory damages verdict, plus interest, in the amount of
approximately $700,000. In August 2009, the jury returned a verdict for the
plaintiffs, finding B&W liable for damages for aggravating circumstances, and on
August 20, 2009, awarded the plaintiffs $1.5 million in punitive damages. The
court denied the plaintiffs’ and the defendant’s post-trial motions. B&W and the
plaintiffs filed notices of appeal in December 2009. Briefing is underway.

On May 26, 2010, a 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 on December 30, 2010, in the amount of $11.95 million. RJR Tobacco filed
a notice of appeal in January 2011. 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 on
March 4, 2011. Briefing on the appeal is underway.

On May 19, 2011, a jury returned a verdict in favor of RJR Tobacco in Hargroves
v. R. J. Reynolds Tobacco Co., a case filed in December 2005 in the Circuit
Court, Hillsborough County, Florida. The plaintiff alleged that as a result of
using the defendant’s products, the decedent, Debra Hargroves, suffered from
lung cancer, emphysema, heart disease and other smoking-related diseases and/or
conditions. Final judgment was entered, and the plaintiff filed a motion for a
new trial. At a hearing in June 2011, the court denied the plaintiff’s motion.
The deadline for the plaintiff to file a notice of appeal is August 4, 2011.

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West Virginia IPIC

In West Virginia, as of June 30, 2011, approximately 600 individual claims
remain pending in a consolidated action, In re: Tobacco Litigation Individual
Personal Injury Cases. The defendants are Philip Morris, Lorillard and RJR
Tobacco (including claims concerning The American Tobacco Company and B&W). The
Case Management Order currently calls for these cases to be resolved in a two
phase procedure — a common issue trial in Phase I, and, if plaintiffs prevail on
one or more issues, a Phase II, consisting of individual trials of liability,
medical causation, compensatory damages and punitive damages for each of the
individual plaintiffs. The Phase I trial will focus on whether defendants
manufactured defective products, whether their conduct was tortious and whether
their conduct meets the standard for a potential award of punitive damages under
West Virginia law. There will be no lump sum award of punitive damages and the
Phase I jury will not be asked to set a punitive multiplier. Instead, if the
jury finds that a defendant’s conduct meets the punitive standard, then
plaintiffs in their individual trials in Phase II will have the chance to ask
Phase II juries to consider awarding punitive damages to each plaintiff on a
case-by-case basis. Phase I trials were initiated twice in 2010 in Kanawha
County (Charleston), resulting in mistrials in February and June 2010, due to an
inability to find a sufficient number of impartial jurors from which to select a
jury. The Court has now moved the case to Ohio County (Wheeling) with a new
Phase I trial to commence October 17, 2011.

Engle and Engle Progeny Cases

Trial began in July 1998 in Engle v. R. J. Reynolds Tobacco Co., a case filed in
May 1994, in Circuit Court, Miami-Dade County, Florida, in which a class
consisting of Florida residents, or their survivors, alleged diseases or medical
conditions caused by their alleged “addiction” to cigarettes. The action was
brought against the major U.S. cigarette manufacturers, including RJR Tobacco
and B&W, seeking actual damages and punitive damages in excess of $100 billion
each and the creation of a medical fund to compensate individuals for future
health-care costs. In July 1999, the jury found against RJR Tobacco, B&W and the
other cigarette-manufacturer defendants in the initial phase, which included
common issues related to certain elements of liability, general causation and a
potential award of, or 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 “Florida class” of approximately $145 billion
against all the defendants, with approximately $36.3 billion and $17.6 billion
being assigned to RJR Tobacco and B&W, respectively.

In November 2000, the trial judge denied all post-trial motions and entered
judgment. The Florida Third District Court of Appeal reversed the trial court’s
final judgment and remanded the case to the Miami-Dade County Circuit Court with
instructions to decertify the class. The class appealed, and the Florida Supreme
Court accepted the case in May 2004.

In July 2006, the court affirmed the dismissal of the punitive damages award and
decertified the class, on a going-forward basis. The court preserved a number of
class-wide findings from Phase I of the trial, including that cigarettes can
cause certain diseases, that nicotine is addictive and that defendants placed
defective and unreasonably dangerous cigarettes on the market, and authorized
former class members to avail themselves of those findings under certain
conditions in individual lawsuits, provided they commence those lawsuits within
one year of the date the court’s decision became final. The court specified that
the eligible plaintiffs are confined to those Florida citizen residents who
suffered or died from smoking-related illnesses that “manifested” themselves on
or before November 21, 1996, and that were caused by an addiction to cigarettes
that contain nicotine.

In August 2006, RJR Tobacco and the other defendants filed a rehearing motion
arguing, among other things, that the findings from the Engle trial were not
sufficiently specific to serve as the basis for further proceedings and that the
Florida Supreme Court’s decision denied the defendants due process. The
plaintiffs also filed a rehearing motion arguing that some smokers who became
sick after November 21, 1996, and who were therefore not class members, should
nevertheless have the statute of limitations tolled since they may have
refrained from filing suit earlier in the mistaken belief that they were Engle
class members. In December 2006, the Florida Supreme Court withdrew its
July 2006, decision and issued a revised opinion, in which it set aside the
jury’s findings of a conspiracy to misrepresent and clarified that the Engle
jury’s finding on express warranty were preserved for use by eligible
plaintiffs. The court also denied the plaintiffs’ motion and confirmed that the
eligible plaintiffs were limited to those individuals who developed alleged
smoking-related illnesses that manifested themselves on or before November 21,
1996.

In the fourth quarter of 2007, the defendants’ petition for writ of certiorari
and petition for rehearing with the U.S. Supreme Court were both denied.

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

Pursuant to the Florida Supreme Court’s July 2006, ruling in Engle v. R. J.
Reynolds Tobacco Co., which decertified the class, eligible plaintiffs had one
year from January 11, 2007, in which to file individual lawsuits. In addition,
some individuals who filed suit prior to January 11, 2007, and who claim they
meet the conditions in Engle, also are attempting to avail themselves of the
Engle ruling. Lawsuits by individuals requesting the benefit of the Engle
ruling, whether filed before or after the January 11, 2007, mandate, are
referred to as the Engle Progeny cases. As of June 30, 2011, RJR Tobacco had
been served in 6,631 Engle Progeny cases in both state and federal courts in
Florida. These cases include approximately 7,963 plaintiffs. The number of cases
will likely change due to individual plaintiffs being severed from
multi-plaintiff cases. Many of these cases are in active discovery or nearing
trial.

Three federal district courts ruled that the findings in the first phase of the
Engle proceedings cannot be used to satisfy elements of plaintiffs’ claims, and
two of those rulings, in Brown v. R. J. Reynolds Tobacco Co. and Burr v. Philip
Morris USA, Inc., were certified by the trial court for interlocutory review. In
July 2010, the Court of Appeals for the Eleventh Circuit held, as a matter of
Florida law, that the findings from the first phase of the Engle proceedings
cannot be given greater effect than what the Engle jury found. Because it
rejected plaintiffs’ approach on state-law grounds, the court did not find it
necessary to consider whether that approach would violate the Due Process Clause
of the U.S. Constitution.

On December 14, 2010, the First District Court of Appeal – an intermediate state
appellate court – rejected the Eleventh Circuit’s holding and concluded, in the
Martin v. R. J. Reynolds Tobacco Co. case, that the Engle findings “establish
the conduct of elements” of plaintiffs’ claims. On July 19, 2011, the Florida
Supreme Court denied RJR Tobacco’s request to review the decision of the
intermediate state appellate court. The Martin holding on the Engle findings is
expected to be given binding precedential effect in state trial courts
throughout Florida and likely supersedes the Eleventh Circuit’s interpretation
of state law even in the federal cases. As a result, the defendants have asked
the federal district courts in Jacksonville and Tampa to rule on their
constitutional due process objection to the use of the Engle findings to satisfy
elements of plaintiffs’ claims. The federal district court in Jacksonville has
scheduled a hearing for September 7, 2011, to further address the use of the
findings and defendants’ due process challenge.

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 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. The plaintiffs have challenged the constitutionality of the bond cap in
four of the cases discussed below. The Alachua County court upheld the bond cap
in three of those cases. The plaintiffs have appealed to the First District
Court of Appeal. Argument in the fourth case took place in a trial court in
Escambia County in January 2011; in that case, Clay v. R. J. Reynolds Tobacco
Co., the trial court upheld the bond cap. The First District Court of Appeal
affirmed the trial court’s decision on April 12, 2011. The First District Court
of Appeal issued a written opinion in Hall v. R. J. Reynolds Tobacco Co., on
July 12, 2011, explaining why the statute is constitutional. The court also
stated that the issues are likely to continue until they are definitively
resolved by the Florida Supreme Court. As a result, the court certified to the
Florida Supreme Court the question of whether the bond cap violates the Florida
Constitution by limiting the amount of the bond necessary to obtain an automatic
stay of the judgment against a signatory to the tobacco settlement agreement
with the State of Florida.

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, 2011
to June 30, 2011, or remained on appeal as of June 30, 2011.

On May 5, 2009, in Sherman v. R. J. Reynolds Tobacco Co., a case filed in
September 2007 in the Circuit Court, Broward County, Florida, a jury returned a
verdict in favor of the plaintiff. The plaintiff, Melba Sherman, alleged that as
a result of using the defendant’s products, the decedent, John Sherman,
developed lung cancer and died. The plaintiff sought compensatory damages and an
unspecified amount of punitive damages. On May 8, 2009, the jury awarded
compensatory damages of $1.55 million and found the decedent to be 50% at fault.
No punitive damages were awarded. The court entered final judgment in the amount
of $775,000 in June 2009. RJR Tobacco filed a notice of appeal to the Fourth
District Court of Appeal, and posted a supersedeas bond in the amount of
approximately $900,000. The plaintiff filed a notice of cross appeal of the
final judgment in July 2009. Oral argument occurred on May 10, 2011. A decision
is pending.

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

On May 20, 2009, in Brown v. R. J. Reynolds Tobacco Co., a case filed in March
2007, in the Circuit Court, Broward County, Florida, a jury returned a verdict
in favor of the plaintiff. The plaintiff alleged that the decedent, Roger Brown,
developed smoking related diseases, which resulted in his death. The plaintiff
sought compensatory damages and an unspecified amount of punitive damages. The
jury later returned a verdict that the decedent was 50% at fault for his
injuries and awarded compensatory damages of $1.2 million. No punitive damages
were awarded. In June 2009, RJR Tobacco’s post-trial motions were denied, and
the court entered final judgment in the amount of $600,000. RJR Tobacco filed a
notice of appeal to the Fourth District Court of Appeal and posted a supersedeas
bond in the amount of approximately $700,000 in July 2009. Oral argument
occurred on February 3, 2011. A decision is pending.

On May 29, 2009, in Martin v. R. J. Reynolds Tobacco Co., a case filed in
October 2007 in the Circuit Court, Escambia County, Florida, a jury returned a
verdict in favor of the plaintiff, found RJR Tobacco to be 66% at fault for the
decedent’s injuries, and awarded $5 million in compensatory damages. The
plaintiff alleged that as a result of Benny Martin’s use of the defendant’s
tobacco products, he developed lung cancer and other medical conditions and
died. The plaintiff, Mathilde Martin, sought an unspecified amount of
compensatory and punitive damages. On June 1, 2009, the jury returned a punitive
damages award of $25 million. In September 2009, the court entered final
judgment, awarding the plaintiff the sum of $3.3 million in compensatory damages
and $25 million in punitive damages, and RJR Tobacco filed a notice of appeal to
the First District Court of Appeal. In October 2009, RJR Tobacco posted a
supersedeas bond in the amount of approximately $5 million, and the plaintiff
filed a notice of cross appeal of the final judgment. The First District Court
of Appeal affirmed the final judgment in December 2010. RJR Tobacco asked the
Florida Supreme Court to accept jurisdiction and review the decision of the
First District. On July 19, 2011, the Florida Supreme Court denied RJR Tobacco’s
request to review the decision. RJR Tobacco has 90 days to file a writ of
certiorari with the U.S. Supreme Court.

On August 19, 2009, in Campbell v. R. J. Reynolds Tobacco Co., a case filed in
December 2007 in the Circuit Court, Escambia County, Florida, a jury returned a
verdict in favor of the plaintiff, found the decedent, Betty Campbell, to be 57%
at fault, RJR Tobacco to be 39% at fault and the remaining defendants to be 4%
at fault, and awarded $7.8 million in compensatory damages. No punitive damages
were awarded. The plaintiff alleged that as a result of Mrs. Campbell’s
addiction to cigarettes, she suffered and died from various smoking related
diseases, including chronic obstructive pulmonary disease. The plaintiff sought
judgment against each defendant for an amount in excess of $15,000, taxable
costs, punitive damages and interest. In September 2009, the court entered final
judgment against RJR Tobacco in the amount of $3.04 million. RJR Tobacco filed a
notice of appeal and posted a supersedeas bond in the amount of approximately
$3 million in January 2010. In March 2011, the Florida First District Court of
Appeal affirmed the trial court’s decision based on its prior ruling in Martin.
RJR Tobacco moved the First District Court of Appeal to certify the case as one
of great public importance, which is the first step in seeking review by the
Florida Supreme Court, but the court denied the motion. The defendants filed a
notice to invoke discretionary jurisdiction of the Florida Supreme Court. On
July 19, 2011, the Florida Supreme Court denied RJR Tobacco’s petition to review
the decision. RJR Tobacco has 90 days to file a writ of certiorari with the U.S.
Supreme Court.

On February 5, 2010, in Gray v. R. J. Reynolds Tobacco Co., a case filed in
November 2007 in the Circuit Court, Escambia County, Florida, a jury returned a
verdict in favor of the plaintiff, Carolyn Gray. The jury found the decedent,
Charles Gray, to be 40% at fault and RJR Tobacco to be 60% at fault for
Mr. Gray’s injuries, and awarded $7 million in compensatory damages. On
February 8, 2010, the jury awarded $2 million in punitive damages. Mrs. Gray
alleged that as a result of her husband’s addiction and use of RJR Tobacco’s
products, he died from lung cancer. Mrs. Gray sought an unspecified amount of
compensatory and punitive damages. In March 2010, the court entered final
judgment against RJR Tobacco in the amount of $4.2 million in compensatory
damages and $2 million in punitive damages. In July 2010, RJR Tobacco filed a
notice of appeal and posted a supersedeas bond in the amount of $5 million. In
June 2011, the First District Court of Appeal affirmed per curiam the trial
court’s order. The defendants filed a notice to invoke discretionary
jurisdiction of the Florida Supreme Court. On July 20, 2011, the Florida Supreme
Court denied RJR Tobacco’s petition to review the decision. RJR Tobacco has 90
days to file a writ of certiorari with the U.S. Supreme Court.

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

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 the decedent, Laura Grossman’s, addiction to
cigarettes, she 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. On April 21, 2010, the jury returned a verdict in favor of the plaintiff
in Phase I, finding that the decedent was addicted to cigarettes containing
nicotine and the addiction was the legal cause of her death by lung cancer. On
April 29, 2010, the jury 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 and posted a supersedeas bond in the amount of approximately
$484,000 in July 2010. The plaintiff filed a notice of cross appeal. Briefing is
underway.

On March 10, 2010, in Douglas v. Philip Morris USA, Inc., a case filed in
October 2007 in Circuit Court, Hillsborough County, Florida, a jury returned a
verdict for the plaintiff, found the decedent, Charlotte Douglas, to be 50% at
fault, RJR Tobacco to be 5% at fault and the remaining defendants to be 45% at
fault, and awarded $5 million in compensatory damages. No punitive damages were
awarded. The plaintiff alleged that as a result of the decedent’s addiction to
smoking the defendants’ cigarettes, she suffered bodily injury and died. In
March 2010, the court entered final judgment against RJR Tobacco in the amount
of $250,000. RJR Tobacco filed a notice of appeal to the Second District Court
of Appeal and posted a supersedeas bond in the amount of $250,000. Briefing is
underway.

In Hall v. R. J. Reynolds Tobacco Co., a case filed in December 2007 in the
Circuit Court, Alachua County, Florida, the jury returned a verdict in favor of
the plaintiff on March 11, 2010. The jury also found the decedent, Arthur Hall,
to be 35% at fault and RJR Tobacco to be 65% at fault, and awarded $5 million in
compensatory damages. On March 12, 2010, the jury returned a $12.5 million
punitive damages award. The plaintiff alleged that as a result of the decedent’s
use of the defendant’s products he suffered from lung cancer and died. In March
2010, the court entered final judgment in the amount of $3.25 million in
compensatory damages and $12.5 million in punitive damages. RJR Tobacco filed a
notice of appeal and posted a supersedeas bond in the amount of $5 million in
May 2010. The plaintiff filed a notice of cross appeal. In May 2011, the First
District Court of Appeal affirmed per curiam the trial court’s decision. RJR
Tobacco filed a notice to invoke the discretionary jurisdiction of the Florida
Supreme Court. On July 19, 2011, the Florida Supreme Court denied RJR Tobacco’s
petition to review the decision. RJR Tobacco has 90 days to file a writ of
certiorari with the U.S. Supreme Court.

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 and the plaintiff filed a motion to amend or alter the final judgment.
The court entered an amended judgment to include interest from the date of the
verdict in September 2010. The plaintiff filed a notice of cross appeal. RJR
Tobacco filed a notice of appeal and posted a supersedeas bond in the amount of
$2.5 million in October 2010. Briefing is underway.

On April 13, 2010, in Clay v. R. J. Reynolds Tobacco Co., a case filed in
December 2007 in the Circuit Court, Escambia County, Florida, a jury returned a
verdict in favor of the plaintiff, found the decedent, Janie Mae Clay, to be 30%
at fault, RJR Tobacco to be 60% at fault and the remaining defendant to be 10%
at fault, and awarded $3.5 million in compensatory damages. The plaintiff
alleged that the decedent developed addiction, chronic obstructive pulmonary
disease and other conditions and diseases as a result of using the defendants’
products. On April 14, 2010, the jury awarded $18 million in punitive damages,
of which $17 million was assigned to RJR Tobacco. The court entered final
judgment against RJR Tobacco in the amount of $2.1 million in compensatory
damages and $17 million in punitive damages in September 2010. RJR Tobacco filed
a notice of appeal and posted a supersedeas bond in the amount of approximately
$4.7 million. The plaintiff filed a notice of cross appeal. Briefing is
underway.

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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, the jury returned a
verdict in favor of the plaintiff, finding 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, Margot Putney, suffered from nicotine
addiction and lung cancer as a result of using the defendants’ products. 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 of the amended final judgment, and RJR Tobacco posted a supersedeas
bond in the amount of approximately $2.4 million. Briefing is underway.

On April 21, 2010, in Townsend v. R. J. Reynolds Tobacco Co., a case filed in
December 2007 in the Circuit Court, Alachua County, Florida, the jury returned a
verdict in favor of the plaintiff, found RJR Tobacco to be 51% at fault and the
decedent, Frank Townsend, to be 49% at fault, and awarded $10.8 million in
compensatory damages and $80 million in punitive damages. The plaintiff alleged
that the decedent suffered from lung cancer and other conditions and diseases as
a result of smoking the defendant’s products. Final judgment was entered on
April 29, 2010, in the amount of $5.5 million in compensatory and $40.8 million
in punitive damages, which represents 51% of the original damages awards. RJR
Tobacco filed a notice of appeal and posted a supersedeas bond in the amount of
$5 million. Briefing is complete. A decision is pending.

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, the 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. 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 and posted a supersedeas bond in the amount of
$5 million. The plaintiff also filed a notice of appeal. Briefing is underway.

In Frazier v. Philip Morris USA Inc., a case filed in December 2007 in the
Circuit Court, Miami-Dade County, Florida, the court declared a mistrial on
May 14, 2010, due to the inability to seat a jury. The plaintiff alleged that as
a result of smoking defendants’, including RJR Tobacco’s, products she developed
chronic obstructive pulmonary disease. Retrial began on September 20, 2010. In
October 2010, the jury returned a verdict in favor of the defendants. The
plaintiff’s post-trial motions were denied and final judgment was entered in
February 2011. The plaintiff has filed a notice of appeal, and the defendants
have filed a cross-appeal. Briefing is underway.

On June 18, 2010, in Alexander v. R. J. Reynolds Tobacco Co., a case filed in
January 2008, in the Circuit Court, Alachua County, Florida, the jury returned a
verdict in favor of the plaintiff, found RJR Tobacco to be 51% at fault and the
defendant to be 49% at fault, and awarded $2.5 million in compensatory damages
and $2.5 million in punitive damages. The plaintiff alleged that as a result of
smoking the defendant’s products, the decedent suffered from chronic obstructive
pulmonary disease, lung cancer and emphysema. In July 2010, the court entered
final judgment in the amount of $1.275 million in compensatory damages and $2.5
million in punitive damages. RJR Tobacco filed a notice of appeal and posted a
supersedeas bond in the amount of approximately $3.8 million in September 2010.
The plaintiff filed a notice of cross appeal. Briefing is underway.

On August 5, 2010, in Piendle v. R. J. Reynolds Tobacco Co., a case filed in
November 2007, in the Circuit Court, Palm Beach County, Florida, the jury
returned a verdict in favor of the plaintiff, found RJR Tobacco to be 27.5% at
fault, the defendant to be 45% at fault and the remaining defendants to be 27.5%
at fault, and awarded $4 million in compensatory damages. On August 19, 2010,
the jury returned a punitive damages verdict in the amount of $180,000 against
RJR Tobacco. The plaintiff’s motion for new trial as to the amount of the
punitive damages was denied. In September 2010, the court entered final judgment
against RJR Tobacco in the amount of $1.1 million in compensatory damages and
$180,000 in punitive damages. The defendants have filed a notice of appeal. In
February 2011, RJR Tobacco posted a supersedeas bond in the amount of $1.28
million. Briefing is underway.

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On August 26, 2010, in Budnick v. R. J. Reynolds Tobacco Co., the jury returned
a verdict in favor of RJR Tobacco. The case was filed in December 2007, in the
Circuit Court, Broward County, Florida. The plaintiff alleged that the decedent,
Leonard Budnick, was addicted to cigarettes manufactured by the defendants, and
as a result, developed one or more smoking related medical conditions and/or
diseases. In September 2010, the court denied the motion for a new trial and
entered final judgment pursuant to the jury’s verdict. The plaintiff filed a
notice of appeal. Briefing is underway.

On October 29, 2010, in Koballa v. Philip Morris USA Inc., the court declared a
mistrial after the jury informed the court that they were unable to reach a
verdict. The case was filed in December 2007, in the Circuit Court, Volusia
County, Florida against tobacco industry defendants, including RJR Tobacco. The
plaintiff alleges that as a result of the use of the defendants’ defective and
unreasonably dangerous tobacco products, she suffers from, or has suffered from,
nicotine addiction, lung cancer and other smoking related medical conditions
and/or diseases. Retrial began on March 21, 2011, and on March 31, 2011, the
jury returned an inconsistent verdict. The jury found that RJR Tobacco was not
liable for the plaintiff’s injuries, but found that her past injuries were worth
$1 million with the plaintiff being 70% at fault and RJR Tobacco 30% at fault.
Post-trial motions have been filed and RJR Tobacco included a request to enter
judgment in favor of RJR Tobacco. A hearing on post-trial motions is scheduled
for August 1, 2011.

On November 4, 2010, in Vasko v. R. J. Reynolds Tobacco Co., the jury returned a
verdict in favor of RJR Tobacco. The jury found that the plaintiff’s claim was
barred by the statute of limitations. The case was filed in January 2008, in the
Circuit Court, Broward County, Florida. The plaintiff alleged that the decedent,
John Vasko, was addicted to cigarettes manufactured by the defendants, and as a
result, developed one or more smoking related medical conditions and/or
diseases, including lung cancer. Final judgment was entered, and the plaintiff
filed a notice of appeal. Briefing is underway.

On November 15, 2010, in Webb v. R. J. Reynolds Tobacco Co., the 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 case was filed in
December 2007, in the Circuit Court, Levy County, Florida. The plaintiff alleged
that as a result of smoking the defendant’s products, the decedent developed one
or more smoking related medical conditions and/or diseases. The court entered
final judgment in November 2010. RJR Tobacco filed a notice of appeal and posted
a supersedeas bond in the amount of $5 million. The plaintiff filed a notice of
cross appeal. Briefing is underway.

On January 5, 2011, in Smith v. R. J. Reynolds Tobacco Co., the court declared a
mistrial due to the inability to seat a jury. The case was filed in January 2008
in the Circuit Court, Jackson County, Florida. The plaintiff alleged that he was
addicted to cigarettes manufactured by the defendants, and as a result,
developed lung cancer. Retrial is scheduled to begin on August 8, 2011.

On February 10, 2011, in Kirkland v. R. J. Reynolds Tobacco Co., a jury returned
a verdict in favor of the plaintiff, found RJR Tobacco to be 10% at fault and
the plaintiff to be 90% at fault, and awarded $100,000 in compensatory damages.
The jury also awarded the plaintiff $250,000 in punitive damages. The case was
filed in January 2008, in the Circuit Court, Hillsborough County, Florida. The
plaintiff alleged that he was addicted to cigarettes, and as a result, developed
larynx cancer and other smoking related medical conditions and/or diseases. The
plaintiff’s post-trial motions were denied, and final judgment was entered in
March 2011. The plaintiff filed a notice of appeal on April 12, 2011. RJR
Tobacco filed a motion to dismiss the appeal as premature due to the trial court
not ruling on RJR Tobacco’s post-trial motions. The motion to dismiss the appeal
was denied, however, the appellate court relinquished jurisdiction for 45 days
to allow the trial court to address the outstanding post-trial motions. RJR
Tobacco’s post-trial motions were denied in July 2011. Briefing in the appeal is
underway.

On February 22, 2011, in Huish v. R. J. Reynolds Tobacco Co., a jury returned a
verdict in favor of the plaintiff, found RJR Tobacco to be 25% at fault, the
decedent, John Huish, to be 50% at fault and the remaining defendant to be 25%
at fault, and awarded $750,000 in compensatory damages and $3 million in
punitive damages, $1.5 million to each defendant. The case was filed in January
2008, in the Circuit Court, Alachua County, Florida. The plaintiff alleged that
as a result of smoking the defendants’ products, the decedent suffered from lung
cancer and other smoking related medical conditions and/or diseases. Final
judgment was entered in the amount of $1.69 million against each defendant.
Post-trial motions were denied, and the defendants filed a notice of appeal and
posted a supersedeas bond in the amount of $1.69 million. Briefing is underway.

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On March 18, 2011, in Mack v. R. J. Reynolds Tobacco Co., a jury returned a
verdict in favor of the plaintiff, found RJR Tobacco to be 51% at fault and the
decedent, Peter Mack, Sr., to be 49% at fault, and awarded $1 million in
compensatory damages. No punitive damages were awarded. The case was filed in
June 2008, in the Circuit Court, Alachua County, Florida. The plaintiff alleged
that due to the decedent’s addiction to cigarettes, he developed bronchitis and
lung cancer. Post-trial motions were denied, and final judgment was entered in
April 2011. RJR Tobacco filed a notice of appeal and posted a supersedeas bond
in the amount of $510,000 in May 2011. Briefing is underway.

On March 28, 2011, in Oliva v. R. J. Reynolds Tobacco Co., a jury returned a
verdict in favor of the defendants, including RJR Tobacco. The case was filed in
November 2007, in the Circuit Court, Duval County, Florida. The plaintiff
alleged that as a result of smoking the defendants’ cigarettes, he developed
chronic obstructive pulmonary disease and other smoking related diseases. Final
judgment was entered, and the plaintiff’s motion for a new trial was denied. The
plaintiff filed a notice of appeal and the defendants filed a notice of
cross-appeal in June 2011. Briefing is underway.

On April 4, 2011, in Weick v. R. J. Reynolds Tobacco Co., the jury returned a
verdict in favor of RJR Tobacco. The case was filed in November 2007, in the
Circuit Court, Hillsborough County, Florida. The plaintiff alleged that as a
result of smoking the defendant’s products, the decedent, Richard Weick,
developed lung cancer and later died. The court entered final judgment in April
2011.

On April 13, 2011, in Tullo v. R. J. Reynolds Tobacco Co., the jury returned a
verdict in favor of RJR Tobacco and the plaintiff, but against the remaining
defendants. The jury awarded $4.5 million in compensatory damages and no
punitive damages. The jury found the decedent, Dominick Tullo, to be 45% at
fault and the remaining defendants cumulatively to be 55% at fault. The case was
filed in December 2007, in the Circuit Court, Palm Beach County, Florida. The
plaintiff alleged that the decedent was addicted to cigarettes manufactured by
the defendants, and as a result, developed chronic obstructive pulmonary disease
and other smoking related illnesses and/or diseases. The plaintiff sought in
excess of $15,000 against each defendant, taxable costs and interest. The court
denied the plaintiff’s motion for a new trial against RJR Tobacco and denied the
remaining defendants’ post-trial motions in June 2011.

On April 19, 2011, in Betty Allen v. R. J. Reynolds Tobacco Co., the court
declared a mistrial due to the jury’s inability to reach a verdict. The case was
filed in December 2007, in the Circuit Court, Hillsborough County, Florida. The
plaintiff alleged that the decedent, Herman Allen, was addicted to cigarettes,
and as a result, suffered from lung cancer. A new trial date has not been
scheduled.

On April 20, 2011, in Marraffino v. R. J. Reynolds Tobacco Co., the court
declared a mistrial during opening statements. The case was filed in November
2007, in the Circuit Court, Broward County, Florida. The plaintiff alleges that
the decedent, Phyllis Talenfeld, was addicted to cigarettes, and as a result,
developed one or more smoking-related diseases. A new trial date has not been
scheduled.

On April 26, 2011, in Andy Allen v. R. J. Reynolds Tobacco Co., the 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 case was filed in
September 2007, in the Circuit Court, Duval County, Florida. The plaintiff
alleged that as result of smoking the defendants’ products, the decedent
developed chronic obstructive pulmonary disease. Final judgment was entered
against RJR Tobacco in the amount of $19.7 million in May 2011. Post-trial
motions are currently pending.

On May 20, 2011, in Reese v. R. J. Reynolds Tobacco Co., the jury returned a
verdict in favor of the plaintiff, found RJR Tobacco to be 30% at fault, and
awarded $3.6 million in compensatory damages and no punitive damages. The case
was filed on September 2007, in the Circuit Court, Miami-Dade County, Florida.
The plaintiff alleged that as a result of smoking the defendant’s products, she
became addicted and developed laryngeal cancer, peripheral vascular disease and
chronic obstructive pulmonary disease. The court entered final judgment on
May 25, 2011. Post-trial motions are currently pending.

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On May 20, 2011, in Jewett v. R. J. Reynolds Tobacco Co., the 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 case was filed in December 2007, in the Circuit Court, Duval
County, Florida. 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. The
defendants’ post-trial motions were denied on May 26, 2011. Final judgment was
entered in June 2011. RJR Tobacco filed a notice of appeal and posted a
supersedeas bond in the amount of $218,600.

On June 16, 2011, in Soffer v. R. J. Reynolds Tobacco Co., the 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 case was filed in December
2007, in the Circuit Court, Alachua County, Florida. 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. Post-trial motions were
denied. Final judgment was entered against RJR Tobacco in the amount of $2
million. The plaintiff filed a notice of appeal in July 2011. RJR Tobacco filed
a notice of cross-appeal.

On July 15, 2011, in Ciccone v. R. J. Reynolds Tobacco Co., the jury returned a
verdict finding the plaintiff is a member of the Engle class. The case was filed
in August 2004, in the Circuit Court, Broward County, Florida. 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. On July 21, 2011, the jury
awarded approximately $3.2 million in compensatory damages and $50,000 in
punitive damages. The jury found the plaintiff to be 70% at fault and RJR
Tobacco to be 30% at fault. The plaintiff will likely file post-trial motions.

On July 19, 2011, in Weingart v. R. J. Reynolds Tobacco Co., the jury returned a
verdict in favor of the plaintiff, however they refused to award compensatory or
punitive damages and found the plaintiff to be 91% at fault. The case was filed
in November 2007, in the Circuit Court, Palm Beach County, Florida. The
plaintiff alleged that as a result of using the defendants’ tobacco products,
the decedent, Claire Weingart, developed lung cancer and other smoking related
diseases and/or medical conditions. The plaintiff will likely file post-trial
motions.

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.

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As of June 30, 2011, there were 2,588 Broin II lawsuits pending in Florida.
There have been no Broin II trials since 2007.

Class-Action Suits

Overview. As of June 30, 2011, 15 class-action cases, exclusive of one antitrust
class action, 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,
Minnesota, Missouri, West Virginia, New Mexico and Arizona. All pending
class-action cases are discussed below.

The pending class actions against RJR Tobacco or its affiliates or indemnitees
include nine 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,
Minnesota, Missouri, New Mexico and Arizona 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., discussed
below under “— ‘Lights’ Cases,” both of which were filed in the U.S. District
Court for the Eastern District of New York and ultimately decertified.

Medical Monitoring and Smoking Cessation Case. On November 5, 1998, in Scott v.
American Tobacco Co., a case filed in District Court, Orleans Parish, Louisiana,
the trial court certified a medical monitoring or smoking cessation class of
Louisiana residents who were smokers on or before May 24, 1996, in an action
brought against the major U.S. cigarette manufacturers, including RJR Tobacco
and B&W, seeking to recover an unspecified amount of compensatory and punitive
damages. In July 2003, the jury returned a verdict in favor of the defendants on
the plaintiffs’ claim for medical monitoring and found that cigarettes were not
defectively designed. However, the jury also made certain findings against the
defendants on claims relating to fraud, conspiracy, marketing to minors and
smoking cessation. Notwithstanding these findings, this portion of the trial did
not determine liability as to any class member or class representative. What
primarily remained in the case was a class-wide claim that the defendants pay
for a program to help people stop smoking.

In May 2004, the jury returned a verdict in the amount of $591 million on the
class’s claim for a smoking cessation program. In September 2004, the defendants
posted a $50 million bond, pursuant to legislation that limits the amount of the
bond to $50 million collectively for MSA signatories, and noticed their appeal.
RJR Tobacco posted $25 million (the portions for RJR Tobacco and B&W) towards
the bond. In February 2007, the Louisiana Court of Appeals upheld the class
certification and found the defendants responsible for funding smoking cessation
for eligible class members. The appellate court also ruled, however, that the
defendants were not liable for any post-1988 claims, rejected the award of
prejudgment interest, struck eight of the 12 components of the smoking cessation
program and remanded the case for further proceedings. In particular, the
appellate court ruled that no class member, who began smoking after September 1,
1988, could receive any relief, and that only those smokers, whose claims
accrued on or before September 1, 1988, would be eligible for the smoking
cessation program. The plaintiffs have expressly represented to the trial court
that none of their claims accrued before 1988 and that the class claims did not
accrue until around 1996, when the case was filed. The defendants’ application
for writ of certiorari with the

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Louisiana Supreme Court was denied in January 2008. The defendants’ petition for
writ of certiorari with the U.S. Supreme Court was denied in June 2008. In
July 2008, the trial court entered an amended judgment in the case, finding that
the defendants are jointly and severally liable for funding the cost of a
court-supervised smoking cessation program and ordered the defendants to deposit
approximately $263 million together with interest from June 30, 2004, into a
trust for the funding of the program. The court also stated that it would
favorably consider a motion to return to defendants a portion of unused funds at
the close of each program year in the event the monies allocated for the
preceding program year were not fully expended because of a reduction in class
size or underutilization by the remaining plaintiffs.

In December 2008, the trial court judge signed an order granting the defendants
an appeal from the amended judgment. In April 2010, the court of appeals amended
but largely affirmed the trial court’s July 2008 judgment and ordered the
defendants to deposit with the court $242 million with judicial interest from
July 21, 2008, until paid. The defendants’ motion for rehearing was denied. In
September 2010, the defendants’ application for writ of certiorari or review and
their emergency motion to stay execution of judgment with the Louisiana Supreme
Court were denied. In September 2010, the U.S. Supreme Court granted the
defendant’s motion to stay the judgment pending applicants’ timely filing, and
the Court’s disposition, of a petition for writ of certiorari. The defendants
filed a petition for writ of certiorari in the U.S. Supreme Court in December
2010. The court denied the petition on June 27, 2011. RJR Tobacco accrued $139
million, the portions of the judgment allocated to RJR Tobacco and B&W, in the
second quarter of 2011.

California Business and Professions Code Cases. On April 11, 2001, in Brown v.
American Tobacco Co., Inc., a case filed in June 1997 in Superior Court,
San Diego County, California, the court granted in part the plaintiffs’ motion
for certification of a class composed of residents of California who smoked at
least one of the defendants’ cigarettes from June 10, 1993 through April 23,
2001, and who were exposed to the defendants’ marketing and advertising
activities in California. The action was brought against the major
U.S. cigarette manufacturers, including RJR Tobacco and B&W, seeking to recover
restitution, disgorgement of profits and other equitable relief under California
Business and Professions Code § 17200 et seq. and § 17500 et seq. Certification
was granted as to the plaintiffs’ claims that the defendants violated § 17200 of
the California Business and Professions Code pertaining to unfair competition.
The court, however, refused to certify the class under the California Legal
Remedies Act and on the plaintiffs’ common law claims. In March 2005, the court
granted the defendants’ motion to decertify the class, and in September 2006,
the California Court of Appeal affirmed the order decertifying the class. In
November 2006, the plaintiffs’ petition for review with the California Supreme
Court was granted, and in May 2009, the court reversed the decision of the trial
court, and the California Court of Appeal that decertified the class and
remanded the case to the trial court for further proceedings. In March 2010, the
trial court found that the plaintiffs’ “lights” claims were not preempted by the
Federal Cigarette Labeling and Advertising Act and denied the defendants’ second
motion for summary judgment. The plaintiffs filed a tenth amended complaint in
September 2010. RJR Tobacco and B&W filed their answers to the complaint, and
discovery is underway. Subsequently, on February 24, 2011, the court found that
the named class representatives were not adequate, were not typical, and lacked
standing. The plaintiffs’ motion for reconsideration was denied. The court
tentatively granted the plaintiffs’ motion to amend the complaint by adding new
class representatives and denied the defendants’ motion to dismiss.

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
plaintiffs 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

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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 it 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. Briefing is
underway.

“Lights” Cases. As noted above, “lights” class-action cases are pending against
RJR Tobacco or B&W in Illinois (3), Missouri (2), Minnesota (2), New Mexico
(1) and Arizona (1). 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
pending 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 to
the State of Illinois. 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. On May 5, 2011,
Philip Morris filed a petition for leave to appeal to the Illinois Supreme
Court.

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. There is currently no
activity in the case.

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 &

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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. There is currently no activity in the case.

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. There is currently no activity in the case.

In Dahl v. R. J. Reynolds Tobacco Co., a case filed in April 2003, and pending
in District Court, Hennepin County, Minnesota, a judge dismissed the case in
May 2005, ruling the “lights” claims are preempted by the Federal Cigarette
Labeling and Advertising Act. In July 2005, the plaintiffs appealed to the
Minnesota Court of Appeals for the Fourth Judicial District. During the pendency
of the appeal, RJR Tobacco removed the case to the U.S. District Court for the
District of Minnesota. In February 2007, the Eighth Circuit remanded the case to
the Minnesota Court of Appeals, which in December 2007, reversed the judgment
and remanded the case to the District Court. In January 2009, the Minnesota
Supreme Court issued an order vacating the February 2008 order that granted RJR
Tobacco’s petition for review. In July 2009, the plaintiffs in this case and in
Thompson v. R. J. Reynolds Tobacco Co., discussed below, filed a motion to
consolidate for discovery and trial. In October 2009, the court companioned the
two cases and reserved its ruling on the motion to consolidate, which it said
will be reevaluated as discovery progresses. In February 2010, a stipulation and
order was entered to stay proceedings in this case, and in Thompson until
completion of all appellate review in Curtis v. Altria Group, Inc. There is
currently no activity in the case.

In Thompson v. R. J. Reynolds Tobacco Co., a case filed in February 2005 in
District Court, Hennepin County, Minnesota, RJR Tobacco removed the case to the
U.S. District Court for the District of Minnesota. In October 2007, the
U.S. District Court remanded the case to state district court. In May 2009, the
court entered an agreed scheduling order that bifurcates merits and class
certification discovery. The parties are engaged in class certification
discovery. In July 2009, the plaintiffs in this case and in Dahl v. R. J.
Reynolds Tobacco Co. filed a motion to consolidate for discovery and trial. In
October 2009, the court companioned the two cases and reserved its ruling on the
motion to consolidate, which it said will be reevaluated as discovery
progresses. In February 2010, a stipulation and order was entered to stay
proceedings in this case, and in Dahl above until completion of all appellate
review in Curtis v. Altria Group, Inc. There is currently no activity in the
case.

In Cleary v. Philip Morris, Inc., a case filed in June 1998, and pending in
Circuit Court, Cook County, Illinois, the plaintiffs filed their motion for
class certification in December 2001, in an action brought against the major
U.S. cigarette manufacturers, including RJR Tobacco and B&W. The case was
brought on behalf of persons who have allegedly been injured by (1) the
defendants’ purported conspiracy pursuant to which defendants concealed material
facts regarding the addictive nature of nicotine, (2) the defendants’ alleged
acts of targeting their advertising and marketing to minors, and (3) the
defendants’ claimed breach of the public right to defendants’ compliance with
the laws prohibiting the distribution of cigarettes to minors. The plaintiffs
requested that the defendants be required to disgorge all profits unjustly
received through their sale of cigarettes to plaintiffs and the class, which in
no event will be greater than $75,000 per each class member, inclusive of
punitive damages, interest and costs. In March 2006, the court dismissed
count V, public nuisance, and count VI, unjust enrichment. The plaintiffs filed
an amended complaint in March 2009, to add a claim of unjust enrichment and, to
include in the class, individuals who smoked “light” cigarettes. RJR Tobacco and
B&W answered the amended complaint in March 2009. In July 2009, the plaintiffs
filed an additional motion for class certification. In September 2009, the court
granted the defendants’ motion for summary judgment on the pleadings concerning
the “lights” claims as to all defendants other than Philip Morris. In February
2010, the court denied the plaintiffs’ motion for class certification of all
three putative classes. However, the court ruled that the plaintiffs may
reinstate the class dealing with the conspiracy to conceal the addictive nature
of nicotine if they identify a new class representative. In April 2010, the
court granted the plaintiffs’ motion to file a fourth amended complaint and
withdraw the motion to reinstate count I by identifying a new plaintiff. The
defendants filed a motion to dismiss the plaintiffs’ fourth amended complaint,
which was granted in June 2010. The court denied the plaintiffs’ motion to
reconsider, and in August 2010, the plaintiffs filed a notice of appeal in the
U.S. Court of Appeals for the Seventh Circuit. Oral argument occurred on
April 7, 2011. A decision is pending.

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In VanDyke v. R. J. Reynolds Tobacco Co., a case filed in August 2009 in the
U.S. District Court for the District of New Mexico against RJR Tobacco and RAI,
the plaintiffs brought the case on behalf of all New Mexico residents who from
July 1, 2004, to the date of judgment, purchased, not for resale, the
defendants’ cigarettes labeled as “lights” or “ultra-lights.” The plaintiffs
allege fraudulent misrepresentation, breach of express warranty, breach of
implied warranties of merchantability and of fitness for a particular purpose,
violations of the New Mexico Unfair Practices Act, unjust enrichment, negligence
and gross negligence. The plaintiffs seek a variety of damages, including
actual, compensatory and consequential damages to the plaintiff and the class
but not damages for personal injury or health-care claims. Discovery is
underway.

In Shaffer v. R. J. Reynolds Tobacco Co., a case filed in October 2009 in the
Superior Court of Pima County, Arizona against RJR Tobacco, RAI and other
defendants, the plaintiffs brought the case on behalf of all persons residing in
Arizona who purchased, not for resale, defendants’ cigarettes labeled as “light”
or “ultra-light” from the date of the defendants’ first sales of such cigarettes
in Arizona to the date of judgment. The plaintiffs allege consumer fraud,
concealment, nondisclosure, negligent misrepresentation and unjust enrichment.
The plaintiffs seek a variety of damages, including compensatory, restitutionary
and punitive damages. In November 2009, the defendants removed the case to the
U.S. District Court for the District of Arizona, and RJR Tobacco and RAI filed
their answers to the complaint. Discovery is underway. The case was referred to
mediation in May 2011 to determine whether the case might be suitable for
mediation. A decision is pending.

As referred to in the “Cautionary Statements,” in the event RJR Tobacco and its
affiliates or indemnitees lose one or more of the pending “lights” class-action
suits, RJR Tobacco could face bonding difficulties depending upon the amount of
damages ordered, if any, 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 October 2004, the trial court stayed this
case pending the outcome of the appeal in Scott v. American Tobacco Co., Inc.,
discussed above under “— Medical Monitoring and Smoking Cessation Case.”

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 American 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 has been limited activity in this case.

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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 June 30, 2011, three 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 more 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 are tables depicting the unadjusted tobacco industry settlement
payment schedule and the settlement payment schedule for RAI’s operating
subsidiaries under the State Settlement Agreements, and related information for
2009 and beyond:

Unadjusted Original Participating Manufacturers’ Settlement Payment Schedule

 

     2009     2010     2011 and
thereafter  

First Four States’ Settlements:(1)

      

Mississippi Annual Payment

   $ 136      $ 136      $ 136   

Florida Annual Payment

     440        440        440   

Texas Annual Payment

     580        580        580   

Minnesota Annual Payment

     204        204        204   

Remaining States’ Settlement:

      

Annual Payments(1)

     8,004        8,004        8,004   

Base Foundation Funding

     —          —          —     

Growers’ Trust(2)

     295        295        —     

Offset by federal tobacco buyout(2)

     (295 )      (295 )      —        

 

 

   

 

 

   

 

 

 

Total

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

 

 

   

 

 

   

 

 

 

RAI’s Operating Subsidiaries’ Settlement Expenses and Payment Schedule

 

Settlement expenses

   $ 2,540       $ 2,496         —     

Settlement cash payments

   $ 2,249       $ 2,519         —     

Projected settlement expenses

         $ >2,500   

Projected settlement cash payments

         $ >2,500   

 

(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.

(2)

The Growers’ Trust payments expired December 2010 and were offset by certain
obligations resulting from the federal tobacco buyout legislation, not included
in this table, signed in October 2004. See “— Tobacco Buyout Legislation and
Related Litigation” below.

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.

Department of Justice Case. On September 22, 1999, 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

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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 historical 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’ 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, B&W and 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. The defendants filed a motion to vacatur, in which they
moved to vacate the trial court’s injunctions and factual findings and dismiss
the case in its entirety, on March 3, 2011. The court denied the motion on
June 1, 2011.

International Cases. Five health-care reimbursement cases are pending against
RJR Tobacco, its current or former affiliates, or B&W outside the United States,
four in Canada and one in Israel. In these actions, foreign governments are
seeking to recover for health care, medical and other assistance 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 JTI. Subject to a reservation of rights, JTI has assumed the defense
of RJR Tobacco and its current or former affiliates in these actions.

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  •  

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, illegal importation, strict liability, deceit and
misrepresentation, violation of trade practice and competition acts, concerted
action, and joint liability. RJR Tobacco and its affiliate filed statements of
defense in January 2007. In February 2010, the trial date was adjourned, and no
new date has been set.

 

  •  

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 and one of its
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
2006, which 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. In
June 2008, RJR Tobacco and its affiliate filed notices of intent to defend and
have since filed defenses to these claims.

 

  •  

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 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. RJR Tobacco and its affiliate have brought a motion
challenging the jurisdiction of the Ontario court. A decision is pending.

 

  •  

Newfoundland and Labrador - In February 2011, a case was filed on behalf of the
Province of Newfoundland and Labrador, Canada, hereinafter Newfoundland, 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 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, New Brunswick and Ontario
actions described above based on analogous theories of liability. Service on RJR
Tobacco and one of its affiliates was effected in March 2011.

 

  •  

Israel - In September 1998, the General Health Services, Israel’s second largest
health fund, filed a statement of claim against certain cigarette manufacturers
and distributors, including RJR Tobacco, RJR Nabisco and B&W, in the District
Court of Jerusalem, Israel. The plaintiff seeks to recover the present value of
the total expenditure by the government 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 the estimated total expenditure by the government 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 plaintiff alleges that the
defendants are liable under the following theories: defective product, failure
to warn, sale of cigarettes to children and adolescents, strict liability,
deceit and misrepresentation and violation of trade practice and competition
acts. In 2002, the plaintiff obtained leave to serve RJR Tobacco and B&W outside
the jurisdiction. On behalf of RJR Tobacco, JTI filed a motion challenging the
grant of leave, which was denied. JTI appealed the decision to the Supreme Court
of Israel alongside other defendants’ applications for a strike out of the
claim. A decision is pending.

The following six 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, and Saskatchewan, although the plaintiffs’ counsel have
been actively pursuing only the action pending in Saskatchewan 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
plaintiffs brought the case on behalf 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.

 

  •  

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
plaintiffs brought the case on behalf of all individuals, including their
estates, dependents and family members, who purchased or smoked cigarettes
designed, manufactured, marketed or distributed by the defendants.

 

  •  

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
plaintiffs brought the case on behalf of all individuals, including their
estates, and their dependents and family members, who purchased or smoked
cigarettes manufactured by the defendants.

 

  •  

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
plaintiffs brought the case on behalf 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
of January 1, 1954, to the expiry of the opt out period as set by the court.

 

  •  

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
plaintiffs brought the case on behalf 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.

 

  •  

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
plaintiffs brought the case on behalf 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.

In each of these six 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. The plaintiffs seek
compensatory and aggravated damages; punitive or exemplary damages; the right to
waive the torts described above

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and claim disgorgement of the amount of revenues or profits the defendants
received from the sale of tobacco products to putative class members; interest
pursuant to the Pre-judgment Interest Act and other similar legislation; and
other relief the court deems just. Pursuant to the terms of the 1999 sale of RJR
Tobacco’s international tobacco business, RJR Tobacco has tendered the defense
of these six 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.

Native American Tribe Cases. As of June 30, 2011, 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.

Hospital Cases. As of June 30, 2011, no cases brought by hospitals were pending
against cigarette manufacturers, including RJR Tobacco and B&W. In City of
St. Louis v. American Tobacco Co., Inc., filed in November 1998, in the Circuit
Court of the City of St. Louis, Missouri, hospitals sought recovery of
uncompensated, unreimbursed health-care costs expended or to be expended on
behalf of patients who suffer, or have suffered, from illnesses allegedly
resulting from the use of cigarettes. In June 2005, the court granted the
defendants’ motion for summary judgment as to claims for damages which accrued
prior to November 16, 1993. In June 2010, the court granted the defendants’
motions for summary judgment on failure to warn claims, negligent omission
claims, and all related targeting marketing claims and allegations based on
federal preemption. In September 2010, the court granted the defendants’ motion
for summary judgment on plaintiffs’ claims concerning ETS and plaintiffs’ claims
for damages based on the loss of use of monies prior to judgment. In October
2010, the court granted the defendants’ motions for summary judgment on
misrepresentation, concealment and omission. The remaining motions for summary
judgment were denied. On April 29, 2011, the jury returned a verdict in favor of
all defendants. Final judgment was entered on June 10, 2011. The parties agreed
that the plaintiffs would waive all rights to appeal, including the right to
file any post-trial motions, and each party would bear its own costs. All
interlocutory and/or outstanding issues in the case were merged into the
judgment.

Other Cases

In August 2009, RJR Tobacco and American Snuff Co. joined other tobacco
manufacturers and a tobacco retailer in filing a lawsuit in the U.S. District
Court for the Western District of Kentucky (Commonwealth Brands, Inc., v. United
States of America), challenging certain provisions of the Family Smoking
Prevention and Tobacco Control Act, referred to as the FDA Tobacco Act, that
severely restricts the few remaining channels available to communicate with
adult tobacco consumers. RAI believes these provisions cannot be justified on
any basis consistent with the demands of the First Amendment. The suit does not
challenge the U.S. Congress’s decision to give the FDA regulatory authority over
tobacco products, nor does it challenge the vast majority of the provisions of
the new law. In November 2009, the court denied certain plaintiffs’ motion for
preliminary injunction as to the modified risk tobacco products provision of the
FDA Tobacco Act. The parties finished briefing their respective cross-motions
for summary judgment in December 2009, and in January 2010, the court granted
summary judgment for the plaintiffs so as to allow the continued use of color
and imagery in labeling and advertising and the right to make statements that
their products conform to FDA regulatory requirements. The court granted summary
judgment to the U.S. Government as to all other challenged provisions. In March
2010, each side filed a notice of appeal with the Sixth Circuit Court of
Appeals. Oral argument is scheduled for July 27, 2011.

On February 25, 2011, RJR Tobacco, Lorillard Inc., and Lorillard Tobacco Company
jointly filed a lawsuit, in the U.S. District Court for the District of
Columbia, challenging the composition of the Tobacco Products Scientific
Advisory Committee, referred to as the TPSAC, which had been established by the
FDA. 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 defendants filed a motion
to dismiss in April 2011.

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

For a detailed description of the FDA Tobacco Act, see “— Governmental Activity”
in “Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” in Item 7.

Finally, RJR Tobacco and others brought suit against the City of Worcester,
Massachusetts to enjoin enforcement of an ordinance prohibiting all outdoor
advertising of tobacco products and any indoor advertising that is visible from
the street. The suit, National Association of Tobacco Outlets, Inc. v. City of
Worcester, was filed in the U.S. District Court for the Central Division of
Massachusetts on June 17, 2011. The City and the other defendants agreed to stay
enforcement of the ordinance until after a ruling on the plaintiffs’ motion for
preliminary injunction.

State Settlement Agreements-Enforcement and Validity; Adjustments

As of June 30, 2011, there were 33 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.

The Vermont Attorney General filed suit in July 2005, in the Vermont Superior
Court, Chittenden County, alleging that certain advertising for the Eclipse
cigarette brand violated both the MSA and the Vermont Consumer Fraud Statute.
The State of Vermont is seeking declaratory, injunctive, and monetary relief.
The bench trial in this action began on October 6, 2008, and lasted a total of
five weeks. Closing arguments occurred on March 11, 2009. On March 10, 2010, the
court issued its opinion, finding that three of the advertising claims made by
RJR Tobacco were not supported by the appropriate degree of scientific evidence.
The court did, however, rule that the remaining six advertising claims
challenged by the State of Vermont were not actionable. The court indicated that
remedies and any damages to be awarded, as well as the issue of attorney’s fees
and litigation expenses, will be addressed in additional proceedings. On
March 22, 2010, RJR Tobacco filed a motion to amend findings of fact that it
believes are demonstrably contrary to, or unsupported by, the record. On
December 14, 2010, the court issued an order granting in part and denying in
part RJR Tobacco’s motion. On March 18, 2011, a scheduling order was entered,
leading to an October 3, 2011 trial date on the remaining issues.

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. A hearing on B&W’s
motion for summary judgment and the State’s motion to enforce the settlement
agreement was held on July 27, 2011.

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 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.

In October 2008, Vibo Corporation, Inc. d/b/a General Tobacco, referred to as
General, filed a complaint in the U.S. District Court for the Western District
of Kentucky against RJR Tobacco and other participating manufacturers, referred
to as PMs, under the MSA, and the Attorneys General of the 52 states and
territories that are parties to the MSA. General sought, among other things, to
enjoin enforcement of certain provisions of the MSA and an order relieving it of
certain of its payment obligations under the MSA and, in the event such relief
was not granted, rescission of General’s 2004 agreement to join the MSA. General
also moved for a preliminary injunction that, among other things, would have
enjoined the states from enforcing certain of General’s payment obligations
under the MSA. In November 2008, RJR Tobacco and the other defendants moved to
dismiss General’s complaint. In January 2009, the court issued a memorandum
opinion and order granting the defendants’ motions and dismissing General’s
lawsuit. Final judgment was entered on January 5, 2010. On January 13, 2010,
General noticed its appeal of this decision. Briefing is complete. Oral argument
has not been scheduled.

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

In December 2007, nine states (California, Connecticut, Illinois, Maine,
Maryland, New York, Ohio, Pennsylvania and Washington) sued RJR Tobacco claiming
that an advertisement published in Rolling Stone magazine the prior month
violated the MSA’s ban on the use of cartoons. The states asserted that the
magazine’s content adjacent to a Camel gatefold advertisement included cartoon
images prohibited by the MSA and that certain images used in the Camel ad itself
were prohibited cartoons. In addition, three states (Connecticut, New York and
Maryland) also claimed that a direct mail piece distributed by RJR Tobacco
violated the MSA prohibition against distributing utilitarian items bearing a
tobacco brand name. Each state sought injunctive relief and punitive monetary
sanctions. Eight of the nine courts have since ruled that the states are not
entitled to the punitive sanctions being sought. The issue has not been resolved
definitively by the other court at this time.

Six of these magazine advertisement cases have been ruled upon following bench
trials:

 

  •  

In Maine, RJR Tobacco received a complete defense ruling.

 

  •  

In Washington, the Washington Court of Appeals reversed, in part, a favorable
ruling in favor of RJR Tobacco at the trial court, holding that some of the
images used in the RJR Tobacco advertisement were cartoons, and remanded the
case for further proceedings. The Washington Supreme Court declined to review
the decision by the Court of Appeals. The case was settled in the second quarter
of 2011 for a non-material amount.

 

  •  

In Ohio, the court agreed that the Camel advertisement did not use any cartoons,
but ruled that the company should have prevented the use of cartoons in
magazine-created content next to the RJR Tobacco advertisement. No monetary
sanctions were awarded. RJR Tobacco appealed this decision, and the Court of
Appeals reversed the trial court’s ruling regarding RJR Tobacco’s duty to
prevent the use of cartoons in adjacent magazine-created content. The State
petitioned the Ohio Supreme Court for review, and that petition was denied.

 

  •  

The court in California ruled that the company was not liable for preventing the
use of cartoons in magazine-created content next to the RJR Tobacco
advertisement, but that a few of the images in the RJR Tobacco advertisement
itself were “technical” and unintentional cartoons. No monetary sanctions were
awarded by the California court. The parties’ appeals are ongoing. The
California Court of Appeals affirmed the judgment on the merits. In April 2011,
the California Court of Appeals reversed the trial court’s award of attorneys’
fees to the State and remanded the case to the trial court with instructions to
use the correct legal standard and prevailing market rates in determining the
award of fees to either party. Oral argument will occur in October 2011.
Briefing is underway.

 

  •  

The Pennsylvania court ruled against RJR Tobacco on both claims, agreeing with
the Commonwealth that the RJR Tobacco advertisement contained unspecified
cartoons and that RJR Tobacco was responsible for the cartoons included in the
magazine-created content, regardless of whether the company was aware of it in
advance. In addition, the Pennsylvania court ordered RJR Tobacco to pay for the
creation of a single page youth smoking prevention advertisement in Rolling
Stone issues in Pennsylvania within a year, or pay a penalty of approximately
$302,000, if it fails to do so. RJR Tobacco appealed. In August 2010, the
Pennsylvania Court of Appeals reversed the trial court on both claims. The
Commonwealth filed a motion for reargument, which was denied in October 2010. In
November 2010, the Commonwealth filed a petition for leave to appeal, which was
denied in April 2011.

 

  •  

In Illinois, RJR Tobacco received a complete defense ruling. The State requested
reconsideration of the court’s ruling, and the court reaffirmed its ruling in
favor of RJR Tobacco. The State filed an appeal. On June 30, 2011, the appellate
court affirmed in part and reversed in part and remanded the case to the trial
court to determine the State’s attorneys’ fees and costs. The appellate court
reversed the ruling that found that RJR Tobacco did not use some images that
were cartoons under the consent decree in its advertisement in Rolling Stone.
The appellate court affirmed the ruling that RJR Tobacco did not “cause” Rolling
Stone to “use” cartoons in the editorial portion of the gatefold and affirmed
the ruling that the State was not entitled to any monetary sanctions for
violating the consent decree. RJR Tobacco is presently evaluating its options.

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

The three remaining cases – in Maryland, New York and Connecticut – were
individually settled in the first quarter of 2010 for a non-material amount.

NPM Adjustment. The MSA includes an adjustment, referred to as an NPM
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 designated under the MSA 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.

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 MSA 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 a single, nationwide
arbitration panel of three former federal 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.

As of June 30, 2011, 47 of the 48 courts that had addressed the question whether
the dispute concerning the 2003 NPM Adjustment is arbitrable had ruled that
arbitration is required under the MSA. The orders compelling arbitration in
these states are now final and/or non-appealable. 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.

As of January 2009, RJR Tobacco and certain other PMs entered into an Agreement
Regarding Arbitration, referred to as the Arbitration Agreement, with 45 of the
settling states, representing approximately 90% of the allocable share of the
settling states. Pursuant to the Arbitration Agreement, signing states will have
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 have, without releasing or waiving any claims, authorized the release of
those funds to the settling states.

Montana is one of the settling states that signed the Arbitration Agreement.
Thus, notwithstanding the ruling of the Montana Supreme Court with respect to
the arbitrability of the diligent enforcement issue, Montana is contractually
obligated to participate with the other states in the arbitration that will
address all remaining issues related to the dispute pertaining to the 2003 NPM
Adjustment.

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

The arbitration panel contemplated by the MSA and the Arbitration Agreement has
been selected and proceedings before the panel with respect to the 2003 NPM
Adjustment Claim have begun. An initial administrative conference was held in
July 2010, and subsequent proceedings have been held since then. It is
anticipated that it will be 12 to 18 months before a decision on the merits with
respect to the 2003 NPM Adjustment is reached.

Other NPM Adjustment Claims. From 2006 to 2008, proceedings were initiated with
respect to an NPM Adjustment for 2004, 2005 and 2006. The Adjustment
Requirements were satisfied with respect to the NPM Adjustment for each of 2004,
2005 and 2006. As a result:

 

  •  

in April 2007, RJR Tobacco placed approximately $561 million of its 2007 MSA
payment (representing its share of the 2004 NPM Adjustment as calculated by the
MSA independent auditor), and in April 2008, placed approximately $431 million
of its 2008 MSA payment (representing its share of the 2005 NPM Adjustment as
calculated by the independent auditor, net of certain slight adjustments to
reflect revised independent auditor calculations of RJR Tobacco’s share of the
2003 and 2004 NPM Adjustments) into the disputed payments account. In 2009 and
2010, revised independent auditor calculations resulted in increases in RJR
Tobacco’s 2005 NPM Adjustment, bringing the total amount of the adjustment to
approximately $445 million; and

 

  •  

in April 2009, RJR Tobacco retained approximately $406.5 million of its 2009 MSA
payment to reflect its share of the 2006 NPM Adjustment as calculated by the
independent auditor. Based on revised calculations by the MSA independent
auditor, in April 2010, RJR Tobacco withheld an additional amount, bringing the
total amount withheld with respect to the 2006 NPM Adjustment to approximately
$420 million. Again based on revised calculations by the MSA independent
auditor, in April 2011, RJR Tobacco paid approximately $1 million extra to
account for a downward adjustment in its share of the 2006 NPM Adjustment.

The MSA permits PMs to retain disputed payment amounts pending resolution of the
dispute. If the resolution of the dispute ultimately requires a PM to pay some
or all of the disputed amount, then the amount deemed to be due includes
interest calculated from the date the payment was originally due at the prime
rate plus three percent.

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 provides that the settling states will 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 will become 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 will pay 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.

Based on the payment calculations of the MSA independent auditor and the
agreement described above regarding in pertinent part the 2007 and 2008
significant factor determinations, the Adjustment Requirements were satisfied
with respect to the NPM Adjustments for 2007 and 2008. As a result, in April
2010, RJR Tobacco placed approximately $448 million of its 2010 MSA payment
(representing its share of the 2007 NPM Adjustment as calculated by the MSA
independent auditor) into the disputed payments account, and in April 2011, it
placed approximately $477 million of its 2011 MSA payment (representing its
share of the 2008 NPM Adjustment as calculated by the MSA independent auditor)
into the disputed payments account. RJR Tobacco’s 2011 payment into the disputed
payments account was reduced by approximately $1.1 million to adjust for a
downward revision by the independent auditor to RJR Tobacco’s share of the 2007
NPM Adjustment.

The table below summarizes the information discussed above with respect to the
disputed portions of RJR Tobacco’s MSA payment obligations from 2003 through
2008 – the years as to which the Adjustment Requirements have been met:

 

Year for which NPM Adjustment Calculated

     2003         2004         2005         2006         2007         2008   

Year in which deduction from NPM may be taken

     2006         2007         2008         2009         2010         2011   

RJR Tobacco’s approximate share of disputed NPM Adjustment (millions)

   $ 615       $ 562       $ 445       $ 419       $ 447       $ 477   

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

In addition to the NPM Adjustment claims described above, RJR Tobacco has filed
dispute notices with respect to its 2009 and 2010 annual MSA payments relating
to the NPM Adjustments potentially applicable to those years. The amount at
issue for those two years is approximately $937 million.

Due to the uncertainty over the final resolution of the 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.

Antitrust Cases

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
June 30, 2011, all of the federal and state court cases on behalf of indirect
purchasers had been dismissed, except for one state court case pending in
Kansas.

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. The parties are currently engaged in
discovery. In November 2010, RJR Tobacco and B&W filed a motion for summary
judgment. A decision is pending.

Other Litigation and Developments

Claims for Indemnification. By purchase agreement dated May 12, 1999, referred
to as the 1999 Purchase Agreement, RJR and RJR Tobacco sold the international
tobacco business to JTI. RJR and RJR Tobacco retained certain liabilities
relating to the activities of Northern Brands, including those relating to a
1998 guilty plea entered in the U.S. District Court for the Northern District of
New York, as well as an investigation conducted by the Royal Canadian Mounted
Police, referred to as RCMP, for possible violations of Canadian law related to
the activities that led to the Northern Brands guilty plea and certain conduct
by Stanley Smith, a former executive of RJR-Macdonald, Inc., referred to as
RJR-MI, which led to the termination of his severance agreement. Under its
reading of the indemnification provisions of the 1999 Purchase Agreement, JTI
requested indemnification for any damages arising out of the matters described
below:

 

  •  

JTI sought indemnification for criminal charges filed by the RCMP in the
Province of Ontario alleging fraud and conspiracy to defraud Canada and the
Provinces of Ontario and Quebec in connection with the purchase, sale, export,
import and/or re-export of cigarettes and/or fine-cut tobacco against the
following: JTI Macdonald Corp., referred to as JTI-MC, Northern Brands, R. J.
Reynolds Tobacco International, Inc., referred to as RJR-TI, R. J. Reynolds
Tobacco Co., Puerto Rico, referred to as RJR-PR and eight individuals associated
with RJR-MI and/or RJR-TI during the period of January 1, 1991, through
December 31, 1996. These claims were resolved with respect to Canadian
governmental entities when, on April 13, 2010, Northern Brands entered into a
plea agreement with the Ministry of the Attorney General of Ontario, under which
Northern Brands pled guilty to a one-count violation of the Canadian Criminal
Code for conspiring to aid other persons to sell and be in possession of tobacco
products that were not packaged and stamped in conformity with the Canadian
Excise Act during the period February 18, 1993 through December 31, 1996. That
plea was accepted and resulted in Northern Brands being required to pay a CAD
$75 million fine, which fine was paid on April 13, 2010. Further, and through a
Settlement Agreement and Mutual Release between RJR and JTI dated as of
April 13, 2010, referred to as the SA-MR, the parties resolved, by mutual
release, JTI’s request for indemnification of the claims referenced above by,
among other things, (1) RJR Tobacco agreeing to give up its reservation of
rights with respect to all moneys already advanced to JTI for certain attorneys’
fees, expenses and costs in the criminal proceedings and to pay for any
additional fees, expenses

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

 

and costs of like kind incurred in those proceedings up to a specified date;
(2) JTI agreeing to pay for all (i) Canadian Goods and Services Taxes incurred
to date, and (ii) such taxes incurred in the future in connection with the
foregoing attorney services already provided or to be provided in the criminal
proceedings; (3) the parties agreeing to split evenly the payment of certain
other attorneys’ fees already incurred in connection with the Canadian matters;
and (4) the parties resolving other issues related to these matters.

 

  •  

JTI also sought indemnification relating to the following civil claims: (1) a
Statement of Claim filed by the Attorney General of Canada in the Superior Court
of Justice, Ontario, Canada against, among others, JTI and a number of its
affiliates, seeking to recover taxes and duties allegedly not paid as a result
of cigarette smuggling and related activities; and (2) a tax assessment against
JTI-MC by the Quebec Ministry of Revenue for the period from January 1, 1990,
through December 31, 1998, for alleged unpaid duties, penalties, and interest
resulting from cigarette smuggling and related activities. Following the tax
assessment by the Quebec Ministry of Revenue, JTI-MC sought protection under the
Companies’ Creditor Arrangement Act in the Ontario Superior Court of Justice,
which proceedings are referred to as the CCAA Proceedings. In the CCAA
Proceedings, Canada and the Provinces of Ontario, New Brunswick, Quebec, British
Columbia, Nova Scotia, Prince Edward Island, and Manitoba submitted civil claims
relating to the movement of contraband tobacco products in Canada for the period
before 2000. These claims were resolved with respect to the governmental
entities when, effective April 13, 2010, RJR Tobacco entered into the
Comprehensive Agreement with the Canadian federal, provincial and territorial
governments. The Comprehensive Agreement covers all civil claims related to the
movement of contraband tobacco products in Canada during the period 1985 through
1999 that the governments have asserted or could assert against RJR Tobacco and
its affiliates. Pursuant to the Comprehensive Agreement, RJR Tobacco has paid
the governments a total of CAD $325 million. Should RJR Tobacco or its
affiliates decide in the future to sell tobacco products in Canada, they have
also agreed to adopt packaging, marking and other measures that will assist the
Canadian governments in their efforts to combat the movement of contraband
tobacco products in Canada. Further, and pursuant to the SA-MR, JTI’s
indemnification claims with respect to the matters described in this paragraph
also have been resolved by mutual release.

 

  •  

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-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.

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 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. In the
interim, RJR and RJR Tobacco have been paying defense costs and expenses
incurred by JTI in connection with some, but not all, of the Canadian litigation
matters described above. RJR Tobacco expensed $3 million during the first six
months of 2011, for funds to be reimbursed to JTI for such costs and expenses.

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

See note 5 for additional information related to the Comprehensive Agreement
entered into by RJR Tobacco with the Canadian federal, provincial and
territorial governments, and the plea agreement of Northern Brands in connection
with certain Canadian matters.

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 has been stayed and
largely inactive since 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. Oral argument of the motion
occurred on October 26, 2010. Supplemental briefs were then filed. 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. An appellate
briefing schedule has yet to be set.

Star Patent Infringement. On May 23, 2001, and July 30, 2002, Star Scientific,
Inc. filed two patent infringement actions, later consolidated, against RJR
Tobacco in the U.S. District Court for the District of Maryland. The
consolidated action, known as Star I, involved two patents (U.S. Patent Nos.
6,202,649 and 6,425,401), both entitled “Method of Treating Tobacco to Reduce
Nitrosamine Content, and Products Produced Thereby.” Star accused RJR Tobacco of
infringing certain claims of these patents during the 2001 and 2002 growing
seasons and asked the court to: enter an injunction restraining RJR Tobacco from
further acts of infringement; award Star damages, including a reasonable
royalty, to compensate for the infringement; increase the damages due to
willfulness; award pre-judgment and post-judgment interest and reasonable
attorney fees; and order RJR Tobacco to deliver up to the court for destruction
all products manufactured from any process that infringes any claim of either
patent. RJR Tobacco filed counterclaims seeking a declaration that the asserted
claims of Star’s patents are invalid, unenforceable and not infringed by RJR
Tobacco. Between January 31 and February 8, 2005, the court held a first bench
trial on RJR Tobacco’s affirmative defense and counterclaim based upon
inequitable conduct. Additionally, in response to the court’s invitation, RJR
Tobacco filed two summary judgment motions in January 2005.

In January 2007, the court granted RJR Tobacco’s motion for summary judgment of
invalidity based on indefiniteness. The court granted in part and denied in
part, RJR Tobacco’s other summary judgment motion concerning the effective
filing date of Star’s patents. In June 2007, the court ruled that Star’s patents
are unenforceable due to inequitable conduct by Star and its representatives in
the U.S. Patent & Trademark Office, referred to as the PTO, and entered final
judgment in favor of RJR Tobacco and against Star. Star filed a notice of appeal
with the U.S. Court of Appeals for the Federal Circuit.

In August 2008, the Federal Circuit issued a decision reversing the district
court’s rulings against Star and remanded the case to the district court for
further proceedings on the issues of validity and infringement. Star updated its
reasonable royalty damages calculation to a range of $294.9 to $362.1 million.

In late 2008, RJR Tobacco petitioned the PTO to reexamine the claims of Star’s
patents at issue in Star I based on substantial new questions of patentability.
The PTO agreed to reexamine the claims ex parte. The district court decided to
move forward with the trial in Star I rather than await the outcome of the
reexamination proceedings.

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

Trial began on May 18, 2009, and continued for twenty trial days. On June 16,
2009, the jury returned a verdict in favor of RJR Tobacco on every question put
to it. The jury decided that RJR Tobacco had not infringed either of Star’s
patents and that the patents were invalid on four independent bases.

Shortly after the start of the Star I jury trial, in May 2009, Star filed a
follow-on lawsuit – Star II – in the U.S. District Court for the District of
Maryland seeking damages for alleged infringement during the 2003 growing season
and beyond of the two Star patents found invalid and not infringed in Star I.
The district court stayed Star II pending the outcome of proceedings in Star I,
and Star II was administratively closed pending further order of the district
court upon the application, by December 31, 2012, of any party.

In November 2009, RJR Tobacco filed a bill of costs (later renewed) seeking
reimbursement of its recoverable costs as the prevailing party in Star I, and
also filed a motion seeking reimbursement of its attorney fees and excess costs
incurred in defending Star I. In December 2009, the district court upheld the
jury verdict by denying Star’s combined motion for judgment as a matter of law
or new trial. The court entered judgment in RJR Tobacco’s favor and awarded RJR
Tobacco all assessable costs. The court deferred proceedings with respect to RJR
Tobacco’s motion for attorneys’ fees and excess costs pending final resolution
of the reexamination and any appellate proceedings.

On Star’s request and without objection from RJR Tobacco, the district court
deferred briefing on RJR Tobacco’s renewed bill of costs until after the
resolution of appellate proceedings.

In December 2009, Star filed a notice of appeal in the Federal Circuit from the
district court’s final judgment order. The appeal was docketed in February 2010.
Briefing by both parties followed, and the Federal Circuit heard oral argument
on January 11, 2011. A decision on Star’s appeal is pending.

In the PTO reexamination proceeding, the PTO in March and April 2011 issued ex
parte reexamination certificates confirming the patentability of the claims of
the Star patents at issue in Star I. For several reasons, RJR Tobacco believes
that the PTO’s reexamination decision, which is not binding on the Federal
Circuit, should not materially affect the Federal Circuit’s review of the
district court’s final judgment because the jury found non-infringement in any
case and invalidity in RJR Tobacco’s favor on grounds not considered by the PTO.

Other Matters. In November, 2009, RAI and B&W were served with subpoenas issued
by the Office of the Inspector General, U.S. Department of Defense, seeking two
broad categories of documents in connection with a civil investigation:

 

  •  

documents regarding the sale of U.S. manufactured cigarettes to the Army Air
Force Exchange Service and the Navy Exchange Command either directly by the
manufacturers or through distributors during the period January 1, 1998 through
December 31, 2001; and

 

  •  

documents regarding the sale of U.S. manufactured cigarettes by the
manufacturers to civilian market customers for resale in non-federal excise tax
markets during the periods January 1, 1998 through December 31, 2001 and
September 1, 2008 through September 1, 2009.

RAI and RJRT has responded to the subpoenas, including the extent to which the
subpoenas seek documents regarding the domestic tobacco operations acquired from
B&W in 2004, and to otherwise cooperate appropriately with the investigation.

In May 2011, RJR Tobacco and Santa Fe received separate letters from counsel to
Walgreen Co. regarding a 60-Day notice served on Walgreen by a consumer group
alleging violations of California’s Proposition 65. The group claims that
Walgreen provided or sold products with containers or wrappers containing
insufficient warning in violation of California law. Walgreen believes that RJR
Tobacco and Santa Fe provided the noticed products, and is requesting that RJR
Tobacco and Santa Fe pay for Walgreen’s defense, indemnify Walgreen and hold
Walgreen harmless from all liability, loss or expense (including legal expense)
related to sales of any products covered by the 60-day notice, manufactured or
distributed to Walgreen by RJR Tobacco and Santa Fe. In June 2011, RJR Tobacco
submitted a reply to Walgreen’s counsel, and Santa Fe will submit a reply in
July 2011. RJR Tobacco and Santa Fe each believes that it has valid defenses to
Walgreen’s claims.

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

Finally, in the first quarter of 2005, Commonwealth Brands, Inc., referred to as
Commonwealth, was served with an individual smoking and health case, Croft v.
Akron Gasket in Cuyahoga County, Ohio. Commonwealth requested indemnity from RJR
Tobacco pursuant to the Asset Purchase Agreement dated July 24, 1996, between
Commonwealth and B&W, referred to as the 1996 Purchase Agreement. As a result of
the B&W business combination, RJR Tobacco agreed to indemnify Commonwealth for
this claim to the extent, if any, required by the 1996 Purchase Agreement. The
scope of the indemnity will be at issue and has not been determined.

Smokeless Tobacco Litigation

As of June 30, 2011, 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 600 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 not a
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.

On September 4, 2009, American Snuff Co. and others, brought suit in the Circuit
Court, Marion County, Oregon (Conwood Company, LLC v. John Kroger), to enjoin
the enforcement of an Oregon statute requiring smokeless tobacco manufacturers
to either comply with certain requirements of the Smokeless Tobacco Master
Settlement Agreement, referred to as the STMSA, or pay into an escrow account
$0.40 per unit sold in Oregon. American Snuff Co. contends the statute violates
the constitutions of Oregon and the United States. In June 2010, the court
denied American Snuff Co.’s motion for a preliminary injunction against
enforcement of the statute. American Snuff Co. voluntarily dismissed the case in
April 25, 2011. American Snuff Co. is not escrowing money in Oregon, having
provided STMSA compliance certifications to the Oregon Attorney General’s
office.

Tobacco Buyout Legislation and Related Litigation

In 2004, legislation was passed eliminating the U.S. government’s tobacco
production controls and price support program. The buyout of tobacco quota
holders provided for in the Fair and Equitable Tobacco Reform Act, referred to
as FETRA, is funded by a direct quarterly assessment on every tobacco product
manufacturer and importer, on a market-share basis measured on volume to which
federal excise tax is applied. The aggregate cost of the buyout to the industry
is approximately $9.9 billion, including approximately $9.6 billion payable to
quota tobacco holders and growers through industry assessments over ten years
and approximately $290 million for the liquidation of quota tobacco stock. As a
result of the tobacco buyout legislation, the MSA Phase II obligations
established in 1999 continued as scheduled through the end of 2010, but were
offset against the tobacco quota buyout obligations. RAI’s operating
subsidiaries’ annual expense under FETRA for 2011 and thereafter, excluding the
tobacco stock liquidation assessment, is estimated to be approximately
$230 million to $260 million.

RAI’s operating subsidiaries recorded the FETRA assessment on a quarterly basis
as cost of goods sold. RAI’s operating subsidiaries estimate that their overall
share of the buyout will approximate $2.4 billion to $2.8 billion prior to the
deduction of permitted offsets under the MSA. In addition, future market pricing
could impact the carrying value of inventory, and adversely affect RJR Tobacco’s
financial position and results of operations.

As noted above, the MSA Phase II obligations are offset against the tobacco
quota buyout obligations. Because growers in two states, Maryland and
Pennsylvania, did not participate in the quota system, they are not eligible for
payments under FETRA. Given that the assessments paid by tobacco product
manufacturers and importers under FETRA fully offset their MSA Phase II payment
obligations, the growers in Maryland and Pennsylvania would no longer receive
payments under the MSA Phase II program. Thus, the growers in these two states
do not receive payments under either FETRA or the MSA Phase II program.

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

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. A decision is 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.

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

In September 2009, the U.S. Environmental Protection Agency, referred to as EPA,
passed a rule which requires companies to monitor greenhouse gas, referred to as
GHG, emissions beginning in January, 2010 and, depending upon the industry in
which the particular company operates or the amount of the company’s GHG
emissions, report these emissions to EPA on an annual basis, beginning in 2011.
Based upon its current GHG emission levels, RJR Tobacco expects that it will be
necessary to submit GHG emissions reports to the EPA pertaining to one of its
facilities. When necessary and appropriate, RJR Tobacco is fully prepared to
submit this data annually in accordance with the EPA’s regulations.

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 and
financial impacts will be driven more by the cost of natural gas and
electricity. Efforts are made to mitigate the effect of increases in fuel costs
directly impacting RAI’s operating subsidiaries by evaluating natural gas usage
and market conditions, and occasionally purchasing forward contracts, limited to
a three-year period, for natural gas. In addition, RAI’s operating subsidiaries
are constantly evaluating electrical energy conservation measures and energy
efficient equipment to mitigate impacts of increases in electrical 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 or financial position of RAI or its
subsidiaries.

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—Canadian Matters,” RJR Tobacco has received claims
for indemnification from JTI, and several of these have been resolved pursuant
to the SA-MR. 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, Santa Fe 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,
Santa Fe has entered into an agreement to indemnify a supplier from liability
and related defense costs arising out of the sale or use of Santa Fe’s products.
The cost has been, and is expected to be, insignificant. RJR Tobacco, Santa Fe
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.

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

Schedule 3.12

Subsidiaries

Part A: Material Subsidiaries

 

Name of Subsidiary

   State of
Incorporation/Formation    Borrower
Direct/Indirect
Ownership Interest  

1. American Snuff Company, LLC

   Delaware      100 % 

2. R. J. Reynolds Tobacco Company

   North Carolina      100 % 

 

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

Part B: Subsidiary Guarantors

 

Name of Subsidiary

   State of
Incorporation/Formation    Borrower
Direct/Indirect
Ownership Interest  

1. American Snuff Company, LLC

   Delaware      100 % 

2. Conwood Holdings, Inc.

   Delaware      100 % 

3. RAI Services Company

   North Carolina      100 % 

4. Reynolds Finance Company

   Delaware      100 % 

5. Reynolds Innovations Inc.

   North Carolina      100 % 

6. R.J. Reynolds Global Products, Inc.

   Delaware      100 % 

7. R.J. Reynolds Tobacco Co.

   Delaware      100 % 

8. R. J. Reynolds Tobacco Company

   North Carolina      100 % 

9. R.J. Reynolds Tobacco Holdings, Inc.

   Delaware      100 % 

10. Rosswil LLC

   Delaware      100 % 

11. Santa Fe Natural Tobacco Company, Inc.

   New Mexico      100 % 

 

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

Part C: Non-Guarantor Subsidiaries

Niconovum AB

Niconovum Market AB

Niconovum USA, Inc.

Northern Brands International, Inc.

Quezon Holdings, B.V.

RAI International, Inc.

Reynolds Asia-Pacific Limited

Reynolds International Holdings B.V.

Reynolds Technologies, Inc.

R.J. Reynolds Tobacco B.V.

R.J. Reynolds Tobacco (CI), Co.

R.J. Reynolds Tobacco C.V.

R.J. Reynolds Tobacco International, Inc.

RJR Realty Relocation Services, Inc.

Santa Fe Natural Tobacco Company: Germany GmbH

Santa Fe Natural Tobacco Company Italy S.r.1

Santa Fe Natural Tobacco Company Japan K.K.

S.F. Imports, Inc.

SFNTC/RSM, LLC

SFR Tobacco International GmbH (SFRTI)

 

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

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, 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 letters
of credit, guarantees, and swingline loans 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]2]

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 $750,000,000 Credit Agreement dated as
of July 29, 2011 among Reynolds American Inc., the Lenders party thereto,
JPMorgan Chase Bank, N.A., as Administrative Agent, and the other agents party
thereto

 

2

Select as applicable.

 

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

6. Assigned Interest:

 

     Aggregate Amount of
Commitment/Revolving
Credit Exposure for all
Lenders    Amount of
Commitment/Revolving
Credit Exposure
Assigned      Percentage Assigned of
Commitment/Revolving
Credit Exposure3      $    $           %       $    $           %       $    $  
        %   

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.

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:

 

3 

Set forth, to at least 9 decimals, as a percentage of the Commitment/Loans of
all Lenders thereunder.

 

2

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

[Consented to and]4 Accepted:

 

[NAME OF ADMINISTRATIVE AGENT], as Administrative Agent

By       Title: [Consented to:]5 [NAME OF RELEVANT PARTY] By       Title:

 

4

To be added only if the consent of the Administrative Agent is required by the
terms of the Credit Agreement.

5 

To be added only if the consent of the Borrower and/or other parties (e.g., each
Swingline Lender, each Issuing Bank, etc.) is required by the terms of
Section 9.04 of the Credit Agreement.

 

3

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

ANNEX 1

REYNOLDS AMERICAN INC. 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.

 

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EXHIBIT B

[FORM OF]

SUBSIDIARY GUARANTEE AGREEMENT

[SEE EXHIBIT 10.2]

 

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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 Credit Agreement, dated as of July 29, 2011 (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, (iv) it
is not a controlled foreign corporation related to the Borrower as described in
Section 881(c)(3)(C) of the Code and (v) the interest payments in question are
not effectively connected with the undersigned’s conduct of a U.S. trade or
business.

The undersigned has furnished the Administrative Agent and the Borrower with a
certificate of its non-U.S. person status on IRS Form W-8BEN. 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[    ]

 

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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 Credit Agreement, dated as of July 29, 2011 (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 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 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 partners/members is a ten percent shareholder of the Borrower
within the meaning of Section 871(h)(3)(B) of the Code, (v) none of its
partners/members is a controlled foreign corporation related to the Borrower as
described in Section 881(c)(3)(C) of the Code, and (vi) the interest payments in
question are not effectively connected with the undersigned’s or its
partners/members’ conduct of a U.S. trade or business.

The undersigned has furnished the Administrative Agent and the Borrower with
IRS Form W-8IMY accompanied by an IRS Form W-8BEN from each of its
partners/members 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[    ]

 

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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 Credit Agreement, dated as of July 29, 2011 (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, (iv) it is not a controlled foreign
corporation related to the Borrower as described in Section 881(c)(3)(C) of the
Code, and (v) the interest payments in question are not effectively connected
with the undersigned’s conduct of a U.S. trade or business.

The undersigned has furnished its participating Lender with a certificate of its
non-U.S. person status on IRS Form W-8BEN. 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[    ]

 

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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 Credit Agreement, dated as of July 29, 2011 (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
partners/members are the sole beneficial owners of such participation,
(iii) with respect such participation, neither the undersigned nor any of its
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 partners/members is a ten
percent shareholder of the Borrower within the meaning of Section 871(h)(3)(B)
of the Code, (v) none of its partners/members is a controlled foreign
corporation related to the Borrower as described in Section 881(c)(3)(C) of the
Code, and (vi) the interest payments in question are not effectively connected
with the undersigned’s or its partners/members’ conduct of a U.S. trade or
business.

The undersigned has furnished its participating Lender with IRS Form W-8IMY
accompanied by an IRS Form W-8BEN from each of its partners/members 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[    ]

 

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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 Credit Agreement, dated as of July 29, 2011 (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 1.0

Required Ratio =

   3.0 to 1.0

 

5

Insert position of Financial Officer.

 

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

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 1.0

Required Ratio =

   4.0 to 1.0

Supporting detail showing the calculation of Consolidated Interest Coverage
Ratio is attached hereto as Schedule 2.

 

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ANNEX 1

[Applicable Financial Statements to Be Attached]

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

SCHEDULE 1

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;

   

 

(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;

   

 

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(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 clauses (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

   

 

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

(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);

   

 

(h)     any cash payment received during such period in respect of any non-cash
item described in clause (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; and

   

 

(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, 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);

   

 

(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; and

   

 

(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.

 

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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 as if such Material Acquisition occurred on the first day of such
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

  3:00:1.00

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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 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 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

  4:00:1.00

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IN WITNESS WHEREOF, I have executed this Compliance Certificate this
             day of             , 20__.

 

REYNOLDS AMERICAN INC. By:       Name:     Title: