Ex-10.2



 




Exhibit
10.2




Via UPS Overnight




October 11, 2005




Ms. Teresa Riggs

President, BATUS Japan, Inc.

401 South Fourth Street, Suite 1200

Louisville, Kentucky 40202




Dear Teresa:




     R.J. Reynolds Tobacco Company (“R.J. Reynolds”) is pleased to be manufacturing Pall Mall
cigarettes for BATUS Japan, Inc. We are optimistic that this new brand launch will result in
mutual long-term benefits. We understand this new brand launch will require significant investment
by BATUS Japan. In recognition of the expected long-term cigarette volume growth, R.J. Reynolds is
happy to offer a temporary price reduction, effective April 1, 2005, of $2.00/1000 cigarettes for
the 1st billion cigarettes manufactured (total volume of all 3 Pall Mall styles included
in the launch) or for a period of one year beginning with the first shipment, whichever comes
first. The price reduction on a per 1000 cigarette basis is calculated by subtracting $2.00 from
the full cost plus a 10% mark-up (see attachment).



     R.J. Reynolds looks forward to continuing to provide you with the highest quality products
going forward and to continuing to expand our mutually beneficial business relationship. If you
have any questions, please feel free to contact me. Please confirm your agreement to the foregoing
by signing in the place provided below.



	 	 	 	 	 
	 	R.J. REYNOLDS TOBACCO COMPANY

 	 
	 	By:  	/s/ Jeffrey A. Eckmann
 	 
	 	 	Name:  	Jeffrey A. Eckmann 	 
	 	 	Title:  	EVP, Strategy, Integration and IT 	 


Date:   October 14, 2005

Nunc Pro Tunc




	 	 	 	 	 
	 	BATUS JAPAN, INC.

 	 
	 	By:  	/s/ Teresa M. Riggs
 	 
	 	 	Name:  	Teresa M. Riggs 	 
	 	 	Title:  	President 	 


Date:   October 13, 2005

Nunc Pro Tunc



R.J.
Reynolds Tobacco Company P.O. Box 2959 Winston-Salem, NC 27102 













 






Principles For BATUSJ and RJRTC To Follow When Considering

Matters Arising From The Contract Manufacturing Agreement





	A.	 	BATUSJ and RJRTC should work in a seamless partnership.
	 
	B.	 	The focus of both BATUSJ and RJRTC should be on jointly exploiting the Japan market by
enhancing the competitive position of the brands and products in such a way that is mutually
beneficial.
	 
	C.	 	It is in each party’s independent interest to stimulate long-term volume, market share and
profit growth.




In order to help promote these principles, the following guidelines have been developed to bring
clarity and efficiency to the business development process. These guidelines are meant to be
consistent with the spirit of the Contract Manufacturing Agreement (CMA) and do not replace or
modify its provisions in any way. Their applicability to any specific situation is subject to
agreement by BATUSJ and RJRTC. These guidelines should be regularly discussed between both parties
and further developed as needed through the joint agreement, at top management level, between the
BAT Japan Group Finance Director and RJRTC’s Director of International Operations.




Guidelines
For Product Changes Proposed By BATUSJ That Require
RJRTC To Undertake Manufacturing Changes





	1.	 	Each instance should be addressed on a case-by-case basis, applying these guidelines.
	 
	2.	 	Only manufacturing changes that result in RJRTC acquiring new equipment or change parts
should occasion project charges to BATUSJ. In such cases, only the equipment cost and
change-related costs to RJRTC should be charged.
	 
	3.	 	Production capacity for existing product lines (those as of July 30, 2004) is the
responsibility of RJRTC. Therefore, further investment in equipment required by RJRTC to
meet BATUSJ product volume for the existing product lines should not be charged to BATUSJ.
	 
	4.	 	Product changes proposed by BATUSJ which are within RJRTC’s existing manufacturing
capacity should not result in project charges. Product changes proposed by BATUSJ which
are not within RJRTC’s existing manufacturing capacity that require investment in equipment
shall be chargeable to BATUSJ.
	 
	5.	 	Both BATUSJ and RJRTC will enter into dialogue so that each can understand the position
of the other party, especially with respect to matters such as :




 









 












	 	•	 	launch timescales
	 
	 	•	 	product longevity in the market and projected volumes
	 
	 	•	 	particular pricing and margin constraints
	 
	 	•	 	the strategic importance of the new product
	 
	 	•	 	manufacturing capability
	 
	 	•	 	the full range of manufacturing solutions, including those which would avoid or
minimise the use of capital expenditure






	 	 	with the aim of seeking to avoid or minimise the cost of the changes, whilst addressing the
market need and generating a mutually beneficial outcome for both parties over the long-term.
This could be, for example, through discussing alternative but similar product or packaging
modifications or different manufacturing processes which avoid or reduce the investment eg.
more labour intensive solutions.
	 
	6.	 	Where it is agreed that the only viable solution is to undertake capital investment in
acquiring new equipment, RJRTC will seek to source the equipment in the most efficient
manner possible. This should include RJRTC contacting the BAT Group’s Operations management
to determine whether they have suitable equipment available and the terms for acquiring
same..
	 
	7.	 	RJRTC will acquire, install and commission the equipment – taking perpetual ownership of
it. Should RJRTC subsequently wish to decommission or dispose of equipment costing $500,000
or more, during the first 5 years after installation, RJRTC will consult with BATUSJ
concerning the manner in which this should be accomplished and offer the BAT Group first
right of refusal to purchase or convert the equipment. If the disposition results in net
proceeds, those net proceeds will be apportioned between RJRTC and BATUSJ in a way
consistent with the charges. Any BATUSJ apportioned proceeds will be applied towards the
remaining charges to BATUSJ.
	 
	8.	 	BATUSJ is only responsible for costs that are associated with changes that are solely for
its benefit. Where benefits of the manufacturing changes are shared either with RJRTC or
other BAT Group companies or any other third parties, BATUSJ’s share of the costs will be
apportioned using a suitable allocation approach agreed between BATUSJ and RJRTC. This
should also apply retrospectively where such machinery has later been used for other
customers.
	 
	9.	 	The cost chargeable to BATUSJ should represent the incremental costs of actually
acquiring, installing and commissioning the equipment. This should include:






	 	•	 	any incremental cost of installation or commissioning whether performed by RJRTC
staff or outside contractors, as the existing price structure does not cover such project
costs.
	 
	 	•	 	include cost of interest on project costs using the prime rate, as reported by the US
Wall Street Journal, in effect January 1 of the year the project is
initiated.




 









 












	10.	 	Individual projects requiring costs of less than $10,000 will not be charged to BATUSJ.
	 
	11.	 	In any calendar year, BATUSJ will not be charged for the first $100,000 of such costs
associated with projects costing over $10,000.
	 
	12.	 	The basis of invoicing BATUSJ will be time bound depending on the total cost of the
project. Projects costing less than $500,000 will be invoiced at the completion of the
project. Projects costing between $500,000 and $10,000,000 will be incorporated into the
stem price over five years based on projected annual volumes with a settle-up to the
projected volumes at the end of each calendar year. The final settle-up will occur in the
month following the end of the five year period. The billing arrangements for projects with
total costs greater then $10 million will be negotiated between the parties on a case by
case basis.
	 
	13.	 	It is noted that such manufacturing changes may increase or decrease product prices. But
costs recovered directly through additional billings to BATUSJ should not be included in any
conversion cost components of product costing eg. as depreciation or additional support
costs.
	 
	14.	 	These guidelines will be revisited when the product cost basis switches to an actual cost
plus mark-up basis, after 2009.





	 	 	 
	R.J. Reynolds Tobacco Company	 	
BATUS Japan Inc.
	By: /s/ Jeffrey A. Eckmann
 

Printed Name:     Jeffrey A. Eckmann
 

Title: EVP, Strategy, Integration and IT
 

Date: October 14, 2005
 
	 	
By:       /s/  Teresa M. Riggs
 

Printed Name:      Teresa M Riggs
 

Title:      President
 

Date:      October 11, 2005
 








 










 






Principles for BATUSJ and RJRTC To Follow When Considering Matters

Arising From The Contract Manufacturing Agreement





	A.	 	BATUSJ and RJRTC should work in a seamless partnership.
	 
	B.	 	The focus of both BATUSJ and RJRTC should be on jointly exploiting the Japan market by
enhancing the competitive position of the brands and products in such a way that is mutually
beneficial.
	 
	C.	 	It is in each party’s independent interest to stimulate long-term volume, market share and
profit growth.




In order to help promote these principles, the following guidelines have been developed to bring
clarity and efficiency to the business development process. These guidelines are meant to be
consistent with the spirit of the Contract Manufacturing Agreement (CMA) and do not replace or
modify its provisions in any way. Their applicability to any specific situation is subject to
agreement by BATUSJ and RJRTC. These guidelines should be regularly discussed between both parties
and further developed as needed through the joint agreement, at top management level, between the
BAT Japan Group Finance Director and RJRTC’s Director of International Operations.




Guidelines
For Manufacturing Sourcing Of “Novelty Items”





	 	1.	 	These guidelines are based on the following:






	 	a)	 	RJRTC is BATUSJ’s exclusive manufacturer of all of BATUSJ’s requirements for
American-blend cigarettes intended to be distributed and sold in Japan, except cigarettes
bearing the brand names CARTIER, VOGUE, DUNHILL, or STATE Express 555.
	 
	 	b)	 	“Novelty Items” are cigarette products that are different because of unique
cigarette, package or carton shapes or sizes and/or technology not currently commercially
available from RJRTC or cigarette products required for a limited time or volume.




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	 	c)	 	BATUSJ intends to increase its introductions of conventional new brands and brand
styles as well as temporary promotion of “novelty items” to further improve its market
performance.
	 
	 	d)	 	The parties agree that there might be situations where market timing and high costs
of complexity will result in both parties preferring to have “novelty items” produced
outside of RJRTC’s Winston-Salem factories.






	 	2.	 	RJRTC and BATUSJ will communicate openly on all “novelty item” projects beginning with
conception.
	 
	 	3.	 	If RJRTC can make and wishes to make certain “novelty items” for BATUSJ and can meet
reasonable launch timetables, RJRTC will manufacture them.
	 
	 	4.	 	If RJRTC cannot make or chooses not to make certain “novelty items” for BATUSJ, BATUSJ
can choose to have these products manufactured outside of RJRTC.
	 
	 	5.	 	RJRTC and BATUSJ will monthly evaluate the current and six month forecasted volume
requirements for all “novelty items” and BATUSJ’s recommendation for production at RJRTC
factories and outside RJRTC factories. If for a particular novelty item, manufactured
outside RJRTC, the forecast volume or duration will exceed the original forecast, and as a
result RJRTC wishes to begin manufacturing, RJRTC shall give BATUSJ a minimum of ninety (90)
days notice.





	 	 	 
	R.J. Reynolds Tobacco Company	 	
BATUS Japan Inc.
	By:    /s/ Jeffrey A. Eckmann
 

Printed Name:     Jeffrey A. Eckmann
 

Title    :EVP, Strategy, Integration and IT
 

Date:             October 14, 2005
 
	 	
By:       /s/  Teresa M. Riggs
 

Printed Name:      Teresa M Riggs
 

Title:      President
 

Date:      October 11, 2005
 








2










 






Principles For BATUSJ and RJRTC To Follow When Considering Matters

Arising From The Contract Manufacturing Agreement





	A.	 	BATUSJ and RJRTC should work in a seamless partnership.
	 
	B.	 	The focus of both BATUSJ and RJRTC should be on jointly exploiting the Japan market by
enhancing the competitive position of the brands and products in such a way that is mutually
beneficial.
	 
	C.	 	It is in each party’s independent interest to stimulate long-term volume, market share and
profit growth.




In order to help promote these principles, the following guidelines have been developed to bring
clarity and efficiency to the business development process. These guidelines are meant to be
consistent with the spirit of the Contract Manufacturing Agreement (CMA) and do not replace or
modify its provisions in any way. Their applicability to any specific situation is subject to
agreement by BATUSJ and RJRTC. These guidelines should be regularly discussed between both parties
and further developed as needed through the joint agreement, at top management level, between the
BAT Japan Group Finance Director and RJRTC’s Director of International Operations.




Guidelines For Pricing New Products and Line Extensions

Planned by BATUSJ





	 	1.	 	Each instance should be addressed on a case-by-case basis, applying these guidelines.
	 
	 	2.	 	New products include new brands & line extensions to existing product ranges being sold
by BATUSJ in the market. New brands are brand trademarks not included on the CMA. Line
extensions are new styles that are added to the existing brand family. Line extensions
developed to replace existing styles will not be considered as line extensions under these
guidelines.




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	 	3.	 	Both RJRTC and BATUSJ should engage in dialogue so that both parties understand the
salient features of the proposed new product such as :






	 	•	 	launch timetable
	 
	 	•	 	forecast volumes
	 
	 	•	 	longevity of the product in the market
	 
	 	•	 	its source of business and cannibalisation potential
	 
	 	•	 	pricing and margin sensitivities
	 
	 	•	 	the strategic importance of the new product






with a view to arriving at a mutually beneficial outcome for both parties in the long-term.




	 	4.	 	All components of the new product or line extension, including materials or conversion
costs will be valued as follows:






	 	•	 	If a standard price already exists for a component in connection with a product RJRTC
already produces, then that price will be used for the new product.
	 
	 	•	 	If a standard price for a component of a new product or line extension does not
currently exist, then a standard cost will be established via RJRTC’s normal quote/bidding
process.






Once all costs have been properly valued, prices for the new product or line extension will be
derived per the terms of the CMA at cost plus 10 %.




	 	5.	 	The mark-up of 10% shall apply to the appropriate costs.
	 
	 	6.	 	In recognition of the mutual long-term benefits of launching new products in the market,
the parties may negotiate temporary price reductions where estimated incremental costs to
BATUSJ to launch the new brand/styles (excludes product replacements and “Limited Edition
Packs”) are projected to have a significant short-term negative impact on BATUSJ’s operating
performance. The initial temporary price reduction may be based on a volume threshold or up
to 12 months. The parties may discuss extending the temporary reduction period if the
dynamics of the launch period continue or if it is deemed to be in the interest of growth,
ie. benefiting both parties. The temporary price reduction amount will be negotiated
between the BAT Japan Group Finance Director and the RJRTC Director of International
Operations based on a portion of RJRTC’s markup and fixed cost coverage. Temporary price
reductions will be considered for the launch of Pall Mall and then for other new
brands/styles launched after the date of this agreement.




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	 	7.	 	These guidelines will be revisited when the product cost basis switches to an actual cost
plus mark-up basis, after 2009.





Guidelines For Pricing Specification Changes To Existing Products 

Supplied to BATUSJ By RJRTC





	 	8.	 	Each instance should be addressed on a case-by-case basis, applying these guidelines.
	 
	 	9.	 	For specification changes to existing products which already have a current price, the
cost, and resulting price, will be adjusted as follows:






	 	•	 	If a standard price already exists for the new component in connection with a product
RJRTC already produces, then the difference, plus 10%, will be added (or subtracted) to
the current price to arrive at a new price.
	 
	 	•	 	If a standard price for the new component does not currently exist, then a standard
cost will be established via RJRTC’s normal quote/bidding process. The difference between
the existing component and new component, plus 10%, will be added (or subtracted) to the
current price to arrive at a new price.






	 	10.	 	Where waiting for this information introduces delay, then “best estimates” may be used in
the intervening period and then a “catch-up” adjustment made, if necessary, once the
information has been received.




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	 	11.	 	These guidelines will be revisited when the product cost basis switches to an actual cost
plus mark-up basis, after 2009.





Guidelines for Volume Threshold Pricing





	 	12.	 	When cigarette volumes produced by RJRTC for BATUSJ exceed 25.8 billion units in any
contract year (August 1 through July31), RJRTC will reduce the price of the volume in excess
of 25.8 billion units by $1.50 per thousand cigarettes where the excess is a result of new
products (products launched after August 1, 2004 that were not included in Exhibit A of the
Contract Manufacturing Agreement dated July 30, 2004) and by $0.75 per thousand cigarettes
where the excess is a result of existing products (products and/or their replacements
included in Exhibit A of the Contract Manufacturing Agreement). This price reduction will
be achieved through a rebate paid in September of the following contract year. In
calculating the rebate, the volume amount in excess of 25.8 billion units will be reduced by
any volume for which there has been a Temporary Price Reduction. This provision will apply
to the first five years of the Contract Manufacturing Agreement.





	 	 	 
	R.J. Reynolds Tobacco Company	 	
BATUS Japan Inc.
	By:     /s/ Jeffrey A. Eckmann
 

Printed Name:     Jeffrey A. Eckmann
 

Title: EVP, Strategy, Integration and IT
 

Date:             October 14, 2005
 
	 	
By:       /s/  Teresa M. Riggs
 

Printed Name:      Teresa M Riggs
 

Title:      President
 

Date:      October 11, 2005
 








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