-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WCiwkjr14yIw1wbMwNI71quAvcuI7EyxiI4VFouRtKsZtWHLBL9mXd+6K/fXRnuW w5pJtmEixodyTWHwK/W8xA== 0000950144-01-003225.txt : 20010307 0000950144-01-003225.hdr.sgml : 20010307 ACCESSION NUMBER: 0000950144-01-003225 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010301 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RJ REYNOLDS TOBACCO HOLDINGS INC CENTRAL INDEX KEY: 0000083612 STANDARD INDUSTRIAL CLASSIFICATION: CIGARETTES [2111] IRS NUMBER: 560950247 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-06388 FILM NUMBER: 1558377 BUSINESS ADDRESS: STREET 1: 401 NORTH MAIN STREET CITY: WINSTON-SALEM STATE: NC ZIP: 27102 BUSINESS PHONE: 336-741-5500 MAIL ADDRESS: STREET 1: 401 NORTH MAIN STREET CITY: WINSTON SALEM STATE: NC ZIP: 27102 FORMER COMPANY: FORMER CONFORMED NAME: RJR NABISCO INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: REYNOLDS R J INDUSTRIES INC DATE OF NAME CHANGE: 19860501 10-K405 1 g67125e10-k405.txt R.J. REYNOLDS TOBACCO HOLDINGS, INC. 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER: 1-6388 --------------------- R.J. REYNOLDS TOBACCO HOLDINGS, INC. (Exact name of registrant as specified in its charter) DELAWARE 56-0950247 (State or other jurisdiction of incorporation (I.R.S. Employer Identification No.) or organization)
401 NORTH MAIN STREET WINSTON-SALEM, NC 27102-2866 (Address of principal executive offices) (Zip Code) (336) 741-5500 (Registrant's telephone number, including area code) --------------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH NAME OF EACH EXCHANGE ON WHICH EXCHANGE ON WHICH TITLE OF EACH CLASS REGISTERED TITLE OF EACH CLASS REGISTERED - --------------------------------------- ----------------- -------------------------------------- ----------------- Common Stock, par value $.01 per share New York 8 3/4% Senior Notes due April 15, 2004 New York 8% Notes due July 15, 2001 New York 8 3/4% Notes due August 15, 2005 New York 8 5/8% Notes due December 1, 2002 New York 8 3/4% Notes due July 15, 2007 New York 7 5/8% Notes due September 15, 2003 New York 9 1/4% Debentures due August 15, 2013 New York
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of common stock held by non-affiliates of R.J. Reynolds Tobacco Holdings, Inc. on January 31, 2001 was approximately $5.3 billion, based on the closing price of $52.95. Certain directors of R.J. Reynolds Tobacco Holdings, Inc. are considered affiliates for purposes of this calculation but should not necessarily be deemed affiliates for any other purpose. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: January 31, 2001: 102,033,212 shares of common stock, par value $.01 per share. --------------------- DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Definitive Proxy Statement of R.J. Reynolds Tobacco Holdings, Inc. to be filed with the Securities and Exchange Commission pursuant to Regulation 14A of the Securities Exchange Act of 1934 on or prior to March 15, 2001 are incorporated by reference into Part III of this report. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 INDEX
PAGE ---- PART I Item 1. Business.................................................... 3 Item 2. Properties.................................................. 17 Item 3. Legal Proceedings........................................... 17 Item 4. Submission of Matters to a Vote of Security Holders......... 18 Executive Officers and Certain Significant Employees of the Registrant................................................ 18 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....................................... 20 Item 6. Selected Financial Data..................................... 21 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 22 Item 7a. Quantitative and Qualitative Disclosures about Market Risk...................................................... 34 Item 8. Financial Statements and Supplementary Data................. 35 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................. 74 PART III Item 10. Directors and Executive Officers of the Registrant.......... 74 Item 11. Executive Compensation...................................... 74 Item 12. Security Ownership of Certain Beneficial Owners and Management................................................ 74 Item 13. Certain Relationships and Related Transactions.............. 74 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................................................... 74
2 3 PART I ITEM 1. BUSINESS R.J. Reynolds Tobacco Holdings, Inc., formerly known as RJR Nabisco, Inc., was incorporated as a holding company in 1970, and is listed on the NYSE as RJR. RJR's subsidiaries include its wholly owned operating subsidiary, R. J. Reynolds Tobacco Company, referred to as RJR Tobacco, and RJR Acquisition Corp. RJR Tobacco operates in one industry segment and is the second largest cigarette manufacturer in the United States. RJR Tobacco's largest selling cigarette brands, CAMEL, WINSTON, SALEM and DORAL, were four of the top ten, best-selling brands of cigarettes in the United States in 2000. Those brands, and its other brands, including VANTAGE, MORE, NOW, MONARCH and BEST VALUE, are manufactured in a variety of styles and marketed in the United States and meet a range of smoker preferences. During 1999, RJR and Nabisco Group Holdings Corp., referred to as NGH, completed a series of transactions to reorganize their businesses and capital structures. In May 1999, RJR and RJR Tobacco substantially completed the sale of the international tobacco business for $8 billion, including the assumption of $200 million of net debt, to Japan Tobacco Inc. As a result of this sale, RJR Tobacco's business consists exclusively of the manufacture and sale of cigarettes in the United States and its territories, commonwealths, protectorates and possessions. A portion of the proceeds from the sale of the international tobacco business was used by RJR to repurchase $4 billion of its debt. Additionally, RJR transferred $1.6 billion in cash proceeds, together with its 80.5% interest in Nabisco Holdings Corp., referred to as Nabisco, to NGH through a merger transaction. In June 1999, NGH distributed all of the outstanding shares of RJR common stock to NGH common stockholders of record as of May 27, 1999, and shares of RJR began trading separately on June 15, 1999. On December 11, 2000, through a merger, RJR acquired its former parent, NGH, a non-operating public shell company with no material assets or liabilities, at the time of the acquisition, other than $11.8 billion in cash. RJR Acquisition Corp. paid $30 for each outstanding share of NGH, or $9.8 billion in the aggregate, and was merged into NGH, with NGH being the surviving corporation. After the merger, NGH changed its name to RJR Acquisition Corp. Net proceeds to RJR were $1.5 billion, after transaction costs and payments to NGH stockholders. INDUSTRY OVERVIEW U.S. cigarette shipments decreased at a compound annual rate of 1.6% from 1987 through 1997. After declining 4.6% in 1998 and 9% in 1999, industry shipments stabilized during 2000 at 419.8 billion units. From December 1999 to December 2000, wholesale cigarette prices increased $.33 per pack in response to payment obligations under the Master Settlement Agreement with state attorneys general and other state settlement costs. For more discussion of tobacco litigation and the MSA, see "-- Litigation Affecting the Cigarette Industry," "-- Environmental Matters," "Management's Discussion and Analysis -- Governmental Activity" in Item 7, note 14 to the consolidated financial statements and Exhibit 99.1 to this report. COMPETITION The U.S. market in which RJR Tobacco operates is highly competitive, with several large participants. Based on data collected by Information Resources Inc., during 2000, 1999 and 1998, Philip Morris Incorporated had an overall retail share of market of 50.37%, 49.58% and 48.73%, respectively. During these same years, RJR Tobacco had an overall share of 23.58%, 23.92% and 25.18%, respectively, and the remaining participants held lesser shares. Competition is primarily based on a brand's positioning, consumer loyalty, retail display and promotion, quality and price. Substantial marketing support, merchandising display and competitive pricing generally are required to maintain or improve a brand's market position or to introduce a new brand. Increased selling prices and higher cigarette taxes have resulted in increased competitive discounting and the proliferation of deep-discount brands from manufacturers not yet impacted to a significant degree by the MSA and other state settlement agreements. 3 4 Anti-smoking groups have undertaken activities designed to restrict cigarette sales, the form and content of cigarette advertising and the testing and introduction of new cigarette products. The MSA, signed in late 1998, contains provisions restricting the marketing of cigarettes. See "-- Litigation Affecting the Cigarette Industry" for more discussion of the MSA. Because of significant cigarette marketing restrictions in the United States, established cigarette brands usually have a competitive advantage. RJR Tobacco has repositioned or introduced brands designed to appeal to adult smokers of competing brands in the United States, but there can be no assurance that such efforts will be successful. See "-- Marketing" for more discussion of RJR Tobacco's marketing efforts. STRATEGY RJR's goals are to: - stabilize, then grow earnings and cash flow; - deliver an attractive return to its stockholders, including meaningful and sustainable dividends; and - stabilize, then grow share of market for RJR Tobacco's four investment brands: CAMEL, WINSTON, SALEM and DORAL. MARKETING RJR Tobacco is committed to providing unique products and increased value to its adult smoking consumers. RJR Tobacco's marketing programs are designed to strengthen each brand's image, build brand awareness and loyalty and attract adult smokers of competing brands, primarily in an effort to stabilize, then grow share of market of RJR Tobacco's four investment brands. These four brands achieved combined retail share of market stability in 2000. CAMEL continued to show strong retail share of market growth in 2000, resulting from its unique positioning supported by the "Pleasure to Burn" advertising campaign, the successful launch of its Turkish Gold line extension, the CML magalog and a continuous stream of new specialty products and promotions. WINSTON's performance improved during 2000 by leveraging its "No Bull" image, the launch of the "Winston Racing Nation" continuity program, which celebrates the lifestyle and passion of motorsports fans nationwide, and new ads featuring WINSTON's "First Cut" tobacco. SALEM has experienced recent share growth in its emphasis markets, where full marketing support includes its unique "It's not what you expect" positioning, innovative SLIDE BOX packaging and interaction with adult smokers through programs such as the Orb-e talent competition. DORAL, the industry's leading savings brand, benefited from its "Imagine Getting More" positioning. During 2000, DORAL launched its "Packed Tighter to Burn Slower" advertising campaign supporting a significant product enhancement that packs more tobacco into each cigarette, resulting in a slower-burning and longer-lasting product. In addition to its marketing programs discussed above, RJR Tobacco utilizes a defensive retail pricing strategy, periodically discounting at retail, to defend its brands' share of market against competitive pricing pressure. RJR Tobacco enhanced the execution of its retail strategy during 2000, gaining increased promotional coverage, broader retail presence and more competitive pricing. On a combined basis, RJR Tobacco's four investment brands represent over 80% of its volume and share of market. Additional RJR Tobacco full-price and savings products are offered to meet the diverse needs of adult smokers. Other full-price brands include VANTAGE, MORE and NOW. In the savings category, MONARCH, BEST VALUE and various private label brands are available for more cost-conscious adult smokers. RJR Tobacco also is committed to finding ways to develop and market consumer-acceptable cigarettes that may present less risk associated with smoking. In 2000, RJR Tobacco expanded its test market of ECLIPSE to the Dallas/Fort Worth area. ECLIPSE is a cigarette that primarily heats, rather than burns tobacco, greatly reducing second-hand smoke, while leaving no ashes, stains or lingering odor, and may present less risk of cancer, chronic bronchitis and possibly emphysema, compared to other cigarettes. 4 5 RJR Tobacco continues to use advertisements in magazines read primarily by adults, direct mailings to age-verified adult smokers and other means to market the brands and enhance their appeal among adult smokers. RJR Tobacco continues to advertise and promote at retail cigarette locations and in other adult venues where permitted. As a result of the MSA and other federal, state and local legislative and regulatory restrictions, RJR Tobacco does not utilize television, radio or billboard advertising or certain other marketing and promotional tools for cigarettes. MANUFACTURING AND DISTRIBUTION RJR Tobacco owns both of its cigarette manufacturing facilities, which are located in the Winston-Salem, North Carolina area: Tobaccoville, a two-million-square-foot facility constructed in 1985; and the Whitaker Park complex, which includes a one-and-one-half-million-square-foot plant, RJR Tobacco's Central Distribution Center and a pilot plant for trial manufacturing of new products. RJR Tobacco has a combined production capacity of approximately 150 billion cigarettes per year, and believes its cigarette manufacturing facilities are among the most technologically advanced in the United States. RJR Tobacco sells its cigarettes primarily to distributors and wholesalers and to certain large retail stores. Most of RJR Tobacco's customers buy on a spot basis rather than under long-term agreements. RJR Tobacco distributes its cigarettes primarily to public warehouses located throughout the United States that serve as local distribution centers for its customers. No significant backlog of orders existed at December 31, 2000 or 1999. During 2000, 1999 and 1998, sales made by RJR Tobacco to McLane Company, Inc. and its affiliate, Wal-Mart Stores, Inc., comprised 19%, 17% and 16%, respectively, of RJR's revenue. No other customer accounted for 10% or more of RJR's revenue during those years. RAW MATERIALS In its production of cigarettes, RJR Tobacco uses domestic burley and flue-cured leaf tobaccos, as well as oriental tobaccos, grown primarily in Turkey and Greece, and certain other non-domestic tobaccos. RJR Tobacco believes there is a sufficient supply in the worldwide tobacco market to satisfy its current and anticipated production requirements. During 2000, RJR Tobacco primarily contracted directly with tobacco growers to purchase flue-cured leaf, while burley tobaccos were purchased primarily at domestic auction. In 2001, RJR Tobacco expects to contract-purchase both flue-cured and burley tobaccos. RJR Tobacco does not expect the cost of tobacco purchased by contract from growers to differ materially from that purchased at auction. Tobacco leaf is an agricultural product subject in the United States to government production controls and price supports that can affect market prices substantially. The tobacco leaf price support program is subject to congressional review and may be changed at any time. In December 1994, Congress enacted the Uruguay Round Agreements Act to replace a domestic content requirement with a tariff rate quota system that bases tariffs on import volumes. The tariff rate quotas have been established by the United States with overseas tobacco producers and became effective on September 13, 1995. RESEARCH AND DEVELOPMENT RJR Tobacco's research and development activities are located in its technologically advanced Bowman Gray Technical Center in Whitaker Park. Scientists and engineers continue to create more efficient methods of preparing tobacco blends and new products, as well as produce product enhancements and packaging that differentiate CAMEL, WINSTON, SALEM, DORAL and other RJR Tobacco brands from competitive brands. RJR Tobacco has developed a simple, practical way to reduce tobacco-specific nitrosamines, or TSNAs, by approximately 90% in flue-cured tobacco, and expects to switch to low-TSNA flue-cured tobacco in its cigarette blends as soon as reasonably possible. In addition, a major focus for research and development activity is the development of products that may present less risk associated with smoking. See note 1 to the 5 6 consolidated financial statements for RJR Tobacco's research and development expense for the years ended December 31, 2000, 1999 and 1998. INTELLECTUAL PROPERTY RJR Tobacco owns numerous trademarks, including the brand names of its cigarettes and their distinctive packaging and display. Also, RJR Tobacco considers the blends of tobacco that make each of its brands distinctive to be trade secrets. These trade secrets generally are not patented, although certain of RJR Tobacco's manufacturing processes are patented. All of RJR Tobacco's material trademarks are registered with the U.S. Patent and Trademark Office. Rights in these trademarks in the United States will last as long as RJR Tobacco continues to use the trademarks. In connection with the sale of the international tobacco business, RJR Tobacco sold most of its trademarks and patents outside the United States. LEGISLATION AND OTHER MATTERS AFFECTING THE CIGARETTE INDUSTRY The tobacco industry is subject to a wide range of laws and regulations regarding the advertising, sale, taxation and use of tobacco products imposed by local, state, federal and foreign governments. Various state governments have adopted or are considering, among other things, legislation and regulations restricting displays and advertising of tobacco products, establishing fire safety standards for cigarettes, raising the minimum age to possess or purchase tobacco products, requiring the disclosure of ingredients used in the manufacture of tobacco products, imposing restrictions on public smoking and restricting the sale of tobacco products directly to consumers or other unlicensed recipients or over the Internet. In addition, in 2001 the U.S. Congress may consider legislation regarding increases in the federal excise tax, regulation by the U.S. Food and Drug Administration of the manufacture and sale of cigarettes and implementation of a national standard for "fire-safe" cigarettes. For a discussion of the regulatory and legislative environment applicable to the cigarette business, see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Governmental Activity" in Item 7. LITIGATION AFFECTING THE CIGARETTE INDUSTRY Overview. Various legal actions, proceedings and claims, including legal actions claiming that lung cancer and other diseases, as well as addiction, have resulted from the use of, or exposure to, RJR Tobacco's products, are pending or may be instituted against RJR or its affiliates, including RJR Tobacco, or indemnitees. During 2000, 1,330 new actions, 1,100 of which were filed in state court in West Virginia in two complaints by the same law firm, were served against RJR Tobacco and/or its affiliates or indemnitees, and 207 actions were dismissed or otherwise resolved in favor of RJR Tobacco and/or its affiliates or indemnitees without trial. On December 31, 2000, there were 1,664 active cases pending, as compared with 541 on December 31, 1999 and 664 on December 31, 1998. As of February 7, 2001, 1,668 active cases were pending against RJR Tobacco and/or its affiliates or indemnitees: 1,665 in the United States, 2 in Puerto Rico and 1 in the Marshall Islands. The U.S. case number does not include the 3,074 Broin II cases pending as of February 7, 2001, discussed below. The U.S. cases, exclusive of the Broin II cases, are pending in 38 states and the District of Columbia. The breakdown is as follows: 1,232 in West Virginia; 111 in New York; 57 in California; 55 in Florida; 36 in Louisiana; 18 in the District of Columbia; 11 in New Jersey; 10 in Texas; 9 in each of Alabama, Iowa, Mississippi, Pennsylvania and Tennessee; 8 in Missouri; 7 in each of Georgia, Illinois and New Mexico; 6 in Nevada; 5 in Michigan; 4 in each of Indiana, Massachusetts, Minnesota, North Carolina, New Hampshire and Wisconsin; 3 in each of Connecticut, North Dakota and South Carolina; 2 in each of Arizona, Kansas, Ohio, Oklahoma, South Dakota and Washington; and 1 in each of Hawaii, Maryland, Maine, Oregon and Utah. Of the 1,665 active U.S. cases, 139 are pending in federal court, 1,522 in state court and 4 in tribal court. Most of these cases were brought by individual plaintiffs, but many of these cases seek recovery on behalf of third parties or large classes of claimants. 6 7 Theories of Recovery. The plaintiffs seek recovery on a variety of legal theories, including strict liability in tort, design defect, negligence, special duty, voluntary undertaking, breach of warranty, failure to warn, fraud, misrepresentation, unfair trade practices, conspiracy, aiding and abetting, unjust enrichment, indemnity, medical monitoring, public nuisance, and violations of state and federal antitrust and RICO laws. Punitive damages, often in amounts ranging into the hundreds of millions or even billions of dollars, are specifically pleaded in a number of cases, in addition to compensatory and other damages. Seven of the 1,665 active cases in the United States, plus the 3,074 Broin II cases, involve alleged nonsmokers claiming injuries resulting from exposure to environmental tobacco smoke. Thirty-seven cases purport to be class actions on behalf of thousands of individuals. Purported classes include individuals claiming to be addicted to cigarettes, individuals and their estates claiming illness and death from cigarette smoking, persons making claims based on alleged exposure to environmental tobacco smoke, African-American smokers claiming their civil rights have been violated by the sale of menthol cigarettes, current smokers who have no tobacco-related disease but are seeking to recover the costs of medical monitoring, purchasers of cigarettes claiming to have been defrauded and seeking to recover their costs and Blue Cross and Blue Shield subscribers seeking reimbursement for premiums paid. Approximately 66 cases seek recovery of the cost of Medicaid/Medicare payments or other health-related costs paid for treatment of individuals suffering from diseases or conditions allegedly related to tobacco use. Ten cases, brought by entities administering asbestos liability, seek contribution for the costs of settlements and judgments. Defenses. The defenses raised by RJR Tobacco and/or its affiliates, including RJR, include, where applicable, preemption by the Federal Cigarette Labeling and Advertising Act of some or all such claims arising after 1969, the lack of any defect in the product, assumption of the risk, contributory or comparative fault, lack of proximate cause and statutes of limitations or repose. RJR has asserted additional defenses, including jurisdictional defenses, in many of these cases in which it is named. Industry Trial Results in Individual Smoker Cases. The tobacco industry in general, and RJR Tobacco in particular, continue to win most individual smoking and health cases. In Anderson v. Fortune Brands, Inc., a Brooklyn, New York jury found in favor of the industry, including RJR Tobacco, on June 27, 2000. In Nunnally v. R.J. Reynolds Tobacco Co., a Mississippi state court jury found RJR Tobacco not liable on July 12, 2000. On January 16, 2001, a Brooklyn, New York state court jury returned a verdict in favor of RJR Tobacco and other cigarette manufacturers in Apostolou v. American Tobacco Co. Most recently, in Little v. Brown & Williamson Tobacco Corp., a South Carolina federal district court judge granted a directed verdict in favor of RJR Tobacco. The trial of this case continued and the jury rendered a verdict in favor of the remaining defendant, Brown & Williamson, on February 6, 2001. RJR Tobacco has prevailed in all individual smoker cases that have gone to trial except two. In Whiteley v. Raybestos-Manhattan, Inc., a tobacco-asbestos synergy case brought in San Francisco Superior Court, the jury found against RJR Tobacco and Philip Morris on March 20, 2000, and awarded $1.7 million in compensatory damages. On March 27, 2000, the same jury awarded $20 million in punitive damages ($10 million against RJR Tobacco and $10 million against Philip Morris). RJR Tobacco and Philip Morris have filed their notice of appeal, and RJR Tobacco believes it has valid grounds for appeal. In Jones v. R. J. Reynolds Tobacco Co., a wrongful death case, a Tampa state court jury found against RJR Tobacco on October 12, 2000. Although the jury found that RJR Tobacco was negligent and liable, it refused to find that RJR Tobacco was part of a conspiracy to defraud. The jury awarded approximately $200,000 in compensatory damages; however, the jury refused to award punitive damages. On December 28, 2000, the trial judge granted RJR Tobacco's motion for a new trial. Juries have found for plaintiffs in five smoking and health cases in which RJR Tobacco was not a defendant, although, to date, no damages have been paid. Two of the verdicts have been overturned on appeal, and the other three remain on appeal. In February 1999, in Henley v. Philip Morris, Inc., a San Francisco state court jury awarded an individual smoker $1.5 million in compensatory damages and $50 million in punitive damages. In April 1999, the trial judge reduced the punitive damages award to $25 million, but otherwise denied Philip Morris' post-trial motions challenging the verdict. Philip Morris is appealing the verdict. In Williams v. Philip Morris, Inc., an Oregon state court jury returned a verdict against Philip Morris in March 1999, in the amount of $800,000 in actual damages, $21,500 in medical expenses and $79 million in punitive 7 8 damages. The judge in this case reduced the punitive damages to $32 million. Philip Morris' appeal is pending. In the third case, Carter v. American Tobacco Co, the Florida Supreme Court, on November 22, 2000, reversed the ruling (in favor of Brown & Williamson) by the Florida Second District Court of Appeal, and reinstated the jury verdict against Brown & Williamson. On January 29, 2001, the Florida Supreme Court denied Brown & Williamson's request for a rehearing. Brown & Williamson may appeal to the United States Supreme Court. Broin II Cases. As of February 7, 2001, approximately 3,074 lawsuits, referred to as the Broin II cases, have been filed, and are still pending, in Florida, by individual flight attendants, for personal injury as a result of illness allegedly caused by exposure to secondhand tobacco smoke in airline cabins. In these lawsuits, filed pursuant to the terms of the settlement of the Broin v. Philip Morris, Inc. class action, discussed below, each individual flight attendant will be required to prove that he or she has a disease caused by exposure to secondhand smoke in airplane cabins. On October 5, 2000, Judge Robert Kaye 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. Rather, under this order, they will be required only to prove that their alleged adverse health effects were actually caused by environmental tobacco smoke exposure. Although defendants still may prevail on causation and other theories, RJR Tobacco does not believe the order is correct under Florida law or that it accurately reflects the intent of the Broin settlement agreement. Accordingly, defendants appealed Judge Kaye's ruling to the Third District Court of Appeal on November 3, 2000. Plaintiffs moved to dismiss the appeal on November 28, 2000. However, on January 12, 2001, the Third District Court of Appeal denied plaintiffs' motion to dismiss. Defendants-Appellants' initial brief was filed on January 26, 2001. Class-Action Suits. In May 1996, in an early class-action case, Castano v. American Tobacco Co., the Fifth Circuit Court of Appeals overturned the certification of a nationwide class of persons whose claims related to alleged addiction to tobacco. Since this ruling by the Fifth Circuit, most class-action suits have sought certification of statewide, rather than nationwide, classes. Class-action suits based on claims similar to those asserted in Castano have been brought against RJR Tobacco, and in some cases RJR, in state or federal courts in Alabama, Arkansas, California, the District of Columbia, Florida, Hawaii, Illinois, Indiana, Iowa, Louisiana, Maryland, Massachusetts, Michigan, Minnesota, Missouri, New Mexico, Nevada, New Jersey, New York, North Carolina, Ohio, Oklahoma, Pennsylvania, South Carolina, Tennessee, Texas, Utah, Virginia and West Virginia. In addition, a class action filed in Tennessee seeks reimbursement of Blue Cross and Blue Shield premiums paid by subscribers throughout the United States, and class-action suits against RJR Tobacco in Illinois, Missouri, New Jersey, Ohio and Pennsylvania claim that the marketing of "light" and "ultralight" cigarettes is deceptive. Plaintiffs have made similar claims in other lawsuits elsewhere. Other types of class-action suits also have been filed in additional jurisdictions. Most of these suits assert claims on behalf of classes of individuals who claim to be addicted, injured, or at greater risk of injury by the use of tobacco or exposure to environmental tobacco smoke, or who are the legal survivors of such persons. A number of unions and other third-party payors have filed health-care cost recovery actions in the form of class actions. These cases are discussed separately below. Class certification motions are pending in several state and federal courts. Few smoker class-action complaints have been certified, or if certified, have survived on appeal. All 13 federal courts that have considered the issue, including two courts of appeals, have rejected class certification in smoker cases. On November 6, 2000, the United States District Court for the Eastern District of New York denied certification to a purported class of smokers in Simon v. Philip Morris, Inc. The class was defined as all persons residing in the United States, or who were residents at the time of their death, who had a 20-pack-per-year history of smoking, and who had a timely claim as of April 9, 1999 for personal injury or wrongful death arising from lung cancer. Most recently, on December 29, 2000, in Aksamit v. Brown & Williamson Tobacco Corp., the United States District Court for the District of South Carolina denied class certification to a purported class defined as any and all persons who have been addicted to, harmed or killed by, tobacco 8 9 products that were designed, tested, manufactured, distributed and/or sold by any of the defendants within the geographic territory of the State of South Carolina. Similarly, most state courts have refused to certify smoker class actions. On January 10, 2000, in Taylor v. American Tobacco Co., a Michigan state court judge denied certification of another smoker class action. On April 10, 2000, a California state court judge denied certification in Brown v. American Tobacco Co. On May 16, 2000, in Richardson v. Philip Morris Inc., the highest state court in Maryland reversed a trial court's decision to certify a class of individual smokers. On September 19, 2000, in Walls v. American Tobacco Co., an Oklahoma state court answered a series of state law questions (certified to the state court by the federal court where the purported class was filed) in such a way that led the parties to stipulate that the case should not be certified as a class action in federal court and that the individual plaintiffs would dismiss their federal court cases without prejudice. The federal court issued an order on October 19, 2000, refusing to certify the case as a class action, and dismissed the individual plaintiffs' cases. On December 8, 2000, in Geiger v. American Tobacco Co., the Appellate Division of the Supreme Court of New York, Second Judicial Department, affirmed denial of class action status to a purported class defined as all New York residents, including their heirs, representatives and estates, who contracted lung and/or throat cancer as a result of smoking cigarettes. On December 19, 2000, the Court of Common Pleas of Philadelphia County, Pennsylvania, denied plaintiffs' motion for class certification in Oliver v. R. J. Reynolds Tobacco Co. Plaintiffs had sought certification on behalf of residents of Pennsylvania who, on or after March 3, 1992, purchased and smoked light and/or ultralight cigarettes within Pennsylvania that were manufactured, marketed and/or distributed by defendants. Finally, on January 30, 2001, in Badillo v. American Tobacco Co., Inc., the Nevada Supreme Court, in response to questions raised by a federal district court in Nevada, held that Nevada law does not recognize medical monitoring as a cause of action. The federal district court will consider this opinion in determining whether or not to certify the Badillo case (a purported class of casino workers exposed to environmental tobacco smoke) and several individual smoker class actions. Classes have remained certified thus far in five state court class-action cases in which RJR Tobacco is a defendant. On November 5, 1998, in Scott v. American Tobacco Co., a Louisiana state appeals court affirmed the certification of a medical monitoring and/or smoking cessation class of Louisiana residents who were smokers on or before May 24, 1996. On February 26, 1999, the Louisiana Supreme Court denied the defendants' petition for writ of certiorari and/or review. Trial is scheduled to begin on June 18, 2001. On August 16, 2000, in Blankenship v. Philip Morris, Inc., a West Virginia state court conditionally certified (only to the extent of medical monitoring) a class of West Virginia residents consisting of: (1) all nicotine-dependent persons who are West Virginia residents who have purchased and smoked cigarettes manufactured, promoted, marketed, advertised and/or sold by defendants, (2) the estates, representatives and administrators of West Virginia residents who were or are nicotine-dependent cigarette smokers, and (3) the spouses, children, relatives and "significant others" of these West Virginia residents who were or are nicotine-dependent cigarette smokers as their heirs or survivors. The trial of this case ended on January 25, 2001, when the judge declared a mistrial. Argument on decertification of the class, among other things, has been scheduled for February 19, 2001. On November 30, 2000, in Daniels v. Philip Morris Cos., Inc., a San Diego Superior Court judge reversed a prior ruling and, based on a California statute, certified a class consisting of all persons who, as California resident minors, smoked one or more cigarettes in California between April 2, 1994 and December 1, 1999. In addition, defendants settled one class-action suit, Broin v. Philip Morris, Inc., in October 1997. The Florida Court of Appeal denied challenges to this settlement on March 24, 1999, and subsequently denied motions to reconsider. On September 7, 1999, the Florida Supreme Court dismissed all proceedings, and the settlement and judgment became final. The Broin II cases, discussed above, arose out of the settlement of this case. Trial began in July 1998 in Florida state court in Engle v. R. J. Reynolds Tobacco Co., in which a class consisting of Florida residents, or their survivors on their behalf, claim to have diseases or medical conditions caused by their alleged "addiction" to cigarettes. On July 7, 1999, the jury found against RJR Tobacco 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. 9 10 The second phase of the trial, which consisted of the claims of three of the named class representatives, began on November 1, 1999. On April 7, 2000, the jury returned a verdict against all defendants. They awarded plaintiff Mary Farnan $2.85 million, the estate of plaintiff Angie Della Vecchia $4.023 million and plaintiff Frank Amodeo $5.831 million. The jury also found, however, that Frank Amodeo knew or should have known of his claim prior to May 5, 1990. The legal effect of that finding should be to bar his claim based on the applicable statute of limitations. In the second phase, the trial court also ordered the jury to determine punitive damages, if any, on a class-wide basis. On July 14, 2000, 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 being assigned to RJR Tobacco. On July 24, 2000, the defendants, including RJR Tobacco, filed numerous post-verdict motions, including motions for a new trial and to reduce the amount of the punitive damages verdict. On November 6, 2000, the trial judge denied the post-trial motions and entered judgment. On November 7, 2000, RJR Tobacco posted an appeal bond in the amount of $100 million, pursuant to a Florida statute enacted on May 9, 2000, and initiated the appeals process. RJR Tobacco believes it has numerous bases for a successful appeal, although it cannot predict the outcome of the appellate process. Although the bond legislation described above is intended to apply to the Engle case, RJR Tobacco cannot predict the outcome of any possible challenges to the legislation's validity. In addition, four states, Georgia, Kentucky, North Carolina and Virginia have enacted legislation that limits the size of the bond required to stay execution of a punitive damages verdict pending appeal, but does not affect the underlying verdict. Governmental Health-Care Cost Recovery Cases. In June 1994, the Mississippi attorney general brought an action, Moore v. American Tobacco Co., against various industry members, including RJR Tobacco. This case was brought on behalf of the state to recover state funds paid for health care and medical and other assistance to state citizens suffering from diseases and conditions allegedly related to tobacco use. By making the state the plaintiff in the case and basing its claims on economic loss rather than personal injury, the state sought to avoid the defenses otherwise available against an individual plaintiff. Most other states, through their attorneys general or other state agencies, sued RJR Tobacco and other U.S. cigarette manufacturers based on similar theories. The cigarette manufacturer defendants, including RJR Tobacco, settled the first four of these cases scheduled to come to trial, those of Mississippi, Florida, Texas and Minnesota, by separate agreements between each state and those manufacturers in each case. On November 23, 1998, the major U.S. cigarette manufacturers, including RJR Tobacco, 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. The MSA became effective on November 12, 1999, when final approval of the settlement was achieved in 80% of the settling jurisdictions. As of October 17, 2000, final approval had been achieved in all settling jurisdictions. The MSA settled all the health-care cost recovery actions brought by, or on behalf of, the settling jurisdictions and contains releases of various additional present and future claims. In the settling jurisdictions, the MSA released RJR Tobacco, its indemnitees and RJR from: (1) 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 (2) all monetary claims 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. - Monetary Liabilities. In addition to the payments made in 1998, 1999 and 2000, the MSA calls for three annual initial industry payments starting in 2001 of up to approximately $2.5 billion, $2.6 billion and $2.7 billion, respectively. It also requires perpetual annual industry payments, increasing from the current $5 billion to $8 billion in 2004, and further to $9 billion in 2018 and thereafter. Ten additional payments of $861 million are due annually beginning in April 2008. All payments are to be allocated among the companies on the basis of relative market share and most are subject to adjustments for changes in sales volume units, inflation and other factors. Accordingly, RJR Tobacco records its allocation of charges in cost of goods sold as products are shipped. 10 11 The tobacco companies also agreed to (1) make a one-time payment of $50 million on March 31, 1999, to establish a fund for enforcement of the MSA and law relating to tobacco products and (2) fund activities of the National Association of Attorneys General relating to the MSA at the cost of $150,000 per year for ten years. In addition, the MSA calls for the creation of a national foundation that would establish public education and other programs, and conduct or sponsor research, to reduce youth smoking, and to understand, and educate the public about, diseases associated with tobacco product use. The tobacco companies agreed to fund the foundation with (1) ten annual payments of $25 million, which began on March 31, 1999, (2) further payments of $250 million, which began on March 31, 1999, and $300 million annually thereafter for four years, and (3) additional annual payments of $300 million beginning in 2004 if, during the year preceding the year when payment is due, participating manufacturers collectively accounted for at least 99.05% of the cigarette market. Each of these payments is to be allocated among the companies on the basis of relative market share. Other than the $25 million annual payments and the $250 million payment made on March 31, 1999, the payments for the foundation are subject to adjustments for changes in sales volume units, inflation and other factors. The manufacturers also agreed to pay the litigation costs, including government attorneys' fees, of the offices of the attorneys general relating to the settled cases and, subject to certain quarterly and annual payment caps, the costs and fees of outside counsel to the jurisdictions. Outside counsel fees have been determined either by arbitration or in accordance with a negotiated fee procedure. Awards determined by arbitration will be paid subject to an aggregate annual cap on arbitrated attorneys' fees for all these and certain other settled cases of $500 million. Fees set by the negotiated fee procedure are subject to an annual cap of $250 million, and will not exceed a total of $1.25 billion. As of February 7, 2001, awards determined by arbitration totaled $11.9 billion, and awards determined in accordance with a negotiated fee procedure totaled approximately $626 million. Reimbursement of costs is capped at $150 million for litigation costs, including government attorneys' fees, of the attorneys' general offices and at $75 million annually for outside counsels' costs. Payments for attorneys' fees and costs are to be allocated on a market-share basis. - Growers' Trust. As part of the MSA, the tobacco companies agreed to work with U.S. tobacco growers to address the possible adverse economic impact of the MSA on growers. As a result, RJR Tobacco and the three other major manufacturers agreed to participate in funding a $5.2 billion trust fund to be administered by a trustee, in conjunction with a certification entity from each of the tobacco growing states. The trust agreement provides for a schedule of aggregate annual payments, subject to various adjustments, that are payable in quarterly installments each year from 1999 through 2010. The aggregate annual payment by all participating manufacturers is adjusted each year for inflation and any change in the total domestic cigarette volume of all participating manufacturers. In general, the annual payment by each participating manufacturer, including RJR Tobacco, is based on each manufacturer's relative market share of total domestic cigarette shipments during the preceding calendar year. Each manufacturer's annual payment is also subject to a tax offset adjustment. - Other MSA Obligations. The MSA also contains provisions restricting the marketing of cigarettes. Among these are restrictions or prohibitions on the use of cartoon characters, brand name sponsorships, brand name non-tobacco products, outdoor and transit brand advertising, payments for product placement, free sampling and lobbying. The MSA also required the dissolution of three industry-sponsored research and advocacy organizations. The cash payments made by RJR Tobacco under the MSA and other existing settlement agreements were $2.2 billion, $1.6 billion and $.8 billion in 2000, 1999 and 1998, respectively. RJR Tobacco estimates these payments in 2001 and future years will exceed $2 billion per year. However, these payments will be subject to adjustments based upon, among other things, the volume of cigarettes sold by RJR Tobacco, RJR Tobacco's market share and inflation. On April 20, 1999, the Canadian Province of British Columbia brought a case in British Columbia Provincial Court, similar to the U.S. attorneys' general cases, against RJR Tobacco and certain other 11 12 Canadian and U.S. tobacco companies and their parent companies, including RJR. This lawsuit relied heavily upon special legislation enacted in British Columbia that was separately challenged by various Canadian tobacco companies. An agreement was reached with the government in British Columbia to litigate the separate constitutional challenges prior to the health-care cost recovery action itself. On February 21, 2000, the British Columbia Supreme Court declared the Cost Recovery Act unconstitutional and dismissed the action. That decision was not appealed by the government. On September 22, 1999, the U.S. Department of Justice brought an action in the United States District Court for the District of Columbia against various industry members, including RJR Tobacco. The government seeks to recover federal funds expended in providing health care to smokers who have developed diseases and injuries alleged to be smoking-related, and, in addition, seeks, pursuant to the federal RICO statute, disgorgement of profits the government contends were earned as a consequence of a RICO racketeering "enterprise." On December 27, 1999, defendants filed a motion to dismiss challenging all counts included in the action brought by the DOJ. On June 6, 2000, the trial court heard oral argument on the motion. On September 28, 2000, federal court Judge Gladys Kessler of the United States District Court for the District of Columbia granted the non-Liggett defendants' motion to dismiss the following counts of plaintiff's complaint: (1) Medical Care Recovery Act claim, and (2) Medicare Secondary Payer claim. The court, however, denied the motion with respect to the RICO claims. On October 13, 2000, the United States filed a motion to limit Judge Kessler's September 28, 2000 order to claims for payments under Medicare and the Federal Employee Health Benefits Act. Union Cases. Although the MSA settled some of the most potentially burdensome health-care cost recovery actions, many other such cases have been brought by other types of plaintiffs. As of February 7, 2001, approximately 21 lawsuits by union trust funds against cigarette manufacturers and others are pending. The funds seek recovery of payments made by them for medical expenses of their participant union members and their dependents allegedly injured by cigarettes. The claims in these cases are almost identical, and several of these cases purport to be class actions on behalf of all union trust funds in a particular state. The defendants in these actions argue, among other things, 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. In addition, they argue that the traditional subrogation remedy cannot be supplanted by a direct right of action for the trust fund that strips defendants of the defenses they would ordinarily have against the allegedly injured individual. On March 29, 1999, in the first of these cases to be considered by a federal court of appeals, Steamfitters Local Union 420 v. Philip Morris, Inc., the U.S. Court of Appeals for the Third Circuit affirmed a district court ruling dismissing a case on remoteness grounds. Since then, the U.S. Courts of Appeals for the Second, Third, Fifth, Seventh, Eighth, Ninth and Eleventh Circuits have all ruled in favor of the industry in similar union cases. On January 10, 2000, the United States Supreme Court denied petitions for certiorari filed in cases from the Second, Third and Ninth Circuits. On August 22, 2000, the Eleventh Circuit ruled that the district court did not err in dismissing the plaintiff's complaint and in denying the plaintiff's leave to amend the complaint in United Food and Commercial Workers Unions and Employers Health and Welfare Fund v. Philip Morris, Inc. On September 1, 2000, in Lyons v. Philip Morris, Inc., the Eighth Circuit affirmed the trial court's dismissal. Numerous trial court judges also have dismissed union trust fund cases on remoteness grounds. Nonetheless, some union, or other third-party payor, cases have survived motions to dismiss and may proceed to trial. On August 2, 1999, a federal district court in New York denied defendants' motions to dismiss in two separate cases heard together, National Asbestos Workers Medical Fund v. Philip Morris, Inc. and Blue Cross and Blue Shield of New Jersey, Inc. v. Philip Morris, Inc. On December 21, 1999, the federal district court in the District of Columbia denied defendants' motions to dismiss in three cases consolidated for pretrial purposes: Service Employees International Union Health and Welfare Fund v. Philip Morris, Inc., S.E.I.U. Local 74 Welfare Fund v. Philip Morris, Inc. and Holland v. Philip Morris, Inc. The latter set of cases is on appeal to the United States Court of Appeals for the District of Columbia. 12 13 On March 3, 2000, a New York state court granted motions to dismiss ten union cases, Eastern States Health & Welfare Fund v. Philip Morris, Inc., brought by 14 union trust funds seeking to recover money paid for medical bills incurred by their participants and beneficiaries who suffer from alleged tobacco-caused diseases. This group of cases is on appeal to the Appellate Division of the Supreme Court of New York. On September 26, 2000, in Steamfitters Local Union No. 614 Health and Welfare Fund v. Philip Morris, Inc., the Tennessee Court of Appeals affirmed the trial court's dismissal of the antitrust claim and found the remaining claims in the plaintiffs' complaint were too remote to permit recovery. The first and only union case to go to trial to date was Iron Workers Local No. 17 v. Philip Morris, Inc., which was tried in federal court in Ohio. On March 18, 1999, the jury returned a unanimous verdict for the defendants, including RJR Tobacco. The plaintiffs dismissed their appeal of the verdict. Other Health-Care Cost Recovery and Aggregated Claims Plaintiffs. Native American tribes have filed similar cases, out of which four remain pending in tribal courts, one in federal court in each of New Mexico and Texas and one class action in San Diego Superior Court. On December 8, 2000, in Utu Utu Gwaitu Paiute Tribe v. Philip Morris, Inc., the San Diego Superior Court denied plaintiffs' motion for class certification. On January 10, 2001, plaintiffs filed a request for dismissal with the court, which has yet to be approved. Trial in this matter had been scheduled to begin June 4, 2001. On July 11, 2000, in Lower Brule Sioux Tribe v. American Tobacco Co., the Lower Brule Sioux Tribe voluntarily dismissed its suit in tribal court. On November 12, 1999, in Table Bluff Reservation v. Philip Morris, Inc., a federal district court dismissed the plaintiffs' lawsuit. Plaintiffs have appealed this ruling to the United States Court of Appeals for the Ninth Circuit. Groups of health-care insurers, as well as a private entity that purported to self-insure its employee health-care programs, have also advanced claims similar to those found in the union health-care cost recovery actions. Two of these "insurer" cases, Williams & Drake v. American Tobacco Co. and Regence Blueshield v. Philip Morris, Inc., were dismissed in their entirety on remoteness grounds by federal district courts in Pennsylvania and Washington. These cases are on appeal to the Third and Ninth Circuits, respectively. In a third case, Group Health Plan, Inc. v. Philip Morris, Inc., a federal district judge in Minnesota dismissed all claims, except a state antitrust claim and a state conspiracy claim. The federal court certified to the Minnesota Supreme Court the question of whether these two claims could be pursued under Minnesota law by Group Health Plan. On January 11, 2001, the Minnesota Supreme Court ruled that the plaintiff can pursue these claims. Other cost recovery suits have been brought by, among others, foreign countries, local governmental jurisdictions, taxpayers on behalf of a government jurisdiction, a university and hospitals. On November 4, 1999, in Allegheny General Hospital v. Philip Morris, Inc., the U.S. District Court for the Western District of Pennsylvania dismissed a third-party payor lawsuit filed against the tobacco industry by a number of hospital and health-care facilities. Plaintiff appealed this ruling to the United States Court of Appeals for the Third Circuit, which affirmed the trial court's dismissal on October 6, 2000. On December 14, 1999, a federal district court in Washington dismissed a similar case, Association of Washington Public Hospital Districts v. Philip Morris, Inc. Plaintiffs have appealed this ruling to the United States Court of Appeals for the Ninth Circuit. On May 30, 2000, in A.O. Fox Memorial Hospital v. American Tobacco Co., Inc., a group of approximately 175 hospitals filed suit against the tobacco industry seeking repayment from cigarette companies for costs expended to treat smoking-related illnesses. Plaintiffs seek at least $3.6 billion in damages. On August 7, 2000, a federal district court in Washington, D.C. dismissed an international health-care cost recovery action entitled Ontario v. Imperial Tobacco, Ltd. Plaintiffs are appealing the dismissal to the United States Court of Appeals for the District of Columbia. A number of foreign countries have filed suit in state and federal courts in the United States against RJR Tobacco and other tobacco industry defendants to recover funds for health care and medical and other assistance paid by those foreign governments to their citizens. Of the 18 cases currently pending, eight are pending in state court and ten are pending in federal court. Six federal court cases have been transferred by the Panel on Multi-District Litigation to the District Court of the District of Columbia. Other foreign governments and entities have stated that they are considering filing such actions in the United States. In addition, the Republic of the Marshall Islands has brought a health-care cost recovery lawsuit in the Marshall 13 14 Islands against RJR Tobacco and other cigarette manufacturers. Pursuant to the terms of the 1999 sale of RJR's international tobacco business, Japan Tobacco Inc. assumed RJR Tobacco's liability, if any, in these cases. On January 5, 2000, a San Diego Superior Court judge dismissed certain claims in two lawsuits: California v. Philip Morris, Inc. and California v. Brown & Williamson Tobacco Corp. These lawsuits, brought by the cities of Los Angeles and San Jose, on behalf of the people of California, claimed that the tobacco industry violated California's Proposition 65 and several California state laws by failing to warn nonsmokers about the State of California's conclusions concerning the dangers of environmental tobacco smoke. The judge found that the industry had not violated Proposition 65 and dismissed those claims. The judge did not dismiss certain other California state law claims. The parties in these two actions agreed to settle the remaining claims. On November 20, 2000, the court approved the settlements and entered final judgments. Finally, ten lawsuits are pending against RJR Tobacco in which asbestos companies and/or asbestos-related trust funds allege that they "overpaid" claims brought against them to the extent that tobacco use, not asbestos exposure, was the cause of the alleged personal injuries for which they paid compensation. Falise v. American Tobacco Co. was dismissed by the United States District Court for the Eastern District of New York on November 2, 1999, due to a lack of subject matter jurisdiction. This case was refiled on November 11, 1999. Trial began on November 27, 2000. On January 22, 2001, the judge declared a mistrial. No date has yet been set for the re-trial of this case. Other such cases pending in New York, Mississippi and California might go to trial in 2001. Antitrust Cases. Approximately 52 lawsuits have been filed by tobacco wholesalers, or indirect purchasers, against United States cigarette manufacturers, including RJR Tobacco, and its parent company, RJR, 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. Approximately 39 of these cases remain pending -- 8 in federal court and 31 in state courts. In all cases, plaintiffs are asking the court to certify the lawsuits as class actions, and to allow the respective plaintiffs to pursue the lawsuits as representatives of other persons in the United States, and throughout the world, that purchased cigarettes directly from one or more of the defendants. The federal cases have been consolidated and sent by the Judicial Panel on Multidistrict Litigation for pretrial in the United States District Court for the Northern District of Georgia. On November 30, 2000, the court dismissed plaintiffs' claims of fraudulent concealment, claims concerning conduct outside the United States, and allegations relating to non-price conduct. On January 12, 2001, plaintiffs moved to replead their fraudulent concealment allegations. On January 23, 2001, the federal court certified a class of direct-purchaser plaintiffs. On March 2, 2000, Liggett Group Inc. filed an antitrust action against RJR Tobacco in the U.S. District Court for the District of New Jersey. Subsequently, the court granted RJR Tobacco's motion to transfer this action to the United States District Court for the Middle District of North Carolina. The suit alleges that RJR Tobacco's Every-Day-Low-Price merchandising program, which provides consumer discounts in retail establishments that choose to offer RJR Tobacco products as their lowest-priced cigarettes, is a violation of the Sherman Antitrust Act and New Jersey antitrust laws. RJR Tobacco believes that its program is pro-competitive and that the court will find Liggett's allegations to be without merit. On July 30, 1999, Cigarettes Cheaper!, a retailer, filed an antitrust counterclaim against RJR Tobacco in a gray market trademark suit originally brought by RJR Tobacco in the United States District Court for the Northern District of Illinois. Cigarettes Cheaper! alleges that it was denied promotional resources in violation of the Robinson-Patman Act. The district court declined to dismiss the counterclaim. Discovery is ongoing. On January 19, 2001, Cigarettes Cheaper! moved to amend its counterclaim to include a violation of the Sherman Act sec. 1, claiming that RJR Tobacco conspired with other retailers to deny promotions to Cigarettes Cheaper!. On May 10, 2000, the Customer Company, a retailer affiliated with Cigarettes Cheaper!, filed a substantially similar antitrust claim against RJR Tobacco in the United States District Court for the Northern District of California. Discovery is ongoing. Trial is scheduled to begin on October 29, 2001 in Oakland, California. 14 15 Tobacco Growers' Case. On February 16, 2000, a class-action complaint, Deloach v. Philip Morris Cos., Inc., was brought against RJR Tobacco, other cigarette manufacturers and others, in the United States District Court for the District of Columbia on behalf of a putative class of all tobacco growers and tobacco allotment holders (some 5,930 of which are actually named in the first amended complaint). Plaintiffs' current theory, as reflected in their second amended complaint (which was filed on September 2, 2000), is that the defendants (Philip Morris, Inc., RJR Tobacco, Brown & Williamson Tobacco Corp. and Lorillard Tobacco Co.) engaged in bid-rigging of American tobacco auctions (both burley and flue-cured) beginning at least by 1996 and continuing to present. Defendants' actions are alleged to have held the auction prices of tobacco at artificially low prices resulting in damage to tobacco growers and allotment holders. In addition, plaintiffs allege that defendants have engaged in a conspiracy to force the elimination or destruction of the federal government's tobacco quota and price support program through an alleged illegal group boycott. On October 9, 2000, defendants filed a motion to dismiss the second amended complaint and a motion to transfer venue to the United States District Court for the Middle District of North Carolina. On November 30, 2000, the court granted the motion to transfer the case. On December 20, 2000, plaintiffs moved to amend the complaint to add leaf-buying companies as defendants. Scheduled Trials. RJR Tobacco is a defendant in 11 non-Broin II cases currently scheduled for trial in the first half of 2001. These cases include five individual smoking and health cases, four asbestos contribution cases, one health-care cost recovery case and one medical monitoring class action. Additionally, several Broin II cases are scheduled for trial during this period. Although trial schedules are subject to change and many cases are dismissed before trial, it is likely that there will be an increased number of tobacco cases, some involving claims for possibly billions of dollars, against RJR Tobacco and RJR coming to trial over the next year. Other Developments. RJR Tobacco is aware of a grand jury investigation being conducted in North Carolina that relates to the cigarette business of certain of its former affiliates. In connection with this investigation, RJR Tobacco responded to document subpoenas dated July 7, 1999 and June 1, 2000, respectively. On December 22, 1998, Northern Brands International, Inc. entered into a plea agreement with the United States Attorney for the Northern District of New York. Northern Brands is a now-inactive tobacco subsidiary that was part of the business of R.J. Reynolds International B.V., a former Netherlands subsidiary of RJR Tobacco which was managed by a former affiliate, RJR-MacDonald, Inc. On May 12, 1999, RJR-MacDonald, Inc. was sold to Japan Tobacco Inc. and subsequently changed its name to JTI-MacDonald, Inc. Northern Brands was charged with aiding and abetting certain customers who brought merchandise into the United States "by means of false and fraudulent practices . . . ." JTI-MacDonald, Inc., Japan Tobacco's international operating company in Canada, is cooperating with an investigation now being conducted by the Royal Canadian Mounted Police relating to the same events that gave rise to the Northern Brands investigation. On December 21, 1999, the government of Canada filed a lawsuit in the United States District Court for the Northern District of New York against RJR Tobacco, RJR, several currently and formerly related companies, including Northern Brands, and the Canadian Tobacco Manufacturers Council. The lawsuit alleges that, beginning in 1991, the defendants conspired with known distributors and smugglers to illegally import into Canada tobacco products originally earmarked for export from Canada, in a fashion that avoided the imposition of certain excise and retail taxes and duty payments. On June 30, 2000, this case was dismissed by the United States District Court for the Northern District of New York. Plaintiff appealed the dismissal to the United States Court of Appeals for the Second Circuit on July 28, 2000; no ruling has been issued. Although the international tobacco business was sold, RJR Tobacco retained certain liabilities relating to the events disclosed above. On or about October 30, 1998, a boat manufacturer, American Marine Holdings, Inc., filed suit against RJR Tobacco claiming that one of its boats was not properly identified in RJR Tobacco cigarette advertising. The plaintiff claims, among other things, violations of the Lanham Act and breach of an alleged oral contract and seeks in excess of $20 million in damages. Trial is scheduled for April 2, 2001. 15 16 For further discussion of litigation and legal proceedings pending against RJR, its affiliates, including RJR Tobacco, or indemnitees, see "-- Environmental Matters" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Governmental Activity" in Item 7. For more detailed information about the class action and other aggregated claims suits pending against RJR, its affiliates, including RJR Tobacco, or indemnitees, see Exhibit 99.1 to this report. --------------------- Litigation is subject to many uncertainties, and it is possible that some of the tobacco-related legal actions, proceedings or claims could be decided against RJR Tobacco or its affiliates, including RJR, or indemnitees. Determinations of liability or adverse rulings against other cigarette manufacturers that are defendants in similar actions, even if such rulings are not final, could adversely affect the litigation against RJR Tobacco or its affiliates or indemnitees and could encourage an increase in the number of such claims. 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 at which new lawsuits are filed against RJR Tobacco and RJR, a significant increase in litigation and/or in adverse outcomes for tobacco defendants could have an adverse effect on either or both of these entities. RJR Tobacco and RJR each believe that they have a number of valid defenses to any of those actions and intend to defend those actions vigorously. RJR believes that, notwithstanding the quality of defenses available to it and RJR Tobacco in litigation matters, it is possible that the results of operations or cash flows of RJR in particular quarterly or annual periods or RJR's financial condition could be materially affected by the ultimate outcome of certain pending litigation matters, including bonding and litigation costs. RJR's management is unable to predict the outcome of the litigation or to derive a meaningful estimate of the amount or range of any possible loss in any particular quarterly or annual period or in the aggregate. ENVIRONMENTAL MATTERS RJR 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. Finally, regulations promulgated by the U.S. Environmental Protection Agency and other governmental agencies under various statutes have resulted in, and likely will continue to result in, substantial expenditures for pollution control, waste treatment, plant modification and similar activities. RJR has been named in an insurance coverage suit brought by another company named as a potentially responsible party under CERCLA with respect to a superfund site in Hawaii at which a former subsidiary of RJR had operations. In this lawsuit, Del Monte Fresh Produce v. Fireman's Fund Insurance, filed August 13, 1997 in the First Circuit Court of the State of Hawaii, the plaintiff seeks declaratory judgment that it is entitled to insurance coverage for the site or, in the alternative, that RJR is obligated to indemnify the plaintiff under the terms of the agreement by which RJR sold that company in 1989. The Fireman's Fund Insurance Company has filed a motion for summary judgment that has not yet been heard. Del Monte Corporation has been named a defendant in two lawsuits related to the same Hawaii superfund site, Board of Water Supply of the City and County of Honolulu v. Shell Oil Company and Akee v. The Dow Chemical Co., filed in the First Circuit Court of the State of Hawaii on September 27, 1999, and October 7, 1999, respectively. Also, Del Monte Corporation has received a demand for indemnity from an entity that was a chemical supplier to Del Monte Corporation and is named a defendant in one of these 16 17 lawsuits. Del Monte Corporation has sought indemnity from RJR under the terms of the agreement by which RJR sold Del Monte Corporation in 1989. In connection with any liability RJR may incur arising out of these claims, the buyers of the Del Monte fresh fruit business are obligated to indemnify RJR under the terms of the agreement by which RJR sold the Del Monte fresh fruit business in 1989. RJR has provided notice of these claims to the buyers, and their successors, of the Del Monte fresh fruit business and has asserted its right to be indemnified by the buyers for any liability arising out of such claims. RJR Tobacco has been notified by the EPA of its potential liability under CERCLA for a superfund site in Greer, South Carolina. The notice and demand for reimbursement of costs incurred by the EPA were sent to a group of companies previously involved as potentially responsible parties in another superfund site, which includes RJR Tobacco. The EPA alleges that some waste from the cleanup of the other site was transported to the site in question. RJR Tobacco has executed a tolling agreement with the EPA. This tolling agreement provides for entry into good faith negotiations with the EPA, and is not an admission of fact or liability. It also should have no impact on any defense RJR Tobacco may assert, other than a defense based on the running of the statute of limitations. This matter is in its preliminary stage, as information is still being gathered from other potentially responsible parties recently notified by the EPA. In December 1998, the EPA proposed regulations that would have imposed restrictions on RJR Tobacco's use of certain fumigants used to protect stores of tobacco from agricultural pests. Those proposed regulations would have required RJR Tobacco to make significant expenditures to comply with the EPA regulations, or risk the loss of substantial stores of tobacco to agricultural pests. The EPA finalized approval of new regulations for use of these fumigants in November 2000. RJR Tobacco will be able to continue fumigation of stored tobacco under new label conditions. Although some future expenditures may be required to comply with the EPA regulations, RJR Tobacco does not expect that those expenditures will be significant. RJR and its subsidiaries have been engaged in a continuing program to assure compliance with federal, state and local environmental laws and regulations. Although it is difficult to identify precisely the portion of capital expenditures or other costs attributable to compliance with environmental laws and regulations and to estimate the cost of resolving these CERCLA matters, RJR does not expect such expenditures or other costs to have a material adverse effect on the business, results of operations or financial condition of RJR or its subsidiaries. EMPLOYEES At December 31, 2000, RJR and its subsidiaries had approximately 8,100 employees and 1,000 part-time employees. None of these employees is unionized. RJR Tobacco believes that it maintains good relations with its employees. In January 2001, RJR Tobacco was included in Fortune magazine's annual list of the "100 Best Companies to Work For." ITEM 2. PROPERTIES RJR Tobacco owns two buildings in downtown Winston-Salem, North Carolina, in which RJR's executive offices are located. For information about RJR Tobacco's operating facilities see "Business -- Manufacturing" and "Business -- Research and Development" in Item 1. ITEM 3. LEGAL PROCEEDINGS Various legal actions, proceedings and claims, including legal actions claiming that lung cancer and other diseases, as well as addiction, have resulted from the use of, or exposure to, RJR Tobacco's products, are pending or may be instituted against RJR or its affiliates, including RJR Tobacco, or indemnitees. For information about litigation and legal proceedings pending against RJR or its affiliates, including RJR Tobacco, or indemnitees, see "Business -- Litigation Affecting the Cigarette Industry" and "Business -- Environmental Matters" in Item 1; "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Governmental Activity" in Item 7; note 14 to the consolidated financial statements; and Exhibit 99.1 to this report. A copy of Exhibit 99.1 will be provided free of charge upon request by writing 17 18 to the Corporate Secretary, R.J. Reynolds Tobacco Holdings, Inc., P.O. Box 2866, 401 N. Main Street, Winston-Salem, NC 27402-2866, or by phoning 336-741-5162. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. EXECUTIVE OFFICERS AND CERTAIN SIGNIFICANT EMPLOYEES OF THE REGISTRANT The executive officers and certain significant employees of RJR and RJR Tobacco are: Andrew J. Schindler. Mr. Schindler, 56, has served as President and Chief Executive Officer of RJR Tobacco since 1995 and of RJR since June 14, 1999. He has served as Director of RJR Tobacco since 1989, and as Chairman of the Board of RJR and RJR Tobacco since July 2, 1999. Mr. Schindler joined RJR in 1974. He became Senior Vice President -- Operations of RJR Tobacco in June 1989 and was elected Executive Vice President -- Operations of RJR Tobacco in 1991. In May of 1994, Mr. Schindler became President and Chief Operating Officer of RJR Tobacco. He is a member of the North Carolina School of the Arts Foundation Board, the Wake Forest University Baptist Medical Center Board of Visitors, the board of trustees of the R. J. Reynolds Foundation and the boards of directors of Winston-Salem Business, Inc. and the Winston-Salem Alliance. Mr. Schindler is Vice Chairman of !dealliance (formerly the North Carolina Emerging Technology Alliance). Thomas R. Adams. Mr. Adams, 50, has been Senior Vice President and Controller of RJR and RJR Tobacco since June 14, 1999. From 1985 until 1999, he was Partner at the accounting firm of Deloitte & Touche LLP. Lynn J. Beasley. Ms. Beasley, 43, has served as Executive Vice President -- Marketing of RJR Tobacco since 1997. Ms. Beasley joined RJR Tobacco in 1982 as a marketing assistant. After holding a number of positions at RJR Tobacco, she became Senior Vice President of the Winston/Camel business unit in 1993. From 1995 until 1997, she was Senior Vice President of Brand Marketing for WINSTON, CAMEL and SALEM. Ms. Beasley is a member of the Senior Services Board and the Tanglewood Park Foundation Board. Charles A. Blixt. Mr. Blixt, 49, has been Executive Vice President, General Counsel and Director of RJR Tobacco since 1995 and Executive Vice President, General Counsel and Assistant Secretary of RJR since June 14, 1999. He joined RJR Tobacco as Associate Counsel -- Litigation in 1985. Mr. Blixt serves on the Board of Visitors of Salem College and Academy and the Board of Visitors of Wake Forest University School of Law. McDara P. Folan, III. Mr. Folan, 42, joined RJR in June 1999 as Vice President, Deputy General Counsel and Secretary. He also was Vice President, Deputy General Council and Secretary of RJR Tobacco from June 1999 to March 2000, and currently serves as Assistant Secretary of RJR Tobacco. From 1992 until 1999, Mr. Folan served as Vice President, Secretary and General Counsel for Allen Telecom Inc., a manufacturer and distributor of wireless communications equipment, in Cleveland, Ohio. Robert R. Gordon, Jr. Mr. Gordon, 56, has been Executive Vice President -- Human Resources of RJR Tobacco since 1994 and of RJR since July 2, 1999, and Director of RJR Tobacco since 1991. He joined RJR Tobacco in 1967 and became Vice President of Personnel in 1984. In 1989, he was promoted to Senior Vice President of Personnel of RJR Tobacco. Mr. Gordon also is Chairman of the board of trustees of the Triad North Carolina Region of Novant Health, Inc., a non-profit system of community-based healthcare providers and inpatient hospitals. Lynn L. Lane. In June 1999, Ms. Lane, 49, rejoined RJR as Senior Vice President and Treasurer and was named Senior Vice President and Treasurer of RJR Tobacco. She joined RJR in 1973 and was promoted to Vice President and Assistant Treasurer of RJR in 1991. In 1995, she was named Vice President and Treasurer of R.J. Reynolds Tobacco Worldwide. From 1996 until 1999, Ms. Lane was Vice President -- Treasurer and Investor Relations of Burlington Industries, a manufacturer and distributor of fabrics and other 18 19 textile products. She also serves on the boards of trustees of the R. J. Reynolds Foundation and Greensboro College and the East Carolina University Board of Visitors and is Chair-Elect of the East Carolina University Foundation Board. Kenneth J. Lapiejko. Mr. Lapiejko, 52, has served as Executive Vice President and Chief Financial Officer of RJR Tobacco since June 15, 1999 and of RJR since June 14, 1999. He has been Director of RJR Tobacco since 1996. From 1995 until 1999, he served as Senior Vice President, Chief Financial Officer and Treasurer of RJR Tobacco. Mr. Lapiejko joined R.J. Reynolds Tobacco International as a senior financial analyst in 1977. After holding a number of positions with RJR Tobacco, in 1991 he was promoted to Vice President of Finance and Accounting. James V. Maguire. In July 1999, Mr. Maguire, 49, was promoted to Executive Vice President -- Sales of RJR Tobacco after serving as Senior Vice President -- Sales of RJR Tobacco since 1994. He joined RJR Tobacco in 1973 as a sales representative and after holding a number of positions at RJR Tobacco and RJR, he became Vice President of Sales and Marketing Development of RJR Tobacco in 1993. Tommy J. Payne. Mr. Payne, 43, assumed his current positions as Executive Vice President -- External Relations of RJR Tobacco and of RJR in July 1999, after serving as Senior Vice President -- External Relations of RJR Tobacco since 1998 and of RJR since June 1999. He joined RJR in 1988 and was promoted to Director of Federal Government Affairs in 1995. From 1995 until 1998, he was Vice President -- Federal Government Affairs of RJR Tobacco in Washington, D.C. Mr. Payne serves on the boards of trustees of Winston-Salem State University, the Southeast Center for Contemporary Art, the North Carolina Community Colleges Foundation and the R. J. Reynolds Foundation and the East Carolina University Board of Visitors. David E. Townsend. In October 2000, Dr. Townsend, 53, was promoted to Executive Vice President -- Research and Development of RJR Tobacco after serving as Vice President of the Research and Development Product Development and Assessment Group of RJR Tobacco since 1997. He joined RJR Tobacco in 1977 and, after holding a number of positions at RJR Tobacco, was promoted to Senior Principal Scientist of RJR Tobacco in 1995, and to Director of Product Development and Assessment of RJR Tobacco in 1996. James H. Wilson. In July 1999, Mr. Wilson, 58, was promoted to Executive Vice President -- Operations of RJR Tobacco after serving as Senior Vice President -- Operations of RJR Tobacco since 1994 and Director of RJR Tobacco since 1997. He joined RJR Tobacco in 1962 and was promoted to Vice President of Manufacturing of RJR Tobacco in 1991. 19 20 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS RJR's common stock, par value $.01 per share, is listed on the NYSE as RJR and began trading on June 15, 1999. On January 31, 2001, there were approximately 38,000 holders of record of RJR's common stock. Stockholders whose shares are held of record by a broker or clearing agency are not included in this amount; however, each of those brokers or clearing agencies is included as one holder of record. The common stock closing price on January 31, 2001 was $52.95. The high and low sales prices per share for the common stock on the NYSE Composite Tape, as reported by the NYSE, was:
HIGH LOW ------ ------ 2000: First Quarter............................................. $20.50 $15.75 Second Quarter............................................ 31.94 16.94 Third Quarter............................................. 37.25 24.88 Fourth Quarter............................................ 50.25 30.81 1999: Second Quarter (from June 15, 1999)....................... 32.94 30.38 Third Quarter............................................. 32.88 24.81 Fourth Quarter............................................ 28.38 16.00
Since the third quarter of 1999, the board of directors of RJR has declared a quarterly cash dividend of $.775 per common share, or $3.10 on an annualized basis. RJR conducts its business through its subsidiaries and is dependent on the earnings and cash flow of its subsidiaries to satisfy its obligations and other cash needs. RJR's credit facilities limit the payment by RJR of dividends on its common stock in excess of specific amounts. For more information see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Financial Condition" in Item 7 and note 10 to the consolidated financial statements. RJR believes that the provisions of its credit facilities will not impair its payment of quarterly dividends. 20 21 ITEM 6. SELECTED FINANCIAL DATA The selected historical consolidated financial data as of December 31, 2000 and 1999 and for each of the years in the three-year period ended December 31, 2000 are derived from the consolidated financial statements and accompanying notes, which have been audited by RJR's independent auditors. The selected historical consolidated financial data as of December 31, 1998 and 1997 and for the years ended December 31, 1997 and 1996 are derived from audited consolidated financial statements not presented or incorporated by reference. The selected historical consolidated financial data as of December 31, 1996 are derived from unaudited consolidated financial statements, which are not presented or incorporated by reference, that reflect all adjustments, consisting only of adjustments of a normal and recurring nature, necessary for a fair presentation. The financial statements prior to 2000 segregate the account balances and activities of the international tobacco business and Nabisco and report those account balances and activities as discontinued operations. This table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 and the consolidated financial statements.
FOR THE YEARS ENDED DECEMBER 31, ----------------------------------------------- 2000 1999 1998 1997 1996 ------- ------- ------- ------- ------- (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) RESULTS OF OPERATIONS: Net sales (1)....................................... $ 8,167 $ 7,567 $ 5,716 $ 5,044 $ 4,702 Income (loss) from continuing operations............ 352 195 (519) 19 226 Income from discontinued operations................. -- 2,398 3 414 440 Extraordinary items - gain (loss)................... 1,475 (250) -- -- -- Net income (loss)................................... 1,827 2,343 (516) 433 666 PER SHARE DATA: Basic income (loss) from continuing operations...... 3.48 1.80 (4.77) .17 2.08 Diluted income (loss) from continuing operations.... 3.46 1.80 (4.77) .17 2.08 Basic income from discontinued operations........... -- 22.10 .03 3.81 4.05 Diluted income from discontinued operations......... -- 22.08 .03 3.81 4.05 Basic income (loss) from extraordinary items........ 14.56 (2.30) -- -- -- Diluted income (loss) from extraordinary items...... 14.48 (2.30) -- -- -- Basic net income (loss)............................. 18.04 21.60 (4.74) 3.98 6.13 Diluted net income (loss)........................... 17.94 21.58 (4.74) 3.98 6.13 Basic weighted average shares, in thousands......... 101,264 108,495 108,691 108,691 108,691 Diluted weighted average shares, in thousands....... 101,857 108,570 108,691 108,691 108,691 Cash dividends declared per share of common stock (2)............................................... $ 3.10 $ 1.55 $ -- $ -- $ -- BALANCE SHEET DATA (AT END OF PERIODS): Total assets........................................ 15,554 14,377 19,310 20,251 20,747 Long-term debt...................................... 1,674 1,653 4,861 4,944 4,928 Stockholders' equity................................ 8,436 7,064 9,886 11,079 11,669 OTHER DATA: Ratio of earnings to fixed charges (3).............. 5.1 2.8 -- 1.5 2.2 Deficiency in the coverage of fixed charges by earnings before fixed charges (3)................. $ -- $ -- $ (679) $ -- $ --
- --------------- (1) Net sales and costs of products sold exclude excise taxes of $1.631 billion, $1.173 billion, $1.292 billion, $1.369 billion and $1.401 billion for the years ended December 31, 2000, 1999, 1998, 1997 and 1996, respectively. (2) RJR began trading as a separate company on June 15, 1999. Since the third quarter of 1999, a quarterly dividend of $.775, or $3.10 on an annualized basis, has been declared. (3) Earnings consist of income before income taxes and fixed charges. Fixed charges consist of interest on indebtedness, amortization of debt issuance costs and one-third of operating rental expense, representative of the interest factor. 21 22 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion and analysis of the consolidated financial condition and results of operations of RJR should be read in conjunction with the consolidated financial statements and the related notes of RJR as of December 31, 2000 and 1999 and for each of the years in the three-year period ended December 31, 2000. On December 11, 2000, through a merger, RJR acquired its former parent, NGH, a non-operating public shell company with no material assets or liabilities, at the time of the acquisition, other than $11.8 billion in cash. Pursuant to an agreement and plan of merger dated June 25, 2000, as amended, RJR Acquisition Corp. was merged into NGH, with NGH being the surviving corporation. After the merger, NGH changed its name to RJR Acquisition Corp. The acquisition was accounted for as a purchase, and accordingly, the cost of the acquisition was allocated on the basis of the estimated fair market value of the assets acquired, principally $11.8 billion cash, and liabilities assumed. As consideration, RJR Acquisition Corp. paid $30 for each outstanding share of NGH, or $9.8 billion in the aggregate, provided from the net cash proceeds of the acquisition. The remaining $1.5 billion excess of net assets acquired, after costs related to the transaction, was recognized as an extraordinary gain on acquisition in the fourth quarter of 2000. RESULTS OF OPERATIONS
2000 1999 1998 ------ ------ ------ Net sales................................................... $8,167 $7,567 $5,716 Cost of products sold (*)................................... 3,325 3,233 1,289 Selling, general and administrative expenses................ 3,562 3,082 2,844 ------ ------ ------ 1,280 1,252 1,583 Tobacco settlement and related expenses (*)................. (3) 23 1,442 ------ ------ ------ Operating company contribution.............................. $1,283 $1,229 $ 141 ====== ====== ======
- --------------- (*) $2,329 million, $2,178 million and $148 million of ongoing settlement expense was recorded in cost of products sold for the years ended 2000, 1999 and 1998, respectively. Tobacco settlement and related expenses include only initial, up-front tobacco settlement and related expenses. 2000 COMPARED WITH 1999 Net sales of $8.2 billion for the year ended December 31, 2000 increased 7.9% over 1999. This increase was driven by favorable pricing of $626 million, as a result of price increases in 2000 and the last half of 1999, partially offset by a $38 million unfavorable volume shift in the branded savings price-tier to private label. RJR Tobacco's shipment volume for the year of 96.4 billion units, excluding Puerto Rico and certain other U.S. territories' volume of 1.4 billion units, was level with the prior year, while industry volume increased 0.1% to 419.8 billion units. Preliminary analysis indicates that RJR Tobacco's shipment volume benefited from an increase in trade inventory levels. RJR Tobacco's consumption volume declined 3.5%, and the industry declined 2.5% during 2000 compared with 1999. Consumption is expected to continue to decline in 2001. RJR Tobacco's full-price shipments represented 63.2% and 62.6% of its total shipments for the years ended December 31, 2000 and 1999, respectively. Industry-wide, full-price shipments represented 73.5% and 73.4% of total shipments for the years ended December 31, 2000 and 1999, respectively. RJR Tobacco's full-price shipments increased 0.9% while the industry full-price increase was 0.2%. CAMEL shipments, excluding the non-filter style, for 2000 were up 10.2% versus 1999 and WINSTON's base styles increased 0.6% during 2000 from 1999. SALEM shipments were down 3.9% compared with the prior year. Shipments for DORAL decreased 1.6% compared with the prior year, while the industry savings decline was 0.2%. RJR Tobacco's retail share of market averaged 23.58% for the year ended December 31, 2000, a decrease of .34 share points compared with the prior year. 22 23 CAMEL, RJR Tobacco's largest full-price brand, continued to show strong growth. Its share of market, excluding the non-filtered style, grew .42 share points to 5.14% in 2000. CAMEL's growth was supported by its "Pleasure to Burn" positioning, its successful launch of Turkish Gold and its creative and integrated marketing programs. Base WINSTON's retail share of 4.76% for the year ended December 31, 2000 was down slightly from its 1999 share of 4.83%; however, its share increased .16 share points in the second half compared with the first half of 2000. WINSTON's "No Bull" positioning and a more competitive retail plan contributed to the brand's performance. SALEM's share averaged 3.01% in 2000 compared with 3.17% in 1999, reflecting increased competitive activity in the menthol category. However, SALEM's share has recently grown in its emphasis markets where the brand's full marketing support is having a positive impact among adult menthol smokers. These initiatives include SALEM's "It's not what you expect" positioning, unique packaging, promotions and adult smoker events. DORAL's retail share of market was 6.16% in 2000, down .14 share points compared with the prior year. Competitive pricing pressure from deep-discount brands impacted DORAL's performance, particularly in the second quarter of 2000. To more effectively compete against these brands, refined retail pricing promotions were begun in mid-2000. These promotions, along with its "Imagine Getting More" positioning, contributed to consecutive share gains in the third and fourth quarters. RJR Tobacco expanded its test market of ECLIPSE to include the Dallas/Fort Worth area, in April 2000 through direct mail and Internet sales to age-verified, adult smokers, and in January 2001 through limited retail sales. ECLIPSE is a cigarette that primarily heats rather than burns tobacco, greatly reducing second-hand smoke, while leaving no ashes, stains or lingering odor. Additionally, using a four-step scientific methodology, RJR Tobacco announced that while the effect of ECLIPSE on the risk of cardiovascular disease is inconclusive, ECLIPSE may present less risk of cancer, chronic bronchitis and possibly emphysema when compared with other cigarettes. RJR Tobacco is continuing to evaluate the test market results. Cost of products sold of $3.3 billion increased $92 million from 1999, primarily due to an increase of $151 million in ongoing settlement costs partly offset by lower raw material cost. Selling, general and administrative expenses of $3.6 billion in 2000 increased $480 million from the prior year. This change over the prior-year period was primarily due to increased promotional expense, composed mainly of retail discounting. Tobacco settlement and related expenses during 2000 reflect activity in the $1.4 billion initial, up-front charge recorded in 1998 as follows:
"MOST FAVORED NATION" RATIONALIZATION EMPLOYEE MASTER MINNESOTA ADJUSTMENTS OF SEVERANCE SETTLEMENT SETTLEMENT FOR PREVIOUSLY MANUFACTURING AND RELATED AGREEMENT AGREEMENT SETTLED STATES OPERATIONS BENEFITS TOTAL ---------- ---------- -------------- --------------- ----------- ------- Original charge..................... $ 620 $ 312 $ 145 $ 214 $151 $ 1,442 Utilized in 1998.................... (620) (312) (145) (214) (54) (1,345) ----- ----- ----- ----- ---- ------- Balance, December 31, 1998.......... -- -- -- -- 97 97 Utilized in 1999.................... -- -- -- -- (42) (42) Adjusted in 1999.................... -- -- -- -- (17) (17) ----- ----- ----- ----- ---- ------- Balance, December 31, 1999.......... -- -- -- -- 38 38 Utilized in 2000.................... -- -- -- -- (28) (28) Adjusted in 2000.................... -- -- -- -- (3) (3) ----- ----- ----- ----- ---- ------- Balance, December 31, 2000.......... $ -- $ -- $ -- $ -- $ 7 $ 7 ===== ===== ===== ===== ==== =======
23 24 For more information about the MSA and other state settlement agreements, see "Business -- Litigation Affecting the Cigarette Industry" in Item 1 and note 14 to the consolidated financial statements. The rationalization of manufacturing operations primarily represents a charge to write down the book value of one of RJR Tobacco's production facilities and certain equipment in Winston-Salem, North Carolina, to fair value. The employee severance and related benefits expense was a charge for workforce reductions totaling approximately 1,300 employees. These charges were in response to the changing business conditions expected to result from the MSA signed in November 1998. Management believes that RJR Tobacco's price increases, which were necessary to satisfy its ongoing annual payment obligations under the MSA, have adversely affected, and may continue to adversely affect RJR Tobacco's volume. During 2000 and 1999, $3 million and $17 million, respectively, were reversed from the liability for employee severance and related benefits to tobacco settlement and related expenses, which reflected a less-than-expected volume decline and a corresponding less-than-expected related workforce reduction. Cash expenditures related to the termination of employees is expected to be $77 million, of which $70 million was paid as of December 31, 2000. The remaining reserve is expected to be paid from operations in 2001. Pre-tax savings in 2000 and 1999 were approximately $85 million and $57 million, respectively, and are expected to be $85 million in 2001. During 1999, RJR Tobacco recorded $40 million, $24 million after-tax, for initial, up-front costs related to the tobacco growers' settlement. Operating company contribution, an alternative performance measure, increased 4.4% to $1.3 billion for 2000 when compared with the prior year. This increase is primarily due to the factors discussed above. An impairment charge of $89 million, $54 million after-tax, was incurred during the fourth quarter of 2000 on two of RJR Tobacco's non-investment brands, MAGNA and CENTURY. As a result of this charge, amortization expense related to trademarks will decrease $4 million on an annual basis. Headquarters close-down and related charges recorded by RJR in the second quarter of 1999 of $143 million, $93 million after-tax, reflected the elimination of its New York corporate headquarters. Total cash expenditures related to this charge were $122 million. The elimination of its headquarters resulted from reorganization transactions described in note 2 to the consolidated financial statements. Approximately $127 million of the charge was for severance and related benefits for approximately 100 employees whose employment was terminated on June 14, 1999, at which time RJR satisfied its obligation in full. The remainder of the charge was primarily related to contractual lease termination payments and the write-off of leasehold improvements and abandoned equipment. Interest and debt expense was $168 million and $268 million in 2000 and 1999, respectively. This decrease resulted from the repurchase of approximately $4 billion of debt, partly offset by the issuance of $1.25 billion of debt, during the second quarter of 1999. Interest income increased $5 million during 2000 when compared with the prior year, primarily reflecting higher cash balances and higher interest rates. Other expense, net decreased $27 million for the year ended December 31, 2000 from the prior year. This decrease was primarily the result of higher 1999 charges related to the spin-off. See note 2 to the consolidated financial statements. Provision for income taxes was $396 million, or an effective rate of 52.9%, in 2000 compared with $315 million recorded in 1999. The effective tax rates exceed the federal statutory rate of 35% primarily due to the impact of certain nondeductible items, including goodwill amortization, and to a lesser extent, state taxes. Discontinued operations for the year ended December 31, 1999 included after-tax income of $76 million related to the operations of the international tobacco business and Nabisco. Additionally, discontinued operations included a $2.3 billion gain on the sale of the international tobacco business, net of a $322 million loss on the recognition of Nabisco's cumulative translation adjustment account. See note 2 to the consolidated financial statements. 24 25 Extraordinary items included a gain of $1.5 billion realized during the fourth quarter of 2000 in connection with RJR's acquisition of NGH. See note 3 to the consolidated financial statements. An extraordinary loss of $384 million, $250 million after-tax, was incurred during 1999 in connection with the repurchase of approximately $4 billion of debt securities. See note 2 to the consolidated financial statements. 1999 COMPARED WITH 1998 Net sales of $7.6 billion for the year ended December 31, 1999 increased 32.4% over 1998. This increase was primarily due to favorable pricing of $2.5 billion, partly offset by $692 million in lower volumes. Collective price increases since November 1998, in response to litigation settlements, adversely impacted the shipment volume of RJR Tobacco and the industry in general. RJR Tobacco's total shipment volume during 1999 of 96.4 billion units, excluding Puerto Rico and certain other territories' volume of approximately 1.4 billion units, declined 12.7% from the prior year, while industry volume declined 9.0%. RJR Tobacco's full-price shipments represented 62.6% of total shipments for each of the years ended December 31, 1999 and 1998, whereas industry-wide, full-price shipments represented 73.4% and 73.0% of total shipments for the years ended December 31, 1999 and 1998, respectively. Compared with 1998, the 1999 shipment volume for CAMEL, excluding the non-filter style, was down 7.4%, but outperformed the industry full-price decline of 8.5%. Shipments of the WINSTON styles supported by the "No Bull" repositioning, declined 13.9% compared with 1998. WINSTON's performance was negatively impacted by the unprecedented settlement-related price increases and the price sensitivity among its franchise smokers. Consequently, new WINSTON "No Bull" programs, such as "Winston Racing Nation," were introduced to enhance loyalty among WINSTON's adult smokers. SALEM shipments were down 12.7% compared with 1998, also negatively impacted by settlement-related price increases. Volume for DORAL, the industry's leading savings brand, was down 13.5% from 1998. DORAL's performance reflected the savings-brand industry decline of 10.3% during 1999, and also was impacted negatively by increased activity from competitive deep-discount brands. RJR Tobacco's total retail share of market declined by 1.26 share points in 1999 compared with 25.18% in 1998. Most of this share loss occurred by the end of the second quarter. In line with RJR Tobacco's strategy to stabilize, then grow, market share on the four investment brands, the second-half 1999 trend improved due to the combined performance of CAMEL, WINSTON, SALEM and DORAL. CAMEL's market share, excluding the non-filter style, grew almost .20 share points on average in the last half of the year compared with the second quarter of 1999. CAMEL finished the year at 4.72% share of market, up slightly versus 1998. WINSTON and SALEM experienced retail market share declines in the first half of 1999, most of which occurred in the first quarter largely as a result of the impact of increased prices and competitive activity. However, SALEM's retail share of market was stable since March 1999, reflecting the positive impact of the January 1999 "It's not what you expect" national repositioning. WINSTON styles supported by the "No Bull" repositioning had been level since June 1999. Due to gains made by deep-discount brands, DORAL, the nation's leading savings brand, experienced slight market share declines for the full year, down .13 points from 1998. Additional marketing programs were put into place to stabilize, then strengthen DORAL's share of market. DORAL's 1999 share performance, although a decline, exceeded the performance of the industry branded savings category, which declined .75 points from 1998. Cost of products sold of $3.2 billion for the year ended December 31, 1999 increased $1.9 billion from 1998, primarily due to an increase of $2 billion in ongoing settlement costs. Selling, general and administrative expenses of $3.1 billion for 1999 increased $238 million, or 8.4%, from the comparable prior-year period. This increase over 1998 was primarily due to increased promotional expenses, composed mainly of competitive discounts provided directly to retailers and passed through to the consumer, partly offset by lower corporate expenses. 25 26 Tobacco settlement and related expenses, excluding ongoing tobacco settlement costs included in cost of products sold, of $23 million during 1999 included a $40 million charge related to the tobacco growers' settlement, partly offset by a $17 million reversal of the liability for employee severance and related benefits recorded in 1998. Operating company contribution of $1.2 billion in 1999 increased $1.1 billion, primarily due to the factors described above. Restructuring expense of $80 million, $52 million after-tax, was recorded by RJR Tobacco in 1997 related to the reorganization of its operations, including the closure of a processing facility, to enhance its competitive position and improve its long-term earnings growth prospects. The components of the charges included: $30 million related to employee severance and related benefits that reflected the reductions of 192 full-time positions and 217 seasonal positions; $30 million related to the rationalization of manufacturing operations and the write-off of equipment to be abandoned; and $20 million for leaf contract terminations and other costs. The charge was substantially utilized as of December 31, 1999. Cash outlays were expected to be approximately $42 million. During 1999, $2 million was reversed from the charge reflecting lower-than-expected expenses. See note 7 to the consolidated financial statements for additional details. Headquarters close-down and related charges recorded by RJR in the second quarter of 1999 of $143 million, $93 million after-tax, reflected the elimination of its New York corporate headquarters. The elimination of headquarters resulted from the reorganization transactions described in note 2 to the consolidated financial statements. Total cash expenditures related to this charge were $122 million. Approximately $127 million of the charge was for severance and related benefits for approximately 100 employees. The remainder of the charge was primarily related to contractual lease termination payments and the write-off of leasehold improvements and abandoned equipment. Interest and debt expense of $268 million in 1999 decreased $158 million from the prior-year period. The 1999 decrease resulted from the repurchase of approximately $4 billion of debt, partly offset by the issuance of $1.25 billion of debt. See note 2 to the consolidated financial statements. Interest income increased to $114 million in 1999 from $7 million in 1998, mainly due to the temporary investment of net proceeds from the sale of the international tobacco business in the second quarter of 1999. See note 2 to the consolidated financial statements. Other expense, net increased $23 million in 1999 from the prior year, primarily due to various expenses related to the reorganization. Provision for (benefit from) income taxes included a 1999 tax provision of $315 million, or an effective rate of 61.8%, compared with a $160 million tax benefit, or an effective rate of 23.6%, in 1998. The variances of the effective rates from the statutory rate of 35% were primarily due to the adverse impact of nondeductible goodwill amortization on income (loss) before income taxes. This impact increased the 1999 provision and decreased the 1998 benefit. Discontinued operations increased $2.4 billion, after-tax, compared with 1998. This increase was primarily due to the gain on the sale of the international tobacco business in May of 1999, partially offset by the loss on the recognition of Nabisco's cumulative translation adjustment account. See note 2 to the consolidated financial statements. Extraordinary items included a loss of $384 million, $250 million after-tax, during 1999 in connection with the repurchase of approximately $4 billion of debt securities. See note 2 to the consolidated financial statements. LIQUIDITY AND FINANCIAL CONDITION LIQUIDITY At present, the principal sources of liquidity for RJR Tobacco's business and operating needs are internally generated funds from its operations and available borrowings through RJR. RJR Tobacco believes 26 27 that cash flows from operating activities will be sufficient for the foreseeable future to enable it to meet its obligations under the MSA with attorneys general for most U.S. states, territories and possessions and other existing settlement agreements, to fund its budgeted capital expenditures and to make payments to RJR that will enable RJR to make its required debt-service payments and to pay dividends to RJR stockholders. Additionally, the acquisition of NGH in December 2000 provided $1.5 billion cash proceeds to RJR Acquisition Corp., a portion of which is funding RJR's current share repurchase program. RJR and RJR Tobacco cannot predict their cash requirements related to any future settlements or judgments, including cash required to bond any appeals, if necessary, and make no assurance that they will be able to meet all of those requirements. CASH FLOWS Net cash flows from operating activities of $590 million in 2000 decreased $339 million from 1999. This decrease primarily reflects an increase in cash payments for tobacco settlements and the posting of a $100 million bond related to the appeal of the Engle verdict, partially offset by increased revenues from higher pricing. Net cash flows from operating activities were $929 million in 1999 in comparison to $367 million in 1998, which primarily resulted from 1999 price increases, partly offset by lower volume. In addition, the fourth quarter of 1998 was negatively impacted by the payment of tobacco settlements. Net cash flows from investing activities of $1.6 billion in 2000 decreased $6 billion from 1999. Net cash flows from 2000 investing activities included the net proceeds from the NGH acquisition and $110 million in proceeds from the maturities of short-term investments. Net cash flows from investing activities for 1999 were $7.6 billion, compared to a use of $43 million in 1998, primarily due to the proceeds received from the sale of the international tobacco business. Net cash flows used in financing activities of $881 million in 2000, compared with $5.4 billion in 1999, included $387 million repayment of long-term debt, $322 million of dividends paid and $231 million repurchase of common stock. Net cash flows used in financing activities were $5.4 billion in 1999, compared with $611 million in 1998, primarily due to payments of approximately $4.5 billion for the early extinguishment of debt and related costs, transfers and payments of approximately $2 billion made to NGH and $85 million of dividends paid in the fourth quarter, partially offset by proceeds from the issuance of $1.25 billion of debt. Net cash flows related to discontinued operations primarily resulted from $2.1 billion of income taxes paid on the gain on the sale of the international tobacco business in 1999, and an $84 million refund of related taxes during 2000. Also, net cash flows related to discontinued operations provided $116 million in 1999 and $202 million in 1998. In connection with the spin-off from NGH, RJR has assumed, subject to specified exceptions, all U.S. pension liabilities and related assets for current and former tobacco employees. The additional cash required, compared with 1998, to fund these liabilities was $58 million in each of 1999 and 2000, and is expected to be $58 million in each of the years 2001, 2002 and 2003. On December 12, 2000, RJR's board of directors authorized the repurchase of shares of its common stock from time to time in the open market, with a maximum aggregate cost of $350 million, to enhance stockholder value. The program is funded by dividends from RJR Acquisition Corp. utilizing the cash proceeds of the NGH acquisition. The timing of repurchases and the number of shares ultimately repurchased will depend upon market conditions. Under this authorization, RJR repurchased 1,329,900 shares with an aggregate cost of $61 million during 2000. Authorizations in November 1999 of $125 million and in February 2000 of $100 million were completed during 2000 through repurchases of 7,185,839 shares with a total cost of $170 million. From November 1999 through December 31, 2000, cumulative repurchases of all programs were 11,243,139 shares with an aggregate cost of $286 million, and through January 31, 2001 cumulative repurchases of all programs were 11,323,139 shares with an aggregate cost of $290 million. Shares held by RJR through repurchase, in addition to shares 27 28 cancelled pursuant to employee benefit plans, are included in treasury stock in RJR's consolidated balance sheet. See note 17 to the consolidated financial statements for information about RJR's stock plans. DEBT On May 18, 1999, RJR completed tender offers to purchase substantially all of its outstanding debt securities which resulted in RJR repurchasing approximately $4 billion of its debt with a portion of the proceeds from the sale of the international tobacco business. As a result, RJR recognized an extraordinary loss from the early extinguishment of debt of $384 million, $250 million after-tax. RJR entered into a $1.235 billion revolving credit facility with a syndicate of banks effective May 18, 1999, as amended and restated on November 17, 2000. Under the amendment and restatement, the committed amount will remain at $1.235 billion until November 2001, at which time the committed amount will be reduced to $622 million through May 2003. RJR can use the full facility to obtain loans or letters of credit, at its option. RJR Tobacco and, as of November 17, 2000, RJR Acquisition Corp. have guaranteed RJR's obligations under this revolving credit facility. If RJR's senior unsecured debt is rated below BBB- by S&P or Baa3 by Moody's, RJR's other material subsidiaries will have to guarantee the facility. If RJR falls below these thresholds for both of these rating agencies, or two levels below these thresholds for either of these rating agencies, RJR and the guarantors will have to pledge their assets to secure their obligations. RJR is not required to maintain compensating balances; however, commitment fees of 1% of the committed amount are payable quarterly. The credit facility also limits RJR's ability to pay dividends, repurchase stock, incur indebtedness, engage in transactions with affiliates, create liens, acquire, sell or dispose of specific assets and engage in specified mergers or consolidations. Borrowings under the revolving credit facility bear interest at rates that vary with the prime rate or LIBOR. At December 31, 2000, RJR had $193 million in letters of credit and no borrowings outstanding, with the remaining $1,042 million of the facility available for borrowing. RJR was in compliance with the covenants of the facility at December 31, 2000. RJR had additional letters of credit outstanding outside the credit facility of approximately $4 million at December 31, 2000. RJR also has a $30 million uncommitted, unsecured line of credit with one bank. No borrowings were outstanding on this line of credit at December 31, 2000. RJR filed a registration statement, effective October 8, 1999, in order to issue publicly registered notes of $550 million in principal amount at 7 3/8% due 2003, $500 million in principal amount at 7 3/4% due 2006 and $200 million in principal amount at 7 7/8% due 2009 in exchange for an aggregate $1.25 billion of private placement debt securities. The net proceeds received from the private placement were used for general corporate purposes. These notes are senior unsecured obligations and, unlike RJR's other non-bank debt, are guaranteed by RJR Tobacco and RJR Acquisition Corp. In addition, any other subsidiaries of RJR that in the future guarantee the $1.235 billion revolving credit facility, as amended and restated, will also be required to guarantee these notes. Generally, the terms of the notes restrict the issuance of guarantees by subsidiaries, the pledge of collateral, sale/leaseback transactions and the transfer of all or substantially all of the assets of RJR and its subsidiaries. RJR was in compliance with all covenants and restrictions imposed by its indebtedness at December 31, 2000. On December 10, 1999, RJR filed a shelf registration statement, which became effective December 22, 1999, for $1.876 billion of debt securities. As of the date of this filing, no debt securities have been issued under this registration statement. On December 11, 2000, related to the acquisition of NGH, RJR acquired $98 million of 9 1/2% junior subordinated debentures, due in 2047, redeemable by RJR on September 30, 2003. Interest is paid quarterly in arrears. These debentures are effectively defeased by an irrevocable trust, which is included in other assets and deferred charges in the accompanying consolidated balance sheet as of December 31, 2000. The trust holds certain U.S. Government Obligations maturing at such times and in such amounts sufficient to pay interest and redemption principal. As of December 31, 2000, RJR also had $404 million of public notes, at fixed interest rates of 6.8% through 10%, due in 2001 through 2013. See note 13 to the consolidated financial statements. 28 29 DIVIDENDS Since the third quarter of 1999, the board of directors of RJR has declared a quarterly cash dividend of $.775 per common share, or $3.10 on an annualized basis. On January 31, 2001, RJR's board of directors declared a quarterly cash dividend of $.775 per common share payable on April 2, 2001 to stockholders of record as of March 9, 2001. CAPITAL EXPENDITURES Capital expenditures were $60 million in 2000, $55 million in 1999 and $47 million in 1998. Management expects that its capital expenditure program will continue at a level sufficient to support the strategic and operating needs of RJR Tobacco. RJR Tobacco plans to spend $70 million to $80 million for capital expenditures during 2001 funded primarily by cash flows from operations. There were no material long-term commitments for capital expenditures as of December 31, 2000. LITIGATION AND SETTLEMENTS Various legal actions, proceedings and claims, including legal actions claiming that lung cancer and other diseases, as well as addiction, have resulted from the use of, or exposure to, RJR Tobacco's products, are pending or may be instituted against RJR or its affiliates, including RJR Tobacco, or indemnitees. For further discussion of litigation and legal proceedings pending against RJR or its affiliates, including RJR Tobacco, or indemnitees, see "Business -- Litigation Affecting the Cigarette Industry" and "Business -- Environmental Matters" in Item 1; "-- Governmental Activity"; note 14 to the consolidated financial statements; and Exhibit 99.1 to this report. RJR believes that, notwithstanding the quality of defenses available to it and its affiliates in litigation matters, it is possible that its results of operations or cash flows in particular quarterly or annual periods could be materially affected by the ultimate outcome of various pending or future litigation matters, including litigation costs. RJR is unable to predict the outcome of the litigation or to derive a meaningful estimate of the amount or range of any possible loss in any particular quarterly or annual period or in the aggregate. In November 1998, RJR Tobacco and the other major U.S. cigarette manufacturers entered into the MSA with attorneys general representing most U.S. states, territories and possessions. As described under "Business -- Litigation Affecting the Cigarette Industry" in Item 1, the MSA imposes a stream of future payment obligations on RJR Tobacco and the other major U.S. cigarette manufacturers and places significant restrictions on their ability to market and sell cigarettes in the future. The cash payments made by RJR Tobacco under the MSA and other existing settlement agreements were $2.2 billion, $1.6 billion and $.8 billion in 2000, 1999 and 1998, respectively. RJR Tobacco estimates those payments in 2001 and future years to exceed $2.0 billion per year. However, these payments will be subject to, among other things, the volume of cigarettes sold by RJR Tobacco, RJR Tobacco's market share and inflation adjustments. RJR Tobacco cannot predict the impact on its business, competitive position and results of operations of the MSA and the other existing settlement agreements, the business activity restrictions to which it is subject under these agreements or the price increases that it may be required to make as a result of these agreements. GOVERNMENTAL ACTIVITY The advertising, sale, taxation and use of cigarettes have been subject to substantial regulation by government and health officials for many years. Various state governments have adopted or are considering, among other things, legislation and regulations restricting displays and advertising of tobacco products, establishing fire safety standards for cigarettes, raising the minimum age to possess or purchase tobacco products, requiring the disclosure of ingredients used in the manufacture of tobacco products, imposing restrictions on public smoking and restricting the sale of tobacco products directly to consumers or other unlicensed recipients or over the Internet. In addition, in 2001 the U.S. Congress may consider legislation regarding further increases in the federal excise tax, regulation of cigarette manufacturing and sale by the U.S. Food and Drug Administration and implementation of a national standard for "fire-safe" cigarettes. Together 29 30 with manufacturers' price increases in recent years and substantial increases in state and federal excise taxes on cigarettes, these developments have had and will likely continue to have an adverse effect on cigarette sales. Cigarettes are subject to substantial excise taxes in the United States. The federal excise tax per pack of 20 cigarettes was $.34 as of January 1, 2000. The federal cigarette excise tax will increase by $.05 per pack in 2002. In addition, all states and the District of Columbia impose excise taxes at levels ranging from $.025 per pack in Virginia to $1.11 per pack in New York. In 1964, the Report of the Advisory Committee to the Surgeon General of the U.S. Public Health Service concluded that cigarette smoking was a health hazard of sufficient importance to warrant appropriate remedial action. Since 1966, federal law has required a warning statement on cigarette packaging. Since 1971, television and radio advertising of cigarettes has been prohibited in the United States. Cigarette advertising in other media in the United States is required to include information with respect to the "tar" and nicotine yield of cigarettes, as well as a warning statement. During the past three decades, various laws affecting the cigarette industry have been enacted. In 1984, Congress enacted the Comprehensive Smoking Education Act. Among other things, the Smoking Education Act: - establishes an interagency committee on smoking and health that is charged with carrying out a program to inform the public of any dangers to human health presented by cigarette smoking; - requires a series of four health warnings to be printed on cigarette packages and advertising on a rotating basis; - increases type size and area of the warning required in cigarette advertisements; and - requires that cigarette manufacturers provide annually, on a confidential basis, a list of ingredients added to tobacco in the manufacture of cigarettes to the Secretary of Health and Human Services. The warnings currently required on cigarette packages and advertisements are: - "SURGEON GENERAL'S WARNING: Smoking Causes Lung Cancer, Heart Disease, Emphysema, And May Complicate Pregnancy"; - "SURGEON GENERAL'S WARNING: Quitting Smoking Now Greatly Reduces Serious Risks To Your Health"; - "SURGEON GENERAL'S WARNING: Smoking By Pregnant Women May Result in Fetal Injury, Premature Birth, and Low Birth Weight"; and - "SURGEON GENERAL'S WARNING: Cigarette Smoke Contains Carbon Monoxide". Since the initial report in 1964, the Secretary of Health, Education and Welfare (now the Secretary of Health and Human Services) and the Surgeon General have issued a number of other reports which purport to find the nicotine in cigarettes addictive and to link cigarette smoking and exposure to cigarette smoke with certain health hazards, including various types of cancer, coronary heart disease and chronic obstructive lung disease. These reports have recommended various governmental measures to reduce the incidence of smoking. In 1992, the federal Alcohol, Drug Abuse and Mental Health Act was signed into law. This act requires states to adopt a minimum age of 18 for purchases of tobacco products and to establish a system to monitor, report and reduce the illegal sale of tobacco products to minors in order to continue receiving federal funding for mental health and drug abuse programs. In January 1996, the U.S. Department of Health and Human Services announced regulations implementing this legislation. In December 1992, the U.S. Environmental Protection Agency issued a report that classified environmental tobacco smoke as a Group A (known human) carcinogen. RJR Tobacco and others filed suit to challenge the validity of the EPA report. On July 17, 1998, a U.S. District Court judge held that the EPA's classification of environmental tobacco smoke was invalid and vacated those portions of the report dealing with lung cancer. The EPA appealed, and oral argument was held before the Court of Appeals for the Fourth Circuit on June 7, 1999. RJR Tobacco is awaiting the Court's decision. 30 31 In March 1994, the U.S. Occupational Safety and Health Administration announced proposed regulations that would restrict smoking in the workplace to designated smoking rooms that are separately exhausted to the outside. RJR Tobacco submitted comments on the proposed regulations during the comment period that closed in February 1996, but no regulation has been adopted to date. Although RJR Tobacco cannot predict the form or timing of any regulations that may be finally adopted by OSHA, if the proposed regulations are adopted, RJR Tobacco expects that many employers who have not already done so would prohibit smoking in the workplace rather than make expenditures necessary to establish designated smoking areas to accommodate smokers. Because many employers currently do not permit smoking in the workplace, RJR Tobacco cannot predict the effect of any regulations that may be adopted, but incremental restrictions on smokers could have an adverse effect on cigarette sales of all manufacturers. Legislation imposing various restrictions on public smoking also has been enacted in 48 states and many local jurisdictions, and many employers have initiated programs restricting or eliminating smoking in the workplace. A number of states have enacted legislation designating a portion of increased cigarette excise taxes to fund either anti-smoking programs, health care programs or cancer research. In addition, educational and research programs addressing health care issues related to smoking are being funded from industry payments made or to be made under settlements with state attorneys general. Federal law prohibits smoking in scheduled passenger aircraft, and the U.S. Interstate Commerce Commission has banned smoking on buses transporting passengers inter-state. Certain common carriers have imposed additional restrictions on passenger smoking. Several states require disclosure of ingredients used in the manufacture of tobacco products. In July 1996, Massachusetts enacted legislation requiring manufacturers of tobacco products sold in Massachusetts to report yearly, beginning December 15, 1997, the ingredients of each brand sold. The statute also requires the reporting of nicotine yield ratings in accordance with procedures established by the state. The legislation contemplates public disclosure of all ingredients in descending quantitative order, a trade-secret disclosure that RJR Tobacco believes could damage the competitive position of its brands. RJR Tobacco, together with other cigarette manufacturers, filed suit in the U.S. District Court for the District of Massachusetts seeking to have the statute declared invalid. The court granted a preliminary injunction that enjoined Massachusetts officials from enforcing the law relating to ingredient reporting. That decision was upheld by the Court of Appeals for the First Circuit. In September 2000, the district court permanently enjoined enforcement of provisions relating to ingredient reporting. Massachusetts has appealed to the Court of Appeals for the First Circuit, and briefing is now underway. In August 1998, the Massachusetts Department of Public Health issued proposed regulations for public comment that would require annual reporting, beginning July 1, 2000, on a brand-by-brand basis of 43 smoke constituents in both mainstream smoke and sidestream smoke. RJR Tobacco, together with other cigarette manufacturers, filed comments with the MDPH on October 9, 1998. RJR Tobacco and the other manufacturers believe that the MDPH lacks legal authority to promulgate these regulations. Nevertheless, RJR Tobacco and the other manufacturers have conducted a cooperative benchmarking study to address certain MDPH concerns. The benchmarking study obtained smoke constituent information on a representative number of cigarette brand styles. The final report, including all data, was presented to the MDPH. The MDPH has drafted additional proposed regulations requiring further extensive testing of cigarette brands. The MDPH has engaged in discussions about these additional proposed regulations with representatives of the cigarette manufacturers and others, but has not formally issued them for public comment. Although the MDPH has stated its intention to promulgate additional reporting requirements, RJR Tobacco cannot predict the form they will take or the effect they will have on RJR Tobacco's business or operations. On May 21, 1999, RJR Tobacco, Lorillard Tobacco Company, Brown & Williamson Tobacco Corporation and Philip Morris, Inc. filed lawsuits in the U.S. District Court for the District of Massachusetts to enjoin implementation of certain Massachusetts Attorney General regulations concerning the advertisement and display of tobacco products. The regulations go beyond those required by the MSA. RJR Tobacco is challenging regulations that prohibit point-of-sale advertising less than five feet above ground in any retail outlet that is not limited to adults only. RJR Tobacco is also challenging the regulation that bans all cigarette advertising (other than a black-and-white sign reading "Tobacco Products Sold Here") visible within 1,000 31 32 feet of any public playground, public park or school. This provision would effectively ban outdoor advertising in all but the most rural areas of the state. The district court ruled against the industry on January 25, 2000, and the U.S. Court of Appeals for the First Circuit affirmed. The U.S. Supreme Court granted the industry's petition for writ of certiorari on January 8, 2001, and in April 2001 will hear arguments on pre-emption and First Amendment challenges to the Massachusetts regulations. In June 2000, the New York state legislature passed legislation charging the state's Office of Fire Prevention and Control with developing standards for "fire-safe" or self-extinguishing cigarettes. The OFPC has until January 1, 2003 to issue final regulations. Six months from the issuance of the standards, but no later than July 1, 2003, all cigarettes offered for sale in New York state will be required to be manufactured to those standards. RJR Tobacco is offering to share its ignition propensity research with the state. Similar legislation is being considered by other state legislatures. A price differential exists between cigarettes manufactured for sale abroad and cigarettes manufactured for U.S. sale; consequently, a domestic "gray market" has developed in cigarettes manufactured for sale abroad. These cigarettes compete with the cigarettes RJR Tobacco manufactures for domestic sale. Forty-six states have enacted legislation prohibiting the sale and distribution of gray market cigarettes. Similarly, federal legislation prohibiting the sale and distribution of gray market cigarettes became effective on January 1, 2000. In addition, RJR Tobacco has taken legal action against certain distributors and retailers who engage in such practices. Tobacco leaf is an agricultural product subject to U.S. Government production controls and price supports that can affect market prices substantially. The tobacco leaf price support program is subject to congressional review and may be changed at any time. In December 1994, Congress enacted the Uruguay Round Agreements Act to replace a domestic content requirement with a tariff rate quota system that bases tariffs on import volumes. The tariff rate quotas have been established by the United States with overseas tobacco producers and became effective on September 13, 1995. Because of the importance of tobacco leaf as a raw material for RJR Tobacco's products, substantial changes in the legislative or regulatory environment applicable to tobacco leaf could have a material effect on RJR Tobacco's results of operations and cash flows. It is not possible to determine what additional federal, state or local legislation or regulations relating to smoking or cigarettes will be enacted or to predict the effect of new legislation or regulations on RJR Tobacco or the cigarette industry in general, but any new legislation or regulations could have an adverse effect on RJR Tobacco or the cigarette industry in general. For further discussion of litigation and legal proceedings pending against RJR, its affiliates, including RJR Tobacco, or indemnitees, see "Business -- Litigation Affecting the Cigarette Industry" and "Business -- Environmental Matters" in Item 1; note 14 to the consolidated financial statements; and Exhibit 99.1 to this report. ENVIRONMENTAL MATTERS RJR 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. RJR and its subsidiaries have been engaged in a continuing program to assure compliance with these environmental laws and regulations. Although it is difficult to identify precisely the portion of capital expenditures or other costs attributable to compliance with environmental laws and regulations, RJR or its subsidiaries do not expect such expenditures or other costs to have a material adverse effect on its business or financial condition. For further discussion of environmental matters involving RJR and its affiliates, including RJR Tobacco, or indemnitees, see "Business -- Environmental Matters" in Item 1 and note 14 to the consolidated financial statements. OTHER CONTINGENCIES Until the acquisition by merger by Philip Morris Companies, Inc. of Nabisco from NGH on December 11, 2000, NGH and Nabisco were members of the consolidated group of NGH for U.S. federal income 32 33 tax purposes. Each member of a consolidated group is jointly and severally liable for the U.S. federal income tax liability of other members of the group as well as for pension and funding liabilities of the other group members. NGH, now known as RJR Acquisition Corp., continues to be jointly and severally liable for these Nabisco liabilities for the period prior to December 11, 2000. In connection with Philip Morris' acquisition by merger of Nabisco and RJR's subsequent acquisition by merger of NGH, Philip Morris, Nabisco and NGH entered into a voting and indemnity agreement that generally seeks to allocate tax liabilities ratably based upon NGH's taxable income and that of Nabisco, had the parties been separate taxpayers. If Philip Morris and Nabisco are unable to satisfy their obligations under this agreement, NGH, now known as RJR Acquisition Corp., would be responsible for satisfying them. In connection with the sale of the international tobacco business to Japan Tobacco Inc. on May 12, 1999, RJR and RJR Tobacco agreed to indemnify Japan Tobacco against (1) 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, (2) any liabilities, costs and expenses that Japan Tobacco or any of its affiliates, including the acquired entities, may incur after the sale in respect of any of RJR's or RJR Tobacco's employee benefit and welfare plans and (3) any liabilities, costs and expenses incurred by Japan Tobacco or any of its affiliates arising out of certain activities of Northern Brands. See "Business -- Litigation Affecting the Cigarette Industry" in Item 1 and note 14 to the consolidated financial statements for a description of the Northern Brands litigation. Although it is impossible to predict the outcome of the Northern Brands litigation or the amount of liabilities, costs and expenses, if any, RJR and RJR Tobacco may be required to indemnify Japan Tobacco in connection with the matters described in the preceding outcome, a significant adverse outcome regarding any of these items could have an adverse effect on either or both of RJR and RJR Tobacco. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS During 2000, the Financial Accounting Standards Board's Emerging Issues Task Force issued EITF No. 00-10, "Accounting for Shipping and Handling Fees and Costs," which addresses the income statement classification of shipping and handling costs billed to customers. EITF No. 00-10 was effective in the fourth quarter of 2000 and did not have an impact on RJR's financial position or results of operations. Also during 2000, the EITF reached consensus on Issue No. 00-14, "Accounting for Certain Sales Incentives," which addresses the recognition, measurement and income statement classification for certain sales incentives including rebates, coupons and free products or services. In November 2000, the EITF revised the effective date of EITF No. 00-14 to be the second quarter of 2001. Upon adoption, certain program costs currently included in selling, general and administrative expenses will be reclassified as reductions of net sales and prior period amounts will be restated for comparative purposes. RJR Tobacco's management has determined that on an annual basis, the impact of adoption will reduce net sales approximately 1% to 2% and will have no impact on net income. Additionally, adoption of EITF No. 00-14 will result in a portion of the recognition of these incentives in different interim periods than would result from current methods of recognition. Accordingly, had RJR Tobacco adopted EITF No. 00-14 on January 1, 2000, net income for the first, second and fourth quarters of 2000 would have increased/(decreased) by $(1) million, $10 million and $(9) million, respectively, and income per share would have increased/(decreased) by $(.01), $.10 and $(.09), respectively. During the second quarter of 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." In June 1999, the FASB issued SFAS No. 137, which amended SFAS No. 133 to delay its effective date by one year. SFAS No. 133 is effective for RJR on January 1, 2001. SFAS No. 133 requires that all derivative instruments be recorded on the consolidated balance sheet at their fair value. Changes in the fair value of derivatives will be recorded each period in earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. In June 2000, the FASB issued SFAS No. 138, which amended SFAS No. 133. RJR's management has reviewed the terms of all material contracts and 33 34 financial instruments and has determined that the adoption of SFAS No. 133, as amended, will have no material impact on its financial position or results of operations. --------------------- Statements included in "Management's Discussion and Analysis of Financial Condition and Results of Operations" which are not historical in nature are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements regarding RJR's future performance and financial results include certain risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. These risks include the substantial and increasing regulation and taxation of the cigarette industry; various legal actions, proceedings and claims arising out of the tobacco business and claimed health effects of cigarettes that are pending or may be instituted against RJR or its subsidiaries; the substantial payment obligations and limitations on the advertising and marketing of cigarettes, under various litigation settlement agreements; the continuing decline in volume in the domestic cigarette industry; competition from other cigarette manufacturers; the success of new product innovations and acquisitions; the effect of market conditions on the performance of pension assets and the return on corporate cash; and the ratings of RJR securities. Due to these uncertainties and risks, readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk represents the risk of loss that may impact RJR's consolidated financial position, results of operations or cash flows due to adverse changes in financial market prices and rates. RJR is exposed to interest rate risk directly related to its normal investing and funding activities. See note 15 to the consolidated financial statements for more information. RJR has established various policies and procedures to manage its exposure to market risks and uses major institutions with high credit ratings to minimize its investment and credit risk. RJR does not use derivative financial instruments for trading or speculative purposes. RJR uses the value-at-risk model to statistically measure the maximum fair value, cash flows or earnings loss over one year from adverse changes in interest rates. The computation assumes a 95% confidence level under normal market conditions. RJR believes that near term changes, if any, in interest rates will not have a material impact on its future earnings, fair values or cash flows, based on the historical movements in interest rates and the fair value of market-rate sensitive instruments at December 31, 2000. 34 35 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF KPMG LLP, INDEPENDENT AUDITORS The Board of Directors R.J. Reynolds Tobacco Holdings, Inc.: We have audited the accompanying consolidated balance sheet of R.J. Reynolds Tobacco Holdings, Inc. and subsidiaries as of December 31, 2000, and the related consolidated statements of income, stockholders' equity and comprehensive income, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of R.J. Reynolds Tobacco Holdings, Inc. and subsidiaries as of December 31, 2000, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP Greensboro, North Carolina January 24, 2001, except as to note 14, which is as of February 7, 2001 35 36 REPORT OF DELOITTE & TOUCHE LLP, INDEPENDENT AUDITORS R.J. Reynolds Tobacco Holdings, Inc.: We have audited the accompanying consolidated balance sheet of R.J. Reynolds Tobacco Holdings, Inc. and subsidiaries ("RJR"), as of December 31, 1999, and the related consolidated statements of income, of cash flows and of stockholders' equity and comprehensive income for each of the two years in the period ended December 31, 1999. These financial statements are the responsibility of RJR's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the consolidated financial position of RJR at December 31, 1999, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States of America. /s/ Deloitte & Touche LLP Winston-Salem, North Carolina January 27, 2000 (February 23, 2000 as to note 14) 36 37 REPORT OF MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS The financial statements presented in this report are the responsibility of management, and have been prepared in accordance with generally accepted accounting principles using, where appropriate, management's best estimates and judgment. Management maintains a system of internal controls to provide reasonable assurance that RJR's assets are safeguarded and transactions are executed as authorized and properly recorded. The system includes established policies and procedures, a program of internal audits, management reviews and careful selection and training of qualified personnel. The audit committee of RJR's board of directors is composed solely of outside directors. It meets periodically with management, the internal auditors and the independent auditors, to discuss and address internal accounting control, auditing and financial reporting matters. Both independent and internal auditors have unrestricted access to the audit committee. /s/ Andrew J. Schindler - ---------------------------------------------------- Chairman of the Board, President and Chief Executive Officer /s/ Kenneth J. Lapiejko - ---------------------------------------------------- Executive Vice President and Chief Financial Officer 37 38 CONSOLIDATED STATEMENTS OF INCOME (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 2000 1999 1998 -------- -------- -------- NET SALES*.................................................. $8,167 $7,567 $5,716 Costs and expenses: Cost of products sold*.................................... 3,325 3,233 1,289 Selling, general and administrative expenses.............. 3,562 3,082 2,844 Tobacco settlement and related expenses................... (3) 23 1,442 Amortization of trademarks and goodwill................... 366 366 366 Impairment charge......................................... 89 -- -- Headquarters close-down and related charges............... -- 143 -- Restructuring expense..................................... -- (2) -- ------ ------ ------ OPERATING INCOME (LOSS)................................ 828 722 (225) Interest and debt expense................................... 168 268 426 Interest income............................................. (119) (114) (7) Other expense, net.......................................... 31 58 35 ------ ------ ------ INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES................................................ 748 510 (679) Provision for (benefit from) income taxes................... 396 315 (160) ------ ------ ------ INCOME (LOSS) FROM CONTINUING OPERATIONS............... 352 195 (519) Discontinued operations: Income from operations of discontinued businesses, net of income taxes........................................... -- 76 3 Gain on discontinued businesses, net of income taxes...... -- 2,322 -- ------ ------ ------ INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS............... 352 2,593 (516) Extraordinary item -- gain on acquisition, net of income taxes..................................................... 1,475 -- -- Extraordinary item -- loss on early extinguishment of debt, net of income taxes....................................... -- (250) -- ------ ------ ------ NET INCOME (LOSS)...................................... $1,827 $2,343 $ (516) ====== ====== ====== BASIC INCOME (LOSS) PER SHARE: Income (loss) from continuing operations.................. $ 3.48 $ 1.80 $(4.77) Income from discontinued operations....................... -- 22.10 .03 Extraordinary items -- gain (loss)........................ 14.56 (2.30) -- ------ ------ ------ Net income (loss)...................................... $18.04 $21.60 $(4.74) ====== ====== ====== DILUTED INCOME (LOSS) PER SHARE: Income (loss) from continuing operations.................. $ 3.46 $ 1.80 $(4.77) Income from discontinued operations....................... -- 22.08 .03 Extraordinary items -- gain (loss)........................ 14.48 (2.30) -- ------ ------ ------ Net income (loss)...................................... $17.94 $21.58 $(4.74) ====== ====== ====== DIVIDENDS DECLARED PER SHARE................................ $ 3.10 $ 1.55 $ -- ====== ====== ======
- --------------- * Excludes excise taxes of $1,631 million, $1,173 million and $1,292 million for the years ended 2000, 1999 and 1998, respectively. See Notes to Consolidated Financial Statements 38 39 CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN MILLIONS)
FOR THE YEARS ENDED DECEMBER 31, --------------------------------- 2000 1999 1998 --------- --------- ------- CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES: Net income (loss)......................................... $ 1,827 $ 2,343 $(516) Less income from discontinued operations.................. -- 2,398 3 ------- ------- ----- Subtotal.................................................. 1,827 (55) (519) Adjustments to reconcile to net cash flows from (used in) continuing operating activities: Depreciation and amortization.......................... 485 482 498 Impairment charge...................................... 89 -- -- Deferred income tax benefit............................ (31) (307) (374) Extraordinary gain on acquisition...................... (1,475) -- -- Extraordinary loss on early extinguishment of debt..... -- 384 -- Other changes, net of acquisition effects, that provided (used) cash: Accounts and notes receivable........................ (12) (32) (5) Inventories.......................................... (23) (41) 106 Accounts payable and accrued liabilities including income taxes...................................... (194) (50) (96) Litigation bonds....................................... (118) -- -- Tobacco settlement and related expenses................ 82 564 805 Restructuring and related expenses, net of cash........ -- (8) (41) Headquarters close-down and related charges, net of cash................................................. -- 21 -- Other, net............................................. (40) (29) (7) ------- ------- ----- Net cash flows from operating activities............... 590 929 367 ------- ------- ----- CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES: Short-term investments.................................... 110 (110) -- Capital expenditures...................................... (60) (55) (47) Net proceeds from acquisition............................. 1,519 -- -- Net proceeds from the sale of the international tobacco business............................................... -- 7,760 -- Other, net................................................ 4 (19) 4 ------- ------- ----- Net cash flows from (used in) investing activities..... 1,573 7,576 (43) ------- ------- ----- CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES: Repayments of long-term debt.............................. (387) (4,450) (68) Dividends paid on common stock............................ (322) (85) -- Repurchase of common stock................................ (231) (55) -- Proceeds from exercise of stock options................... 59 -- -- Proceeds from issuance of long-term debt.................. -- 1,244 -- Transfers and payments to former parent................... -- (1,968) (607) Increase (decrease) in short-term borrowing............... -- (62) 62 Other, net................................................ -- 17 2 ------- ------- ----- Net cash flows used in financing activities............ (881) (5,359) (611) ------- ------- ----- Net cash flows related to discontinued operations (including income taxes paid on gain on sale of the international tobacco business of $2,085 in 1999)....................... 84 (1,969) 202 ------- ------- ----- Net change in cash and cash equivalents..................... 1,366 1,177 (85) Cash and cash equivalents at beginning of year.............. 1,177 -- 85 ------- ------- ----- Cash and cash equivalents at end of year.................... $ 2,543 $ 1,177 $ -- ======= ======= ===== Income taxes paid, net of refunds........................... $ 309 $ 2,605 $ 250 Interest paid............................................... $ 153 $ 341 $ 414 Tobacco settlement and related expense payments............. $ 2,247 $ 1,636 $ 786
See Notes to Consolidated Financial Statements 39 40 CONSOLIDATED BALANCE SHEETS (DOLLARS IN MILLIONS)
DECEMBER 31, ----------------- 2000 1999 ------- ------- ASSETS Current assets: Cash and cash equivalents................................. $ 2,543 $ 1,177 Short-term investments.................................... -- 110 Accounts and notes receivable, net of allowance (2000 -- $11; 1999 -- $11)............................. 100 84 Inventories............................................... 588 565 Deferred income taxes..................................... 459 437 Prepaid excise taxes and other............................ 181 95 ------- ------- Total current assets................................... 3,871 2,468 Property, plant and equipment, at cost: Land and land improvements................................ 94 93 Buildings and leasehold improvements...................... 666 662 Machinery and equipment................................... 1,531 1,548 Construction-in-process................................... 34 23 ------- ------- Total property, plant and equipment....................... 2,325 2,326 Less accumulated depreciation.......................... 1,277 1,246 ------- ------- Property, plant and equipment, net................... 1,048 1,080 Trademarks, net of accumulated amortization (2000 -- $1,348; 1999 -- $1,153)........................................... 2,875 3,070 Goodwill, net of accumulated amortization (2000 -- $3,099; 1999 -- $2,839)........................................... 7,303 7,563 Other assets and deferred charges........................... 457 196 ------- ------- $15,554 $14,377 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 80 $ 81 Tobacco settlement and related accruals................... 1,394 1,278 Accrued liabilities....................................... 1,229 1,322 Current maturities of long-term debt...................... 73 387 ------- ------- Total current liabilities.............................. 2,776 3,068 Long-term debt (less current maturities).................... 1,674 1,653 Deferred income taxes....................................... 1,856 1,630 Long-term retirement benefits............................... 543 676 Other noncurrent liabilities................................ 269 286 Commitments and contingencies Stockholders' equity: Common stock (shares issued: 2000 -- 112,563,918; 1999 -- 109,631,397)................................... 1 1 Paid-in capital........................................... 7,291 7,287 Retained earnings (accumulated deficit)................... 1,481 (131) Accumulated other comprehensive loss -- cumulative minimum pension liability adjustment........................... (8) (13) Unamortized restricted stock.............................. (41) (25) ------- ------- 8,724 7,119 Less treasury stock (shares: 2000 -- 11,299,092; 1999 -- 2,728,630), at cost............................ (288) (55) ------- ------- Total stockholders' equity........................ 8,436 7,064 ------- ------- $15,554 $14,377 ======= =======
See Notes to Consolidated Financial Statements 40 41 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (DOLLARS IN MILLIONS)
RETAINED ACCUMULATED EARNINGS OTHER UNAMORTIZED TOTAL COMMON PAID-IN (ACCUMULATED COMPREHENSIVE RESTRICTED TREASURY STOCKHOLDERS' STOCK CAPITAL DEFICIT) INCOME (LOSS) STOCK STOCK EQUITY ------ ------- ------------ ------------- ----------- -------- ------------- Balance at December 31, 1997........................ $ 1 $11,491 $ -- $(413) $ -- $ -- $11,079 Net loss...................... -- -- (516) -- -- -- (516) Foreign currency translation, net of tax benefit of $6 million..................... -- -- -- (50) -- -- (50) Minimum pension liability, net of tax expense of $1 million..................... -- -- -- 3 -- -- 3 Total comprehensive loss...... -- -- -- -- -- -- -- Dividends..................... -- (607) -- -- -- -- (607) Other......................... -- (23) -- -- -- -- (23) ---- ------- ------- ----- ---- ----- ------- BALANCE AT DECEMBER 31, 1998........................ 1 10,861 (516) (460) -- -- 9,886 Net income.................... -- -- 2,343 -- -- -- 2,343 Foreign currency translation, net of tax benefit of $11 million..................... -- -- -- (86) -- -- (86) Minimum pension liability, net of tax benefit of $4 million..................... -- -- -- (7) -- -- (7) Total comprehensive income.... -- -- -- -- -- -- -- Dividends..................... -- (169) -- -- -- -- (169) Items related to international tobacco business (see note 2).......................... -- -- -- 218 -- -- 218 Merger transaction*........... -- (3,435) (1,958) 322 -- -- (5,071) Stock options exercised....... -- 4 -- -- -- 4 Restricted stock awarded...... -- 23 -- -- (32) -- (9) Restricted stock amortization................ -- -- -- -- 7 -- 7 Common stock repurchased...... -- -- -- -- -- (55) (55) Other......................... -- 3 -- -- -- -- 3 ---- ------- ------- ----- ---- ----- ------- BALANCE AT DECEMBER 31, 1999........................ 1 7,287 (131) (13) (25) (55) 7,064 Net income.................... -- -- 1,827 -- -- -- 1,827 Minimum pension liability, net of tax expense of $3 million..................... -- -- -- 5 -- -- 5 Total comprehensive income.... -- -- -- -- -- -- -- Dividends..................... -- (102) (215) -- -- -- (317) Stock options exercised....... -- 62 -- -- -- -- 62 Tax benefit on stock options exercised................... -- 7 -- -- -- -- 7 Restricted stock awarded...... -- 37 -- -- (37) -- -- Restricted stock amortization................ -- -- -- -- 19 -- 19 Restricted stock forfeited.... -- -- -- -- 2 (2) -- Common stock repurchased...... -- -- -- -- -- (231) (231) ---- ------- ------- ----- ---- ----- ------- BALANCE AT DECEMBER 31, 2000........................ $ 1 $ 7,291 $ 1,481 $ (8) $(41) $(288) $ 8,436 ==== ======= ======= ===== ==== ===== ======= COMPREHENSIVE INCOME ------------- Balance at December 31, 1997........................ Net loss...................... $ (516) Foreign currency translation, net of tax benefit of $6 million..................... (50) Minimum pension liability, net of tax expense of $1 million..................... 3 ------ Total comprehensive loss...... $ (563) ====== Dividends..................... Other......................... BALANCE AT DECEMBER 31, 1998........................ Net income.................... $2,343 Foreign currency translation, net of tax benefit of $11 million..................... (86) Minimum pension liability, net of tax benefit of $4 million..................... (7) ------ Total comprehensive income.... $2,250 ====== Dividends..................... Items related to international tobacco business (see note 2).......................... Merger transaction*........... Stock options exercised....... Restricted stock awarded...... Restricted stock amortization................ Common stock repurchased...... Other......................... BALANCE AT DECEMBER 31, 1999........................ Net income.................... $1,827 Minimum pension liability, net of tax expense of $3 million..................... 5 ------ Total comprehensive income.... $1,832 ====== Dividends..................... Stock options exercised....... Tax benefit on stock options exercised................... Restricted stock awarded...... Restricted stock amortization................ Restricted stock forfeited.... Common stock repurchased...... BALANCE AT DECEMBER 31, 2000........................
- --------------- * Transfer of RJR's 80.5% interest in Nabisco, together with a portion of the proceeds from the sale of the international tobacco business, to NGH. See note 2. See Notes to Consolidated Financial Statements 41 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The consolidated financial statements include the accounts of R.J. Reynolds Tobacco Holdings, Inc., referred to as RJR, and its wholly owned subsidiaries, including R. J. Reynolds Tobacco Company, referred to as RJR Tobacco, and RJR Acquisition Corp. All material intercompany balances have been eliminated. The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Certain reclassifications were made to conform prior years' financial statements to the current presentation. For 1999 and 1998, the account balances and activities of the international tobacco business and Nabisco Holdings Corp., referred to as Nabisco, are segregated and reported as discontinued operations in the accompanying consolidated financial statements. In addition, financial data for all periods have been restated to give effect to the number of shares issued in connection with the distribution of RJR common stock to the stockholders of its former parent, Nabisco Group Holdings Corp., referred to as NGH. See note 2 for more discussion. Unless otherwise noted, all dollar amounts presented are in millions. Cash Equivalents Cash equivalents are held primarily in money market funds, commercial paper and time deposits, in major institutions with high credit ratings to minimize investment risk. Debt securities included in cash equivalents are classified as held-to-maturity. As short-term, highly liquid investments with original maturities of three months or less and readily convertible to known amounts of cash, cash equivalents have carrying values that approximate fair values. Inventories Inventories are stated at the lower of cost or market. The cost of tobacco inventories is determined principally under the LIFO method. The cost of work in process and finished goods includes materials, direct labor, and variable and full absorption of fixed manufacturing overhead. In accordance with recognized industry practice, stocks of tobacco, which must be cured for more than one year, are classified as current assets. Property, Plant and Equipment Property, plant and equipment are recorded at cost and are depreciated using the straight-line method over the estimated useful lives of the assets. Useful lives range from 20 to 50 years for buildings and improvements and from 3 to 30 years for machinery and equipment. The cost and related accumulated depreciation of assets sold or retired are removed from the accounts and the gain or loss on disposition is recognized in income. Intangibles Intangibles include primarily goodwill and trademarks, and are amortized using the straight-line method, principally over 40 years. Software Costs Certain computer software and software development costs incurred in connection with developing or obtaining computer software for internal use are capitalized and amortized over five years or less. During 2000 42 43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) and 1999, costs of $19 million and $7 million, respectively, were capitalized and at December 31, 2000, the unamortized balance was $24 million. Related amortization expense was $4 million, $1 million and $0 for the years ended December 31, 2000, 1999 and 1998, respectively. Long-Lived Assets Management continually reviews goodwill for impairment, and for other long-lived assets held for use, including trademarks and property, plant and equipment, whenever events or changes in circumstances indicate that the book value of the asset may not be recoverable. The carrying value of long-lived assets would be reduced if management's best estimate of future undiscounted cash flows over the remaining amortization period would be less than the carrying value. If an asset is determined to be impaired, the loss is measured using estimated fair value. Assets to be disposed of are reported at the lower of their carrying value or estimated net realizable value. Revenue Recognition Revenue from product sales is recognized upon shipment, when title and risk of loss passes to the customer. Advertising and Research and Development Advertising costs, which are expensed as incurred, were $137 million, $168 million and $245 million in the years ended December 31, 2000, 1999 and 1998, respectively. Research and development costs, which are expensed as incurred, were $58 million, $59 million and $64 million in the years ended December 31, 2000, 1999 and 1998, respectively. Other Expense, Net Other expense, net includes certain gains and losses on foreign currency transactions, financing-related fees and other items of a financial nature. Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Income taxes are calculated for RJR, RJR Tobacco and RJR Acquisition Corp. on a separate return basis. Pension and Postretirement Unrecognized prior service costs are being amortized over the estimated remaining service lives of employees. The unrecognized net gain or loss resulting from changes in the amount of either the projected benefit obligation or plan assets from experience that differs from that assumed, is amortized over five years. Recently Issued Accounting Pronouncements During 2000, the Financial Accounting Standards Board's Emerging Issues Task Force issued EITF No. 00-10, "Accounting for Shipping and Handling Fees and Costs," which addresses the income statement classification of shipping and handling costs billed to customers. EITF No. 00-10 was effective in the fourth quarter of 2000 and did not have an impact on RJR's financial position or results of operations. 43 44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Also during 2000, the EITF reached consensus on Issue No. 00-14, "Accounting for Certain Sales Incentives," which addresses the recognition, measurement and income statement classification for certain sales incentives including rebates, coupons and free products or services. In November 2000, the EITF revised the effective date of EITF No. 00-14 to be the second quarter of 2001. Upon adoption, certain program costs currently included in selling, general and administrative expenses will be reclassified as reductions of net sales and prior period amounts will be restated for comparative purposes. RJR Tobacco's management has determined that on an annual basis, the impact of adoption will reduce net sales approximately 1% to 2% and will have no impact on net income. Additionally, adoption of EITF No. 00-14 will result in a portion of the recognition of these incentives in different interim periods than would result from current methods of recognition. Accordingly, had RJR Tobacco adopted EITF No. 00-14 on January 1, 2000, net income for the first, second and fourth quarters of 2000 would have increased/(decreased) by $(1) million, $10 million and $(9) million, respectively, and income per share would have increased/(decreased) by $(.01), $.10 and $(.09), respectively. During the second quarter of 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." In June 1999, the FASB issued SFAS No. 137, which amended SFAS No. 133 to delay its effective date by one year. SFAS No. 133 is effective for RJR on January 1, 2001. SFAS No. 133 requires that all derivative instruments be recorded on the consolidated balance sheet at their fair value. Changes in the fair value of derivatives will be recorded each period in earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. In June 2000, the FASB issued SFAS No. 138, which amended SFAS No. 133. RJR's management has reviewed the terms of all material contracts and financial instruments and has determined that the adoption of SFAS No. 133, as amended, will have no material impact on its financial position or results of operations. NOTE 2 -- REORGANIZATION During 1999, RJR and NGH completed a series of transactions to reorganize their businesses and capital structures. On May 12, 1999, RJR and RJR Tobacco substantially completed the sale of the international tobacco business to Japan Tobacco Inc. As a result of this sale, RJR Tobacco's business consists exclusively of the manufacture and sale of cigarettes in the United States and its territories, commonwealths, protectorates and possessions. A portion of the proceeds from the sale of the international tobacco business were used by RJR to repurchase approximately $4 billion of its debt, which resulted in a $384 million, $250 million after-tax, extraordinary loss from the early extinguishment of debt. On May 18, 1999, RJR transferred its 80.5% interest in Nabisco to NGH through a merger transaction. On June 14, 1999, NGH distributed all of the outstanding shares of RJR common stock to NGH common stockholders of record as of May 27, 1999. Shares of RJR began trading separately on June 15, 1999. The operating results of the international tobacco business until May 12, 1999, the date of sale, are segregated and reported as discontinued operations in the consolidated financial statements. Nabisco's operating results through May 18, 1999, the date of the merger transaction, are segregated and reported as discontinued operations in the consolidated financial statements. Summarized operating results of the discontinued operations were:
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------- 2000 1999 1998 --------- -------- --------- Net sales...................................... $ -- $3,827 $11,321 Provision for income taxes..................... -- 34 179
NOTE 3 -- ACQUISITION On December 11, 2000, through a merger, RJR acquired its former parent, NGH, a non-operating public shell company with no material assets or liabilities, at the time of the acquisition, other than $11.8 billion in 44 45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) cash. Pursuant to an agreement and plan of merger dated June 25, 2000, as amended, RJR Acquisition Corp. was merged into NGH, with NGH being the surviving corporation. After the merger, NGH changed its name to RJR Acquisition Corp. The acquisition was accounted for as a purchase, and accordingly, the cost of the acquisition was allocated on the basis of the estimated fair market value of the assets acquired, principally $11.8 billion cash, and liabilities assumed. As consideration, RJR Acquisition Corp. paid $30 for each outstanding share of NGH, or $9.8 billion in the aggregate, provided from the net cash proceeds of the acquisition. The remaining $1.5 billion excess of net assets acquired, after costs related to the transaction, was recognized as an extraordinary gain on acquisition in the fourth quarter of 2000. Pro forma results of operations are not applicable, as NGH was a non-operating public shell company. NOTE 4 -- TOBACCO SETTLEMENT AND RELATED EXPENSES During 1998, RJR Tobacco recorded pre-tax charges totaling $1.442 billion for tobacco settlement and related expenses as follows:
"MOST FAVORED NATION" RATIONALIZATION EMPLOYEE MASTER MINNESOTA ADJUSTMENTS OF SEVERANCE SETTLEMENT SETTLEMENT FOR PREVIOUSLY MANUFACTURING AND RELATED AGREEMENT AGREEMENT SETTLED STATES OPERATIONS BENEFITS TOTAL ---------- ---------- -------------- --------------- ----------- ------- Original charge............... $ 620 $ 312 $ 145 $ 214 $151 $ 1,442 Utilized in 1998.............. (620) (312) (145) (214) (54) (1,345) ----- ----- ----- ----- ---- ------- Balance, December 31, 1998.... -- -- -- -- 97 97 Utilized in 1999.............. -- -- -- -- (42) (42) Adjusted in 1999.............. -- -- -- -- (17) (17) ----- ----- ----- ----- ---- ------- Balance, December 31, 1999.... -- -- -- -- 38 38 ----- ----- ----- ----- ---- ------- Utilized in 2000.............. -- -- -- -- (28) (28) Adjusted in 2000.............. -- -- -- -- (3) (3) ----- ----- ----- ----- ---- ------- Balance, December 31, 2000.... $ -- $ -- $ -- $ -- $ 7 $ 7 ===== ===== ===== ===== ==== =======
The rationalization of manufacturing operations primarily represents a charge to write down the book value of one of RJR Tobacco's production facilities and certain equipment in Winston-Salem, North Carolina to fair value. The employee severance and related benefits expense was a charge for workforce reductions totaling approximately 1,300 employees. These charges were in response to the changing business conditions expected to result from the MSA signed in November 1998. During 2000 and 1999, $3 million and $17 million, respectively, was reversed from the liability for employee severance and related benefits to tobacco settlement and related expenses, which reflected a less-than-expected volume decline and a corresponding less-than-expected related workforce reduction. Cash expenditures related to the termination of employees are expected to be approximately $77 million, of which $70 million was paid as of December 31, 2000. During 1999, RJR Tobacco recorded $40 million, $24 million after-tax, for initial, up-front costs related to the tobacco growers' settlement. Ongoing tobacco settlement costs of $2.3 billion, $2.2 billion and $148 million during 2000, 1999 and 1998, respectively, were included in cost of products sold. For more information about the MSA and other state settlement agreements, see note 14. 45 46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 5 -- IMPAIRMENT CHARGE Upon the occurrence of certain events or changes in circumstances, RJR and RJR Tobacco analyze the recoverability of the carrying value of their trademarks based on their estimated undiscounted net future cash flows. As a result, in the fourth quarter of 2000, RJR Tobacco determined an impairment had occurred on two of its non-investment brands, MAGNA and CENTURY. Accordingly, RJR Tobacco recorded an impairment charge of $89 million, $54 million after-tax, or $0.53 per diluted share, based on the excess of its carrying value over its present value of estimated future cash flows using a discount rate of 12.0%. This impairment charge is reflected as an increase in accumulated amortization in the consolidated balance sheet, as an impairment charge in the consolidated income statement and had no impact on cash flows. As a result of this charge, amortization expense related to trademarks will decrease $4 million on an annual basis. NOTE 6 -- HEADQUARTERS CLOSE-DOWN AND RELATED CHARGES During 1999, RJR recorded a charge of $143 million, $93 million after-tax, to reflect the elimination of its New York corporate headquarters. Total cash expenditures related to this charge were $122 million. The elimination of its headquarters resulted from reorganization transactions, described in note 2, that fundamentally changed RJR's business and capital structure. Approximately $127 million of the charge was for severance and related benefits for approximately 100 employees at the New York headquarters. The employment of these individuals was terminated on June 14, 1999, at which time RJR satisfied its obligation in full. The remainder of the charge was primarily related to contractual lease termination payments and the write-off of leasehold improvements and abandoned equipment. NOTE 7 -- RESTRUCTURING RJR Tobacco recorded a pre-tax restructuring expense of $80 million, $52 million after-tax, in 1997 related to a restructuring program that was implemented to enhance its competitive position and improve its long-term earnings growth prospects. The components of the charges recorded in 1997 and utilized through December 31, 2000 were:
EMPLOYEE RATIONALIZATION CONTRACT SEVERANCE AND OF MANUFACTURING TERMINATION AND RELATED BENEFITS OPERATIONS OTHER COSTS TOTAL ---------------- ---------------- --------------- ----- Original charge...................... $ 30 $ 30 $ 20 $ 80 Utilized in 1997..................... (5) (2) -- (7) ---- ---- ---- ---- Balance, December 31, 1997........... 25 28 20 73 Utilized in 1998..................... (15) (28) (20) (63) ---- ---- ---- ---- Balance, December 31, 1998........... 10 -- -- 10 Utilized in 1999..................... (7) -- -- (7) Adjusted in 1999..................... (2) -- -- (2) ---- ---- ---- ---- Balance, December 31, 1999........... 1 -- -- 1 Utilized in 2000..................... (1) -- -- (1) ---- ---- ---- ---- Balance, December 31, 2000........... $ -- $ -- $ -- $ -- ==== ==== ==== ====
Charges related to the closure of a facility included the employee severance and related benefits charge, which reflected the reduction of 192 full-time positions and 217 seasonal positions in manufacturing and staff, the rationalization of manufacturing operations and the write-off of equipment to be abandoned. The contract termination and other costs related to management's commitment in 1997 to a plan of termination of a leaf supply contract at a price below RJR Tobacco's contract price. Of the $80 million total restructuring charge, cash outlays were $1 million, $7 million and $35 million during 2000, 1999 and 1998, respectively. During 1999, RJR Tobacco reduced the accrued restructuring 46 47 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) charge by $2 million, reflecting lower-than-expected expenses. Pre-tax savings were $18 million in each of 2000 and 1999, and $33 million in 1998. NOTE 8 -- INCOME PER SHARE The components of the calculation of income per share were:
FOR THE YEARS ENDED DECEMBER 31, --------------------------------- 2000 1999 1998 --------- --------- --------- Income (loss) from continuing operations............... $ 352 $ 195 $ (519) Income from discontinued operations.................... -- 2,398 3 Extraordinary items -- gain (loss)..................... 1,475 (250) -- -------- -------- -------- Net income (loss)...................................... $ 1,827 $ 2,343 $ (516) ======== ======== ======== Basic weighted average shares, in thousands............ 101,264 108,495 108,691 Effect of dilutive potential shares: Options........................................... 371 66 -- Restricted stock.................................. 222 9 -- -------- -------- -------- Diluted weighted average shares, in thousands.......... 101,857 108,570 108,691 ======== ======== ========
During 2000 and 1999, average outstanding shares of restricted stock of 1,603 thousand and 826 thousand, respectively, were excluded from the basic share calculation, as the related vesting provisions had not been met. NOTE 9 -- INVENTORIES The components of inventories at December 31 were:
2000 1999 ---- ---- Leaf tobacco................................................ $403 $385 Raw materials............................................... 26 26 Work in process............................................. 40 37 Finished products........................................... 93 92 Other....................................................... 26 25 ---- ---- $588 $565 ==== ====
Inventories valued under the LIFO method were approximately $543 million and $522 million at December 31, 2000 and 1999, respectively. The current cost of LIFO inventories at December 31, 2000 and 1999 was greater than the amount at which these inventories were carried on the consolidated balance sheets by $125 million and $159 million, respectively. During 2000 and 1999, there was no significant impact on net income from LIFO inventory liquidations. LIFO inventory liquidations increased 1998 net income by $18 million. The LIFO liquidations resulted from programs to reduce tobacco leaf levels to reflect forecasts of future operating requirements. NOTE 10 -- SHORT-TERM BORROWINGS AND BORROWING ARRANGEMENTS RJR entered into a $1.235 billion revolving credit facility with a syndicate of banks effective May 18, 1999, as amended and restated on November 17, 2000. Under the amendment and restatement, the committed amount will remain at $1.235 billion until November 2001, at which time the committed amount will be reduced to $622 million through May 2003. RJR can use the full facility to obtain loans or letters of credit, at its option. RJR Tobacco and, as of November 17, 2000, RJR Acquisition Corp. have guaranteed RJR's obligations under this revolving credit facility. If RJR's senior unsecured debt is rated below BBB- by 47 48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) S&P or Baa3 by Moody's, RJR's other material subsidiaries will have to guarantee the facility. If RJR falls below these thresholds for both of these rating agencies, or two levels below these thresholds for either of these rating agencies, RJR and the guarantors will have to pledge their assets to secure their obligations. RJR is not required to maintain compensating balances; however, commitment fees of 1% of the committed amount are payable quarterly. The credit facility also limits RJR's ability to pay dividends, repurchase stock, incur indebtedness, engage in transactions with affiliates, create liens, acquire, sell or dispose of specific assets and engage in specified mergers or consolidations. Borrowings under the revolving credit facility bear interest at rates that vary with the prime rate or LIBOR. At December 31, 2000, RJR had $193 million in letters of credit and no borrowings outstanding, with the remaining $1,042 million of the facility available for borrowing. RJR was in compliance with the covenants of the facility at December 31, 2000. RJR had additional letters of credit outstanding outside the credit facility of approximately $4 million at December 31, 2000. RJR also has a $30 million uncommitted, unsecured line of credit with one bank. No borrowings were outstanding on this line of credit at December 31, 2000. NOTE 11 -- ACCRUED LIABILITIES Accrued liabilities at December 31 included:
2000 1999 ------ ------ Payroll and employee benefits............................... $ 293 $ 271 Marketing and advertising................................... 406 468 Accrued interest............................................ 24 27 Accrued income taxes........................................ -- 49 Other....................................................... 506 507 ------ ------ $1,229 $1,322 ====== ======
NOTE 12 -- INCOME TAXES The components of the provision for (benefit from) income taxes from continuing operations were:
FOR THE YEARS ENDED DECEMBER 31, -------------------- 2000 1999 1998 ---- ----- ----- Current: Federal............................................... $368 $ 530 $ 191 State and other....................................... 59 92 23 ---- ----- ----- 427 622 214 ---- ----- ----- Deferred: Federal............................................... (30) (265) (374) State and other....................................... (1) (42) -- ---- ----- ----- (31) (307) (374) ---- ----- ----- Provision for (benefit from) income taxes............... $396 $ 315 $(160) ==== ===== =====
48 49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The current deferred income tax asset shown on the consolidated balance sheets at December 31 included:
2000 1999 ----- ----- Deferred tax assets: LIFO inventories.......................................... $(136) $(123) Pension and other postretirement liabilities.............. 31 23 Tobacco settlement related accruals and other accrued liabilities............................................ 564 537 ----- ----- $ 459 $ 437 ===== =====
The non-current deferred income tax liability shown on the consolidated balance sheets at December 31 included:
2000 1999 ------ ------ Deferred tax assets: Pension and other postretirement liabilities.............. $ (208) $ (254) Tobacco settlement related accruals and other accrued liabilities............................................ (109) (108) ------ ------ (317) (362) ------ ------ Deferred tax liabilities: Property and equipment.................................... 310 311 Trademarks................................................ 1,121 1,202 Other..................................................... 742 479 ------ ------ 2,173 1,992 ------ ------ $1,856 $1,630 ====== ======
The differences between the provision for (benefit from) income taxes and income taxes computed at statutory U.S. federal income tax rates were:
FOR THE YEARS ENDED DECEMBER 31, ------------------- 2000 1999 1998 ---- ---- ----- Income taxes computed at statutory U.S. federal income tax rates..................................................... $262 $178 $(238) State and local income taxes, net of federal tax benefits... 33 30 8 Goodwill amortization....................................... 91 91 91 Exempt foreign sales corporation earnings................... -- -- (10) Other items, net............................................ 10 16 (11) ---- ---- ----- Provision for (benefit from) income taxes................... $396 $315 $(160) ==== ==== ===== Effective tax rate.......................................... 52.9% 61.8% 23.6% ==== ==== =====
NOTE 13 -- LONG-TERM DEBT Long-term debt at December 31 included:
2000 1999 ------ ------ 6.8%-10% unsecured notes, due 2001 to 2013.................. $ 404 $ 451 5.375%-6.875% foreign currency debt......................... -- 345 7.375%-7.875% senior unsecured notes, due 2003 to 2009...... 1,245 1,244 9.5% junior subordinated debentures, due 2047............... 98 -- Current maturities of long-term debt........................ (73) (387) ------ ------ $1,674 $1,653 ====== ======
49 50 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The payment of long-term debt is as follows:
YEAR AMOUNT ---- ------ 2002................................ $ 43 2003................................ 740 2004................................ 56 2005................................ 50 Thereafter.......................... 785 ------ $1,674 ======
On May 18, 1999, RJR completed tender offers to purchase substantially all of its outstanding debt securities, which resulted in RJR repurchasing approximately $4 billion of its debt with a portion of the proceeds from the sale of the international tobacco business. As a result, RJR recognized an extraordinary loss from the early extinguishment of debt of $384 million, $250 million after-tax. RJR filed a registration statement, effective October 8, 1999, in order to issue publicly registered notes of $550 million in principal amount at 7 3/8% due 2003, $500 million in principal amount at 7 3/4% due 2006 and $200 million in principal amount at 7 7/8% due 2009 in exchange for an aggregate $1.25 billion of private placement debt securities. The net proceeds received from the private placement were used for general corporate purposes. These notes are senior unsecured obligations and, unlike RJR's other non-bank debt, are guaranteed by RJR Tobacco and RJR Acquisition Corp. In addition, any other subsidiaries of RJR that in the future guarantee the $1.235 billion revolving credit facility, as amended and restated, will also be required to guarantee these notes. Generally, the terms of the notes restrict the issuance of guarantees by subsidiaries, the pledge of collateral, sale/leaseback transactions and the transfer of all or substantially all of the assets of RJR and its subsidiaries. RJR was in compliance with all covenants and restrictions imposed by its indebtedness at December 31, 2000. See note 22 for condensed consolidating financial information, which separates the account balances and activities of the issuer, the guarantors and the subsidiaries of RJR and RJR Tobacco that are not guarantors of the notes. On December 10, 1999, RJR filed a shelf registration statement, which became effective December 22, 1999, for $1.876 billion of debt securities. As of the date of this filing, no debt securities have been issued under this registration statement. On December 11, 2000, related to the acquisition of NGH, RJR acquired $98 million of 9 1/2% junior subordinated debentures, due in 2047, redeemable by RJR on September 30, 2003. Interest is paid quarterly in arrears. These debentures are effectively defeased by an irrevocable trust, which is included in other assets and deferred charges in the accompanying consolidated balance sheet as of December 31, 2000. The trust holds certain U.S. Government Obligations maturing at such times and in such amounts sufficient to pay interest and redemption principal. The estimated fair value of the consolidated long-term debt of RJR was $1.7 billion as of December 31, 2000 and $1.5 billion as of December 31, 1999. The fair values are based on available market quotes, discounted cash flows and book values, as appropriate. NOTE 14 -- COMMITMENTS AND CONTINGENCIES TOBACCO LITIGATION Overview. Various legal actions, proceedings and claims, including legal actions claiming that lung cancer and other diseases, as well as addiction, have resulted from the use of, or exposure to, RJR Tobacco's products, are pending or may be instituted against RJR or its affiliates, including RJR Tobacco, or indemnitees. During 2000, 1,330 new actions, 1,100 of which were filed in state court in West Virginia in two complaints by the same law firm, were served against RJR Tobacco and/or its affiliates or indemnitees, and 207 actions were dismissed or otherwise resolved in favor of RJR Tobacco and/or its affiliates or indemnitees 50 51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) without trial. On December 31, 2000, there were 1,664 active cases pending, as compared with 541 on December 31, 1999 and 664 on December 31, 1998. As of February 7, 2001, 1,668 active cases were pending against RJR Tobacco and/or its affiliates or indemnitees: 1,665 in the United States, 2 in Puerto Rico and 1 in the Marshall Islands. The U.S. case number does not include the 3,074 Broin II cases pending as of February 7, 2001, discussed below. The U.S. cases, exclusive of the Broin II cases, are pending in 38 states and the District of Columbia. The breakdown is as follows: 1,232 in West Virginia; 111 in New York; 57 in California; 55 in Florida; 36 in Louisiana; 18 in the District of Columbia; 11 in New Jersey; 10 in Texas; 9 in each of Alabama, Iowa, Mississippi, Pennsylvania and Tennessee; 8 in Missouri; 7 in each of Georgia, Illinois and New Mexico; 6 in Nevada; 5 in Michigan; 4 in each of Indiana, Massachusetts, Minnesota, North Carolina, New Hampshire and Wisconsin; 3 in each of Connecticut, North Dakota and South Carolina; 2 in each of Arizona, Kansas, Ohio, Oklahoma, South Dakota and Washington; and 1 in each of Hawaii, Maryland, Maine, Oregon and Utah. Of the 1,665 active U.S. cases, 139 are pending in federal court, 1,522 in state court and 4 in tribal court. Most of these cases were brought by individual plaintiffs, but many of these cases seek recovery on behalf of third parties or large classes of claimants. Theories of Recovery. The plaintiffs seek recovery on a variety of legal theories, including strict liability in tort, design defect, negligence, special duty, voluntary undertaking, breach of warranty, failure to warn, fraud, misrepresentation, unfair trade practices, conspiracy, aiding and abetting, unjust enrichment, indemnity, medical monitoring, public nuisance, and violations of state and federal antitrust and RICO laws. Punitive damages, often in amounts ranging into the hundreds of millions or even billions of dollars, are specifically pleaded in a number of cases, in addition to compensatory and other damages. Seven of the 1,665 active cases in the United States, plus the 3,074 Broin II cases, involve alleged nonsmokers claiming injuries resulting from exposure to environmental tobacco smoke. Thirty-seven cases purport to be class actions on behalf of thousands of individuals. Purported classes include individuals claiming to be addicted to cigarettes, individuals and their estates claiming illness and death from cigarette smoking, persons making claims based on alleged exposure to environmental tobacco smoke, African-American smokers claiming their civil rights have been violated by the sale of menthol cigarettes, current smokers who have no tobacco-related disease but are seeking to recover the costs of medical monitoring, purchasers of cigarettes claiming to have been defrauded and seeking to recover their costs and Blue Cross and Blue Shield subscribers seeking reimbursement for premiums paid. Approximately 66 cases seek recovery of the cost of Medicaid/Medicare payments or other health-related costs paid for treatment of individuals suffering from diseases or conditions allegedly related to tobacco use. Ten cases, brought by entities administering asbestos liability, seek contribution for the costs of settlements and judgments. Defenses. The defenses raised by RJR Tobacco and/or its affiliates, including RJR, include, where applicable, preemption by the Federal Cigarette Labeling and Advertising Act of some or all such claims arising after 1969, the lack of any defect in the product, assumption of the risk, contributory or comparative fault, lack of proximate cause and statutes of limitations or repose. RJR has asserted additional defenses, including jurisdictional defenses, in many of these cases in which it is named. Industry Trial Results in Individual Smoker Cases. The tobacco industry in general, and RJR Tobacco in particular, continue to win most individual smoking and health cases. In Anderson v. Fortune Brands, Inc., a Brooklyn, New York jury found in favor of the industry, including RJR Tobacco, on June 27, 2000. In Nunnally v. R.J. Reynolds Tobacco Co., a Mississippi state court jury found RJR Tobacco not liable on July 12, 2000. On January 16, 2001, a Brooklyn, New York state court jury returned a verdict in favor of RJR Tobacco and other cigarette manufacturers in Apostolou v. American Tobacco Co. Most recently, in Little v. Brown & Williamson Tobacco Corp., a South Carolina federal district court judge granted a directed verdict in favor of RJR Tobacco. The trial of this case continued and the jury rendered a verdict in favor of the remaining defendant, Brown & Williamson, on February 6, 2001. 51 52 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) RJR Tobacco has prevailed in all individual smoker cases that have gone to trial except two. In Whiteley v. Raybestos-Manhattan, Inc., a tobacco-asbestos synergy case brought in San Francisco Superior Court, the jury found against RJR Tobacco and Philip Morris on March 20, 2000, and awarded $1.7 million in compensatory damages. On March 27, 2000, the same jury awarded $20 million in punitive damages ($10 million against RJR Tobacco and $10 million against Philip Morris). RJR Tobacco and Philip Morris have filed their notice of appeal, and RJR Tobacco believes it has valid grounds for appeal. In Jones v. R. J. Reynolds Tobacco Co., a wrongful death case, a Tampa state court jury found against RJR Tobacco on October 12, 2000. Although the jury found that RJR Tobacco was negligent and liable, it refused to find that RJR Tobacco was part of a conspiracy to defraud. The jury awarded approximately $200,000 in compensatory damages; however, the jury refused to award punitive damages. On December 28, 2000, the trial judge granted RJR Tobacco's motion for a new trial. Juries have found for plaintiffs in five smoking and health cases in which RJR Tobacco was not a defendant, although, to date, no damages have been paid. Two of the verdicts have been overturned on appeal, and the other three remain on appeal. In February 1999, in Henley v. Philip Morris, Inc., a San Francisco state court jury awarded an individual smoker $1.5 million in compensatory damages and $50 million in punitive damages. In April 1999, the trial judge reduced the punitive damages award to $25 million, but otherwise denied Philip Morris' post-trial motions challenging the verdict. Philip Morris is appealing the verdict. In Williams v. Philip Morris, Inc., an Oregon state court jury returned a verdict against Philip Morris in March 1999, in the amount of $800,000 in actual damages, $21,500 in medical expenses and $79 million in punitive damages. The judge in this case reduced the punitive damages to $32 million. Philip Morris' appeal is pending. In the third case, Carter v. American Tobacco Co, the Florida Supreme Court, on November 22, 2000, reversed the ruling (in favor of Brown & Williamson) by the Florida Second District Court of Appeal, and reinstated the jury verdict against Brown & Williamson. On January 29, 2001, the Florida Supreme Court denied Brown & Williamson's request for a rehearing. Brown & Williamson may appeal to the United States Supreme Court. Broin II Cases. As of February 7, 2001, approximately 3,074 lawsuits, referred to as the Broin II cases, have been filed, and are still pending, in Florida, by individual flight attendants, for personal injury as a result of illness allegedly caused by exposure to secondhand tobacco smoke in airline cabins. In these lawsuits, filed pursuant to the terms of the settlement of the Broin v. Philip Morris, Inc. class action, discussed below, each individual flight attendant will be required to prove that he or she has a disease caused by exposure to secondhand smoke in airplane cabins. On October 5, 2000, Judge Robert Kaye 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. Rather, under this order, they will be required only to prove that their alleged adverse health effects were actually caused by environmental tobacco smoke exposure. Although defendants still may prevail on causation and other theories, RJR Tobacco does not believe the order is correct under Florida law or that it accurately reflects the intent of the Broin settlement agreement. Accordingly, defendants appealed Judge Kaye's ruling to the Third District Court of Appeal on November 3, 2000. Plaintiffs moved to dismiss the appeal on November 28, 2000. However, on January 12, 2001, the Third District Court of Appeal denied plaintiffs' motion to dismiss. Defendants-Appellants' initial brief was filed on January 26, 2001. Class-Action Suits. In May 1996, in an early class-action case, Castano v. American Tobacco Co., the Fifth Circuit Court of Appeals overturned the certification of a nationwide class of persons whose claims related to alleged addiction to tobacco. Since this ruling by the Fifth Circuit, most class-action suits have sought certification of statewide, rather than nationwide, classes. Class-action suits based on claims similar to those asserted in Castano have been brought against RJR Tobacco, and in some cases RJR, in state or federal courts in Alabama, Arkansas, California, the District of Columbia, Florida, Hawaii, Illinois, Indiana, Iowa, Louisiana, Maryland, Massachusetts, Michigan, Minne- 52 53 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) sota, Missouri, New Mexico, Nevada, New Jersey, New York, North Carolina, Ohio, Oklahoma, Pennsylvania, South Carolina, Tennessee, Texas, Utah, Virginia and West Virginia. In addition, a class action filed in Tennessee seeks reimbursement of Blue Cross and Blue Shield premiums paid by subscribers throughout the United States, and class-action suits against RJR Tobacco in Illinois, Missouri, Ohio and Pennsylvania claim that the marketing of "light" and "ultralight" cigarettes is deceptive. Plaintiffs have made similar claims in other lawsuits elsewhere. Other types of class-action suits also have been filed in additional jurisdictions. Most of these suits assert claims on behalf of classes of individuals who claim to be addicted, injured, or at greater risk of injury by the use of tobacco or exposure to environmental tobacco smoke, or who are the legal survivors of such persons. A number of unions and other third-party payors have filed health-care cost recovery actions in the form of class actions. These cases are discussed separately below. Class certification motions are pending in several state and federal courts. Few smoker class-action complaints have been certified, or if certified, have survived on appeal. All 13 federal courts that have considered the issue, including two courts of appeals, have rejected class certification in smoker cases. On November 6, 2000, the United States District Court for the Eastern District of New York denied certification to a purported class of smokers in Simon v. Philip Morris, Inc. The class was defined as all persons residing in the United States, or who were residents at the time of their death, who had a 20-pack-per-year history of smoking, and who had a timely claim as of April 9, 1999 for personal injury or wrongful death arising from lung cancer. Most recently, on December 29, 2000, in Aksamit v. Brown & Williamson Tobacco Corp., the United States District Court for the District of South Carolina denied class certification to a purported class defined as any and all persons who have been addicted to, harmed or killed by, tobacco products that were designed, tested, manufactured, distributed and/or sold by any of the defendants within the geographic territory of the State of South Carolina. Similarly, most state courts have refused to certify smoker class actions. On January 10, 2000, in Taylor v. American Tobacco Co., a Michigan state court judge denied certification of another smoker class action. On April 10, 2000, a California state court judge denied certification in Brown v. American Tobacco Co. On May 16, 2000, in Richardson v. Philip Morris Inc., the highest state court in Maryland reversed a trial court's decision to certify a class of individual smokers. On September 19, 2000, in Walls v. American Tobacco Co., an Oklahoma state court answered a series of state law questions (certified to the state court by the federal court where the purported class was filed) in such a way that led the parties to stipulate that the case should not be certified as a class action in federal court and that the individual plaintiffs would dismiss their federal court cases without prejudice. The federal court issued an order on October 19, 2000, refusing to certify the case as a class action, and dismissed the individual plaintiffs' cases. On December 8, 2000, in Geiger v. American Tobacco Co., the Appellate Division of the Supreme Court of New York, Second Judicial Department, affirmed denial of class action status to a purported class defined as all New York residents, including their heirs, representatives and estates, who contracted lung and/or throat cancer as a result of smoking cigarettes. On December 19, 2000, the Court of Common Pleas of Philadelphia County, Pennsylvania, denied plaintiffs' motion for class certification in Oliver v. R. J. Reynolds Tobacco Co. Plaintiffs had sought certification on behalf of residents of Pennsylvania who, on or after March 3, 1992, purchased and smoked light and/or ultralight cigarettes within Pennsylvania that were manufactured, marketed and/or distributed by defendants. Finally, on January 30, 2001, in Badillo v. American Tobacco Co., Inc., the Nevada Supreme Court, in response to questions raised by a federal district court in Nevada, held that Nevada law does not recognize medical monitoring as a cause of action. The federal district court will consider this opinion in determining whether or not to certify the Badillo case (a purported class of casino workers exposed to environmental tobacco smoke) and several individual smoker class actions. Classes have remained certified thus far in five state court class-action cases in which RJR Tobacco is a defendant. On November 5, 1998, in Scott v. American Tobacco Co., a Louisiana state appeals court affirmed the certification of a medical monitoring and/or smoking cessation class of Louisiana residents who were smokers on or before May 24, 1996. On February 26, 1999, the Louisiana Supreme Court denied the defendants' petition for writ of certiorari and/or review. Trial is scheduled to begin on June 18, 2001. On 53 54 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) August 16, 2000, in Blankenship v. Philip Morris, Inc., a West Virginia state court conditionally certified (only to the extent of medical monitoring) a class of West Virginia residents consisting of: (1) all nicotine-dependent persons who are West Virginia residents who have purchased and smoked cigarettes manufactured, promoted, marketed, advertised and/or sold by defendants, (2) the estates, representatives and administrators of West Virginia residents who were or are nicotine-dependent cigarette smokers, and (3) the spouses, children, relatives and "significant others" of these West Virginia residents who were or are nicotine-dependent cigarette smokers as their heirs or survivors. The trial of this case ended on January 25, 2001, when the judge declared a mistrial. Argument on decertification of the class, among other things, has been scheduled for February 19, 2001. On November 30, 2000, in Daniels v. Philip Morris Cos., Inc., a San Diego Superior Court judge reversed a prior ruling and, based on a California statute, certified a class consisting of all persons who, as California resident minors, smoked one or more cigarettes in California between April 2, 1994 and December 1, 1999. In addition, defendants settled one class-action suit, Broin v. Philip Morris, Inc., in October 1997. The Florida Court of Appeal denied challenges to this settlement on March 24, 1999, and subsequently denied motions to reconsider. On September 7, 1999, the Florida Supreme Court dismissed all proceedings, and the settlement and judgment became final. The Broin II cases, discussed above, arose out of the settlement of this case. Trial began in July 1998 in Florida state court in Engle v. R. J. Reynolds Tobacco Co., in which a class consisting of Florida residents, or their survivors on their behalf, claim to have diseases or medical conditions caused by their alleged "addiction" to cigarettes. On July 7, 1999, the jury found against RJR Tobacco 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. The second phase of the trial, which consisted of the claims of three of the named class representatives, began on November 1, 1999. On April 7, 2000, the jury returned a verdict against all defendants. They awarded plaintiff Mary Farnan $2.85 million, the estate of plaintiff Angie Della Vecchia $4.023 million and plaintiff Frank Amodeo $5.831 million. The jury also found, however, that Frank Amodeo knew or should have known of his claim prior to May 5, 1990. The legal effect of that finding should be to bar his claim based on the applicable statute of limitations. In the second phase, the trial court also ordered the jury to determine punitive damages, if any, on a class-wide basis. On July 14, 2000, 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 being assigned to RJR Tobacco. On July 24, 2000, the defendants, including RJR Tobacco, filed numerous post-verdict motions, including motions for a new trial and to reduce the amount of the punitive damages verdict. On November 6, 2000, the trial judge denied the post-trial motions and entered judgment. On November 7, 2000, RJR Tobacco posted an appeal bond in the amount of $100 million, pursuant to a Florida statute enacted on May 9, 2000, and initiated the appeals process. RJR Tobacco believes it has numerous bases for a successful appeal, although it cannot predict the outcome of the appellate process. Although the bond legislation described above is intended to apply to the Engle case, RJR Tobacco cannot predict the outcome of any possible challenges to the legislation's validity. In addition, four states, Georgia, Kentucky, North Carolina and Virginia have enacted legislation that limits the size of the bond required to stay execution of a punitive damages verdict pending appeal, but does not affect the underlying verdict. Governmental Health-Care Cost Recovery Cases. In June 1994, the Mississippi attorney general brought an action, Moore v. American Tobacco Co., against various industry members, including RJR Tobacco. This case was brought on behalf of the state to recover state funds paid for health care and medical and other assistance to state citizens suffering from diseases and conditions allegedly related to tobacco use. By making the state the plaintiff in the case and basing its claims on economic loss rather than personal injury, the state sought to avoid the defenses otherwise available against an individual plaintiff. Most other states, through their attorneys general or other state agencies, sued RJR Tobacco and other U.S. cigarette manufacturers based on similar theories. The cigarette manufacturer defendants, including RJR Tobacco, 54 55 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) settled the first four of these cases scheduled to come to trial, those of Mississippi, Florida, Texas and Minnesota, by separate agreements between each state and those manufacturers in each case. On November 23, 1998, the major U.S. cigarette manufacturers, including RJR Tobacco, 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. The MSA became effective on November 12, 1999, when final approval of the settlement was achieved in 80% of the settling jurisdictions. As of October 17, 2000, final approval had been achieved in all settling jurisdictions. The MSA settled all the health-care cost recovery actions brought by, or on behalf of, the settling jurisdictions and contains releases of various additional present and future claims. In the settling jurisdictions, the MSA released RJR Tobacco, indemnitees and RJR from: (1) 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 (2) all monetary claims 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. - Monetary Liabilities. In addition to the payments made in 1998, 1999 and 2000, the MSA calls for three annual initial industry payments starting in 2001 of up to approximately $2.5 billion, $2.6 billion and $2.7 billion, respectively. It also requires perpetual annual industry payments, increasing from the current $5 billion to $8 billion in 2004, and further to $9 billion in 2018 and thereafter. Ten additional payments of $861 million are due annually beginning in April 2008. All payments are to be allocated among the companies on the basis of relative market share and most are subject to adjustments for changes in sales volume units, inflation and other factors. Accordingly, RJR Tobacco records its allocation of charges in cost of goods sold as products are shipped. The tobacco companies also agreed to (1) make a one-time payment of $50 million on March 31, 1999, to establish a fund for enforcement of the MSA and law relating to tobacco products and (2) fund activities of the National Association of Attorneys General relating to the MSA at the cost of $150,000 per year for ten years. In addition, the MSA calls for the creation of a national foundation that would establish public education and other programs, and conduct or sponsor research, to reduce youth smoking, and to understand, and educate the public about, diseases associated with tobacco product use. The tobacco companies agreed to fund the foundation with (1) ten annual payments of $25 million, which began on March 31, 1999, (2) further payments of $250 million, which began on March 31, 1999, and $300 million annually thereafter for four years, and (3) additional annual payments of $300 million beginning in 2004 if, during the year preceding the year when payment is due, participating manufacturers collectively accounted for at least 99.05% of the cigarette market. Each of these payments is to be allocated among the companies on the basis of relative market share. Other than the $25 million annual payments and the $250 million payment made on March 31, 1999, the payments for the foundation are subject to adjustments for changes in sales volume units, inflation and other factors. The manufacturers also agreed to pay the litigation costs, including government attorneys' fees, of the offices of the attorneys general relating to the settled cases and, subject to certain quarterly and annual payment caps, the costs and fees of outside counsel to the jurisdictions. Outside counsel fees have been determined either by arbitration or in accordance with a negotiated fee procedure. Awards determined by arbitration will be paid subject to an aggregate annual cap on arbitrated attorneys' fees for all these and certain other settled cases of $500 million. Fees set by the negotiated fee procedure are subject to an annual cap of $250 million, and will not exceed a total of $1.25 billion. As of February 7, 2001, awards determined by arbitration totaled $11.9 billion, and awards determined in accordance with a negotiated fee procedure totaled approximately $626 million. Reimbursement of costs is capped at $150 million for litigation costs, including government attorneys' fees, of the attorneys' general offices and at 55 56 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) $75 million annually for outside counsels' costs. Payments for attorneys' fees and costs are to be allocated on a market-share basis. - Growers' Trust. As part of the MSA, the tobacco companies agreed to work with U.S. tobacco growers to address the possible adverse economic impact of the MSA on growers. As a result, RJR Tobacco and the three other major manufacturers agreed to participate in funding a $5.2 billion trust fund to be administered by a trustee, in conjunction with a certification entity from each of the tobacco growing states. The trust agreement provides for a schedule of aggregate annual payments, subject to various adjustments, that are payable in quarterly installments each year from 1999 through 2010. The aggregate annual payment by all participating manufacturers is adjusted each year for inflation and any change in the total domestic cigarette volume of all participating manufacturers. In general, the annual payment by each participating manufacturer, including RJR Tobacco, is based on each manufacturer's relative market share of total domestic cigarette shipments during the preceding calendar year. Each manufacturer's annual payment is also subject to a tax offset adjustment. - Other MSA Obligations. The MSA also contains provisions restricting the marketing of cigarettes. Among these are restrictions or prohibitions on the use of cartoon characters, brand name sponsorships, brand name non-tobacco products, outdoor and transit brand advertising, payments for product placement, free sampling and lobbying. The MSA also required the dissolution of three industry-sponsored research and advocacy organizations. The cash payments made by RJR Tobacco under the MSA and other existing settlement agreements were $2.2 billion, $1.6 billion and $.8 billion in 2000, 1999 and 1998, respectively. RJR Tobacco estimates these payments in 2001 and future years will exceed $2 billion per year. However, these payments will be subject to adjustments based upon, among other things, the volume of cigarettes sold by RJR Tobacco, RJR Tobacco's market share and inflation. On April 20, 1999, the Canadian Province of British Columbia brought a case in British Columbia Provincial Court, similar to the U.S. attorneys' general cases, against RJR Tobacco and certain other Canadian and U.S. tobacco companies and their parent companies, including RJR. This lawsuit relied heavily upon special legislation enacted in British Columbia that was separately challenged by various Canadian tobacco companies. An agreement was reached with the government in British Columbia to litigate the separate constitutional challenges prior to the health-care cost recovery action itself. On February 21, 2000, the British Columbia Supreme Court declared the Cost Recovery Act unconstitutional and dismissed the action. That decision was not appealed by the government. On September 22, 1999, the U.S. Department of Justice brought an action in the United States District Court for the District of Columbia against various industry members, including RJR Tobacco. The government seeks to recover federal funds expended in providing health care to smokers who have developed diseases and injuries alleged to be smoking-related, and, in addition, seeks, pursuant to the federal RICO statute, disgorgement of profits the government contends were earned as a consequence of a RICO racketeering "enterprise." On December 27, 1999, defendants filed a motion to dismiss challenging all counts included in the action brought by the DOJ. On June 6, 2000, the trial court heard oral argument on the motion. On September 28, 2000, federal court Judge Gladys Kessler of the United States District Court for the District of Columbia granted the non-Liggett defendants' motion to dismiss the following counts of plaintiff's complaint: (1) Medical Care Recovery Act claim, and (2) Medicare Secondary Payer claim. The court, however, denied the motion with respect to the RICO claims. On October 13, 2000, the United States filed a motion to limit Judge Kessler's September 28, 2000 order to claims for payments under Medicare and the Federal Employee Health Benefits Act. Union Cases. Although the MSA settled some of the most potentially burdensome health-care cost recovery actions, many other such cases have been brought by other types of plaintiffs. As of February 7, 2001, approximately 21 lawsuits by union trust funds against cigarette manufacturers and others are pending. The funds seek recovery of payments made by them for medical expenses of their participant union members and 56 57 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) their dependents allegedly injured by cigarettes. The claims in these cases are almost identical, and several of these cases purport to be class actions on behalf of all union trust funds in a particular state. The defendants in these actions argue, among other things, 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. In addition, they argue that the traditional subrogation remedy cannot be supplanted by a direct right of action for the trust fund that strips defendants of the defenses they would ordinarily have against the allegedly injured individual. On March 29, 1999, in the first of these cases to be considered by a federal court of appeals, Steamfitters Local Union 420 v. Philip Morris, Inc., the U.S. Court of Appeals for the Third Circuit affirmed a district court ruling dismissing a case on remoteness grounds. Since then, the U.S. Courts of Appeals for the Second, Third, Fifth, Seventh, Eighth, Ninth and Eleventh Circuits have all ruled in favor of the industry in similar union cases. On January 10, 2000, the United States Supreme Court denied petitions for certiorari filed in cases from the Second, Third and Ninth Circuits. On August 22, 2000, the Eleventh Circuit ruled that the district court did not err in dismissing the plaintiff's complaint and in denying the plaintiff's leave to amend the complaint in United Food and Commercial Workers Unions and Employers Health and Welfare Fund v. Philip Morris, Inc. On September 1, 2000, in Lyons v. Philip Morris, Inc., the Eighth Circuit affirmed the trial court's dismissal. Numerous trial court judges also have dismissed union trust fund cases on remoteness grounds. Nonetheless, some union, or other third-party payor, cases have survived motions to dismiss and may proceed to trial. On August 2, 1999, a federal district court in New York denied defendants' motions to dismiss in two separate cases heard together, National Asbestos Workers Medical Fund v. Philip Morris, Inc. and Blue Cross and Blue Shield of New Jersey, Inc. v. Philip Morris, Inc. On December 21, 1999, the federal district court in the District of Columbia denied defendants' motions to dismiss in three cases consolidated for pretrial purposes: Service Employees International Union Health and Welfare Fund v. Philip Morris, Inc., S.E.I.U. Local 74 Welfare Fund v. Philip Morris, Inc. and Holland v. Philip Morris, Inc. The latter set of cases is on appeal to the United States Court of Appeals for the District of Columbia. On March 3, 2000, a New York state court granted motions to dismiss ten union cases, Eastern States Health & Welfare Fund v. Philip Morris, Inc., brought by 14 union trust funds seeking to recover money paid for medical bills incurred by their participants and beneficiaries who suffer from alleged tobacco-caused diseases. This group of cases is on appeal to the Appellate Division of the Supreme Court of New York. On September 26, 2000, in Steamfitters Local Union No. 614 Health and Welfare Fund v. Philip Morris, Inc., the Tennessee Court of Appeals affirmed the trial court's dismissal of the antitrust claim and found the remaining claims in the plaintiffs' complaint were too remote to permit recovery. The first and only union case to go to trial to date was Iron Workers Local No. 17 v. Philip Morris, Inc., which was tried in federal court in Ohio. On March 18, 1999, the jury returned a unanimous verdict for the defendants, including RJR Tobacco. The plaintiffs dismissed their appeal of the verdict. Other Health-Care Cost Recovery and Aggregated Claims Plaintiffs. Native American tribes have filed similar cases, out of which four remain pending in tribal courts, one in federal court in each of New Mexico and Texas and one class action in San Diego Superior Court. On December 8, 2000, in Utu Utu Gwaitu Paiute Tribe v. Philip Morris, Inc., the San Diego Superior Court denied plaintiffs' motion for class certification. On January 10, 2001, plaintiffs filed a request for dismissal with the court, which has yet to be approved. Trial in this matter had been scheduled to begin June 4, 2001. On July 11, 2000, in Lower Brule Sioux Tribe v. American Tobacco Co., the Lower Brule Sioux Tribe voluntarily dismissed its suit in tribal court. On November 12, 1999, in Table Bluff Reservation v. Philip Morris, Inc., a federal district court dismissed the plaintiffs' lawsuit. Plaintiffs have appealed this ruling to the United States Court of Appeals for the Ninth Circuit. 57 58 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Groups of health-care insurers, as well as a private entity that purported to self-insure its employee health-care programs, have also advanced claims similar to those found in the union health-care cost recovery actions. Two of these "insurer" cases, Williams & Drake v. American Tobacco Co. and Regence Blueshield v. Philip Morris, Inc., were dismissed in their entirety on remoteness grounds by federal district courts in Pennsylvania and Washington. These cases are on appeal to the Third and Ninth Circuits, respectively. In a third case, Group Health Plan, Inc. v. Philip Morris, Inc., a federal district judge in Minnesota dismissed all claims, except a state antitrust claim and a state conspiracy claim. The federal court certified to the Minnesota Supreme Court the question of whether these two claims could be pursued under Minnesota law by Group Health Plan. On January 11, 2001, the Minnesota Supreme Court ruled that the plaintiff can pursue these claims. Other cost recovery suits have been brought by, among others, foreign countries, local governmental jurisdictions, taxpayers on behalf of a government jurisdiction, a university and hospitals. On November 4, 1999, in Allegheny General Hospital v. Philip Morris, Inc., the U.S. District Court for the Western District of Pennsylvania dismissed a third-party payor lawsuit filed against the tobacco industry by a number of hospital and health-care facilities. Plaintiff appealed this ruling to the United States Court of Appeals for the Third Circuit, which affirmed the trial court's dismissal on October 6, 2000. On December 14, 1999, a federal district court in Washington dismissed a similar case, Association of Washington Public Hospital Districts v. Philip Morris, Inc. Plaintiffs have appealed this ruling to the United States Court of Appeals for the Ninth Circuit. On May 30, 2000, in A.O. Fox Memorial Hospital v. American Tobacco Co., Inc., a group of approximately 175 hospitals filed suit against the tobacco industry seeking repayment from cigarette companies for costs expended to treat smoking-related illnesses. Plaintiffs seek at least $3.6 billion in damages. On August 7, 2000, a federal district court in Washington, D.C. dismissed an international health-care cost recovery action entitled Ontario v. Imperial Tobacco, Ltd. Plaintiffs are appealing the dismissal to the United States Court of Appeals for the District of Columbia. A number of foreign countries have filed suit in state and federal courts in the United States against RJR Tobacco and other tobacco industry defendants to recover funds for health care and medical and other assistance paid by those foreign governments to their citizens. Of the 18 cases currently pending, eight are pending in state court and ten are pending in federal court. Six federal court cases have been transferred by the Panel on Multi-District Litigation to the District Court of the District of Columbia. Other foreign governments and entities have stated that they are considering filing such actions in the United States. In addition, the Republic of the Marshall Islands has brought a health-care cost recovery lawsuit in the Marshall Islands against RJR Tobacco and other cigarette manufacturers. Pursuant to the terms of the 1999 sale of RJR's international tobacco business, Japan Tobacco Inc. assumed RJR Tobacco's liability, if any, in these cases. On January 5, 2000, a San Diego Superior Court judge dismissed certain claims in two lawsuits: California v. Philip Morris, Inc. and California v. Brown & Williamson Tobacco Corp. These lawsuits, brought by the cities of Los Angeles and San Jose, on behalf of the people of California, claimed that the tobacco industry violated California's Proposition 65 and several California state laws by failing to warn nonsmokers about the State of California's conclusions concerning the dangers of environmental tobacco smoke. The judge found that the industry had not violated Proposition 65 and dismissed those claims. The judge did not dismiss certain other California state law claims. The parties in these two actions agreed to settle the remaining claims in these cases. On November 20, 2000, the court approved the settlements and entered final judgments. Finally, ten lawsuits are pending against RJR Tobacco in which asbestos companies and/or asbestos-related trust funds allege that they "overpaid" claims brought against them to the extent that tobacco use, not asbestos exposure, was the cause of the alleged personal injuries for which they paid compensation. Falise v. American Tobacco Co. was dismissed by the United States District Court for the Eastern District of New York on November 2, 1999, due to a lack of subject matter jurisdiction. This case was refiled on November 11, 1999. Trial began on November 27, 2000. On January 22, 2001, the judge declared a mistrial. No date has yet been set for the re-trial of this case. Other such cases pending in New York, Mississippi and California might go to trial in 2001. 58 59 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Antitrust Cases. Approximately 52 lawsuits have been filed by tobacco wholesalers, or indirect purchasers, against United States cigarette manufacturers, including RJR Tobacco, and its parent company, RJR, 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. Approximately 39 of these cases remain pending -- 8 in federal court and 31 in state courts. In all cases, plaintiffs are asking the court to certify the lawsuits as class actions, and to allow the respective plaintiffs to pursue the lawsuits as representatives of other persons in the United States, and throughout the world, that purchased cigarettes directly from one or more of the defendants. The federal cases have been consolidated and sent by the Judicial Panel on Multidistrict Litigation for pretrial in the United States District Court for the Northern District of Georgia. On November 30, 2000, the court dismissed plaintiffs' claims of fraudulent concealment, claims concerning conduct outside the United States, and allegations relating to non-price conduct. On January 12, 2001, plaintiffs moved to replead their fraudulent concealment allegations. On January 23, 2001, the federal court certified a class of direct-purchaser plaintiffs. On March 2, 2000, Liggett Group Inc. filed an antitrust action against RJR Tobacco in the U.S. District Court for the District of New Jersey. Subsequently, the court granted RJR Tobacco's motion to transfer this action to the United States District Court for the Middle District of North Carolina. The suit alleges that RJR Tobacco's Every-Day-Low-Price merchandising program, which provides consumer discounts in retail establishments that choose to offer RJR Tobacco products as their lowest-priced cigarettes, is a violation of the Sherman Antitrust Act and New Jersey antitrust laws. RJR Tobacco believes that its program is pro-competitive and that the court will find Liggett's allegations to be without merit. On July 30, 1999, Cigarettes Cheaper!, a retailer, filed an antitrust counterclaim against RJR Tobacco in a gray market trademark suit originally brought by RJR Tobacco in the United States District Court for the Northern District of Illinois. Cigarettes Cheaper! alleges that it was denied promotional resources in violation of the Robinson-Patman Act. The district court declined to dismiss the counterclaim. Discovery is ongoing. On January 19, 2001, Cigarettes Cheaper! moved to amend its counterclaim to include a violation of the Sherman Act sec. 1, claiming that RJR Tobacco conspired with other retailers to deny promotions to Cigarettes Cheaper!. On May 10, 2000, the Customer Company, a retailer affiliated with Cigarettes Cheaper!, filed a substantially similar antitrust claim against RJR Tobacco in the United States District Court for the Northern District of California. Discovery is ongoing. Trial is scheduled to begin on October 29, 2001 in Oakland, California. Tobacco Growers' Case. On February 16, 2000, a class-action complaint, Deloach v. Philip Morris Cos., Inc., was brought against RJR Tobacco, other cigarette manufacturers and others, in the United States District Court for the District of Columbia on behalf of a putative class of all tobacco growers and tobacco allotment holders (some 5,930 of which are actually named in the first amended complaint). Plaintiffs' current theory, as reflected in their second amended complaint (which was filed on September 2, 2000), is that the defendants (Philip Morris, Inc., RJR Tobacco, Brown & Williamson Tobacco Corp. and Lorillard Tobacco Co.) engaged in bid-rigging of American tobacco auctions (both burley and flue-cured) beginning at least by 1996 and continuing to present. Defendants' actions are alleged to have held the auction prices of tobacco at artificially low prices resulting in damage to tobacco growers and allotment holders. In addition, plaintiffs allege that defendants have engaged in a conspiracy to force the elimination or destruction of the federal government's tobacco quota and price support program through an alleged illegal group boycott. On October 9, 2000, defendants filed a motion to dismiss the second amended complaint and a motion to transfer venue to the United States District Court for the Middle District of North Carolina. On November 30, 2000, the court granted the motion to transfer the case. On December 20, 2000, plaintiffs moved to amend the complaint to add leaf-buying companies as defendants. Scheduled Trials. RJR Tobacco is a defendant in 11 non-Broin II cases currently scheduled for trial in the first half of 2001. These cases include five individual smoking and health cases, four asbestos contribution 59 60 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) cases, one health-care cost recovery case and one medical monitoring class action. Additionally, several Broin II cases are scheduled for trial during this period. Although trial schedules are subject to change and many cases are dismissed before trial, it is likely that there will be an increased number of tobacco cases, some involving claims for possibly billions of dollars, against RJR Tobacco and RJR coming to trial over the next year. Other Developments. RJR Tobacco is aware of a grand jury investigation being conducted in North Carolina that relates to the cigarette business of certain of its former affiliates. In connection with this investigation, RJR Tobacco responded to document subpoenas dated July 7, 1999 and June 1, 2000, respectively. On December 22, 1998, Northern Brands International, Inc. entered into a plea agreement with the United States Attorney for the Northern District of New York. Northern Brands is a now-inactive tobacco subsidiary that was part of the business of R.J. Reynolds International B.V., a former Netherlands subsidiary of RJR Tobacco which was managed by a former affiliate, RJR-MacDonald, Inc. On May 12, 1999, RJR-MacDonald, Inc. was sold to Japan Tobacco Inc. and subsequently changed its name to JTI-MacDonald, Inc. Northern Brands was charged with aiding and abetting certain customers who brought merchandise into the United States "by means of false and fraudulent practices . . . ." JTI-MacDonald, Inc., Japan Tobacco's international operating company in Canada, is cooperating with an investigation now being conducted by the Royal Canadian Mounted Police relating to the same events that gave rise to the Northern Brands investigation. On December 21, 1999, the government of Canada filed a lawsuit in the United States District Court for the Northern District of New York against RJR Tobacco, RJR, several currently and formerly related companies, including Northern Brands, and the Canadian Tobacco Manufacturers Council. The lawsuit alleges that, beginning in 1991, the defendants conspired with known distributors and smugglers to illegally import into Canada tobacco products originally earmarked for export from Canada, in a fashion that avoided the imposition of certain excise and retail taxes and duty payments. On June 30, 2000, this case was dismissed by the United States District Court for the Northern District of New York. Plaintiff appealed the dismissal to the United States Court of Appeals for the Second Circuit on July 28, 2000; no ruling has been issued. Although the international tobacco business was sold, RJR Tobacco retained certain liabilities relating to the events disclosed above. On or about October 30, 1998, a boat manufacturer, American Marine Holdings, Inc., filed suit against RJR Tobacco claiming that one of its boats was not properly identified in RJR Tobacco cigarette advertising. The plaintiff claims, among other things, violations of the Lanham Act and breach of an alleged oral contract and seeks in excess of $20 million in damages. Trial is scheduled for April 2, 2001. --------------------- Litigation is subject to many uncertainties, and it is possible that some of the tobacco-related legal actions, proceedings or claims could be decided against RJR Tobacco or its affiliates, including RJR, or indemnitees. Determinations of liability or adverse rulings against other cigarette manufacturers that are defendants in similar actions, even if such rulings are not final, could adversely affect the litigation against RJR Tobacco or its affiliates or indemnitees and could encourage an increase in the number of such claims. 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 at which new lawsuits are filed against RJR Tobacco and RJR, a significant increase in litigation and/or in adverse outcomes for tobacco defendants could have an adverse effect on either or both of these entities. RJR Tobacco and RJR each believe that they have a number of valid defenses to any of those actions and intend to defend those actions vigorously. 60 61 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) RJR believes that, notwithstanding the quality of defenses available to it and RJR Tobacco in litigation matters, it is possible that the results of operations or cash flows of RJR in particular quarterly or annual periods or RJR's financial condition could be materially affected by the ultimate outcome of certain pending litigation matters, including bonding and litigation costs. RJR's management is unable to predict the outcome of the litigation or to derive a meaningful estimate of the amount or range of any possible loss in any particular quarterly or annual period or in the aggregate. ENVIRONMENTAL MATTERS RJR 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. Finally, regulations promulgated by the U.S. Environmental Protection Agency and other governmental agencies under various statutes have resulted in, and likely will continue to result in, substantial expenditures for pollution control, waste treatment, plant modification and similar activities. RJR and its subsidiaries monitor their environmental matters and, dependent upon the probability of occurrence and reasonable estimation of cost, accrue or disclose any material liability. RJR has been named in an insurance coverage suit brought by another company named as a potentially responsible party under CERCLA with respect to a superfund site in Hawaii at which a former subsidiary of RJR had operations. In this lawsuit, Del Monte Fresh Produce v. Fireman's Fund Insurance, filed August 13, 1997 in the First Circuit Court of the State of Hawaii, the plaintiff seeks declaratory judgment that it is entitled to insurance coverage for the site or, in the alternative, that RJR is obligated to indemnify the plaintiff under the terms of the agreement by which RJR sold that company in 1989. The Fireman's Fund Insurance Company has filed a motion for summary judgment that has not yet been heard. Del Monte Corporation has been named a defendant in two lawsuits related to the same Hawaii superfund site, Board of Water Supply of the City and County of Honolulu v. Shell Oil Company and Akee v. The Dow Chemical Co., filed in the First Circuit Court of the State of Hawaii on September 27, 1999, and October 7, 1999, respectively. Also, Del Monte Corporation has received a demand for indemnity from an entity that was a chemical supplier to Del Monte Corporation and is named a defendant in one of these lawsuits. Del Monte Corporation has sought indemnity from RJR under the terms of the agreement by which RJR sold Del Monte Corporation in 1989. In connection with any liability RJR may incur arising out of these claims, the buyers of the Del Monte fresh fruit business are obligated to indemnify RJR under the terms of the agreement by which RJR sold the Del Monte fresh fruit business in 1989. RJR has provided notice of these claims to the buyers, and their successors, of the Del Monte fresh fruit business and has asserted its right to be indemnified by the buyers for any liability arising out of such claims. RJR Tobacco has been notified by the EPA of its potential liability under CERCLA for a superfund site in Greer, South Carolina. The notice and demand for reimbursement of costs incurred by the EPA were sent to a group of companies previously involved as potentially responsible parties in another superfund site, which includes RJR Tobacco. The EPA alleges that some waste from the cleanup of the other site was transported to the site in question. RJR Tobacco has executed a tolling agreement with the EPA. This tolling agreement provides for entry into good faith negotiations with the EPA, and is not an admission of fact or liability. It also should have no impact on any defense RJR Tobacco may assert, other than a defense based on the running of the statute of limitations. This matter is in its preliminary stage, as information is still being gathered from other potentially responsible parties recently notified by the EPA. 61 62 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In December 1998, the EPA proposed regulations that would have imposed restrictions on RJR Tobacco's use of certain fumigants used to protect stores of tobacco from agricultural pests. Those proposed regulations would have required RJR Tobacco to make significant expenditures to comply with the EPA regulations, or risk the loss of substantial stores of tobacco to agricultural pests. The EPA finalized approval of new regulations for use of these fumigants in November 2000. RJR Tobacco will be able to continue fumigation of stored tobacco under new label conditions. Although some future expenditures may be required to comply with the EPA regulations, RJR Tobacco does not expect that those expenditures will be significant. RJR and its subsidiaries have been engaged in a continuing program to assure compliance with federal, state and local environmental laws and regulations. Although it is difficult to identify precisely the portion of capital expenditures or other costs attributable to compliance with environmental laws and regulations and to estimate the cost of resolving these CERCLA matters, RJR does not expect such expenditures or other costs to have a material adverse effect on the business, results of operations or financial condition of RJR or its subsidiaries. OTHER CONTINGENCIES Until the acquisition by merger by Philip Morris Companies, Inc. of Nabisco from NGH on December 11, 2000, NGH and Nabisco were members of the consolidated group of NGH for U.S. federal income tax purposes. Each member of a consolidated group is jointly and severally liable for the U.S. federal income tax liability of other members of the group as well as for pension and funding liabilities of the other group members. NGH, now known as RJR Acquisition Corp., continues to be jointly and severally liable for these Nabisco liabilities for the period prior to December 11, 2000. In connection with Philip Morris' acquisition by merger of Nabisco and RJR's subsequent acquisition by merger of NGH, Philip Morris, Nabisco and NGH entered into a voting and indemnity agreement that generally seeks to allocate tax liabilities ratably based upon NGH's taxable income and that of Nabisco, had the parties been separate taxpayers. If Philip Morris and Nabisco are unable to satisfy their obligations under this agreement, NGH, now known as RJR Acquisition Corp., would be responsible for satisfying them. In connection with the sale of the international tobacco business to Japan Tobacco Inc. on May 12, 1999, RJR and RJR Tobacco agreed to indemnify Japan Tobacco against (1) 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), (2) any liabilities, costs and expenses that Japan Tobacco or any of its affiliates, including the acquired entities, may incur after the sale in respect of any of RJR's or RJR Tobacco's employee benefit and welfare plans, and (3) any liabilities, costs and expenses incurred by Japan Tobacco or any of its affiliates arising out of certain activities of Northern Brands. Although it is impossible to predict the outcome of the Northern Brands litigation or the amount of liabilities, costs and expenses, if any, RJR and RJR Tobacco may be required to indemnify Japan Tobacco in connection with the matters prescribed in the preceding outcome, a significant adverse outcome regarding any of these items could have an adverse effect on either or both of RJR and RJR Tobacco. COMMITMENTS At December 31, 2000, commitments totaled $283 million, primarily for marketing-related activities, the purchase of leaf tobacco inventories and operating lease commitments. The operating lease amounts for each of the next five years are: 2001 -- $20 million; 2002 -- $10 million; 2003 -- $4 million; 2004 -- $1 million; and 2005 -- $2 million. Rent expense was $44 million during each of 2000 and 1999, and $49 million during 1998. 62 63 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 15 -- FINANCIAL INSTRUMENTS FOREIGN CURRENCY ARRANGEMENTS At December 31, 1999, RJR had $362 million of outstanding foreign exchange contracts in which foreign currencies were purchased, and no contracts in which foreign currencies were sold. These purchases were entered into primarily to offset obligations associated with debt denominated in the Swiss franc and German mark. See note 13 for information on foreign-denominated debt. The weighted average maturity of the arrangements outstanding at December 31, 1999 approximated ten months. The net carrying value and estimated fair value of forward foreign exchange contracts to purchase foreign currencies as of December 31, 1999 were $(26) million and $(25) million, respectively. There were no foreign exchange contracts outstanding at December 31, 2000. CREDIT RISK RJR minimizes counterparty credit risk related to its financial instruments by using major institutions with high credit ratings. NOTE 16 -- STOCKHOLDERS' EQUITY The authorized capital stock of RJR at December 31, 2000 consisted of 50 million shares of preferred stock, par value $.01 per share, and 290 million shares of common stock, par value $.01 per share. The preferred stock, none of which is issued or outstanding, ranks senior to common stock as to dividends and liquidation preferences. On December 12, 2000, RJR's board of directors authorized the repurchase of shares of its common stock from time to time in the open market, with a maximum aggregate cost of $350 million, to enhance stockholder value. The program is funded by dividends from RJR Acquisition Corp. utilizing the cash proceeds of the NGH acquisition. The timing of repurchases and the number of shares ultimately repurchased will depend upon market conditions. Under this authorization, RJR repurchased 1,329,900 shares with an aggregate cost of $61 million during 2000. Authorizations in November 1999 of $125 million and in February 2000 of $100 million were completed during 2000 through repurchases of 7,185,839 shares with a total cost of $170 million. From November 1999 through December 31, 2000, cumulative repurchases of all programs were 11,243,139 shares with an aggregate cost of $286 million. NOTE 17 -- STOCK PLANS At December 31, 2000, RJR had two stock plans, the Amended and Restated Equity Incentive Award Plan for Directors and the 1999 Long Term Incentive Plan. RJR's EIAP provides for grants of stock options and deferred stock units to outside directors. Under certain circumstances, directors may elect to receive shares of common stock in lieu of deferred stock units. A maximum of 500,000 shares of common stock may be issued under this plan, of which 383,801 shares were available for grant as of December 31, 2000. Options granted upon becoming a director may be exercised between six months and ten years at a price that is the market value of the stock on the grant date. Prior to April 2000, each outside director was awarded an annual grant of stock options that vested in three years and was exercisable for ten years. Effective in April 2000, the annual grant of stock options was replaced by a quarterly grant of deferred stock units. Deferred stock units granted under the EIAP have a value equal to, and bear dividends at the same rate as, one share of RJR common stock. The dividends are paid as units in an amount equal to the number of common shares that could be purchased with the dividend on the date of payment. The director receives payment of the units in common stock, or by election, in cash, as to the annual grants, and only in cash as to the quarterly grants, as soon as practicable following his or her last year of service 63 64 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) on the board. Cash payments are based on the average closing price of RJR's common stock during December of the year preceding payment. RJR's LTIP provides for grants of incentive stock options, other stock options, stock appreciation rights, restricted stock, performance units and performance shares to key employees. The total number of shares of common stock authorized for grant under the plan is 8,000,000 shares, plus 5,772,814 shares issuable under NGH awards that, in connection with the spin-off, were converted into RJR options or shares of restricted common stock. Of this authorization, 4,377,176 shares were available for grant as of December 31, 2000. All stock options and restricted shares granted before June 14, 1999 were part of the NGH plans and denominated in shares of NGH common stock. Disclosures related to those shares and weighted average exercise prices as of December 31, 1998 would not be meaningful. On June 15, 1999, as a result of the distribution to shareholders, 17,065,066 options held by employees to purchase common stock of NGH, formerly known as RJR Nabisco Holdings Corp., were equitably adjusted into 18,354,932 options for NGH shares and 5,456,114 options for RJR shares. The spin-off did not change the value of the option grant, ratio of exercise price to market value, vesting provision or exercise period. The allocation of RJR options was transferred into the RJR LTIP. Also, in connection with the spin-off, holders of restricted stock under the NGH LTIP received one RJR restricted share for every three NGH restricted shares. The resulting 316,700 restricted shares were transferred into the RJR LTIP. The five-year vesting provisions of the RJR restricted shares remain unchanged for continuing RJR employees, lapsed on those related to the sale of the international tobacco business and lapsed on the remaining shares in connection with the acquisition of NGH in December 2000. Compensation expense related to the shares held by continuing RJR employees was $.3 million and $.2 million in 2000 and 1999, respectively. At December 31, 2000, 45,333 shares remained restricted. Unless forfeited, restrictions on all of these shares will lapse in 2003. The unamortized portion remaining in stockholders' equity at December 31, 2000 was $.6 million. In 1999, RJR granted 745,000 shares of restricted stock, net of forfeitures of 32,000 shares, in tandem with 3,108,000 options, included in the following option table, to eligible employees. Upon vesting, the holder may forfeit the restricted stock and elect to receive four options for each restricted share forfeited. Generally, these shares may not be disposed of, or transferred during the three- to five-year restricted period. Of these restrictions, 372,500 will lapse in 2002, 186,250 will lapse in 2003 and 186,250 will lapse in 2004, unless the related shares are forfeited. The market price of the stock on the grant date was charged to stockholders' equity as unearned compensation and was amortized on a straight-line basis over the vesting periods through September 2000. As of the fourth quarter of 2000, management determined that it is more probable that holders will forfeit the restricted stock grant at vesting and elect to exercise the related tandem options. Accordingly, amortization of the unamortized equity to compensation expense was suspended. Compensation expense of $4 million and $3 million was recorded in 2000 and 1999, respectively. The unamortized portion remaining in stockholders' equity at December 31, 2000 was $14 million. During 2000, RJR granted 673,898 shares of restricted stock to eligible employees under the 1999 LTIP. Generally, these shares may not be disposed of or transferred during the three-year vesting period. These restrictions will lapse in 2003, unless the related shares are forfeited. Because the actual number of shares granted may increase or decrease based on certain performance factors, this grant is accounted for as a variable grant and, accordingly, the fair value is being charged to stockholders' equity as unearned compensation and is being amortized over the three-year vesting period. During 2000, 16,314 restricted shares were forfeited and restrictions on 3,163 shares lapsed. During 2000, including amortization of expected performance shares and dividends on forfeited shares, compensation expense was $11 million and the unamortized portion remaining in stockholders' equity at December 31, 2000 was $25 million. 64 65 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In the EIAP and the LTIP, at December 31, 2000, there were 6,030,342 options outstanding, of which 3,042,503 were exercisable, with a price range of $23.32 to $33.71, and a weighted average remaining contractual life of 8.4 years. Additionally, there were 66,228 options outstanding and exercisable, with a price range of $36.24 to $48.33, and a weighted average remaining contractual life of 5.8 years. The changes in RJR's stock options during 2000 and 1999 were:
2000 1999 --------------------- -------------------- WEIGHTED WEIGHTED AVERAGE AVERAGE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE ---------- -------- --------- -------- Balance at beginning of year.................. 8,492,564 $28.43 -- $ -- Options transferred in........................ -- -- 5,456,114 28.02 Options granted............................... -- -- 3,199,500 29.01 Options cancelled............................. (138,371) 27.52 -- -- Options exercised............................. (2,257,623) 27.58 (163,050) 26.13 ---------- --------- Balance at end of year........................ 6,096,570 28.76 8,492,564 28.43 ========== ========= Exercisable at end of year.................... 3,108,731 28.55 5,325,068 28.09 ========== =========
RJR measures and expenses compensation costs related to employee stock plans utilizing the intrinsic value based method. During 1999, the amortization of tandem restricted stock held was recorded as compensation expense and, as a result, approximated compensation expense had it been based on fair value. Furthermore, related pro forma results would have approximated those reported. During 2000, had compensation expense been based on the fair value, net income would have been reduced by $3 million or $.03 per basic share and per diluted share. The foregoing impact of pro forma compensation cost was based on fair value at grant date, using a Black-Scholes methodology assuming a 5.96% risk-free interest rate, a weighted average expected life of 4.2 years, expected volatility of 33.0% and no dividend yield. 65 66 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 18 -- RETIREMENT BENEFITS RJR sponsors a number of non-contributory defined benefit pension plans covering most employees. RJR also provides certain health and life insurance benefits for retired employees and their dependents. The changes in benefit obligations and plan assets, as well as the funded status of RJR's pension plans at December 31 were:
POSTRETIREMENT PENSION BENEFITS BENEFITS ----------------- --------------- 2000 1999 2000 1999 ------- ------- ------ ------ Change in benefit obligation: Obligation at beginning of year............................. $2,270 $2,444 $ 589 $ 652 Service cost................................................ 31 39 6 7 Interest cost............................................... 176 169 49 44 Actuarial (gain) loss....................................... 148 (162) 75 (71) Plan amendments............................................. 5 -- -- -- Special termination benefits................................ -- 14 -- 1 Benefits paid............................................... (190) (176) (50) (40) Settlements................................................. (11) -- -- -- Acquisition of NGH.......................................... 33 -- 6 -- Transfer to other members of controlled group............... -- (58) -- (4) ------ ------ ----- ----- Obligation at end of year................................... $2,462 $2,270 $ 675 $ 589 ====== ====== ===== ===== Change in plan assets: Fair value of plan assets at beginning of year.............. $2,499 $2,070 $ -- $ -- Actual return on plan assets................................ (156) 469 -- -- Employer contributions...................................... 98 67 50 40 Benefits paid............................................... (190) (176) (50) (40) Settlements................................................. (11) -- -- -- Acquisition of NGH.......................................... 20 -- -- -- Transfer from other members of controlled group............. -- 69 -- -- ------ ------ ----- ----- Fair value of plan assets at end of year.................... $2,260 $2,499 $ -- $ -- ====== ====== ===== ===== Funded status: Funded status............................................... $ (202) $ 229 $(675) $(589) Unrecognized transition asset............................... -- -- (21) (26) Unrecognized prior service cost............................. -- (12) -- -- Unrecognized net actuarial (gain) loss...................... 117 (417) 109 35 ------ ------ ----- ----- Net amount recognized....................................... $ (85) $ (200) $(587) $(580) ====== ====== ===== ===== Amounts recognized in the consolidated balance sheets consist of: Prepaid benefit cost...................................... $ -- $ 29 $ -- $ -- Accrued benefit liability................................. (104) (250) (587) (580) Intangible asset.......................................... 7 1 -- -- Accumulated other comprehensive income.................... 12 20 -- -- ------ ------ ----- ----- Net amount recognized....................................... $ (85) $ (200) $(587) $(580) ====== ====== ===== =====
66 67 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) As of December 31, 2000, for the pension plans with accumulated benefit obligations in excess of plan assets, the projected benefit obligation, accumulated benefit obligation and fair value of plan assets were $89 million, $76 million and $15 million, respectively. As of December 31, 1999, the projected benefit obligation, accumulated benefit obligation and fair value of plan assets were $63 million, $56 million and $0, respectively.
POSTRETIREMENT PENSION BENEFITS BENEFITS --------------------- ------------------ 2000 1999 1998 2000 1999 1998 ----- ----- ----- ---- ---- ---- Components of total benefit cost (income): Service cost................................... $ 31 $ 39 $ 42 $ 6 $ 6 $ 8 Interest cost.................................. 176 169 158 49 44 40 Expected return on plan assets................. (229) (195) (178) -- -- -- Amortization of transition asset............... -- -- -- (6) (6) (7) Amortization of prior service cost............. (3) (3) (4) -- -- -- Amortization of net loss (gain)................ (7) 2 1 1 6 3 ----- ----- ----- --- --- --- Net periodic benefit cost (income)............. (32) 12 19 50 50 44 Curtailment/special benefits................... -- 14 -- -- 1 -- Settlements.................................... 2 -- -- -- -- -- ----- ----- ----- --- --- --- Total benefit cost (income).................... $ (30) $ 26 $ 19 $50 $51 $44 ===== ===== ===== === === ===
The weighted average actuarial assumptions used for the pension and postretirement benefit plans as of December 31 were:
2000 1999 ---- ---- Discount rate............................................... 7.50% 8.00% Expected return on pension plan assets...................... 9.50% 9.50% Rate of compensation increase............................... 5.00% 5.00%
For measurement purposes, a 28% annual rate of increase in the per capita cost of covered health care was assumed for the HMO plan for 2000. The rate was assumed to decrease to 13% for 2001 and 5% for 2002 and remain at that level thereafter. Additionally, for the indemnity plan an 8% annual rate of increase in the per capita cost of covered health care was assumed for 2000. The rate was assumed to decrease 0.75% per year to 5% for 2004 and remain at that level thereafter. Assumed health-care cost trend rates have a significant effect on the amounts reported for the health-care plans. A one-percentage-point change in assumed health-care cost trend rates would effect:
1-PERCENTAGE-POINT 1-PERCENTAGE-POINT ------------------ ------------------ INCREASE DECREASE -------- -------- Total of service and interest cost components................................. $ 2 $ (2) Postretirement benefit obligation............ 29 (26)
In connection with the NGH acquisition, plan assets and benefit obligations attributable to certain former NGH employees were transferred to RJR, which resulted in an increase in pension plan assets of $20 million and an increase in pension plan benefit obligations of $33 million. Postretirement benefit obligations of $6 million were also acquired by RJR. The impact of these changes will be recognized in net periodic benefit costs over future periods. In connection with the reorganization in 1999, the assets and liabilities of the Retirement Plan for Employees of RJR Nabisco, Inc., referred to as the old plan, were split into two new plans, one for employees and former employees of RJR and the other for employees and former employees of Nabisco and NGH. The split of the assets and liabilities of the old plan was in accordance to an agreement with the Pension Benefit Guaranty Corporation that resulted in an increase in the RJR plan assets of $132 million. In addition, plan assets and benefit obligations attributable to certain former NGH employees both in the old plan and in other 67 68 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) pension plans were transferred to NGH, which resulted in a decrease in pension plan assets of $63 million and a decrease in pension plan benefit obligations of $58 million. Postretirement benefit obligations of $4 million were also transferred to NGH. The impact of these changes will be recognized in net periodic benefit costs over future periods. As a result, periodic benefit cost for 1999 decreased by $7 million. The PBGC agreement described above also required contributions of $58 million in each of the five years beginning in 1999, as well as contribution of the RJR plan's normal cost beginning in 2000 through the end of the agreement. The agreement is expected to continue for five years; however, there are certain circumstances under which it could be extended. The PBGC agreement also requires a $116 million letter of credit with respect to these contributions. In connection with the close-down of the New York headquarters, special termination benefits were provided to employees resulting in a 1999 one-time charge of $14 million for pension benefits and $1 million for postretirement benefits. These additional benefit obligations were subsequently transferred to NGH, as described above. RJR sponsors a qualified defined contribution plan and matches 50% of a participant's contribution based on a maximum of 6% of a participant's compensation. RJR's expense related to this plan was $12 million in each of 2000, 1999 and 1998. NOTE 19 -- SEGMENT INFORMATION RJR Tobacco is organized and reports its results of operations in one operating segment that manufactures and markets cigarettes in the United States. The nature of the product, manufacturing process, distribution method, type of customer and regulatory environment are similar for substantially all of RJR Tobacco's products. During 2000, 1999 and 1998, sales made by RJR Tobacco to McLane Company, Inc. and its affiliate, Wal-Mart Stores, Inc., comprised 19%, 17% and 16%, respectively, of RJR's consolidated revenue. No other customer accounted for 10% or more of RJR's revenue during those years. NOTE 20 -- RELATED PARTY TRANSACTIONS Prior to April 2000, a member of RJR's board of directors also served as Vice Chairman of Hershey Foods Corporation. RJR Tobacco has provided services to Hershey Foods Corporation, for which Hershey Foods paid $1 million and $3 million to RJR Tobacco during 2000 and 1999, respectively. Subsequent to the 1999 spin-off from, and prior to the acquisition of, NGH, related party transactions between RJR, RJR Tobacco and NGH consisted of several agreements governing the relationships among the parties after the distribution of RJR's shares to NGH stockholders, including certain tax matters, indemnification rights and obligations and other matters. As a result of these agreements, at December 31, 1999, NGH owed RJR $1.3 million. RJR sold its international tobacco business to Japan Tobacco in 1999. RJR Tobacco manufactures products for sale by Japan Tobacco, and Japan Tobacco manufactures products for sale by RJR Tobacco. Additionally, under the sale agreement with Japan Tobacco, RJR and RJR Tobacco have retained certain liabilities that may arise from litigation prior to the sale. See note 2 and note 14 for further information on contingencies. RJR believes that each of the related party transactions were on terms similar to those with unaffiliated third parties. 68 69 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 21 -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
2000 (1) FIRST SECOND THIRD FOURTH - -------- ------ ------ ------ ------ Net sales................................................... $1,922 $2,085 $2,119 $2,041 Gross profit................................................ 1,116 1,234 1,268 1,224 Income from continuing operations........................... 80 109 117 46 Extraordinary item, net of income taxes..................... -- -- -- 1,475 Net income.................................................. 80 109 117 1,521 Per share data (2): Basic: Income from continuing operations......................... .77 1.08 1.17 .46 Extraordinary item, net of income taxes................... -- -- -- 14.76 Net income................................................ .77 1.08 1.17 15.22 Diluted: Income from continuing operations......................... .77 1.07 1.16 .45 Extraordinary item, net of income taxes................... -- -- -- 14.58 Net income................................................ .77 1.07 1.16 15.03 1999 (3) - -------- Net sales................................................... 1,693 1,907 1,991 1,976 Gross profit................................................ 951 1,078 1,166 1,139 Income (loss) from continuing operations.................... 30 (39) 96 108 Income (loss) from discontinued operations, net of income taxes..................................................... 65 2,668 (221) (114) Extraordinary item, net of income taxes..................... -- (250) -- -- Net income (loss)........................................... 95 2,379 (125) (6) Per share data (2): Basic: Income (loss) from continuing operations.................. .28 (.36) .88 1.00 Income (loss) from discontinued operations, net of income taxes.................................................. .60 24.54 (2.03) (1.06) Extraordinary item, net of income taxes................... -- (2.30) -- -- Net income (loss)......................................... .88 21.88 (1.15) (.06) Diluted: Income (loss) from continuing operations.................. .28 (.36) .88 1.00 Income (loss) from discontinued operations, net of income taxes.................................................. .60 24.54 (2.03) (1.06) Extraordinary item, net of income taxes................... -- (2.30) -- -- Net income (loss)......................................... .88 21.88 (1.15) (.06)
- --------------- (1) The second quarter includes a $3 million, $2 million after-tax, reversal of prior tobacco settlement charges. The fourth quarter includes $1,475 million extraordinary gain on acquisition and an $89 million, $54 million after-tax, impairment charge. (2) Income per share is computed independently for each of the periods presented. The sum of the income per share amounts for the quarters may not equal the total for the year. (3) The second quarter includes $143 million, $93 million after-tax, charges related to the close-down of the New York headquarters. The third quarter includes $40 million, $24 million after-tax, for initial, up-front costs related to the tobacco growers' settlement. The fourth quarter includes a $17 million pre-tax reversal of 1998 accruals related to the tobacco settlement and related expenses. NOTE 22 -- CONDENSED CONSOLIDATING FINANCIAL STATEMENTS RJR has not presented separate financial statements and other disclosures concerning RJR Tobacco and RJR Acquisition Corp. because management has determined that such information is not material to holders 69 70 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) of the exchange notes. RJR Tobacco and RJR Acquisition Corp. are wholly owned subsidiaries of RJR, and have fully and unconditionally guaranteed the exchange notes. The following condensed consolidating financial statements of RJR include: the accounts and activities of RJR, the issuer of the exchange notes; RJR Tobacco and RJR Acquisition Corp., the guarantors of the exchange notes; the subsidiaries of RJR and RJR Tobacco that are not guarantors of the exchange notes; and elimination adjustments. 70 71 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONDENSED CONSOLIDATING STATEMENTS OF INCOME (DOLLARS IN MILLIONS) (UNAUDITED)
ISSUER GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED ------ ---------- -------------- ------------ ------------ FOR THE YEAR ENDED DECEMBER 31, 2000 Net sales........................................ $ -- $ 8,169 $ 48 $ (50) $8,167 Cost of products sold............................ -- 3,372 3 (50) 3,325 Selling, general and administrative expenses..... 42 3,835 (315) -- 3,562 Tobacco settlement and related expenses.......... -- (3) -- -- (3) Amortization of trademarks and goodwill.......... -- 260 106 -- 366 Impairment charge................................ -- -- 89 -- 89 Interest and debt expense........................ 164 4 -- -- 168 Interest income.................................. (1) (111) (7) -- (119) Intercompany interest (income) expense........... (11) 394 (383) -- -- Intercompany dividend............................ (238) (861) -- 1,099 -- Other expense (income), net...................... 6 26 (1) -- 31 ------ ------- ------ ------- ------ INCOME BEFORE INCOME TAXES................... 38 1,253 556 (1,099) 748 Provision for (benefit from) income taxes........ (64) 264 196 -- 396 Equity income from subsidiaries.................. 2,825 360 -- (3,185) -- ------ ------- ------ ------- ------ INCOME BEFORE EXTRAORDINARY ITEM............. 2,927 1,349 360 (4,284) 352 Extraordinary item -- gain (loss) on acquisition, net of taxes................................... (1) 1,476 -- -- 1,475 ------ ------- ------ ------- ------ NET INCOME............................... $2,926 $ 2,825 $ 360 $(4,284) $1,827 ====== ======= ====== ======= ====== FOR THE YEAR ENDED DECEMBER 31, 1999 Net sales........................................ $ -- $ 7,511 $ 56 $ -- $7,567 Cost of products sold............................ -- 3,224 9 -- 3,233 Selling, general and administrative expenses..... 43 3,342 (303) -- 3,082 Amortization of trademarks and goodwill.......... -- 260 106 -- 366 Headquarters close-down and related charges...... 143 -- -- -- 143 Interest and debt expense........................ 267 1 -- -- 268 Interest income.................................. (4) (85) (25) -- (114) Intercompany interest (income) expense........... (393) 620 (227) -- -- Other expense (income), net...................... (67) 28 118 -- 79 ------ ------- ------ ------- ------ INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES............................... 11 121 378 -- 510 Provision for (benefit from) income taxes........ (16) 163 168 -- 315 Equity income from subsidiaries from continuing operations..................................... 168 209 -- (377) -- ------ ------- ------ ------- ------ INCOME FROM CONTINUING OPERATIONS............ 195 167 210 (377) 195 Income (loss) from discontinued operations....... (611) 1,162 1,847 -- 2,398 Equity income from subsidiaries from discontinued operations..................................... 3,009 1,848 -- (4,857) -- ------ ------- ------ ------- ------ INCOME BEFORE EXTRAORDINARY ITEM............. 2,593 3,177 2,057 (5,234) 2,593 Extraordinary item -- loss on early extinguishment of debt, net of taxes........... (250) -- -- -- (250) ------ ------- ------ ------- ------ NET INCOME............................... $2,343 $ 3,177 $2,057 $(5,234) $2,343 ====== ======= ====== ======= ====== FOR THE YEAR ENDED DECEMBER 31, 1998 Net sales........................................ $ -- $ 5,663 $ 53 $ -- $5,716 Cost of products sold............................ -- 1,277 12 -- 1,289 Selling, general and administrative expenses..... 27 3,027 (210) -- 2,844 Tobacco settlement and related expenses.......... -- 1,442 -- -- 1,442 Amortization of trademarks and goodwill.......... -- 260 106 -- 366 Interest and debt expense........................ 426 -- -- -- 426 Intercompany interest (income) expense........... (951) 955 (4) -- -- Other expense (income), net...................... 28 (59) 59 -- 28 ------ ------- ------ ------- ------ INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES........................ 470 (1,239) 90 -- (679) Provision for (benefit from) income taxes........ 124 (315) 31 -- (160) Equity income (loss) from subsidiaries from continuing operations.......................... (865) 59 -- 806 -- ------ ------- ------ ------- ------ INCOME (LOSS) FROM CONTINUING OPERATIONS..... (519) (865) 59 806 (519) Income from discontinued operations.............. -- -- 3 -- 3 Equity income from subsidiaries from discontinued operations..................................... 3 60 -- (63) -- ------ ------- ------ ------- ------ NET INCOME (LOSS)........................ $ (516) $ (805) $ 62 $ 743 $ (516) ====== ======= ====== ======= ======
71 72 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (DOLLARS IN MILLIONS) (UNAUDITED)
ISSUER GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED ------- ---------- -------------- ------------ ------------ FOR THE YEAR ENDED DECEMBER 31, 2000 Cash flows from operating activities.......... $ 615 $ 641 $ 432 $(1,098) $ 590 ------- ------ ------- ------- ------- Cash flows from (used in) investing activities: Short-term investments...................... -- 109 1 -- 110 Intercompany transfers...................... 2 34 811 (847) -- Net proceeds from acquisition............... -- 1,519 -- -- 1,519 Other, net.................................. (5) (50) (1) -- (56) ------- ------ ------- ------- ------- Net cash flows from (used in) investing activities............................ (3) 1,612 811 (847) 1,573 ------- ------ ------- ------- ------- Cash flows from (used in) financing activities: Repayments of long-term debt................ (387) -- -- -- (387) Dividends paid on common stock.............. (322) (238) (860) 1,098 (322) Repurchase of common stock.................. (231) -- -- -- (231) Intercompany payables....................... 1 (470) (377) 846 -- Other, net.................................. 238 (164) (16) 1 59 ------- ------ ------- ------- ------- Net cash flows used in financing activities............................ (701) (872) (1,253) 1,945 (881) ------- ------ ------- ------- ------- Net cash flows related to discontinued operations............................ 103 (19) -- -- 84 ------- ------ ------- ------- ------- Net change in cash and cash equivalents....... 14 1,362 (10) -- 1,366 Cash and cash equivalents at beginning of year........................................ -- 1,062 115 -- 1,177 ------- ------ ------- ------- ------- Cash and cash equivalents at end of year...... $ 14 $2,424 $ 105 $ -- $ 2,543 ======= ====== ======= ======= ======= FOR THE YEAR ENDED DECEMBER 31, 1999 Cash flows from operating activities.......... $ 138 $ 518 $ 273 $ -- $ 929 ------- ------ ------- ------- ------- Cash flows from (used in) investing activities: Net proceeds from the sale of the international tobacco business............ (35) 2,611 5,184 -- 7,760 Short-term investments...................... -- (109) (1) -- (110) Other, net.................................. -- (55) (19) -- (74) ------- ------ ------- ------- ------- Net cash flows from (used in) investing activities............................ (35) 2,447 5,164 -- 7,576 ------- ------ ------- ------- ------- Cash flows from (used in) financing activities: Proceeds from issuance of long-term debt.... 1,244 -- -- -- 1,244 Repayments of long-term debt................ (4,450) -- -- -- (4,450) Transfers and payments to former parent..... (1,968) -- -- -- (1,968) Intercompany transfer....................... 5,216 (881) (4,335) -- -- Other, net.................................. (185) -- -- -- (185) ------- ------ ------- ------- ------- Net cash flows used in financing activities............................ (143) (881) (4,335) -- (5,359) ------- ------ ------- ------- ------- Cash flows related to discontinued operations (including income taxes paid on the gain on sale of the international tobacco business)................................... -- (982) (987) -- (1,969) ------- ------ ------- ------- ------- Net change in cash and cash equivalents........................... (40) 1,102 115 -- 1,177 Cash and cash equivalents at beginning of year........................................ 40 (40) -- -- -- ------- ------ ------- ------- ------- Cash and cash equivalents at end of year...... $ -- $1,062 $ 115 $ -- $ 1,177 ======= ====== ======= ======= ======= FOR THE YEAR ENDED DECEMBER 31, 1998 Cash flows from operating activities.......... $ 185 $ 50 $ 132 $ -- $ 367 ------- ------ ------- ------- ------- Cash flows used in investing activities....... (1) (42) -- -- (43) ------- ------ ------- ------- ------- Cash flows from (used in) financing activities: Increase in short-term borrowings........... 62 -- -- -- 62 Repayments of long-term debt................ (68) -- -- -- (68) Dividends paid to NGH....................... (607) -- -- -- (607) Other, net.................................. 170 (32) (136) -- 2 ------- ------ ------- ------- ------- Net cash flows used in financing activities............................ (443) (32) (136) -- (611) ------- ------ ------- ------- ------- Cash flows related to discontinued operations.................................. 159 39 4 -- 202 ------- ------ ------- ------- ------- Net change in cash and cash equivalents........................... (100) 15 -- -- (85) Cash and cash equivalents at beginning of year........................................ 140 (55) -- -- 85 ------- ------ ------- ------- ------- Cash and cash equivalents at end of year...... $ 40 $ (40) $ -- $ -- $ -- ======= ====== ======= ======= =======
72 73 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONDENSED CONSOLIDATING BALANCE SHEETS (DOLLARS IN MILLIONS) (UNAUDITED)
ISSUER GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED ------- ---------- -------------- ------------ ------------ DECEMBER 31, 2000 ASSETS Cash and cash equivalents.............. $ 14 $ 2,424 $ 105 $ -- $ 2,543 Other current assets................... 7 2,221 54 (954) 1,328 Trademarks, net........................ -- -- 2,875 -- 2,875 Goodwill, net.......................... -- 7,303 -- -- 7,303 Intercompany notes receivable.......... 141 5 4,103 (4,249) -- Investment in subsidiaries............. 11,957 6,117 -- (18,074) -- Other noncurrent assets................ 69 1,429 6 1 1,505 ------- ------- ------ -------- ------- Total assets...................... $12,188 $19,499 $7,143 $(23,276) $15,554 ======= ======= ====== ======== ======= LIABILITIES AND STOCKHOLDERS' EQUITY Tobacco settlement and related accruals............................. $ -- $ 1,394 $ -- $ -- $ 1,394 Other current liabilities.............. 1,307 993 36 (954) 1,382 Intercompany notes payable............. 54 4,195 -- (4,249) -- Long-term debt (less current maturities).......................... 1,576 98 -- -- 1,674 Other noncurrent liabilities........... 815 843 1,009 1 2,668 Stockholders' equity................... 8,436 11,976 6,098 (18,074) 8,436 ------- ------- ------ -------- ------- Total liabilities and stockholders' equity............ $12,188 $19,499 $7,143 $(23,276) $15,554 ======= ======= ====== ======== ======= DECEMBER 31, 1999 ASSETS Cash and cash equivalents.............. $ -- $ 1,062 $ 115 $ -- $ 1,177 Other current assets................... 22 1,767 13 (511) 1,291 Trademarks, net........................ -- -- 3,070 -- 3,070 Goodwill, net.......................... -- 7,563 -- -- 7,563 Intercompany notes receivable.......... 143 38 4,914 (5,095) -- Investment in subsidiaries............. 10,401 6,636 -- (17,037) -- Other noncurrent assets................ 81 1,191 5 (1) 1,276 ------- ------- ------ -------- ------- Total assets...................... $10,647 $18,257 $8,117 $(22,644) $14,377 ======= ======= ====== ======== ======= LIABILITIES AND STOCKHOLDERS' EQUITY Tobacco settlement and related accruals............................. $ -- $ 1,278 $ -- $ -- $ 1,278 Other current liabilities.............. 1,175 1,095 31 (511) 1,790 Intercompany notes payable............. 53 4,664 378 (5,095) -- Long-term debt (less current maturities).......................... 1,653 -- -- -- 1,653 Other noncurrent liabilities........... 702 790 1,101 (1) 2,592 Stockholders' equity................... 7,064 10,430 6,607 (17,037) 7,064 ------- ------- ------ -------- ------- Total liabilities and stockholders' equity............ $10,647 $18,257 $8,117 $(22,644) $14,377 ======= ======= ====== ======== =======
73 74 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Item 10 is incorporated by reference to "Item 1: Election of Class II Directors" and "Stock Ownership-Section 16(a) beneficial ownership of reporting compliance" of RJR's Definitive Proxy Statement to be filed with the SEC on or before March 15, 2001. Reference is also made regarding the executive officers of the registrant to "Executive Officers and Certain Significant Employees of the Registrant" in Item 4 of Part I of this report. ITEM 11. EXECUTIVE COMPENSATION Item 11 is incorporated by reference to "Executive Compensation and Transactions with Management" of RJR's Definitive Proxy Statement to be filed with the SEC on or before March 15, 2001. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Item 12 is incorporated by reference to "Stock Ownership" of RJR's Definitive Proxy Statement to be filed with the SEC on or before March 15, 2001. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Item 13 is hereby incorporated by reference to "Executive Compensation and Transactions with Management -- Transactions with directors and executive officers," of RJR's Definitive Proxy Statement to be filed with the SEC on or before March 15, 2001. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as a part of this report: (1) Consolidated Statements of Income for the years ended December 31, 2000, 1999 and 1998. Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998. Consolidated Balance Sheets for the years ended December 31, 2000 and 1999. Consolidated Statements of Stockholders' Equity and Comprehensive Income for the years ended December 31, 2000, 1999 and 1998. (2) Financial Statement Schedules have been omitted because the information required has been separately disclosed in the consolidated financial statements or notes. (3) See (c) below. (b) RJR filed a Current Report on Form 8-K, dated December 11, 2000, disclosing its acquisition, through a merger, of Nabisco Group Holdings Corp., a non-operating public shell company. 74 75 (c) The following exhibits are filed as part of this report, Exhibit Numbers 10.24 through 10.57 are management contracts, compensatory plans or arrangements:
EXHIBIT NUMBER - ------- 2.1 Distribution Agreement dated as of May 12, 1999, among RJR Nabisco Holdings Corp., RJR Nabisco, Inc. and R. J. Reynolds Tobacco Company (incorporated by reference to Exhibit 2.1 to Registrant's Form 8-A filed May 19, 1999). 2.2 Certificate of Merger and Agreement and Plan of Merger among RJR Nabisco Holdings Corp., RJR Nabisco, Inc. and R.J. Reynolds Tobacco Holdings, Inc. (incorporated by reference to Exhibit 2.2 to Registrant's Form 8-K filed May 28, 1999). 2.3 Agreement and Plan of Merger dated as of June 25, 2000, among Nabisco Group Holdings Corp., R.J. Reynolds Tobacco Holdings, Inc. and RJR Acquisition Corp. (incorporated by reference to Exhibit 2.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, filed August 7, 2000). 2.4 Amendment No. 1, dated September 20, 2000, to the Agreement and Plan of Merger dated as of June 25, 2000, among Nabisco Group Holdings Corp., R.J. Reynolds Tobacco Holdings, Inc. and RJR Acquisition Corp. (incorporated by reference to Exhibit 2.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000, filed November 3, 2000). 2.5 Letter dated October 19, 2000, from R.J. Reynolds Tobacco Holdings, Inc. to Nabisco Group Holdings Corp., electing that Nabisco Group Holdings Corp. be merged with and into RJR Acquisition Corp. under the Agreement and Plan of Merger dated as of June 25, 2000, as amended, among Nabisco Group Holdings Corp., R.J. Reynolds Tobacco Holdings, Inc. and RJR Acquisition Corp. (incorporated by reference to Exhibit 2.2 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000, filed November 3, 2000). 2.6 Letter dated November 20, 2000, from R.J. Reynolds Tobacco Holdings, Inc. to Nabisco Group Holdings Corp., withdrawing its previous election made on October 19, 2000, and electing that RJR Acquisition Corp. be merged with and into Nabisco Group Holdings Corp. under the Agreement and Plan of Merger dated as of June 25, 2000, as amended, among Nabisco Group Holdings Corp., R.J. Reynolds Tobacco Holdings, Inc. and RJR Acquisition Corp. (incorporated by reference to Exhibit 2.4 to Registrant's Form 8-K filed December 21, 2000). 2.7 Letter dated October 27, 2000, from R.J. Reynolds Tobacco Holdings, Inc. to Nabisco Group Holdings Corp., agreeing that it will pay or cause to be paid to stockholders of Nabisco Group Holdings Corp., in circumstances described in Section 2.02(b) of the Agreement and Plan of Merger dated as of June 25, 2000, as amended, among Nabisco Group Holdings Corp., R.J. Reynolds Tobacco Holdings, Inc. and RJR Acquisition Corp., an amount equal to 100% of the difference between the Net Proceeds (as defined in the Agreement and Plan of Merger) and $11.729 billion (incorporated by reference to Exhibit 2.3 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000, filed November 3, 2000). 3.1 Restated Certificate of Incorporation of R.J. Reynolds Tobacco Holdings, Inc. (incorporated by reference to Exhibit 3.1 to Registrant's Form 8-K dated June 14, 1999). 3.2 Bylaws of R.J. Reynolds Tobacco Holdings, Inc. (incorporated by reference to Exhibit 3.2 to Registrant's Form 8-K dated June 14, 1999). 4.1 Rights Agreement dated as of May 18, 1999, between R.J. Reynolds Tobacco Holdings, Inc. and its rights agent (incorporated by reference to Exhibit 4.1 to Registrant's Form 8-K dated June 14, 1999). 4.2 Amended and Restated Indenture dated as of July 24, 1995, between RJR Nabisco, Inc. and The Bank of New York (incorporated by reference to Exhibit 4.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995, filed August 8, 1995).
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EXHIBIT NUMBER - ------- 4.3 First Supplemental Indenture and Waiver dated as of April 27, 1999, between RJR Nabisco, Inc. and The Bank of New York, to the Amended and Restated Indenture dated as of July 24, 1995, between RJR Nabisco, Inc. and The Bank of New York, as successor trustee (incorporated by reference to Exhibit 10.3 to Registrant's Form 8-A filed May 19, 1999). 4.4 Second Supplemental Indenture and Waiver dated as of April 27, 1999, between RJR Nabisco, Inc. and The Bank of New York, to the Amended and Restated Indenture dated as of May 18, 1992 between RJR Nabisco, Inc. and The Bank of New York, as successor trustee, as amended by the Form of First Supplemental Indenture and Waiver thereto dated as of June 2, 1995 (incorporated by reference to Exhibit 10.4 to Registrant's Form 8-A filed May 19, 1999). 4.5 Indenture dated as of May 15, 1999, among RJR Nabisco, Inc., R. J. Reynolds Tobacco Company and The Bank of New York, as trustee (incorporated by reference to Exhibit 10.2 to Registrant's Form 8-A flied May 19, 1999). 4.6 First Supplemental Indenture dated as of December 12, 2000, among RJR Acquisition Corp., R.J. Reynolds Tobacco Holdings, Inc., R. J. Reynolds Tobacco Company and The Bank of New York, as Trustee, to the Indenture dated as of May 15, 1999, among RJR Nabisco, Inc., R. J. Reynolds Tobacco Company and The Bank of New York, as Trustee. 10.1 Amended and Restated Credit Agreement dated as of November 17, 2000, among R.J. Reynolds Tobacco Holdings, Inc. and the lending institutions listed and to be listed from time to time on Annex I. 10.2 Form of Amended and Restated Subsidiary Guaranty by R. J. Reynolds Tobacco Company and RJR Acquisition Corp. to the creditors defined therein, issued in connection with the Credit Agreement dated as of May 18, 1999 and Amended and Restated as of November 17, 2000, among R.J. Reynolds Tobacco Holdings, Inc. and the lending institutions listed and to be listed from time to time on Annex I. 10.3 Guarantee dated as of May 18, 1999, by R. J. Reynolds Tobacco Company to the holders and to The Bank of New York, as trustee, issued in connection with the Indenture dated as of May 15, 1999, among RJR Nabisco, Inc., R. J. Reynolds Tobacco Company and The Bank of New York, as trustee (incorporated by reference to Exhibit 10.6 to Registrant's Form 8-A filed May 19, 1999). 10.4 Tax Sharing Agreement dated as of June 14, 1999, among RJR Nabisco Holdings Corp., R.J. Reynolds Tobacco Holdings, Inc., R. J. Reynolds Tobacco Company and Nabisco Holdings Corp. (incorporated by reference to Exhibit 10.1 to Registrant's Form 8-K dated June 14, 1999). 10.5 Amendment to Tax Sharing Agreement dated June 25, 2000, among Nabisco Group Holdings Corp., R.J. Reynolds Tobacco Holdings, Inc., Nabisco Holdings Corp. and R. J. Reynolds Tobacco Company (incorporated by reference to Exhibit 10.2 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, filed August 7, 2000). 10.6 Agreement dated as of May 20, 1999, among Pension Benefit Guaranty Corporation, RJR Nabisco Holdings Corp. and R. J. Reynolds Tobacco Company (incorporated by reference to Exhibit 10.16 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999, filed August 16, 1999). 10.7 Amendment effective as of June 14, 1999, to the Agreement effective as of May 20, 1999, by and among the Pension Benefit Guaranty Corporation, R.J. Reynolds Tobacco Holdings, Inc. and R. J. Reynolds Tobacco Company (incorporated by reference to Exhibit 10.3 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, filed August 7, 2000). 10.8 Purchase Agreement dated as of March 9, 1999, as amended and restated as of May 11, 1999, among R. J. Reynolds Tobacco Company, RJR Nabisco, Inc. and Japan Tobacco Inc. (incorporated by reference to Exhibit 2.1 to Registrant's Form 8-K dated May 12, 1999).
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EXHIBIT NUMBER - ------- 10.9 Settlement Agreement dated August 25, 1997, between the State of Florida and settling defendants in The State of Florida v. American Tobacco Co. (incorporated by reference to Exhibit 2 to Registrant's Form 8-K dated August 25, 1997). 10.10 Comprehensive Settlement Agreement and Release dated January 16, 1998, between the State of Texas and settling defendants in The State of Texas v. American Tobacco Co. (incorporated by reference to Exhibit 2 to Registrant's Form 8-K dated January 16, 1998). 10.11 Settlement Agreement and Release in re: The State of Minnesota v. Philip Morris, Inc., by and among the State of Minnesota, Blue Cross and Blue Shield of Minnesota and the various tobacco company defendants named therein, dated as of May 8, 1998 (incorporated by reference to Exhibit 99.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 30, 1998, filed May 15, 1998). 10.12 Settlement Agreement and Stipulation for Entry of Consent Judgment in re: The State of Minnesota v. Philip Morris, Inc., by and among the State of Minnesota, Blue Cross and Blue Shield of Minnesota and the various tobacco company defendants named therein, dated as of May 8, 1998 (incorporated by reference to Exhibit 99.2 to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 30, 1998, filed May 15, 1998). 10.13 Form of Consent Judgment by Judge Kenneth J. Fitzpatrick, Judge of District Court in re: The State of Minnesota v. Philip Morris, Inc. (incorporated by reference to Exhibit 99.3 to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 30, 1998, filed May 15, 1998). 10.14 Agreement to Pay State of Minnesota Attorney's Fees and Costs, by and among the State of Minnesota and the various tobacco companies, dated as of May 8, 1998 (incorporated by reference to Exhibit 99.4 to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 30, 1998, filed May 15, 1998). 10.15 Agreement to Pay Blue Cross and Blue Shield of Minnesota Attorney's Fees and Costs by and among Blue Cross and Blue Shield of Minnesota and various tobacco companies, dated as of May 8, 1998 (incorporated by reference to Exhibit 99.5 to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 30, 1998, filed May 15, 1998). 10.16 Mississippi Fee Payment Agreement dated as of July 2, 1998, by and among Philip Morris, Inc., R. J. Reynolds Tobacco Company, Brown & Williamson Tobacco Corporation (collectively, the "Mississippi Defendants"), the State of Mississippi ("Mississippi") and Mississippi's private counsel named therein (the "Mississippi Counsel") in connection with Moore v. The American Tobacco Co., Mississippi Litigation No. 94-1429 (the "Mississippi Action") (incorporated by reference to Exhibit 99.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, filed August 14, 1998). 10.17 Stipulation of Amendment to Settlement Agreement and for Entry of Agreed Order dated July 2, 1998, by and among the Mississippi Defendants, Mississippi and the Mississippi Counsel in connection with the Mississippi Action (incorporated by reference to Exhibit 99.2 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, filed August 14, 1998). 10.18 Texas Fee Payment Agreement dated as of July 24, 1998, by and among Philip Morris, Inc., R. J. Reynolds Tobacco Company, Brown & Williamson Tobacco Corporation, Lorillard Tobacco Company and United States Tobacco Company (collectively, the "Texas Defendants"), the State of Texas ("Texas") and Texas' private counsel named therein (the "Texas Counsel") in connection with Texas v. The American Tobacco Co., Texas Litigation No. 5-96CV-91 (the "Texas Action") (incorporated by reference to Exhibit 99.3 to Registrant's quarterly Report on Form 10-Q for the quarter ended June 30, 1998, filed August 14, 1998).
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EXHIBIT NUMBER - ------- 10.19 Stipulation of Amendment to Settlement Agreement and for Entry of Consent Decree dated July 24, 1998, by and among the Texas Defendants, Texas and the Texas Counsel in connection with the Texas Action (incorporated by reference to Exhibit 99.4 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, filed August 14, 1998). 10.20 Stipulation of Amendment to Settlement Agreement and for Entry of Consent Decree dated September 11, 1998, by and among the State of Florida and the tobacco companies named therein (incorporated by reference to Exhibit 99.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, filed November 12, 1998). 10.21 Florida Fee Payment Agreement dated September 11, 1998, by and among the State of Florida, various Florida counsel and the tobacco companies named therein (incorporated by reference to Exhibit 99.2 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, filed November 12, 1998). 10.22 Form of MFN Escrow Agreement by and among the State of Florida, the tobacco companies named therein and a bank acting as escrow agent (incorporated by reference to Exhibit 99.3 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, filed November 12, 1998). 10.23 Master Settlement Agreement (the "MSA") dated November 23, 1998, between the Settling States named in the MSA and the Participating Manufacturers also named therein (incorporated by reference to Exhibit 4 to Registrant's Form 8-K dated November 23, 1998). 10.24 Amended and Restated Equity Incentive Award Plan for Directors of R.J. Reynolds Tobacco Holdings, Inc. and Subsidiaries (the "EIAP") (incorporated by reference to Exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000, filed May 9, 2000). 10.25 Form of Deferred Stock Unit Agreement between R.J. Reynolds Tobacco Holdings, Inc. and the Director named therein, pursuant to the EIAP (incorporated by reference to Exhibit 10.9 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999, filed August 16, 1999). 10.26 Form of Stock Option Agreement (Initial) between R.J. Reynolds Tobacco Holdings, Inc. and the Director named therein, pursuant to the EIAP (incorporated by reference to Exhibit 10.10 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999, filed August 16, 1999). 10.27 Form of Stock Option Agreement (Annual) between R.J. Reynolds Tobacco Holdings, Inc. and the Director named therein, pursuant to the EIAP, dated as of June 15, 1999 (incorporated by reference to Exhibit 10.11 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999, filed August 16, 1999). 10.28 Deferred Compensation Plan for Directors between R.J. Reynolds Tobacco Holdings, Inc. (Effective June 14, 1999) (incorporated by reference to Exhibit 10.12 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999, filed August 16, 1999). 10.29 R.J. Reynolds Tobacco Holdings, Inc. 1999 Long Term Incentive Plan (incorporated by reference to Exhibit 10.2 to Registrant's Form 8-K filed June 16, 1999). 10.30 Form of 1999 Performance Appreciation Rights Agreement under R.J. Reynolds Tobacco Holdings, Inc. 1999 Long Term Incentive Plan between R.J. Reynolds Tobacco Holdings, Inc. and the grantee named therein (incorporated by reference to Exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, filed November 12, 1999).
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EXHIBIT NUMBER - ------- 10.31 Form of Tandem Restricted Stock/Stock Option Agreement dated June 15, 1999, between R.J. Reynolds Tobacco Holdings, Inc. and the grantee named therein (incorporated by reference to Exhibit 10.2 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, filed November 12, 1999). 10.32 Form of Tandem Restricted Stock/Stock Option Agreement dated June 15, 1999, between R.J. Reynolds Tobacco Holdings, Inc. and Andrew J. Schindler (incorporated by reference to Exhibit 10.3 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, filed November 12, 1999). 10.33 Form of Tandem Restricted Stock/Stock Option Agreement dated July 28, 1999, between R.J. Reynolds Tobacco Holdings, Inc. and the grantee named therein (incorporated by reference to Exhibit 10.4 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, filed November 12, 1999). 10.34 Form of Restricted Stock Agreement dated February 2, 2000, between R.J. Reynolds Tobacco Holdings, Inc. and the grantee named therein (incorporated by reference to Exhibit 10.35 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1999, filed March 8, 2000). 10.35 Form of Performance Unit Agreement (three-year vesting) dated February 2, 2000, between R.J. Reynolds Tobacco Holdings, Inc. and the grantee named therein (incorporated by reference to Exhibit 10.36 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1999, filed March 8, 2000). 10.36 Form of Restricted Stock Agreement dated January 31, 2001, between R.J. Reynolds Tobacco Holdings, Inc. and the grantee named therein. 10.37 Form of Performance Unit Agreement (one-year vesting) dated January 31, 2001, between R.J. Reynolds Tobacco Holdings, Inc. and the grantee named therein. 10.38 Form of Performance Unit Agreement (three-year vesting) dated January 31, 2001, between R.J. Reynolds Tobacco Holdings, Inc. and the grantee named therein. 10.39 Master Trust Agreement, as amended and restated as of October 12, 1988, between RJR Nabisco, Inc. and Wachovia Bank and Trust Company, N.A. (incorporated by reference to Exhibit 10.18 to the Registration Statement on Form S-4 of RJR Holdings Corp. and RJR Holdings Group, Inc., Registration No. 33-27894, filed April 5, 1989, as amended). 10.40 Amendment No. 1 to Master Trust Agreement, dated January 27, 1989 (incorporated by reference to Exhibit 10(g)(ii) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, filed March 9, 1989). 10.41 Amendment No. 2 to Master Trust Agreement, dated January 27, 1989 (incorporated by reference to Exhibit 10(g)(iii) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, filed March 9, 1989). 10.42 Excess Benefit Master Trust Agreement, as amended and restated as of October 12, 1988, between RJR Nabisco, Inc. and Wachovia Bank and Trust Company, N.A. (incorporated by reference to Exhibit 10.21 to Registrant's Registration Statement on Form S-4 of RJR Holdings Corp. and RJR Holdings Group, Inc., Registration No. 33-27894, filed April 5, 1989, as amended). 10.43 Amendment No. 1 to Excess Benefit Master Trust Agreement, dated January 27, 1989 (incorporated by reference to Exhibit 10(h)(ii) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, filed March 9, 1989).
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EXHIBIT NUMBER - ------- 10.44 RJR Nabisco, Inc. Supplemental Executive Retirement Plan, as amended on July 21, 1988 (incorporated by reference to Exhibit 10.32 to the Registration Statement on Form S-4 of RJR Holdings Corp. and RJR Holdings Group, Inc., Registration No. 33-27894, filed April 5, 1989, as amended). 10.45 Amendment to Supplemental Executive Retirement Plan, dated November 23, 1988 (incorporated by reference to Exhibit 10(m)(ii) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, filed March 9, 1989). 10.46 Amendment No. 2 to Supplemental Executive Retirement Plan, dated January 27, 1989 (incorporated by reference to Exhibit 10(m)(iii) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, filed March 9, 1989). 10.47 Amendment to Supplemental Executive Retirement Plan, dated April 10, 1993 (incorporated by reference to Registrant's Annual Report on Form 10-K for the year ended December 31, 1993, filed February 24, 1994). 10.48 Retention Trust Agreement dated May 13, 1998, by and between RJR Nabisco, Inc. and Wachovia Bank, N.A. (incorporated by reference to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, filed August 14, 1998). 10.49 Form of Employment Agreement dated as of October 31, 1988, by and between RJR Nabisco, Inc. and Andrew J. Schindler (incorporated by reference to Exhibit 10 to Registrant's Schedule 14D-9 filed on November 8, 1988). 10.50 Form of Special Addendum dated December 20, 1988, to the Employment Agreement dated as of October 31, 1988, between RJR Nabisco, Inc. and Andrew J. Schindler (incorporated by reference to Exhibit 10(d)(i) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, filed March 8, 1989). 10.51 Amendment dated June 7, 1999, to the Employment Agreement dated as of October 31, 1988, and previously amended as of December 20, 1988, between RJR Nabisco, Inc. and Andrew J. Schindler (incorporated by reference to Exhibit 10.8 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, filed November 12, 1999). 10.52 Change of Control Letter Agreement dated December 5, 1995, by and among RJR Nabisco Holdings Corp., RJR Nabisco, Inc. and Andrew J. Schindler (incorporated by reference to Exhibit 10.44 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, filed February 22, 1996). 10.53 Participation Agreement, RJR Nabisco, Inc. Supplemental Executive Retirement Plan, for Andrew J. Schindler dated December 28, 1995 (incorporated by reference to Exhibit 10.45 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, filed February 22, 1996). 10.54 Cash Retention Grant Letter Agreement dated August 17, 1999, between R.J. Reynolds Tobacco Holdings, Inc. and Andrew J. Schindler (incorporated by reference to Exhibit 10.9 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, filed November 12, 1999). 10.55 Form of Change of Control Letter Agreement between R.J. Reynolds Tobacco Holdings, Inc. and the executive officer named therein (incorporated by reference to Exhibit 10.5 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, filed November 12, 1999). 10.56 Form of Special Severance Benefits Letter Agreement between R. J. Reynolds Tobacco Company and the executive officer named therein (incorporated by reference to Exhibit 10.6 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, filed November 12, 1999).
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EXHIBIT NUMBER - ------- 10.57 Form of Amendment to Special Severance Benefits Letter Agreement between R. J. Reynolds Tobacco Company and the executive officer named therein (incorporated by reference to Exhibit 10.7 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, filed November 12, 1999). 12.1 Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends/Deficiency in the Coverage of Combined Fixed Charges and Preferred Stock Dividends by Earnings Before Fixed Charges for each of the five years within the period ended December 31, 2000. 21.1 Subsidiaries of the Registrant. 23.1 Consent of Independent Auditors. 23.2 Consent of Independent Auditors. 99.1 Expanded Litigation Disclosure.
81 82 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. R.J. REYNOLDS TOBACCO HOLDINGS, INC. Dated: March 1, 2001 By: /s/ Andrew J. Schindler ------------------------------------ Andrew J. Schindler Chairman of the Board, President, Chief Executive Officer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ Andrew J. Schindler Chairman of the Board, March 1, 2001 - ----------------------------------------------------- President, Andrew J. Schindler Chief Executive Officer and Director (principal executive officer) /s/ Kenneth J. Lapiejko Executive Vice President and March 1, 2001 - ----------------------------------------------------- Chief Financial Officer Kenneth J. Lapiejko (principal financial officer) /s/ Thomas R. Adams Senior Vice President and March 1, 2001 - ----------------------------------------------------- Controller Thomas R. Adams (principal accounting officer) /s/ Mary K. Bush Director March 1, 2001 - ----------------------------------------------------- Mary K. Bush /s/ John T. Chain, Jr. Director March 1, 2001 - ----------------------------------------------------- John T. Chain, Jr. /s/ A.D. Frazier, Jr. Director March 1, 2001 - ----------------------------------------------------- A.D. Frazier, Jr. /s/ Denise Ilitch Director March 1, 2001 - ----------------------------------------------------- Denise Ilitch /s/ John G. Medlin, Jr. Director March 1, 2001 - ----------------------------------------------------- John G. Medlin, Jr. /s/ Nana Mensah Director March 1, 2001 - ----------------------------------------------------- Nana Mensah Director - ----------------------------------------------------- Joseph P. Viviano /s/ Thomas C. Wajnert Director March 1, 2001 - ----------------------------------------------------- Thomas C. Wajnert
82 83 EXHIBIT INDEX Exhibit Number ------- 2.1 Distribution Agreement dated as of May 12, 1999, among RJR Nabisco Holdings Corp., RJR Nabisco, Inc. and R. J. Reynolds Tobacco Company (incorporated by reference to Exhibit 2.1 to Registrant's Form 8-A filed May 19, 1999). 2.2 Certificate of Merger and Agreement and Plan of Merger among RJR Nabisco Holdings Corp., RJR Nabisco, Inc. and R.J. Reynolds Tobacco Holdings, Inc. (incorporated by reference to Exhibit 2.2 to Registrant's Form 8-K filed May 28, 1999). 2.3 Agreement and Plan of Merger dated as of June 25, 2000, among Nabisco Group Holdings Corp., R.J. Reynolds Tobacco Holdings, Inc. and RJR Acquisition Corp. (incorporated by reference to Exhibit 2.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, filed August 7, 2000). 2.4 Amendment No. 1, dated September 20, 2000, to the Agreement and Plan of Merger dated as of June 25, 2000, among Nabisco Group Holdings Corp., R.J. Reynolds Tobacco Holdings, Inc. and RJR Acquisition Corp. (incorporated by reference to Exhibit 2.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000, filed November 3, 2000). 2.5 Letter dated October 19, 2000, from R.J. Reynolds Tobacco Holdings, Inc. to Nabisco Group Holdings Corp., electing that Nabisco Group Holdings Corp. be merged with and into RJR Acquisition Corp. under the Agreement and Plan of Merger dated as of June 25, 2000, as amended, among Nabisco Group Holdings Corp., R.J. Reynolds Tobacco Holdings, Inc. and RJR Acquisition Corp. (incorporated by reference to Exhibit 2.2 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000, filed November 3, 2000). 2.6 Letter dated November 20, 2000, from R.J. Reynolds Tobacco Holdings, Inc. to Nabisco Group Holdings Corp., withdrawing its previous election made on October 19, 2000, and electing that RJR Acquisition Corp. be merged with and into Nabisco Group Holdings Corp. under the Agreement and Plan of Merger dated as of June 25, 2000, as amended, among Nabisco Group Holdings Corp., R.J. Reynolds Tobacco Holdings, Inc. and RJR Acquisition Corp. (incorporated by reference to Exhibit 2.4 to Registrant's Form 8-K filed December 21, 2000). 2.7 Letter dated October 27, 2000, from R.J. Reynolds Tobacco Holdings, Inc. to Nabisco Group Holdings Corp., agreeing that it will pay or cause to be paid to stockholders of Nabisco Group Holdings Corp., in circumstances described in Section 2.02(b) of the Agreement and Plan of Merger dated as of June 25, 2000, as amended, among Nabisco Group Holdings Corp., R.J. Reynolds Tobacco Holdings, Inc. and RJR Acquisition Corp., an amount equal to 100% of the difference between the Net Proceeds (as defined in the Agreement and Plan of Merger) and $11.729 billion (incorporated by reference to Exhibit 2.3 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000, filed November 3, 2000). 3.1 Restated Certificate of Incorporation of R.J. Reynolds Tobacco Holdings, Inc. (incorporated by reference to Exhibit 3.1 to Registrant's Form 8-K dated June 14, 1999). 3.2 Bylaws of R.J. Reynolds Tobacco Holdings, Inc. (incorporated by reference to Exhibit 3.2 to Registrant's Form 8-K dated June 14, 1999). 4.1 Rights Agreement dated as of May 18, 1999, between R.J. Reynolds Tobacco Holdings, Inc. and its rights agent (incorporated by reference to Exhibit 4.1 to Registrant's Form 8-K dated June 14, 1999). 4.2 Amended and Restated Indenture dated as of July 24, 1995, between RJR Nabisco, Inc. and The Bank of New York (incorporated by reference to Exhibit 4.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995, filed August 8, 1995). 4.3 First Supplemental Indenture and Waiver dated as of April 27, 1999, between RJR Nabisco, Inc. and The Bank of New York, to the Amended and Restated Indenture dated as of July 24, 1995, between RJR Nabisco, Inc. and The Bank of New York, as successor trustee (incorporated by reference to Exhibit 10.3 to Registrant's Form 8-A filed May 19, 1999). 84 Exhibit Number ------- 4.4 Second Supplemental Indenture and Waiver dated as of April 27, 1999, between RJR Nabisco, Inc. and The Bank of New York, to the Amended and Restated Indenture dated as of May 18, 1992 between RJR Nabisco, Inc. and The Bank of New York, as successor trustee, as amended by the Form of First Supplemental Indenture and Waiver thereto dated as of June 2, 1995 (incorporated by reference to Exhibit 10.4 to Registrant's Form 8-A filed May 19, 1999). 4.5 Indenture dated as of May 15, 1999, among RJR Nabisco, Inc., R. J. Reynolds Tobacco Company and The Bank of New York, as trustee (incorporated by reference to Exhibit 10.2 to Registrant's Form 8-A flied May 19, 1999). 4.6 First Supplemental Indenture dated as of December 12, 2000, among RJR Acquisition Corp., R.J. Reynolds Tobacco Holdings, Inc., R. J. Reynolds Tobacco Company and The Bank of New York, as Trustee, to the Indenture dated as of May 15, 1999, among RJR Nabisco, Inc., R. J. Reynolds Tobacco Company and The Bank of New York, as Trustee. 10.1 Amended and Restated Credit Agreement dated as of November 17, 2000, among R.J. Reynolds Tobacco Holdings, Inc. and the lending institutions listed and to be listed from time to time on Annex I. 10.2 Form of Amended and Restated Subsidiary Guaranty by R. J. Reynolds Tobacco Company and RJR Acquisition Corp. to the creditors defined therein, issued in connection with the Credit Agreement dated as of May 18, 1999 and Amended and Restated as of November 17, 2000, among R.J. Reynolds Tobacco Holdings, Inc. and the lending institutions listed and to be listed from time to time on Annex I. 10.3 Guarantee dated as of May 18, 1999, by R. J. Reynolds Tobacco Company to the holders and to The Bank of New York, as trustee, issued in connection with the Indenture dated as of May 15, 1999, among RJR Nabisco, Inc., R. J. Reynolds Tobacco Company and The Bank of New York, as trustee (incorporated by reference to Exhibit 10.6 to Registrant's Form 8-A filed May 19, 1999). 10.4 Tax Sharing Agreement dated as of June 14, 1999, among RJR Nabisco Holdings Corp., R.J. Reynolds Tobacco Holdings, Inc., R. J. Reynolds Tobacco Company and Nabisco Holdings Corp. (incorporated by reference to Exhibit 10.1 to Registrant's Form 8-K dated June 14, 1999). 10.5 Amendment to Tax Sharing Agreement dated June 25, 2000, among Nabisco Group Holdings Corp., R.J. Reynolds Tobacco Holdings, Inc., Nabisco Holdings Corp. and R. J. Reynolds Tobacco Company (incorporated by reference to Exhibit 10.2 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, filed August 7, 2000). 10.6 Agreement dated as of May 20, 1999, among Pension Benefit Guaranty Corporation, RJR Nabisco Holdings Corp. and R. J. Reynolds Tobacco Company (incorporated by reference to Exhibit 10.16 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999, filed August 16, 1999). 10.7 Amendment effective as of June 14, 1999, to the Agreement effective as of May 20, 1999, by and among the Pension Benefit Guaranty Corporation, R.J. Reynolds Tobacco Holdings, Inc. and R. J. Reynolds Tobacco Company (incorporated by reference to Exhibit 10.3 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, filed August 7, 2000). 10.8 Purchase Agreement dated as of March 9, 1999, as amended and restated as of May 11, 1999, among R. J. Reynolds Tobacco Company, RJR Nabisco, Inc. and Japan Tobacco Inc. (incorporated by reference to Exhibit 2.1 to Registrant's Form 8-K dated May 12, 1999). 10.9 Settlement Agreement dated August 25, 1997, between the State of Florida and settling defendants in The State of Florida v. American Tobacco Co. (incorporated by reference to Exhibit 2 to Registrant's Form 8-K dated August 25, 1997). 10.10 Comprehensive Settlement Agreement and Release dated January 16, 1998, between the State of Texas and settling defendants in The State of Texas v. American Tobacco Co. (incorporated by reference to Exhibit 2 to Registrant's Form 8-K dated January 16, 1998). 85 Exhibit Number ------- 10.11 Settlement Agreement and Release in re: The State of Minnesota v. Philip Morris, Inc., by and among the State of Minnesota, Blue Cross and Blue Shield of Minnesota and the various tobacco company defendants named therein, dated as of May 8, 1998 (incorporated by reference to Exhibit 99.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 30, 1998, filed May 15, 1998). 10.12 Settlement Agreement and Stipulation for Entry of Consent Judgment in re: The State of Minnesota v. Philip Morris, Inc., by and among the State of Minnesota, Blue Cross and Blue Shield of Minnesota and the various tobacco company defendants named therein, dated as of May 8, 1998 (incorporated by reference to Exhibit 99.2 to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 30, 1998, filed May 15, 1998). 10.13 Form of Consent Judgment by Judge Kenneth J. Fitzpatrick, Judge of District Court in re: The State of Minnesota v. Philip Morris, Inc. (incorporated by reference to Exhibit 99.3 to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 30, 1998, filed May 15, 1998). 10.14 Agreement to Pay State of Minnesota Attorney's Fees and Costs, by and among the State of Minnesota and the various tobacco companies, dated as of May 8, 1998 (incorporated by reference to Exhibit 99.4 to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 30, 1998, filed May 15, 1998). 10.15 Agreement to Pay Blue Cross and Blue Shield of Minnesota Attorney's Fees and Costs by and among Blue Cross and Blue Shield of Minnesota and various tobacco companies, dated as of May 8, 1998 (incorporated by reference to Exhibit 99.5 to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 30, 1998, filed May 15, 1998). 10.16 Mississippi Fee Payment Agreement dated as of July 2, 1998, by and among Philip Morris, Inc., R. J. Reynolds Tobacco Company, Brown & Williamson Tobacco Corporation (collectively, the "Mississippi Defendants"), the State of Mississippi ("Mississippi") and Mississippi's private counsel named therein (the "Mississippi Counsel") in connection with Moore v. The American Tobacco Co., Mississippi Litigation No. 94-1429 (the "Mississippi Action") (incorporated by reference to Exhibit 99.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, filed August 14, 1998). 10.17 Stipulation of Amendment to Settlement Agreement and for Entry of Agreed Order dated July 2, 1998, by and among the Mississippi Defendants, Mississippi and the Mississippi Counsel in connection with the Mississippi Action (incorporated by reference to Exhibit 99.2 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, filed August 14, 1998). 10.18 Texas Fee Payment Agreement dated as of July 24, 1998, by and among Philip Morris, Inc., R. J. Reynolds Tobacco Company, Brown & Williamson Tobacco Corporation, Lorillard Tobacco Company and United States Tobacco Company (collectively, the "Texas Defendants"), the State of Texas ("Texas") and Texas' private counsel named therein (the "Texas Counsel") in connection with Texas v. The American Tobacco Co., Texas Litigation No. 5-96CV-91 (the "Texas Action") (incorporated by reference to Exhibit 99.3 to Registrant's quarterly Report on Form 10-Q for the quarter ended June 30, 1998, filed August 14, 1998). 10.19 Stipulation of Amendment to Settlement Agreement and for Entry of Consent Decree dated July 24, 1998, by and among the Texas Defendants, Texas and the Texas Counsel in connection with the Texas Action (incorporated by reference to Exhibit 99.4 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, filed August 14, 1998). 10.20 Stipulation of Amendment to Settlement Agreement and for Entry of Consent Decree dated September 11, 1998, by and among the State of Florida and the tobacco companies named therein (incorporated by reference to Exhibit 99.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, filed November 12, 1998). 86 Exhibit Number ------- 10.21 Florida Fee Payment Agreement dated September 11, 1998, by and among the State of Florida, various Florida counsel and the tobacco companies named therein (incorporated by reference to Exhibit 99.2 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, filed November 12, 1998). 10.22 Form of MFN Escrow Agreement by and among the State of Florida, the tobacco companies named therein and a bank acting as escrow agent (incorporated by reference to Exhibit 99.3 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, filed November 12, 1998). 10.23 Master Settlement Agreement (the "MSA") dated November 23, 1998, between the Settling States named in the MSA and the Participating Manufacturers also named therein (incorporated by reference to Exhibit 4 to Registrant's Form 8-K dated November 23, 1998). 10.24 Amended and Restated Equity Incentive Award Plan for Directors of R.J. Reynolds Tobacco Holdings, Inc. and Subsidiaries (the "EIAP") (incorporated by reference to Exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000, filed May 9, 2000). 10.25 Form of Deferred Stock Unit Agreement between R.J. Reynolds Tobacco Holdings, Inc. and the Director named therein, pursuant to the EIAP (incorporated by reference to Exhibit 10.9 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999, filed August 16, 1999). 10.26 Form of Stock Option Agreement (Initial) between R.J. Reynolds Tobacco Holdings, Inc. and the Director named therein, pursuant to the EIAP (incorporated by reference to Exhibit 10.10 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999, filed August 16, 1999). 10.27 Form of Stock Option Agreement (Annual) between R.J. Reynolds Tobacco Holdings, Inc. and the Director named therein, pursuant to the EIAP, dated as of June 15, 1999 (incorporated by reference to Exhibit 10.11 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999, filed August 16, 1999). 10.28 Deferred Compensation Plan for Directors between R.J. Reynolds Tobacco Holdings, Inc. (Effective June 14, 1999) (incorporated by reference to Exhibit 10.12 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999, filed August 16, 1999). 10.29 R.J. Reynolds Tobacco Holdings, Inc. 1999 Long Term Incentive Plan (incorporated by reference to Exhibit 10.2 to Registrant's Form 8-K filed June 16, 1999). 10.30 Form of 1999 Performance Appreciation Rights Agreement under R.J. Reynolds Tobacco Holdings, Inc. 1999 Long Term Incentive Plan between R.J. Reynolds Tobacco Holdings, Inc. and the grantee named therein (incorporated by reference to Exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, filed November 12, 1999). 10.31 Form of Tandem Restricted Stock/Stock Option Agreement dated June 15, 1999, between R.J. Reynolds Tobacco Holdings, Inc. and the grantee named therein (incorporated by reference to Exhibit 10.2 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, filed November 12, 1999). 10.32 Form of Tandem Restricted Stock/Stock Option Agreement dated June 15, 1999, between R.J. Reynolds Tobacco Holdings, Inc. and Andrew J. Schindler (incorporated by reference to Exhibit 10.3 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, filed November 12, 1999). 10.33 Form of Tandem Restricted Stock/Stock Option Agreement dated July 28, 1999, between R.J. Reynolds Tobacco Holdings, Inc. and the grantee named therein (incorporated by reference to Exhibit 10.4 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, filed November 12, 1999). 87 Exhibit Number ------- 10.34 Form of Restricted Stock Agreement dated February 2, 2000, between R.J. Reynolds Tobacco Holdings, Inc. and the grantee named therein (incorporated by reference to Exhibit 10.35 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1999, filed March 8, 2000). 10.35 Form of Performance Unit Agreement (three-year vesting) dated February 2, 2000, between R.J. Reynolds Tobacco Holdings, Inc. and the grantee named therein (incorporated by reference to Exhibit 10.36 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1999, filed March 8, 2000). 10.36 Form of Restricted Stock Agreement dated January 31, 2001, between R.J. Reynolds Tobacco Holdings, Inc. and the grantee named therein. 10.37 Form of Performance Unit Agreement (one-year vesting) dated January 31, 2001, between R.J. Reynolds Tobacco Holdings, Inc. and the grantee named therein. 10.38 Form of Performance Unit Agreement (three-year vesting) dated January 31, 2001, between R.J. Reynolds Tobacco Holdings, Inc. and the grantee named therein. 10.39 Master Trust Agreement, as amended and restated as of October 12, 1988, between RJR Nabisco, Inc. and Wachovia Bank and Trust Company, N.A. (incorporated by reference to Exhibit 10.18 to the Registration Statement on Form S-4 of RJR Holdings Corp. and RJR Holdings Group, Inc., Registration No. 33-27894, filed April 5, 1989, as amended). 10.40 Amendment No. 1 to Master Trust Agreement, dated January 27, 1989 (incorporated by reference to Exhibit 10(g)(ii) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, filed March 9, 1989). 10.41 Amendment No. 2 to Master Trust Agreement, dated January 27, 1989 (incorporated by reference to Exhibit 10(g)(iii) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, filed March 9, 1989). 10.42 Excess Benefit Master Trust Agreement, as amended and restated as of October 12, 1988, between RJR Nabisco, Inc. and Wachovia Bank and Trust Company, N.A. (incorporated by reference to Exhibit 10.21 to Registrant's Registration Statement on Form S-4 of RJR Holdings Corp. and RJR Holdings Group, Inc., Registration No. 33-27894, filed April 5, 1989, as amended). 10.43 Amendment No. 1 to Excess Benefit Master Trust Agreement, dated January 27, 1989 (incorporated by reference to Exhibit 10(h)(ii) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, filed March 9, 1989). 10.44 RJR Nabisco, Inc. Supplemental Executive Retirement Plan, as amended on July 21, 1988 (incorporated by reference to Exhibit 10.32 to the Registration Statement on Form S-4 of RJR Holdings Corp. and RJR Holdings Group, Inc., Registration No. 33-27894, filed April 5, 1989, as amended). 10.45 Amendment to Supplemental Executive Retirement Plan, dated November 23, 1988 (incorporated by reference to Exhibit 10(m)(ii) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, filed March 9, 1989). 10.46 Amendment No. 2 to Supplemental Executive Retirement Plan, dated January 27, 1989 (incorporated by reference to Exhibit 10(m)(iii) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, filed March 9, 1989). 10.47 Amendment to Supplemental Executive Retirement Plan, dated April 10, 1993 (incorporated by reference to Registrant's Annual Report on Form 10-K for the year ended December 31, 1993, filed February 24, 1994). 10.48 Retention Trust Agreement dated May 13, 1998, by and between RJR Nabisco, Inc. and Wachovia Bank, N.A. (incorporated by reference to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, filed August 14, 1998). 10.49 Form of Employment Agreement dated as of October 31, 1988, by and between RJR Nabisco, Inc. and Andrew J. Schindler (incorporated by reference to Exhibit 10 to Registrant's Schedule 14D-9 filed on November 8, 1988). 88 Exhibit Number ------- 10.50 Form of Special Addendum dated December 20, 1988, to the Employment Agreement dated as of October 31, 1988, between RJR Nabisco, Inc. and Andrew J. Schindler (incorporated by reference to Exhibit 10(d)(i) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, filed March 8, 1989). 10.51 Amendment dated June 7, 1999, to the Employment Agreement dated as of October 31, 1988, and previously amended as of December 20, 1988, between RJR Nabisco, Inc. and Andrew J. Schindler (incorporated by reference to Exhibit 10.8 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, filed November 12, 1999). 10.52 Change of Control Letter Agreement dated December 5, 1995, by and among RJR Nabisco Holdings Corp., RJR Nabisco, Inc. and Andrew J. Schindler (incorporated by reference to Exhibit 10.44 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, filed February 22, 1996). 10.53 Participation Agreement, RJR Nabisco, Inc. Supplemental Executive Retirement Plan, for Andrew J. Schindler dated December 28, 1995 (incorporated by reference to Exhibit 10.45 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, filed February 22, 1996). 10.54 Cash Retention Grant Letter Agreement dated August 17, 1999, between R.J. Reynolds Tobacco Holdings, Inc. and Andrew J. Schindler (incorporated by reference to Exhibit 10.9 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, filed November 12, 1999). 10.55 Form of Change of Control Letter Agreement between R.J. Reynolds Tobacco Holdings, Inc. and the executive officer named therein (incorporated by reference to Exhibit 10.5 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, filed November 12, 1999). 10.56 Form of Special Severance Benefits Letter Agreement between R. J. Reynolds Tobacco Company and the executive officer named therein (incorporated by reference to Exhibit 10.6 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, filed November 12, 1999). 10.57 Form of Amendment to Special Severance Benefits Letter Agreement between R. J. Reynolds Tobacco Company and the executive officer named therein (incorporated by reference to Exhibit 10.7 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, filed November 12, 1999). 12.1 Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends/Deficiency in the Coverage of Combined Fixed Charges and Preferred Stock Dividends by Earnings Before Fixed Charges for each of the five years within the period ended December 31, 2000. 21.1 Subsidiaries of the Registrant. 23.1 Consent of Independent Auditors. 23.2 Consent of Independent Auditors. 99.1 Expanded Litigation Disclosure. EX-4.6 2 g67125ex4-6.txt FIRST SUPPLEMENTAL INDENTURE DATED 12/12/2000 1 Exhibit 4.6 FIRST SUPPLEMENTAL INDENTURE This First Supplemental Indenture, dated as of December 12, 2000 (this "First Supplemental Indenture" or "Guarantee"), among RJR Acquisition Corp. (the "Guarantor"), R.J. Reynolds Tobacco Holdings, Inc. (together with its successors and assigns, the "Company"), R.J. Reynolds Tobacco Company ("RJRT"), the existing Guarantor under the Indenture referred to below, and The Bank of New York, as Trustee under the Indenture referred to below. WITNESSETH: WHEREAS, the Company, RJRT and the Trustee have heretofore executed and delivered an Indenture, dated as of May 15, 1999 (as amended, supplemented, waived or otherwise modified, the "Indenture"), providing for the issuance of an aggregate principal amount of $550,000,000 of 7 3/8% Notes due 2003, an aggregate principal amount of $500,000,000 7 3/4% Notes due 2006, and an aggregate principal amount of $200,000,000 7 7/8% Notes due 2009 of the Company (the "Notes"); WHEREAS, Section 10.5 of the Indenture provides that the Company is required to cause each Subsidiary (whether previously existing or created or acquired by the Company) which is or becomes a guarantor under the Amended and Restated Credit Agreement, dated as of May 7, 1999, and amended and restated as of November 17, 2000, among the Company, The Chase Manhattan Bank, as Administrative Agent and the various lending institutions named on the signature pages thereto, to execute and deliver to the Trustee a Guarantee pursuant to which such Subsidiary will unconditionally and irrevocably guarantee, as primary obligor and not merely as surety, on a joint and several basis with each other Guarantor, the full and punctual payment when due, whether at maturity, by acceleration, by redemption, by repurchase, or otherwise, of the principal of, premium, if any, and interest, including Additional Interest, on the Notes and all other obligations of the Company under this Indenture (all the foregoing being hereinafter collectively called the "Obligations"); and WHEREAS, pursuant to Section 9.1 of the Indenture, the Trustee and the Company are authorized to execute and deliver this First Supplemental Indenture to amend the Indenture, without the consent of any Noteholder; NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt of which is hereby acknowledged, the Guarantor, the Company, the other Guarantor and the Trustee mutually covenant and agree for the equal and ratable benefit of the holders of the Notes as follows: 1 2 ARTICLE I Definitions SECTION 1.1 Defined Terms. As used in this Guarantee, terms defined in the Indenture or in the preamble or recital hereto are used herein as therein defined, except that the term "Holders" in this Guarantee shall refer to the term "Holders" as defined in the Indenture and the Trustee acting on behalf or for the benefit of such holders. The words "herein," "hereof" and "hereby" and other words of similar import used in this First Supplemental Indenture refer to this First Supplemental Indenture as a whole and not to any particular section hereof. ARTICLE II Agreement to be Bound; Guarantee SECTION 2.1 Agreement to be Bound. The Guarantor hereby becomes a party to the Indenture as a Guarantor and as such will have all of the rights and be subject to all of the obligations and agreements of a Guarantor under the Indenture. The Guarantor agrees to be bound by all of the provisions of the Indenture applicable to a Guarantor and to perform all of the obligations and agreements of a Guarantor under the Indenture. SECTION 2.2 Guarantee. The Guarantee hereby fully, unconditionally and irrevocably guarantees, as primary obligor and not merely as surety, jointly and severally with each other Guarantor, to each Holder of the Notes and the Trustee, the full and punctual payment when due, whether at maturity, by acceleration, by redemption or otherwise, of the Obligations in accordance with Article X of the Indenture. ARTICLE III Miscellaneous SECTION 3.1 Notices. All notices and other communications to the Guarantor shall be given as provided in the Indenture to the Guarantor, at its address set forth below, with a copy to the Company as provided in the Indenture for notices to the Company. SECTION 3.2 Parties. Nothing expressed or mentioned herein is intended or shall be construed to give any Person, firm or corporation, other than the Holders and the Trustee, any legal or equitable right, remedy or claim under or in respect of this First Supplemental Indenture or the Indenture or any provision herein or therein contained. SECTION 3.3 Governing Law. This First Supplemental Indenture shall be governed by the laws of the State of New York. SECTION 3.4 Severability Clause. In any case any provision in this First Supplemental Indenture shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby and such provision shall be ineffective only to the extent of such invalidity, illegality or unenforceability. 2 3 SECTION 3.5 Ratification of Indenture; First Supplemental Indenture Part of Indenture. Except as expressly amended hereby, the Indenture is in all respects ratified and confirmed and all the terms, conditions and provisions thereof shall remain in full force and effect. This First Supplemental Indenture shall form a part of the Indenture for all purposes, and every holder of Notes heretofore or hereafter authenticated and delivered shall be bound hereby. The Trustee makes no representation or warranty as to the validity of this First Supplemental Indenture. SECTION 3.6 Counterparts. The parties hereto may sign one or more copies of this First Supplemental Indenture in counterparts, all of which together shall constitute one and the same agreement. SECTION 3.7 Headings. The headings of the Articles and the sections in this Guarantee are for convenience of reference only and shall not be deemed to alter or affect the meaning or interpretation of any provisions hereof. IN WITNESS WHEREOF, the parties hereto have caused this First Supplemental Indenture to be duly executed as of the date first above written. Address: RJR ACQUISITION CORP., 1201 North Market Street as a Guarantor Suite 1702 Wilmington, Delaware 19801 By: /s/ McDara P. Folan, III ----------------------------------- Name: McDara P. Folan, III Title: Vice President and Secretary Address: R.J. REYNOLDS TOBACCO HOLDINGS, INC., 401 North Main Street Winston-Salem, NC 27102 By: /s/ Kenneth J. Lapiejko ----------------------------------- Name: Kenneth J. Lapiejko Title: EVP & CFO Address: R. J. REYNOLDS TOBACCO COMPANY, 401 North Main Street as a Guarantor Winston-Salem, NC 27102 By: /s/ Lynn L. Lane ----------------------------------- Name: Lynn L. Lane Title: SVP & Treasurer THE BANK OF NEW YORK, as Trustee By: /s/ Ming J. Shiang --------------------------------- Name: Ming J. Shiang Title: Vice President 3 EX-10.1 3 g67125ex10-1.txt AMENDED AND RESTATED CREDIT AGREEMENT 11/17/2000 1 Exhibit 10.1 [Conformed as Executed] ================================================================================ AMENDED AND RESTATED CREDIT AGREEMENT AMONG R.J. REYNOLDS TOBACCO HOLDINGS, INC. (f/k/a RJR Nabisco, Inc.) THE CHASE MANHATTAN BANK, AS ADMINISTRATIVE AGENT, CITIBANK, N.A. AND CREDIT SUISSE FIRST BOSTON, AS SYNDICATION AGENTS, CHASE SECURITIES INC. AND SALOMON SMITH BARNEY INC., EACH AS A LEAD ARRANGER AND BOOK MANAGER, AND VARIOUS LENDING INSTITUTIONS ------------------------- Dated as of November 17, 2000 ------------------------- $1,235,000,000 ================================================================================ 2 TABLE OF CONTENTS Page ---- SECTION 1. Amount and Terms of Credit.........................................1 1.01 Commitments.........................................................1 1.02 Minimum Amount of Each Borrowing; Maximum Number of Borrowings......3 1.03 Notice of Borrowing of Committed Loans..............................3 1.04 Competitive Bid Borrowings..........................................4 1.05 Disbursement of Funds...............................................6 1.06 Notes; Register.....................................................7 1.07 Conversions.........................................................7 1.08 Pro Rata Borrowings.................................................8 1.09 Interest............................................................8 1.10 Interest Periods....................................................9 1.11 Increased Costs, Illegality, etc...................................10 1.12 Compensation.......................................................12 1.13 Change of Lending Office...........................................12 1.14 Maturity Date Extensions...........................................12 1.15 Replacement of Lenders.............................................13 1.16 Notice of Certain Costs............................................14 SECTION 2. Letters of Credit.................................................14 2.01 Letters of Credit..................................................14 2.02 Letter of Credit Requests..........................................16 2.03 Letter of Credit Participations....................................16 2.04 Agreement to Repay Letter of Credit Drawings.......................18 2.05 Increased Costs....................................................19 2.06 Indemnification; Nature of Letter of Credit Issuers' Duties........19 SECTION 3. Fees; Commitments.................................................21 3.01 Fees...............................................................21 3.02 Voluntary Reduction of Commitments.................................22 3.03 Mandatory Reduction of Commitments, etc............................22 SECTION 4. Payments..........................................................23 4.01 Voluntary Prepayments..............................................23 4.02 Mandatory Prepayments..............................................23 4.03 Method and Place of Payment........................................24 4.04 Net Payments.......................................................25 SECTION 5. Conditions Precedent..............................................26 5.01 Conditions Precedent to the Restatement Effective Date.............26 5.02 Conditions Precedent to All Credit Events..........................28 (i) 3 Page ---- SECTION 6. Representations, Warranties and Agreements........................28 6.01 Status.............................................................29 6.02 Power and Authority................................................29 6.03 No Violation.......................................................29 6.04 Litigation.........................................................29 6.05 Use of Proceeds; Margin Regulations................................29 6.06 Governmental Approvals.............................................30 6.07 Investment Company Act.............................................30 6.08 True and Complete Disclosure.......................................30 6.09 Financial Condition; Financial Statements..........................30 6.10 Tax Returns and Payments...........................................31 6.11 Compliance with ERISA..............................................31 6.12 Subsidiaries.......................................................31 6.13 Patents, etc.......................................................31 6.14 Pollution and Other Regulations....................................31 6.15 Properties.........................................................32 SECTION 7. Affirmative Covenants.............................................32 7.01 Information Covenants..............................................32 7.02 Books, Records and Inspections.....................................33 7.03 Insurance..........................................................34 7.04 Payment of Taxes...................................................34 7.05 Consolidated Corporate Franchises..................................34 7.06 Compliance with Statutes, etc......................................34 7.07 ERISA..............................................................34 7.08 Good Repair........................................................35 7.09 End of Fiscal Years; Fiscal Quarters...............................35 7.10 Competitive Bid Loan Outstandings..................................35 7.11 Subsidiary Guaranty; Collateral....................................36 SECTION 8. Negative Covenants................................................36 8.01 Changes in Business................................................37 8.02 Consolidation, Merger, Sale of Assets, etc.........................37 8.03 Liens..............................................................39 8.04 Indebtedness.......................................................40 8.05 Limitation on Dividends............................................42 8.06 Transactions with Affiliates.......................................44 8.07 Consolidated Net Worth.............................................44 8.08 Fixed Charge Coverage Ratio........................................44 8.09 Investments........................................................44 8.10 NoNegative Pledge..................................................44 8.11 Prepayments of Indebtedness........................................44 SECTION 9. Events of Default.................................................45 9.01 Payments...........................................................45 9.02 Representations, etc...............................................45 (ii) 4 Page ---- 9.03 Covenants..........................................................45 9.04 Default Under Other Agreements.....................................45 9.05 Bankruptcy, etc....................................................45 9.06 ERISA..............................................................46 9.07 Subsidiary Guaranty................................................46 9.08 Judgments..........................................................47 9.09 Security Documents.................................................47 SECTION 10. Definitions......................................................48 SECTION 11. The Senior Managing Agents.......................................70 11.01 Appointment.......................................................70 11.02 Delegation of Duties..............................................70 11.03 Exculpatory Provisions............................................71 11.04 Reliance by Senior Managing Agents................................71 11.05 Notice of Default.................................................72 11.06 Non-Reliance on Senior Managing Agents and Other Lenders..........72 11.07 Indemnification...................................................72 11.08 Senior Managing Agents in Their Individual Capacities.............73 11.09 Successor Senior Managing Agents, etc.............................73 SECTION 12. Miscellaneous....................................................74 12.01 Payment of Expenses, etc..........................................74 12.02 Right of Setoff...................................................74 12.03 Notices...........................................................74 12.04 Benefit of Agreement..............................................75 12.05 No Waiver; Remedies Cumulative....................................78 12.06 Payments Pro Rata.................................................78 12.07 Calculations; Computations........................................78 12.08 Governing Law; Submission to Jurisdiction; Venue..................79 12.09 Counterparts......................................................80 12.10 Execution.........................................................80 12.11 Headings Descriptive..............................................80 12.12 Amendment or Waiver...............................................80 12.13 Survival..........................................................81 12.14 Domicile of Loans.................................................81 12.15 Confidentiality...................................................81 12.16 Waiver of Jury Trial..............................................82 12.17 Special Provisions Regarding Section 12.04(e).....................82 (iii) 5 ANNEX I -- List of Lenders and Commitments ANNEX II -- Lender Addresses ANNEX III -- Existing Letters of Credit ANNEX IV -- Certain Litigation ANNEX V -- Schedule of Material Subsidiaries ANNEX VI -- Existing Liens ANNEX VII -- Existing Debt EXHIBIT A -- Form of Note EXHIBIT B -- Form of Letter of Credit Request EXHIBIT C-1 -- Form of Opinion of Executive Vice President, General Counsel and Assistant Secretary of the Borrower EXHIBIT C-2 -- Form of Opinion of White & Case LLP EXHIBIT D -- Form of Amended and Restated Subsidiary Guaranty EXHIBIT E-1 -- Form of Notice of Assignment EXHIBIT E-2 -- Form of Assignment Agreement EXHIBIT F -- Form of Confidentiality Agreement EXHIBIT G -- Form of Amended and Restated Intercompany Subordination Agreement (iv) 6 AMENDED AND RESTATED CREDIT AGREEMENT, dated as of November 17, 2000, among R.J. REYNOLDS TOBACCO HOLDINGS, INC. (f/k/a/ RJR Nabisco, Inc.), a Delaware corporation, and the lending institutions listed from time to time on Annex I hereto (each, a "Lender" and, collectively, the "Lenders"). Unless otherwise defined herein, all capitalized terms used herein and defined in Section 10 are used herein as so defined. W I T N E S S E T H: WHEREAS, the Borrower and certain financial institutions are party to a Credit Agreement, dated as of May 7, 1999 (as amended, modified, supplemented and in effect immediately prior to the Restatement Effective Date, the "Original Credit Agreement"); and WHEREAS, the parties hereto wish to amend and restate the Original Credit Agreement in its entirety as herein provided; NOW, THEREFORE, the parties hereto agree that the Original Credit Agreement shall be and is hereby amended and restated in its entirety as follows: NOW, THEREFORE, IT IS AGREED: SECTION 1. Amount and Terms of Credit. 1.01 Commitments. (A) Subject to and upon the terms and conditions herein set forth, each Lender severally agrees to make a loan or loans (each, a "Revolving Loan" and, collectively, the "Revolving Loans") to the Borrower, which Revolving Loans: (i) shall be made at any time and from time to time on and after the Original Effective Date and prior to such Lender's Final Maturity Date; (ii) may, at the option of the Borrower, be incurred and maintained as, and/or converted into, Reference Rate Loans or Eurodollar Loans, provided that all Revolving Loans made by all Lenders pursuant to the same Borrowing shall, unless otherwise specifically provided herein, consist entirely of Revolving Loans of the same Type; (iii) may be repaid and reborrowed in accordance with the provisions hereof; and (iv) shall not exceed for any Lender at any time outstanding that aggregate principal amount which, when added to (A) the product of (x) such Lender's Adjusted Percentage and (y) the sum of (I) the aggregate Letter of Credit Outstandings and (II) the aggregate outstanding principal amount of all Swingline Loans then outstanding plus (B) the product of (x) such Lender's Percentage and (y) the aggregate outstanding principal amount of all Competitive Bid Loans then outstanding, equals the Commitment of such Lender at such time. (B) Subject to and upon the terms and conditions herein set forth, each Swingline Lender severally agrees, at any time and from time to time on and after the Original Effective 7 Date and prior to the Final Swingline Maturity Date, to make a loan or loans (each, a "Swingline Loan" and, collectively, the "Swingline Loans") to the Borrower, which Swingline Loans: (i) shall be Reference Rate Loans; (ii) shall have the benefit of the provisions of Section 1.01(C); (iii) shall not exceed in the aggregate at any one time outstanding the Swingline Commitment of such Swingline Lender at such time; (iv) shall not exceed in the aggregate for all Swingline Lenders at any one time outstanding, when combined with the aggregate principal amount of all Revolving Loans and Competitive Bid Loans then outstanding and all Letter of Credit Outstandings at such time, the Total Commitment then in effect; and (v) may be repaid and reborrowed in accordance with the provisions hereof. On (x) the Final Swingline Maturity Date, all Swingline Loans shall be repaid in full and (y) the last Business Day of each calendar quarter, all Swingline Loans shall be repaid in full and may not be reborrowed until the next succeeding Business Day, provided that repayment of the Swingline Loans pursuant to this clause (y) shall not be required to the extent that the aggregate outstanding principal amount of Swingline Loans to be repaid is less than $10,000,000. No Swingline Lender will make a Swingline Loan after it has received written notice from the Required Lenders that one or more of the applicable conditions to Credit Events specified in Section 5 are not then satisfied. (C) On any Business Day, a Swingline Lender (the "Notifying SL Lender") may, in its sole discretion, give notice to the Lenders that all then outstanding Swingline Loans shall be funded with a Borrowing of Revolving Loans (provided that such notice shall be deemed to have been automatically given by each Swingline Lender and each Swingline Lender shall constitute a Notifying SL Lender upon the occurrence of an Event of Default under Section 9.05), in which case a Borrowing of Revolving Loans constituting Reference Rate Loans (each such Borrowing, a "Mandatory Borrowing") shall be made on the immediately succeeding Business Day by all Lenders pro rata based on each Lender's Adjusted Percentage, and the proceeds thereof shall be applied directly to repay ratably all Swingline Lenders for their outstanding Swingline Loans. Each Lender hereby irrevocably agrees to make Reference Rate Loans upon one Business Day's notice pursuant to each Mandatory Borrowing in the amount and in the manner specified in the preceding sentence and on the date specified in writing by the Notifying SL Lender notwithstanding (i) that the amount of the Mandatory Borrowing may not comply with the Minimum Borrowing Amount otherwise required hereunder, (ii) whether any conditions specified in Section 5 are then satisfied, (iii) whether a Default or an Event of Default has occurred and is continuing, (iv) the date of such Mandatory Borrowing and (v) any reduction in the Total Commitment after any such Swingline Loans were made. In the event that any Mandatory Borrowing cannot for any reason be made on the date otherwise required above (including, without limitation, as a result of the commencement of a proceeding under the Bankruptcy Code in respect of the Borrower), each Lender (other than each Swingline Lender with respect to its Swingline Loans) hereby agrees that it shall forthwith purchase from each Swingline Lender (without recourse or warranty) such assignment of its outstanding Swingline -2- 8 Loans as shall be necessary to cause the Lenders to share in such Swingline Loans ratably based upon their respective Adjusted Percentages; provided that all interest payable on such Swingline Loans shall be for the account of the Swingline Lenders until the date the respective assignment is purchased and, to the extent attributable to the purchased assignment, shall be payable to the Lender purchasing same from and after such date of purchase. (D) Subject to and upon the terms and conditions herein set forth, each Lender severally agrees that the Borrower may incur a loan or loans (each, a "Competitive Bid Loan" and, collectively, the "Competitive Bid Loans") pursuant to a Competitive Bid Borrowing from time to time on and after the Original Effective Date and prior to the date which is the third Business Day preceding the date which is 14 days prior to the Facility Maturity Date; provided that, after giving effect to any Competitive Bid Borrowing and the use of the proceeds thereof, (x) the aggregate outstanding principal amount of Competitive Bid Loans when combined with the aggregate outstanding principal amount of all Revolving Loans and Swingline Loans then outstanding and the aggregate Letter of Credit Outstandings at such time shall not exceed the Total Commitment at such time or (y) if the Interest Period applicable to such Competitive Bid Borrowing extends beyond the then First Maturity Date of any Lender, the aggregate outstanding principal amount of all Competitive Bid Loans and Revolving Loans with Interest Periods that extend beyond such First Maturity Date when combined with the Stated Amount of all outstanding Letters of Credit with expiration dates that extend beyond such First Maturity Date will not exceed the Expected Total Commitment in effect for each day of the Interest Period applicable to such Competitive Bid Loan that occurs beyond such First Maturity Date. Within the foregoing limits and subject to the conditions set out in Section 1.04, Competitive Bid Loans may be repaid and reborrowed in accordance with the provisions hereof. 1.02 Minimum Amount of Each Borrowing; Maximum Number of Borrowings. The aggregate principal amount of each Borrowing of Committed Loans shall not be less than the Minimum Borrowing Amount with respect thereto (except that Mandatory Borrowings shall be made in the amounts required by Section 1.01(C)). More than one Borrowing may be incurred on any date; provided, that at no time shall there be outstanding more than twenty Borrowings of Eurodollar Loans under this Agreement. 1.03 Notice of Borrowing of Committed Loans. (a) Whenever the Borrower desires to incur Revolving Loans hereunder (other than Mandatory Borrowings), it shall give the Administrative Agent at the Administrative Agent's Office (x) prior to 11:00 A.M. (New York time) at least three Business Days' prior written notice (or telephonic notice promptly confirmed in writing) of each Borrowing of Revolving Loans constituting Eurodollar Loans and (y) prior to 11:00 A.M. (New York time) at least one Business Day's prior written notice (or telephonic notice promptly confirmed in writing) of each Borrowing of Revolving Loans constituting Reference Rate Loans. Each such notice (each, together with each notice of a Borrowing of Swingline Loans pursuant to Section 1.03(b), a "Notice of Borrowing") shall be irrevocable and shall specify (i) the aggregate principal amount of the Revolving Loans to be made pursuant to such Borrowing, (ii) the date of Borrowing (which shall be a Business Day) and (iii) whether the respective Borrowing shall consist of Reference Rate Loans or Eurodollar Loans and, if Eurodollar Loans, the Interest Period to be initially applicable thereto. The Administrative Agent shall promptly give each Lender written notice (or telephonic notice promptly confirmed in writ- -3- 9 ing) of each proposed Borrowing of Revolving Loans, of such Lender's proportionate share thereof and of the other matters covered by the Notice of Borrowing. (b) Whenever the Borrower desires to incur Swingline Loans hereunder, it shall give the Administrative Agent at the Administrative Agent's Office written notice (or telephonic notice promptly confirmed in writing) of each Borrowing of Swingline Loans prior to 11:00 A.M. (New York time) on the date of such Borrowing. Each such notice shall be irrevocable and shall specify (i) the aggregate principal amount of the Swingline Loans to be made pursuant to such Borrowing and (ii) the date of Borrowing (which shall be a Business Day). The Administrative Agent shall promptly give each Swingline Lender written notice (or telephonic notice promptly confirmed in writing) of each proposed Borrowing of Swingline Loans, of such Swingline Lender's proportionate share thereof and of the other matters covered by the Notice of Borrowing. (c) Mandatory Borrowings shall be made upon the notice specified in Section 1.01(C), with the Borrower irrevocably agreeing, by its incurrence of any Swingline Loan, to the making of Mandatory Borrowings as set forth in such Section. (d) Without in any way limiting the obligation of the Borrower to confirm in writing any notice it may give hereunder by telephone, the Administrative Agent may act prior to receipt of written confirmation without liability upon the basis of such telephonic notice, believed by the Administrative Agent in good faith to be from the Chairman, Chief Financial Officer or Treasurer of the Borrower, or from any other person designated in writing to the Administrative Agent by the Chief Financial Officer or Treasurer of the Borrower as a person entitled to give telephonic notices under this Agreement on behalf of the Borrower. In each such case the Borrower hereby waives the right to dispute the Administrative Agent's record of the terms of any such telephonic notice. 1.04 Competitive Bid Borrowings. (a) Whenever the Borrower desires to incur a Competitive Bid Borrowing, it shall deliver to the Administrative Agent at the Administrative Agent's Office, prior to 11:00 A.M. (New York time) at least three Business Days prior to the date of such proposed Competitive Bid Borrowing, a written notice (each, a "Notice of Competitive Bid Borrowing"), which notice shall specify in each case (i) the date (which shall be a Business Day) and the aggregate amount of the proposed Competitive Bid Borrowing, (ii) the maturity date for repayment of each Competitive Bid Loan to be made as part of such Competitive Bid Borrowing (which maturity date may not be earlier than 14 days after the date of such Competitive Bid Borrowing or later than the earlier to occur of (x) 180 days after the date of such Competitive Bid Borrowing and (y) the third Business Day preceding the Facility Maturity Date), (iii) the interest payment date or dates relating thereto and (iv) any other terms to be applicable to such Competitive Bid Borrowing. The Administrative Agent shall promptly notify each Bidder of each such request for a Competitive Bid Borrowing received by it from the Borrower by telecopying to each such Bidder a copy of the related Notice of Competitive Bid Borrowing. (b) Each Bidder shall, if, in its sole discretion, it elects to do so, irrevocably offer to make one or more Competitive Bid Loans to the Borrower as part of such proposed -4- 10 Competitive Bid Borrowing at a rate or rates of interest specified by such Lender in its sole discretion and determined by such Lender independently of each other Lender, by notifying the Administrative Agent (which shall give prompt notice thereof to the Borrower) before 11:00 A.M. (New York time) on the date (the "Reply Date") which is two Business Days before the date of such proposed Competitive Bid Borrowing, of the minimum amount and maximum amount of each Competitive Bid Loan which such Lender would be willing to make as part of such proposed Competitive Bid Borrowing (which amounts may, subject to the proviso to the first sentence of Section 1.01(D), exceed such Lender's Commitment), the rate or rates of interest therefor and such Lender's lending office with respect to such Competitive Bid Loan; provided, that if the Administrative Agent in its capacity as a Lender shall, in its sole discretion, elect to make any such offer, it shall notify the Borrower of such offer before 9:30 A.M. (New York time) on the Reply Date. Any Bidder not giving the Administrative Agent the notice specified in the preceding sentence shall not be obligated to, and shall not, make any Competitive Bid Loan as part of such Competitive Bid Borrowing. (c) The Borrower shall, in turn, before 12:00 Noon (New York time) on the Reply Date, either: (i) cancel such Competitive Bid Borrowing by giving the Administrative Agent notice to such effect, or (ii) accept one or more of the offers made by any Bidder or Bidders by giving notice (in writing or by telephone confirmed in writing) to the Administrative Agent of the amount of each Competitive Bid Loan (which amount shall be equal to or greater than the minimum amount, and equal to or less than the maximum amount, notified to the Borrower by the Administrative Agent on behalf of such Bidder for such Competitive Bid Borrowing) to be made by each Bidder as part of such Competitive Bid Borrowing, and reject any remaining offers made by Bidders by giving the Administrative Agent notice to that effect; provided, that (x) acceptance of offers may only be made on the basis of ascending Absolute Rates commencing with the lowest rate so offered and (y) if offers are made by two or more Bidders at the same rate and acceptance of all such equal offers would result in a greater principal amount of Competitive Bid Loans being accepted than the aggregate principal amount requested by the Borrower, the Borrower shall then have the right to accept one or more such equal offers in their entirety and reject the other equal offer or offers or to allocate acceptance among all such equal offers (but giving effect to the minimum and maximum amounts specified for each such offer), as the Borrower may elect in its sole discretion; provided further, that in no event shall the aggregate principal amount of the Competitive Bid Loans accepted by the Borrower as part of a Competitive Bid Borrowing exceed the amount specified by the Borrower in the related Notice of Competitive Bid Borrowing. (d) If the Borrower notifies the Administrative Agent that such Competitive Bid Borrowing is canceled, the Administrative Agent shall give prompt notice thereof to the Bidders and such Competitive Bid Borrowing shall not be made. -5- 11 (e) If the Borrower accepts one or more of the offers made by any Bidder or Bidders, the Administrative Agent shall in turn promptly notify (x) each Bidder that has made an offer of the date and aggregate amount of such Competitive Bid Borrowing and whether or not any offer or offers made by such Bidder have been accepted by the Borrower and (y) each Bidder that is to make a Competitive Bid Loan as part of such Competitive Bid Borrowing of the amount of each Competitive Bid Loan to be made by such Bidder. (f) On the last Business Day of each calendar quarter, the Administrative Agent shall notify the Lenders of the aggregate principal amount of Competitive Bid Loans outstanding at such time. 1.05 Disbursement of Funds. (a) No later than 1:00 P.M. (New York time) on the date of each Borrowing (including Mandatory Borrowings), each Lender will make available its pro rata portion, if any, of each Borrowing requested to be made on such date in the manner provided below. (b) Each Lender shall make available all amounts it is to fund under any Borrowing in U.S. dollars and immediately available funds to the Administrative Agent at the Administrative Agent's Office and the Administrative Agent will (except in the case of Mandatory Borrowings) make available to the Borrower by depositing to its account at the Administrative Agent's Office the aggregate of the amounts so made available in U.S. dollars and the type of funds received. Unless the Administrative Agent shall have been notified by any Lender prior to the date of any such Borrowing that such Lender does not intend to make available to the Administrative Agent its portion of the Borrowing or Borrowings to be made on such date, the Administrative Agent may assume that such Lender has made such amount available to the Administrative Agent on such date of Borrowing, and the Administrative Agent, in reliance upon such assumption, may (in its sole discretion and without any obligation to do so) make available to the Borrower a corresponding amount. If such corresponding amount is not in fact made available to the Administrative Agent by such Lender and the Administrative Agent has made available same to the Borrower, the Administrative Agent shall be entitled to recover such corresponding amount from such Lender. If such Lender does not pay such corresponding amount forthwith upon the Administrative Agent's demand therefor, the Administrative Agent shall promptly notify the Borrower, and the Borrower shall immediately pay such corresponding amount to the Administrative Agent. The Administrative Agent shall also be entitled to recover from such Lender or the Borrower, as the case may be, interest on such corresponding amount in respect of each day from the date such corresponding amount was made available by the Administrative Agent to the Borrower to the date such corresponding amount is recovered by the Administrative Agent, at a rate per annum equal to (x) if paid by such Lender, the overnight Federal Funds Rate or (y) if paid by the Borrower, the then applicable rate of interest, calculated in accordance with Section 1.09, for the respective Loans. (c) Nothing in this Section 1.05 shall be deemed to relieve any Lender from its obligation to fulfill its commitments hereunder or to prejudice any rights which the Borrower may have against any Lender as a result of any default by such Lender hereunder. -6- 12 1.06 Notes; Register. (a) The Borrower's obligation to pay the principal of, and interest on, the Revolving Loans made by each Lender shall, except as provided in Sections 1.15 and 12.04 and only to the extent requested by such Lender, be evidenced by a promissory note duly executed and delivered by the Borrower substantially in the form of Exhibit A with blanks appropriately completed in conformity herewith (each, a "Note" and, collectively, the "Notes"). (b) The Note issued to each Lender shall (i) be payable to the order of such Lender and be dated the Restatement Effective Date, (ii) be in a stated principal amount equal to the Commitment of such Lender and be payable in the principal amount of the Revolving Loans evidenced thereby, (iii) mature on such Lender's Final Maturity Date and (iv) bear interest as provided in the appropriate clause of Section 1.09 in respect of the Reference Rate Loans and Eurodollar Loans, as the case may be, evidenced thereby. (c) Each Lender will note on its internal records the amount of each Loan made by it and each payment in respect thereof and will prior to any transfer of its Note endorse on the reverse side thereof the outstanding principal amount of Revolving Loans evidenced thereby. Failure to make any such notation or any error in any such notation shall not affect the Borrower's obligations in respect of such Revolving Loans. (d) The Administrative Agent shall maintain at the Administrative Agent's Office a register for the recordation of the names and addresses of the Lenders, the Commitments (and Short-Term Commitments and Long-Term Commitments, if any) of the Lenders from time to time, and the principal amount of the Revolving Loans, Swingline Loans and Competitive Bid Loans owing to each Lender from time to time together with the maturity and interest rates applicable to each such Competitive Bid Loan, and other terms applicable thereto (the "Register"). The entries in the Register shall be conclusive and binding for all purposes, absent manifest error. The Register shall be available for inspection by the Borrower or any Lender at any reasonable time and from time to time upon reasonable prior notice. 1.07 Conversions. The Borrower shall have the option to convert on any Business Day all or a portion equal to at least the Minimum Borrowing Amount of the outstanding principal amount of Revolving Loans of one Type into a Borrowing or Borrowings of another Type; provided that (i) no partial conversion of Eurodollar Loans shall reduce the outstanding principal amount of Eurodollar Loans made pursuant to a single Borrowing to less than the Minimum Borrowing Amount, (ii) Reference Rate Loans may only be converted into Eurodollar Loans if no Event of Default is in existence on the date of the conversion and (iii) Borrowings resulting from conversions pursuant to this Section 1.07 shall be limited in number as provided in Section 1.02. Each such conversion shall be effected by the Borrower by giving the Administrative Agent at the Administrative Agent's Office prior to 11:00 A.M. (New York time) at least three Business Days' (or one Business Day's in the case of a conversion into Reference Rate Loans) prior written notice (or telephonic notice promptly confirmed in writing) (each, a "Notice of Conversion") specifying the Revolving Loans to be so converted, the Type of Revolving Loans to be converted into and, if to be converted into Eurodollar Loans, the Interest Period to be initially applicable thereto. The Administrative Agent shall give each Lender notice as promptly as practicable of any such proposed conversion affecting any of its Revolving Loans. -7- 13 1.08 Pro Rata Borrowings. All Borrowings of Revolving Loans under this Agreement shall be loaned by the Lenders pro rata on the basis of their Percentages (with each such Borrowing loaned by a Lender (other than a Non-Extending Lender) to be incurred from such Lender on a pro rata basis among the Short-Term Commitment and Long-Term Commitment of such Lender (based upon the relative amounts of the Short-Term Commitment and Long-Term Commitment of such Lender, in each case as in effect immediately before giving effect to such Borrowing)); provided that all Borrowings of Revolving Loans made pursuant to a Mandatory Borrowing shall be loaned by the Lenders pro rata on the basis of their Adjusted Percentages. All Borrowings of Swingline Loans shall be loaned by the Swingline Lenders pro rata on the basis of their Swingline Commitments. It is understood that no Lender shall be responsible for any default by any other Lender in its obligation to make Loans hereunder and that each Lender shall be obligated to make the Loans provided to be made by it hereunder, regardless of the failure of any other Lender to fulfill its commitments hereunder. 1.09 Interest. (a) The unpaid principal amount of each Reference Rate Loan shall bear interest from the date of the Borrowing thereof until maturity (whether by acceleration or otherwise) at a rate per annum which shall at all times be the Applicable Reference Rate Margin plus the Reference Rate in effect from time to time. (b) The unpaid principal amount of each Eurodollar Loan shall bear interest from the date of the Borrowing thereof until maturity (whether by acceleration or otherwise) at a rate per annum which shall at all times be the Applicable Eurodollar Margin plus the relevant Eurodollar Rate. (c) The unpaid principal amount of each Competitive Bid Loan shall bear interest from the date the proceeds thereof are made available to the Borrower until maturity (whether by acceleration or otherwise) at the rate or rates per annum specified by a Bidder or Bidders, as the case may be, pursuant to Section 1.04(b) and accepted by the Borrower pursuant to Section 1.04(c). (d) Overdue principal and, to the extent permitted by law, overdue interest in respect of each Loan shall bear interest at a rate per annum equal to the Reference Rate in effect from time to time plus the sum of (i) 2% and (ii) the Applicable Reference Rate Margin; provided, that each Eurodollar Loan and Competitive Bid Loan shall bear interest after maturity (whether by acceleration or otherwise) until the end of the Interest Period then applicable thereto at a rate per annum equal to 2% in excess of the rate of interest applicable thereto at maturity. (e) Interest on each Loan shall accrue from and including the date of any Borrowing to but excluding the date of any repayment thereof and shall be payable (i) in respect of each Reference Rate Loan, quarterly in arrears on the 15th day of each January, April, July and October, (ii) in respect of any Competitive Bid Loan, at such times as specified in the Notice of Competitive Bid Borrowing relating thereto, (iii) in respect of each Eurodollar Loan, on the last day of each Interest Period applicable thereto and, in the case of an Interest Period in excess of three months, on each date occurring at three-month intervals after the first day of such Interest Period, (iv) in respect of each Loan (other than a Reference Rate Loan), on any prepayment (on -8- 14 the amount prepaid) and (v) in respect of each Loan, at maturity (whether by acceleration or otherwise) and, after such maturity, on demand. (f) All computations of interest hereunder shall be made in accordance with Section 12.07(b). (g) The Administrative Agent, upon determining the interest rate for any Borrowing of Eurodollar Loans for any Interest Period, shall promptly notify the Borrower and the Lenders thereof. 1.10 Interest Periods. At the time the Borrower gives a Notice of Competitive Bid Borrowing in respect of the making of a Competitive Bid Borrowing or at the time it gives a Notice of Borrowing or Notice of Conversion in respect of the making of, or conversion into, a Borrowing of Eurodollar Loans (in the case of the initial Interest Period applicable thereto) or prior to 11:00 A.M. (New York time) on the third Business Day prior to the expiration of an Interest Period applicable to a Borrowing of Eurodollar Loans, it shall have the right to elect by giving the Administrative Agent written notice (or telephonic notice promptly confirmed in writing) the Interest Period applicable to such Borrowing, which Interest Period shall, at the option of the Borrower, be (x) in the case of a Eurodollar Loan, a one, two, three or six month period and (y) in the case of a Competitive Bid Loan, subject to availability, a period of 14 to 180 days as elected by the Borrower in the related Notice of Competitive Bid Borrowing. Notwithstanding anything to the contrary contained above: (i) the initial Interest Period for any Borrowing of Eurodollar Loans shall commence on the date of such Borrowing (including the date of any conversion from a Borrowing of Reference Rate Loans) and each Interest Period occurring thereafter in respect of such Borrowing shall commence on the day on which the next preceding Interest Period expires; (ii) if any Interest Period relating to a Borrowing of Eurodollar Loans begins on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period, such Interest Period shall end on the last Business Day of such calendar month; (iii) if any Interest Period would otherwise expire on a day which is not a Business Day, such Interest Period shall expire on the next succeeding Business Day, provided that if any Interest Period in respect of a Eurodollar Loan would otherwise expire on a day which is not a Business Day but is a day of the month after which no further Business Day occurs in such month, such Interest Period shall expire on the next preceding Business Day; and (iv) no Interest Period in respect of any Borrowing of Eurodollar Loans shall extend beyond a Maturity Date for any Lender participating in such Borrowing. Notwithstanding the foregoing, if an Event of Default is in existence at the time any Interest Period in respect of any Eurodollar Loans is to expire, such Eurodollar Loans may not be continued as Eurodollar Loans but instead shall be automatically converted on the last day of such Interest Period -9- 15 into Reference Rate Loans. If upon the expiration of any Interest Period in respect of Eurodollar Loans, the Borrower has failed to elect a new Interest Period to be applicable thereto as provided above, the Borrower shall be deemed to have elected to convert such Borrowing into a Borrowing of Reference Rate Loans effective as of the expiration date of such current Interest Period. 1.11 Increased Costs, Illegality, etc. (a) In the event that (x) in the case of clause (i) below, the Administrative Agent or (y) in the case of clauses (ii) and (iii) below, any Lender shall have determined (which determination shall, absent manifest error, be final and conclusive and binding upon all parties hereto): (i) on any date for determining the Eurodollar Rate for any Interest Period that, by reason of any changes arising on or after the date of this Agreement affecting the interbank Eurodollar market, adequate and fair means do not exist for ascertaining the applicable interest rate on the basis provided for in the definition of Eurodollar Rate; or (ii) at any time, that such Lender shall incur increased costs or reductions in the amounts received or receivable hereunder with respect to any Eurodollar Loans or Competitive Bid Loans because of (x) any change since the date of this Agreement (or, in the case of any such cost or reduction with respect to any Competitive Bid Loan, since the date of the making of such Competitive Bid Loan) in any applicable law, governmental rule, regulation, guideline or order (or in the interpretation or administration thereof and including the introduction of any new law or governmental rule, regulation, guideline or order) (such as, for example, but not limited to, a change in official reserve requirements, but, in all events, excluding reserves required under Regulation D and/or (y) other circumstances affecting the interbank Eurodollar market; or (iii) at any time, that the making or continuance of any Loan (other than Reference Rate Loans) has become unlawful by compliance by such Lender in good faith with any law, governmental rule, regulation, guideline or order (or would conflict with any such governmental rule, regulation, guideline or order not having the force of law even though the failure to comply therewith would not be unlawful), or, in the case of a Eurodollar Loan, has become impracticable as a result of a contingency occurring after the date of this Agreement which materially and adversely affects the interbank Eurodollar market; then, and in any such event, such Lender (or the Administrative Agent, in the case of clause (i) above) shall on such date give notice (if by telephone confirmed in writing) to the Borrower and to the Administrative Agent of such determination (which notice the Administrative Agent shall promptly transmit to each of the other Lenders). Thereafter (x) in the case of clause (i) above, Eurodollar Loans shall no longer be available until such time as the Administrative Agent notifies the Borrower and the Lenders that the circumstances giving rise to such notice by the Administrative Agent no longer exist, and any Notice of Borrowing or Notice of Conversion given by the Borrower with respect to Eurodollar Loans which have not yet been incurred shall be deemed rescinded by the Borrower, (y) in the case of clause (ii) above, the Borrower shall pay to such Lender, upon written demand therefor, such additional amounts (in the form of an increased rate of, or a different method of calculating, interest or otherwise as such Lender in its sole discretion shall determine) as shall be required to compensate such Lender for such increased costs or reductions in amounts receivable -10- 16 hereunder (a written notice as to the additional amounts owed to such Lender, showing in reasonable detail the basis for the calculation thereof, submitted to the Borrower by such Lender shall, absent manifest error, be final and conclusive and binding upon all parties hereto) and (z) in the case of clause (iii) above, the Borrower shall take one of the actions specified in Section 1.11(b) as promptly as possible and, in any event, within the time period required by law. (b) At any time that any Eurodollar Loan or Competitive Bid Loan is affected by the circumstances described in Section 1.11(a)(ii) (for Eurodollar Loans only) or (iii), the Borrower may (and in the case of a Eurodollar Loan or a Competitive Bid Loan affected pursuant to Section 1.11(a)(iii) shall) either (i) if the affected Eurodollar Loan or Competitive Bid Loan is then being made pursuant to a Borrowing, cancel said Borrowing by giving the Administrative Agent telephonic notice (confirmed promptly in writing) thereof as promptly as practicable after the Borrower was notified by a Lender pursuant to Section 1.11(a)(ii) or (iii), (ii) if the affected Eurodollar Loan is then outstanding, upon at least three Business Days' notice to the Administrative Agent, require the affected Lender to convert each such Eurodollar Loan into a Reference Rate Loan or (iii) if the affected Competitive Bid Loan is then outstanding, prepay such Competitive Bid Loan in full; provided that if more than one Lender is affected in a similar manner at any time, then all such similarly affected Lenders must be treated the same pursuant to this Section 1.11(b). (c) If after the date hereof, the adoption of any applicable law, rule or regulation regarding capital adequacy, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by a Lender or its parent with any request or directive made or adopted after the date hereof regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on such Lender's or its parent's capital or assets as a consequence of such Lender's commitments or obligations hereunder to a level below that which such Lender or its parent could have achieved but for such adoption, effectiveness, change or compliance (taking into consideration such Lender's or its parent's policies with respect to capital adequacy), then from time to time, within 15 days after demand by such Lender (with a copy to the Administrative Agent), the Borrower shall pay to such Lender such additional amount or amounts as will compensate such Lender or its parent for such reduction. Each Lender, upon determining in good faith that any additional amounts will be payable pursuant to this Section 1.11(c), will give prompt written notice thereof to the Borrower, which notice shall set forth in reasonable detail the basis of the calculation of such additional amounts, although the failure to give any such notice shall not, subject to Section 1.16, release or diminish any of the Borrower's obligations to pay additional amounts pursuant to this Section 1.11(c) upon receipt of such notice. (d) In the event that any Lender shall reasonably determine (which determination shall, absent manifest error, be final and conclusive and binding on all parties hereto) at any time that by reason of Regulation D such Lender is required to maintain reserves in respect of eurodollar loans or liabilities during any period it has a Eurodollar Loan outstanding, such Lender shall promptly notify the Borrower in writing specifying the additional amounts required to indemnify such Lender against the cost of maintaining such reserves (such written notice to set -11- 17 forth in reasonable detail a computation of such additional amounts) and the Borrower shall pay to such Lender such specified amounts as additional interest at the time that such Borrower is otherwise required to pay interest in respect of the affected Eurodollar Loan or, if later, on written demand therefor from such Lender. 1.12 Compensation. The Borrower shall compensate each Lender, upon its written request (which request shall set forth in reasonable detail the basis for requesting such compensation), for all reasonable losses, expenses and liabilities (including, without limitation, any loss, expense or liability incurred by reason of the liquidation or reemployment of deposits or other funds required by such Lender to fund its Eurodollar Loans or Competitive Bid Loans but excluding any loss of anticipated profit with respect to such Loans) which such Lender may sustain: (i) if for any reason (other than a default by such Lender or the Administrative Agent) a Borrowing of Eurodollar Loans or Competitive Bid Loans accepted by the Borrower in accordance with Section 1.04(c)(ii) does not occur on a date specified therefor in a Notice of Borrowing, Notice of Competitive Bid Borrowing or Notice of Conversion (whether or not withdrawn by the Borrower or deemed withdrawn pursuant to Section 1.11); (ii) if any repayment or conversion of any of its Eurodollar Loans or any repayment of Competitive Bid Loans occurs on a date which is not the last day of an Interest Period applicable thereto; (iii) if any prepayment of any of its Eurodollar Loans is not made on any date specified in a notice of prepayment given by the Borrower; or (iv) as a consequence of (x) any other default by the Borrower to repay its Eurodollar Loans or Competitive Bid Loans when required by the terms of this Agreement or (y) an election made pursuant to Section 1.11(b). Calculation of all amounts payable to a Lender under this Section 1.12 in respect of Eurodollar Loans shall be made as though that Lender had actually funded its relevant Eurodollar Loan through the purchase of a Eurodollar deposit bearing interest at the Eurodollar Rate in an amount equal to the amount of that Loan, having a maturity comparable to the relevant Interest Period and through the transfer of such Eurodollar deposit from an offshore office of that Lender to a domestic office of that Lender in the United States of America; provided, however, that each Lender may fund each of its Eurodollar Loans in any manner it sees fit and the foregoing assumption shall be utilized only for the calculation of amounts payable under this Section 1.12. 1.13 Change of Lending Office. Each Lender agrees that, upon the occurrence of any event giving rise to the operation of Section 1.11(a)(ii) or (iii), 2.05 or 4.04 with respect to such Lender, it will, if requested by the Borrower, use reasonable efforts (subject to overall policy considerations of such Lender) to designate another lending office for any Loans affected by such event; provided, that such designation is made on such terms that such Lender and its lending office suffer no economic, legal or regulatory disadvantage, with the object of avoiding the consequence of the event giving rise to the operation of any such Section. Nothing in this Section 1.13 shall affect or postpone any of the obligations of the Borrower or the right of any Lender provided in Section 1.11, 2.05 or 4.04. 1.14 Maturity Date Extensions. Prior to (but not less than 60 days nor more than 90 days prior to) the Extension Date and prior to (but not less than 60 days nor more than 90 days prior to) each anniversary of the 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 Facility Maturity Date then in effect be extended to the date which is one year -12- 18 after such existing Facility Maturity Date. Such request shall be accompanied by a certificate of an Authorized Officer of the Borrower stating that no Default or Event of Default has occurred and is continuing. If, by the date (a "Response Date") which is 30 days prior to the Extension Date or the relevant anniversary thereof, as the case may be, 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 Facility Maturity Date, and the Final Maturity Date of each Continuing Lender then consenting, shall be automatically extended to the first anniversary of the then existing Facility Maturity Date. In the event that the Borrower has not obtained the requisite percentage of Continuing Lenders to permit an extension by the relevant Response Date, the Borrower may extend the deadline for obtaining such percentage to the 30th day following such Response Date in order to take such actions, including those contemplated by Section 1.15, with respect to any Lender that is a Non-Continuing Lender after giving effect to such Response Date in order to obtain the requisite percentage of Lenders constituting Continuing Lenders to permit such extension. 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 1.14 and any such extension shall be in the sole discretion of each of them. A Lender's Final Maturity Date shall not be so extended pursuant to this Section 1.14 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. 1.15 Replacement of Lenders. If (w) any Lender becomes a Non-Continuing Lender at any time after the first Response Date occurring after the Restatement Effective Date, (x) any Lender becomes a Defaulting Lender or otherwise defaults in its obligations to make Loans or fund Unpaid Drawings, (y) any Lender refuses to give timely consent to proposed changes, waivers, discharges or terminations with respect to this Agreement which have been approved by the Required Lenders or (z) any Lender is owed increased costs under Section 1.11(a) or (c), Section 2.05 or Section 4.04 which in the judgment of the Borrower are material in amount and which are not otherwise requested generally by the other Lenders, the Borrower shall have the right, if no Event of Default then exists and, in the case of a Lender described in clause (z) above, such Lender has not withdrawn its request for such compensation or changed its applicable lending office with the effect of eliminating or substantially decreasing (to a level which in the judgment of the Borrower is not material) such increased cost, to replace such Lender (the "Replaced Lender") with one or more other Eligible Transferee or Transferees (collectively, the "Replacement Lender") reasonably acceptable to the Majority SMA, provided that (i) at the time of any replacement pursuant to this Section 1.15, the Replacement Lender shall enter into one or more Assignment Agreements pursuant to which the Replacement Lender shall acquire all of the Commitment (and the Short-Term Commitment and Long-Term Commitment, if any) and outstanding Loans of, and participations in Letters of Credit by, the Replaced Lender and, in connection therewith, shall pay to (x) the Replaced Lender in respect thereof an amount equal to the sum of (a) an amount equal to the principal of, and all accrued interest on, all outstanding Loans of the Replaced Lender, (b) an amount equal to such Replaced Lender's participations in Unpaid Drawings that have been funded by such Replaced Lender, together with all then unpaid interest with respect thereto at such time, and (c) an amount equal -13- 19 to all accrued, but theretofore unpaid, Fees owing to the Replaced Lender pursuant to Section 3.01 hereof and (y) the appropriate Letter of Credit Issuer (or to the extent the Letter of Credit Issuer has been funded for any portion of Unpaid Drawings not funded by such Replacement Lender through an increase in the other Lenders' Adjusted Percentages, the other Lenders so affected) an amount equal to such Replaced Lender's Percentage of any Unpaid Drawing not funded by such Replaced Lender, (ii) all obligations of the Borrower owing to the Replaced Lender (other than those specifically described in clause (i) above in respect of which the assignment purchase price has been, or is concurrently being, paid) shall be paid in full to such Replaced Lender concurrently with such replacement and (iii) in the case of the replacement of a Replaced Lender that is a Non-Continuing Lender as contemplated by clause (w) above, the only Maturity Date applicable to the Replacement Lender's Commitment shall be the Facility Maturity Date then in effect. Upon the execution of the respective assignment documentation, the payment of amounts referred to in clauses (i) and (ii) above and, if so requested by the Replacement Lender, delivery to the Replacement Lender of the appropriate Note executed by the Borrower, the Replacement Lender shall become a Lender hereunder and the Replaced Lender shall cease to constitute a Lender hereunder, except with respect to indemnification provisions under this Agreement, which shall survive as to such Replaced Lender. 1.16 Notice of Certain Costs. Notwithstanding anything in this Agreement to the contrary, to the extent any notice required by Section 1.11 or 2.05 is given by any Lender more than 180 days after the occurrence of the event giving rise to the additional cost, reduction in amounts or other additional amounts of the type described in such Section, such Lender shall not be entitled to compensation under Section 1.11 or Section 2.05, as the case may be, for any such amounts incurred or accruing prior to the giving of such notice to the Borrower. SECTION 2. Letters of Credit. 2.01 Letters of Credit. (a) Subject to and upon the terms and conditions herein set forth, the Borrower, at any time and from time to time on or after the Original Effective Date and prior to the Facility Maturity Date, may request that a Letter of Credit Issuer issue, for the account of the Borrower and in support of any Permitted Obligations, to replace Existing Letters of Credit, to effect Permitted Litigation Bonding or in support of such other obligations of the Borrower and/or any of its Subsidiaries as are acceptable to the Majority SMA, an irrevocable standby letter of credit or letters of credit in such form as may be approved by such Letter of Credit Issuer and the Majority SMA, acting reasonably, and, subject to and upon the terms and conditions set forth in this Agreement, each Designated Issuer and, to the extent it has agreed to issue Letters of Credit, each other Letter of Credit Issuer will issue the Letters of Credit so requested to be issued. It is the intention of the Borrower and the Designated Issuers that each Designated Issuer only issue Letters of Credit in an aggregate Stated Amount that is substantially pro rata to the aggregate Stated Amount of the Letters of Credit issued by each other Designated Issuer, it being recognized that credit policies of beneficiaries may result in non-pro rata treatment for one or more Designated Issuers and may require adjustments to the procedures set forth in the next sentence. To effect the foregoing intention, (i) subject to the following clauses (ii) and (iii), new Letters of Credit issued after the Original Effective Date will be issued serially by the Designated Issuers in the same order as the Designated Issuers are listed in the definition thereof, (ii) any Letter of Credit with a Stated Amount in excess of $100,000,000 that is to be -14- 20 issued by a Designated Issuer will be issued severally by all Designated Issuers, pro rata among same (or otherwise allocated to give effect to clause (i) above), with Chase, if an issuer thereunder (or, if Chase is not an issuer, such other issuer as selected by the Borrower) to be the paying agent under any such Letter of Credit, and (iii) a Designated Issuer will not be obligated to (but may in its sole discretion) issue any Letter of Credit if after giving effect thereto the aggregate Stated Amount of all outstanding Letters of Credit issued by such Designated Issuer shall exceed by more than $100,000,000 the highest aggregate Stated Amount of outstanding Letters of Credit issued by any other Designated Issuer, with the Administrative Agent to provide the Designated Issuers at the time of issuance of any new Letter of Credit with any requested information relating to the outstanding Letters of Credit issued by the Designated Issuers. The Administrative Agent will coordinate the issuance of Letters of Credit by the Designated Issuers to give effect to the two foregoing sentences. (b) Notwithstanding the foregoing (i) no Letter of Credit shall be issued (x) the Stated Amount of which, when added to the Letter of Credit Outstandings at such time would exceed, when added to the sum of the aggregate principal amount of all Revolving Loans made by Non-Defaulting Lenders and all Competitive Bid Loans and all Swingline Loans then outstanding, the Adjusted Total Commitment at such time or (y) with an expiration date beyond the then First Maturity Date of any Lender if after giving effect thereto the Stated Amount of all Letters of Credit with an expiration date beyond such First Maturity Date would exceed, when added to the aggregate outstanding principal amount of all Competitive Bid Loans and Revolving Loans with Interest Periods that extend beyond such First Maturity Date, the Expected Total Commitment in effect for each day on which such Letter of Credit is to be outstanding that occurs beyond such First Maturity Date; (ii) each Letter of Credit shall, unless otherwise agreed by the Majority SMA and the Letter of Credit Issuer, have an expiry date occurring no later than one year after the date of issuance thereof (except to the extent consented to by the prospective Letter of Credit Issuer or Issuers), and in no event occurring later than the Business Day next preceding the then First Maturity Date of the Letter of Credit Issuer or Issuers thereunder, except that, in the case of the Existing Letters of Credit, the initial expiry date will be automatically extended for consecutive one year periods (or shorter period as required and specified by the Borrower) (but not later than the Business Day preceding the then First Maturity Date of the Letter of Credit Issuer or Issuers thereunder) unless (I) any of the Letter of Credit Issuers thereof elects, in accordance with the terms of such Existing Letter of Credit, not to permit any such extension, (II) the Borrower elects not to obtain such extension or (III) the Required Lenders shall have notified the Administrative Agent (who shall promptly inform the Letter of Credit Issuers thereof) on or prior to the seventy-seventh day preceding any such extension that a Default or Event of Default has occurred and is continuing or would result from the extension of the then outstanding Existing Letters of Credit and, accordingly, that the then expiry date for all the outstanding Existing Letters of Credit shall not be extended, in which case the Letter of Credit Issuers of all then outstanding Existing Letters of Credit shall, and hereby agree to, give notice to the beneficiaries thereof of such nonextension; (iii) each Letter of Credit shall be denominated in U.S. dollars or an Approved Alternate Currency; and (iv) no Letter of Credit shall be issued by a Letter of Credit Issuer after it has received a notice in writing from the Required Lenders that one or more of the applicable conditions specified in Section 5 are not then satisfied. -15- 21 2.02 Letter of Credit Requests. Whenever the Borrower desires that a Letter of Credit be issued for its account, it shall give the Administrative Agent and the Letter of Credit Issuer or Letter of Credit Issuers that are to issue same at least five Business Days' (or such lesser number of days as may be agreed to by the relevant Letter of Credit Issuer) written notice thereof. Each notice shall be executed by the Borrower and shall be in the form of Exhibit B attached hereto (each, a "Letter of Credit Request"). The Administrative Agent shall promptly transmit copies of each Letter of Credit Request to each Lender. 2.03 Letter of Credit Participations. (a) Immediately upon the issuance by a Letter of Credit Issuer of any Letter of Credit, such Letter of Credit Issuer shall be deemed to have sold and transferred to each other Lender (each such other Lender, in its capacity under this Section 2.03, a "Participant"), and each such Participant shall be deemed irrevocably and unconditionally to have purchased and received from such Letter of Credit Issuer, without recourse or warranty, an undivided interest and participation (each, a "participation"), to the extent of such Participant's Adjusted Percentage (with each such purchase by a Lender (other than a Non-Extending Lender) to applied as a utilization of the Short-Term Commitment and Long-Term Commitment of such Lender on a pro rata basis (based upon the relative amounts of the Short-Term Commitment and the Long-Term Commitment of such Lender, in each case as in effect immediately before giving effect to such purchase)), in such Letter of Credit, each substitute letter of credit, each drawing made thereunder and the obligations of the Borrower under this Agreement with respect thereto, and any security therefor that remains in effect after the Original Effective Date, or guaranty pertaining thereto (although Letter of Credit Fees will be paid directly to the Administrative Agent for the ratable account of the Participants as provided in Section 3.01(c) and the Participants shall have no right to receive any portion of any Facing Fees). Upon any change in the Commitments (and the Short-Term Commitments and Long-Term Commitments, if any) of the Lenders pursuant to Section 1.15 or 12.04, the termination of a Commitment of a Non-Continuing Lender or the occurrence of any Lender Default, it is hereby agreed that, with respect to all outstanding Letters of Credit and Unpaid Drawings, there shall be an automatic adjustment to the participations pursuant to this Section 2.03 to reflect the new Adjusted Percentages of the assignor and assignee Lender, of all Continuing Lenders or of all Non-Defaulting Lenders, as the case may be. (b) In determining whether to pay under any Letter of Credit, the Letter of Credit Issuer issuing same shall have no obligation relative to the Participants other than to confirm that any documents required to be delivered under such Letter of Credit have been delivered and that they appear to comply on their face with the requirements of such Letter of Credit. Any action taken or omitted to be taken by a Letter of Credit Issuer under or in connection with any Letter of Credit issued by it, if taken or omitted in the absence of gross negligence or willful misconduct, shall not create for such Letter of Credit Issuer any resulting liability. (c) In the event that any Letter of Credit Issuer makes any payment under any Letter of Credit issued by it and the Borrower shall not have reimbursed such amount in full to such Letter of Credit Issuer pursuant to Section 2.04(a), such Letter of Credit Issuer shall promptly notify the Administrative Agent and each Participant of such failure, and each Participant shall promptly and unconditionally pay to the Administrative Agent for the account of such Letter of Credit Issuer, the amount of such Participant's Adjusted Percentage of such -16- 22 unreimbursed payment in lawful money of the United States of America and in same day funds (with each such payment by a Lender (other than a Non-Extending Lender) to applied as a utilization of the Short-Term Commitment and Long-Term Commitment of such Lender on a pro rata basis (based upon the relative amounts of the Short-Term Commitment and the Long-Term Commitment of such Lender, in each case as in effect immediately before giving effect to such payment)); provided, however, that no Participant shall be obligated to pay to the Administrative Agent for the account of such Letter of Credit Issuer its Adjusted Percentage of such unreimbursed amount for any wrongful payment made by such Letter of Credit Issuer under a Letter of Credit as a result of acts or omissions constituting willful misconduct or gross negligence as determined by a court of competent jurisdiction on the part of such Letter of Credit Issuer. If such Letter of Credit Issuer so notifies, prior to 11:00 A.M. (New York time) on any Business Day, any Participant required to fund a payment under a Letter of Credit, such Participant shall make available to the Administrative Agent for the account of such Letter of Credit Issuer such Participant's Adjusted Percentage of the amount of such payment on such Business Day in same day funds. If and to the extent such Participant shall not have so made its Adjusted Percentage of the amount of such payment available to the Administrative Agent for the account of such Letter of Credit Issuer, such Participant agrees to pay to the Administrative Agent for the account of such Letter of Credit Issuer, forthwith on demand such amount, together with interest thereon for each day from such date until the date such amount is paid to the Administrative Agent for the account of such Letter of Credit Issuer at the overnight Federal Funds Rate. The failure of any Participant to make available to the Administrative Agent for the account of the applicable Letter of Credit Issuer its Adjusted Percentage of any payment under any Letter of Credit shall not relieve any other Participant of its obligation hereunder to make available to the Administrative Agent for the account of such Letter of Credit Issuer its Adjusted Percentage of any payment under any Letter of Credit on the date required, as specified above, but no Participant shall be responsible for the failure of any other Participant to make available to the Administrative Agent such other Participant's Adjusted Percentage of any such payment. (d) Whenever any Letter of Credit Issuer receives a payment in respect of an unpaid reimbursement obligation as to which the Administrative Agent has received for the account of such Letter of Credit Issuer any payments from the Participants pursuant to the preceding clause (c), such Letter of Credit Issuer shall pay to the Administrative Agent and the Administrative Agent shall promptly pay to each Participant which has paid its Adjusted Percentage of such reimbursement obligation, in lawful money of the United States of America and in same day funds, an amount equal to such Participant's share (based upon the proportionate aggregate amount originally funded by such Participant to the aggregate amount funded by all Participants) of the principal amount of such reimbursement obligation and interest thereon accruing after the purchase of the respective participations. (e) The obligations of the Participants to make payments to the Administrative Agent for the account of the Letter of Credit Issuers with respect to Letters of Credit shall be irrevocable and not subject to counterclaim, set-off or other defense or any other qualification or exception whatsoever (except as expressly provided in Section 2.03(c)) and shall be made in accordance with the terms and conditions of this Agreement under all circumstances, including, without limitation, any of the following circumstances: -17- 23 (i) any lack of validity or enforceability of this Agreement or any of the other Credit Documents; (ii) the existence of any claim, set-off, defense or other right which the Borrower may have at any time against a beneficiary named in a Letter of Credit, any transferee of any Letter of Credit (or any Person for whom any such transferee may be acting), the Administrative Agent, any Letter of Credit Issuer, any Lender, or other Person, whether in connection with this Agreement, any Letter of Credit, the transactions contemplated herein or any unrelated transactions (including any underlying transaction between the Borrower and the beneficiary named in any such Letter of Credit); (iii) any draft, certificate or any other document presented under the Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (iv) the surrender or impairment of any security for the performance or observance of any of the terms of any of the Credit Documents; (v) the occurrence of any Default or Event of Default; or (vi) the failure of any condition precedent set forth in Section 5 hereof to have been satisfied at the time of the issuance of any Letter of Credit unless the applicable Letter of Credit Issuer shall have received a notice in writing to such effect from the Required Lenders pursuant to Section 2.01(b)(iv) hereof prior to the issuance of such Letter of Credit. 2.04 Agreement to Repay Letter of Credit Drawings. (a) The Borrower hereby agrees to reimburse the respective Letter of Credit Issuer, by making payment to the Administrative Agent in U.S. dollars and immediately available funds at the Administrative Agent's Office, for any payment or disbursement made by such Letter of Credit Issuer under any Letter of Credit issued by it (each such amount so paid until reimbursed, an "Unpaid Drawing") immediately after, and in any event on the date of, notice given by such Letter of Credit Issuer to the Borrower of such payment (which notice each Letter of Credit Issuer hereby agrees to give promptly after the making of any payment or disbursement under a Letter of Credit), with interest on the amount so paid or disbursed by such Letter of Credit Issuer, to the extent not reimbursed prior to 1:00 P.M. (New York time) on the date of such payment or disbursement, from and including the date paid or disbursed to but excluding the date such Letter of Credit Issuer is reimbursed therefor, at a rate per annum which shall be the Applicable Reference Rate Margin plus the Reference Rate as in effect from time to time (plus an additional 2% per annum if not reimbursed by the second Business Day following any such notice of payment or disbursement), such interest to be payable on demand. Notwithstanding the foregoing, to the extent that a Letter of Credit Issuer of a Letter of Credit denominated in a currency other than U.S. dollars has agreed in writing to such arrangement at the time of the issuance of such Letter of Credit, the Borrower shall reimburse any Drawing thereunder in the currency in which such Letter of Credit is denominated; provided, that (x) if any such Drawing is made at a time when there exists an Event of Default or (y) if such reimbursement is not made by the close of business two Business Days -18- 24 after the Borrower has received notice of such Drawing, then, in either such case, such reimbursement shall instead be made in U.S. dollars and in immediately available funds. (b) The Borrower's obligations under this Section 2.04 to reimburse each Letter of Credit Issuer with respect to Unpaid Drawings (including, in each case, interest thereon) issued by it shall be absolute and unconditional under any and all circumstances and irrespective of any setoff, counterclaim or defense to payment which the Borrower or any other Person may have or have had against any Lender (including in its capacity as a Letter of Credit Issuer or as a Participant), including, without limitation, any defense based upon the failure of any drawing under a Letter of Credit (each, a "Drawing") to conform to the terms of the Letter of Credit or any non-application or misapplication by the beneficiary of the proceeds of such Drawing; provided, that the Borrower shall not be obligated to reimburse the respective Letter of Credit Issuer for any wrongful payment made by such Letter of Credit Issuer under a Letter of Credit as a result of acts or omissions constituting willful misconduct or gross negligence as determined by a court of competent jurisdiction on the part of such Letter of Credit Issuer. 2.05 Increased Costs. If after the date hereof, the adoption of any applicable law, rule or regulation, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or actual compliance by any Letter of Credit Issuer or any Participant with any request or directive made or adopted after the date hereof (whether or not having the force of law), by any such authority, central bank or comparable agency shall either (i) impose, modify or make applicable any reserve, deposit, capital adequacy or similar requirement against letters of credit issued by such Letter of Credit Issuer, or such Participant's participation therein, or (ii) impose on any Letter of Credit Issuer or any Participant any other conditions affecting its obligations under this Agreement in respect of Letters of Credit or participations therein or any Letter of Credit or such Participant's participation therein; and the result of any of the foregoing is to increase the cost to such Letter of Credit Issuer or such Participant of issuing, maintaining or participating in any Letter of Credit, or to reduce the amount of any sum received or receivable by such Letter of Credit Issuer or such Participant hereunder in respect of Letters of Credit or participations therein, then, upon demand to the Borrower by such Letter of Credit Issuer or such Participant, as the case may be (a copy of which notice shall be sent by such Letter of Credit Issuer or such Participant to each Senior Managing Agent), the Borrower shall pay to such Letter of Credit Issuer or such Participant such additional amount or amounts as will compensate such Letter of Credit Issuer or such Participant for such increased cost or reduction. A certificate submitted to the Borrower by such Letter of Credit Issuer or such Participant, as the case may be (a copy of which certificate shall be sent by such Letter of Credit Issuer or such Participant to each Senior Managing Agent), setting forth in reasonable detail the basis for the determination of such additional amount or amounts necessary to compensate such Letter of Credit Issuer or such Participant as aforesaid shall be conclusive and binding on the Borrower absent manifest error although the failure to deliver any such certificate shall not, subject to Section 1.16, release or diminish any of the Borrower's obligations to pay additional amounts pursuant to this Section 2.05 upon receipt of such certificate. -19- 25 2.06 Indemnification; Nature of Letter of Credit Issuers' Duties. (a) In addition to its other obligations under this Section 2, the Borrower hereby agrees to protect, indemnify, pay and save each of the Letter of Credit Issuers harmless from and against any and all claims, demands, liabilities, damages, losses, costs, charges and expenses (including reasonable attorneys' fees but excluding those taxes excluded from the definition of Taxes in Section 4.04) that any such Letter of Credit Issuer may incur or be subject to as a consequence, direct or indirect, of (i) the issuance of any Letter of Credit or (ii) the failure of any Letter of Credit Issuer to honor a drawing under a Letter of Credit as a result of any act or omission, whether rightful or wrongful, of any present or future de jure or de facto government or governmental authority (all such acts or omissions, herein called "Government Acts"). (b) As between the Borrower and the Letter of Credit Issuers, the Borrower shall assume all risks of the acts, omissions or misuse of any Letter of Credit by the beneficiary thereof. The Letter of Credit Issuers shall not be responsible: (i) for the form, validity, sufficiency, accuracy, genuineness or legal effect of any document submitted by any party in connection with the application for and issuance of any Letter of Credit, even if it should in fact prove to be in any or all respects invalid, insufficient, inaccurate, fraudulent or forged; (ii) for the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign any Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, that may prove to be invalid or ineffective for any reason; (iii) for failure of the beneficiary of a Letter of Credit to comply fully with conditions required in order to draw upon a Letter of Credit; (iv) for errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, cable, telegraph, telex or otherwise, whether or not they be in cipher; (v) for errors in interpretation of technical terms; (vi) for any loss or delay in the transmission or otherwise of any document required in order to make a drawing under a Letter of Credit or of the proceeds thereof; and (vii) for any consequences arising from causes beyond the control of the Letter of Credit Issuers, including, without limitation, any Government Acts. None of the above shall affect, impair, or prevent the vesting of any of the Letter of Credit Issuers' rights or powers hereunder. (c) In furtherance and extension and not in limitation of the specific provisions hereinabove set forth, any action taken or omitted by any Letter of Credit Issuer, under or in connection with any Letter of Credit or the related certificates, if taken or omitted in good faith, shall not put such Letter of Credit Issuer under any resulting liability to the Borrower. It is the intention of the parties that this Agreement shall be construed and applied to protect and indemnify the Letter of Credit Issuers against any and all risks involved in the issuance of the Letters of Credit arising from any present or future Government Acts. The Letter of Credit Issuers shall not, in any way, be liable for any failure by the Letter of Credit Issuers or anyone else to pay any Drawing under any Letter of Credit as a result of any Government Acts or any other cause beyond the control of the Letter of Credit Issuers. (d) Nothing in this Section 2.06 is intended to limit the reimbursement obligation of the Borrower contained in Section 2.04 hereof. The obligations of the Borrower under this Section 2.06 shall survive the termination of this Agreement. No act or omission of any current or prior beneficiary of a Letter of Credit shall in any way affect or impair the rights of the Letter of Credit Issuers to enforce any right, power or benefit under this Agreement. -20- 26 (e) Notwithstanding anything to the contrary contained in this Section 2.06, (i) the Borrower shall have no obligation to indemnify any Letter of Credit Issuer in respect of any liability incurred by such Letter of Credit Issuer arising solely out of the gross negligence or willful misconduct of such Letter of Credit Issuer as determined by a court of competent jurisdiction and (ii) the Borrower shall have a claim against any Letter of Credit Issuer and such Letter of Credit Issuer shall be liable to the Borrower to the extent, but only to the extent, of any direct, as opposed to consequential, damages suffered by the Borrower which the Borrower proves were caused by (x) such Letter of Credit Issuer's willful misconduct or gross negligence as determined by a court of competent jurisdiction in determining whether the documents presented under its Letter of Credit complied with the terms of such Letter of Credit or (y) such Letter of Credit Issuer's willful or grossly negligent failure to pay under its Letter of Credit after presentation to it of a drawing certificate and any other documents strictly complying with the terms and conditions of such Letter of Credit as determined by a court of competent jurisdiction. SECTION 3. Fees; Commitments. 3.01 Fees. (a) The Borrower agrees to pay the Administrative Agent for the account of each Non-Defaulting Lender a facility fee (the "Facility Fee") for the period from and including the Original Effective Date to but not including the Facility Maturity Date or, if earlier, the date upon which the Total Commitment has been terminated, computed for each day at a rate per annum equal to the Applicable Facility Fee Percentage for such day multiplied by the then Commitment of such Lender. Such Facility Fee shall be due and payable quarterly in arrears on the 15th day of each January, April, July and October and on the date upon which the Total Commitment is terminated. (b) The Borrower agrees to pay to the Administrative Agent for the account of the Lenders pro rata on the basis of their respective Adjusted Percentages, a fee in respect of each Letter of Credit (the "Letter of Credit Fee"), computed for each day at a rate equal to the Applicable Eurodollar Margin for such day multiplied by the then Stated Amount of such Letter of Credit. Such Letter of Credit Fees shall be due and payable quarterly in arrears on the 15th day of each January, April, July and October and on the date upon which the Total Commitment is terminated. (c) The Borrower agrees to pay to the Administrative Agent for the account of each Letter of Credit Issuer a fee in respect of each Letter of Credit issued by it (the "Facing Fee") computed for each day at a rate equal to .25% multiplied by the average daily Stated Amount of such Letter of Credit. Such Facing Fees shall be due and payable quarterly in arrears on the 15th day of each January, April, July and October and on the date upon which the Total Commitment is terminated. (d) The Borrower hereby agrees to pay directly to each Letter of Credit Issuer upon each issuance of, drawing under, and/or amendment of, a Letter of Credit issued by such Letter of Credit Issuer such amount as shall at the time of such issuance, drawing or amendment be the administrative charge which such Letter of Credit Issuer is customarily charging for issuances of, drawings under or amendments of, letters of credit issued by it. -21- 27 (e) The Borrower shall pay to the Administrative Agent for the account of each Senior Managing Agent and each other Lender the fees specified in the accepted commitment letter, or related fee letter, executed by such Senior Managing Agent or such Lender, as the case may be, when and as due. (f) All computations of Fees shall be made in accordance with Section 12.07(b). 3.02 Voluntary Reduction of Commitments. Upon at least three Business Days' prior written notice (or telephonic notice confirmed in writing) to the Administrative Agent at the Administrative Agent's Office (which notice the Administrative Agent shall promptly transmit to each of the Lenders), the Borrower shall have the right, without premium or penalty, (i) to terminate the Total Unutilized Commitment, in part or in whole (or, to the extent that at such time there are no Loans outstanding and no Letter of Credit Outstandings, to terminate the Total Commitment, in whole), provided, that (x) any such termination shall apply to proportionately and permanently reduce the Commitment of each of the Lenders, (y) the amount of any such reduction to the Commitment of any Lender shall reduce the Short-Term Commitment, if any, and the Long-Term Commitment, if any, of such Lender on a pro rata basis (based upon the relative amounts of the Short-Term Commitment and the Long-Term Commitment, if any, of such Lender, in each case as in effect before giving effect to such reduction) and (z) any partial reduction pursuant to this Section 3.02(i) shall be in the amount of at least $10,000,000, and (ii) at any time within the 30 days prior to the Final Maturity Date of any Non-Continuing Bank and so long as no Event of Default then exists, to terminate the Commitment of such Non-Continuing Bank, provided that (x) all Loans, together with unpaid accrued interest thereon, of such Non-Continuing Bank are repaid in full and (y) after giving effect to such termination and repayment, the sum of the aggregate principal amount of all outstanding Loans and the Letter of Credit Outstandings does not exceed the Total Commitment. 3.03 Mandatory Reduction of Commitments, etc. (a) On the date which is the earlier of (x) 30 days after any date on which a Change of Control occurs and (y) the date on which any Indebtedness of the Borrower in excess of $75,000,000 individually or $150,000,000 in the aggregate is required to be repurchased as a result of any such Change of Control, the Total Commitment and Total Swingline Commitment shall be reduced to zero. (b) The Total Commitment shall be reduced on any date on which the Borrower or Reynolds Tobacco issues or incurs Specified Debt if after giving effect to such issuance the sum of (i) the Total Commitment plus (ii) the aggregate outstanding principal amount of Specified Debt exceeds $3 billion, such reduction to be in amount equal to the excess of such sum over $3 billion. (c) The Total Commitment shall terminate on the Facility Maturity Date. (d) The Total Swingline Commitment shall terminate on the Final Swingline Maturity Date. (e) Each Swingline Lender's Swingline Commitment shall terminate on such Swingline Lender's Swingline Maturity Date. -22- 28 (f) Each Lender's Commitment (including its Long-Term Commitment, if any) shall terminate on such Lender's Final Maturity Date. (g) Each Lender's Short-Term Commitment, if any, shall terminate on such Lender's First Maturity Date. (h) Each partial reduction of the Total Commitment pursuant to Section 3.03(b) shall apply proportionately to the Commitment of each Lender and each such reduction to the Commitment of each Lender shall reduce the Short-Term Commitment, if any, and the Long-Term Commitment, if any, of such Lender on a pro rata basis (based upon the relative amounts of the Short-Term Commitment and the Long-Term Commitment, if any, of such Lender, in each case as in effect before giving effect to such reduction). SECTION 4. Payments. 4.01 Voluntary Prepayments. The Borrower shall have the right to prepay Revolving Loans and Swingline Loans in whole or in part from time to time on the following terms and conditions: (i) the Borrower shall give the Administrative Agent at the Administrative Agent's Office written notice (or telephonic notice promptly confirmed in writing) of its intent to make such prepayment, the amount of such prepayment and (in the case of Eurodollar Loans) the specific Borrowing(s) pursuant to which made, which notice shall be given by the Borrower no later than (x) in the case of Revolving Loans, 11:00 A.M. (New York time) one Business Day prior to, or (y) in the case of Swingline Loans, 11:00 A.M. (New York time) on, the date of such prepayment and shall promptly be transmitted by the Administrative Agent to each of the Lenders or Swingline Lenders, as the case may be; (ii) each partial prepayment of any Borrowing shall be in an aggregate principal amount of at least $10,000,000, provided that no partial prepayment of Eurodollar Loans made pursuant to a single Borrowing shall reduce the outstanding Revolving Loans made pursuant to such Borrowing to an amount less than the Minimum Borrowing Amount for Eurodollar Loans; and (iii) each prepayment in respect of any Revolving Loans or Swingline Loans made pursuant to a Borrowing shall be applied pro rata among such Revolving Loans or Swingline Loans, provided that, at the Borrower's election in connection with any prepayment pursuant to this Section 4.01, such prepayment shall not be applied to any Revolving Loan of a Defaulting Lender at any time when the aggregate amount of Revolving Loans of any Non-Defaulting Lender exceeds such Non-Defaulting Lender's Percentage of all Revolving Loans then outstanding. The Borrower shall not have the right to voluntarily prepay any Competitive Bid Loan without the consent of the Lender that has made same. 4.02 Mandatory Prepayments. (A) Requirements. If on any date the sum of the outstanding principal amount of Revolving Loans made by Non-Defaulting Lenders, Swingline Loans and Competitive Bid Loans and the aggregate amount of Letter of Credit Outstandings (all the foregoing, collectively, the "Aggregate Outstandings") exceeds the Adjusted Total Commitment as then in effect, the Borrower shall repay on such date the principal of Swingline Loans and, after Swingline Loans have been paid in full, Revolving Loans, in an amount equal to such excess. If, after giving -23- 29 effect to the prepayment of all outstanding Swingline Loans and Revolving Loans, the Aggregate Outstandings exceed the Adjusted Total Commitment then in effect, the Borrower shall pay to the Administrative Agent an amount in cash equal to such excess and the Administrative Agent shall hold such payment as security for the obligations of the Borrower hereunder (including without limitation obligations in respect of Letter of Credit Outstandings) pursuant to a cash collateral agreement to be entered into in form and substance satisfactory to the Administrative Agent (which shall permit certain investments in cash equivalents satisfactory to the Administrative Agent, until the proceeds are applied to the secured obligations). If, after giving effect to the prepayment of all outstanding Swingline Loans and Revolving Loans and the cash collateralization of all Letter of Credit Outstandings as set forth above, the remaining Aggregate Outstandings exceed the Adjusted Total Commitment, the Borrower shall repay on such date the principal of Competitive Bid Loans in an aggregate amount equal to such excess, provided that no Competitive Bid Loan shall be prepaid pursuant to this sentence unless the Lender that made same consents to such prepayment. In addition, the Borrower shall repay (i) to each Lender on such Lender's First Maturity Date the Short-Term Commitment Percentage of such Lender's outstanding Revolving Loans on such date, (ii) the Revolving Loans of each Lender on such Lender's Final Maturity Date and (iii) the Swingline Loans of each Swingline Lender on such Swingline Lender's Swingline Maturity Date. (B) Application. With respect to each prepayment of Loans required by this Section 4.02, the Borrower may designate the Types of Loans which are to be prepaid and the specific Borrowing(s) pursuant to which made; provided, that: (i) if any prepayment of Eurodollar Loans made pursuant to a single Borrowing shall reduce the outstanding Revolving Loans made pursuant to such Borrowing to an amount less than the Minimum Borrowing Amount for Eurodollar Loans, such Borrowing shall immediately be converted into Reference Rate Loans; (ii) each prepayment of any Loans made pursuant to a Borrowing shall be applied pro rata among such Loans; and (iii) notwithstanding the provisions of the preceding clause (ii), no prepayment made pursuant to Section 4.02(A) (other than the last sentence thereof) of Revolving Loans shall be applied to the Revolving Loans of any Defaulting Lender. In the absence of a designation by the Borrower as described in the preceding sentence, the Administrative Agent shall, subject to the above, make such designation in its sole discretion with a view, but no obligation, to minimize breakage costs owing under Section 1.12. 4.03 Method and Place of Payment. (a) Except as otherwise specifically provided herein, all payments under this Agreement shall be made to the Administrative Agent for the ratable account of the Lenders entitled thereto, not later than 1:00 P.M. (New York time) on the date when due and shall be made in immediately available funds and in lawful money of the United States of America at the Administrative Agent's Office, it being understood that written, telex or facsimile notice by the Borrower to the Administrative Agent to make a payment from the funds in the Borrower's account at the Administrative Agent's Office shall constitute the making of such payment to the extent of such funds held in such account. The Administrative Agent will thereafter cause to be distributed on the same day (if payment was actually received by the Administrative Agent prior to 2:00 P.M. (New York time) on such day) like funds relating to the payment of principal or interest or Fees ratably to the Lenders entitled thereto. If and to the extent that any such distribution shall not be so made by the Administrative Agent in full on the same day (if payment was actually received by the Administrative Agent -24- 30 prior to 2:00 P.M. (New York time) on such day), the Administrative Agent shall pay to each Lender its ratable amount thereof and each such Lender shall be entitled to receive from the Administrative Agent, upon demand, interest on such amount at the overnight Federal Funds Rate for each day from the date such amount is paid to the Administrative Agent until the date the Administrative Agent pays such amount to such Lender. (b) Any payments under this Agreement which are made later than 1:00 P.M. (New York time) shall be deemed to have been made on the next succeeding Business Day. Whenever any payment to be made hereunder shall be stated to be due on a day which is not a Business Day, the due date thereof shall be extended to the next succeeding Business Day and, with respect to payments of principal, interest shall be payable during such extension at the applicable rate in effect immediately prior to such extension. 4.04 Net Payments. (a) All payments made by the Borrower hereunder will be made without setoff or counterclaim. The Borrower will pay, prior to the date on which penalties attach thereto, all present and future income, stamp and other taxes, levies, or costs and charges whatsoever imposed, assessed, levied or collected on or in respect of a Loan and/or the recording, registration, notarization or other formalization thereof and/or any payments of principal, interest or other amounts made on or in respect of a Loan (all such taxes, levies, costs and charges being herein collectively called "Taxes"; provided that Taxes shall not include taxes imposed on or measured by the overall net income of that Lender (or any alternative tax imposed generally by any relevant jurisdiction in lieu of a tax on net income) by the United States of America or any political subdivision or taxing authority thereof or therein, taxes imposed under Section 884 of the Code or taxes on or measured by the overall net income (or any alternative tax imposed generally by any relevant jurisdiction in lieu of a tax on net income) of that Lender or any foreign office, branch or subsidiary of that Lender by any foreign country or subdivision thereof in which that Lender or that office, branch or subsidiary is doing business). The Borrower shall also pay such additional amounts equal to increases in taxes payable by that Lender described in the foregoing proviso which increases are attributable to payments made by the Borrower described in the immediately preceding sentence of this Section. Promptly after the date on which payment of any such Tax is due pursuant to applicable law, the Borrower will, at the request of that Lender, furnish to that Lender evidence, in form and substance satisfactory to that Lender, that the Borrower has met its obligation under this Section 4.04. The Borrower will indemnify each Lender against, and reimburse each Lender on demand for, any Taxes, as determined by that Lender in its good faith and reasonable discretion. Such Lender shall provide the Borrower with appropriate receipts for any payments or reimbursements made by the Borrower pursuant to this Section 4.04. (b) Each Lender which is not a United States person (as such term is defined in Section 7701(a)(30) of the Code) for United States federal income tax purposes agrees to provide to the Borrower on or prior to the Original Effective Date, or in the case of a Lender that is an assignee or transferee of an interest under this Agreement pursuant to Section 1.15 or Section 12.04 (unless the respective Lender was already a Lender hereunder immediately prior to such assignment or transfer and such Lender is in compliance with the provisions of this Section 4.04(b)), on the date of such assignment or transfer to such Lender, two accurate and complete original signed copies of Internal Revenue Service Form W-8ECI or Form W-8BEN (with -25- 31 respect to a complete exemption under an income tax treaty) (or successor forms) certifying to such Lender's entitlement to a complete exemption from United States withholding tax with respect to payments to be made under this Agreement or any Note. Each Lender that is a United States person (as such term is defined in Section 7701(a)(30) of the Code) for Federal income tax purposes, but that is not a corporation (as such term is defined in Section 7701(a)(3) of the Code) for such purposes, agrees to provide to the Borrower on or prior to the Original Effective Date, or in the case of a Lender that is an assignee or transferee of an interest under this Agreement pursuant to Section 1.15 or Section 12.04 (unless the respective Lender was already a Lender hereunder immediately prior to such assignment or transfer and such Lender is in compliance with the provisions of this Section 4.04(b)), on the date of such assignment to such Lender, two accurate and complete original signed copies of Internal Revenue Service Form W-9 (or successor form). In addition, each such Lender agrees that from time to time after the Original Effective Date, when a lapse in time or change in circumstances renders the previous certification obsolete or inaccurate in any material respect, it will deliver to the Borrower two new accurate and complete original signed copies of Internal Revenue Service Form W-8ECI or W-8BEN (with respect to a claim for benefits of an income tax treaty), as the case may be, and such other forms as may be required in order to confirm or establish the entitlement of such Lender to a continued exemption from or reduction in United States withholding tax with respect to payments under this Agreement or any Note, or it shall immediately notify the Borrower and the Administrative Agent of its inability to deliver any such form. Notwithstanding anything to the contrary contained in Section 4.04(a), (x) the Borrower shall be entitled, to the extent it is required to do so by law, to deduct or withhold income or other similar taxes imposed by the United States (or any political subdivision or taxing authority thereof or therein) from interest, fees or other amounts payable hereunder for the account of any Lender which is not a United States person (as such term is defined in Section 7701(a)(30) of the Code) for United States federal income tax purposes and which has not provided to the Borrower such forms that establish a complete exemption from such deduction or withholding and (y) the Borrower shall not be obligated pursuant to Section 4.04(a) to pay a Lender in respect of income or similar taxes imposed by the United States or any additional amounts with respect thereto if such Lender has not provided to the Borrower the Internal Revenue Service forms required to be provided to the Borrower pursuant to this Section 4.04(b). SECTION 5. Conditions Precedent. 5.01 Conditions Precedent to the Restatement Effective Date. This Agreement shall become effective on the date (the "Restatement Effective Date") when each of the following conditions are first satisfied: A. Execution; Notes. The Restatement Execution Date shall have occurred as provided in Section 12.10 and there shall have been delivered to the Administrative Agent for the account of each Lender the appropriate Note executed by the Borrower in the amount, maturity and as otherwise provided herein. B. Officer's Certificate. The Administrative Agent shall have received certificates dated the Restatement Effective Date signed by an appropriate officer of the -26- 32 Borrower stating that all of the applicable conditions set forth in Sections 5.01F., G., H., J., K. and L. and 5.02 exist as of such date. C. Opinions of Counsel. The Administrative Agent shall have received an opinion, or opinions, in form and substance satisfactory to each Senior Managing Agent, addressed to each of the Lenders and dated the Restatement Effective Date, from (i) Charles A. Blixt, Executive Vice President, General Counsel and Assistant Secretary of the Borrower, which opinion shall cover the matters contained in Exhibit C-1 hereto and (ii) White & Case LLP, special counsel to the Lenders, which opinion shall cover the matters contained in Exhibit C-2 hereto, together with such other opinions, if any, covering such matters as the Majority SMA shall reasonably request, from counsel, and in form and substance, satisfactory to the Majority SMA. D. Corporate Proceedings. On the Restatement Effective Date, all corporate and legal proceedings and all instruments and agreements in connection with the transactions contemplated by this Agreement and the other Credit Documents shall be satisfactory in form and substance to each Senior Managing Agent, and the Administrative Agent shall have received all information and copies of all certificates, documents and papers, including records of corporate proceedings and governmental approvals, if any, which any Senior Managing Agent reasonably may have requested in connection therewith, such documents and papers where appropriate to be certified by proper corporate or governmental authorities. E. Organizational Documentation etc. The Lenders shall have received copies of the Certificate of Incorporation and By-Laws or other equivalent organizational documents of each Credit Party, certified on the Restatement Effective Date as true and complete by an appropriate corporate officer or governmental authority. F. Adverse Change, etc. Nothing shall have occurred from December 31, 1999 to the Restatement Effective Date which has (x) a material adverse effect on the ability of any Credit Party to perform its obligations to the Lenders or (y) a Material Adverse Effect. G. Litigation. Except as set forth in Annex IV hereto, there shall be on the Restatement Effective Date no actions, suits, proceedings, inquiry, injunction or restraining order pending, entered or threatened with respect to the Borrower or any of its Subsidiaries that are reasonably likely to have (x) a material adverse effect on the rights or remedies of the Lenders or on the ability of any Credit Party to perform its obligations to the Lenders hereunder or under any other Credit Document to which it is a party or (y) a Material Adverse Effect. H. No Defaults. On the Restatement Effective Date, there shall exist no event of default (or condition which would constitute an event of default with the giving of notice or the passage of time) under any material financing or lease agreement or other material contract of any of the Credit Parties. I. Projections. The Lenders shall have received financial forecasts for Borrower and its Subsidiaries for the period from September 30, 2000 to and including December 31, 2003 -27- 33 (the "Projections"). The Projections (and the supporting assumptions and explanations thereto) shall be in form and substance satisfactory to the Majority SMA. J. Subsidiary Guaranty. Reynolds Tobacco shall have duly authorized, executed and delivered an amended and restated Subsidiary Guaranty substantially in the form of Exhibit D hereto (as so amended and restated and as the same may be further amended, restated, modified and/or supplemented from time to time in accordance with the terms hereof and thereof, the "Subsidiary Guaranty"), and the Subsidiary Guaranty shall be in full force and effect. K. Intercompany Subordination Agreement. Each of Reynolds Tobacco, Acquisition Corp., FSH, GMB and R.J. Reynolds Tobacco Co. shall have duly authorized, executed and delivered an amended and restated Subordination Agreement substantially in the form of Exhibit G hereto (as so amended and restated and as the same may be further amended, restated, modified and/or supplemented from time to time in accordance with the terms hereof and thereof, the "Intercompany Subordination Agreement"), and the Intercompany Subordination Agreement shall be in full force and effect. L. Fees, etc. On the Restatement Effective Date, the Borrower shall have paid to each Senior Managing Agent and each Lender all costs, fees and expenses payable to the Senior Managing Agents or the Lenders, to the extent then due. 5.02 Conditions Precedent to All Credit Events. The obligation of each Lender to make any Loans (other than pursuant to a Mandatory Borrowing) and the obligation of each Letter of Credit Issuer to issue or extend Letters of Credit, is subject, at the time of the making of each such Loan and/or the issuance or extension of each such Letter of Credit, to the satisfaction of the following conditions at such time: A. No Default; Representations and Warranties. At the time of each Credit Event and also after giving effect thereto (i) there shall exist no Default or Event of Default and (ii) all representations and warranties contained herein or in the other Credit Documents shall be true and correct in all material respects with the same effect as though such representations and warranties had been made on and as of the date of such Credit Event. The acceptance of the benefits of each Credit Event shall constitute a representation and warranty by each Credit Party to each of the Lenders that all of the applicable conditions specified above exist as of that time. All of the certificates, legal opinions and other documents and papers referred to in Section 5.01, unless otherwise specified, shall be delivered to the Administrative Agent at the Administrative Agent's Office for the account of each of the Lenders and, except for the Notes, in sufficient counterparts for each of the Lenders and shall be satisfactory in form and substance to each Senior Managing Agent. SECTION 6. Representations, Warranties and Agreements. In order to induce the Lenders to enter into this Agreement, to make the Loans and issue or participate in Letters of Credit as provided for herein, the Borrower makes the following representations and warranties to and agreements with the Lenders, all of which shall survive the execution and delivery of this Agreement and the making of the Loans and the issuance of the Letters of Credit (with (x) all such representations, warranties and agreements being first made on the Restatement Effective -28- 34 Date and (y) occurrence of each Credit Event being deemed to constitute a representation and warranty that the matters specified in this Section 6 are true and correct in all material respects on and as of the date hereof and as of the date of each such Credit Event unless such representation and warranty expressly indicates that it is being made as of any specific date): 6.01 Status. Each of the Borrower and each of its Material Subsidiaries (i) is a duly organized and validly existing corporation or other entity in good standing under the laws of the jurisdiction of its organization and has the corporate or other organizational power and authority to own its property and assets and to transact the business in which it is engaged and (ii) has duly qualified and is authorized to do business and is in good standing in all jurisdictions where it is required to be so qualified and where the failure to be so qualified would have a material adverse effect on the operations, business, properties, assets or financial condition of the Borrower and its Subsidiaries taken as a whole. 6.02 Power and Authority. Each Credit Party has the corporate or other power and authority to execute, deliver and carry out the terms and provisions of the Credit Documents to which it is a party and has taken all necessary corporate or other action to authorize the execution, delivery and performance of the Credit Documents to which it is a party. Each Credit Party has duly executed and delivered each Credit Document to which it is a party and each such Credit Document constitutes the legal, valid and binding obligation of such Person enforceable in accordance with its terms. 6.03 No Violation. Neither the execution, delivery and performance by any Credit Party of the Credit Documents to which it is a party nor compliance with the terms and provisions thereof, nor the consummation of the transactions contemplated therein (i) will contravene any applicable provision of any law, statute, rule, regulation, order, writ, injunction or decree of any court or governmental instrumentality, (ii) will conflict or be inconsistent with or result in any breach of any of the terms, covenants, conditions or provisions of, or constitute a default under, or result in the creation or imposition of (or the obligation to create or impose) any Lien upon any of the property or assets of the Borrower or any of its Subsidiaries pursuant to the terms of any material indenture, mortgage, deed of trust, agreement or other instrument to which the Borrower or any of its Subsidiaries is a party or by which it or any of its property or assets is bound or to which it may be subject or (iii) will violate any provision of the Certificate of Incorporation or By-Laws (or equivalent organizational documents) of the Borrower or any of its Subsidiaries. 6.04 Litigation. Except as set forth on Annex IV, there are no actions, suits or proceedings pending or threatened with respect to the Borrower or any of its Subsidiaries that are reasonably likely to have (x) a material adverse effect on the rights or remedies of the Lenders or on the ability of any Credit Party to perform its obligations to them hereunder and under the other Credit Documents to which it is a party or (y) a Material Adverse Effect. 6.05 Use of Proceeds; Margin Regulations. (a) The proceeds of all Loans shall be utilized by the Borrower for general corporate purposes of the Borrower and/or its Subsidiaries (including, without limitation, payment of fees and expenses in connection with the -29- 35 Transaction, the refinancing of Indebtedness, the backing up of commercial paper issued by the Borrower and Permitted Litigation Bonding). (b) Neither the making of any Loan hereunder, nor the use of the proceeds thereof, will violate or be inconsistent with the provisions of Regulation T, U or X of the Board of Governors of the Federal Reserve System. At the time of each Credit Event, not more than 25% of the value of the assets of the Borrower and its Subsidiaries on a consolidated basis subject to the restrictions contained in Sections 8.02 and 8.03 will constitute Margin Stock. Notwithstanding the foregoing provisions of this Section 6.05, no proceeds of any Loan will be utilized to purchase any Margin Stock in a transaction, or as part of a series of transactions, the result of which is the ownership by the Borrower and/or its Subsidiaries of 5% or more of the capital stock of a corporation unless the Board of Directors of such corporation has approved such transaction prior to any public announcement of the purchase, or the intent to purchase, any such Margin Stock. 6.06 Governmental Approvals. No order, consent, approval, license, authorization, or validation of, or filing, recording or registration with, or exemption by, any foreign or domestic governmental or public body or authority, or any subdivision thereof, is required to authorize or is required in connection with (i) the execution, delivery and performance of any Credit Document or (ii) the legality, validity, binding effect or enforceability of any Credit Document. 6.07 Investment Company Act. Neither 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. 6.08 True and Complete Disclosure. All factual information (taken as a whole) heretofore or contemporaneously furnished by or on behalf of the Credit Parties or any of their Subsidiaries in writing to any Senior Managing Agent or any Lender for purposes of or in connection with this Agreement or any transaction contemplated herein is, and all other such factual information (taken as a whole) hereafter furnished by or on behalf of such Persons in writing to any Lender will be, true and accurate in all material respects on the date as of which such information is dated or certified and not incomplete by omitting to state any material fact necessary to make such information (taken as a whole) not misleading at such time in light of the circumstances under which such information was provided. The projections and pro forma financial information contained in such materials were based on good faith estimates and assumptions believed by such Persons to be reasonable at the time made, it being recognized by the Lenders that such projections as to future events are not to be viewed as facts and that actual results during the period or periods covered by any such projections may differ from the projected results. 6.09 Financial Condition; Financial Statements. The consolidated balance sheets of the Borrower and its Subsidiaries, at December 31, 1997, at December 31, 1998 and at December 31, 1999 and the related consolidated statements of income and cash flows (and retained earnings) for the fiscal years ended as of said dates, which statements have been examined by Deloitte & Touche LLP, independent certified public accountants, who delivered an -30- 36 unqualified opinion in respect thereof, copies of which have heretofore been furnished to each Lender, present fairly the consolidated financial position of the Borrower at the dates of said statements and the results of operations for the periods covered thereby. All such financial statements have been prepared in accordance with GAAP consistently applied except to the extent provided in the notes to said financial statements. Since December 31, 1999, nothing has occurred which has had a Material Adverse Effect. 6.10 Tax Returns and Payments. Each of the Borrower and its Subsidiaries has filed all federal income tax returns and all other material tax returns, domestic and foreign, required to be filed by it and has paid all material taxes and assessments payable by it which have become due, other than those not yet delinquent and except for those contested in good faith. The Borrower and each of its Subsidiaries have paid, or have provided adequate reserves (in the good faith judgment of the management of the Borrower) for the payment of, all federal, state and foreign income taxes applicable for all prior fiscal years and for the current fiscal year to the date hereof. 6.11 Compliance with ERISA. Except to the extent that all events described in the following clauses of this sentence and then in existence would not, in the aggregate, be likely to have a Material Adverse Effect, each Plan is in substantial compliance with ERISA and the Code; no Reportable Event has occurred with respect to any Plan; no Plan is insolvent or in reorganization, no Plan has an Unfunded Current Liability, and no Plan has an accumulated or waived funding deficiency or permitted decreases in its funding standard account within the meaning of Section 412 of the Code; neither the Borrower, any Subsidiary nor any ERISA Affiliate has incurred any material liability to or on account of a Plan pursuant to Section 409, 502(i), 502(1), 515, 4062, 4063, 4064, 4069, 4201 or 4204 of ERISA or Section 4971 or 4975 of the Code; no proceedings have been instituted to terminate any Plan; no condition exists which presents a material risk to the Borrower or any Subsidiary of incurring a liability to or on account of a Plan pursuant to the foregoing provisions of ERISA and the Code. With respect to Plans that are multi-employer plans (within the meaning of Section 3(37) of ERISA) and Plans which are not currently maintained or contributed to by the Borrower, any Subsidiary or any ERISA Affiliate, the representations and warranties in this Section are made to the best knowledge of the Borrower. 6.12 Subsidiaries. Annex V hereto lists each Material Subsidiary of the Borrower (and the direct and indirect ownership interest of the Borrower therein), in each case existing on the Restatement Effective Date. All ownership percentages referred to in Annex V are calculated without regard to directors' or nominees' qualifying shares. 6.13 Patents, etc. The Borrower and each of its Subsidiaries have obtained all material patents, trademarks, servicemarks, trade names, copyrights, licenses and other rights, free from burdensome restrictions, that are necessary for the operation of their respective businesses as presently conducted and as proposed to be conducted. 6.14 Pollution and Other Regulations. The Borrower and each of its Subsidiaries are in material compliance with all material laws and regulations relating to pollution and environmental control, equal employment opportunity and employee safety in all domestic -31- 37 jurisdictions in which the Borrower and each of its Subsidiaries is presently doing business, and the Borrower will comply and cause each of its Subsidiaries to comply with all such laws and regulations which may be imposed in the future in jurisdictions in which the Borrower or such Subsidiary may then be doing business other than in each case those the non-compliance with which would not have a material adverse effect on the business, assets, properties or financial condition of the Borrower and its Subsidiaries taken as a whole. 6.15 Properties. The Borrower and each of its Subsidiaries have good title to all properties that are necessary for the operation of their respective businesses as presently conducted and as proposed to be conducted, free and clear of all Liens, other than as permitted by this Agreement. SECTION 7. Affirmative Covenants. The Borrower hereby covenants and agrees that on the Restatement Effective Date and thereafter, for so long as this Agreement is in effect and until the Commitments and each Letter of Credit have terminated and the Loans and Unpaid Drawings, together with interest, Fees and all other Obligations incurred hereunder, are paid in full: 7.01 Information Covenants. The Borrower will furnish to each Lender: (a) Annual Financial Statements. Within 100 days after the close of each fiscal year of the Borrower, to the extent prepared to comply with SEC requirements, a copy of the SEC Form 10-Ks filed by the Borrower with the SEC for such fiscal year, or, if no such Form 10-K was so filed by the Borrower for such fiscal year, the consolidated balance sheet of the Borrower and its Subsidiaries, as at the end of such fiscal year and the related consolidated statements of income and of cash flows for such fiscal year, setting forth comparative consolidated figures as of the end of and for the preceding fiscal year, and examined by independent certified public accountants of recognized national standing whose opinion shall not be qualified as to the scope of audit or as to the status of the Borrower or any of its Subsidiaries as a going concern, together in any event with a certificate of such accounting firm stating that in the course of its regular audit of the business of the Borrower, which audit was conducted in accordance with generally accepted auditing standards, such accounting firm has obtained no knowledge of any Default or Event of Default which has occurred and is continuing or, if in the opinion of such accounting firm such a Default or Event of Default has occurred and is continuing, a statement as to the nature thereof. (b) Quarterly Financial Statements. As soon as available and in any event within 55 days after the close of each of the first three quarterly accounting periods in each fiscal year of the Borrower to the extent prepared to comply with SEC requirements, a copy of the SEC Form 10-Qs filed by the Borrower with the SEC for each such quarterly period, or, if no such Form 10-Q was so filed by the Borrower with respect to any such quarterly period, the consolidated condensed balance sheet of the Borrower and its Subsidiaries as at the end of such quarterly period and the related consolidated condensed statements of income for such quarterly period and for the elapsed portion of the fiscal year ended with the last day of such quarterly period, and the related consolidated condensed statement of -32- 38 cash flows for the elapsed portion of the fiscal year ended with the last day of such quarterly period, and in each case setting forth comparative consolidated figures for the related periods in the prior fiscal year or, in the case of such consolidated condensed balance sheet, for the last day of the prior fiscal year, all of which shall be certified by the Chief Financial Officer, Controller, Chief Accounting Officer or other Authorized Officer of the Borrower, subject to changes resulting from audit and normal year-end audit adjustments. (c) Officer's Certificates. At the time of the delivery of the financial statements provided for in Section 7.01(a) and (b), a certificate of the Chief Financial Officer, Controller, Chief Accounting Officer or other Authorized Officer of the Borrower to the effect that no Default or Event of Default exists or, if any Default or Event of Default does exist, specifying the nature and extent thereof, which certificate shall set forth the calculations required to establish whether the Borrower and its Subsidiaries were in compliance with the provisions of Sections 3.03(b), 8.03(g), 8.03(h), 8.04(j), 8.04(l), 8.05, 8.07, and 8.08 as at the end of such fiscal period or year, as the case may be. (d) Notice of Default or Litigation. Promptly, and in any event within three Business Days after any senior financial or legal officer of the Borrower obtains knowledge thereof, notice of (x) the occurrence of any event which constitutes a Default or Event of Default which notice shall specify the nature thereof, the period of existence thereof and what action the Borrower proposes to take with respect thereto and (y) any litigation or governmental proceeding pending against or affecting the Borrower or any of its Subsidiaries which is likely to have a material adverse effect on the business, properties, assets, financial condition or prospects of the Borrower and its Subsidiaries taken as a whole or the ability of any Credit Party to perform its obligations hereunder or under any other Credit Document. (e) Credit Rating Changes. Promptly after any senior financial or legal officer of the Borrower obtains knowledge thereof, notice of any change in the Applicable Credit Rating assigned by either Rating Agency. (f) Other Information. Promptly upon transmission thereof, copies of any filings and registrations with, and reports to, the Securities and Exchange Commission or any successor thereto (the "SEC") by the Borrower or any of its Subsidiaries (other than amendments to any registration statement (to the extent such registration statement, in the form it becomes effective, is delivered to the Lenders), exhibits to any registration statement, any registration statements on Form S-8 and Forms 3, 4 and 5 and any annual report on Form 11-K) and copies of all financial statements, proxy statements, notices and reports that the Borrower or any of its Subsidiaries shall send to analysts or the holders of any publicly issued debt of the Borrower and/or any of its Subsidiaries in their capacity as such holders (in each case to the extent not theretofore delivered to the Lenders pursuant to this Agreement) and, with reasonable promptness, such other information or documents (financial or otherwise) as any Senior Managing Agent on its own behalf or on behalf of the Required Lenders may reasonably request from time to time. -33- 39 7.02 Books, Records and Inspections. The Borrower will, and will cause each of its Subsidiaries to, permit, upon reasonable notice to the Chief Financial Officer, Controller or any other Authorized Officer of the Borrower, officers and designated representatives of any Senior Managing Agent or the Required Lenders to visit and inspect any of the properties or assets of the Borrower and any of its Subsidiaries in whomsoever's possession, and to examine the books of account of the Borrower and any of its Subsidiaries and discuss the affairs, finances and accounts of the Borrower and of any of its Subsidiaries with, and be advised as to the same by, its and their officers and independent accountants, all at such reasonable times and intervals and to such reasonable extent as any Senior Managing Agent or the Required Lenders may desire. 7.03 Insurance. The Borrower will, and will cause each of its Subsidiaries to, at all times maintain in full force and effect insurance in such amounts, covering such risks and liabilities and with such deductibles or self-insured retentions as are in accordance with normal industry practice. 7.04 Payment of Taxes. The Borrower will pay and discharge, and will cause each of its Subsidiaries to pay and discharge, all taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits, or upon any properties belonging to it, prior to the date on which material penalties attach thereto, and all lawful claims which, if unpaid, might become a Lien or charge upon any properties of the Borrower or any of its Subsidiaries; provided, that neither the Borrower nor any Subsidiary shall be required to pay any such tax, assessment, charge, levy or claim which is being contested in good faith and by proper proceedings if it has maintained adequate reserves (in the good faith judgment of the management of the Borrower) with respect thereto in accordance with GAAP. 7.05 Consolidated Corporate Franchises. The Borrower will do, and will cause each of its Material Subsidiaries to do, or cause to be done, all things necessary to preserve and keep in full force and effect its existence, rights and authority; provided, that any transaction permitted by Section 8.02 will not constitute a breach of this Section 7.05. 7.06 Compliance with Statutes, etc. The Borrower will, and will cause each Subsidiary to, comply with all applicable statutes, regulations and orders of, and all applicable restrictions imposed by, all governmental bodies, domestic or foreign, in respect of the conduct of its business and the ownership of its property (including applicable statutes, regulations, orders and restrictions relating to environmental standards and controls) other than those the non-compliance with which would not have a material adverse effect on the business, properties, assets or financial condition of the Borrower and its Subsidiaries taken as a whole or on the ability of any Credit Party to perform its obligations under any Credit Document to which it is party. 7.07 ERISA. As soon as possible and, in any event, within 10 days after the Borrower or any Subsidiary knows or has reason to know of the occurrence of any of the following, the Borrower will deliver to each of the Lenders a certificate of the Chief Financial Officer, Treasurer or Controller of the Borrower setting forth details as to such occurrence and the action, if any, which the Borrower, such Subsidiary or an ERISA Affiliate is required or -34- 40 proposes to take, together with any notices required or proposed to be given to or filed with or by the Borrower, such Subsidiary, such ERISA Affiliate, the PBGC, a Plan participant (other than notices relating to an individual participant's benefits) or the Plan administrator with respect thereto: that a Reportable Event has occurred (except to the extent that the Borrower has previously delivered to the Lenders a certificate and notices (if any) concerning such event pursuant to the next clause hereof), that a contributing sponsor (as defined in Section 4001(a)(13) of ERISA) of a Plan subject to Title IV of ERISA is subject to the advance reporting requirement of PBGC Regulation Section 4043.61 (without regard to subparagraph (b)(1) thereof), that an accumulated funding deficiency has been incurred or an application may be or has been made to the Secretary of the Treasury for a waiver or modification of the minimum funding standard (including any required installment payments) or an extension of any amortization period under Section 412 of the Code with respect to a Plan, that a Plan which has an Unfunded Current Liability has been or may be terminated, reorganized, partitioned or declared insolvent under Title IV of ERISA, that a Plan has an Unfunded Current Liability giving rise to a lien under ERISA or the Code, that proceedings may be or have been instituted to terminate a Plan which has an Unfunded Current Liability, that a proceeding has been instituted pursuant to Section 515 of ERISA to collect a delinquent contribution to a Plan, or that the Borrower, any Subsidiary or any ERISA Affiliate will or may incur any liability (including any contingent or secondary liability) to or on account of the termination of or withdrawal from a Plan under Section 4062, 4063, 4064, 4069, 4201 or 4204 of ERISA or with respect to a Plan under Section 4971 or 4975 of the Code or Section 409 or 502(i) or 502(l) of ERISA. Upon request of a Lender, the Borrower will deliver to such Lender a complete copy of the annual report (Form 5500) of each Plan required to be filed with the Internal Revenue Service. In addition to any certificates or notices delivered to the Lenders pursuant to the first sentence hereof, copies of any notices received by the Borrower or any Subsidiary shall be delivered to the Lenders no later than 10 days after the later of the date such notice has been filed with the Internal Revenue Service or the PBGC, given to Plan participants (other than notices relating to an individual participant's benefits) or received by the Borrower or such Subsidiary. 7.08 Good Repair. The Borrower will, and will cause each of its Subsidiaries to, ensure that its properties and equipment used or useful in its business in whomsoever's possession they may be, are kept in good repair, working order and condition, normal wear and tear excepted, and that from time to time there are made in such properties and equipment all needful and proper repairs, renewals, replacements, extensions, additions, betterments and improvements thereto, to the extent and in the manner customary for companies in similar businesses. 7.09 End of Fiscal Years; Fiscal Quarters. The Borrower will, for financial reporting purposes, cause (i) each of its fiscal years to end on December 31 of each year, (ii) each of its fiscal quarters to end on March 31, June 30, September 30 and December 31 of each year and (iii) each of the Subsidiaries to maintain the accounting periods maintained by such Subsidiary on the Original Effective Date, consistent with the past practice and procedures of each such Subsidiary; provided that any of the foregoing fiscal or reporting periods may be changed if (x) the Borrower gives the Lenders 30 days' prior written notice of such proposed change and (y) prior to effecting such change the Borrower and the Majority SMA shall have agreed upon adjustments, if any, to Sections 3.03(b), 8.05, 8.07 and 8.08 (and the definitions -35- 41 used therein) the sole purpose of which shall be to give effect to the proposed change in fiscal or accounting periods (it being understood and agreed that to the extent that the Borrower and the Majority SMA cannot agree on appropriate adjustments to such Sections (or that no adjustments are necessary), the proposed change may not be effected). 7.10 Competitive Bid Loan Outstandings. On the date of the delivery by the Borrower of any Notice of Borrowing, Notice of Competitive Bid Borrowing or Letter of Credit Request at any time when the Borrower shall have knowledge that a mandatory prepayment is required pursuant to Section 4.02(A) of this Agreement and, in any event, on the last Business Day of each fiscal quarter of the Borrower, the Borrower will furnish to the Administrative Agent a statement setting forth the aggregate outstanding principal amount of Competitive Bid Loans at such time. 7.11 Subsidiary Guaranty; Collateral. (a) No later than 15 days after the date on which a Guaranty Event occurs, each Material Subsidiary not then a Subsidiary Guarantor shall (i) authorize the execution of, and execute and deliver to the Administrative Agent on behalf of the Lenders, a Subsidiary Guaranty and (ii) cause to be delivered such opinions of counsel as are reasonably requested by, and are reasonably satisfactory to, the Senior Managing Agents in respect of such Subsidiary Guaranty. (b) No later than 15 days after the date on which a Trigger Event occurs each Credit Party (including any Person required by Section 7.11(a) to become a Credit Party at such time) shall (i) authorize, execute and deliver to the Collateral Agent on behalf of the Secured Creditors pledge agreements, security agreements and/or mortgages that are reasonably acceptable in form and substance to the Senior Managing Agents (the "Security Documents") which create in favor of the Collateral Agent on behalf of the Secured Creditors a pledge of and/or a lien on substantially all of its assets with such exceptions as are reasonably satisfactory to the Senior Managing Agents (the "Collateral") with such priority as is provided for in the representations contained in the respective Security Documents, provided that Reynolds Tobacco shall not be required to grant a leasehold mortgage in the leasehold interest and rights of Reynolds Tobacco in and to property located at the Zachary Smith Reynolds Airport, under a certain lease agreement with the Airport Commission of Forsyth County, dated January 1, 1980, recorded in Book 1298, Page 1365, Forsyth County Registry, and assigned and transferred to Reynolds Tobacco by its former parent company pursuant to an Assignment of Lease, dated April 27, 1989, to the extent the grant of a leasehold mortgage in such leasehold is prohibited by the terms thereof, (ii) deliver in pledge thereunder all securities, notes and stock powers required to be delivered by the terms of the respective Security Documents, (iii) execute and cause to be filed such financing statements and mortgages as are required to perfect the pledges and Liens created under the Security Documents and to obtain the priority of such perfection required by the respective Security Documents and (iv) cause to be delivered such opinions of counsel as are reasonably requested by, and as are reasonably satisfactory to, the Senior Managing Agents with respect to the Security Documents and the pledges and Liens created thereunder. Notwithstanding the foregoing, all Collateral shall be automatically released (subject to reinstatement upon the occurrence of a new Trigger Event) if at any time subsequent to the Credit Parties providing the Collateral in compliance with the preceding sentence the Applicable Credit Rating issued by each Rating Agency shall, giving effect to such release and subject to the -36- 42 completion of such release, if applicable, each be the Minimum Investment Grade Rating or higher. SECTION 8. Negative Covenants. The Borrower hereby covenants and agrees that on the Restatement Effective Date and thereafter, for so long as this Agreement is in effect and until the Commitments and each Letter of Credit have terminated and the Loans and Unpaid Drawings, together with interest, Fees and all other Obligations incurred hereunder, are paid in full: 8.01 Changes in Business. Except as otherwise permitted by Section 8.02, the Borrower and its Subsidiaries, taken as a whole, will not substantively alter the character of their business from that conducted by the Borrower and its Subsidiaries taken as a whole at the Original Execution Date. 8.02 Consolidation, Merger, Sale of Assets, etc. (a) The Borrower will not, and will not permit any Subsidiary Guarantor and (whether or not a Subsidiary Guarantor) any Specified Subsidiary to, wind up, liquidate or dissolve its affairs, or enter into any transaction of merger or consolidation, or sell or otherwise dispose of all or any substantial part of its property or assets (other than inventory and equipment to the extent sold or disposed of in the ordinary course of business) or agree to do any of the foregoing at any future time, except that the following shall be permitted: (i) any other Subsidiary (including any of the Specified Subsidiaries) may merge with, or liquidate into, Reynolds Tobacco, with Reynolds Tobacco being the survivor thereof, or transfer all or any of their business, properties and assets to Reynolds Tobacco; (ii) any of FSH and GMB may merge or consolidate with each other and all of the capital stock of FSH may be transferred to GMB; (iii) after the NGH Acquisition is consummated, Acquisition Corp. or NGH (as the surviving corporation of the merger pursuant to the NGH Acquisition) may merge or consolidate with any Subsidiary, so long as such merger or consolidation is not prohibited by Section 8.02(c); and (iv) the NGH Acquisition may be consummated so long as, (v) immediately prior to the consummation thereof, the NA Divestiture shall have been consummated and NGH shall have received aggregate cash proceeds of approximately $11,700,000,000 therefrom, (w) prior to or concurrently with the consummation thereof, NGH shall have paid all Dividends theretofore declared but unpaid, (x) prior to or concurrently with the consummation thereof, Acquisition Corp. or NGH (as the surviving corporation of the merger pursuant to the NGH Acquisition) shall have duly authorized, executed and delivered to the Administrative Agent a counterpart of the Subsidiary Guaranty, (y) prior to the consummation thereof, the Borrower shall have delivered to the Administrative Agent an officer's certificate executed by a senior financial officer of the Borrower, which (I) shall contain a certification that all of the representations and warranties in Section 6 are true and correct in all material respects, (II) shall contain a representation -37- 43 and warranty that, except for (A) Indebtedness evidenced by the Junior Subordinated Debentures, (B) liabilities arising in connection with tobacco litigation, (C) NGH's obligation to cash out holders of restricted stock of NGH and options to purchase common stock of NGH for aggregate cash consideration not to exceed $475,000,000 (which obligation shall be satisfied as soon as reasonably practicable after the consummation of the NGH Acquisition), (D) liabilities arising under non-qualified pension and retiree medical plans of former employees of NGH in an aggregate amount not to exceed $20,000,000 and (E) continuing indemnity obligations of NGH to NHC for taxes which may be owing for tax periods occurring prior to and through and including the Spin-Off arising under that certain Tax Sharing Agreement, dated as of June 14, 1999, among NGH, the Borrower, Reynolds Tobacco and NHC, there shall be (immediately after giving effect to the NGH Acquisition) no liabilities or obligations of NGH of any nature whatsoever (whether absolute, accrued, contingent or otherwise and whether or not due) which, either individually or in the aggregate, could reasonably be expected to have a material adverse effect on the operations, business, property, assets or financial condition of NGH, (III) shall contain a representation and warranty that immediately after giving effect to the NGH Acquisition, no Default or Event of Default exists and (IV) shall certify compliance with each of the foregoing conditions to the consummation of the NGH Acquisition and (z) within one week after the consummation thereof, the Borrower shall have delivered to the Administrative Agent an officer's certificate executed by a senior financial officer of the Borrower, which certificate shall certify as to the amount of the cash held by Acquisition Corp. or NGH (as the surviving corporation of the merger pursuant to the NGH Acquisition) (immediately after giving effect to the NGH Acquisition and the payment by Acquisition Corp. or NGH of all obligations owing by it as described in clause (y)(II)(C) above) (such amount, the "Certified Acquired NGH Cash Amount"). (b) The Borrower will not permit any Subsidiary to enter into any transaction of merger or consolidation with, or to sell or otherwise dispose of all or any substantial part of its assets, to the Borrower, provided that Acquisition Corp. or NGH (as the surviving corporation of the merger pursuant to the NGH Acquisition) may merge or consolidate with, or sell or otherwise dispose of all or any substantial part of its assets, to the Borrower, so long as (i) prior to any such transaction, Acquisition Corp. or NGH, as the case may be, has not theretofore (x) merged or consolidated with any other Subsidiary of the Borrower (other than Acquisition Corp., in the case of NGH) or (y) engaged in any tobacco related business and (ii) in the case of a merger or consolidation of Acquisition Corp. or NGH, as the case may be, with the Borrower, the Borrower is the surviving corporation of such merger or consolidation. (c) The Borrower will not, and will not permit any Subsidiary to, liquidate into, or enter into any transaction of merger or consolidation with, or sell or otherwise dispose of any part of its properties, to any other Subsidiary (including one formed as a result thereof) if (x) any such transaction involves a Subsidiary Guarantor and the survivor of such merger or consolidation or the transferee of such properties or assets is not a Subsidiary Guarantor or (y) if a Guaranty Event has occurred and is continuing, the Person that is the survivor of any such merger or consolidation is a Material Subsidiary and none of the Persons so merging or consolidating were Material Subsidiaries prior thereto, or the Person that is any such transferee is a Material -38- 44 Subsidiary after giving effect thereto but was not a Material Subsidiary prior thereto unless, in each case, either (I) the Senior Managing Agents have consented to such transaction in writing or (II) the new Material Subsidiary resulting becomes a Subsidiary Guarantor and executes (x) a counterpart of the Subsidiary Guaranty and (y) if the Security Documents are in effect at such time, such Security Documents as the Majority SMA shall reasonably request, with, in the case of this clause (y) such actions having been taken to perfect the pledge of, and Liens on, the stock and substantially all of the assets of such new Subsidiary as would have been taken if such new Subsidiary had been a Subsidiary at the time of the last Trigger Event, all to the reasonable satisfaction of the Majority SMA, provided that Reynolds Tobacco may transfer, contribute as a capital contribution or otherwise dispose of properties located at 1502 State Road, Merry Hill, North Carolina and comprising its AVOCA division to a newly-formed Subsidiary of Reynolds Tobacco, so long as (i) no Default or Event of Default is then in existence and (ii) the fair market value of the assets so transferred (determined in good faith by management of the Borrower) does not exceed $40,000,000 (the "AVOCA Asset Transfer"). 8.03 Liens. The Borrower will not, and will not permit any Subsidiary to, (x) create, incur, assume or suffer to exist any Lien in respect of Indebtedness upon any property or assets of any kind (real or personal, tangible or intangible) of the Borrower or any such Subsidiary whether now owned or hereafter acquired or (y) assign any right to receive income as security for the payment of Indebtedness, except: (a) Liens encumbering customary initial deposits and margin deposits, and other Liens incurred in the ordinary course of business and which are within the general parameters customary in the industry, securing obligations under Commodities Agreements; (b) Liens securing reimbursement obligations of the Borrower and its Subsidiaries with respect to (x) trade letters of credit incurred in the ordinary course of business, which are to be repaid in full not more than one year after the date originally incurred to finance the purchase of goods by the Borrower or any of its Subsidiaries, provided that such Liens shall attach only to documents or other property relating to such letters of credit and the products and proceeds thereof and (y) letters of credit incurred in the ordinary course of business in connection with payments of foreign excise taxes in respect of tobacco sales, provided that (i) no such letter of credit shall have an expiry date later than six months after the date of issuance thereof and (ii) such Liens are granted in the ordinary course of business; (c) Liens (x) arising pursuant to purchase money mortgages securing Indebtedness (and any extensions, renewals or refinancings of such Indebtedness to the extent not increasing the outstanding principal amount thereof) representing the purchase price (or financing of the purchase price within 180 days after the respective purchase) of assets acquired after the Original Effective Date, provided that (i) any such Liens attach only to the assets so purchased and (ii) the Indebtedness (including any such permitted extensions, renewals or refinancings) secured by any such Lien does not exceed 100%, nor is less than 70%, of the purchase price of the property being purchased and (y) existing on specific tangible assets at the time acquired by the Borrower or any of its Subsidiaries or on assets of a Person at the time such Person first becomes a Subsidiary -39- 45 (together with Liens securing any extensions, renewals or refinancings of the Indebtedness secured thereby to the extent not increasing the outstanding principal amount thereof), provided that (i) any such Liens were not created at the time of or in contemplation of the acquisition of such assets or Person by the Borrower and/or its Subsidiaries, (ii) in the case of any such acquisition of a Person, any such Lien attaches only to a specific tangible asset of such Person and not assets of such Person generally and (iii) the Indebtedness secured by any such Lien does not exceed 100% of the fair market value of the asset to which such Lien attaches, determined at the time of the acquisition of such asset or at the time such Person first becomes a Subsidiary, as the case may be; (d) Liens created pursuant to the Security Documents and the Escrow; (e) Liens resulting from the Borrower or Reynolds Tobacco cash collateralizing supersedeas and other appeal bonds, or providing cash collateral directly to courts to satisfy such courts' requirements for a stay to appeal verdicts, orders and/or judgments, in each case to the extent utilizing Permanent Surplus Cash; (f) Existing Liens (and any extensions or renewals of such Liens (to the extent included in the definition of Existing Liens) to the extent such Liens do not attach to any additional properties and the Indebtedness secured thereby is not increased); (g) Liens not otherwise permitted by the foregoing clauses (a) through (f) above or succeeding clauses (h) through (j) securing any Indebtedness of the Borrower and/or its Subsidiaries, provided that the aggregate principal amount of Indebtedness on a consolidated basis secured by Liens permitted by this clause (g) shall not exceed $100,000,000 at any time; (h) Liens resulting from the Borrower directly cash collateralizing PBGC Obligations and/or cash collateralizing bonds in support of PBGC Obligations, provided that the sum of (i) the aggregate amount of cash that collateralizes PBGC Obligations and/or bonds in support of such PBGC Obligations plus (ii) the aggregate stated amounts of bonds and letters of credit (including Letters of Credit) issued in support of PBGC Obligations (but excluding any portion of the stated amounts of such bonds or letters of credit that are cash collateralized and thus included pursuant to preceding clause (i)) does not exceed $150,000,000; (i) Liens encumbering the deposits of cash and/or cash equivalents referred to in Section 8.04(m); and (j) Liens encumbering Borrower Common Stock repurchased in accordance with the requirements of Section 8.05(ii) or (iii), to the extent that such Liens (x) are created for the sole purpose of securing obligations of the Borrower to the agent brokering any such repurchase incurred in connection with such repurchase and (y) terminate upon the payment of such obligations. -40- 46 8.04 Indebtedness. The Borrower will not permit any Subsidiary to contract create, incur, assume or suffer to exist any Indebtedness, except: (a) Indebtedness of the Subsidiary Guarantors under the Subsidiary Guaranty; (b) (i) Indebtedness owing by any Subsidiary Guarantor to the Borrower or any other Subsidiary Guarantor and (ii) Indebtedness of any Subsidiary (other than a Specified Subsidiary) (x) consisting of Contingent Obligations in respect of, or (y) constituting reimbursement obligations under letters of credit issued in support of, obligations (other than Contingent Obligations) of any Subsidiary of the Borrower to the extent such other obligations are permitted by this Agreement (but excluding any Contingent Obligations in respect of, or reimbursement obligations relating to, Independent Litigation Bonds); (c) Obligations under letters of credit described in Section 8.03(b); (d) Indebtedness of Reynolds Tobacco (x) under any guaranty of Permitted Currency Agreements and/or (y) constituting reimbursement obligations in respect of Independent Litigation Bonds; (e) Obligations of any Subsidiary (other than any Specified Subsidiary) under letters of credit incurred in the ordinary course of business in connection with the purchase of tobacco or other products or goods for use in the day-to-day operations of the Borrower and its Subsidiaries consistent with the Borrower's past practices or then current industry practices; (f) Indebtedness secured, in whole or in part, by Liens permitted by Section 8.03(e); (g) Existing Debt (and any extensions, renewals or refinancings of such Indebtedness to the extent not increasing the outstanding principal amount thereof); (h) Indebtedness of Subsidiary Guarantors as guarantors of (x) the Borrower's obligations in respect of any Specified Debt (other than the Stub Notes) and/or any Supported CP and (y) Reynolds Tobacco's obligations in respect of Independent Litigation Bonds; (i) Indebtedness of (I) Reynolds Tobacco (x) owing to R.J. Reynolds Tobacco Co., a Delaware corporation, on the Original Effective Date, together with any accrued or capitalized interest in respect thereof, (y) owing from time to time to FHS and (z) owing from time to time to other Subsidiaries of Reynolds Tobacco to the extent arising in the normal course of business in connection with their cash management systems, (II) after the consummation of the NGH Acquisition, Reynolds Tobacco owing from time to time to Acquisition Corp. or NGH (as the surviving corporation of the merger pursuant to the NGH Acquisition) and (III) after the consummation of the NGH Acquisition, Acquisition Corp. or NGH (as the surviving corporation of the merger pursuant to the NGH Acquisition) owing from time to time to FHS, in the case of clauses (I) and (III) above to the extent such Indebtedness is subordinated to the obligations of Reynolds Tobacco, -41- 47 Acquisition Corp. or NGH, as the case may be, under the Subsidiary Guaranty pursuant to, and in accordance with the terms of, the Intercompany Subordination Agreement; (j) Indebtedness of any Subsidiary (other than any Specified Subsidiary) in any manner guaranteeing or intended to guarantee, whether directly or indirectly, any leases, dividends or other monetary obligations of any Person in which such Subsidiary has an ownership interest, provided that the aggregate maximum stated or determinable amount (or, if not stated or determinable, the maximum reasonably anticipated liability in respect of such Indebtedness as determined in good faith by such Subsidiary) of all Indebtedness permitted pursuant to this clause (j) shall not exceed at any time an amount in excess of $50,000,000; (k) Indebtedness of (i) Subsidiaries of the Borrower (other than Reynolds Tobacco, Acquisition Corp. and NGH) owing to Reynolds Tobacco to the extent incurred in the ordinary course of business consistent with past practices, (ii) Subsidiaries of the Borrower (other than Acquisition Corp., NGH and Reynolds Tobacco) owing to Acquisition Corp. or NGH (as the surviving corporation of the merger pursuant to the NGH Acquisition) to the extent incurred in the ordinary course of business or for tax planning purposes, (iii) Subsidiaries that are not Subsidiary Guarantors or Specified Subsidiaries to other Subsidiaries that are not Subsidiary Guarantors or Specified Subsidiaries, and (iv) GMB to FSH and/or FSH to GMB; (l) Indebtedness of Subsidiaries (other than the Specified Subsidiaries) not otherwise permitted by the foregoing clauses (a) through (k) and succeeding clause (m), provided that the aggregate outstanding principal amount of Indebtedness on a consolidated basis incurred pursuant to this clause (l) shall not exceed $100,000,000 at any time; and (m) after the consummation of the NGH Acquisition, Indebtedness evidenced by the Junior Subordinated Debentures, so long as (i) the aggregate principal amount thereof at any time outstanding does not exceed $101,000,000 (less the amount of any repayments of principal thereof after the Restatement Effective Date) and (ii) concurrently with the consummation of the NGH Acquisition, the Junior Subordinated Debentures shall have been economically defeased by way of a deposit and pledge of cash and/or cash equivalents with the trustee under the Debenture Indenture in accordance with the requirements of Section 10.1(C)(a) of the Debenture Indenture. 8.05 Limitation on Dividends. The Borrower will not, declare or pay any dividends (other than dividends payable solely in its capital stock) or make, declare or otherwise authorize any return of capital to its shareholders or make, declare or otherwise authorize any other distribution, payment or delivery of property or cash to its stockholders as such, or redeem, retire, purchase or otherwise acquire, directly or indirectly, for a consideration, any shares of any class of its capital stock now or hereafter outstanding (or any warrants for or options or stock appreciation rights in respect of any of such shares but not including any convertible debt), or set aside any funds for any of the foregoing purposes, or permit any of its Subsidiaries to purchase or otherwise acquire for consideration any shares of any class of the capital stock of the Borrower -42- 48 now or hereafter outstanding (or any options or warrants or stock appreciation rights issued by the Borrower with respect to its capital stock) (all of the foregoing made, declared or authorized after the Original Effective Date, "Dividends"), provided that so long as no Event of Default then exists in the case of clauses (i), (ii), (iii), (v) and (vi): (i) the Borrower may issue shares of Borrower Common Stock 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 pay cash in lieu of issuing fractional shares of Borrower Common Stock; (ii) the Borrower may repurchase Borrower Common Stock (and/or options or warrants in respect thereof) pursuant to, and in accordance with the terms of, management and/or employee stock plans, provided that the aggregate amount of cash paid in respect of all such repurchases in any calendar year pursuant to this clause (ii) does not exceed $15,000,000; (iii) the Borrower may declare and pay, or otherwise pay or make, any other Dividend, provided that, at the time it is, in the case of a Non-Declared Dividend, paid or made and, in the case of any other Dividend, declared or otherwise authorized, the aggregate amount of such Dividend, when added to all Non-Declared Dividends theretofore paid or made and any other Dividends theretofore declared or otherwise authorized (or paid) pursuant to this Section 8.05(iii), after the Original Effective Date shall not exceed an amount equal to the sum of (x) $500,000,000 plus (y) 50% of Cumulative Adjusted Cash Net Income plus (z) the aggregate cash proceeds (net of underwriting discounts and commissions) received by the Borrower after the Original Effective Date from issuances of its equity securities (provided that the aggregate amount of such aggregate net cash proceeds received in any twelve-month period shall be deemed not to exceed $250,000,000 for purposes of this Section 8.05(iii)), in each case determined at, in the case of a Non-Declared Dividend, the date paid or made and, in the case of any other Dividend, the date declared or otherwise authorized, provided that such Dividend (other than a Dividend that is a Non-Declared Dividend) is paid within 90 days of the making of such declaration or other authorization, provided that Dividends may only be paid or made by the Borrower under this clause (iii) if at the time of, in the case of a Non-Declared Dividend, the date paid or made and, in the case of any other Dividend, the date declared or otherwise authorized, the excess of (i) the sum of the Total Unutilized Commitment and Permanent Surplus Cash, in each case at such time, over (ii) the sum of (A) the amount of, in the case of a Non-Declared Dividend, the aggregate amount of such Non-Declared Dividend plus any other Dividends theretofore declared or otherwise authorized but then unpaid and, in the case of any other Dividend, the amount thereof so declared or otherwise authorized and (B) the outstanding principal or face amount of Supported CP at such time, shall equal at least $225,000,000; (iv) 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; -43- 49 (v) the Borrower may, in connection with any reclassification of its common stock and any exchange permitted by clause (iv) above, pay cash in lieu of issuing fractional shares of any class or series of its common stock; and (vi) after the consummation of the NGH Acquisition (and so long as the Borrower has theretofore delivered to the Administrative Agent the officer's certificate required to be delivered pursuant to clause (z) of Section 8.02(a)(iv)), the Borrower may pay or make Dividends with the proceeds of any cash dividends or distribution received by it from Acquisition Corp. or NGH (as the surviving corporation of the merger pursuant to the NGH Acquisition), provided that the aggregate amount of Dividends paid or made by the Borrower pursuant to this clause (vi) does not exceed the Certified Acquired NGH Cash Amount. 8.06 Transactions with Affiliates. The Borrower will not, and will not permit any Subsidiary to, enter into any transaction or series of transactions, whether or not in the ordinary course of business, with any Affiliate (other than any Wholly-Owned Subsidiary of the Borrower) other than on terms and conditions substantially as favorable to the Borrower or such Subsidiary as would be obtainable by the Borrower or such Subsidiary at the time in a comparable arm's-length transaction with a Person other than an Affiliate; provided, that the foregoing restrictions shall not apply to: (i) customary fees paid to members of the Board of Directors of the Borrower and of its Subsidiaries; (ii) the Distribution Agreement; and (iii) the Transaction. 8.07 Consolidated Net Worth. The Borrower will not permit Consolidated Net Worth to be less than $6,800,000,000 at any time. 8.08 Fixed Charge Coverage Ratio. The Borrower will not permit the ratio of (i) Adjusted Operating Income to (ii) Consolidated Fixed Charges for any Test Period to be less than 1.10 to 1.00. 8.09 Investments. The Borrower will not, and will not permit any of its Subsidiaries to, purchase or acquire any stock of, or any other ownership or equity interest in, or make any capital contribution to, any other Person except pursuant to an acquisition wherein the merger or consolidation, and/or the consideration paid by the Borrower and/or its Subsidiaries in connection with such acquisition, is permitted by Section 8.02, provided that any such acquisition of the stock or interests in a Person that has theretofore been conducting a business or that theretofore has owned assets and that was not theretofore a Subsidiary must constitute a Permitted Investment, provided further that to the extent the AVOCA Asset Transfer takes the form of a capital contribution to a newly-formed Subsidiary of Reynolds Tobacco, the AVOCA Asset Transfer shall be permitted to the extent consummated in accordance with the requirements of the proviso to Section 8.02(c).. 8.10 No Negative Pledge. The Borrower shall not, and shall not permit any Subsidiary to, enter into any agreement or arrangement that prohibits or restricts (including by requiring ratable sharing of Liens) the Borrower or any Subsidiary Guarantor from entering into the Security Documents and/or granting any Lien in favor of the Collateral Agent for the benefit -44- 50 of the Secured Creditors other than (i) any ratable sharing of Liens provisions governing any of the New Senior Notes to the extent such provisions shall be satisfied by the entering into of the Security Documents and the granting of Liens thereunder in favor of the Collateral Agent for the benefit of the Secured Creditors and (ii) any prohibition created in connection with any Lien permitted by Section 8.03 to the extent applicable only to the property subject to such Lien. 8.11 Prepayments of Indebtedness. The Borrower will not make any voluntary or optional prepayment on or voluntary or optional redemption, repurchase or acquisition for value of, any Qualified Stub Notes or New Senior Notes if after giving effect thereto the aggregate outstanding principal amount of Qualified Stub Notes and New Senior Notes would be less than $1,000,000,000. SECTION 9. Events of Default. Upon the occurrence of any of the following specified events (each, an "Event of Default"): 9.01 Payments. The Borrower shall (i) default in the payment when due of any principal of the Loans or (ii) default, and such default shall continue for five or more days, in the payment when due of any interest on the Loans or any Fees or any Unpaid Drawings or any other amounts owing hereunder or under any other Credit Document; or 9.02 Representations, etc. Any representation, warranty or statement made or deemed made by any Credit Party herein or in any other Credit Document or in any statement or certificate delivered or required to be delivered pursuant hereto or thereto shall prove to be untrue in any material respect on the date as of which made or deemed made; or 9.03 Covenants. Any Credit Party shall (a) default in the due performance or observance by it of any term, covenant or agreement contained in Section 7.10, 7.11 or 8, or (b) default in the due performance or observance by it of any term, covenant or agreement (other than those referred to in Section 9.01, 9.02 or clause (a) of this Section 9.03) contained in this Agreement and such default shall continue unremedied for a period of at least 30 days after notice to the Borrower by any Senior Managing Agent or the Required Lenders; or 9.04 Default Under Other Agreements. The Borrower or any of its Subsidiaries shall (i) default in any payment with respect to any Indebtedness (other than the Obligations) in excess of $75,000,000 individually or $150,000,000 in the aggregate, for the Borrower and its Subsidiaries, beyond the period of grace, if any, provided in the instrument or agreement under which such Indebtedness was created or (ii) default in the observance or performance of any agreement or condition relating to any such Indebtedness or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event shall occur or condition exist, the effect of which default or other event or condition is to cause, or to permit the holder or holders of such Indebtedness (or a trustee or agent on behalf of such holder or holders) to cause (determined without regard to whether any notice or lapse of time is required), any such Indebtedness to become due prior to its stated maturity; or (b) any such Indebtedness shall be declared to be due and payable, or required to be prepaid other than by a regularly scheduled required prepayment or as a mandatory prepayment (unless such required prepayment or -45- 51 mandatory prepayment results from a default or an event of the type that constitutes an Event of Default), prior to the stated maturity thereof; or 9.05 Bankruptcy, etc. The Borrower or any of its Material Subsidiaries shall commence a voluntary case concerning itself under Title 11 of the United States Code entitled "Bankruptcy," as now or hereafter in effect, or any successor thereto (the "Bankruptcy Code"); or an involuntary case is commenced against the Borrower or any of its Material Subsidiaries and the petition is not controverted within 10 days after service of notice of such case on the Borrower or such Material Subsidiary, or is not dismissed within 60 days after commencement of the case; or a custodian (as defined in the Bankruptcy Code) is appointed for, or takes charge of, all or substantially all of the property of the Borrower or any of its Material Subsidiaries; or the Borrower or any of its Material Subsidiaries commences any other proceeding under any reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction whether now or hereafter in effect relating to the Borrower or any of its Material Subsidiaries; or there is commenced against the Borrower or any of its Material Subsidiaries any such proceeding which remains undismissed for a period of 60 days; or the Borrower or any of its Material Subsidiaries is adjudicated insolvent or bankrupt; or any order of relief or other order approving any such case or proceeding is entered; or the Borrower or any of its Material Subsidiaries suffers any appointment of any custodian or the like for it or any substantial part of its property to continue undischarged or unstayed for a period of 60 days; or the Borrower or any of its Material Subsidiaries makes a general assignment for the benefit of creditors; or any corporate action is taken by the Borrower or any of its Material Subsidiaries for the purpose of effecting any of the foregoing; or 9.06 ERISA. (a) A single-employer plan (as defined in Section 4001 of ERISA) maintained or contributed to by any Credit Party or any of its Subsidiaries or any ERISA Affiliate shall fail to maintain the minimum funding standard required by Section 412 of the Code for any plan year or part thereof or a waiver of such standard or extension of any amortization period is sought or granted under Section 412 of the Code or shall provide security to induce the issuance of such waiver or extension, (b) any Plan is or shall have been terminated or the subject of termination proceedings under ERISA or an event has occurred entitling the PBGC to terminate a Plan under Section 4042(a) of ERISA, (c) any Plan shall have an Unfunded Current Liability, (d) the Borrower or any Subsidiary or any ERISA Affiliate has incurred or is likely to incur a material liability to or on account of a termination of or a withdrawal from a Plan under Section 515, 4062, 4063, 4064, 4069, 4201 or 4204 of ERISA, (e) the Borrower or any Subsidiary has incurred after the Original Effective Date liabilities (after giving effect to any reserves applicable thereto and maintained on the Original Effective Date) pursuant to one or more employee welfare benefit plans (as defined in Section 3(1) of ERISA) which provide benefits to retired employees (other than as required by Section 601 of ERISA) or employee pension benefit plans (as defined in Section 3(2) of ERISA) (except in each case solely as a result of a change in estimate or adjustment of liabilities existing on the Original Effective Date upon the adoption or implementation of Financial Accounting Statement 106), or (f) the Borrower or any Subsidiary or any ERISA Affiliate has incurred a liability under Section 409, 502(i) or 502(l) of ERISA or Section 4971 or 4975 of the Code; and there shall result from any such event or events described in the preceding clauses of this Section 9.06 the imposition of a Lien upon the assets of the Borrower or any Subsidiary, the granting of a security interest, or a liability or a material risk of -46- 52 incurring a liability, which Lien, security interest or liability would have a material adverse effect upon the business, operations or financial condition of the Borrower and its Subsidiaries taken as a whole; or 9.07 Subsidiary Guaranty. The Subsidiary Guaranty or any provision thereof shall cease to be in full force or effect or any Subsidiary Guarantor or any Person acting by or on behalf thereof shall deny or disaffirm such Subsidiary Guarantor's obligations under the Subsidiary Guaranty 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 Guaranty and such default, if a default of the covenant therein not to violate the provisions of Section 7 hereof, shall continue unremedied for a period of at least 30 days after written notice to the Borrower from the Administrative Agent; or 9.08 Judgments. One or more judgments or decrees shall be entered against the Borrower or any of its Material Subsidiaries involving a liability of $75,000,000 or more in the case of any one such judgment or decree and $150,000,000 or more in the aggregate for all such judgments and decrees for the Borrower and its Material Subsidiaries (to the extent not paid or fully covered by insurance) and any such judgments or decrees shall not have been vacated, discharged or stayed or bonded pending appeal within 60 days from the entry thereof; or 9.09 Security Documents. At any time the Security Documents are required to be in effect pursuant to Section 7.11, (a) any Security Document shall cease to be in full force and effect, or shall cease to give the Collateral Agent the Liens or any of the material rights, powers and privileges purported to be created thereby in favor of the Collateral Agent, or (b) any Credit Party shall default in the due performance or observance of any material term, covenant or agreement on its part to be performed or observed pursuant to any such Security Document and such default (other than a default arising from the failure to deliver collateral) shall continue unremedied for a period of at least 30 days after written notice to the Borrower by the Collateral Agent; then, and in any such event, and at any time thereafter, if any Event of Default shall then be continuing, the Administrative Agent shall, upon the written request of the Required Lenders, by written notice to the Borrower, take any or all of the following actions, without prejudice to the rights of any Senior Managing Agent or any Lender to enforce its claims against the Borrower, except as otherwise specifically provided for in this Agreement (provided that, if an Event of Default specified in Section 9.05 shall occur with respect to the Borrower, the result which would occur upon the giving of written notice by the Administrative Agent as specified in clauses (i) and (ii) below shall occur automatically without the giving of any such notice): (i) declare the Total Commitment terminated, whereupon the Commitment and Swingline Commitment, if any, of each Lender shall forthwith terminate immediately and any Facility Fee theretofore accrued shall forthwith become due and payable without any other notice of any kind; (ii) declare the principal of and any accrued interest in respect of all Loans and all other Obligations owing hereunder and thereunder to be, whereupon the same shall become, forthwith due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower; (iii) terminate any Letter of Credit which may be terminated in accordance with its terms; (iv) direct the Borrower to pay (and the Borrower agrees that upon receipt of such notice, or upon the occurrence of an Event of Default specified in Section 9.05 with respect to the Borrower, it will pay) to the Administrative Agent at the Administrative Agent's Office such additional amounts of cash, to be -47- 53 held as security for the Borrower's reimbursement obligations for Drawings that may subsequently occur thereunder, equal to the aggregate Stated Amount of all Letters of Credit issued and then outstanding; and/or (v) direct the Collateral Agent to enforce any or all of the Security Documents then in effect. Notwithstanding anything contained in the foregoing paragraph, if at any time within 60 days after an acceleration of the Loans pursuant to the preceding paragraph, the Borrower shall pay all arrears of interest and all payments on account of principal which shall have become due otherwise than by acceleration (with interest on principal and, to the extent permitted by law, on overdue interest, at the rates specified in this Agreement) and all Events of Default and Defaults (other than non-payment of the principal of and accrued interest on the Loans, in each case which is due and payable solely by virtue of acceleration) shall be remedied or waived pursuant to Section 12.12, then Non-Defaulting Lenders holding at least 66-2/3% of the Adjusted Total Commitment (which Lenders shall include in any event the Majority SMA), by written notice to the Borrower, may at their option rescind and annul the acceleration and its consequences; but such action shall not affect any subsequent Event of Default or Default or impair any right consequent thereon. The provisions of this paragraph are intended merely to bind the Lenders to a decision which may be made at the election of the aforesaid percentage of the Lenders and are not intended to benefit the Borrower and do not grant the Borrower the right to require the Lenders to rescind or annul any acceleration hereunder, even if the conditions set forth herein are met. SECTION 10. Definitions. As used herein, the following terms shall have the meanings herein specified unless the context otherwise requires. Defined terms in this Agreement shall include in the singular number the plural and in the plural the singular: "Absolute Rate" shall mean an interest rate (rounded to the nearest .0001) expressed as a decimal. "Acquisition Corp." shall mean RJR Acquisition Corp., a Delaware corporation and shall include the surviving company of the merger of NGH and Acquisition Corp. pursuant to the NGH Acquisition. "Adjusted Operating Income" shall mean for any period (x) the consolidated operating income of the Borrower and its Subsidiaries for such period plus (y) the sum of the consolidated depreciation expense and consolidated amortization expense of the Borrower and its Subsidiaries for such period, all as determined in accordance with GAAP, it being understood that the determination of the amount specified in clauses (x) and (y) shall be made on a consistent basis with the methodology utilized by the Borrower to determine such amount on the Original Effective Date, provided that (i) for the purposes of Section 8.08 only, for any Test Period during which Consolidated Fixed Charges includes cash taxes paid as a result of any extraordinary sale of assets, Adjusted Operating Income shall include a portion of the gross cash proceeds received by the Borrower and its Subsidiaries as a result of such extraordinary sale of assets equal to the percentage of such gross cash proceeds determined by dividing the cash taxes paid during such Test Period as a result of such sale by the aggregate cash taxes payable as a result of such sale, (ii) for the purposes only of Section 8.08 (to the extent such acquisition resulted in Consolidated -48- 54 Capital Expenditures) for any Test Period during which any acquisition of any Person or business occurs, Adjusted Operating Income shall give pro forma effect to such acquisition as if it occurred on the first day of such Test Period, and (iii) for all purposes, Adjusted Operating Income shall be adjusted by subtracting therefrom the amount of all payments made by the Borrower and its Subsidiaries during any Test Period pursuant to any settlement with respect to tobacco liability which otherwise did not reduce Adjusted Operating Income for such period or prior periods. "Adjusted Percentage" shall mean (x) at a time when no Lender Default exists, for each Lender such Lender's Percentage and (y) at a time when a Lender Default exists (i) for each Lender that is a Defaulting Lender, zero and (ii) for each Lender that is a Non-Defaulting Lender, the percentage determined by dividing such Lender's Commitment at such time by the Adjusted Total Commitment at such time, it being understood that all references herein to Commitments at a time when the Total Commitment has been terminated shall be references to the Commitments in effect immediately prior to such termination, provided that (A) no Lender's Adjusted Percentage shall change upon the occurrence of a Lender Default from that in effect immediately prior to such Lender Default if after giving effect to such Lender Default, and any repayment of Loans at such time pursuant to Section 4.02(A) or otherwise, the sum of (i) the aggregate outstanding principal amount of Loans plus (ii) the Letter of Credit Outstandings exceeds the Adjusted Total Commitment, (B) the changes to the Adjusted Percentage that would have become effective upon the occurrence of a Lender Default but that did not become effective as a result of the preceding clause (A) shall become effective on the first date after the occurrence of the relevant Lender Default on which the sum of (i) the aggregate outstanding principal amount of the Loans plus (ii) the Letter of Credit Outstandings is equal to or less than the Adjusted Total Commitment and (C) if (i) a Non-Defaulting Lender's Adjusted Percentage is changed pursuant to the preceding clause (B) and (ii) any repayment of such Lender's Loans that were made during the period commencing after the date of the relevant Lender Default and ending on the date of such change to its Adjusted Percentage must be returned to the Borrower as a preferential or similar payment in any Bankruptcy or similar proceeding of the Borrower, then the change to such Non-Defaulting Lender's Adjusted Percentage effected pursuant to said clause (B) shall be reduced to that positive change, if any, as would have been made to its Adjusted Percentage if (x) such repayments had not been made and (y) the maximum change to its Adjusted Percentage would have resulted in the sum of the outstanding principal of Revolving Loans made by such Lender plus such Lender's new Adjusted Percentage of the outstanding principal amount of Swingline Loans and of Letter of Credit Outstandings equaling such Lender's Commitment at such time. "Adjusted Total Commitment" shall mean at any time the Total Commitment less the aggregate Commitments of all Defaulting Lenders. "Administrative Agent" shall mean Chase, provided that if Chase shall cease to constitute a Senior Managing Agent hereunder, the remaining Senior Managing Agents shall have the option to appoint one of such remaining Senior Managing Agents as the Administrative Agent. -49- 55 "Administrative Agent's Office" shall mean the office of the Administrative Agent located at 270 Park Avenue, New York, New York 10017, or such other office in New York City as the Administrative Agent may hereafter designate in writing as such to the other parties hereto. "Affiliate" shall mean, with respect to any Person, any other Person directly or indirectly controlling, controlled by, or under direct or indirect common control with such Person. A Person shall be deemed to control a corporation if such Person possesses, directly or indirectly, the power (i) to vote 20% or more of the securities having ordinary voting power for the election of directors of such corporation or (ii) to direct or cause the direction of the management and policies of such corporation, whether through the ownership of voting securities, by contract or otherwise. "Aggregate Outstandings" shall have the meaning provided in Section 4.02(A). "Agreement" shall mean the Original Credit Agreement as amended and restated pursuant to this Amended and Restated Credit Agreement, as so amended and restated and as the same may be further amended, restated, modified and/or supplemented from time to time. "Applicable Credit Rating" shall mean the highest rating level (a rating level being, e.g., each of BBB-, BBB and BBB+, in the case of S&P) assigned by each Rating Agency to any of the Long Term Debt Issues of the Borrower. "Applicable Eurodollar Margin" shall mean, in respect of each Interest Period commencing during a period set forth below, the percentage set forth below opposite such period below: Applicable Period Eurodollar Margin ------ ----------------- Level II NIG Period 1.500% Level I NIG Period 1.500% Minimum Investment Grade Period 1.500% Increased Investment Grade Period 1.375% Maximum Investment Grade Period 1.250% "Applicable Facility Fee Percentage" shall mean, at any time during a period set forth below, the percentage set forth opposite such period below: Applicable Period Fee Percentage ------ -------------- Level II NIG Period 1.500% -50- 56 Level I NIG Period 1.250% Minimum Investment Grade Period 1.000% Increased Investment Grade Period .875% Maximum Investment Grade Period .750% "Applicable Reference Rate Margin" shall mean, at any time during a period set forth below, the percentage set forth opposite such period below: Applicable Reference Period Rate Margin ------ ----------- Level II NIG Period .500% Level I NIG Period .500% Minimum Investment Grade Period .500% Increased Investment Grade Period .375% Maximum Investment Grade Period .250% "Approved Alternate Currency" shall mean Euros, Deutsche Marks and Swiss Francs. "Assignment Agreement" shall have the meaning provided in Section 12.04(b)(A). "Authorized Officer" shall mean any senior officer of the Borrower designated as such in writing to the Senior Managing Agents by the Borrower, in each case to the extent acceptable to the Majority SMA. "AVOCA Asset Transfer" shall have the meaning provided in Section 8.02(c). "Bankruptcy Code" shall have the meaning provided in Section 9.05. "Barclays" shall mean Barclays Bank PLC and any successor corporation thereto by merger, consolidation or otherwise. "Base Rate" shall mean, for any day, the publicly announced prime rate on such date of Chase. "Bidder" shall mean each Lender that has notified in writing (and has not withdrawn such notice) the Administrative Agent that it desires to participate generally in the bidding arrangements relating to Competitive Bid Borrowings. -51- 57 "Borrower" shall mean R.J. Reynolds Tobacco Holdings, Inc., a Delaware corporation. "Borrower Common Stock" shall mean the common stock of the Borrower. "Borrowing" shall mean and include (i) the incurrence of Swingline Loans from the Swingline Lenders on a pro rata basis on a given date, (ii) the incurrence of one Type of Loan by the Borrower from all of the Lenders on a pro rata basis on a given date (or resulting from conversions on a given date), having in the case of Eurodollar Loans the same Interest Period, provided that Reference Rate Loans incurred pursuant to Section 1.11(b) shall be considered part of any related Borrowing of Eurodollar Loans and (iii) a Competitive Bid Borrowing. "BTCo" shall mean Bankers Trust Company and any successor corporation thereto by merger, consolidation or otherwise. "Business Day" shall mean (i) for all purposes other than as covered by clause (ii) below, any day excluding Saturday, Sunday and any day which shall be in the City of New York a legal holiday or a day on which banking institutions are authorized by law or other governmental actions to close and (ii) with respect to all notices and determinations in connection with, and payments of principal and interest on, Eurodollar Loans, any day which is a Business Day described in clause (i) and which is also a day for trading by and between banks in U.S. dollar deposits in the interbank Eurodollar market. "Capital Lease," as applied to any Person, shall mean any lease of any property (whether real, personal or mixed) by that Person as lessee which, in conformity with GAAP, is, or is required to be, accounted for as a capital lease on the balance sheet of that Person. "Capitalized Lease Obligations" shall mean all obligations under Capital Leases of the Borrower or any of its Subsidiaries in each case taken at the amount thereof accounted for as liabilities in accordance with GAAP. "Certified Acquired NGH Cash Amount" shall have the meaning provided in Section 8.02(iv). "Change of Control" shall mean and include (a) at any time Continuing Directors shall not constitute a majority of the Board of Directors of the Borrower; and/or (b) any Person or group (as such term is defined in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), 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. "Chase" shall mean The Chase Manhattan Bank and any successor corporation thereto by merger, consolidation or otherwise. "Citibank" shall mean Citibank, N.A. and any successor corporation thereto by merger, consolidation or otherwise. -52- 58 "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time, and the regulations promulgated and rulings issued thereunder. Section references to the Code are to the Code, as in effect at the date of this Agreement and any subsequent provisions of the Code, amendatory thereof, supplemental thereto or substituted therefor. "Collateral" shall have the meaning provided in Section 7.11(b). "Collateral Agent" shall mean the Administrative Agent acting as Collateral Agent under the Security Documents. "Commitment" shall mean, with respect to each Lender, the amount set forth opposite such Lender's name in Annex I hereto, as the same may be reduced from time to time pursuant to Section 3.02, 3.03, 9 and/or 12.04(b)(A). "Committed Loans" shall mean Revolving Loans and Swingline Loans. "Commodities Agreement" shall mean any forward contract, futures contract, option contract or similar agreement or arrangement, in each case intended to protect the Persons entering into same from fluctuations in the price of, or shortage of supply of, commodities. "Competitive Bid Borrowing" shall mean a Borrowing of Competitive Bid Loans pursuant to Section 1.04 with respect to which the Borrower has requested that the Lenders offer to make Competitive Bid Loans at Absolute Rates. "Competitive Bid Loans" shall have the meaning provided in Section 1.01(D). "Confidential Information" shall have the meaning provided in Section 12.15. "Computation Date" shall mean the last Business Day of each month and any other date specified in writing by a Letter of Credit Issuer with respect to an Existing Letter of Credit, or any replacement or renewal thereof. "Consolidated Capital Expenditures" shall mean, for any period, the aggregate of all expenditures (whether paid in cash or accrued as liabilities and including in all events all amounts expended or capitalized under Capital Leases but excluding any amount representing capitalized interest) by the Borrower and its Subsidiaries during that period that, in conformity with GAAP, are or are required to be included as additions during such period to property, plant or equipment reflected in a consolidated balance sheet of the Borrower and its Subsidiaries, provided that (x) except as set forth in clause (y) below, Consolidated Capital Expenditures shall in any event include the purchase price paid in connection with the acquisition of any Person (including through the purchase of all of the capital stock or other ownership interests of such Person, or through merger or consolidation with any Person but not including any capital contribution that forms or establishes any Subsidiary) whether or not allocable to property, plant and equipment and (y) Consolidated Capital Expenditures shall in any event exclude (A) expenditures made in connection with the replacement, substitution or restoration of assets (i) to the extent financed from insurance proceeds paid on account of the loss of or damage to the assets being replaced or restored or (ii) with awards of compensation arising from the taking by -53- 59 eminent domain or condemnation of the assets being replaced, (B) the purchase price paid by the Borrower in connection with the NGH Acquisition and (C) the purchase price paid by the Borrower or any of its Subsidiaries in connection with any Investment Equities. "Consolidated Cash Interest Expense" shall mean, for any period, (x) (i) consolidated interest expense of the Borrower and its Subsidiaries, but excluding, however, to the extent included in such consolidated interest expense, (I) non-cash interest expense, (II) amortization of debt issuance cost and (III) following the consummation of the NGH Acquisition, interest expense of NGH payable in respect of the Junior Subordinated Debentures during such period less (ii) consolidated cash interest income of the Borrower and its Subsidiaries, but excluding, however, to the extent included in such consolidated interest income, interest income of NGH receivable in respect of the cash and/or cash equivalents referred to in Section 8.04(m) plus (y) cash dividends paid on all preferred stock of the Borrower and its Subsidiaries during such period, it being understood that the determination of the amounts specified in clauses (x)(i)(I) and (x)(i)(II) shall be made on a consistent basis with the methodology utilized by the Borrower to determine such amounts on the Original Effective Date. "Consolidated Fixed Charges" shall mean, for any period, the sum, without duplication, of (A) the amounts for such period of (i) Consolidated Cash Interest Expense, (ii) cash taxes paid during such period (other than (x) any such cash taxes paid as result of the International Tobacco Sale (as defined in the Original Credit Agreement) and (y) cash taxes paid to the extent (and only to the extent) that such taxes were due and payable solely as a result of the NGH Acquisition), and (iii) Consolidated Capital Expenditures, all as determined on a consolidated basis for the Borrower and its Subsidiaries in accordance with GAAP, it being understood that the determination of the amounts specified in clause (iii) shall be made on a consistent basis with the methodology utilized by the Borrower to determine such amount on the Original Effective Date plus (B) all Dividends paid by the Borrower during such period pursuant to Section 8.05(ii), (iii) or (v). "Consolidated Net Worth" shall mean, as at any date of determination, the stockholders' equity of the Borrower determined in accordance with GAAP and as would be reflected on a consolidated balance sheet of the Borrower and its Subsidiaries only prepared as of such date (it being understood that determinations of such amounts shall be made on a consistent basis with the methodology utilized by the Borrower to determine such amounts on the Original Effective Date); provided that, notwithstanding the foregoing (and notwithstanding any differing treatment by GAAP of the assets acquired by the Borrower pursuant to the NGH Acquisition), on and after the consummation of the NGH Acquisition, Consolidated Net Worth as otherwise determined above shall be adjusted by adding thereto an amount equal to the remainder of (x) the Certified Acquired NGH Cash Amount less (y) the amount of the increase in the stockholders' equity of the Borrower resulting from the NGH Acquisition as of such date, as determined in accordance with GAAP and as would be reflected on a consolidated balance sheet of the Borrower and its Subsidiaries prepared as of such date. "Contingent Obligations" shall mean, as to any Person, any obligation of such Person guaranteeing or intended to guarantee any Indebtedness, leases, dividends or other monetary obligations including reimbursement obligations in respect of litigation bonds (the -54- 60 "primary obligations") of any other Person (the "primary obligor") in any manner, whether directly or indirectly, including, without limitation, any obligation of such Person, whether or not contingent, (a) to purchase any such primary obligation or any property constituting direct or indirect security therefor, (b) to advance or supply funds (i) for the purchase or payment of any such primary obligation or (ii) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, (c) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation or (d) otherwise to assure or hold harmless the owner of such primary obligation against loss in respect thereof; provided, however, that the term Contingent Obligation shall not include endorsements of instruments for deposit or collection in the ordinary course of business. The amount of any Contingent Obligation shall be deemed to be an amount equal to the lesser of (x) the maximum stated or determinable amount of such Contingent Obligation and (y) the stated or determinable amount of the primary obligation in respect of which such Contingent Obligation 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. "Continuing Director" shall mean, at any date, an individual (x) who is a member of the Board of Directors of the Borrower on the date of this Agreement, (y) who, as at such date, has been a member of such Board of Directors for at least the twelve preceding months, or (z) who has been nominated to be a member of such Board of Directors by a majority of the other Continuing Directors then in office. "Continuing Lender" shall mean, at any time, each Lender which has a Maturity Date which is the Facility Maturity Date. "Credit Documents" shall mean this Agreement, the Notes, the Subsidiary Guaranty, the Intercompany Subordination Agreement and, once executed and delivered and in effect, the Security Documents. "Credit Event" shall mean and include the making of a Loan and/or the issuance of a Letter of Credit. "Credit Lyonnais" shall mean Credit Lyonnais New York Branch and any successor corporation thereto by merger, consolidation or otherwise. "Credit Party" shall mean each of the Borrower and each Subsidiary Guarantor. "Credit Rating" shall mean (i) the Applicable Credit Rating assigned by each Rating Agency, if such Applicable Credit Ratings are the same or (ii) if the Applicable Credit Ratings assigned by the Rating Agencies differ, the lower of the Applicable Credit Ratings assigned by the Rating Agencies. "CSFB" shall mean Credit Suisse First Boston and any successor corporation thereto by merger, consolidation or otherwise. -55- 61 "Cumulative Adjusted Cash Net Income" shall mean, at any time for any determination thereof, the sum of (i) consolidated net income of the Borrower and its Subsidiaries, determined in accordance with GAAP, for the period (taken as one accounting period) commencing July 1, 1999 and ending on the last day of the last fiscal quarter of the Borrower then ended plus (ii) all losses from debt retirement deducted in determining such consolidated net income of the Borrower and its Subsidiaries for the period referred to in clause (i) above plus (iii) all cash dividends actually received from NHC during such period to the extent not included in clause (i) above plus (iv) all trademark and goodwill amortization deducted in determining such consolidated net income, reduced by any tax benefit relating thereto included in determining such consolidated net income for such period. "Currency Agreement" shall mean any foreign exchange contract, currency swap agreement, futures contract, option contract, synthetic cap or other similar agreement designed to protect the Persons entering into same against fluctuations in currency values. "Debenture Indenture" shall mean that certain Second Supplemental Indenture, dated as of September 16, 1998, between NGH and The Bank of New York, as trustee, supplemental to that certain Indenture, dated as of September 21, 1995, among NGH and The Bank of New York, as trustee. "Default" shall mean any event, act or condition which with notice or lapse of time, or both, would constitute an Event of Default other than an Event of Default under Section 9.08. "Defaulting Lender" shall mean any Lender with respect to which a Lender Default is in effect. "Designated Issuers" shall mean Chase, BTCo, Credit Lyonnais, Barclays and CSFB, in each case, so long as such entity remains a Lender hereunder. "Distribution Agreement" shall mean the Distribution Agreement, among RJR Nabisco Holdings Corp., the Borrower and Reynolds Tobacco in the form of the draft delivered to, and found acceptable by, the Original Senior Managing Agents prior to the Original Effective Date, as the same may be changed, modified or amended with the consent of the Senior Managing Agents. "Dividends" shall have the meaning provided in Section 8.05. "Drawing" shall have the meaning provided in Section 2.04(b). "Eligible Transferee" shall mean and include a commercial Lender, financial institution or other "accredited investor" (as defined in SEC Regulation D); provided that Eligible Transferee shall not include any Person (or any Affiliate thereof) who competes with the Borrower and its Subsidiaries in the tobacco business. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated and rulings issued thereunder. Sec- -56- 62 tion references to ERISA are to ERISA, as in effect at the date of this Agreement and any subsequent provisions of ERISA, amendatory thereof, supplemental thereto or substituted therefor. "ERISA Affiliate" shall mean each person (as defined in Section 3(9) of ERISA) which together with the Borrower, any Subsidiary or any Credit Party would be deemed to be a "single employer" within the meaning of Section 414(b), (c), (m) or (o) of the Code. "Escrow" shall have the meaning provided in the definition of Specified Debt. "Eurodollar Loans" shall mean each Revolving Loan bearing interest at the rates provided in Section 1.09(b). "Eurodollar Rate" shall mean, with respect to each day during each Interest Period for a Eurodollar Loan, the rate of interest determined on the basis of the rate for deposits in Dollars for a period equal to such Interest Period commencing on the first day of such Interest Period appearing on Page 3750 of the Telerate screen as of 11:00 A.M., London time, two Business Days prior to the beginning of such Interest Period. In the event that such rate does not appear on Page 3750 of the Telerate Service (or otherwise on such service), the "Eurodollar Rate" shall be determined by reference to such other publicly available service for displaying eurodollar rates as may be agreed upon by the Administrative Agent and the Borrower or, in the absence of such agreement, the "Eurodollar Rate" shall instead be the rate per annum announced by the Administrative Agent as the rate at which the Administrative Agent is offered Dollar deposits at or about 10:00 A.M., New York time, two Business Days prior to the beginning of such Interest Period, in the interbank eurodollar market where the eurodollar and foreign currency and exchange operations in respect of its Eurodollar Loans are then being conducted for delivery on the first day of such Interest Period for the number of days comprised therein and in an amount comparable to the amount of its Eurodollar Loan to be outstanding during such Interest Period. "Event of Default" shall have the meaning provided in Section 9. "Existing Debt" shall mean the Indebtedness of the Borrower and its Subsidiaries outstanding on the Original Effective Date and set forth in Annex VII, provided that such Indebtedness shall not exceed $200,000,000 in aggregate outstanding principal amount. "Existing Foreign Currency Debt" shall mean (i) the 5%/10% Dual Coupon/Dual Currency Swiss Franc/U.S. Dollar Bonds due 2001 and (ii) the 6-7/8% Deutsche Mark Bearer Bonds due 2000. "Existing Letter of Credit" shall mean those letters of credit listed on Annex III to this Agreement that were outstanding prior to the Original Effective Date and became Letters of Credit hereunder on the Original Effective Date. "Existing Liens" shall mean the Liens on the assets and properties of the Borrower and its Subsidiaries outstanding on the Original Effective Date and set forth in Annex VI, provided that the Indebtedness secured by all such Liens shall not have exceeded $20,000,000 in aggregate outstanding principal amount. -57- 63 "Expected Total Commitment" shall mean, at any time of determination with respect to any future date, the Adjusted Total Commitment in effect at such time of determination less the aggregate Commitments of all Non-Defaulting Lenders with a Maturity Date prior to such future date. "Extension Date" shall mean May 19, 2002. "Facility Fee" shall have the meaning provided in Section 3.01(a). "Facility Maturity Date" shall mean May 19, 2003, as such date may be extended pursuant to Section 1.14. "Facing Fee" shall have the meaning provided in Section 3.01(c). "Federal Funds Rate" shall mean for any period, a fluctuating interest rate equal for each day during such period to the weighted average of the rates on overnight Federal Funds transactions with members of the Federal Reserve System arranged by Federal Funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by the Administrative Agent from three Federal Funds brokers of recognized standing selected by the Administrative Agent. "Fees" shall mean all amounts payable pursuant to, or referred to in, Section 3.01. "Final Maturity Date" of any Lender, as at any date of determination, shall mean the latest Maturity Date of such Lender at such time. "Final Swingline Maturity Date" shall mean the date which is five Business Days prior to the Facility Maturity Date. "First Maturity Date" of any Lender, as at any date of determination, shall mean the earliest Maturity Date of such Lender at such time. "FSH" shall mean FHS, LLC, a Delaware limited liability company. "Fuji" shall mean The Fuji Bank, Limited and any successor corporation thereto by merger, consolidation or otherwise. "GAAP" shall mean generally accepted accounting principles in the United States of America as in effect from time to time; it being understood and agreed that determinations in accordance with GAAP for purposes of Section 8, including defined terms as used therein, shall be made pursuant to Section 12.07(a). "GMB" shall mean GMB, Inc., a North Carolina corporation. "Government Acts" shall have the meaning provided in Section 2.06(a). -58- 64 "Granting Lender" shall have the meaning provided in Section 12.04. "Guaranteed L/C Obligations" shall mean the reimbursement obligations of the Borrower in respect of letters of credit (other than Letters of Credit) issued for its account to the extent such reimbursement obligations are guaranteed by Reynolds Tobacco. "Guaranty Event" shall mean that the Applicable Credit Rating issued by at least one Rating Agency is at least one level below the Minimum Investment Grade Rating. "Hedging Agreements" shall mean and include Commodities Agreements, Currency Agreements and Interest Rate Agreements and all other similar hedging arrangements. "Increased Investment Grade Period" shall mean any period during which the Credit Rating at all times is the Increased Investment Grade Rating. "Increased Investment Grade Rating" shall mean the rating assigned by each Rating Agency which is one rating level above the Minimum Investment Grade Rating, it being understood that as of the date of this Agreement the "Increased Investment Grade Rating" of S&P is BBB and the "Increased Investment Grade Rating" of Moody's is Baa2. "Indebtedness" of any Person shall mean (i) all indebtedness of such Person for borrowed money, (ii) the deferred purchase price of assets or services which in accordance with GAAP would be shown on the liability side of the balance sheet of such Person, (iii) the face amount of all letters of credit issued for the account of such Person and, without duplication, all drafts drawn thereunder until reimbursed in full, (iv) the stated amount of all litigation bonds issued for the account of such Person and without duplication of all payments made thereunder until reimbursed in full, (v) all Indebtedness of a second Person secured by any Lien on any property owned by such first Person, whether or not such Indebtedness has been assumed, (vi) all Capitalized Lease Obligations of such Person, (vii) all obligations of such Person to pay a specified purchase price for goods or services whether or not delivered or accepted, i.e., take-or-pay and similar obligations, (viii) all obligations of such Person under Hedging Agreements and (ix) all Contingent Obligations of such Person, provided that Indebtedness shall not include (x) trade payables and accrued expenses, in each case arising in the ordinary course of business and (y) 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 past practices or then current industry practices; and provided further, that (a) for the purposes of Section 9.04, the amount of Indebtedness represented by any Hedging Agreement shall be at any time the unrealized net loss position, if any, of the Borrower and/or its Subsidiaries thereunder on a marked to market basis determined no more than one month prior to such time and (b) for the purposes of determining the Indebtedness permitted to be secured by Section 8.03(g) or outstanding under Section 8.04(l), the amount of Indebtedness included in such determination that is attributable to all Hedging Agreements secured or permitted thereunder, as the case may be, shall be the Net Termination Value, if any, of all such Hedging Agreements. -59- 65 "Independent Litigation Bond" shall mean any surety bond, judgment bond or other bond or insurance policy issued for bonding litigation judgments for appeal, other than any such bond or insurance policy that has been fully cash collateralized (to the satisfaction of the Majority SMA) by the Borrower or Reynolds Tobacco or which is supported by Letters of Credit issued hereunder in the full stated amount of such bond or insurance policy. "Intercompany Subordination Agreement" shall have the meaning provided in Section 5.01K. "Interest Period" shall mean, with respect to any Loan, the interest period applicable thereto, as determined pursuant to Section 1.10. "Interest Rate Agreement" shall mean any interest rate swap agreement, interest rate cap agreement, interest rate collar agreement, interest rate futures contract, interest rate option contract or other similar agreement or arrangement. "Investment Equities" shall mean and include (x) equity securities (i) of any entity in which the Borrower and its Subsidiaries do not collectively own more than 5% of the outstanding equity securities of such entity, (ii) which are listed and regularly traded on a nationally recognized U.S. stock exchange or market and (iii) which are not restricted as to resale by the Borrower or its Subsidiaries (whether by contract, law or otherwise) and (y) preferred stock of any investment vehicle owned by the Borrower or any of its Subsidiaries, so long as (i) such investment vehicle invests solely in debt securities and (ii) the aggregate amount of cash used to acquire such preferred stock after the Original Effective Date does not exceed $15,000,000. "Junior Subordinated Debentures" shall mean NGH's 9-1/2% Junior Subordinated Debentures due 2047, issued pursuant to the Debenture Indenture. "Lender" shall have the meaning provided in the first paragraph of this Agreement. "Lender Default" shall mean (i) the refusal (which has not been retracted) of a Lender to make available its portion of any Borrowing or to fund its portion of any unreimbursed payment under Section 2.03(c) or (ii) a Lender having notified any Senior Managing Agent and/or the Borrower that it does not intend to comply with its obligations under Section 1.01(A) or 1.01(C) or under Section 2.03(c), in the case of either (i) or (ii) as a result of the appointment of a receiver or conservator with respect to such Lender at the direction or request of any regulatory agency or authority. "Letter of Credit" shall mean each standby letter of credit issued pursuant to Section 2.01. "Letter of Credit Fee" shall have the meaning provided in Section 3.01(b). -60- 66 "Letter of Credit Issuer" shall mean and include (i) each of the Designated Issuers and (ii) each other Lender requested by the Borrower to issue Letters of Credit to the extent consented to by such Lender. "Letter of Credit Outstandings" shall mean, at any time, the sum of, without duplication, (i) the aggregate Stated Amount of all outstanding Letters of Credit and (ii) the aggregate amount of all Unpaid Drawings in respect of all Letters of Credit. "Letter of Credit Request" shall have the meaning provided in Section 2.02. "Level I NIG Period" shall mean any period during which the Credit Rating is at all times the Level I NIG Rating. "Level I NIG Rating" shall mean the rating assigned by each Rating Agency which is one level below the Minimum Investment Grade Rating, it being understood that as of the Restatement Effective Date the "Level I NIG Rating" of S&P is BB+ and the "Level I NIG Rating" of Moody's is Ba1. "Level II NIG Period" shall mean any period during which the Credit Rating is at all times below the Level I NIG Rating. "Lien" shall mean any mortgage, pledge, security interest, encumbrance, lien or charge of any kind (including any agreement (other than customary negative pledge clauses) to give any of the foregoing, any conditional sale or other title retention agreement or any lease in the nature thereof). "Loan" shall mean any Competitive Bid Loan, Revolving Loan or Swingline Loan. "Long Term Debt Issues" shall mean, with respect to the Borrower, each issuance of long-term senior debt of the Borrower which ranks on a parity, as to payment and security, with the Loans. "Long-Term Commitment" shall mean, with respect to each Lender, the amount set forth opposite such Lender's name under the heading "Long-Term Commitment" in Annex I hereto, as the same may be reduced from time to time pursuant to Section 3.02, 3.03, 9 and/or 12.04(b)(A). "Majority SMA" shall mean, at any time, at least one-half in number of the Senior Managing Agents. "Mandatory Borrowing" shall have the meaning provided in Section 1.01(C). "Margin Stock" shall have the meaning provided in Regulation U. "Material Adverse Effect" shall mean (i) a material adverse effect on the operations, business, property, assets or financial condition of the Borrower and its Subsidiaries -61- 67 taken as a whole and/or (ii) in the case of Section 5.01G and Section 6.04, a material adverse effect on the prospects of the Borrower and its Subsidiaries taken as a whole, provided that (w) neither the existence of the Permitted Obligations described in clause (ix) of the definition thereof nor the issuance of Letters of Credit to support such Permitted Obligations shall constitute a Material Adverse Effect, (x) the existence of any action, suit, proceeding or inquiry or the rendering of any verdict or entry of any order, injunction or judgment thereunder will not have a Material Adverse Effect, or a material adverse effect on the rights or remedies of the Lenders or the ability of any Credit Party to perform its obligations to the Lenders hereunder or under any other Credit Documents to which it is party unless such action, suit, proceeding or verdict, order, injunction and/or judgment has also been designated in writing by the Required Lenders as having such a Material Adverse Effect or material adverse effect, as the case may be, (y) 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 Annex IV will not have a Material Adverse Effect for purposes of Section 5.01G and Section 6.04 and (z) (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 each case, in and of itself have a Material Adverse Effect for purposes of Section 5.01F or Section 6.09, even if such verdict, order or judgment could be viewed as having a material adverse effect on future litigation prospects, unless such verdict, order 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 Subsidiary" shall mean and include Reynolds Tobacco, Acquisition Corp., each of the Specified Subsidiaries and each other Subsidiary (including any Person first becoming a Subsidiary upon consummation of a Permitted Investment) to the extent that (x) the aggregate book value of the assets of such other Subsidiary, determined on a consolidating basis, is equal to or more than $100,000,000 or (y) the net sales of such other Subsidiary during its then most recently ended fiscal year, determined on a consolidating basis, were equal to or more than $75,000,000 provided that such net sales shall be determined on a pro forma basis for the 12 months last ended when determining whether any Person that is the survivor of any merger or consolidation or that is the transferee of any property or assets from other Subsidiaries of the Borrower is a Material Subsidiary. "Maturity Date" of any Lender shall mean (i) in the case of a Non-Extending Lender, with respect to the Commitment of, and outstanding Revolving Loans made by, such Non-Extending Lender, November 18, 2001, (ii) in the case of any Lender other than a Non-Extending Lender, with respect to the Short-Term Commitment of, and related outstanding Revolving Loans made by, each Lender, November 18, 2001 and (iii) in the case of any Lender other than a Non-Extending Lender, with respect to the Long-Term Commitment of, and related outstanding Revolving Loans made by, such Lender, May 19, 2003, as such date may be extended for such Lender pursuant to Section 1.14. "Maximum Investment Grade Period" shall mean any period during which the Credit Rating is at all times above the Increased Investment Grade Rating. -62- 68 "Minimum Borrowing Amount" shall mean (i) with respect to a Borrowing of Revolving Loans, $10,000,000 and (ii) with respect to a Borrowing of Swingline Loans, $5,000,000. "Minimum Investment Grade Period" shall mean any period during which the Credit Rating is at all times the Minimum Investment Grade Rating. "Minimum Investment Grade Rating" shall mean the lowest rating level established as investment grade by each Rating Agency; it being understood that, as of the date of this Agreement, the "Minimum Investment Grade Rating" of S&P is BBB- and the "Minimum Investment Grade Rating" of Moody's is Baa3. "Moody's" shall mean Moody's Investors Service, Inc., or any successor corporation thereto. "NA" shall mean Nabisco Holdings, N.A., a Delaware corporation. "NA Divestiture" shall mean the sale by NGH of all of the capital stock of NA to PM pursuant to, and in accordance with the terms of, the NA Merger Agreement. "NA Merger Agreement" shall mean the Agreement and Plan of Merger dated as of June 25, 2000, among NGH, NA and PM, as the same may be amended, modified or supplemented from time to time in accordance with the terms thereof. "Net Termination Value" shall mean at any time, with respect to all Hedging Agreements for which a Net Termination Value is being determined, the excess, if positive, of (i) the aggregate of the unrealized net loss position of the Borrower and/or its Subsidiaries under each of such Hedging Agreements on a marked to market basis determined no more than one month prior to such time less (ii) the aggregate of the unrealized net gain position of the Borrower and/or its Subsidiaries under each of such Hedging Agreements on a marked to market basis determined no more than one month prior to such time. "New Senior Notes" shall mean senior notes of the Borrower issued after May 1, 1999 on terms specified in the Borrower's Preliminary Offering Memorandum dated April 29, 1999 relating to the issuance of such notes (a copy of which was delivered to the Original Senior Managing Agents prior to the Original Execution Date) or otherwise on terms reasonably satisfactory to the Senior Managing Agents, which term shall not include any Stub Notes or the Existing Foreign Currency Debt. "NGH" shall mean Nabisco Group Holdings Corp., a Delaware corporation and shall include the surviving company of the merger of Acquisition Corp. and NGH pursuant to the NGH Acquisition. "NGH Acquisition" shall mean the Borrower's acquisition of all of the capital stock of NGH for aggregate cash consideration of approximately $9,800,000,000 by way of a one-step merger of NGH with Acquisition Corp., pursuant to, and in accordance with the terms -63- 69 of, the NGH Merger Agreement, with Acquisition Corp. or NGH (at the election of the Borrower) to be the surviving corporation of such merger. "NGH Merger Agreement" shall mean the Agreement and Plan of Merger dated as of June 25, 2000, among the Borrower, NGH and Acquisition Corp., as the same may be amended, modified or supplemented from time to time in accordance with the terms thereof. "NHC" shall mean Nabisco Holdings Corp., a Delaware corporation. "Non-Continuing Lender" shall mean, at any time, each Lender which is not a Continuing Lender at such time. "Non-Declared Dividend" shall mean and include, 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 Original 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 Dividend on or after the Original Effective Date by such Person which does not require or involve a declaration or authorization by such Person. "Non-Defaulting Lender" shall mean and include each Lender other than a Defaulting Lender. "Non-Extending Lender" shall mean, at any time, each Lender which does not have a Long-Term Commitment at such time (or, if the Total Commitment has been terminated, did not have a Long-Term Commitment immediately prior to such termination). "Note" shall have the meaning provided in Section 1.06(a). "Notice of Borrowing" shall have the meaning provided in Section 1.03(a). "Notice of Competitive Bid Borrowing" shall have the meaning provided in Section 1.04(a). "Notice of Conversion" shall have the meaning provided in Section 1.07. "Notifying SL Lender" shall have the meaning provided in Section 1.01(C). "Obligations" shall mean all amounts, direct or indirect, contingent or absolute, of every type or description, and at any time existing, owing to any Senior Managing Agent, the Administrative Agent or any Lender pursuant to the terms of this Agreement or any other Credit Document. "Original Effective Date" shall mean the "Closing Date" under, and as defined in, the Original Credit Agreement. -64- 70 "Original Execution Date" shall mean the "Execution Date" under, and as defined in, the Original Credit Agreement. "Original Senior Managing Agents" shall mean the "Senior Managing Agents", as such term is defined in the Original Credit Agreement. "Participant" shall have the meaning provided in Section 2.03(a). "PBGC" shall mean the Pension Benefit Guaranty Corporation established pursuant to Section 4002 of ERISA, or any successor thereto. "PBGC Obligations" shall mean the obligations imposed by the PBGC on the Borrower and its Subsidiaries in connection with the Transactions (as defined in the Original Credit Agreement) pursuant to that certain Agreement, dated as of May 20, 1999 and amended as of June 14, 1999, by and among the PBGC, NGH and the Borrower. "Percentage" shall mean at any time for each Lender, the percentage obtained by dividing such Lender's Commitment by the Total Commitment, provided that at any time when the Total Commitment shall have been terminated each Lender's Percentage shall be the percentage obtained by dividing such Lender's outstanding Revolving Loans by the aggregate outstanding Revolving Loans. "Permanent Surplus Cash" shall mean cash on hand and cash equivalents (including marketable securities) at the Borrower and its Domestic Subsidiaries that (x) has not been designated to be used to pay income, excise or other taxes or to make settlement payments in respect of tobacco liability or (y) is not on deposit in the Escrow, provided that the lesser of $100,000,000 and the total amount of cash on hand in the cash management systems of the Borrower and its Domestic Subsidiaries shall be excluded from Permanent Surplus Cash. "Permitted Currency Agreement" shall mean any Currency Agreement entered into in the ordinary course of business by the Borrower with any Lender or Lenders (and/or their affiliates) to the extent consistent with the practices of the Borrower and its Subsidiaries prior to the Original Effective Date or with then current practices in the industry. "Permitted Investment" shall mean the acquisition of a Person that theretofore has been conducting a business or that theretofore has owned assets and was not a Subsidiary prior to such acquisition to the extent that (i) all or substantially all of the purchase price would constitute Consolidated Capital Expenditures and (ii) such Person shall not be a Material Subsidiary after giving effect to such acquisition unless such acquisition has been consented to in writing by the Senior Managing Agents or such Person becomes a Subsidiary Guarantor upon the consummation of such acquisition and takes all of the actions specified in clause (y)(II) of Section 8.02(c). "Permitted Litigation Bonding" shall mean 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 Credit Party after the Restatement Effective Date, provided that, at the time of the making of any such Loan or issuance of any such Letter of -65- 71 Credit, and after giving effect to any usage by the Credit Parties of Permanent Surplus Cash to effect such bonding of litigation judgments, the amount of Permanent Surplus Cash shall be zero, provided further, however, that, in the event a bonding company requires its bond to be supported by a letter of credit instead of cash, Letters of Credit will be available for bonding litigation judgments before all such Permanent Surplus Cash has been utilized for such purpose, if and only if the Letters of Credit so issued are cash collateralized with the Permanent Surplus Cash otherwise required to be used for such purpose pursuant to cash collateral arrangements in form and substance satisfactory to the Majority SMA. "Permitted Obligations" shall mean and include obligations (i) to pay taxes, (ii) to pay import duties, to post customs bonds and otherwise in connection with customs and trade laws, (iii) to purchase equipment or fixtures and otherwise in connection with capital expenditures, (iv) 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 its Subsidiaries consistent with the Borrower's practices in effect prior to the Original 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, (ix) imposed by the PBGC in connection with the Transactions (as defined in the Original Credit Agreement), provided that the aggregate Stated Amount of the Letter of Credit issued in connection with such PBGC Obligations, when aggregated with the sum of (x) the aggregate amount of cash that collateralizes PBGC Obligations and/or bonds in support of such PBGC Obligations plus (y) the aggregate stated amounts of bonds and any other letters of credit issued in support of PBGC Obligations (but excluding any portion of the stated amounts of bonds or other letters of credit that are cash collateralized pursuant to preceding clause (x)), shall not exceed $150,000,000 and (x) to support Indebtedness supported by Existing Letters of Credit on the Restatement Effective Date. "Person" shall mean any individual, partnership, joint venture, firm, corporation, association, trust or other enterprise or any government or political subdivision or any agency, department or instrumentality thereof. "Plan" shall mean any multiemployer or single-employer plan as defined in Section 4001 of ERISA, which is maintained or contributed to by (or to which there is an obligation to contribution of), or at any time during the five calendar years preceding the date of this Agreement was maintained or contributed to by (or to which there is an obligation to contribution of), Holdings, a Subsidiary, a Credit Party or an ERISA Affiliate. "PM" shall mean Phillip Morris Companies, Inc., a Virginia corporation. "Projections" shall have the meaning provided in Section 5.01I. "Qualified Stub Notes" shall mean Stub Notes with no scheduled principal payment due prior to May 19, 2003. -66- 72 "Rating Agency" shall mean each of S&P and Moody's. "Reference Rate" shall mean, at any time, the higher of (x) the rate which is 1/2 of 1% in excess of the Federal Funds Rate and (y) the Base Rate as in effect from time to time. "Reference Rate Loan" shall mean each Revolving Loan or Swingline Loan bearing interest at the rates provided in Section 1.09(a). "Register" shall have the meaning provided in Section 1.06(d). "Regulation D" shall mean Regulation D of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor to all or a portion thereof establishing reserve requirements. "Regulation U" shall mean Regulation U of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor to all or a portion thereof establishing margin requirements. "Replaced Lender" shall have the meaning provided in Section 1.15. "Replacement Lender" shall have the meaning provided in Section 1.15. "Reply Date" shall have the meaning provided in Section 1.04(b). "Reportable Event" shall mean an event described in Section 4043(c) of ERISA with respect to a Plan as to which the 30-day notice requirement has not been waived by the PBGC. "Required Lenders" shall mean at any time Non-Defaulting Lenders holding more than 50% of the Adjusted Total Commitment (or, if the Total Commitment has been terminated, of the Adjusted Total Commitment as in effect immediately prior to such termination). "Response Date" shall have the meaning provided in Section 1.14. "Restatement Effective Date" shall have the meaning provided in Section 5.01. "Restatement Execution Date" shall have the meaning provided in Section 12.10. "Revolving Loan" shall have the meaning provided in Section 1.01(A). "Reynolds Tobacco" shall mean R.J. Reynolds Tobacco Company, a New Jersey corporation. "S&P" shall mean Standard & Poor's Ratings Services, a division of McGraw-Hill, Inc., or any successor thereto. "SEC" shall have the meaning provided in Section 7.01(f). -67- 73 "SEC Regulation D" shall mean Regulation D as promulgated under the Securities Act of 1933, as amended, as the same may be in effect from time to time. "Secured Creditors" shall mean and include with respect to any Collateral (i) all Lenders (including in their capacity as Letter of Credit Issuers or parties to Hedging Agreements) and their affiliates and other Hedging Agreements parties as provided in the Security Documents, (ii) all holders of the Existing Foreign Currency Debt to the extent the Lien sharing provisions of the Existing Foreign Currency Debt require them to be secured by such Collateral and (iii) all holders of New Senior Notes to the extent the Lien sharing provisions of the New Senior Notes require them to be secured by such Collateral. "Security Documents" shall have the meaning provided in Section 7.11(b). "Senior Managing Agent" shall mean and include (i) at all times on or prior to November 18, 2001, Chase, BTCo, Citibank, Credit Lyonnais, CSFB, Fuji and Barclays, and any successor to any thereof appointed pursuant to Section 11.09 on or prior to such date and (ii) thereafter, Chase, Citibank, CSFB and any successor to any thereof appointed pursuant to Section 11.09 prior to November 18, 2001, and any successor to any of the foregoing appointed pursuant to Section 11.09 after November 18, 2001. "Short-Term Commitment" shall mean, with respect to each Lender, the amount set forth opposite such Lender's name under the heading "Short-Term Commitment" in Annex I hereto, as the same may be reduced from time to time pursuant to Section 3.02, 3.03, 9 and/or 12.04(b)(A). "SPC" shall have the meaning provided in Section 12.04. "Specified Debt" shall mean and include (x) all Indebtedness for borrowed money of the Borrower (including Stub Notes and the Existing Foreign Currency Debt) other than (i) any Indebtedness for borrowed money outstanding under this Agreement, (ii) Stub Notes with principal payments due earlier than May 19, 2003 to the extent an amount equal to the principal payments so due has been escrowed for the payment thereof pursuant to arrangements (the "Escrow") reasonably satisfactory to the Majority SMA, (iii) Qualified Stub Notes and/or New Senior Notes in an aggregate principal amount of up to $500,000,000 and (iv) Supported CP, (y) the full stated amount of all outstanding Independent Litigation Bonds issued for the account of the Borrower or Reynolds Tobacco (other than any portion thereof that has been cash collateralized or supported by Letters of Credit) and (z) all Guaranteed L/C Obligations. "Specified Subsidiaries" shall mean GMB and FSH. "Spin-Off" shall have the meaning provided in the Original Credit Agreement. "Stated Amount" of any Letter of Credit shall mean the maximum amount available to be drawn thereunder, determined without regard to whether any conditions to drawing could then be met. -68- 74 "Stub Notes" shall mean any outstanding senior notes of the Borrower issued on or prior to May 1, 1999 other than any thereof constituting Existing Foreign Currency Debt, which Stub Notes aggregated approximately $356,000,000 in outstanding principal amount on November 17, 2000. "Subsidiary" of any Person shall mean and include (i) any corporation more than 50% of whose stock of any class or classes having by the terms thereof ordinary voting power to elect a majority of the directors of such corporation (irrespective of whether or not at the time stock of any class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time owned by such Person directly or indirectly through Subsidiaries and (ii) any partnership, association, joint venture or other entity in which such Person directly or indirectly through Subsidiaries has more than a 50% equity interest at the time. Unless otherwise expressly provided, all references herein to "Subsidiary" shall mean a Subsidiary of the Borrower. "Subsidiary Guarantor" shall mean each Subsidiary of the Borrower that has executed and delivered the Subsidiary Guaranty. "Subsidiary Guaranty" shall have the meaning provided in Section 5.01J. "Supported CP" shall mean outstanding commercial paper issued by the Borrower to the extent the credit rating assigned to such commercial paper by any rating agency is premised on the liquidity support provided by this Agreement. "Swingline Commitment" shall mean for each Swingline Lender, $16,666,666.66. "Swingline Lender" shall mean and include each of Chase, BTCo, Citibank, Credit Lyonnais, Fuji, Barclays and CSFB, in each case, so long as such entity constitutes a Lender hereunder. "Swingline Loans" shall have the meaning provided in Section 1.01(B). "Swingline Maturity Date" of any Swingline Lender shall mean the date which is five Business Days prior to the Final Maturity Date for the Commitments and Revolving Loans of such Swingline Lender. "Syndication Agents" shall mean Citibank and CSFB. "Taxes" shall have the meaning provided in Section 4.04(a). "Test Period" shall mean for any determination under Section 8.08, the four consecutive fiscal quarters of the Borrower then last ended. "Total Commitment" shall mean the sum of the Commitments of each Lender. -69- 75 "Total Swingline Commitment" shall mean the sum of the Swingline Commitments of each of the Swingline Lenders, provided that the Total Swingline Commitment shall not at any time exceed the Total Commitment. "Total Unutilized Commitment" shall mean the excess of (x) the Total Commitment over (y) the sum of (i) the aggregate outstanding principal amount of all Revolving Loans, Swingline Loans and Competitive Bid Loans and (ii) the Letter of Credit Outstandings. "Transaction" shall mean collectively, (i) the entering into of this Agreement, (ii) the occurrence of the Restatement Effective Date, and (iii) the payment of all fees and expenses incurred in connection with the foregoing. "Trigger Event" shall mean that the Applicable Credit Rating issued by each Rating Agency is at least one level below the Minimum Investment Grade Rating or that the Applicable Credit Rating issued by either Rating Agency is at least two levels below the Minimum Investment Grade Rating. "Type" shall mean any type of Loan determined with respect to the interest option applicable thereto, i.e., a Reference Rate Loan or Eurodollar Loan. "UCC" shall mean the Uniform Commercial Code. "Unfunded Current Liability" of any Plan shall mean the amount, if any, by which the present value of the accrued benefits under such Plan as of the close of its most recent plan year, determined in accordance with Statement of Financial Accounting Standards No. 35, based upon the actuarial assumptions used by such Plan's actuary in the most recent annual valuation of such Plan, exceeds the fair market value of the assets allocable thereto, determined in accordance with Section 412 of the Code. "Unpaid Drawing" shall have the meaning provided in Section 2.04(a). "Wholly-Owned Subsidiary" of any Person shall mean any Subsidiary of such Person to the extent all of the capital stock or other ownership interests in such Subsidiary, other than directors' or nominees' qualifying shares, is owned directly or indirectly by such Person. "Written" or "in writing" shall mean any form of written communication or a communication by means of telex, telecopier device, telegraph or cable. SECTION 11. The Senior Managing Agents. 11.01 Appointment. Each Lender hereby irrevocably designates and appoints Chase, BTCo, Citibank, Credit Lyonnais, CSFB, Fuji and Barclays as Senior Managing Agents (such term to include any of the Senior Managing Agents acting as Administrative Agent or Syndication Agent and the Administrative Agent acting as Collateral Agent) of such Lender to act as specified herein and in the other Credit Documents, and each such Lender hereby irrevocably authorizes Chase, BTCo, Citibank, Credit Lyonnais, CSFB, Fuji and Barclays, as the Senior Managing Agents for such Lender, to take such action on its behalf under the provisions -70- 76 of this Agreement and the other Credit Documents and to exercise such powers and perform such duties as are expressly delegated to the respective Senior Managing Agents by the terms of this Agreement and the other Credit Documents, together with such other powers as are reasonably incidental thereto. Each Senior Managing Agent agrees to act as such upon the express conditions contained in this Section 11. Notwithstanding any provision to the contrary elsewhere in this Agreement, no Senior Managing Agent shall have any duties or responsibilities, except those expressly set forth herein or in the other Credit Documents, or any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or otherwise exist against any Senior Managing Agent. The provisions of this Section 11 are solely for the benefit of the Senior Managing Agents and the Lenders, and no Credit Party shall have any rights as a third party beneficiary of any of the provisions hereof, provided that the Borrower shall have the rights granted to it pursuant to Section 11.09. In performing its functions and duties under this Agreement, each Senior Managing Agent shall act solely as agent of the Lenders and does not assume and shall not be deemed to have assumed any obligation or relationship of agency or trust with or for either Credit Party. No Lender which is a Managing Agent, Co-Agent or Participant (as such Lender may be designated as such pursuant to the signature pages hereto) shall have any duties or obligations in its capacity as such under this Agreement. 11.02 Delegation of Duties. Each Senior Managing Agent may execute any of its duties under this Agreement or any other Credit Document by or through agents or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. No Senior Managing Agent shall be responsible for the negligence or misconduct of any agents or attorneys-in-fact selected by it with reasonable care except to the extent otherwise required by Section 11.03. 11.03 Exculpatory Provisions. No Senior Managing Agent nor any of its officers, directors, employees, agents, attorneys-in-fact or affiliates shall be (i) liable for any action lawfully taken or omitted to be taken by it or such Person under or in connection with this Agreement (except for its or such Person's own gross negligence or willful misconduct) or (ii) responsible in any manner to any of the Lenders for any recitals, statements, representations or warranties made by the Borrower, any Subsidiary or any of their respective officers contained in this Agreement, any other Credit Document or in any certificate, report, statement or other document referred to or provided for in, or received by any Senior Managing Agent under or in connection with, this Agreement or any other Credit Document or for any failure of the Borrower or any Subsidiary or any of their respective officers to perform its obligations hereunder or thereunder. No Senior Managing Agent shall be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement, or to inspect the properties, books or records of the Borrower or any Subsidiary. No Senior Managing Agent shall be responsible to any Lender for the effectiveness, genuineness, validity, enforceability, collectibility or sufficiency of this Agreement or any Credit Document or for any representations, warranties, recitals or statements made herein or therein or made in any written or oral statement or in any financial or other statements, instruments, reports, certificates or any other documents in connection herewith or therewith furnished or made by any Senior Managing Agent to the Lenders or by or on behalf of the Borrower to any Senior Managing Agent or any Lender or be required to ascertain or inquire as -71- 77 to the performance or observance of any of the terms, conditions, provisions, covenants or agreements contained herein or therein or as to the use of the proceeds of the Loans or of the existence or possible existence of any Default or Event of Default. 11.04 Reliance by Senior Managing Agents. Each Senior Managing Agent shall be entitled to rely, and shall be fully protected in relying, upon any note, writing, resolution, notice, consent, certificate, affidavit, letter, cablegram, telegram, facsimile transmission, telex or teletype message, statement, order or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel (including, without limitation, counsel to the Credit Parties), independent accountants and other experts selected by such Senior Managing Agent. Each Senior Managing Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Credit Document unless it shall first receive such advice or concurrence of the Required Lenders as it deems appropriate or it shall first be indemnified to its satisfaction by the Lenders against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. Each Senior Managing Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement and the other Credit Documents in accordance with a request of the Required Lenders (or to the extent specifically provided in Section 12.12, all the Lenders), and such request and any action taken or failure to act pursuant thereto shall be binding upon all the Lenders. 11.05 Notice of Default. No Senior Managing Agent shall be deemed to have knowledge or notice of the occurrence of any Default or Event of Default hereunder unless such Senior Managing Agent has received notice from a Lender or the Borrower referring to this Agreement, describing such Default or Event of Default and stating that such notice is a "notice of default". In the event that any Senior Managing Agent receives such a notice, such Senior Managing Agent shall give prompt notice thereof to the Lenders. The Administrative Agent shall take such action with respect to such Default or Event of Default as shall be reasonably directed by the Required Lenders; provided, that, unless and until the Administrative Agent shall have received such directions, the Administrative Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable in the best interests of the Lenders. 11.06 Non-Reliance on Senior Managing Agents and Other Lenders. Each Lender expressly acknowledges that no Senior Managing Agent nor any of its officers, directors, employees, agents, attorneys-in-fact or affiliates have made any representations or warranties to it and that no act by any Senior Managing Agent hereafter taken, including any review of the affairs of the Borrower or any Subsidiary, shall be deemed to constitute any representation or warranty by any Senior Managing Agent to any Lender. Each Lender represents to each Senior Managing Agent that it has, independently and without reliance upon any Senior Managing Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, assets, operations, property, financial and other conditions, prospects and creditworthiness of the Borrower and its Subsidiaries and made its own decision to make its Loans hereunder and enter into this Agreement. Each Lender also represents that it will, independently and without reliance upon any Senior Managing Agent or any other Lender, and based on such documents and information as it shall deem appropriate at -72- 78 the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement, and to make such investigation as it deems necessary to inform itself as to the business, assets, operations, property, financial and other condition, prospects and creditworthiness of the Borrower and its Subsidiaries. Except for notices, reports and other documents expressly required to be furnished to the Lenders by the Administrative Agent hereunder, no Senior Managing Agent shall have any duty or responsibility to provide any Lender with any credit or other information concerning the business, operations, assets, property, financial and other conditions, prospects or creditworthiness of the Borrower or any of its Subsidiaries which may come into the possession of such Senior Managing Agent or any of its officers, directors, employees, agents, attorneys-in-fact or affiliates. 11.07 Indemnification. The Lenders agree to indemnify each Senior Managing Agent in its capacity as such ratably according to their aggregate Commitments (or, if the Total Commitment has been terminated, their aggregate Commitments as in effect immediately prior to such termination), from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, reasonable expenses or disbursements of any kind whatsoever which may at any time (including, without limitation, at any time following the payment of the Obligations) be imposed on, incurred by or asserted against such Senior Managing Agent in its capacity as such in any way relating to or arising out of this Agreement or any other Credit Document, or any documents contemplated by or referred to herein or the transactions contemplated hereby or any action taken or omitted to be taken by any Senior Managing Agent under or in connection with any of the foregoing, but only to the extent that any of the foregoing is not paid by the Borrower or any of its Subsidiaries; provided that no Lender shall be liable to any Senior Managing Agent for the payment of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting solely from such Senior Managing Agent's gross negligence or willful misconduct. If any indemnity furnished to any Senior Managing Agent for any purpose shall, in the opinion of such Senior Managing Agent, be insufficient or become impaired, such Senior Managing Agent may call for additional indemnity and cease, or not commence, to do the acts indemnified against until such additional indemnity is furnished. The agreements in this Section 11.07 shall survive the payment of all Obligations. 11.08 Senior Managing Agents in Their Individual Capacities. Each Senior Managing Agent and its affiliates may make loans to, accept deposits from and generally engage in any kind of business with the Borrower and its Subsidiaries as though such Senior Managing Agent were not a Senior Managing Agent hereunder. With respect to the Loans made by it and all Obligations owing to it, each Senior Managing Agent shall have the same rights and powers under this Agreement as any Lender and may exercise the same as though it were not a Senior Managing Agent, and the terms "Lender" and "Lenders" shall include each Senior Managing Agent in its individual capacity. 11.09 Successor Senior Managing Agents, etc. (a) Any Senior Managing Agent may resign as a Senior Managing Agent upon 20 days' notice to the Lenders, provided that prior to, and as a condition of, the last remaining Senior Managing Agent so resigning, the Required Lenders shall appoint from among the Lenders a successor Senior Managing Agent for the Lenders subject to prior approval by the Borrower (such approval not to be unreasonably -73- 79 withheld, provided that such Lender agrees to assume the Swingline Commitment of such Senior Managing Agent in full), whereupon such successor agent shall succeed to the rights, powers and duties of the Senior Managing Agents, and the term "Senior Managing Agents" shall include such successor agent effective upon its appointment, and the resigning Senior Managing Agent's rights, powers and duties as a Senior Managing Agent shall be terminated, without any other or further act or deed on the part of such former Senior Managing Agent or any of the parties to this Agreement. (b) In the case of any Senior Managing Agent which ceases to constitute a "Senior Managing Agent" on November 19, 2001 in accordance with the requirements of the definition of "Senior Managing Agent" contained herein, all rights, powers and duties of such Senior Managing Agent as a "Senior Managing Agent" shall be terminated, without any other or further act or deed on the part of such former Senior Managing Agent or any of the parties to this Agreement. (c) After any retiring Senior Managing Agent's resignation hereunder as a Senior Managing Agent pursuant to Section 11.09(a) or the termination of such Senior Managing Agent's rights, powers and duties pursuant to Section 11.09(b), the provisions of this Section 11 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was a Senior Managing Agent under this Agreement. SECTION 12. Miscellaneous. 12.01 Payment of Expenses, etc. The Borrower agrees to: (i) pay all reasonable out-of-pocket costs and expenses of (x) the Senior Managing Agents, whether or not the transactions herein contemplated are consummated, in connection with the negotiation, preparation, execution and delivery of the Credit Documents and the documents and instruments referred to therein and any amendment, waiver or consent relating thereto (including, without limitation, the reasonable fees and disbursements of White & Case LLP but of no other counsel) and (y) each Senior Managing Agent and each of the Lenders in connection with the enforcement of the Credit Documents and the documents and instruments referred to therein (including, without limitation, the reasonable fees and disbursements of counsel for each Senior Managing Agent and for each of the Lenders); (ii) pay and hold each of the Lenders harmless from and against any and all present and future stamp and other similar taxes with respect to the foregoing matters and save each of the Lenders harmless from and against any and all liabilities with respect to or resulting from any delay or omission (other than to the extent attributable to such Lender) to pay such taxes; and (iii) indemnify each Lender, its affiliates and their respective officers, directors, employees, representatives, agents and affiliates from and hold each of them harmless against any and all losses, liabilities, claims, damages or expenses incurred by any of them as a result of, or arising out of, or in any way related to, or by reason of, any investigation, litigation or other proceeding (whether or not any Lender is a party thereto) related to the entering into and/or performance of any Credit Document or the use of the proceeds of any Loans hereunder or the Transaction or the consummation of any other transactions contemplated in any Credit Document, including, without limitation, the reasonable fees and disbursements of counsel incurred in connection with any such investigation, litigation or other proceeding (but excluding -74- 80 any such losses, liabilities, claims, damages or expenses to the extent incurred by reason of the gross negligence or willful misconduct of the Person to be indemnified). 12.02 Right of Setoff. In addition to any rights now or hereafter granted under applicable law or otherwise, and not by way of limitation of any such rights, upon the occurrence of an Event of Default, each Lender is hereby authorized at any time or from time to time, without presentment, demand, protest or other notice of any kind to either Credit Party or to any other Person, any such notice being hereby expressly waived, to set off and to appropriate and apply any and all deposits (general or special) and any other Indebtedness at any time held or owing by such Lender (including, without limitation, by branches and agencies of such Lender wherever located) to or for the credit or the account of either Credit Party against and on account of the Obligations and liabilities of such Credit Party to such Lender under this Agreement or under any of the other Credit Documents, including, without limitation, all interests in Obligations of such Credit Party purchased by such Lender pursuant to Section 12.06(b), and all other claims of any nature or description arising out of or connected with this Agreement or any other Credit Document, irrespective of whether or not such Lender shall have made any demand hereunder and although said Obligations, liabilities or claims, or any of them, shall be contingent or unmatured. 12.03 Notices. Except as otherwise expressly provided herein, all notices and other communications provided for hereunder shall be in writing (including telegraphic, telex, facsimile transmission or cable communication) and mailed, telegraphed, telexed, telecopied, cabled or delivered, if to a Credit Party, at the address specified opposite its signature below or in the other relevant Credit Documents, as the case may be; if to any Lender, at its address specified for such Lender on Annex II hereto; or, at such other address as shall be designated by any party in a written notice to the other parties hereto. All such notices and communications shall be telegraphed, telexed, telecopied, or cabled or sent by overnight courier, and shall be effective when received. 12.04 Benefit of Agreement. (a) This Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto, provided that no Credit Party may assign or transfer any of its interests hereunder, except to the extent any such assignment results from the consummation of a transaction permitted under Section 8.02, without the prior written consent of the Lenders and provided further that the rights of each Lender to transfer, assign or grant participations in its rights and/or obligations hereunder shall be limited as set forth below in this Section 12.04, provided that nothing in this Section 12.04 shall prevent or prohibit any Lender from pledging its rights under this Agreement and/or its Loans and/or Note hereunder to a Federal Reserve Lender in support of borrowings made by such Lender from such Federal Reserve Lender. (b) Each Lender shall have the right to transfer, assign or grant participations in all or any part of its remaining rights and obligations hereunder on the basis set forth below in this clause (b). (A) Assignments. At any time, each Lender may assign pursuant to an Assignment Agreement substantially in the form of Exhibit E-2 hereto (each, an "Assignment -75- 81 Agreement") all or a portion of its rights and obligations hereunder pursuant to this clause (b)(A) to (x) one or more Lenders and/or their affiliates or (y) with the consent of the Administrative Agent and so long as no Event of Default then exists with the consent of the Borrower (which consent shall not be unreasonably withheld), one or more other Eligible Transferees, provided that any such assignment pursuant to clause (y) above shall be in the aggregate amount of at least $5,000,000, except to the extent that after giving effect to such assignment such Lender's Commitment is reduced to zero. Any assignment to another Lender pursuant to this clause (b)(A) will become effective upon the payment to the Administrative Agent by (I) either the assigning or the assignee Lender or (II) in the case of an assignment pursuant to Section 1.15, the Replacement Lender, of a nonrefundable assignment fee of $3,500 and the recording by the Administrative Agent of such assignment, and the resultant effects thereof on the Commitments (and the Short-Term Commitments and Long-Term Commitments, if any) of the assigning Lender and the assignee Lender, in the Register, the Administrative Agent hereby agreeing to effect such recordation no later than five Business Days after its receipt of a written notification by the assigning Lender and the assignee Lender of the proposed assignment, provided that the Administrative Agent shall not be required to (but may if it so elects) so record any assignment in the Register on or after the date on which any proposed amendment, modification or supplement in respect of this Agreement has been circulated to the Lenders for approval until the earlier of (x) the effectiveness of such amendment, modification or supplement in accordance with Section 12.12 or (y) 30 days following the date on which such proposed amendment, modification or supplement was circulated to the Lenders. Assignments pursuant to this clause (b)(A) to any Person not theretofore a Lender hereunder will only be effective if the Administrative Agent shall have received a written notice in the form of Exhibit E-1 hereto from the assigning Lender and the assignee Lender and payment of a nonrefundable assignment fee of $3,500 to the Administrative Agent by (I) either the assigning or the assignee Lender or (II) in the case of an assignment pursuant to Section 1.15, the Replacement Lender. No later than five Business Days after its receipt of such written notice, the Administrative Agent will record such assignment, and the resultant effects thereof on the Commitment (and the Short-Term Commitment and Long-Term Commitment, if any) of the assigning Lender, in the Register, at which time such assignment shall become effective, provided that the Administrative Agent shall not be required to (but may if it so elects) record any assignment in the Register on or after the date on which any proposed amendment, modification or supplement in respect of this Agreement has been circulated to the Lenders for approval until the earlier of (x) the effectiveness of such amendment, modification or supplement in accordance with Section 12.12 or (y) 30 days following the date on which such proposed amendment, modification or supplement was circulated to the Lenders. Upon the effectiveness of any assignment pursuant to this clause (b)(A), (x) the assignee will become a "Lender" for all purposes of this Agreement and the other Credit Documents with a Commitment (and a Short-Term Commitment and Long-Term Commitment, if applicable) as so recorded by the Administrative Agent in the Register, and to the extent of such assignment, the assigning Lender shall be relieved of its obligations hereunder with respect to the portion of its Commitment (and Short-Term Commitment and Long-Term Commitment, if applicable) being assigned, (y) Annex I shall be deemed to be amended to reflect the Commitment (and Short-Term Commitment and Long-Term Commitment) of the respective assignee and of the other Lenders and (z) the Borrower shall issue new Notes (in exchange for the Note of the assigning Lender) to the assigning Lender (to the extent such Lender's -76- 82 Commitment is not reduced to zero as a result of such assignment) and to the assignee Lender, in each case to the extent requested by the assigning Lender or assignee Lender, as the case may be, in conformity with the requirements of Section 1.06 to the extent needed to reflect the revised Commitments of such Lenders. The Administrative Agent will (x) notify each Letter of Credit Issuer within 5 Business Days of the effectiveness of any assignment hereunder and (y) prepare on the last Business Day of each calendar quarter during which an assignment has become effective pursuant to this clause (b)(A) a new Annex I giving effect to all such assignments effected during such quarter and will promptly provide same to the Borrower and each of the Lenders. (B) Participations. Each Lender may transfer, grant or assign participations in all or any part of such Lender's interests and obligations hereunder pursuant to this clause (b)(B) to any Eligible Transferee, provided that (i) such Lender shall remain a "Lender" for all purposes of this Agreement and the transferee of such participation shall not constitute a Lender hereunder and (ii) no participant under any such participation shall have rights to approve any amendment to or waiver of this Agreement or any other Credit Document except to the extent such amendment or waiver would (x) extend the final scheduled maturity of any of the Loans or the Commitment in which such participant is participating, (y) reduce the interest rate (other than as a result of waiving the applicability of any post-default increases in interest rates) or Fees applicable to any of the Loans, Commitments or Letters of Credit or postpone the payment of any thereof or (z) release Reynolds Tobacco from the Subsidiary Guaranty. In the case of any such participation, the participant shall not have any rights under this Agreement or any of the other Credit Documents (the participant's rights against the granting Lender in respect of such participation to be those set forth in the agreement with such Lender creating such participation) and all amounts payable by the Borrower hereunder shall be determined as if such Lender had not sold such participation, provided that such participant shall be entitled to receive additional amounts under Sections 1.11, 1.12, 2.05 and 4.04 on the same basis as if it were a Lender. In addition, each agreement creating any participation must include an agreement by the participant to be bound by the provisions of Section 12.15 and such participant shall have executed a confidentiality agreement in the form of Exhibit F hereto. (c) Notwithstanding any other provisions of this Section 12.04, no transfer or assignment of the interests or obligations of any Lender hereunder or any grant of participations therein shall be permitted if such transfer, assignment or grant would require the Borrower or the Guarantor to file a registration statement with the SEC or to qualify the Loans under the "Blue Sky" laws of any State. (d) Each Lender initially party to this Agreement hereby represents, and each Person that becomes a Lender pursuant to an assignment permitted by the preceding clause (b)(A) will upon its becoming party to this Agreement represent, that it is an Eligible Transferee which makes loans in the ordinary course of its business and that it will make or acquire Loans for its own account in the ordinary course of such business, provided that, subject to the preceding clauses (a) through (c), the disposition of any promissory notes or other evidences of or interests in Indebtedness held by such Lender shall at all times be within its exclusive control. -77- 83 (e) Notwithstanding anything to the contrary contained herein, any Lender (a "Granting Lender") may grant to a special purpose funding vehicle (an, "SPC") of such Granting Lender, identified as such in writing from time to time by the Granting Lender to the Administrative Agent and the Borrower, the option to provide to the Borrower all or any part of any Loan that such Granting Lender would otherwise be obligated to make to the Borrower pursuant to Section 1.01(A) or (D), provided that (i) nothing herein shall constitute a commitment to make any Loan by any SPC and (ii) if an SPC elects not to exercise such option or otherwise fails to provide all or any part of such Loan, the Granting Lender shall be obligated to make such Loan pursuant to the terms hereof. The making of a Loan by an SPC hereunder shall utilize the Commitment of the Granting Lender to the same extent, and as if, such Loan were made by the Granting Lender. Each party hereto hereby agrees that (x) no SPC shall be liable for any payment under this Agreement for which a Lender would otherwise be liable and (y) the Granting Lender for any SPC shall be (and hereby agrees that it is) liable for any payment under this Agreement for which the SPC would be liable in the absence of preceding clause (x). In furtherance of the foregoing, each party hereto hereby agrees that, prior to the date that is one year and one day after the payment in full of all outstanding senior indebtedness of any SPC, it will not institute against, or join any other person in instituting against, such SPC any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings or similar proceedings under the laws of the United States or any State thereof. In addition, notwithstanding anything to the contrary contained in this Section 12.04 any SPC may (i) with notice to, but without the prior written consent of, the Borrower or the Administrative Agent and without paying any processing fee therefor, assign all or a portion of its interests in any Loans to its Granting Lender or to any financial institutions (if consented to by the Borrower and the Administrative Agent) providing liquidity and/or credit facilities to or for the account of such SPC to fund the Loans made by such SPC or to support the securities (if any) issued by such SPC to fund such Loans and (ii) disclose on a confidential basis any non-public information relating to its Loans to any rating agency, commercial paper dealer or provider of a surety, guarantee or credit or liquidity enhancement to such SPC. 12.05 No Waiver; Remedies Cumulative. No failure or delay on the part of any Senior Managing Agent, the Administrative Agent or any Lender in exercising any right, power or privilege hereunder or under any other Credit Document and no course of dealing between either Credit Party and any Senior Managing Agent or any Lender shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder or under any other Credit Document preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder or thereunder. The rights and remedies herein expressly provided are cumulative and not exclusive of any rights or remedies which any Senior Managing Agent or any Lender would otherwise have. No notice to or demand on either Credit Party in any case shall entitle either Credit Party to any other or further notice or demand in similar or other circumstances or constitute a waiver of the rights of the Senior Managing Agents or the Lenders to any other or further action in any circumstances without notice or demand. 12.06 Payments Pro Rata. (a) The Administrative Agent agrees that promptly after its receipt of each payment from or on behalf of either Credit Party in respect of any Obligations of such Credit Party, it shall, except as otherwise provided in this Agreement, distri- -78- 84 bute such payment to the Lenders pro rata based upon their respective shares, if any, of the Obligations with respect to which such payment was received. (b) Each of the Lenders agrees that, if it should receive any amount hereunder (whether by voluntary payment, by realization upon security, by the exercise of the right of setoff or Lender's lien, by counterclaim or cross action, by the enforcement of any right under the Credit Documents, or otherwise) which is applicable to the payment of the principal of, or interest on, the Loans or Fees, of a sum which with respect to the related sum or sums received by other Lenders is in a greater proportion than the total of such Obligations then owed and due to such Lender bears to the total of such Obligations then owed and due to all of the Lenders immediately prior to such receipt, then such Lender receiving such excess payment shall purchase for cash without recourse or warranty from the other Lenders an interest in the Obligations of the respective Credit Party to such Lenders in such amount as shall result in a proportional participation by all of the Lenders in such amount; provided, that if all or any portion of such excess amount is thereafter recovered from such Lender, such purchase shall be rescinded and the purchase price restored to the extent of such recovery, but without interest. 12.07 Calculations; Computations. (a) The financial statements to be furnished to 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 Lenders); provided, that, except as otherwise specifically provided herein, all computations determining compliance with Section 8, including definitions used therein, shall utilize accounting principles and policies in effect at the time of the preparation of, and in conformity with those used to prepare, the historical financial statements delivered to the Lenders pursuant to Section 6.09, provided that in the event GAAP shall be modified from that in effect at the time of the preparation of such financial statements, the Borrower shall be entitled to utilize GAAP, as so modified, for purposes of such computations to the extent that (x) the Borrower gives the Lenders 30 days' prior written notice of such proposed modification and (y) prior thereto the Borrower and the Majority SMA shall have agreed upon adjustments, if any, to Sections 8.03(g), 8.04(l), 8.05, 8.07 and 8.08 (and the definitions used therein) the sole purpose of which shall be to give effect to such proposed change (it being understood and agreed that to the extent that the Borrower and the Majority SMA cannot agree on appropriate adjustments to such Sections (or that no adjustments are necessary), the proposed change may not be effected); and provided further, that if at any time the computations determining compliance with Section 8 utilize accounting principles different from those utilized in the financial statements furnished to the Lenders, such financial statements shall be accompanied by reconciliation work-sheets. Notwithstanding the foregoing, for purposes of the computations determining compliance with Section 8, all expenses and other charges arising from any settlement of tobacco liability 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. (b) All computations of interest and Fees hereunder shall be made on the actual number of days elapsed over a year of 360 days. -79- 85 (c) All determinations of the Stated Amount of Letters of Credit and of the principal amount of Unpaid Drawings, in each case to the extent denominated in a currency other than U.S. dollars, shall be made by converting same into U.S. dollars at (x) if a Currency Agreement has been entered into by the Borrower and/or any of its Subsidiaries in connection with such Indebtedness, and is in effect at the time of such determination, the rate provided in such Currency Agreement, provided that this clause (x) shall not be applicable (I) unless the Administrative Agent has received sufficient information from the Borrower to determine the exchange rate established by such Currency Agreement and the duration thereof, or (II) to any determination of the Borrower's obligation to reimburse in U.S. dollars a Drawing under a Letter of Credit denominated in a currency other than U.S. dollars, (y) in the case of a determination of the Borrower's obligation to reimburse in U.S. dollars a Drawing under a Letter of Credit denominated in a currency other than U.S. dollars, the spot exchange rate for the currency in question of the Letter of Credit Issuer on the date of such Drawing or (z) if the provisions of the foregoing clauses (x) and (y) are not applicable, the "official" exchange rate, if applicable, or the spot exchange rate for the currency in question calculated by the Administrative Agent on the last Computation Date preceding the date on which any such determination is being made and at such other times as the Administrative Agent elects to make such determination, it being understood that the Administrative Agent shall have no obligation to make any such other determinations. The Administrative Agent will promptly notify the Borrower and each Letter of Credit Issuer of its determinations hereunder. 12.08 Governing Law; Submission to Jurisdiction; Venue. (a) THIS AGREEMENT AND THE OTHER CREDIT DOCUMENTS AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER AND THEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAW OF THE STATE OF NEW YORK. Any legal action or proceeding with respect to this Agreement or any other Credit Document may be brought in the courts of the State of New York or of the United States for the Southern District of New York, and, by execution and delivery of this Agreement, each Credit Party hereby irrevocably accepts for itself and in respect of its property, generally and unconditionally, the jurisdiction of the aforesaid courts. Each Credit Party further irrevocably consents to the service of process out of any of the aforementioned courts in any such action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to the respective Credit Party at its address for notices pursuant to Section 12.03, such service to become effective 30 days after such mailing. Each Credit Party hereby irrevocably appoints the Borrower as its agent for service of process in respect of any such action or proceeding. Nothing herein shall affect the right of any Senior Managing Agent or any Lender to serve process in any other manner permitted by law or to commence legal proceedings or otherwise proceed against either Credit Party in any other jurisdiction. (b) Each Credit Party hereby irrevocably waives any objection which it may now or hereafter have to the laying of venue of any of the aforesaid actions or proceedings arising out of or in connection with this Agreement or any other Credit Document brought in the courts referred to in the preceding clause (a) and hereby further irrevocably waives and agrees not to plead or claim in any such court that any such action or proceeding brought in any such court has been brought in an inconvenient forum. -80- 86 12.09 Counterparts. This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. A set of counterparts executed by all the parties hereto shall be lodged with the Borrower and the Administrative Agent. 12.10 Execution. The Amended and Restated Credit Agreement shall be fully executed on the date (the "Restatement Execution Date") on which the Borrower and the Required Lenders shall have signed a copy thereof (whether the same or different copies) and shall have delivered the same to the Administrative Agent at the Administrative Agent's Office or, in the case of the Lenders, shall have given to the Administrative Agent telephonic (confirmed in writing), written, telex or facsimile notice (actually received) at such office that the same has been signed and mailed to it. The Administrative Agent will give the Borrower and each Lender prompt written notice of the occurrence of the Restatement Execution Date. 12.11 Headings Descriptive. The headings of the several sections and subsections of this Agreement are inserted for convenience only and shall not in any way affect the meaning or construction of any provision of this Agreement. 12.12 Amendment or Waiver. Neither this Agreement nor any other Credit Document nor any terms hereof or thereof may be changed, waived, discharged or terminated unless such change, waiver, discharge or termination is in writing signed by the Required Lenders; provided, that (x) no such change, waiver, discharge or termination shall, without the consent of each Lender (other than a Defaulting Lender) with Obligations being directly affected thereby, (i) extend the scheduled final maturity of any Loan or Note, or any portion thereof, or reduce the rate or extend the time of payment of interest (other than as a result of waiving the applicability of any post-default increase in interest rates) thereon or Fees or reduce the principal amount thereof, or increase the Commitment of any Lender over the amount thereof then in effect (it being understood that a waiver of any Default or Event of Default or of a mandatory reduction in the Total Commitment shall not constitute a change in the terms of the Commitment of any Lender), (ii) release Reynolds Tobacco from the Subsidiary Guaranty, (iii) at any time Collateral is pledged pursuant to the Security Documents release (other than pursuant to the automatic release provided for in Section 7.11) all or substantially all of the Collateral, (iv) amend, modify or waive any provision of this Section, or Section 1.11, 1.12, 1.14, 2.05, 4.04, 9.01, 11.07, 12.01, 12.02, 12.04, 12.06, 12.07(b) or 12.15, (v) reduce any percentage specified in, or otherwise modify, the definition of Required Lenders or (vi) consent to the assignment or transfer by the Borrower of any of its rights and obligations under this Agreement; and (y) the financial covenants set forth in Sections 8.03(g), 8.04(l), 8.05, 8.07 and 8.08 (and the defined terms used therein) may be adjusted with the consent of the Borrower and the Majority SMA to the extent provided in Sections 7.09 and 12.07(a). No provision of Section 11 may be amended or modified without the consent of any Senior Managing Agent adversely affected thereby. The obligations of Swingline Lenders to make Swingline Loans, the terms of any such Swingline Loans and the obligations of the other Lenders to fund Mandatory Drawings shall not be amended or modified without the consent of the Swingline Lenders. The terms of Section 2 shall not be amended or modified without the consent of any Letter of Credit Issuer adversely affected thereby. -81- 87 12.13 Survival. All indemnities set forth herein including, without limitation, in Section 1.11, 1.12, 2.05, 4.04, 11.07 or 12.01 shall survive the execution and delivery of this Agreement and the making of the Loans, the issuances of Letters of Credit, the repayment of the Obligations and the termination of the Total Commitment. 12.14 Domicile of Loans. Subject to Section 12.04, each Lender may transfer and carry its Loans at, to or for the account of any branch office, subsidiary or affiliate of such Lender; provided, that the Borrower shall not be responsible for costs arising under Section 1.11, 1.12, 2.05 or 4.04 resulting from any such transfer (other than a transfer pursuant to Section 1.13) to the extent not otherwise applicable to such Lender prior to such transfer. 12.15 Confidentiality. Subject to Section 12.04, each Lender shall hold all non-public information furnished by or on behalf of the Borrower in connection with such Lender's evaluation of whether to become a Lender hereunder or obtained pursuant to the requirements of this Agreement, which has been identified as such by the Borrower ("Confidential Information"), in accordance with its customary procedure for handling confidential information of this nature and in accordance with safe and sound banking practices and in any event may make disclosure reasonably required by any bona fide transferee or participant (which shall be an Eligible Transferee) in connection with the contemplated transfer of any Loans or participations therein or as required or requested by any governmental agency or representative thereof or pursuant to legal process or to such Lender's attorneys or independent auditors; provided, that, unless specifically prohibited by applicable law or court order, each Lender shall notify the Borrower of any request 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) for disclosure of any such non-public information prior to disclosure of such information; and provided further, that in no event shall any Lender be obligated or required to return any materials furnished by the Borrower or any Subsidiary. Each Lender agrees that it will not provide to prospective assignees, transferees or participants any of the Confidential Information unless such Person has executed a Confidentiality Agreement in the form of Exhibit F. 12.16 Waiver of Jury Trial. Each of the parties to this Agreement hereby irrevocably waives all right to a trial by jury in any action, proceeding or counterclaim arising out of or relating to this Agreement, the other Credit Documents or the transactions contemplated hereby or thereby. 12.17 Special Provisions Regarding Section 12.04(e). Notwithstanding anything to the contrary contained in this Agreement, each Lender which executes a counterpart of this Agreement hereby agrees for itself, and its successors and assigns, that such Lender (and for this purpose its successors and assigns) will not in the future agree to amend or modify the provisions of Section 12.04(e) without the consent of each Granting Lender directly and adversely affected by such amendment or modification.] * * * -82- 88 IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart of this Agreement to be duly executed and delivered as of the date first above written. R.J. REYNOLDS TOBACCO HOLDINGS, INC. By: /s/ Lynn Lane --------------------------------------- Title: SVP and Treasurer LEAD AGENTS THE CHASE MANHATTAN BANK, Individually and as Administrative Agent and Senior Managing Agent By: /s/ Robert T. Sacks ---------------------------------------- Title: Managing Director CREDIT SUISSE FIRST BOSTON, Individually and as Syndication Agent and Senior Managing Agent By: /s/ David W. Kratovil ---------------------------------------- Title: Director By: /s/ Mark Heron ---------------------------------------- Title: Assistant Vice President CITIBANK, N.A., Individually and as Syndication Agent and Senior Managing Agent By: /s/ Thomas F. Bruscino ---------------------------------------- Title: Vice President -83- 89 MANAGING AGENT THE BANK OF NOVA SCOTIA By: /s/ William E. Zarrett ---------------------------------------- Title: Managing Director CO-AGENTS THE BANK OF NEW YORK By: /s/ Walter C. Parelli ---------------------------------------- Title: Vice President THE FUJI BANK, LIMITED, Individually and as Senior Managing Agent By: /s/ Nobuoki Koike ---------------------------------------- Title: Vice President & Senior Team Leader CREDIT LYONNAIS NEW YORK BRANCH, Individually and as Senior Managing Agent By: /s/ Scott R. Chappelka ---------------------------------------- Title: Vice President -84- 90 PARTICIPANTS WACHOVIA BANK, N.A. By: /s/ Charlene A. Johnson ---------------------------------------- Title: Senior Vice President NORDDEUTSCHE LANDESBANK GIROZENTRALE, NEW YORK BRANCH AND/OR CAYMAN ISLANDS BRANCH By: /s/ Stefanie Scholz ---------------------------------------- Title: AT By: /s/ Stephanie Finnen ---------------------------------------- Title: VP ERSTE BANK By: /s/ Arcinee Hovanessian ---------------------------------------- Title: Vice President Erste Bank New York Branch By: /s/ John S. Runnion ---------------------------------------- Title: First Vice President Erste Bank New York Branch CITY NATIONAL BANK OF NEW JERSEY By: /s/ Edward R. Wright ---------------------------------------- Title: Chief Financial Officer -85- 91 NON-EXTENDING LENDERS BANKERS TRUST COMPANY, Individually and as Senior Managing Agent By:_________________________________ Name: Title: BARCLAYS BANK PLC, Individually and as Senior Managing Agent By:_________________________________ Name: Title: UBS AG, STAMFORD BRANCH By: /s/ Dorothy L. McKinley ---------------------------------------- Title: Director, Banking Products Services, US By: /s/ Lynne B. Alfarone ---------------------------------------- Title: Associate Director, Banking Products Services, US THE SUMITOMO BANK, LIMITED By:_________________________________ Name: Title: -86- 92 By:_________________________________ Name: Title: ABN AMRO BANK (N.V.) By: /s/ Tracie Elliot ---------------------------------------- Title: Vice President By: /s/ Cameron D. Gateman ---------------------------------------- Title: Group Vice President HSBC BANK USA By: /s/ John Rynne ---------------------------------------- Title: Vice President -87- 93 EUROPEAN - AMERICAN BANK By: ---------------------------------------- Name: Title: FIRST HAWAIIAN BANK By: ---------------------------------------- Name: Title: BANK BOSTON, N.A. By: ---------------------------------------- Name: Title: PIMCO TOTAL RETURN FUND By: ---------------------------------------- Name: Title: -88- 94 ANNEX I LENDERS AND COMMITMENTS
Short-Term Long-Term Lender Commitment Commitment Commitment - ------ ---------- ---------- ---------- ABN AMRO Bank (New York) $50,000,000.00 N/A N/A BankBoston, N.A. $20,000,000.00 N/A N/A Bankers Trust Company $105,000,000.00 N/A N/A Barclays Bank PLC $125,000,000.00 N/A N/A Citibank, N.A. $90,000,000.00 $0 $90,000,000.00 City National Bank of New Jersey $15,000,000.00 $3,000,000.00 $12,000,000.00 Credit Lyonnais New York Branch $110,000,000.00 $60,000,000.00 $50,000,000.00 Credit Suisse First Boston $100,000,000.00 $0 $100,000,000.00 Erste Bank $20,000,000.00 $0 $20,000,000.00 European-American Bank $25,000,000.00 N/A N/A First Hawaiian Bank $10,000,000.00 N/A N/A HSBC Bank USA $75,000,000.00 N/A N/A Norddeutsche Landesbank (New York) $20,000,000.00 N/A $20,000,000.00 PIMCO Total Return Fund $15,000,000.00 N/A N/A The Bank of New York $50,000,000.00 $0 $50,000,000.00 The Bank of Nova Scotia $75,000,000.00 $0 $75,000,000.00 The Chase Manhattan Bank $130,000,000.00 $0 $130,000,000.00 The Fuji Bank, Limited $100,000,000.00 $50,000,000.00 $50,000,000.00 The Sumitomo Bank, Limited $50,000,000.00 N/A N/A UBS AG, Stamford Branch $25,000,000.00 N/A N/A Wachovia Bank, N.A. $25,000,000.00 $0 $25,000,000.00 ----------------- --------------- --------------- Total $1,235,000,000.00 $113,000,000.00 $622,000,000.00
95 ANNEX II LENDER ADDRESSES Lender Address ------ ------- ABN AMRO Bank (New York) 1325 Avenue of the Americas New York, NY 10019 Attn: M. Michael Lerner Tel: (212) 446-4235 Fax: (212) 446-4335 ABN AMRO Bank (New York) 500 Park Avenue - 2F New York, NY 10022 Attn: Cameron Gateman Tel: (212) 446-4388 Fax: (212) 832-7129 BankBoston, N.A. 100 Federal Street Boston, MA 02110 Attn: Renee Nadler Tel: (617) 434-2513 Fax: (617) 434-5617 Bankers Trust Company 130 Liberty Street New York, NY 10006 Attn: Mary Kay Coyle Tel: (212) 250-9094 Fax: (212) 250-7218 Barclays Bank PLC 222 Broadway - 12th Floor New York, NY 10038 Attn: Paul Kavanaugh Tel: (212) 412-1547 Fax: (212) 412-7511 Citibank, N.A. 399 Park Avenue New York, NY 10043 Attn: Tom Bruscino Tel: (212) 559-3344 Fax: (212) 793-7460 96 Annex II Page 2 City National Bank of New Jersey 900 Broad Street Newark, NJ 07102 Attn: Raul Oseguera Tel: (973) 624-0865 x 643 Fax: (973) 624-4369 -and- Attn: Louis Prezeau Tel: (973) 624-0865 x640 Fax: (973) 624-1879 Credit Lyonnais New York Branch 1301 Avenue of the Americas New York, NY 10019 Attn: Mary Collier Tel: (212) 261-7318 Fax: (212) 459-3179 Credit Suisse First Boston 11 Madison Avenue, 20th Floor New York, NY 10010-3629 Attn: David Kratovil Tel: (212) 325-9155 Fax: (212) 325-8309 Erste Bank 280 Park Avenue, West Building New York, NY 10017 Attn: Arcinee Hovanessian Tel: (212) 984-5635 Fax: (212) 984-5627 European-American Bank 335 Madison Avenue, 17th Floor New York, NY 10017 Attn: Peter McGovern Tel: (212) 503-2437 Fax: (212) 503-2667 First Hawaiian Bank 999 Bishop Street, 11th Floor Honolulu, HI 96813 Attn: Chuck Jenkins Tel: (808) 525-6289 Fax: (808) 525-6372 97 Annex II Page 3 HSBC Bank USA 140 Broadway, 4th Floor New York, NY 10005-1185 Attn: Mark Rakov Tel: (212) 658-5113 Fax: (212) 658-5109 Norddeutsche Landesbank 1270 Avenue of the Americas, 14th Floor (New York) New York, NY 10020 Attn: Stephanie Hoevermann-Finnen Tel: (212) 332-8606 Fax: (212) 332-8660 PIMCO Total Return Fund 840 Newport Center Drive Newport Beach, CA 92660 Attn: Melissa Fejdasz Tel: (949) 720-6173 Fax: (949) 718-2623 The Bank of New York One Wall Street New York, NY 10286 Attn: Randy Medrano Tel: (212) 635-6804 Fax: (212) 635-7970 The Bank of Nova Scotia One Liberty Plaza, 26th Floor New York, NY 10006 Attn: Todd Meller Tel: (212) 225-5096 Fax: (212) 225-5090 The Chase Manhattan Bank 270 Park Avenue New York, NY Attn: Michael Lancia Tel: (212) 270-2468 Fax: (212) 270-5120 The Fuji Bank, Limited Two World Trade Center, 79th Floor New York, NY 10048 Attn: Vincent Ingato Tel: (212) 898-2051 Fax: (212) 898-2399 98 Annex II Page 4 The Sumitomo Bank, Limited 277 Park Avenue, 8th Floor New York, NY 10172 Attn: Rohn Lauderischlager Tel: (212) 224-4226 Fax: (212) 224-4384 UBS AG, Stamford Branch 677 Washington Boulevard Stamford, CT 06901 Attn: Dorothy L. McKinley Tel: (203) 719-3158 Fax: (203) 719-3092 Wachovia Bank, N.A. 100 North Main Street Winston-Salem, NC 27102 Attn: Haywood Edmundson Tel: (336) 732-7614 Fax: (336) 732-6935 EX-10.2 4 g67125ex10-2.txt FORM OF AMENDED AND RESTATED SUBSIDIARY GUARANTY 1 Exhibit 10.2 EXHIBIT D [Conformed as Executed] AMENDED AND RESTATED SUBSIDIARY GUARANTY GUARANTY, dated as of May 18, 1999 and amended and restated as of November 17, 2000 (as so amended and restated and as the same may be further amended, restated, modified and/or supplemented from time to time, this "Guaranty"), made by the undersigned (together with any other entity which becomes a party hereto pursuant to Section 24, each a "Guarantor" and, collectively, the "Guarantors"). Except as otherwise defined herein, terms used herein and defined in the Credit Agreement (as defined below) shall be used herein as therein defined. W I T N E S S E T H : WHEREAS, R.J. Reynolds Tobacco Holdings, Inc. (f/k/a RJR Nabisco, Inc. and herein, the "Borrower"), the various lending institutions from time to time party thereto (the "Lenders"), The Chase Manhattan Bank, as Administrative Agent (the "Administrative Agent"), and Citibank, N.A. and Credit Suisse First Boston, as Syndication Agents (the "Syndication Agents"), have entered into a Credit Agreement, dated as of May 7, 1999 and amended and restated as of November 17, 2000 (as so amended and restated and as the same may be further amended, restated, modified and/or supplemented from time to time, the "Credit Agreement"), providing for the making of Loans to the Borrower and the issuance of, and participation in, Letters of Credit for the account of the Borrower, all as contemplated therein (the Lenders, the Administrative Agent, the Syndication Agents, the Senior Managing Agents and the Collateral Agent herein called the "Lender Creditors"); WHEREAS, the Borrower may from time to time enter into one or more (i) interest rate protection agreements (including, without limitation, interest rate swaps, caps, floors, collars and similar agreements), (ii) foreign exchange contracts, currency swap agreements, commodity agreements or other similar agreements or arrangements designed to protect against the fluctuations in currency values and/or (iii) other types of hedging agreements from time to time (each such agreement or arrangement with a Hedging Creditor (as hereinafter defined), a "Permitted Hedging Agreement") with any Lender or Lenders or a syndicate of financial institutions organized by a Lender or an affiliate of a Lender (even if in either case any such Lender ceases to be a Lender under the Credit Agreement for any reason) (any institution that participates therein, and in each case their subsequent successors and assigns, collectively, the "Hedging Creditors", and together with the Lender Creditors, the "Creditors"); WHEREAS, each Guarantor is a direct or indirect Subsidiary of the Borrower; WHEREAS, certain of the Guarantors have heretofore entered into a Subsidiary Guaranty, dated as of May 18, 1999 (as amended, modified and/or supplemented to, but not including, the date hereof, the "Original Subsidiary Guaranty"); 2 WHEREAS, the Guarantors desire to amend and restate the Original Subsidiary Guaranty in the form of this Guaranty; WHEREAS, the Credit Agreement and the Permitted Hedging Agreements require that this Guaranty be executed and delivered; and WHEREAS, each Guarantor will obtain benefits from the incurrence of Loans by the Borrower and the issuance of, and participation in, Letters of Credit for the account of the Borrower under the Credit Agreement and the entering into of the Permitted Hedging Agreements and, accordingly, desires to execute this Guaranty in order to satisfy the requirements described in the preceding paragraph; NOW, THEREFORE, in consideration of the foregoing and other benefits accruing to each Guarantor, the receipt and sufficiency of which are hereby acknowledged, each Guarantor hereby makes the following representations and warranties to the Creditors and hereby covenants and agrees with each Creditor as follows: 1. Each Guarantor, jointly and severally, irrevocably and unconditionally guarantees: (i) to the Lender Creditors the full and prompt payment when due (whether at the stated maturity, by acceleration or otherwise) of (x) the principal of and interest on the Notes issued by, and the Loans made to, the Borrower under the Credit Agreement and all reimbursement obligations and Unpaid Drawings with respect to Letters of Credit and (y) all other obligations (including obligations which, but for any automatic stay under Section 362(a) of the Bankruptcy Code, would become due) and liabilities owing by the Borrower to the Lender Creditors (including, without limitation, indemnities, Fees and interest thereon) now existing or hereafter incurred under, arising out of or in connection with the Credit Agreement or any other Credit Document and the due performance and compliance with the terms, conditions and agreements contained in the Credit Documents by the Borrower (all such principal, interest, liabilities and obligations being herein collectively called the "Credit Document Obligations"); and (ii) to each Hedging Creditor the full and prompt payment when due (whether at the stated maturity, by acceleration or otherwise) of all obligations (including obligations which, but for any automatic stay under Section 362(a) of the Bankruptcy Code, would become due) and liabilities owing by the Borrower to the Hedging Creditors (including, without limitation, indemnities, fees and interest thereon) under any Permitted Hedging Agreements, whether now in existence or hereafter arising, and the due performance and compliance by the Borrower with all terms, conditions and agreements contained therein (all such obligations and liabilities under this clause (ii) being herein collectively called the "Hedging Obligations", and together with the Credit Document Obligations are herein collectively called the "Guaranteed Obligations"). Each Guarantor understands, agrees and confirms that the Creditors may enforce this Guaranty up to the full amount of the Guaranteed Obligations against each Guarantor without proceeding against any other Guarantor, the Borrower, against any security for the Guaranteed Obligations, or against any other guarantor under any other guaranty covering all or a portion of the Guaranteed Obligations. This Guaranty shall constitute a guaranty of payment and not of collection. All payments by each Guarantor under this Guaranty shall be made on the same basis as payments by the Borrower under Sections 4.03 and 4.04 of the Credit Agreement. -2- 3 2. Additionally, each Guarantor, jointly and severally, unconditionally and irrevocably, guarantees the payment of any and all Guaranteed Obligations to the Creditors whether or not due or payable by the Borrower upon the occurrence in respect of the Borrower of any of the events specified in Section 9.05 of the Credit Agreement, and unconditionally and irrevocably, jointly and severally, promises to pay such Guaranteed Obligations to the Creditors, or order, on demand, in lawful money of the United States of America. 3. The liability of each Guarantor hereunder is exclusive and independent of any security for or other guaranty of the Guaranteed Obligations whether executed by such Guarantor, any other Guarantor, any other guarantor or by any other person, and the liability of each Guarantor hereunder shall not be affected or impaired by (i) any direction as to application of payment by the Borrower or by any other person, (ii) any other continuing or other guaranty, undertaking or maximum liability of a guarantor or of any other person as to the Guaranteed Obligations, (iii) any payment on or in reduction of any such other guaranty or undertaking, (iv) any dissolution, termination or increase, decrease or change in personnel by the Borrower, (v) any payment made to any Creditor on the Guaranteed Obligations which any Creditor repays the Borrower pursuant to court order in any bankruptcy, reorganization, arrangement, moratorium or other debtor relief proceeding, and each Guarantor waives any right to the deferral or modification of its obligations hereunder by reason of any such proceeding, (vi) any action or inaction by the Creditors as contemplated in Section 6 hereof or (vii) any invalidity, irregularity or unenforceability of all or part of the Guaranteed Obligations or of any security therefor. 4. The obligations of each Guarantor hereunder are independent of the obligations of any other Guarantor, any other guarantor of the Borrower or the Borrower, and a separate action or actions may be brought and prosecuted against each Guarantor whether or not action is brought against any other Guarantor, any other guarantor of the Borrower or the Borrower and whether or not any other Guarantor, any other guarantor of the Borrower or the Borrower be joined in any such action or actions. Each Guarantor waives, to the fullest extent permitted by law, the benefit of any statute of limitations affecting its liability hereunder or the enforcement thereof. Any payment by the Borrower or other circumstance which operates to toll any statute of limitations as to the Borrower shall operate to toll the statute of limitations as to each Guarantor. 5. Each Guarantor hereby waives notice of acceptance of this Guaranty and notice of any liability to which it may apply, and waives promptness, diligence, presentment, demand of payment, protest, notice of dishonor or nonpayment of any such liabilities, suit or taking of other action by the Administrative Agent or any other Creditor against, and any other notice to, any party liable thereon (including such Guarantor or any other guarantor of the Borrower). 6. Any Creditor may at any time and from time to time without the consent of, or notice to, any Guarantor, without incurring responsibility to such Guarantor, without impairing or releasing the obligations of such Guarantor hereunder, upon or without any terms or conditions and in whole or in part: (i) change the manner, place or terms of payment of, and/or change or extend the time of payment of, renew or alter, any of the Guaranteed Obligations (including any -3- 4 increase or decrease in the rate of interest thereon), any security therefor, or any liability incurred directly or indirectly in respect thereof, and the guaranty herein made shall apply to the Guaranteed Obligations as so changed, extended, renewed or altered; (ii) take and hold security for the payment of the Guaranteed Obligations and/or sell, exchange, release, surrender, realize upon or otherwise deal with in any manner and in any order any property by whomsoever at any time pledged or mortgaged to secure, or howsoever securing, the Guaranteed Obligations or any liabilities (including any of those hereunder) incurred directly or indirectly in respect thereof or hereof, and/or any offset thereagainst; (iii) exercise or refrain from exercising any rights against the Borrower, any Guarantor, any other guarantor of the Borrower or others or otherwise act or refrain from acting; (iv) settle or compromise any of the Guaranteed Obligations, any security therefor or any liability (including any of those hereunder) incurred directly or indirectly in respect thereof or hereof, and may subordinate the payment of all or any part thereof to the payment of any liability (whether due or not) of the Borrower to creditors of the Borrower; (v) apply any sums by whomsoever paid or howsoever realized to any liability or liabilities of the Borrower to the Creditors regardless of what liabilities of the Borrower remain unpaid; (vi) release or substitute any one or more endorsers, guarantors, Guarantors, the Borrower or other obligors; (vii) consent to or waive any breach of, or any act, omission or default under, the Permitted Hedging Agreements, the Credit Documents or any of the instruments or agreements referred to therein, or otherwise amend, modify or supplement any of the Permitted Hedging Agreements, the Credit Documents or any of such other instruments or agreements; and/or (viii) act or fail to act in any manner referred to in this Guaranty which may deprive such Guarantor of its right to subrogation against the Borrower to recover full indemnity for any payments made pursuant to this Guaranty. 7. No invalidity, irregularity or unenforceability of all or any part of the Guaranteed Obligations or of any security therefor shall affect, impair or be a defense to this Guaranty, and this Guaranty shall be primary, absolute and unconditional notwithstanding the occurrence of any event or the existence of any other circumstances which might constitute a legal or equitable discharge of a surety or guarantor except payment in full of the Guaranteed Obligations. =4= 5 8. This Guaranty is a continuing one and all liabilities to which it applies or may apply under the terms hereof shall be conclusively presumed to have been created in reliance hereon. No failure or delay on the part of any Creditor in exercising any right, power or privilege hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein expressly specified are cumulative and not exclusive of any rights or remedies which any Creditor would otherwise have. No notice to or demand on any Guarantor in any case shall entitle such Guarantor to any other further notice or demand in similar or other circumstances or constitute a waiver of the rights of any Creditor to any other or further action in any circumstances without notice or demand. It is not necessary for any Creditor to inquire into the capacity or powers of the Borrower or any of its Subsidiaries or the officers, directors, partners or agents acting or purporting to act on its behalf, and any indebtedness made or created in reliance upon the professed exercise of such powers shall be guaranteed hereunder. 9. Any indebtedness of the Borrower now or hereafter held by any Guarantor is hereby subordinated to the indebtedness of the Borrower to the Creditors; and such indebtedness of the Borrower to any Guarantor, if the Administrative Agent, after an Event of Default has occurred, so requests, shall be collected, enforced and received by such Guarantor as trustee for the Creditors and be paid over to the Creditors on account of the indebtedness of the Borrower to the Creditors, but without affecting or impairing in any manner the liability of such Guarantor under the other provisions of this Guaranty. Prior to the transfer by any Guarantor of any note or negotiable instrument evidencing any indebtedness of the Borrower to such Guarantor, such Guarantor shall mark such note or negotiable instrument with a legend that the same is subject to this subordination. Without limiting the generality of the foregoing, each Guarantor hereby agrees with the Creditors that it will not exercise any right of subrogation which it may at any time otherwise have as a result of this Guaranty (whether contractual, under Section 509 of the Bankruptcy Code or otherwise) until all Guaranteed Obligations have been irrevocably paid in full in cash. 10. (a) Each Guarantor waives any right (except as shall be required by applicable statute and cannot be waived) to require the Creditors to: (i) proceed against the Borrower, any other Guarantor, any other guarantor of the Borrower or any other person; (ii) proceed against or exhaust any security held from the Borrower, any other Guarantor, any other guarantor of the Borrower or any other person; or (iii) pursue any other remedy in the Creditors' power whatsoever. Each Guarantor waives any defense based on or arising out of any defense of the Borrower, any other Guarantor, any other guarantor of the Borrower or any other person other than payment in full in cash of the Guaranteed Obligations, including, without limitation, any defense based on or arising out of the disability of the Borrower, any other Guarantor, any other guarantor of the Borrower or any other person, or the unenforceability of the Guaranteed Obligations or any part thereof from any cause, or the cessation from any cause of the liability of the Borrower other than payment in full in cash of the Guaranteed Obligations. The Creditors may, at their election, foreclose on any security held by the Administrative Agent, the Collateral Agent or the other Creditors by one or more judicial or nonjudicial sales, whether or not every aspect of any such sale is commercially reasonable (to the extent such sale is permitted by -5- 6 applicable law), or exercise any other right or remedy the Creditors may have against the Borrower or any other person, or any security, without affecting or impairing in any way the liability of any Guarantor hereunder except to the extent the Guaranteed Obligations have been paid in full in cash. Each Guarantor waives any defense arising out of any such election by the Creditors, even though such election operates to impair or extinguish any right of reimbursement or subrogation or other right or remedy of such Guarantor against the Borrower or any other person or any security. (b) Each Guarantor waives all presentments, demands for performance, protests and notices, including, without limitation, notices of nonperformance, notices of protest, notices of dishonor, notices of acceptance of this Guaranty, and notices of the existence, creation or incurring of new or additional indebtedness. Each Guarantor assumes all responsibility for being and keeping itself informed of the Borrower's financial condition and assets, and of all other circumstances bearing upon the risk of nonpayment of the Guaranteed Obligations and the nature, scope and extent of the risks which such Guarantor assumes and incurs hereunder, and agrees that the Creditors shall have no duty to advise any Guarantor of information known to them regarding such circumstances or risks. (c) Until such time as the Guaranteed Obligations have been paid in full in cash, each Guarantor hereby waives all contractual, statutory or common law rights of reimbursement, contribution or indemnity from the Borrower or any other Guarantor which it may at any time otherwise have as a result of this Guaranty. 11. If and to the extent that any Guarantor makes any payment to any Creditor or to any other Person pursuant to or in respect of this Guaranty, any claim which such Guarantor may have against the Borrower by reason thereof shall be subject and subordinate to the prior payment in full of the Guaranteed Obligations to each Creditor. Prior to the transfer by any Guarantor of any note or negotiable instrument evidencing any indebtedness of the Borrower to such Guarantor, such Guarantor shall mark such note or negotiable instrument with a legend that the same is subject to this subordination. 12. Each Guarantor covenants and agrees that on and after the date hereof and until the termination of the Total Commitment and all Permitted Hedging Agreements and when no Note or Letter of Credit remains outstanding and all other Guaranteed Obligations have been paid in full (other than those arising from indemnities for which no request has been made), such Guarantor shall take, or will refrain from taking, as the case may be, all actions that are necessary to be taken or not taken so that no violation of any provision, covenant or agreement contained in Section 7 or 8 of the Credit Agreement, and so that no Event of Default, is caused by the actions of such Guarantor or any of its Subsidiaries. 13. The Guarantors hereby jointly and severally agree to pay all reasonable and actual out-of-pocket costs and expenses of each Creditor in connection with the enforcement of this Guaranty and the protection of such Creditor's rights hereunder, and in connection with any amendment, waiver or consent relating hereto (including, without limitation, the reasonable and actual fees and disbursements of counsel employed by the Administrative Agent or any of the other Creditors). Any reference in this Guaranty, to "fees of counsel" shall mean the actual and -6- 7 reasonable fees of counsel incurred at customary and reasonable rates in the jurisdiction in which such counsel performed its services, not pursuant to any statutory formula or percentage calculation. 14. This Guaranty shall be binding upon each Guarantor and its successors and assigns and shall inure to the benefit of the Creditors and their successors and assigns. 15. Neither this Guaranty nor any provision hereof may be changed, waived, discharged or terminated in any manner whatsoever unless in writing duly signed by the Administrative Agent (with the consent of (x) the Required Lenders or, to the extent required by Section 12.12 of the Credit Agreement, all of the Lenders, at all times prior to the time at which all Credit Document Obligations have been paid in full, or (y) the holders of at least a majority of the outstanding Hedging Obligations at all times after the time at which all Credit Document Obligations have been paid in full) and each Guarantor directly affected thereby (it being understood that the addition or release of any Guarantor hereunder shall not constitute a change, waiver, discharge or termination affecting any Guarantor other than the Guarantor so added or released); provided, that any change, waiver, modification or variance affecting the rights and benefits of a single Class (as defined below) of Creditors (and not all Creditors in a like or similar manner) shall require the written consent of the Requisite Creditors (as defined below) of such Class. For the purpose of this Guaranty, the term "Class" shall mean each class of Creditors, i.e., whether (i) the Lender Creditors as holders of the Credit Document Obligations or (ii) the Hedging Creditors as holders of the Hedging Obligations. For the purpose of this Guaranty, the term "Requisite Creditors" of any Class shall mean each of (i) with respect to the Credit Document Obligations, the Required Lenders and (ii) with respect to the Hedging Obligations, the holders of at least a majority of all obligations outstanding from time to time under the Permitted Hedging Agreements. 16. Each Guarantor acknowledges that an executed (or conformed) copy of each of the Credit Documents and the Permitted Hedging Agreements has been made available to its principal executive officers and such officers are familiar with the contents thereof. 17. In addition to any rights now or hereafter granted under applicable law (including, without limitation, Section 151 of the New York Debtor and Creditor Law) and not by way of limitation of any such rights, upon the occurrence and during the continuance of an Event of Default (such term to mean and include any "Event of Default" as defined in the Credit Agreement or any payment default under any Permitted Hedging Agreement and shall in any event, include, without limitation, any payment default on any of the Guaranteed Obligations continuing after any applicable grace period), each Creditor is hereby authorized at any time or from time to time, without notice to any Guarantor or to any other Person, any such notice being expressly waived, to set off and to appropriate and apply any and all deposits (general or special) and any other indebtedness at any time held or owing by such Creditor to or for the credit or the account of such Guarantor, against and on account of the obligations and liabilities of such Guarantor to such Creditor under this Guaranty, irrespective of whether or not such Creditor shall have made any demand hereunder and although said obligations, liabilities, deposits or claims, or any of them, shall be contingent or unmatured. Each Creditor acknowledges and agrees that the -7- 8 provisions of this Section 17 are subject to the sharing provisions set forth in Section 12.06(b) of the Credit Agreement. 18. All notices and other communications provided for hereunder shall be in writing (including telegraphic, telex, facsimile transmission or cable communication) and mailed, telegraphed, telexed, telecopied, cabled or delivered (including by way of overnight courier) (i) in the case of any Lender Creditor, as provided in the Credit Agreement, (ii) in the case of any Guarantor, at its address set forth opposite its signature below and (iii) in the case of any Hedging Creditor, at such address as such Hedging Creditor shall have specified in writing to the Guarantor; or, in any case, at such other address as shall be designated by any party in a written notice to the other parties hereto. All such notices and communications shall be deemed to have been duly given or made (i) in the case of any Creditor, when received and (ii) in the case of any Guarantor, when delivered to such Guarantor in any manner required or permitted hereunder. 19. If claim is ever made upon any Creditor for repayment or recovery of any amount or amounts received in payment or on account of any of the Guaranteed Obligations and any of said Creditors repays all or part of said amount by reason of (i) any judgment, decree or order of any court or administrative body having jurisdiction over such Creditor or any of its property or (ii) any settlement or compromise of any such claim effected by such Creditor with any such claimant (including the Borrower), then and in such event each Guarantor agrees that any such judgment, decree, order, settlement or compromise shall be binding upon such Guarantor, notwithstanding any revocation hereof or the cancellation of any Note or any Permitted Hedging Agreement or other instrument evidencing any liability of the Borrower, and such Guarantor shall be and remain liable to such Creditor hereunder for the amount so repaid or recovered to the same extent as if such amount had never originally been received by any such Creditor. 20. (a) This Guaranty and the rights and obligations of the Creditors and of the undersigned hereunder shall be governed by and construed in accordance with the law of the state of New York. (b) Any legal action or proceeding with respect to this Guaranty or any other Credit Document to which any Guarantor is a party may be brought in the courts of the state of New York or of the United States of America for the Southern District of New York, and, by execution and delivery of this Guaranty, each Guarantor hereby irrevocably accepts for itself and in respect of its property, generally and unconditionally, the jurisdiction of the aforesaid courts. Each Guarantor further irrevocably consents to the service of process out of any of the aforementioned courts in any such action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to such Guarantor at its address set forth opposite its signature below, such service to become effective 30 days after such mailing. Each Guarantor hereby irrevocably waives any objection to such service of process and further irrevocably waives and agrees not to plead or claim in any action or proceeding commenced hereunder or under any other credit document to which such Guarantor is a party that service of process was in any way invalid or ineffective. Each Guarantor hereby irrevocably appoints the Borrower as its agent for service of process in respect of any such action or proceeding. Nothing herein shall -8- 9 affect the right of any of the creditors to serve process in any other manner permitted by law or to commence legal proceedings or otherwise proceed against any Guarantor in any other jurisdiction. (c) Each Guarantor hereby irrevocably waives any objection which it may now or hereafter have to the laying of venue of any of the aforesaid actions or proceedings arising out of or in connection with this Guaranty or any other Credit Document brought in the courts referred to in clause (b) above and hereby further irrevocably waives and agrees not to plead or claim in any such court that such action or proceeding brought in any such court has been brought in an inconvenient forum. (d) Each Guarantor hereby irrevocably waives all rights to a trial by jury in any action, proceeding or counterclaim arising out of or relating to this Guaranty, the other Credit Documents or the transactions contemplated hereby or thereby. 21. In the event that all of the capital stock or other equity interests of one or more Guarantors is sold or otherwise disposed of (to a Person other than the Borrower or a Subsidiary thereof) or liquidated in compliance with the requirements of Section 8.02 of the Credit Agreement (or such sale, disposition or liquidation has been approved in writing by the Required Lenders (or all Lenders if required by Section 12.12 of the Credit Agreement)), such Guarantor shall be released from this Guaranty and this Guaranty shall, as to each such Guarantor or Guarantors, terminate, and have no further force or effect (it being understood and agreed that the sale of one or more Persons that own, directly or indirectly, all of the capital stock or other equity interests of any Guarantor shall be deemed to be a sale of such Guarantor for the purposes of this Section 21). 22. All payments made by any Guarantor hereunder will be made without setoff, counterclaim or other defense. 23. This Guaranty may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. A set of counterparts executed by all the parties hereto shall be lodged with the Borrower and the Administrative Agent. 24. It is understood and agreed that any Subsidiary of the Borrower that is required to execute a counterpart of this Guaranty pursuant to the Credit Agreement shall automatically become a Guarantor hereunder by executing a counterpart hereof and delivering the same to the Administrative Agent. 25. Notwithstanding anything else to the contrary in this Guaranty, the Creditors agree that this Guaranty may be enforced only by the action of the Administrative Agent acting upon the instructions of the Required Lenders (or, after the date on which all Credit Document Obligations have been paid in full, the holders of at least a majority of the outstanding Hedging Obligations), and that no other Creditor shall have any right individually to seek to enforce or to enforce this Guaranty, it being understood and agreed that such rights and remedies may be -9- 10 exercised by the Administrative Agent or the holders of at least a majority of the outstanding Hedging Obligations, as the case may be, for the benefit of the Creditors upon the terms of this Guaranty. The Creditors further agree that this Guaranty may not be enforced against any director, officer, employee, or stockholder of any Guarantor (except to the extent such stockholder is also a Guarantor hereunder). It is understood that the agreement in this Section 25 is among and solely for the benefit of the Lenders and that if the Required Lenders so agree (without requiring the consent of any Guarantor), this Guaranty may be directly enforced by any Creditor. 26. Each Guarantor hereby confirms that it is its intention that this Guaranty not constitute a fraudulent transfer or conveyance for purposes of any bankruptcy, insolvency or similar law, the Uniform Fraudulent Conveyance Act or any similar Federal, state of foreign law. To effectuate the foregoing intention, each Guarantor hereby irrevocably agrees that the Guaranteed Obligations shall be limited to the maximum amount as will, after giving effect to such maximum amount and all other (contingent or otherwise) liabilities of such Guarantor that are relevant under such laws, result in the Guaranteed Obligations of such Guarantor in respect of such maximum amount not constituting a fraudulent transfer or conveyance. * * * IN WITNESS WHEREOF, each Guarantor has caused this Guaranty to be executed and delivered as of the date first above written. Address: P.O. Box 2959 R.J. REYNOLDS TOBACCO COMPANY, as a 401 N. Main Street Guarantor Winston Salem, NC 27102 Attn: Guy Blynn By: /s/ Thomas R. Adams ------------------------------- Title: SVP & Controller Accepted and Agreed to: THE CHASE MANHATTAN BANK, as Administrative Agent for the Lenders By: /s/ Robert T. Sacks ----------------------------------- Title: Managing Director -10- EX-10.36 5 g67125ex10-36.txt FORM OF RESTRICTED STOCK AGREEMENT DATED 1/31/2001 1 Exhibit 10.36 R.J. REYNOLDS TOBACCO HOLDINGS, INC. 1999 LONG TERM INCENTIVE PLAN -------------------------------- RESTRICTED STOCK AGREEMENT -------------------------------- DATE OF GRANT: JANUARY 31, 2001 W I T N E S S E T H: 1. Grant of Restricted Stock. Pursuant to the provisions of the 1999 Long Term Incentive Plan (the "Plan"), R.J. Reynolds Tobacco Holdings, Inc. (the "Company") on the above date has granted, and this Restricted Stock Agreement (this "Agreement") evidences the grant to FIRST NAME LAST NAME (the "Grantee") subject to the terms and conditions which follow and the terms and conditions of the Plan, of a total of REST STOCK shares of Common Stock of the Company ("Common Stock"). A copy of the Plan is attached and made a part of this Agreement with the same effect as if set forth in the Agreement itself. All capitalized terms used in this Agreement below shall have the meaning set forth in the Plan, unless otherwise indicated. 2. Receipt and Delivery of Stock. The Grantee waives receipt from the Company of a certificate or certificates representing the shares of Common Stock granted hereunder, registered in the Grantee's name and bearing a legend evidencing the restrictions imposed on such shares of Common Stock by this Agreement. The Grantee acknowledges and agrees that the Company shall retain custody of such certificate or certificates until the restrictions imposed by Section 3 of this Agreement on the shares of Common Stock granted hereunder lapse. The Grantee acknowledges and agrees that, alternatively, the shares of Common Stock granted hereunder may be maintained in book-entry form with instructions from the Company to the Company's transfer agent that such shares shall remain restricted until the restrictions imposed by Section 3 of this Agreement on such shares lapse. 3. Restrictions on Transfer of Stock. The shares of Common Stock granted hereunder may not be sold, tendered, assigned, transferred, pledged or otherwise encumbered prior to the earliest of: 2 (a) the later of January 31, 2004 or the date the Annual Incentive Award Plan ("AIAP") score for 2003 is determined (the "Normal Vesting Date"), for 100% of the shares; (b) the date of the Grantee's death, for 100% of the shares; (c) the date of the Grantee's Permanent Disability (as defined in the Company's Long Term Disability Plan), for 100% of the shares; (d) the date of the Grantee's Retirement (as defined in this Section 3); or (e) the date of a Change of Control (as defined in the Plan), for 100% of the shares. For purposes of this Agreement, the term "Retirement" shall mean retirement at age 65 or over, or early retirement at age 55 or over with the approval of the Chief Executive Officer of the Company, which approval specifically states the number or percentage of shares (rounded to the nearest whole number of shares) with respect to which the restrictions referred to in this Section 3 will lapse. In the event of the Grantee's involuntary Termination of Employment without Cause (as such terms are defined in Section 5 of this Agreement), the restrictions imposed by this Section 3 will lapse with respect to that number of shares of Common Stock (rounded to the nearest whole number of shares) which is equal to the product of (i) the total number of shares of Common Stock granted to the Grantee under this Agreement and (ii) a fraction, the numerator of which is the number of whole or partial months between the Date of Grant and date of the Grantee's Termination of Employment, and the denominator of which is 36. At the time the restrictions imposed by this Section 3 shall lapse, the appropriate number of shares of Common Stock shall be delivered to the Grantee without a restrictive legend on any Common Stock certificate, or, if such shares are held in book-entry form, the Company's transfer agent shall be instructed to remove the restrictions on such shares. 4. Forfeiture of Stock; Grant of Additional Stock. (a) For the shares of Common Stock granted hereunder to vest, the Company must pay to its stockholders a dividend of at least $0.775 per share in any quarter during the period commencing on January 1, 2001 and ending on December 31, 2003 (the "Threshold Requirement"), unless the Company's Board of Directors specifically approves the nonforfeiture of such shares upon the declaration of a quarterly dividend of less than $0.775 per share. In the event the Company fails to pay to its stockholders a dividend of at least $.0775 2 3 per share per quarter for each of the twelve fiscal quarters commencing on January 1, 2001 and ending on December 31, 2003 and the Company's Board of Directors does not approve the nonforfeiture of the shares of Common Stock granted hereunder, the Grantee shall forfeit all right, title and interest in and to the shares of Common Stock still subject to the restrictions set forth in Section 3 of this Agreement and to any dividends to be paid thereafter on such shares. (b) On the Normal Vesting Date, if the Threshold Requirement is met or otherwise waived by the Company's Board of Directors, the original number of shares of Common Stock granted to the Grantee under this Agreement and still subject to the restrictions set forth in Section 3 of this Agreement (the "Original Number"), shall be multiplied by the average of the total weighted AIAP scores for the financial and market share components of the AIAP for each of 2001, 2002 and 2003 resulting in a "Revised Number." If the Revised Number is greater than the Original Number, the Company shall issue an additional number of shares of Common Stock to the Grantee equal to the difference between the Revised Number and the Original Number (rounded to the nearest whole number of shares) as soon as practicable after the Normal Vesting Date. If the Revised Number is less than the Original Number, the Grantee immediately shall forfeit all right, title and interest in and to that number of shares of Common Stock equal to the difference between the Original Number and the Revised Number (rounded to the nearest whole number of shares) and to any dividends to be paid thereafter on such shares. (c) Upon the Grantee's voluntary Termination of Employment or Termination of Employment for Cause (as such terms are defined in Section 5 of this Agreement), the Grantee shall forfeit all right, title and interest in and to the shares of Common Stock still subject to the restrictions set forth in Section 3 of this Agreement and to any dividends to be paid thereafter on such shares. (d) Any shares of Common Stock granted hereunder and subsequently forfeited shall revert to the Company and shall not become transferable by the Grantee or anyone claiming through the Grantee. The Compensation Committee of the Company's Board of Directors (the "Compensation Committee") or its agent shall act promptly to record forfeitures pursuant to this Section 4 on the stock transfer books of the Company. 5. Termination of Employment. (a) For purposes of this Agreement, the term "Termination of Employment" shall mean termination from active employment with the Company or a subsidiary of the Company; it does not mean the termination of pay and benefits at the end of a period of salary continuation (or other form of severance pay or pay in lieu of salary). (b) For purposes of this Agreement, if the Grantee has an employment or severance agreement, employment shall be deemed to have been terminated for "Cause" only as such term is defined in the employment or severance agreement. For purposes of this Agreement, if the Grantee does not have an employment or severance agreement 3 4 that defines the term "Cause," the Grantee's employment shall be deemed to have been terminated for "Cause" if the Termination of Employment results from the Grantee's: (i) criminal conduct; (ii) deliberate and continual refusal to perform employment duties on substantially a full time basis; (iii) deliberate and continual refusal to act in accordance with any specific lawful instructions of an authorized officer or employee more senior than the Grantee; or (iv) deliberate misconduct which could be materially damaging to the Company or any of its business operations without a reasonable good faith belief by the Grantee that such conduct was in the best interests of the Company. A Termination of Employment shall not be deemed for Cause hereunder unless the senior human resources executive of the Company shall confirm that any such Termination of Employment is for Cause. Any voluntary Termination of Employment by the Grantee in anticipation of an involuntary Termination of Employment for Cause shall be deemed to be a Termination of Employment for Cause. 6. Dividends. If the Grantee is a stockholder of record on any applicable record date, the Grantee shall receive any dividends on the shares of Common Stock granted hereunder when paid regardless of whether the restrictions imposed by Section 3 of this Agreement have lapsed. 7. Voting. If the Grantee is a stockholder of record on any applicable record date, the Grantee shall have the right to vote the shares of Common Stock granted hereunder regardless of whether the restrictions imposed by Section 3 of this Agreement have lapsed. 8. No Right to Employment. The execution and delivery of this Agreement and the granting of shares of Common Stock hereunder shall not constitute or be evidence of any agreement or understanding, express or implied, on the part of the Company or its subsidiaries to employ the Grantee for any specific period or in any particular capacity and shall not prevent the Company or its subsidiaries from terminating the Grantee's employment at any time with or without Cause. 9. Registration. The shares of Common Stock granted hereunder may be offered and sold by the Grantee only if such shares are registered for resale under the Securities Act of 1933 (the "1933 Act"), as amended, or if an exemption from registration under such Act is available. The Company has no obligation to effect such registration. By executing this Agreement, the Grantee (a) agrees not to offer or sell the shares of Common Stock granted hereunder unless and until such shares are registered for resale under the 1933 Act or an exemption from registration is available, (b) represents that the Grantee accepts such shares of Common Stock for his own account for investment and not with a view to, or for sale in connection with, the distribution of any part thereof and (c) agrees that the Grantee or the Grantee's beneficiary, on request, will be obligated to repeat these representations in writing prior to any future delivery of such shares of Common Stock. 4 5 10. Change in Common Stock or Corporate Structure. In the event of any stock split, spin-off, stock dividend, extraordinary cash dividend, stock combination or reclassification, recapitalization or merger, change in control, or similar event, the Compensation Committee shall make an appropriate adjustment to the number or kind of shares or other consideration covered by this Agreement and to the level of dividends required under Section 4(a) of this Agreement, and such other revisions to this Agreement as it deems are equitably required. Any adjustment or revision made by the Compensation Committee shall be final and binding on the Grantee, the Company and all other interested persons; provided, however, that the Compensation Committee may not make any such adjustments or revisions that are adverse to the Grantee without the Grantee's written consent. 11. Application of Laws. The granting of shares of Common Stock hereunder shall be subject to all applicable laws, rules and regulations and to such approvals of any governmental agencies as may be required. 12. Taxes. Any taxes required by federal, state or local laws to be withheld by the Company on the Date of Grant or the delivery of unrestricted shares of Common Stock hereunder shall be paid to the Company by the Grantee by the time such taxes are required to be paid or deposited by the Company. The Grantee hereby authorizes the conversion to cash by the Company of a sufficient number of shares of Common Stock to satisfy the withholding prior to the delivery of unrestricted shares of Common Stock. 13. Notices. Any notices required to be given hereunder to the Company shall be addressed to The Secretary, R.J. Reynolds Tobacco Holdings, Inc., Post Office Box 2866, Winston-Salem, NC 27102-2866, and any notice required to be given hereunder to the Grantee shall be sent to the Grantee's address as shown on the records of the Company. 14. Administration and Interpretation. In consideration of the grant, the Grantee specifically agrees that the Compensation Committee shall have the exclusive power to interpret the Plan and this Agreement and to adopt such rules for the administration, interpretation and application of the Plan and Agreement as are consistent therewith and to interpret or revoke any such rules. All actions taken and all interpretations and determinations made by the Compensation Committee shall be final, conclusive, and binding upon the Grantee, the Company and all other interested persons. No member of the Compensation Committee shall be personally liable for any action, determination or interpretation made in good faith with respect to the Plan or the Agreement. The Compensation Committee may delegate its interpretive authority to an officer or officers of the Company. 15. Amendment. This Agreement is subject to the Plan, a copy of which is attached. The Board of Directors may amend the Plan and the Compensation Committee may amend this Agreement at any time and in any way, except that any 5 6 amendment of the Plan or this Agreement that would impair the Grantee's rights under this Agreement may not be made without the Grantee's written consent. 16. GOVERNING LAW. THE LAWS OF THE STATE OF DELAWARE SHALL GOVERN THE INTERPRETATION, VALIDITY AND PERFORMANCE OF THE TERMS OF THIS AGREEMENT, REGARDLESS OF THE LAW THAT MIGHT BE APPLIED UNDER PRINCIPLES OF CONFLICTS OF LAWS. IN WITNESS WHEREOF, the Company, by its duly authorized officer, and the Grantee have executed this agreement as of the Date of Grant first above written. R.J. REYNOLDS TOBACCO HOLDINGS, INC. By: -------------------------------- Authorized Signatory - -------------------------------- Grantee Grantee's Taxpayer Identification Number: - -------------------------------- Grantee's Home Address: - -------------------------------- - -------------------------------- - -------------------------------- 6 EX-10.37 6 g67125ex10-37.txt FORM OF PERFORMANCE UNIT AGREEMENT (ONE-YEAR) 1 Exhibit 10.37 Performance Unit One-Year Vest R.J. REYNOLDS TOBACCO HOLDINGS, INC. 1999 LONG TERM INCENTIVE PLAN --------------------------------- PERFORMANCE UNIT AGREEMENT --------------------------------- DATE OF GRANT: JANUARY 31, 2001 W I T N E S S E T H: 1. Grant. Pursuant to the provisions of the 1999 Long Term Incentive Plan (collectively, the "Plan"), R.J. Reynolds Tobacco Holdings, Inc. (the "Company") on the above date has granted to First Name Last Name (The "Grantee"), subject to the terms and conditions which follow and the terms and conditions of the Plan, a target of Number Performance Units. A copy of the Plan is attached and made a part of this Agreement with the same effect as if set forth in the Agreement itself. All capitalized terms used in this Agreement shall have the meaning set forth in the Plan, unless otherwise indicated. 2. Valuation of Performance Units. Each Performance Unit shall have an initial value of $1,000 (the "Initial Grant Value"). The Compensation Committee of the Company's Board of Directors (the "Compensation Committee") shall value each Performance Unit at the end of 2001 using the performance measures set forth in the grid attached as Exhibit A, but the Compensation Committee shall have the discretion to reduce the resulting valuation (the "Payment Value"). The Grantee agrees that the Performance Units granted hereunder are in lieu of an award under the Company's Annual Incentive Award Plan for 2001. 3. Vesting. (a) The Performance Units shall vest on December 31, 2001, or if earlier, upon the Grantee's death, Permanent Disability (as defined in the Company's Long Term Disability Plan), or retirement under a retirement plan of the Company or a subsidiary of the Company. (b) Notwithstanding anything in Section 3(a) to the contrary, in the event of the Grantee's involuntary Termination of Employment without Cause (as such terms are defined in Section 5 of this Agreement), the number of Performance Units which shall vest shall be equal to the product of (i) the original number of Performance Units granted to the Grantee under this Agreement and (ii) a fraction, the numerator of which shall be 1 2 the number of whole or partial months between January 1, 2001 and the date of the Grantee's Termination of Employment, and the denominator of which shall be 12. (c) Notwithstanding anything in Section 3(a) to the contrary, in the event of a Change of Control (as defined in the Plan), the number of Performance Units which shall vest shall be equal to the product of (i) the original number of Performance Units granted to the Grantee under this Agreement and (ii) a fraction, the numerator of which shall be the number of whole or partial months commencing on January 1, 2001 and ending on the date of the Change of Control, and the denominator of which shall be 12. Such prorated award shall be paid as soon as practicable after the Change of Control. The value of each Performance Unit shall be equal to the greater of (x) the Initial Grant Value or (y) the Target Value set forth on Exhibit A attached to this Agreement. (d) Upon the Grantee's voluntary Termination of Employment or Termination of Employment for Cause (as such terms are defined in Section 5 of this Agreement) prior to the end of a Performance Period, all of the Grantee's Performance Units shall be cancelled, except to the extent that at the time of Termination of Employment, the Grantee has an employment or termination agreement with the Company or one of its subsidiaries which includes non-cancellation of some or all of the Performance Units. 4. Payment. (a) Payment of Performance Units shall be made only in Cash. Except with respect to a Change of Control as described in Section 3(c) of this Agreement, or except under such other circumstances as the Compensation Committee deems appropriate, no payment shall be made to the Grantee prior to the end of 2001. Except with respect to a Change of Control as described in Section 3(c) of this Agreement, payment of Performance Units shall be made in the amount of the Payment Value as soon as practicable following the close of the Company books at the end of 2001. (b) Any payment made with respect to a Grantee who has died shall be paid, at the end of the applicable award period, to the beneficiary designated by the Grantee to receive the proceeds of any group life insurance coverage provided for the Grantee by the Company or a subsidiary of the Company. If the Grantee has not designated such beneficiary, or desires to designate a different beneficiary, the Grantee may file with the Company a written designation of a beneficiary under this Agreement, which designation may be changed or revoked only by the Grantee. If no designation of beneficiary has been made under such life insurance coverage or filed with the Company under this Agreement, distribution shall be made to the Grantee's spouse, if surviving; otherwise in equal shares to the surviving children of the Grantee, if any; otherwise to the Grantee's estate. 5. Termination of Employment. (a) For purposes of this Agreement, the term "Termination of Employment" shall mean termination from active employment with the Company or a subsidiary of the Company; it does not mean the termination of pay and benefits at the end of a period of salary continuation (or other form of severance pay or pay in lieu of salary). (b) For purposes of this Agreement, if the Grantee has an employment or severance agreement, employment shall be deemed to have been terminated for "Cause" only as such term is defined in the employment or severance agreement. For purposes of 2 3 this Agreement, if the Grantee does not have an employment or severance agreement that defines the term "Cause," the Grantee's employment shall be deemed to have been terminated for "Cause" if the Termination of Employment results from the Grantee's: (i) criminal conduct; (ii) deliberate and continual refusal to perform employment duties on substantially a full time basis; (iii) deliberate and continual refusal to act in accordance with any specific lawful instructions of an authorized officer or employee more senior than the Grantee; or (iv) deliberate misconduct which could be materially damaging to the Company or any of its business operations without a reasonable good faith belief by the Grantee that such conduct was in the best interests of the Company. A Termination of Employment shall not be deemed for Cause hereunder unless the senior human resources executive of the Company shall confirm that any such Termination of Employment is for Cause. Any voluntary Termination of Employment by the Grantee in anticipation of an involuntary Termination of Employment for Cause shall be deemed to be a Termination of Employment for Cause. 6. Transferability. Other than as specifically provided in this Agreement with regard to the death of the Grantee, this Agreement and any benefit provided or accruing hereunder shall not be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, or change; and any attempt to do so shall be void. No such benefit shall, prior to receipt thereof by the Grantee, be in any manner liable for or subject to the debts, contracts, liabilities, engagements or torts of the Grantee. 7. No Right to Employment. Neither the execution and delivery of this Agreement nor the granting of the Performance Units evidenced by this Agreement shall constitute any agreement or understanding, express or implied, on the part of the Company or its subsidiaries to employ the Grantee for any specific period or in any specific capacity or shall prevent the Company or its subsidiaries from terminating the Grantee's employment at any time with or without Cause. 8. Change in Corporate Structure. In the event of any stock split, spin-off, stock dividend, extraordinary cash dividend, stock combination or reclassification, recapitalization or merger, Change of Control or similar event, the Compensation Committee shall make such revisions to this Agreement as it deems are equitably required. Any adjustment or revision made by the Compensation Committee shall be final and binding on the Grantee, the Company and all other interested persons; provided; however, that the Compensation Committee may not make any such adjustments or revisions that are adverse to the Grantee without the Grantee's written consent. 9. Application of Laws. The granting of Performance Units under this Agreement shall be subject to all applicable laws, rules and regulations and to such approvals of any governmental agencies as may be required. 10. Notices. Any notices required to be given hereunder to the Company shall be addressed to The Secretary, R.J. Reynolds Tobacco Holdings, Inc., Post Office Box 2866, Winston-Salem, NC 27102-2866, and any notice required to be given hereunder to the Grantee shall be sent to the Grantee's address as shown on the records of the Company. 11. Taxes. Any taxes required by federal, state or local laws to be withheld by the Company in respect of the grant of Performance Units or payment of the Payment Value hereunder shall be paid to the Company by the Grantee by the time such taxes are 3 4 required to be paid or deposited by the Company. The Grantee hereby authorizes the necessary withholding by the Company to satisfy such tax withholding obligations prior to delivery of the Payment Value. 12. Administration and Interpretation. In consideration of the grant of Performance Units hereunder, the Grantee specifically agrees that the Compensation Committee shall have the exclusive power to interpret the Plan and this Agreement and to adopt such rules for the administration, interpretation and application of the Plan and Agreement as are consistent therewith and to interpret or revoke any such rules. All actions taken and all interpretation and determinations made by the Compensation Committee shall be final, conclusive, and binding upon the Grantee, the Company and all other interested persons. No member of the Compensation Committee shall be personally liable for any action, determination or interpretation made in good faith with respect to the Plan or the Agreement. The Compensation Committee may delegate its interpretive authority to an officer or officers of the Company. 13. Amendment. This Agreement is subject to the Plan, a copy of which is attached. The Board of Directors may amend the Plan and the Compensation Committee may amend this Agreement at any time and in any way, except that any amendment of the Plan or this Agreement that would impair the Grantee's rights under this Agreement may not be made without the Grantee's written consent. 14. Obligations of Grantee. (a) In consideration of the grant of Performance Units hereunder, the Grantee, while both actively employed and in the event of Grantee's Termination of Employment for any reason, specifically agrees that within the term of this grant or within one year following the payment of any amounts pursuant to the grant, if later: (i) the Grantee will personally provide reasonable assistance and cooperation to the Company in activities related to the prosecution or defense of any pending or future lawsuits or claims involving the Company; (ii) the Grantee will promptly notify the Company upon receipt of any requests from anyone other than an employee or agent of the Company for information regarding the Company, or if the Grantee becomes aware of any potential claim or proposed litigation against the Company; (iii) the Grantee will refrain from providing any information related to any claim or potential litigation against the Company to any non-Company representatives without either the Company's written permission or being required to provide information pursuant to legal process; (iv) the Grantee will not disclose or misuse any confidential information or material concerning the Company; and (v) the Grantee will not engage in any activity contrary or harmful to the interests of the Company. In further consideration of the grant of Performance Units hereunder, the Grantee specifically agrees that if required by law to provide sworn testimony regarding any Company-related matter: the Grantee will consult with and have Company designated legal counsel present for such testimony (the Company will be responsible for the costs of such designated counsel); the Grantee will confine his testimony to items about which the Grantee has knowledge rather than speculation, unless otherwise directed by legal process; and the Grantee will cooperate with the Company's attorneys to assist their efforts, especially on matters the Grantee has been privy to, holding all privileged attorney-client matters in strictest confidence. (b) If the Company reasonably determines that the Grantee has materially violated any of the Grantee's obligations under this Agreement, then this Grant shall terminate, effective the date on which such violation began (unless otherwise terminated sooner), 4 5 and the Company may demand the return of any amount paid to the Grantee hereunder and the Grantee hereby agrees to return such amounts upon such demand. If after such demand the Grantee fails to return such amounts, the Grantee acknowledges that the Company has the right to deduct from any amounts the Company owes to the Grantee (including, but not limited to, wages or other compensation), or to commence judicial proceedings against the Grantee, to recover such amounts and any and all of its attorney's fees and costs. 15. GOVERNING LAW. THE LAWS OF THE STATE OF DELAWARE SHALL GOVERN THE INTERPRETATION, VALIDITY AND PERFORMANCE OF THE TERMS OF THIS AGREEMENT, REGARDLESS OF THE LAW THAT MIGHT BE APPLIED UNDER PRINCIPLES OF CONFLICTS OF LAWS. IN WITNESS WHEREOF, the Company, by its duly authorized officer, and the Grantee have executed this Agreement as of the Date of Grant first above written. R.J. REYNOLDS TOBACCO HOLDINGS, INC. By: -------------------------------- Authorized Signatory - ------------------------------------ Grantee Grantee's Taxpayer Identification Number: - ------------------------------------ Grantee's Home Address: - ------------------------------------ - ------------------------------------ - ------------------------------------ 5 EX-10.38 7 g67125ex10-38.txt FORM OF PERFORMANCE UNIT AGREEMENT (THREE-YEAR) 1 Exhibit 10.38 Performance Units Three-Year Vest R.J. REYNOLDS TOBACCO HOLDINGS, INC. 1999 LONG TERM INCENTIVE PLAN --------------------------------- PERFORMANCE UNIT AGREEMENT --------------------------------- DATE OF GRANT: JANUARY 31, 2001 W I T N E S S E T H: 1. Grant. Pursuant to the provisions of the 1999 Long Term Incentive Plan (collectively, the "Plan"), R.J. Reynolds Tobacco Holdings, Inc. (the "Company") on the above date has granted to First Name Last Name (The "Grantee"), subject to the terms and conditions which follow and the terms and conditions of the Plan, a target of Number Performance Units. A copy of the Plan is attached and made a part of this Agreement with the same effect as if set forth in the Agreement itself. The initial grant value of each Performance Unit shall be $1.00 (the "Initial Grant Value"). All capitalized terms used in this Agreement shall have the meaning set forth in the Plan, unless the context requires a different meaning. 2. Vesting. (a) The Performance Units shall have a three-year performance period, consisting of the Company's fiscal years 2001, 2002 and 2003 (the "Performance Period"), at the end of which the Performance Units will be valued and paid, if they vest, or cancelled, if they do not vest. For the Performance Units to vest, the Company must pay to its stockholders a dividend of at least $0.775 per share for each of the 12 quarters of the Performance Period (the "Threshold Requirement"), unless the Company's Board of Directors specifically approves the noncancellation of the Performance Units upon the declaration of a quarterly dividend of less than $0.775 per share. In the event the Company fails to pay its stockholders a dividend of at least $0.775 per share in any quarter during the Performance Period, and the Company's Board of Directors does not approve the noncancellation of the Performance Units, the Performance Units shall be cancelled. (b) Notwithstanding anything in Section 2(a) to the contrary, in the event of (i) the Grantee's death, (ii) the Grantee's Permanent Disability (as defined in the Company's Long Term Disability Plan), (iii) the Grantee's retirement under a retirement plan of the Company or a subsidiary of the Company, or (iv) the Grantee's involuntary Termination of Employment without Cause (as such terms are defined in Section 5 of this Agreement), the number of Performance Units which shall vest, if not previously 1 2 cancelled due to the Company's failure to meet the Threshold Requirement, shall be equal to product of (x) the original number of Performance Units granted to the Grantee under this Agreement and (y) a fraction, the numerator of which shall be the number of whole or partial months between January 1, 2001 and the date of the Grantee's Termination of Employment, and the denominator of which shall be 36. Such prorated award shall be paid as soon as practicable following the close of the Company's books at the end of the Performance Period, and each Performance Unit shall have a Payment Value as defined in Section 3 of this Agreement. (c) Notwithstanding anything in Section 2(a) to the contrary, in the event of a Change of Control (as defined in the Plan), the number of Performance Units which shall vest, if not previously cancelled due to the Company's failure to meet the Threshold Requirement, shall be equal to the product of (i) the original number of Performance Units granted to the Grantee under this Agreement and (ii) a fraction, the numerator of which shall be the number of whole or partial months in the Performance Period before the date of the Change of Control, and the denominator of which shall be 36. Such prorated award shall be paid as soon as practicable after the Change of Control. The value of each Performance Unit shall be equal to the greater of (x) the Initial Grant Value or (y) the Initial Grant Value multiplied by the average of the total weighted AIAP (as defined in Section 3 of this Agreement) scores for the financial and market share components of the AIAP for each of the years 2001, 2002 and 2003 completed prior to the Change of Control. (d) Upon the Grantee's voluntary Termination of Employment or Termination of Employment for Cause (as such terms are defined in Section 5 of this Agreement) prior to the end of a Performance Period, all of the Grantee's Performance Units shall be cancelled, except to the extent that at the time of Termination of Employment, the Grantee has an employment or termination agreement with the Company or one of its subsidiaries which includes non-cancellation of some or all of the Performance Units. 3. Valuation of Performance Units. At the end of the Performance Period, if the Threshold Requirement is met or otherwise waived by the Company's Board of Directors, the value of each Performance Unit shall be determined by multiplying the Initial Grant Value by the average of the total weighted Annual Incentive Award Plan ("AIAP") scores for the financial and market share components of the AIAP for each of 2001, 2002 and 2003 (the "Payment Value"). 4. Payment. (a) Payment of Performance Units shall be made only in cash. Except with respect to a Change of Control as described in Section 2(c) of this Agreement, or except under such other circumstances as the Compensation Committee of the Company's Board of Directors (the "Compensation Committee") deems appropriate, no payment shall be made to the Grantee prior to the end of the Performance Period. Except with respect to a Change of Control as described in Section 2(c) of this Agreement, payment of Performance Units shall be made in the amount of the Payment Value as soon as practicable following the close of the Company books at the end of the Performance Period. (b) Any payment made with respect to a Grantee who has died shall be paid, at the end of the applicable award period, to the beneficiary designated by the Grantee to receive the proceeds of any group life insurance coverage provided for the Grantee by the 2 3 Company or a subsidiary of the Company. If the Grantee has not designated such beneficiary, or desires to designate a different beneficiary, the Grantee may file with the Company a written designation of a beneficiary under this Agreement, which designation may be changed or revoked only by the Grantee. If no designation of beneficiary has been made under such life insurance coverage or filed with the Company under this Agreement, distribution shall be made to the Grantee's spouse, if surviving; otherwise in equal shares to the surviving children of the Grantee, if any; otherwise to the Grantee's estate. 5. Termination of Employment. (a) For purposes of this Agreement, the term "Termination of Employment" shall mean termination from active employment with the Company or a subsidiary of the Company; it does not man the termination of pay and benefits at the end of a period of salary continuation (or other form of severance pay or pay in lieu of salary). (b) For purposes of this Agreement, if the Grantee has an employment or severance agreement, employment shall be deemed to have been terminated for "Cause" only as such term is defined in the employment or severance agreement. For purposes of this Agreement, if the Grantee does not have an employment or severance agreement that defines the term "Cause," the Grantee's employment shall be deemed to have been terminated for "Cause" if the Termination of Employment results from the Grantee's: (i) criminal conduct; (ii) deliberate and continual refusal to perform employment duties on substantially a full time basis; (iii) deliberate and continual refusal to act in accordance with any specific lawful instructions of an authorized officer or employee more senior than the Grantee; or (iv) deliberate misconduct which could be materially damaging to the Company or any of its business operations without a reasonable good faith belief by the Grantee that such conduct was in the best interests of the Company. A Termination of Employment shall not be deemed for Cause hereunder unless the senior human resources executive of the Company shall confirm that any such Termination of Employment is for Cause. Any voluntary Termination of Employment by the Grantee in anticipation of an involuntary Termination of Employment for Cause shall be deemed to be a Termination of Employment for Cause. 6. Transferability. Other than as specifically provided in this Agreement with regard to the death of the Grantee, this Agreement and any benefit provided or accruing hereunder shall not be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, or change; and any attempt to do so shall be void. No such benefit shall, prior to receipt thereof by the Grantee, be in any manner liable for or subject to the debts, contracts, liabilities, engagements or torts of the Grantee. 7. No Right to Employment. Neither the execution and delivery of this Agreement nor the granting of the Performance Units evidenced by this Agreement shall constitute any agreement or understanding, express or implied, on the part of the Company or its subsidiaries to employ the Grantee for any specific period or in any specific capacity or shall prevent the Company or its subsidiaries from terminating the Grantee's employment at any time with or without Cause. 8. Change in Corporate Structure. In the event of any stock split, spin-off, stock dividend, extraordinary cash dividend, stock combination or reclassification, recapitalization or merger, Change of Control or similar event, the Compensation 3 4 Committee shall make an appropriate adjustment to the level of dividends required under Section 2(a) of this Agreement, and such other revisions to this Agreement as it deems are equitably required. Any adjustment or revision made by the Compensation Committee shall be final and binding on the Grantee, the Company and all other interested persons; provided; however, that the Compensation Committee may not make any such adjustments or revisions that are adverse to the Grantee without the Grantee's written consent. 9. Application of Laws. The granting of Performance Units under this Agreement shall be subject to all applicable laws, rules and regulations and to such approvals of any governmental agencies as may be required. 10. Notices. Any notices required to be given hereunder to the Company shall be addressed to The Secretary, R.J. Reynolds Tobacco Holdings, Inc., Post Office Box 2866, Winston-Salem, NC 27102-2866, and any notice required to be given hereunder to the Grantee shall be sent to the Grantee's address as shown on the records of the Company. 11. Taxes. Any taxes required by federal, state or local laws to be withheld by the Company in respect of the grant of Performance Units or payment of the Payment Value hereunder shall be paid to the Company by the Grantee by the time such taxes are required to be paid or deposited by the Company. The Grantee hereby authorizes the necessary withholding by the Company to satisfy such tax withholding obligations prior to delivery of the Payment Value. 12. Administration and Interpretation. In consideration of the grant of Performance Units hereunder, the Grantee specifically agrees that the Compensation Committee shall have the exclusive power to interpret the Plan and this Agreement and to adopt such rules for the administration, interpretation and application of the Plan and Agreement as are consistent therewith and to interpret or revoke any such rules. All actions taken and all interpretation and determinations made by the Compensation Committee shall be final, conclusive, and binding upon the Grantee, the Company and all other interested persons. No member of the Compensation Committee shall be personally liable for any action, determination or interpretation made in good faith with respect to the Plan or the Agreement. The Compensation Committee may delegate its interpretive authority to an officer or officers of the Company. 13. Amendment. This Agreement is subject to the Plan, a copy of which is attached. The Board of Directors may amend the Plan and the Compensation Committee may amend this Agreement at any time and in any way, except that any amendment of the Plan or this Agreement that would impair the Grantee's rights under this Agreement may not be made without the Grantee's written consent. 14. Obligations of Grantee. (a) In consideration of the grant of Performance Units hereunder, the Grantee, while both actively employed and in the event of Grantee's Termination of Employment for any reason, specifically agrees that within the term of this grant or within one year following the payment of any amounts pursuant to the grant, if later: (i) the Grantee will personally provide reasonable assistance and cooperation to the Company in activities related to the prosecution or defense of any pending or future lawsuits or claims involving the Company; (ii) the Grantee will promptly notify the Company upon receipt of any requests from anyone other than an employee or agent of 4 5 the Company for information regarding the Company, or if the Grantee becomes aware of any potential claim or proposed litigation against the Company; (iii) the Grantee will refrain from providing any information related to any claim or potential litigation against the Company to any non-Company representatives without either the Company's written permission or being required to provide information pursuant to legal process; (iv) the Grantee will not disclose or misuse any confidential information or material concerning the Company; and (v) the Grantee will not engage in any activity contrary or harmful to the interests of the Company. In further consideration of the grant of Performance Units hereunder, the Grantee specifically agrees that if required by law to provide sworn testimony regarding any Company-related matter: the Grantee will consult with and have Company designated legal counsel present for such testimony (the Company will be responsible for the costs of such designated counsel); the Grantee will confine his testimony to items about which the Grantee has knowledge rather than speculation, unless otherwise directed by legal process; and the Grantee will cooperate with the Company's attorneys to assist their efforts, especially on matters the Grantee has been privy to, holding all privileged attorney-client matters in strictest confidence. (b) If the Company reasonably determines that the Grantee has materially violated any of the Grantee's obligations under this Agreement, then this Grant shall terminate, effective the date on which such violation began (unless otherwise terminated sooner), and the Company may demand the return of any amount paid to the Grantee hereunder and the Grantee hereby agrees to return such amounts upon such demand. If after such demand the Grantee fails to return such amounts, the Grantee acknowledges that the Company has the right to deduct from any amounts the Company owes to the Grantee (including, but not limited to, wages or other compensation), or to commence judicial proceedings against the Grantee, to recover such amounts and any and all of its attorney's fees and costs. 15. GOVERNING LAW. THE LAWS OF THE STATE OF DELAWARE SHALL GOVERN THE INTERPRETATION, VALIDITY AND PERFORMANCE OF THE TERMS OF THIS AGREEMENT, REGARDLESS OF THE LAW THAT MIGHT BE APPLIED UNDER PRINCIPLES OF CONFLICTS OF LAWS. 5 6 IN WITNESS WHEREOF, the Company, by its duly authorized officer, and the Grantee have executed this Agreement as of the Date of Grant first above written. R.J. REYNOLDS TOBACCO HOLDINGS, INC. By: -------------------------------- Authorized Signatory - -------------------------------------- Grantee Grantee's Taxpayer Identification Number: - -------------------------------------- Grantee's Home Address: - -------------------------------------- - -------------------------------------- - -------------------------------------- 6 EX-12.1 8 g67125ex12-1.txt COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES 1 EXHIBIT 12.1 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES / DEFICIENCY IN THE COVERAGE OF FIXED CHARGES BY EARNINGS BEFORE FIXED CHARGES (DOLLARS IN MILLIONS)
FOR THE YEARS ENDED DECEMBER 31, ----------------------------------- 2000 1999 1998 1997 1996 ---- ---- ----- ---- ------ Earnings before fixed charges: Income (loss) from continuing operations before income taxes.................................................... $748 $510 $(679) $204 $ 563 Interest and debt expense.................................. 168 268 426 433 462 Interest portion of rental expense......................... 15 15 16 16 14 ---- ---- ----- ---- ------ Earnings (loss) before fixed charges....................... $931 $793 $(237) $653 $1,039 ==== ==== ===== ==== ====== Fixed charges: Interest and debt expense.................................. $168 $268 $ 426 $433 $ 462 Interest portion of rental expense......................... 15 15 16 16 14 ---- ---- ----- ---- ------ Total fixed charges................................... $183 $283 $ 442 $449 $ 476 ==== ==== ===== ==== ====== Ratio of earnings to fixed charges......................... 5.1 2.8 -- 1.5 2.2 ==== ==== ===== ==== ====== Deficiency in the coverage of fixed charges by earnings before fixed charges..................................... -- -- $(679) -- -- ==== ==== ===== ==== ======
EX-21.1 9 g67125ex21-1.txt SUBSIDIARIES OF THE REGISTRANT 1 Exhibit 21.1 R. J. REYNOLDS TOBACCO HOLDINGS, INC. SUBSIDIARIES Name of Entity Place of Incorporation -------------- ---------------------- Arjay Equipment Delaware FHS LLC Delaware GMB, Inc. North Carolina Northern Brands International, Inc. Delaware R. J. Reynolds Smoke Shop, Inc. Delaware R. J. Reynolds Tobacco Co. Delaware R. J. Reynolds Tobacco Company New Jersey R. J. Reynolds Tobacco Company, S.L. Spain R. J. Reynolds Tobacco Foreign Sales Corporation U.S. Virgin Islands R. J. Reynolds Tobacco International, Inc. Delaware Reynolds Technologies, Inc. Delaware RJR Acquisition Corp. Delaware The RJR Group, Inc. Delaware RJR Merchandising Marketing Company Delaware RJR Realty Relocation Services, Inc. North Carolina RJR Sales Co. Delaware RJR Smoke Shop, Inc. Delaware RJR Technical Company Delaware S. F. Imports, Inc. Delaware The Smoker's Connection, Inc. Delaware Sports Marketing Enterprises, Inc. North Carolina EX-23.1 10 g67125ex23-1.txt INDEPENDENT AUDITORS' CONSENT (KPMG LLP) 1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to incorporation by reference in the registration statements (No. 333-92489) on Form S-3 and (Nos. 333-80595, 333-80597 and 333-83891) on Form S-8 of R.J. Reynolds Tobacco Holdings, Inc. of our report dated January 24, 2001, except as to note 14, which is as of February 7, 2001, relating to the consolidated balance sheet of R.J. Reynolds Tobacco Holdings, Inc. and subsidiaries as of December 31, 2000 and the related consolidated statements of income, stockholders' equity and comprehensive income, and cash flows for the year then ended, which report appears in the December 31, 2000, annual report on Form 10-K of R.J. Reynolds Tobacco Holdings, Inc. /s/ KPMG LLP Greensboro, North Carolina February 28, 2001 EX-23.2 11 g67125ex23-2.txt INDEPENDENT AUDITORS' CONSENT (DELOITTE & TOUCHE) 1 EXHIBIT 23.2 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 333-92489 of R.J. Reynolds Tobacco Holdings, Inc. on Form S-3 and Registration Statement Nos. 333-80595, 333-80597 and 333-83891 on Form S-8 of our report dated January 27, 2000 (February 23, 2000 as to note 14) appearing in this Annual Report on Form 10-K of R.J. Reynolds Tobacco Holdings, Inc. for the year ended December 31, 2000. /s/ Deloitte & Touche LLP Winston-Salem, North Carolina February 28, 2001 EX-99.1 12 g67125ex99-1.txt EXPANDED LITIGATION DISCLOSURE 1 EXHIBIT 99.1 TO THE R.J. REYNOLDS TOBACCO HOLDINGS, INC. ANNUAL REPORT ON FORM 10-K AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 1, 2001 EXPANDED LITIGATION DISCLOSURE TOBACCO-RELATED LITIGATION Overview. Various legal actions, proceedings and claims, including legal actions claiming that lung cancer and other diseases, as well as addiction, have resulted from the use of, or exposure to, RJR Tobacco's products, are pending or may be instituted against RJR or its affiliates, including RJR Tobacco, or indemnitees. During 2000, 1,330 new actions, 1,100 of which were filed in state court in West Virginia in two complaints by the same law firm, were served against RJR Tobacco and/or its affiliates or indemnitees, and 207 actions were dismissed or otherwise resolved in favor of RJR Tobacco and/or its affiliates or indemnitees without trial. On December 31, 2000, there were 1,664 active cases pending, as compared with 541 on December 31, 1999 and 664 on December 31, 1998. As of February 7, 2001, 1,668 active cases were pending against RJR Tobacco and/or its affiliates or indemnitees: 1,665 in the United States, 2 in Puerto Rico and 1 in the Marshall Islands. The U.S. case number does not include the 3,074 Broin II cases pending as of February 7, 2001, discussed below. The U.S. cases, exclusive of the Broin II cases, are pending in 38 states and the District of Columbia. The breakdown is as follows: 1,232 in West Virginia; 111 in New York; 57 in California; 55 in Florida; 36 in Louisiana; 18 in the District of Columbia; 11 in New Jersey; 10 in Texas; 9 in each of Alabama, Iowa, Mississippi, Pennsylvania and Tennessee; 8 in Missouri; 7 in each of Georgia, Illinois and New Mexico; 6 in Nevada; 5 in Michigan; 4 in each of Indiana, Massachusetts, Minnesota, North Carolina, New Hampshire and Wisconsin; 3 in each of Connecticut, North Dakota and South Carolina; 2 in each of Arizona, Kansas, Ohio, Oklahoma, South Dakota and Washington; and 1 in each of Hawaii, Maryland, Maine, Oregon and Utah. Of the 1,665 active U.S. cases, 139 are pending in federal court, 1,522 in state court and 4 in tribal court. Most of these cases were brought by individual plaintiffs, but many of these cases seek recovery on behalf of third parties or large classes of claimants. Theories of Recovery. The plaintiffs seek recovery on a variety of legal theories, including strict liability in tort, design defect, negligence, special duty, voluntary undertaking, breach of warranty, failure to warn, fraud, misrepresentation, unfair trade practices, conspiracy, aiding and abetting, unjust enrichment, indemnity, medical monitoring, public nuisance, and violations of state and federal antitrust and RICO laws. Punitive damages, often in amounts ranging into the hundreds of millions or even billions of dollars, are specifically pleaded in a number of cases, in addition to compensatory and other damages. Seven of the 1,665 active cases in the United States, plus the 3,074 Broin II cases, involve alleged non-smokers claiming injuries resulting from exposure to environmental tobacco smoke. Thirty-seven cases purport to be class actions on behalf of thousands of individuals. Purported classes include individuals claiming to be addicted to cigarettes, individuals and their estates claiming illness and death from cigarette smoking, persons making claims based on alleged exposure to environmental tobacco smoke, African-American smokers claiming their civil rights have been violated by the sale of menthol cigarettes, current smokers who have no tobacco-related disease but are seeking to recover the costs of medical monitoring, purchasers of cigarettes claiming to have been defrauded by the marketing of lights and ultralight cigarettes, and seeking to recover their costs and Blue Cross and Blue Shield subscribers seeking reimbursement for premiums paid. Approximately 66 cases seek recovery of the cost of Medicaid/Medicare payments or other health-related costs paid for treatment of individuals suffering from diseases or conditions allegedly related to tobacco use. Ten cases, brought by entities administering asbestos liability, seek contribution for the costs of settlements and judgments. Defenses. The defenses raised by RJR Tobacco and/or its affiliates, including RJR, include, where applicable, preemption by the Federal Cigarette Labeling and Advertising Act of some or all such claims arising after 1969, the lack of any defect in the product, assumption of the risk, contributory or comparative fault, lack of -1- 2 proximate cause and statutes of limitations or repose. RJR has asserted additional defenses, including jurisdictional defenses, in many of these cases in which it is named. Industry Trial Results in Individual Smoker Cases. The tobacco industry in general, and RJR Tobacco in particular, continue to win most individual smoking and health cases. In Anderson v. Fortune Brands, Inc., a Brooklyn, New York jury found in favor of the industry, including RJR Tobacco, on June 27, 2000. In Nunnally v. R. J. Reynolds Tobacco Co., a Mississippi state court jury found RJR Tobacco not liable on July 12, 2000. On January 16, 2001, a Brooklyn, New York state court jury returned a verdict in favor of RJR Tobacco and other cigarette manufacturers in Apostolou v. American Tobacco Co. Most recently, in Little v. Brown & Williamson Tobacco Corp., a South Carolina federal district court judge granted a directed verdict in favor of RJR Tobacco on January 30, 2001. The trial of this case continued, and the jury returned a verdict in favor of the remaining defendant, Brown & Williamson, on February 6, 2001. RJR Tobacco has prevailed in all individual smoker cases that have gone to trial except two. In Whiteley v. Raybestos-Manhattan, Inc., a tobacco-asbestos synergy case brought in San Francisco Superior Court, the jury found against RJR Tobacco and Philip Morris on March 20, 2000, and awarded $1.7 million in compensatory damages. On March 27, 2000, the same jury awarded $20 million in punitive damages ($10 million against RJR Tobacco and $10 million against Philip Morris). RJR Tobacco and Philip Morris have filed their notice of appeal, and RJR Tobacco believes it has valid grounds for appeal. In Jones v. R. J. Reynolds Tobacco Co., a wrongful death case, a Tampa state court jury found against RJR Tobacco on October 12, 2000. Although the jury found that RJR Tobacco was negligent and liable, it refused to find that RJR Tobacco was part of a conspiracy to defraud. The jury awarded approximately $200,000 in compensatory damages; however, the jury refused to award punitive damages. On December 28, 2000, the trial judge granted RJR Tobacco's motion for a new trial. Juries have found for plaintiffs in five smoking and health cases in which RJR Tobacco was not a defendant, although, to date, no damages have been paid. Two of the verdicts have been overturned on appeal, and the other three remain on appeal. In February 1999, in Henley v. Philip Morris, Inc., a San Francisco state court jury awarded an individual smoker $1.5 million in compensatory damages and $50 million in punitive damages. In April 1999, the trial judge reduced the punitive damages award to $25 million, but otherwise denied Philip Morris' post-trial motions challenging the verdict. Philip Morris is appealing the verdict. In Williams v. Philip Morris, Inc., an Oregon state court jury returned a verdict against Philip Morris in March 1999 in the amount of $800,000 in actual damages, $21,500 in medical expenses and $79 million in punitive damages. The judge in this case reduced the punitive damages to $32 million. Philip Morris' appeal is pending. In the third case, Carter v. American Tobacco Co, the Florida Supreme Court, on November 22, 2000, reversed the ruling (in favor of Brown & Williamson) by the Florida Second District Court of Appeal, and reinstated the jury verdict against Brown & Williamson. On January 29, 2001, the Florida Supreme Court denied Brown & Williamson's request for rehearing. Brown & Williamson may appeal to the United States Supreme Court. BROIN II CASES As of February 7, 2001, approximately 3,074 lawsuits (referred to as the Broin II cases) have been filed, and are still pending, in Florida, by individual flight attendants, for personal injury as a result of illness allegedly caused by exposure to secondhand tobacco smoke in airline cabins. In these lawsuits, filed pursuant to the terms of the settlement of the Broin v. Philip Morris, Inc. class action, discussed below, each individual flight attendant will be required to prove that he or she has a disease caused by exposure to secondhand smoke in airplane cabins. On October 5, 2000, Judge Robert Kaye, in an order applicable to all Broin II cases, ruled 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. Rather, under this order, they will be required only to prove that their alleged adverse health effects were actually caused by environmental tobacco smoke exposure. Although defendants still may prevail on causation and other theories, RJR Tobacco does not believe the order is correct under Florida law or that it accurately reflects the intent of the Broin settlement agreement. Accordingly, defendants appealed Judge Kaye's ruling to the Third District Court of Appeal November 3, 2000. Plaintiffs moved to dismiss the appeal on November 28, 2000. However, on January 12, 2001, the Third District Court of Appeal denied plaintiffs' motion to dismiss. Defendants-Appellants' initial brief was filed on January 26, 2001. -2- 3 CLASS ACTIONS Lawsuits have been brought by individuals purporting to act as representatives of classes of plaintiffs against cigarette manufacturers, including RJR Tobacco, and, in some cases, its parent company, RJR, and others, in state and federal courts across the country. Plaintiffs request that the lawsuits be certified as class actions, allowing them to prosecute claims on behalf of a specified class, usually for personal injury or death allegedly resulting from diseases associated with cigarette smoking. In the first of these cases, Castano v. American Tobacco Co., the United States Court of Appeals for the Fifth Circuit, on May 23, 1997, overturned the certification of a nationwide class of persons whose claims related to alleged addiction to tobacco. Since this ruling by the Fifth Circuit, most class-action suits have sought certification of statewide, rather than nationwide, classes. Class-action suits based on claims similar to those asserted in Castano have been brought against RJR Tobacco and, in some cases, RJR, in state or federal courts in Alabama, Arkansas, California, the District of Columbia, Florida, Hawaii, Illinois, Indiana, Iowa, Louisiana, Maryland, Massachusetts, Michigan, Minnesota, Missouri, New Mexico, Nevada, New Jersey, New York, North Carolina, Ohio, Oklahoma, Pennsylvania, South Carolina, Tennessee, Texas, Utah, Virginia and West Virginia. In addition, a class action filed in Tennessee seeks reimbursement of Blue Cross and Blue Shield premiums paid by subscribers throughout the United States, and class-action suits against RJR Tobacco in Illinois, Missouri, New Jersey, Ohio and Pennsylvania claim that the marketing of "light" and "ultralight" cigarettes is deceptive. Plaintiffs have made similar claims in other lawsuits elsewhere. Other types of class-action suits also have been filed in additional jurisdictions. Most of the class action suits assert claims on behalf of classes of individuals who claim to be addicted, injured, or at greater risk of injury by the use of tobacco or exposure to environmental tobacco smoke, or who are the legal survivors of such persons. A number of unions and other third party payors have filed health-care cost recovery actions in the form of class actions. These cases are discussed separately below. Class certification motions are pending in several state and federal courts. In May 1994, a nicotine-dependence class action was filed in Florida state court against United States cigarette manufacturers, including RJR Tobacco and its parent, RJR. Engle v. R. J. Reynolds Tobacco Co., Circuit Court, Dade County, Case No. 94-08273CA(20). The parent companies, including RJR, were dismissed. Trial began in July 1998 in Florida state court. On July 7, 1999, the jury found against RJR Tobacco 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. The second phase of the trial, which consisted of the claims of three of the named class representatives, began on November 1, 1999. On April 7, 2000, the jury returned a verdict against all defendants. They awarded plaintiff Mary Farnan $2.85 million, the estate of plaintiff Angie Della Vecchia $4.023 million and plaintiff Frank Amodeo $5.831 million. The jury also found, however, that Frank Amodeo knew or should have known of his claim prior to May 5, 1990. The legal effect of that finding should be to bar his claim based on the applicable statute of limitations. In the second phase, the trial court also ordered the jury to determine punitive damages, if any, on a class-wide basis. On July 14, 2000, 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 being assigned to RJR Tobacco. On July 24, 2000, the defendants, including RJR Tobacco, filed numerous post-verdict motions, including motions for a new trial and to reduce the amount of the punitive damages verdict. On November 6, 2000, the trial judge denied the post trial motions and entered judgment. On November 7, 2000, RJR Tobacco posted an appeal bond in the amount of $100 million, pursuant to a Florida statute enacted on May 9, 2000, and initiated the appeals process. RJR Tobacco believes it has numerous bases for a successful appeal, although it cannot predict the outcome of the appellate process. Although the bond legislation described above is intended to apply to the Engle case, RJR Tobacco cannot predict the outcome of any possible challenges to the legislation's validity. In addition, four states, Georgia, Kentucky, North Carolina and Virginia have enacted legislation that limits the size of the bond required to stay execution of a punitive damages verdict pending appeal, but does not affect the underlying verdict. A nicotine-dependence class action was filed in May 1996, in Indiana state court against United States cigarette manufacturers, including RJR Tobacco, and its parent company, RJR. Norton v. RJR Nabisco Holdings Corp., Superior Court, Madison County, No.48D01-9605-CP-271. In June 1996 defendants removed the case to federal court. Pursuant to plaintiffs' motion, however, the case was remanded to state court on March 24, 1997. On May 17, 1997, plaintiffs filed a petition for class certification. On November 17, 2000, the court granted the parties joint motion to stay the case until April 15, 2001. -3- 4 In May 1996, a physical injury and nicotine-dependence class action was filed in Maryland state court against United States cigarette manufacturers, including RJR Tobacco, and its parent company, RJR. Richardson v. Philip Morris, Inc., Circuit Court, Baltimore City, No. 96145050. The case was removed by defendants to federal court and was subsequently remanded to state court. On January 28, 1998, the Circuit Court for Baltimore City granted plaintiffs' motion for class certification. The Maryland Court of Appeals (the highest state court in Maryland) overturned the class certification ruling and decertified the class on May 16, 2000. In May 1996, a nicotine-dependence/medical monitoring class action was filed in Louisiana state court against United States cigarette manufacturers, including RJR Tobacco, and its parent company, RJR. Scott v. American Tobacco Co., Inc., District Court, Parish of Orleans, Docket No. 96-8461. On April 16, 1997, the trial court granted plaintiffs' motion for class certification on behalf of Louisiana residents who desire smoking cessation assistance and medical monitoring. In the class certification ruling, the court dismissed the wholesaler defendants. The remaining defendants removed the case to federal court on April 16, 1997. On December 2, 1997, plaintiffs' motion to remand the case to the Civil District Court of Orleans Parish was granted. In November 1998, an intermediate appellate court affirmed the trial court's certification of the class. In February 1999, the Louisiana Supreme Court declined to hear defendants' interlocutory appeal of the class certification ruling. Trial is scheduled for June 18, 2001. In June 1996, a physical injury and nicotine-dependence class action was filed in the District of Columbia against United States cigarette manufacturers, including RJR Tobacco, and its parent company, RJR. RJR was voluntarily dismissed from the case. Reed v. Philip Morris, Inc, Superior Court, Case No. CA-5070-96. Plaintiffs' motion for class certification was denied on August 18, 1997. Plaintiffs filed an amended complaint on July 17, 1998, and renewed their motion for class certification. The trial court again denied class certification on July 23, 1999. Although plaintiffs were allowed to continue their cases as separate individuals, they have taken no steps to do so. In August 1996, a nicotine-dependence class action was filed in Alabama state court, on behalf of Alabama and North Carolina residents, against four United States cigarette manufacturers, including RJR Tobacco. In September 1996, the case was removed to federal court. Lyons v. American Tobacco Co., Inc., United States District Court for the Southern District of Alabama, Southern Division, Case No. 96-881-BH-S. Plaintiffs' motion to remand the case to state court was denied. On January 2, 2001, the trial court granted plaintiffs' motion to dismiss the case without prejudice. In August 1996, a nicotine-dependence class action was filed in Ohio state court on behalf of Ohio residents against United States cigarette manufacturers, including RJR Tobacco, and its parent company, RJR. This case was removed to federal court in September 1996. Chamberlain v. American Tobacco Co., Inc., United States District Court for the Northern District of Ohio, Case No. 1:96CV2005. Plaintiffs' motion to remand the case to state court was denied. Plaintiffs' motion for class certification was denied on April 12, 1999. Afterward, defendants filed a motion to dismiss the individual complaints, which was granted on November 22, 1999, with the exception of fraud claims. On May 8, 2000, the parties stipulated to a complete dismissal without prejudice. Pursuant to the stipulation, should the plaintiffs choose to refile their individual cases, they must do so in the United States District Court for the Northern District of Ohio on or before April 30, 2001. In September 1996, a nicotine-dependence class action was filed in Minnesota state court against four United States cigarette manufacturers, including RJR Tobacco, and its parent company, RJR. The case was removed by defendants to federal court in September 1996. Plaintiffs' motion to remand the case to state court was denied. Thompson (formerly Masepohl) v. American Tobacco Co., Inc., United States District Court for the District of Minnesota, Third Division, Case No. CV3-6-888. On November 22, 1999, plaintiffs' motion for class certification was denied by the trial court. On May 23, 2000, the parties stipulated to a dismissal without prejudice; the stipulation was granted by the court on May 30, 2000. In September 1996, a class action was filed in Tennessee state court against four United States cigarette manufacturers, including RJR Tobacco, on behalf of all individuals and entities in the United States who have paid premiums to a Blue Cross or Blue Shield organization for medical insurance. The complaint alleges that defendants' actions have resulted in increased medical insurance premiums for all class members and seeks recovery -4- 5 under various consumer protection statutes as well as under theories of breach of special duty and unjust enrichment. Perry v. Philip Morris, Inc., United States District Court for the Eastern District of Tennessee, Case No. 4:00-CV-97. Defendants removed the case to federal court on November 19, 1996. On May 12, 1997, the case was remanded to the Circuit Court of Coffee County for further proceedings. On November 1, 2000, plaintiffs filed a motion for leave to file a second amended class action complaint. Defendants once again removed the case on December 1, 2000. Plaintiffs filed a motion to remand on January 2, 2001. Defendants filed their opposition to the remand motion on January 19, 2001. In October 1996, a nicotine-dependence class action was filed in New Mexico state court against four United States cigarette manufacturers, including RJR Tobacco, and its parent company, RJR. RJR has been dismissed from this case. Connor v. American Tobacco Co., Inc., District Court, Bernalillo County, Case No. CV-96-9422. On April 7, 2000, the court granted defendants' motion to consolidate this case with the Jimenez case, also pending in this court, for class certification discovery and decision. The order further allowed plaintiffs until April 17, 2000, to move to strike the judge from the consolidated proceedings. Plaintiffs never filed such a motion, and the cases remain dormant. In November 1996, a nicotine-dependence class action was filed in federal court in Arkansas against United States cigarette manufacturers, including RJR Tobacco, and its parent company, RJR. Hansen (formerly McGinty) v. American Tobacco Co., Inc., United States District Court for the Eastern District of Arkansas, Western Division, Case No. LRC 96-881. Plaintiffs' motion for class certification was denied July 21, 1999. Plaintiffs appealed this ruling to the United States Court of Appeals for the Eighth Circuit, which denied plaintiffs' request to appeal. On December 15, 1999, defendants filed motions to sever the individual cases. On October 12, 2000, plaintiffs filed a motion for voluntary non-suit which was granted by the court on October 20, 2000. In January 1997, a nicotine-dependence class action was filed in West Virginia state court against United States cigarette manufacturers, including RJR Tobacco, and its parent company, RJR. Despite the fact that RJR Tobacco and RJR had not been served, they joined with other defendants in removing the case to federal court in February 1997. Blankenship (formerly McCune) v. American Tobacco Co., Inc., Circuit Court, Ohio County, Case No. 2:97-204. Plaintiffs' motion to remand the case was granted on January 30, 1998. The West Virginia Supreme Court transferred all tobacco cases, including Blankenship, to Judge Recht in Wheeling, West Virginia. On August 16, 2000, the court conditionally certified (only to the extent of medical monitoring) a class of West Virginia residents who: (1) on or after January 31, 1995, purchased and smoked cigarettes manufactured, marketed and/or sold by defendants; (2) have a minimum five pack year smoking history; (3) have not been diagnosed with cancer of the lip, oral cavity or pharynx, esophagus, stomach, pancreas, larynx, trachea, bronchus or lung, cervix, uterus, bladder, kidney or other urinary organs, coronary heart or cerebrovascular diseases, bronchitis or emphysema or chronic airways obstruction; and (4) have not received health care paid or reimbursed directly or indirectly by the State of West Virginia. The trial of this case began January 4, 2001, and ended on January 25, 2001, when the judge declared a mistrial. The court heard argument on decertification of the class, among other things, on February 19, 2001. A ruling is expected within the next few weeks. In February 1997, a nicotine-dependence class action was filed in Hawaii state court against United States cigarette manufacturers, including RJR Tobacco, and its parent company, RJR. Peterson v. American Tobacco Co., Inc., Circuit Court, Case No. 97-490-2. Defendants removed this case in March 1997. Plaintiffs' motion to remand this action back to state court was granted on October 6, 1999. On December 29, 1999, the court granted a motion to designate the case as complex. Class certification discovery is proceeding. In February 1997, a physical injury class action was filed in federal court in Oklahoma against United States cigarette manufacturers, including RJR Tobacco. Walls v. American Tobacco Co., Inc., United States District Court for the Northern District of Oklahoma, Case No.97-CV-218-H. On December 9, 1998, the federal court refused to certify for class treatment a number of claims, but certified five questions of Oklahoma state law to the Oklahoma Supreme Court. On September 19, 2000, the Oklahoma Supreme Court answered the certified state law questions in such a way that led the parties to stipulate that the case should not be certified as a class action in federal court and that the individual plaintiffs would dismiss their federal court cases without prejudice. The federal court issued an order on October 19, 2000, refusing to certify the case as a class action, and dismissed the individual plaintiffs' cases. -5- 6 In March 1997, a physical injury class action was filed in state court in West Virginia against United States cigarette manufacturers, including RJR Tobacco. Defendants removed this case to federal court in April 1997. Plaintiff filed a First Amended Complaint on September 26 1997, dropping plaintiff Ima Jean Ingle. On March 2, 1998, the case was remanded to state court. Muncy (formerly Ingle and formerly Woods) v. Philip Morris, Inc., Circuit Court, Ohio County, Case No. 97-C-21-5. The West Virginia Supreme Court transferred all tobacco cases, including Muncy, to Judge Recht in Wheeling, West Virginia. There has been little activity in this case since the transfer. The parties are currently awaiting a scheduling order. In March 1997, a nicotine-dependence/medical monitoring class action was filed in state court in Nevada against United States cigarette manufacturers, including RJR Tobacco, and its parent company, RJR (added via amended complaint). Defendants removed the case to federal court on March 21, 1997. Plaintiffs filed, but withdrew, a motion for remand. Selcer v. R. J. Reynolds Tobacco Co., United States District Court for the District of Nevada, Case No. CVS-97-334 PMP. Selcer is one of four class action cases pending certification decisions in Nevada. On June 1, 1999, the court entered an order certifying certain issues to the Nevada Supreme Court and staying all motions for class certification pending a ruling by the Supreme Court on the issues certified. On January 30, 2001, in Badillo v. American Tobacco Co., Inc., the Nevada Supreme Court held that Nevada law does not recognize medical monitoring as a cause of action. The federal district court will consider this opinion in determining whether or not to certify the Selcer case, as well as the other class action cases pending in Nevada. In April 1997, a physical injury class action was filed in Wisconsin state court against United States cigarette manufacturers, including RJR Tobacco. Defendants removed the case to federal court in May 1997. Plaintiffs' motion to remand the case to the Circuit Court for Rock County was granted August 27, 1997. Defendants removed the case on diversity grounds on April 17, 1998, and plaintiffs' motion for remand was denied on June 10, 1998. Insolia v. Philip Morris, Inc., United States District Court for the Western District of Wisconsin, Case No. 97-C-347-C. In December 1998, the court denied plaintiffs' motion for class certification, and summary judgment was granted on all claims but one. Plaintiffs dismissed the sole remaining claim and appealed to the United States Court of Appeals for the Seventh Circuit. On June 16, 2000, the Seventh Circuit affirmed the federal district court's granting of summary judgment on the claims of strict liability, fraud and intentional exposure to a hazardous substance, as well as the judge's decision not to certify any issues to the Wisconsin Supreme Court. The Seventh Circuit reversed the granting of summary judgment on the negligence claim, and remanded that portion of the case to the district court for further proceedings. The defendants-appellees filed a petition for rehearing with the Seventh Circuit which was denied. On October 2, 2000, defendants filed a motion for judgment on the pleadings which was granted on December 20, 2000. On January 24, 2001, the court granted the parties' stipulation of dismissal without prejudice. In April 1997, a nicotine-dependence class action was filed in state court in New Jersey against United States cigarette manufacturers, including RJR Tobacco, and its parent company, RJR. Cosentino v. Philip Morris, Inc., Superior Court, Middlesex County, Case No. L-5135-97. This case was consolidated for class certification purposes with Kirstein, Lippincott, Piscitello, and Tepper. On October 22, 1998, the court denied plaintiffs' motion for class certification. Plaintiffs filed a motion for leave to appeal on February 26, 1999, which the court denied on April 12, 1999. On July 15, 1999, the judge entered an order requiring plaintiffs to file amended and severed complaints within 45 days or the case would be dismissed. Plaintiffs Cosentino and Lanterman did file amended individual complaints. On February 22, 2000, the Cosentino parties stipulated to a dismissal of the case without costs. In May 1997, a physical injury class action was filed in federal court in Texas against United States cigarette manufacturers, including RJR Tobacco, and others. Cole v. Tobacco Institute, United States District Court for the Eastern District of Texas, Case No. 1:97-CV-256. On May 5, 2000, the court granted defendants' motion for judgment on the pleadings, and the case was dismissed with prejudice. Plaintiffs appealed the ruling to the United States Court of Appeals for the Fifth Circuit. On August 1, 2000, the Fifth Circuit consolidated the appeals of this case and Hughes v. Tobacco Institute, United States District Court for the Eastern District of Texas, Case No. 1:99-CV-163. On November 3, 2000, appellants filed a motion to certify questions to the Texas Supreme Court. Defendants-Appellees are opposing the motion. In May 1997, a physical injury class action was filed in the state court in New York against United States cigarette manufacturers, including RJR Tobacco, and its parent company, RJR. Geiger v. American Tobacco Co., -6- 7 Inc., Supreme Court, Queens County, Case No. 10229/99. In July 1997, the court certified an interim class of all New York smokers with lung and/or throat cancer and their survivors. On July 6, 1998, the New York Appellate Division (Second Department) reversed the trial court's class certification order and remanded the case for discovery and a hearing on class certification. On June 23, 1999, the trial court denied class certification. On October 15, 1999, plaintiffs appealed the court's decision denying class certification to the New York Appellate Division (Second Department), which affirmed the trial court's denial on November 27, 2000. On December 21, 2000, plaintiffs filed a motion for leave to appeal to the New York Court of Appeals. In May 1997, a nicotine-dependence class action was filed in state court in Tennessee against United States cigarette manufacturers, including RJR Tobacco, and its parent company, RJR. Defendants removed this case to the federal court in June 1997. Anderson v. American Tobacco Co., Inc., United States District Court for the Eastern District of Tennessee, Case No. 3:97-CV-1441. Plaintiffs' motion to remand was denied on October 31, 1997. The case has been stayed since January 29, 1998. In May 1997, a nicotine-dependence class action was filed in state court in New Jersey against United States cigarette manufacturers, including RJR Tobacco, and its parent company, RJR. Tepper v. Philip Morris, Inc., Superior Court, Middlesex County, Case No. L-10709-97. On October 14, 1997, the case was transferred to Middlesex County Superior Court, and consolidated for class certification purposes with Cosentino, Kirstein, Lippincott, and Piscitello. On October 22, 1998, the court denied plaintiffs' motion for class certification. Plaintiffs filed a motion for leave to appeal on February 26, 1999, which the court denied on April 12, 1999. On July 15, 1999, the court ordered that plaintiffs file amended and severed individual complaints within 45 days of this order. Matthew Tepper and his son, Scott, remained plaintiffs under this original docket number. Four of the original plaintiffs were severed, and two of these plaintiffs - Bruce Shortino and Patricia Watkins - filed individual amended complaints against tobacco manufacturing defendants other than RJR Tobacco. In May 1997, a physical injury class action was filed in Michigan state court against United States cigarette manufacturers, including RJR Tobacco, and its parent company, RJR. Taylor v. American Tobacco Co., Inc., United States District Court for the Eastern District of Michigan, Case No. 97-715975. On January 10, 2000, the trial court denied certification of the class. On April 14, 2000, the parties stipulated to a dismissal with prejudice. In June 1997, a physical injury/nicotine-dependence class action was filed in state court in New Jersey against United States cigarette manufacturers, including RJR Tobacco, and its parent company, RJR. Lippincott v. American Tobacco Co., Inc., Superior Court, Middlesex County, Case No. L-10825-97. On October 14, 1997 the case was transferred to Middlesex County Superior Court, and consolidated for class certification purposes with Cosentino, Kirstein, Piscitello, and Tepper. On October 22, 1998, the court denied plaintiffs' motion for class certification. Plaintiffs filed a motion for leave to appeal on February 26, 1999, which was denied on April 12, 1999. On July 15, 1999, the court ordered that plaintiffs file amended and severed individual complaints within 45 days of this order. On September 15, 1999, the parties stipulated to a dismissal of this action. In June 1997, a physical injury/addiction class action was filed in state court in Iowa against United States cigarette manufacturers, including RJR Tobacco, and its parent company, RJR. The case was removed to federal court. Fitz (f/k/a Brammer) v. R. J. Reynolds Tobacco Co., United States District Court for the Southern District of Iowa, Case No. 4-97-CV-10461. There was very little activity in this case in 1999, other than parent companies, including RJR, being dismissed from the lawsuit. In 2000, plaintiffs amended their complaint to pursue a lung-cancer-only theory, rather than the former injury/addiction theory. Class certification discovery is proceeding. In June 1997, a physical injury class action including those who desire to participate in smoking cessation programs was filed in state court in California against United States cigarette manufacturers, including RJR Tobacco, and its parent company, RJR. Brown v. American Tobacco Co., Inc., Superior Court, San Diego County, Case No. 711400. On April 10, 2000, a California state court judge denied certification of the class. On February 2, 2001, plaintiffs filed their most recent motion for class certification, which seeks certification based on alleged violations of Sections 17200 and 17500 of the California Civil Code and alleged violations of the California Consumer Legal Remedies Act. The San Diego County Superior Court is scheduled to issue a telephonic ruling on March 19, 2001. -7- 8 In July 1997, a physical injury class action was filed in state court in Illinois against United States cigarette manufacturers, including RJR Tobacco, and its parent company, RJR. Defendants removed the case to federal court in December 1997. Guillory (formerly Daley and Denberg) v. American Brands, Inc., United States District Court for the Northern District of Illinois, Case No. 97C8641. Plaintiffs filed their motion for class certification on August 28, 2000. Defendants' opposition was filed November 15, 2000. Oral argument has not been scheduled. In September 1997, a physical injury/nicotine-dependence class action was filed in federal court in Texas against United States cigarette manufacturers, including RJR Tobacco. Bush v. Philip Morris, Inc., United States District Court for the Eastern District of Texas, Case No. 597CV180. On August 29, 2000, the parties stipulated to a voluntary dismissal of plaintiffs' complaint. In October 1997, an environmental tobacco smoke ("ETS") class action on behalf of casino workers was filed in federal court in Nevada against United States cigarette manufacturers, including RJR Tobacco, and its parent company, RJR. Badillo v. American Tobacco Co., Inc., United States District Court for the District of Nevada, Case No. CV-S-98-1764 PMP (PAL). Badillo is one of four class action cases pending certification decisions in Nevada. On June 1, 1999, the court entered an order certifying certain issues to the Nevada Supreme Court and staying all motions for class certification pending a ruling by the Supreme Court on the issues certified. On January 30, 2001, in Badillo v. American Tobacco Co., Inc., the Nevada Supreme Court held that Nevada law does not recognize medical monitoring as a cause of action. The federal district court will consider this opinion in determining whether or not to certify the Badillo case, as well as the other class action cases pending in Nevada. In November 1997, a physical injury class action was filed in federal court in South Carolina against United States cigarette manufacturers, including RJR Tobacco, and its parent company, RJR. Aksamit v. Brown & Williamson Tobacco Corp., United States District Court for the District of South Carolina, Case No. 6-97-3636-21. On December 29, 2000, the trial court denied class certification. In November 1997, an ETS class action was filed in state court in Louisiana. Defendants removed this case to the United States District Court for the Eastern District of Louisiana on December 12, 1997. Young v. American Tobacco Co., Inc., Circuit Court, Orleans Parish, Louisiana, Case No. 97-19984. The case was remanded to state court on February 2, 1998. Class certification discovery is proceeding. A class certification hearing is scheduled for September 25, 2001. In December 1997, a medicare payment recoupment class action was filed in federal court in Texas against United States cigarette manufacturers, including RJR Tobacco. Mason v. American Tobacco Co., Inc., United States District Court for the Eastern District of New York, Case No. 00-CV-4442. There has been little activity in this case since the September 19, 1999 order allowing plaintiffs to voluntarily dismiss the claim in their complaint for relief under the Medical Care Recovery Act. On July 19, 2000, Chief Judge Buchmeyer transferred this case to the United States District Court for the Eastern District of New York for possible consolidation with Simon II (discussed separately). On September 12, 2000, defendants filed a motion to transfer this case to the United States District Court for the District of Columbia. Judge Weinstein, however, denied defendants' motion on October 5, 2000. This case is part of the Simon II consolidated class action complaint for declaratory relief which was filed on September 6, 2000. The cases underlying the consolidated Simon II complaint are (1) Simon, Case No. 99-CV-1988; (2) Decie v. American Tobacco Co., Inc., Case No. 00-CV-2340; (3) Ebert v. Philip Morris, Inc., Case No. 00-CV-4632; (4) Mason v. American Tobacco Co., Inc., Case No. 00-CV-4442; (5) Bergeron v. Philip Morris, Inc., Case No. 99-CV-6142; (6) National Asbestos Workers Medical Fund v. Philip Morris, Inc., Case No. 98-CV-1492; (7) Blue Cross and Blue Shield of New Jersey v. Philip Morris, Inc., Case No. 98-CV-3287; (8) H.K. Porter Co., Inc. v. American Tobacco Co., Inc., Case No. 97-CV-7658; (9) Raymark Industries, Inc. v. American Tobacco Co., Inc., Case No. 98-CV-675; and (10) Falise v. American Tobacco Co., Inc., Case No. 99-CV-7392. These cases are discussed separately. In December 1997, an ETS class action was filed in federal court in Nevada against cigarette manufacturers, including RJR Tobacco. Dienno v. Liggett Group, Inc., United States District Court for the District of Nevada, Case No. CV-S-98-489 PMP (PAL). Dienno is one of four class actions pending certification decisions in Nevada. In December 1998, this case was consolidated with the Badillo case. On June 1, 1999, the court entered an order certifying certain issues to the Nevada Supreme Court and staying all motions for class certification pending a ruling by the Supreme Court on the issues certified. On January 30, 2001, in Badillo v. American -8- 9 Tobacco Co., Inc., the Nevada Supreme Court held that Nevada law does not recognize medical monitoring as a cause of action. The federal district court will consider this opinion in determining whether or not to certify the Dienno case, as well as the other class action cases pending in Nevada. In February 1998, a class action was filed in federal court in Utah against United States cigarette manufacturers, including RJR Tobacco, and its parent company, RJR. Jackson v. Philip Morris, Inc., United States District Court for the District of Utah, Case No. 2:98CV00178B. This case has had minimal activity during 2000. Plaintiffs have not yet filed an amended complaint, nor have they responded to defendants' proposed case management order. In February 1998, a physical injury class action was filed against asbestos manufacturers, cigarette manufacturers, including RJR Tobacco, and its parent company, RJR, in state court in West Virginia. Parsons v. A C & S, Inc., Circuit Court, Ohio County, Case No. 98-C-388. This case has been stayed pending a final resolution of the motion to refer tobacco litigation to the Mass Litigation Panel. On December 6, 2000, three defendants (Nitram Liquidators, Inc., Desseaux Corporation of North America and Armstrong World Industries) filed bankruptcy petitions in the United States 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. In March 1998, an unfair trade practices class action was filed against RJR Tobacco and its parent company, RJR, in state court in Pennsylvania, alleging that the labels "light" and "ultralight" on certain of RJR Tobacco's cigarettes are misleading. Oliver v. R. J. Reynolds Tobacco Co., Court of Common Pleas, Philadelphia County, Case No. 000268. The trial court denied plaintiffs' motion for class certification on December 19, 2000. In April 1998, an ETS class action on behalf of casino workers was filed in state court in New Jersey against United States cigarette manufacturers, including RJR Tobacco, and its parent company, RJR. Avallone v. American Tobacco Co., Inc., Superior Court, Middlesex County, Case No. MID-L-488398. On April 13, 2000, the trial court denied plaintiffs' motion for class certification. Plaintiffs filed a motion for reconsideration of the court's class certification decision on May 10, 1999. On December 3, 1999, the court denied plaintiffs' motion for reconsideration. On April 27, 2000, plaintiffs' motion for leave to file an interlocutory appeal was granted, nunc pro tunc, but denied in all other aspects of the motion. On September 8, 2000, the court denied plaintiffs' motion for leave to appeal. In April 1998, a nicotine-dependence class action was filed in state court in California against United States cigarette manufacturers, including RJR Tobacco, and its parent company, RJR. Daniels v. Philip Morris Cos, Inc., Superior Court, San Diego County, Case No. 719446. On November 30, 2000, a San Diego Superior Court, relying on a California statute, certified a class consisting of all persons who, as California resident minors, smoked one or more cigarettes in California between April 2, 1994 and December 1, 1999. In April 1998, an ETS class action was filed in state court in Nevada against United States cigarette manufacturers, including RJR Tobacco, and its parent company, RJR. Defendants removed the case to federal court on May 20, 1998. Christensen v. Philip Morris Cos., Inc., United States District Court for the District of Nevada, Case No. CV-S-98-717-LDG (RLH). Christensen is one of four class action cases pending certification decisions in Nevada. On June 1, 1999, the court entered an order certifying certain issues to the Nevada Supreme Court and staying all motions for class certification pending a ruling by the Supreme Court on the issues certified. On January 30, 2001, in Badillo v. American Tobacco Co., Inc., the Nevada Supreme Court held that Nevada law does not recognize medical monitoring as a cause of action. The federal district court will consider this opinion in determining whether or not to certify the Christensen case, as well as the other class action cases pending in Nevada. In June 1998, a class action claiming fraud was filed against United States cigarette manufacturers, including RJR Tobacco, and others. Cleary v. Philip Morris, Inc., Circuit Court, Cook County, Case No. 00L 4952. On February 3, 1999, the court denied defendants' motion to dismiss. On January 19, 2000, plaintiffs filed an amended complaint. On March 22, 2000, defendants moved to stay the case in light of Guillory (see separate discussion) which was denied on December 18, 2000. Plaintiffs moved to transfer the case to the Chancery Division on October 16, 2000. This motion was denied on October 25, 2000. A case management conference is scheduled for April 16, 2001. -9- 10 In July 1998, a nicotine-dependence and physical injury class action was filed in state court in North Carolina against United States cigarette manufacturers, including RJR Tobacco, and its parent company, RJR. Creekmore v. Brown & Williamson Tobacco Corp., Superior Court, Buncombe County, Case No. 98 CV 03403. On April 22, 1999, plaintiffs filed an amended complaint. On May 11, 1999, plaintiffs voluntarily dismissed RJR and several others. An order designating the case as exceptional, and assigning it to Judge Payne, was issued on July 11, 2000. Since then, however, the case has been dormant. In August 1998, a physical injury class action was filed in state court in New Mexico against United States cigarette manufacturers, including RJR Tobacco. Jimenez v. Brown & Williamson Tobacco Corp., District Court, Bernalillo County, Case No. CV-98 08035. On April 7, 2000, the court granted defendants' motion to consolidate this case with the Jimenez case, also pending in this court, for class certification discovery and decision. The order further allowed plaintiffs until April 17, 2000, to move to strike the judge from the consolidated proceedings. Plaintiffs never filed such a motion, and the cases remain dormant. In October 1998, a medical monitoring class action was filed in state court in Pennsylvania against United States cigarette manufacturers, including RJR Tobacco, and its parent company, RJR. Defendants removed the case to federal court on November 16, 1998. Sweeney v. American Tobacco Co., Inc., Court of Commons Pleas, Allegheny County, Case No. 98-1908. This case was remanded to state court on April 28, 1999. The parties agreed to a scheduling and case management order filed May 3, 2000. On November 9, 2000, the court dismissed this case without prejudice due to plaintiffs' failure to comply with the scheduling and case management order. In October 1998, a civil rights class action was filed in federal court in Pennsylvania alleging that United States cigarette manufacturers, including RJR Tobacco, and its parent company, RJR, engaged in "discriminatory targeting of tobacco products sales to Black Americans." Brown v. Philip Morris, Inc., United States District Court for the Eastern District of Pennsylvania, Case No. 98-5518. On September 21, 1999, the court granted defendants' motion to dismiss. This case is currently on appeal to the United States Court of Appeals for the Third Circuit. The Third Circuit heard oral argument on January 19, 2001. No ruling has been issued. In October 1998, a class action was filed in state court in New Jersey against RJR Tobacco and RJR on behalf of New Jersey residents who purchased and smoked RJR Tobacco's light or ultralight cigarettes on or after March 3, 1992. Trombino v. R. J. Reynolds Tobacco Co., Superior Court, Middlesex County, Case No. L-11263-98. The court heard oral argument on plaintiffs' motion for class certification on May 26, 2000. No opinion has been issued. In December 1998, a nicotine-dependence class action was filed in state court in Missouri against United States cigarette manufacturers, including RJR Tobacco. On January 20, 1999, the case was removed to federal court. Gatlin v. American Tobacco Co., Inc., United States District Court for the Eastern District of Missouri, Case No. 982-10021, Division 1. The parties stipulated to a dismissal of this action on February 8, 2000. In December 1998, a nicotine-dependence class action was filed in state court in Missouri against United States cigarette manufacturers, including RJR Tobacco, and its parent company, RJR. Jones v. American Tobacco Co., Inc., Circuit Court, Jackson County, Case No. 98-CV-30687. This case was removed to federal court on February 12, 1999. On February 17, 1999, the court remanded the case to state court. Plaintiffs filed an amended complaint in May 1999. On August 14, 1999, the parties stipulated that responsive pleadings for defendants who either have been, or will be, served prior to the court's entry of an order on class certification, shall not be due until 30 days after the court's ruling on certification. There has been no class certification activity to date. Plaintiff Diana Jones voluntarily dismissed her individual claims on September 7, 2000. In April 1999, a class action was filed in New York against United States cigarette manufacturers, including RJR Tobacco. Simon (formerly Sturgeon) v. Philip Morris, Inc., United States District Court for the Eastern District of New York, Case No. CV 99 1988. On November 6, 2000, the trial court denied certification to this purported class of smokers defined as all persons residing in the United States, or who were residents at the time of their death, who had a 20-pack-per-year history of smoking, and who had a timely claim as of April 9, 1999, for personal injury or wrongful death arising from lung cancer. This case is part of the Simon II consolidated class action complaint for declaratory relief which was filed on September 6, 2000. The cases underlying the consolidated Simon II complaint are (1) Simon, Case No. 99-CV-1988; (2) Decie v. American Tobacco Co., Inc., -10- 11 Case No. 00-CV-2340; (3) Ebert v. Philip Morris, Inc., Case No. 00-CV-4632; (4) Mason v. American Tobacco Co., Inc., Case No. 00-CV-4442; (5) Bergeron v. Philip Morris, Inc., Case No. 99-CV-6142; (6) National Asbestos Workers Medical Fund v. Philip Morris, Inc., Case No. 98-CV-1492; (7) Blue Cross and Blue Shield of New Jersey v. Philip Morris, Inc., Case No. 98-CV-3287; (8) H.K. Porter Co., Inc. v. American Tobacco Co., Inc., Case No. 97-CV-7658; (9) Raymark Industries, Inc. v. American Tobacco Co., Inc., Case No. 98-CV-675; and (10) Falise v. American Tobacco Co., Inc., Case No. 99-CV-7392. These cases are discussed separately. In April 1999, a class action was filed in Alabama on behalf of all minors in the States of Alabama who smoke, against United States cigarette manufacturers, including RJR Tobacco, and its parent company, RJR. Julian v. Philip Morris Cos., Inc., Circuit Court, Montgomery County, Case No. CV-1999-1245-GR. Defendants removed this case to federal court on May 19, 1999. Plaintiffs filed their motion to remand the case on June 17, 1999, which the court granted on August 26, 1999. The case has been inactive since the court's remand ruling in August 1999. In March 1999, a class action was filed in Massachusetts on behalf of all persons having a history of smoking cigarettes which were purchased in Massachusetts against United States cigarette manufacturers, including RJR Tobacco. Tobacco Consumers' Group Number 3 v. R. J. Reynolds Tobacco Co., United States District Court for the District of Massachusetts, Case No. 99-CV-10950-GAO. Defendants removed this case to federal court on April 16, 1999. On May 3, 2000, the parties stipulated to a dismissal without prejudice. In November 1999, a class action was filed against RJR Tobacco, and its parent company, RJR, in Ohio on behalf of Salem Lights smokers who do not have a claim for personal injury from smoking. Nichols v. R. J. Reynolds Tobacco Co., Court of Common Pleas, Summit County, Case No. CV 99 11 4539. Defendants removed this case to federal court on December 10, 1999. Plaintiffs filed a motion to remand the case to the Summit County Court of Common Pleas on January 25, 2000; the motion was granted on April 28, 2000. On September 26, 2000, plaintiffs voluntarily dismissed their complaint against defendants without prejudice. In February 2000, a class action was filed in Illinois on behalf of all Illinois residents who purchased and consumed Doral Lights, but who do not have a claim for personal injury, against RJR Tobacco, and its parent company, RJR. Wallace v. R. J. Reynolds Tobacco Co., Circuit Court, Madison County, Case No. 00-L-113. RJR Tobacco filed its answer to plaintiffs' complaint on April 11, 2000. Discovery is proceeding. In February 2000, a class action was filed in Tennessee on behalf of residents of Tennessee who suffer from nicotine addiction, against United States cigarette manufacturers, including RJR Tobacco, and its parent company, RJR. Temple v. State of Tennessee, United States District Court for the Middle District of Tennessee, Case No. 3-00-126. A scheduling order, in which plaintiffs' motion for leave to amend was granted, was filed on December 4, 2000. In March 2000, a class action was filed in Missouri on behalf of all Missouri residents who smoked Winston Lights, Salem Lights, or Camel Lights, but have no claim for personal injury, against RJR Tobacco and its parent company, RJR. Collora v. R. J. Reynolds Tobacco Co., Circuit Court, St. Louis County, Case No. 002-732. Discovery is proceeding. In March 2000, a class action was filed in Illinois on behalf of all U.S. citizens who have suffered from tobacco-related disease, illness or injury, against United States cigarette manufacturers, including RJR Tobacco, and its parent company, RJR. Force v. American Tobacco Co., Inc., United States District Court for the Southern District of Illinois, Case No. 00-215-GPM. Plaintiffs filed a motion to transfer this case to the United States District Court for the Eastern District of New York, before Judge Weinstein, on December 5, 2000. On December 18, 2000, the motion to transfer was denied. On January 8, 2001, plaintiffs voluntarily dismissed their complaint. In April 2000, a class action was filed in New York on behalf of all smokers who have claims for personal injury, medical monitoring, higher insurance premiums or less insurance coverage, against United States cigarette manufacturers, including RJR Tobacco, and its parent company, RJR. Decie v. American Tobacco Co., Inc., United States District Court for the Eastern District of New York, Case No. 00 CV 2340. The parties have stipulated that defendants have up to and including February 26, 2001 to answer plaintiffs' complaint. This case is part of the Simon II consolidated class action complaint for declaratory relief which was filed on September 6, 2000. The cases underlying the consolidated Simon II complaint are (1) Simon, Case No. 99-CV-1988; (2) Decie v. American -11- 12 Tobacco Co., Inc., Case No. 00-CV-2340; (3) Ebert v. Philip Morris, Inc., Case No. 00-CV-4632; (4) Mason v. American Tobacco Co., Inc., Case No. 00-CV-4442; (5) Bergeron v. Philip Morris, Inc., Case No. 99-CV-6142; (6) National Asbestos Workers Medical Fund v. Philip Morris, Inc., Case No. 98-CV-1492; (7) Blue Cross and Blue Shield of New Jersey v. Philip Morris, Inc., Case No. 98-CV-3287; (8) H.K. Porter Co., Inc. v. American Tobacco Co., Inc., Case No. 97-CV-7658; (9) Raymark Industries, Inc. v. American Tobacco Co., Inc., Case No. 98-CV-675; and (10) Falise v. American Tobacco Co., Inc., Case No. 99-CV-7392. These cases are discussed separately. In June 2000, a class action was filed in Florida on behalf of all persons who were diagnosed after July 15, 1997 with lung cancer, throat cancer, or cancer of the oral cavity, against United States cigarette manufacturers, including RJR Tobacco. Arntiz v. Philip Morris, Inc., Circuit Court, Hillsborough County, Case No. 00-4208-DIV.H. Plaintiffs filed a motion for class certification on July 3, 2000. Defendants filed an answer to plaintiffs' complaint on November 30, 2000. Plaintiff filed a motion to transfer this matter to Division "D" (Trial Division) on January 10, 2000, which the court granted on January 25, 2001. On February 5, 2001, plaintiff filed a motion to sever and abate. In July 2000, a class action was filed in Massachusetts, against United States cigarette manufacturers, including RJR Tobacco. The purported class was defined as all persons who smoked cigarettes while a minor and a resident of Massachusetts between 1970 and the date of the complaint, and who now wish to quit smoking. Lewis v. Philip Morris, Inc., United States District Court for the District of Massachusetts, Case No. 00-12089-RWZ. Defendants' filed their motion to dismiss on November 15, 2000. On January 18, 2001, the court granted plaintiffs' motion for voluntary dismissal without prejudice. In July 2000, a class action was filed in Massachusetts against United States cigarette manufacturers, including RJR Tobacco, on behalf of a purported class of persons who purchased cigarettes in the United States, developed an addiction to nicotine prior to January 1, 1964, and who have been diagnosed with lung cancer within three years of the filing of this action (July 18, 2000). National Tobacco Consumers' Group Number 2 v. R. J. Reynolds Tobacco Co., United States District Court for the District of Massachusetts, Case No. 00CV11408RGS. Plaintiffs filed a motion with the court on November 6, 2000, to transfer this case to the United States District Court for the Eastern District of New York, before Judge Weinstein, which the court denied on November 27, 2000. Defendants have until February 20, 2001, to respond to plaintiffs' complaint. In August 2000, a class action was filed in New York on behalf of all smokers diagnosed with certain diseases alleged to be linked to smoking, against United States cigarette manufacturers, including RJR Tobacco, and its parent company, RJR. Ebert v. Philip Morris, Inc., United States District Court for the Eastern District of New York, Case No. 00 CV 4632. Neither RJR Tobacco nor its parent, RJR, have been served with plaintiffs' complaint. This case is part of the Simon II consolidated class action complaint for declaratory relief which was filed on September 6, 2000. The cases underlying the consolidated Simon II complaint are (1) Simon, Case No. 99-CV-1988; (2) Decie v. American Tobacco Co., Inc., Case No. 00-CV-2340; (3) Ebert v. Philip Morris, Inc., Case No. 00-CV-4632; (4) Mason v. American Tobacco Co., Inc., Case No. 00-CV-4442; (5) Bergeron v. Philip Morris, Inc., Case No. 99-CV-6142; (6) National Asbestos Workers Medical Fund v. Philip Morris, Inc., Case No. 98-CV-1492; (7) Blue Cross and Blue Shield of New Jersey v. Philip Morris, Inc., Case No. 98-CV-3287; (8) H.K. Porter Co., Inc. v. American Tobacco Co., Inc., Case No. 97-CV-7658; (9) Raymark Industries, Inc. v. American Tobacco Co., Inc., Case No. 98-CV-675; and (10) Falise v. American Tobacco Co., Inc., Case No. 99-CV-7392. These cases are discussed separately. In September 2000, a consolidated class action complaint was filed in New York on behalf of all tobacco litigation before Judge Weinstein, focusing on punitive damages, against United States cigarette manufacturers, including RJR Tobacco, and its parent company, RJR. In re Simon II Litigation, United States District Court for the Eastern District of New York, Case No. CV 00-5332. On December 22, 2000, plaintiffs amended their complaint and filed their motion for class certification. On February 2, 2001, defendants filed their respective answers. The parties are currently negotiating the class certification briefing schedule. The cases underlying the consolidated Simon II complaint are (1) Simon, Case No. 99-CV-1988; (2) Decie v. American Tobacco Co., Inc., Case No. 00-CV-2340; (3) Ebert v. Philip Morris, Inc., Case No. 00-CV-4632; (4) Mason v. American Tobacco Co., Inc., Case No. 00-CV-4442; (5) Bergeron v. Philip Morris, Inc., Case No. 99-CV-6142; (6) National Asbestos Workers Medical Fund v. Philip Morris, Inc., Case No. 98-CV-1492; (7) Blue Cross and Blue Shield of New Jersey v. Philip Morris, Inc., Case No. 98-CV-3287; (8) H.K. Porter Co., Inc. v. American Tobacco Co., Inc., Case No. -12- 13 97-CV-7658; (9) Raymark Industries, Inc. v. American Tobacco Co., Inc., Case No. 98-CV-675; and (10) Falise v. American Tobacco Co., Inc., Case No. 99-CV-7392. These cases are discussed separately. In September 2000, a class action was filed in Michigan against United States cigarette manufacturers, including RJR Tobacco, on behalf of persons in the State of Michigan (excluding federal, state and local governmental entities and political subdivisions) who purchase cigarettes manufactured by the defendants. Vandermeulen v. Philip Morris, Inc., United States District Court for the Eastern District of Michigan, Case No. 00-74582. The case was originally filed in Wayne County Circuit Court, but was removed to federal court by defendants on October 13, 2000. Defendants filed answers to plaintiffs' complaint on November 28, 2000. On December 13, 2000, plaintiffs filed a motion to remand the case to the Circuit Court of Wayne County. The court has not issued a ruling on this motion. Discovery has been stayed by agreement, pending negotiation of a case management order. WHOLESALER ANTITRUST CASES Plaintiffs in these lawsuits are tobacco wholesalers who are suing United States cigarette manufacturers, including RJR Tobacco, and its parent company, RJR, 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, as a result of which plaintiffs suffered economic injury. In all cases, plaintiffs are asking the court to certify the lawsuits as class actions, and to allow the respective plaintiffs to pursue the lawsuits as representatives of other persons in the United States, and throughout the world, that purchased cigarettes directly from one or more of the defendants. A.D. Bedell Wholesale Co., Inc. v. Philip Morris, Inc., 3rd Circuit Court of Appeals, Pittsburgh, Pennsylvania, Case No. 00-3410, was filed in April 1999. Smith v. Philip Morris Cos., Inc., District Court, Seward County, Kansas, Case No. 00-CV-26, was filed on February 7, 2000. Buffalo Tobacco Products, Inc. v. Philip Morris Cos., Inc., United States District Court for the Northern District of Georgia, Case No. 1:00cv001445, was filed in February 2000. Serrone v. Philip Morris Cos., Inc., Circuit Court, Wayne County, Michigan, Case No. 00-4035 CZ, was filed in February 2000. Brownstein v. Philip Morris Cos., Inc., Circuit Court, Broward County, Florida, Case No. 00002212 03, was filed in February 2000. Greer v. R. J. Reynolds Tobacco Co., Superior Court, Alameda County, California, Case No. 309826, was filed in February 2000. Withers v. R. J. Reynolds Tobacco Co., Circuit Court, Jefferson County, Tennessee, Case No. 17-194-I, was filed in February 2000. Lennon v. Philip Morris Cos., Inc., Superior Court, New York County, New York, Case No. 102396, was filed on February 9, 2000. Munoz v. R. J. Reynolds Tobacco Co., Superior Court, Alameda County, California, Case No. 309834, was filed in February 2000. Barnes v. Philip Morris Cos., Inc., United States District Court for the District of Columbia, Case No. 00-670, was filed in February 2000. On April 30, 2000, plaintiff's motion for voluntarily dismissal was granted. Gray v. Philip Morris Cos., Inc., Superior Court, Pima County, Arizona, Case No. C20000781, was filed in February 2000. -13- 14 Romero v. Philip Morris Cos., Inc., United States District Court for the District of New Mexico, Case No. CIV 00-426, was filed in February 2000. On April 27, 2000, plaintiff's motion for voluntarily dismissal was granted. Quickle v. Philip Morris Cos., Inc., United States District Court for the Northern District of West Virginia, Case No. 5:00 CV43, was filed in February 2000. On April 17, 2000, plaintiff's motion for voluntarily dismissal was granted. Morse v. R. J. Reynolds Tobacco Co., Superior Court, Alameda County, California, Case No. 822825-9, was filed in February 2000. Ludke v. Philip Morris Inc., District Court, Hennepin County, Minnesota, Case No. MC001954, was filed in February 2000. Rowlen v. Philip Morris Cos., Inc., United States District Court for the Southern District of Mississippi, Case No. 3:00CV119WS, was filed in February 2000. On March 22, 2000, plaintiff voluntarily dismissed the complaint. Vetter v. Philip Morris Cos., Inc., United States District Court for the District of South Dakota, Case No. CV-00-203, was filed in February 2000. On May 10, 2000, plaintiff's motion to dismiss was granted. Faherty v. Philip Morris Cos., Inc., United States District Court for the District of Maine, Case No. 0-cv-87-P-H, was filed in February 2000. On April 4, 2000, plaintiff's motion to dismiss was granted. Shafer v. Philip Morris Cos., Inc., United States District Court for the District of North Dakota, Case No. 00-cv-41, was filed in February 2000. On April 12, 2000, plaintiff's motion for voluntarily dismissal was granted. Cusatis v. Philip Morris Inc., United States District Court for the Eastern District of Wisconsin, Case No. 00-C-434, was filed in February 2000. On May 3, 2000, plaintiff's motion for voluntarily dismissal was granted. Rog-Glo v. R. J. Reynolds Tobacco Co., United States District Court for the Southern District of New York, Case No. 00-CV-1255, was filed in February 2000. On May 16, 2000, plaintiff voluntarily dismissed the complaint. Sullivan v. R. J. Reynolds Tobacco Co., Superior Court, Alameda County, California, Case No. 823162-8, was filed in February 2000. Ulan v. R. J. Reynolds Tobacco Co., Superior Court, Alameda County, California, Case No. 823160-0, was filed in February 2000. Teitler v. R. J. Reynolds Tobacco Co., Superior Court, Alameda County, California, Case No. 823161-9, was filed in February 2000. Williamson Oil Co. v. Philip Morris Cos., Inc., United States District Court for the Northern District of Georgia, Case No. 1:00cv00447, was filed in February 2000. Sand v. Philip Morris Cos., Inc., Superior Court, Alameda County, California, Case No. BC225580, was filed in February 2000. Peirona vs. Philip Morris Cos., Inc., Superior Court, Alameda County, California, Case No. 310283, was filed in February 2000. Amsterdam Tobacco Corp. v. Philip Morris Cos., Inc., United States District Court for the Northern District of Georgia, Case No. 1:00cv001446, was filed in March 2000. Sylvester v. Philip Morris Cos., Inc., Superior Court, New York County, New York, Case No. 60100, was filed n March 2000. -14- 15 I. Goldshlack Co. v. Philip Morris Cos., Inc., United States District Court for the Northern District of Georgia, Case No. 1:00cv01448, was filed in March 2000. Suwannee Swifty Stores v. Philip Morris Cos., Inc., United States District Court for the Northern District of Georgia, Case No. 1:00-CV-667, was filed in March 2000. Holiday Markets v. Philip Morris Cos., Inc., United States District Court for the Northern District of Georgia, Case No. 1:00cv00707, was filed in March 2000. Taylor v. Philip Morris Cos., Inc., Superior Court, Cumberland County, Maine, Case No. CV-00-203, was filed in March 2000. Romero v. Philip Morris Cos., Inc., District Court, Rio Arriba County, New Mexico, Case No. 0-117-CV-2000-972, was filed in April 2000. Belmonte v. R. J. Reynolds Tobacco Co., Superior Court, Alameda County, California, Case No. 825112-1, was filed in April 2000. Belch v. R. J. Reynolds Tobacco Co., Superior Court, Alameda County, California, Case No. 825115-8, was filed in April 2000. Shafer v. Philip Morris Cos., Inc., District Court, Morton County, North Dakota, Case No. 00-C-1231, was filed in April 2000. Swanson v. Philip Morris Cos., Inc., Circuit Court, Hughes County, South Dakota, Case No. 00-144, was filed in April 2000. Marcus Distributors v. Philip Morris Cos., Inc., United States District Court for the Southern District of Illinois, Case No. 00-319-GPM, was filed in April 2000. On June 14, 2000, plaintiff's motion for voluntarily dismissal was granted. Kissel v. Philip Morris Cos., Inc., Circuit Court, Brooke County, West Virginia, Case No. 00-C-82-RI, was filed in April 2000. Cusatis v. Philip Morris Cos., Inc., Circuit Court, Milwaukee County, Wisconsin, Case No. 00CV003676, was filed in May 2000. Customer Co. v. R. J. Reynolds Tobacco Co., United States District Court for the Northern District of California, Case No. C-00-1673, was filed in May 2000. Barnes v. Philip Morris Cos., Inc., Superior Court, District of Columbia, Case No. 3678-00, was filed in May 2000. Campe v. R. J. Reynolds Tobacco Co, Superior Court, Alameda County, California, Case No. 826425-9, was filed in May 2000. Aguayo v. R. J. Reynolds Tobacco Co., Superior Court, Alameda County, California, Case No. 826420-8, was filed in May 2000. Phillips v. R. J. Reynolds Tobacco Co., Superior Court, Alameda County, California, Case No. 826421-7, was filed in May 2000. Anderson v. Philip Morris Cos., Inc., United States District Court for the Northern District of Georgia, Case No. 1:00cv01447, was filed in May 2000. On November 17, 2000, plaintiff's motion for voluntarily dismissal was granted. -15- 16 Lau v. R. J. Reynolds Tobacco Co., Superior Court, Alameda County, California, Case No. 826852-9, was filed in May 2000. Pooler v. R. J. Reynolds Tobacco Co., District Court, Washoe County, Nevada, Case No. CV00-2674, was filed in June 2000. Baker v. R. J. Reynolds Tobacco Co., Superior Court, Alameda County, California, Case No. 827675-3, was filed in June 2000. TOBACCO GROWERS' CASE DeLoach v. Philip Morris Cos., Inc., United States District Court for the District of Columbia, Case No. 1:00CV00294, was filed on February 16, 2000. The class action complaint was filed on behalf of a putative class of all tobacco growers and tobacco allotment holders (some 5,930 of which are actually named in the first amended complaint). Plaintiffs' current theory, as reflected in their second amended complaint (which was filed on September 2, 2000), is that the defendants (Philip Morris, Inc., RJR Tobacco, Brown & Williamson Tobacco Corp. and Lorillard Tobacco Co.) engaged in bid-rigging of American tobacco auctions (both burley and flue-cured) beginning at least by 1996 and continuing to present. Defendants' actions are alleged to have held the auction prices of tobacco at artificially low prices resulting in damage to tobacco growers and allotment holders. In addition, plaintiffs allege that defendants have engaged in a conspiracy to force the elimination or destruction of the federal government's tobacco quota and price support program through an alleged illegal group boycott. On October 9, 2000, defendants filed a motion to dismiss the second amended complaint and a motion to transfer venue to the United States District Court for the Middle District of North Carolina. On November 30, 2000, the court granted the motion to transfer the case. On December 20, 2000, plaintiffs moved to amend the complaint to add leaf-buying companies as defendants. HEALTH-CARE COST RECOVERY LITIGATION In certain of the pending proceedings, various local government entities and others seek reimbursement for health-care expenditures allegedly caused by tobacco products. The claims asserted in these health-care cost recovery actions vary. Generally, plaintiffs assert the equitable claim that the tobacco industry was "unjustly enriched" by plaintiffs' payment of health-care costs allegedly attributable to smoking and seek reimbursement of those costs. The plaintiffs also assert one or more of the following additional claims: the equitable claim of indemnity, common law claims of negligence, strict liability, breach of express and implied warranty, violation of a voluntary undertaking or special duty, fraud, negligent misrepresentation, conspiracy, public nuisance, claims under state and federal statutes governing consumer fraud, antitrust, deceptive trade practices and false advertising, and claims under federal or state RICO statutes. Each plaintiff seeks reimbursement of health-care costs. Other relief sought by some, but not all, plaintiffs includes punitive damages, treble damages for alleged antitrust law violations, injunctions prohibiting alleged marketing and sales to minors, disclosure of research, disgorgement of profits, funding of anti-smoking programs, disclosure of nicotine yields and payment of attorney and expert witness fees. The defendants, including RJR Tobacco, raise a variety of defenses, including: failure to state a valid claim, lack of benefit; adequate remedy at law; "unclean hands" (namely, that plaintiffs cannot recover because they participated in, and benefited from, the sale of cigarettes); lack of antitrust injury; federal preemption; and lack of proximate cause and statute of limitations. In addition, defendants argue that they should be entitled to "set-off" any alleged damages to the extent a governmental entity benefits economically from the sale of cigarettes through the receipt of excise taxes or otherwise. Defendants also argue that all of these cases are improper because plaintiffs must proceed under principles of subrogation and assignment. Under traditional theories of recovery, a payor of medical costs (such as an insurer) can seek recovery of health-care costs from a third party solely by "standing in the shoes" of the injured party. Defendants argue that plaintiffs should be required to bring an action on behalf of each individual health-care recipient and should be subject to all defenses available against the allegedly injured party. -16- 17 The following cases are health-care cost recovery suits filed against RJR Tobacco, and, in some cases, its parent company, RJR, that were active in 2000. These cases have been further broken down as to the type of plaintiff involved. STATE OR COMMONWEALTH HEALTH-CARE COST RECOVERY In June 1994, the Mississippi attorney general brought an action, Moore v. American Tobacco Co., against various industry members, including RJR Tobacco. This case was brought on behalf of the state to recover state funds paid for health-care and medical and other assistance to state citizens suffering from diseases and conditions allegedly related to tobacco use. By making the state the plaintiff in the case and basing its claims on economic loss rather than personal injury, the state sought to avoid the defenses otherwise available against an individual plaintiff. Most other states, through their attorneys general or other state agencies, sued RJR Tobacco and other U.S. cigarette manufacturers based on similar theories. The cigarette manufacturer defendants, including RJR Tobacco, settled the first four of these cases scheduled to come to trial, those of Mississippi, Florida, Texas and Minnesota, by separate agreements between each state and those manufacturers in each case. On November 23, 1998, the major U.S. cigarette manufacturers, including RJR Tobacco, entered into the Master Settlement Agreement ("MSA") with attorneys general representing the remaining 46 states, the District of Columbia, Puerto Rico, Guam, the Virgin Islands, American Samoa and the Northern Marianas. The MSA became effective on November 12, 1999, when final approval of the settlement was achieved in 80% of the settling jurisdictions. As of October 17, 2000, final approval had been achieved in all 50 settling jurisdictions. The MSA settled all the health-care cost recovery actions brought by, or on behalf of, the settling jurisdictions and contains releases of various additional present and future claims. TERRITORY HEALTH-CARE COST RECOVERY Republic of the Marshall Islands v. American Tobacco Co., Inc., High Court, Marshall Islands, Case No. 1997-261, was filed in October 1997. On January 7, 2000, plaintiff filed a second amended complaint. On March 7, 2001, the Supreme Court of the Republic of the Marshall Islands will hear argument on defendants' motion to disqualify the tribunal and their writ of mandamus. Trial has been scheduled for September 10, 2001. CITY/COUNTY HEALTH-CARE COST RECOVERY Claims similar to those advanced in the state attorneys general actions have also been asserted by cities and/or counties in separate actions. In addition to the variety of substantive defenses described above, it is the industry's position that recovery in any such actions (if any) should be subject to the offset provisions of the MSA, and therefore, beyond the potential cost of defending these actions through trial, there should be no additional financial exposure as a result of these cases. Certain of the city/county cases have been dismissed in light of the approval of the MSA in the relevant jurisdictions. Others, however, were active during 2000, and remain pending to date. San Francisco v. Philip Morris, Inc., United States District Court for the Northern District of California, Case No. C-96-2090 DLJ, was filed in June 1996. On February 2, 2000, the parties stipulated to a dismissal of this lawsuit. Los Angeles v. R. J. Reynolds Tobacco Co., superior Court, Los Angeles County, California, Case No. 707651, was filed in August 1996. People of California v. Philip Morris, Inc., Superior Court , San Francisco County, California, Case No. 980864, was filed in September 1996. -17- 18 County of Erie v. Tobacco Institute, Supreme Court, Erie County, New York, Case No. I 1997/359, was filed in January 1997. In February 1999, the court stayed this action until decision of Erie County's appeal of the New York trial court's approval of the MSA or until further order of the court. On January 5, 2000, the parties filed a stipulation discontinuing this action. County of Cook v. Philip Morris, Inc., Circuit Court, Cook County, Illinois, Case No. 97-L-4550, was filed in April 1997. On December 10, 1999, certain defendants, including RJR Tobacco, filed a motion for summary judgment, which was denied on February 10, 2000. On December 20, 2000, certain defendants, including RJR Tobacco, filed a motion for judgment on the pleadings which is currently pending before the court. City of St. Louis v. American Tobacco Co., Inc., Circuit Court, St. Louis County, Missouri, Case No. 982-9652, was filed in November 1998. The parties currently are awaiting the court's ruling on certain defendants' motion to dismiss the first amended petition which was filed on December 16, 1999. On February 9, 2000, the court granted the parties' joint motion to stay the case until September 1, 2000. A hearing on a motion to dismiss by certain defendants, including RJR Tobacco, is scheduled for February 26, 2001. St. Louis County v. American Tobacco Co., Inc., Circuit Court, St. Louis County, Missouri, Case No. 982-9705, was filed in November 1998. On February 15, 2000, the court stayed this case. On January 9, 2001, the court extended the stay for a period of 30 days after the later of: (1) the date on which the Supreme Court of Missouri renders its decision on defendants-respondents' motion for rehearing in State ex rel. Nixon v. American Tobacco Co. (Case No. SC82992), or (2) the date in which the Circuit Court of the City of St. Louis, renders its decision on defendants' motion to dismiss in City of St. Louis v. American Tobacco Co., Inc. (Case No. 982-9652) (discussed above). County of Wayne v. Philip Morris, Inc., United States District Court for the Eastern District of Michigan, Case No. 99-76097, was filed in December 1999. Defendants removed the case to federal court on December 22, 1999. RJR Tobacco filed its answer to the complaint on December 23, 1999. On August 25, 2000, the federal court certified the following question of law to the Michigan Supreme Court for its consideration: "Does the Michigan attorney general have the authority to bind/release claims of a Michigan county as part of a settlement agreement in an action that the attorney general brought on behalf of the State of Michigan?" The federal court stayed all proceedings in this case pending resolution of this question by the Michigan Supreme Court. UNIONS HEALTH-CARE COST RECOVERY Lawsuits have been brought by union trust funds against cigarette manufacturers, including RJR Tobacco, and others (RJR in some cases), in state and federal courts across the country in the past four years. The funds seek recovery on an aggregate basis for their payment of medical expenses of their "participants" - union employees and their dependents -- allegedly injured by cigarettes. The complaints in these cases are substantially identical, and more than 20 of the cases purport to be class actions on behalf of all union funds in a particular state. Stationary Engineers Local 393 Health & Welfare Trust Fund v. Philip Morris, Inc., United States District Court for the Northern District of California, Case No. C-97-1519-DLJ, was filed in April 1997. On August 12, 1999, the trial court granted plaintiffs' motion to dismiss the case, but denied their motion for entry of final judgment as to claims previously dismissed. On September 10, 1999, the plaintiffs filed a notice of appeal to the United States Court of Appeals for the Ninth Circuit. On March 8, 2000, the parties filed a stipulation voluntarily dismissing the appeal. On March 15, 2000, the Ninth Circuit entered an order dismissing the appeal. Northwest Laborers-Employers Health & Security Trust Fund v. Philip Morris, Inc., United States District Court for the Western District of Washington, Case No. C97-849-WD, was filed in May 1997. In December 1998, the court denied defendants' motion for judgment on the pleadings. On July 22, 1999, the court granted defendants' motion for summary judgment and entered judgment for defendants. On December 17, 1999, the court granted the parties' joint motion for preliminary approval of an agreement to dismiss the appeal upon certain conditions and notice to the class. On February 1, 2000, the court granted plaintiffs' motion to dismiss all claims with prejudice and without costs. -18- 19 Massachusetts Laborers Health and Welfare Fund v. Philip Morris, Inc., United States District Court for the District Court of Massachusetts, Case No. 97-11552-GAO, was filed in June 1997. Plaintiffs voluntarily dismissed their complaint on April 25, 2000. Hawaii Health & Welfare Fund for Operating Engineers v. Philip Morris, Inc., United States District Court for the District of Hawaii, Case No. 97-833, was filed in June 1997. In January 1999, the court granted defendants' motion to dismiss. Plaintiffs appealed to the United States Court of Appeals for the Ninth Circuit. On February 15, 2000, the parties reached an agreement to dismiss the case for a waiver of costs. A stipulation of dismissal reflecting this agreement was filed on March 15, 2000. United Federation of Teachers Welfare Fund v. Philip Morris, Inc., United States District Court for the Southern District of New York, Case No.97CIV4676, was filed in June 1997. On March 25, 1999, the federal district court granted in part, and dismissed in part, plaintiffs' complaint. Plaintiffs appealed this ruling to the United States Court of Appeals for the Second Circuit, which, on April 9, 1999, reversed the district court's ruling, and ordered the district court to dismiss plaintiffs' complaint in its entirety. On November 30, 1999, the federal district court entered final judgment in this matter. Plaintiffs filed a petition for certiorari to the U.S. Supreme Court, which was denied on January 10, 2000. Laborers Local 17 Health & Benefit Fund v. Philip Morris, Inc., United States District Court for the Southern District of New York, Case Number 97CIV4550, was filed in June 1997. On March 25, 1999, the federal district court granted in part, and dismissed in part, plaintiffs' complaint. Plaintiffs appealed this ruling to the United States Court of Appeals for the Second Circuit, which, on April 9, 1999, reversed the district court's ruling, and ordered the district court to dismiss plaintiffs' complaint in its entirety. On November 30, 1999, the federal district court entered final judgment in this matter. Plaintiffs filed a petition for certiorari to the U.S. Supreme Court, which was denied on January 10, 2000. Oregon Laborers-Employers Health & Welfare Trust Fund v. Philip Morris, Inc., United States District Court for the District of Oregon, Case No. 9706-4707, was filed in June 1997. Plaintiffs filed a motion for class certification. On August 3, 1998, the federal district court granted defendants' motion for judgment on the pleadings. On July 14, 1999, the Ninth Circuit Court of Appeals affirmed the district court's dismissal. Plaintiffs filed a petition for certiorari to the United States Supreme Court, which was denied on January 10, 2000. Laborers and Operating Engineers' Utility Agreement Health & Welfare Trust Fund v. Philip Morris, Inc., United States District Court for the District of Arizona, Case No. 97-1406-JWS, was filed in June 1997. In February 17 1999, the court granted defendants' motion to dismiss the first amended complaint. Plaintiffs appealed to the United States Court of Appeals for the Ninth Circuit. On February 15, 2000, the parties reached an agreement to dismiss the case for a waiver of costs. A stipulation of dismissal reflecting this agreement was filed on March 15, 2000. Constructions Laborers of Greater St. Louis Welfare Fund v. Philip Morris, Inc., Circuit Court, St. Louis County, Missouri, Case No. 972-08799, was filed in September 1997. On January 19, 2000, the Court granted plaintiffs' motion for voluntary dismissal. Central Laborers Welfare Fund v. Philip Morris, Inc., Circuit Court, Madison County, Illinois, Case No. 97-L-516, was filed in June 1997. In October, 1999, plaintiffs' counsel indicated to defense counsel that they were unsure as to whether to continue this case. To date, no decision has been made, and the case remains pending. Ark-La-Miss Laborers Welfare Fund v. Philip Morris, Inc., United States District Court for the Eastern District of Louisiana, Case No. 97-1944, was filed in June 1997. On March 31, 1999, the court ordered this case stayed and administratively closed, pending a decision by the United States Court of Appeals for the Fifth Circuit in the Texas Carpenters case. On January 19, 2000, the Fifth Circuit affirmed the trial court's dismissal of the Texas Carpenters case. On February 24, 2000, plaintiffs filed an unopposed motion to reopen the case and lift the stay for the purpose of voluntary dismissal. On February 28, 2000, the court dismissed this action. Eastern States Health & Welfare Fund v. Philip Morris, Inc., Supreme Court, New York County, New York, Case No. 97/603869, was filed in July 1997. On January 6, 1998, the judge issued an order stating that the -19- 20 group of similar union cases pending before the court (Eastern States, Puerto Rican ILGWU, IBEW Local 363, IBEW Local 25, Local 840, Local 138, 138A and 138B, Long Island Regional Council of Carpenters, Day Care Council-Local 205, Local 1199 National Benefit Fund, and Local 1199 Home Care Industry) were related for the purposes of pretrial discovery and would be assigned the same judge. On August 28, 1998, defendants filed a motion to dismiss. The court granted in part, and denied in part, their motion. On August 18, 1999, defendants filed a supplemental notice of motion to dismiss on statute of limitation grounds. On August 23, 1999, defendants filed a request for judicial intervention to dismiss this action because of delinquent discovery and inactivity. On March 3, 2000, the court granted defendants' motions to dismiss in the 10 union cases before it (referenced above). Plaintiffs appealed to the New York Supreme Court Appellate Division, First Department. The court has not yet issued its ruling. Rhode Island Laborers Health & Welfare Fund v. American Tobacco Co., Inc., United States District Court for the District of Rhode Island, Case No. 97-500L, was filed in July 1997. On June 6, 2000, the court accepted and adopted the magistrate's recommendation that defendants' motion to dismiss be granted. On June 2, 2000, the court entered final judgment. Connecticut Pipe Trades Health Fund v. Philip Morris, Inc., United States District Court for the District of Connecticut, Case No. 397CV01305 (JBA), was filed in July 1997. On November 24, 1999, the parties' joint stipulation of dismissal was approved by the court. During a telephonic conference on July 10, 2000, the judge reopened this case and authorized the filing of plaintiffs' second amended complaint (April 10, 2000). Defendants filed a motion to dismiss on August 11, 2000, which remains pending before the court. Asbestos Workers Local 53 Health and Welfare Fund v. Philip Morris, Inc., United States District Court for the Eastern District of Louisiana, Case No. 97-2570, was filed in August 1997. On March 31, 1999, this court ordered this case stayed and administratively closed, pending a decision by the United States Court of Appeals for the Fifth Circuit in the Texas Carpenters case. On January 19, 2000, the Fifth Circuit affirmed the trial court's dismissal of the Texas Carpenters case. On February 24, 2000, plaintiffs filed an unopposed motion to reopen the case and lift the stay for the purpose of voluntary dismissal. On February 28, 2000, the court dismissed this action. Steamfitters Local Union No. 420 Welfare Fund v. Philip Morris, Inc., United States District Court for the Eastern District of Pennsylvania, Case No. 99-545, was filed in August 1997. Defendants filed a motion to dismiss on December 22, 1997. The court granted defendants' motion to dismiss on April 22, 1998. Plaintiffs appealed this decision to the United States Court of Appeals for the Third Circuit, which, on March 29, 1999, affirmed the trial court's dismissal. The Third Circuit denied plaintiffs' petition for rehearing on April 29, 1999. Plaintiffs filed a petition for writ of certiorari with the U.S. Supreme Court on September 27, 1999. The petition for writ of certiorari was denied by the U.S. Supreme Court on January 10, 2000. Teamsters No. 142 Health and Welfare Trust Fund v. Philip Morris, Inc., Circuit Court, St. Joseph County, Indiana, Case No. 71CO1-9709-CP-1281, was filed in September 1997. Plaintiffs voluntarily dismissed their case on February 23, 2000. Puerto Rican ILGWU Health & Welfare Fund v. Philip Morris, Inc., Supreme Court, New York County, New York, Case No. 97/604785, was filed in September 1997. On January 6, 1998, the judge issued an order stating that the group of similar union cases pending before the court (Eastern States, Puerto Rican ILGWU, IBEW Local 363, IBEW Local 25, Local 840, Local 138, 138A and 138B, Long Island Regional Council of Carpenters, Day Care Council-Local 205, Local 1199 National Benefit Fund, and Local 1199 Home Care Industry) were related for the purposes of pretrial discovery and would be assigned the same judge. On August 28, 1998, defendants filed a motion to dismiss. The court granted in part, and denied in part, their motion. On August 18, 1999, defendants filed a supplemental notice of motion to dismiss on statute of limitation grounds. On August 23, 1999, defendants filed a request for judicial intervention to dismiss this action because of delinquent discovery and inactivity. On March 3, 2000, the court granted defendants' motions to dismiss in the 10 union cases before it (referenced above). Plaintiffs appealed to the New York Supreme Court Appellate Division, First Department. The court has not yet issued its ruling. Texas Carpenters Health Benefit Fund v. Philip Morris, Inc., United States District Court for the Eastern District of Texas, Case No. 97-CV-625, was filed in October 1997. On January 19, 2000, the United States Court of -20- 21 Appeals for the Fifth Circuit affirmed the trial court's August 31, 1998, order granting defendants' motion to dismiss the complaint. New Mexico and West Texas Multi-Craft Health & Welfare Fund v. Philip Morris, Inc., District Court, Bernalillo County, New Mexico, Case No. CV-97-9118, was filed in October 1997. On December 24, 1998, the court granted defendants' motion to dismiss. Plaintiffs appealed the decision to the United States Court of Appeals for the Tenth Circuit. On April 5, 2000, the parties stipulated to a dismissal of plaintiffs' appeal, which was approved by the court on April 12, 2000. IBEW Local 25 Health & Welfare Benefit Fund v. Philip Morris, Inc., Supreme Court, New York County, New York, Case No. 97/122255, was filed in November 1997. On January 6, 1998, the judge issued an order stating that the group of similar union cases pending before the court (Eastern States, Puerto Rican ILGWU, IBEW Local 363, IBEW Local 25, Local 840, Local 138, 138A and 138B, Long Island Regional Council of Carpenters, Day Care Council-Local 205, Local 1199 National Benefit Fund, and Local 1199 Home Care Industry) were related for the purposes of pretrial discovery and would be assigned the same judge. On August 28, 1998, defendants filed a motion to dismiss. The court granted in part, and denied in part, their motion. On August 18, 1999, defendants filed a supplemental notice of motion to dismiss on statute of limitation grounds. On August 23, 1999, defendants filed a request for judicial intervention to dismiss this action because of delinquent discovery and inactivity. On March 3, 2000, the court granted defendants' motions to dismiss in the 10 union cases before it (referenced above). Plaintiffs appealed to the New York Supreme Court Appellate Division, First Department. The court has not yet issued its ruling. IBEW Local 363 Welfare Fund v. Philip Morris, Inc., Supreme Court, New York County, New York, Case No. 97/122254, was filed in November 1997. On January 6, 1998, the judge issued an order stating that the group of similar union cases pending before the court (Eastern States, Puerto Rican ILGWU, IBEW Local 363, IBEW Local 25, Local 840, Local 138, 138A and 138B, Long Island Regional Council of Carpenters, Day Care Council-Local 205, Local 1199 National Benefit Fund, and Local 1199 Home Care Industry) were related for the purposes of pretrial discovery and would be assigned the same judge. On August 28, 1998, defendants filed a motion to dismiss. The court granted in part, and denied in part, their motion. On August 18, 1999, defendants filed a supplemental notice of motion to dismiss on statute of limitation grounds. On August 23, 1999, defendants filed a request for judicial intervention to dismiss this action because of delinquent discovery and inactivity. On March 3, 2000, the court granted defendants' motions to dismiss in the 10 union cases before it (referenced above). Plaintiffs appealed to the New York Supreme Court Appellate Division, First Department. The court has not yet issued its ruling. Long Island Regional Council of Carpenters Welfare Fund v. Philip Morris, Inc., Supreme Court, New York County, New York, Case No. 97/122258, was filed in November 1997. On January 6, 1998, the judge issued an order stating that the group of similar union cases pending before the court (Eastern States, Puerto Rican ILGWU, IBEW Local 363, IBEW Local 25, Local 840, Local 138, 138A and 138B, Long Island Regional Council of Carpenters, Day Care Council-Local 205, Local 1199 National Benefit Fund, and Local 1199 Home Care Industry) were related for the purposes of pretrial discovery and would be assigned the same judge. On August 28, 1998, defendants filed a motion to dismiss. The court granted in part, and denied in part, their motion. On August 18, 1999, defendants filed a supplemental notice of motion to dismiss on statute of limitation grounds. On August 23, 1999, defendants filed a request for judicial intervention to dismiss this action because of delinquent discovery and inactivity. On March 3, 2000, the court granted defendants' motions to dismiss in the 10 union cases before it (referenced above). Plaintiffs appealed to the New York Supreme Court Appellate Division, First Department. The court has not yet issued its ruling. Local 840, International Brotherhood of Teamsters Health & Insurance Fund v. Philip Morris, Inc., Supreme Court, New York County, New York, Case No. 97/122256, was filed in November 1997. On January 6, 1998, the judge issued an order stating that the group of similar union cases pending before the court (Eastern States, Puerto Rican ILGWU, IBEW Local 363, IBEW Local 25, Local 840, Local 138, 138A and 138B, Long Island Regional Council of Carpenters, Day Care Council-Local 205, Local 1199 National Benefit Fund, and Local 1199 Home Care Industry) were related for the purposes of pretrial discovery and would be assigned the same judge. On August 28, 1998, defendants filed a motion to dismiss. The court granted in part, and denied in part, their motion. On August 18, 1999, defendants filed a supplemental notice of motion to dismiss on statute of limitation grounds. On August 23, 1999, defendants filed a request for judicial intervention to dismiss this action because of delinquent -21- 22 discovery and inactivity. On March 3, 2000, the court granted defendants' motions to dismiss in the 10 union cases before it (referenced above). Plaintiffs appealed to the New York Supreme Court Appellate Division, First Department. The court has not yet issued its ruling. Local 138, 138A, and 138B International Union of Operating Engineers Welfare Fund v. Philip Morris, Inc., Supreme Court, New York County, New York, Case No. 97/122257, was filed in November 1997. On January 6, 1998, the judge issued an order stating that the group of similar union cases pending before the court (Eastern States, Puerto Rican ILGWU, IBEW Local 363, IBEW Local 25, Local 840, Local 138, 138A and 138B, Long Island Regional Council of Carpenters, Day Care Council-Local 205, Local 1199 National Benefit Fund, and Local 1199 Home Care Industry) were related for the purposes of pretrial discovery and would be assigned the same judge. On August 28, 1998, defendants filed a motion to dismiss. The court granted in part, and denied in part, their motion. On August 18, 1999, defendants filed a supplemental notice of motion to dismiss on statute of limitation grounds. On August 23, 1999, defendants filed a request for judicial intervention to dismiss this action because of delinquent discovery and inactivity. On March 3, 2000, the court granted defendants' motions to dismiss in the 10 union cases before it (referenced above). Plaintiffs appealed to the New York Supreme Court Appellate Division, First Department. The court has not yet issued its ruling. United Food & Commercial Workers Union v. Philip Morris, Inc., United States District Court for the Northern District of Alabama, Case No. 97-03351-CV, was filed in November 1997. On December 30, 1997, defendants removed this case to federal court. On August 11, 1999, the trial court entered an order denying plaintiffs' motion to amend its complaint, and granting defendants' motion to dismiss. The court also vacated conditional class certification previously granted by the state court, and dismissed the case as to the claims of the other class members. On September 1, 1999, plaintiffs appealed the federal district court's ruling to the United States Court of Appeals for the Eleventh Circuit. On August 22, 2000, the Eleventh Circuit ruled that the district court did not err in dismissing plaintiffs' complaint and in denying plaintiffs leave to amend their complaint. Screen Actors Guild-Producers Health & Welfare Fund Plan v. Philip Morris, Inc., Superior Court, Los Angeles County, California, Case No. BC181603, was filed in November 1997. On July 26, 1999, the court granted plaintiffs' motion to intervene into Operating Engineers Local 12. On August 30, 1999, plaintiffs filed a request for dismissal due to intervention in Operating Engineers Local 12. The court dismissed the case on April 10, 2000. Day Care Council Local 205 D.C. 1717 Welfare Fund v. Philip Morris, Inc., Supreme Court, New York County, New York, Case No. 97/606240, was filed in December 1997. On January 6, 1998, the judge issued an order stating that the group of similar union cases pending before the court (Eastern States, Puerto Rican ILGWU, IBEW Local 363, IBEW Local 25, Local 840, Local 138, 138A and 138B, Long Island Regional Council of Carpenters, Day Care Council-Local 205, Local 1199 National Benefit Fund, and Local 1199 Home Care Industry) were related for the purposes of pretrial discovery and would be assigned the same judge. On August 28, 1998, defendants filed a motion to dismiss. The court granted in part, and denied in part, their motion. On August 18, 1999, defendants filed a supplemental notice of motion to dismiss on statute of limitation grounds. On August 23, 1999, defendants filed a request for judicial intervention to dismiss this action because of delinquent discovery and inactivity. On March 3, 2000, the court granted defendants' motions to dismiss in the 10 union cases before it (referenced above). Plaintiffs appealed to the New York Supreme Court Appellate Division, First Department. The court has not yet issued its ruling. Local 1199 National Benefit Fund for Health and Human Services Employees v. Philip Morris, Inc., Supreme Court, New York County, New York, Case No. 97/606241, was filed in December 1997. On January 6, 1998, the judge issued an order stating that the group of similar union cases pending before the court (Eastern States, Puerto Rican ILGWU, IBEW Local 363, IBEW Local 25, Local 840, Local 138, 138A and 138B, Long Island Regional Council of Carpenters, Day Care Council-Local 205, Local 1199 National Benefit Fund, and Local 1199 Home Care Industry) were related for the purposes of pretrial discovery and would be assigned the same judge. On August 28, 1998, defendants filed a motion to dismiss. The court granted in part, and denied in part, their motion. On August 18, 1999, defendants filed a supplemental notice of motion to dismiss on statute of limitation grounds. On August 23, 1999, defendants filed a request for judicial intervention to dismiss this action because of delinquent discovery and inactivity. On March 3, 2000, the court granted defendants' motions to dismiss in the 10 union cases before it (referenced above). Plaintiffs appealed to the New York Supreme Court Appellate Division, First Department. The court has not yet issued its ruling. -22- 23 Local 1199 Home Care Industry Benefit Fund v. Philip Morris, Inc., Supreme Court, New York County, New York, Case No. 97/606249, was filed in December 1997. On January 6, 1998, the judge issued an order stating that the group of similar union cases pending before the court (Eastern States, Puerto Rican ILGWU, IBEW Local 363, IBEW Local 25, Local 840, Local 138, 138A and 138B, Long Island Regional Council of Carpenters, Day Care Council-Local 205, Local 1199 National Benefit Fund, and Local 1199 Home Care Industry) were related for the purposes of pretrial discovery and would be assigned the same judge. On August 28, 1998, defendants filed a motion to dismiss. The court granted in part, and denied in part, their motion. On August 18, 1999, defendants filed a supplemental notice of motion to dismiss on statute of limitation grounds. On August 23, 1999, defendants filed a request for judicial intervention to dismiss this action because of delinquent discovery and inactivity. On March 3, 2000, the court granted defendants' motions to dismiss in the 10 union cases before it (referenced above). Plaintiffs appealed to the New York Supreme Court Appellate Division, First Department. The court has not yet issued its ruling. Operating Engineers Local 12 Health & Welfare Fund v. American Tobacco Co., Inc., Superior Court, Los Angeles County, California, Case No. BC 177968, was filed in December 1997. On July 26, 1999, the court granted plaintiffs' motion to consolidate several similar cases, pending before the same judge, with this case designated as the lead and controlling case for the consolidation. On February 26, 1999, the court ruled that the California immunity statute barred claims of fraudulent concealment. On March 10, 2000, the trial court determined that, to the extent that plaintiffs' complaint sought monetary relief, such relief was beyond the scope of the statute that authorized their remaining claims, although injunctive relief was still available. Plaintiffs chose not to pursue injunctive relief, and, on April 4, 2000, filed an ex parte motion for dismissal of all claims with prejudice as to all defendants, which the court granted on April 10, 2000. On April 11, 2000, plaintiff appealed various rulings of the trial court to the Court of Appeal of the State of California, Fourth Appellate District. Briefing is underway. Carpenters & Joiners Welfare Fund v. Philip Morris, Inc., United States District Court for the District of Minnesota, Case No. 98-515JMR/FLN, was filed in December 1997. Defendants' motion to dismiss plaintiffs' amended complaint was granted by the trial court on April 29, 1999. Plaintiffs appealed to the United States Court of Appeals for the Eighth Circuit, which, on September 1, 2000, affirmed the district court's dismissal. Operating Engineers Local 324 Health Care Fund v. Philip Morris, Inc., United States District Court for the Eastern District of Michigan, Southern Division, Case No. 5:98-CV-60020, was filed in December 1997. On February 26, 1999, the court granted defendants' motion to dismiss plaintiffs' first amended complaint. This case is currently on appeal to the Michigan Court of Appeals, which has not issued its ruling. Steamfitters Local Union No. 614 Health and Welfare Fund v. Philip Morris, Inc., Circuit Court, Shelby County, Tennessee, Case No. 92260-2, was filed in January 1998. On January 29, 1999, the trial court granted in part and denied in part defendants' motion to dismiss. On September 26, 2000, the Tennessee Court of Appeals (1) affirmed the trial court's dismissal of the antitrust claim, (2) reversed the trial court's denial of the motion to dismiss the remaining claims, finding the plaintiffs' alleged injuries are too remote, as a matter of law, to permit recover, and (3) remanded the case to the Circuit Court for dismissal of plaintiffs' complaint. National Asbestos Workers Medical Fund v. Philip Morris, Inc., United States District Court for the Eastern District of New York, Case No. CV 98 1492, was filed in February 1998. On October 19, 1998, the court denied defendants' motion to dismiss. This case is scheduled for trial on May 21, 2001. This case is part of the Simon II consolidated class action complaint for declaratory relief which was filed on September 6, 2000. The cases underlying the consolidated Simon II complaint are (1) Simon, Case No. 99-CV-1988; (2) Decie v. American Tobacco Co., Inc., Case No. 00-CV-2340; (3) Ebert v. Philip Morris, Inc., Case No. 00-CV-4632; (4) Mason v. American Tobacco Co., Inc., Case No. 00-CV-4442; (5) Bergeron v. Philip Morris, Inc., Case No. 99-CV-6142; (6) National Asbestos Workers Medical Fund v. Philip Morris, Inc., Case No. 98-CV-1492; (7) Blue Cross and Blue Shield of New Jersey v. Philip Morris, Inc., Case No. 98-CV-3287; (8) H.K. Porter Co., Inc. v. American Tobacco Co., Inc., Case No. 97-CV-7658; (9) Raymark Industries, Inc. v. American Tobacco Co., Inc., Case No. 98-CV-675; and (10) Falise v. American Tobacco Co., Inc., Case No. 99-CV-7392. These cases are discussed separately. -23- 24 Milwaukee Carpenters District Council Health Fund, Welfare Benefit Plan and Its Trustees v. Philip Morris, Inc., United States District Court for the Eastern District of Wisconsin, Case No. 98 CV 394, was filed in March 1998. On January 13, 2000, this case was dismissed with prejudice by court order. Service Employees International Union Health & Welfare Fund v. Philip Morris, Inc., United States District Court for the District of Columbia, Case No. 1:98CV00704-GK, was filed in March 1998. On December 21, 1999, in three Washington, D.C. union reimbursement lawsuits -- (1) Michael H. Holland; (2) Service Employees International Union; and (3) S.E.I.U. Local 74 -- a federal district court judge denied in part, and granted in part, defendants' motions to dismiss the complaints. The judge held that plaintiffs' complaints would not be dismissed on the grounds that they were too remote. She denied motions to dismiss plaintiffs' RICO claims. She also denied defendants' motions to dismiss due to failure to join necessary parties. As to plaintiffs' remaining claims, the judge dismissed plaintiffs' fraud allegations, but gave the plaintiffs the opportunity to amend, and dismissed each of the remaining individual causes of action (i.e., violations of antitrust laws, negligent or intentional breach of a special duty or underlying indemnity, and unjust enrichment). This case is on appeal to the U.S. Court of Appeals for the District of Columbia, where oral argument is scheduled for February 21, 2001. Utah Laborers Health & Welfare Trust Fund v. Philip Morris, Inc., United States District Court for the District of Utah, Case No. 2:98CV403B, was filed in June 1998. On March 31, 1999, the court denied defendants' motion to dismiss. On November 22, 1999, the United States Court of Appeals for the Tenth Circuit granted defendants' petition to appeal this ruling. Defendants-Appellants filed their appeal on December 22, 1999. Pursuant to stipulation, this case was dismissed on April 12, 2000. S.E.I.U. Local 74 Welfare Fund v. Philip Morris, Inc., United States District Court for the District of Columbia, Case No. 1:98CV01569, was filed in June 1998. On December 21, 1999, in three Washington, D.C. union reimbursement lawsuits -- (1) Michael H. Holland; (2) Service Employees International Union; and (3) S.E.I.U. Local 74 -- a federal district court judge denied in part, and granted in part, defendants' motions to dismiss the complaints. The judge held that plaintiffs' complaints would not be dismissed on the grounds that they were too remote. She denied motions to dismiss plaintiffs' RICO claims. She also denied defendants' motions to dismiss due to failure to join necessary parties. As to plaintiffs' remaining claims, the judge dismissed plaintiffs' fraud allegations, but gave the plaintiffs the opportunity to amend, and dismissed each of the remaining individual causes of action (i.e., violations of antitrust laws, negligent or intentional breach of a special duty or underlying indemnity, and unjust enrichment. This case is on appeal to the U.S. Court of Appeals for the District of Columbia, where oral argument is scheduled for February 21, 2001. Holland v. Philip Morris, Inc., United States District Court for the District of Columbia, Case No. 1:98CV01716, was filed in August 1998. On December 21, 1999, in three Washington, D.C. union reimbursement lawsuits -- (1) Michael H. Holland; (2) Service Employees International Union; and (3) S.E.I.U. Local 74 -- a federal district court judge denied in part, and granted in part, defendants' motions to dismiss the complaints. The judge held that plaintiffs' complaints would not be dismissed on the grounds that they were too remote. She denied motions to dismiss plaintiffs' RICO claims. She also denied defendants' motions to dismiss due to failure to join necessary parties. As to plaintiffs' remaining claims, the judge dismissed plaintiffs' fraud allegations, but gave the plaintiffs the opportunity to amend, and dismissed each of the remaining individual causes of action (i.e., violations of antitrust laws, negligent or intentional breach of a special duty or underlying indemnity, and unjust enrichment. This case is on appeal to the U.S. Court of Appeals for the District of Columbia, where oral argument is scheduled for February 21, 2001. Sheet Metal Workers Trust Fund v. Philip Morris, Inc., United States District Court for the District of Columbia, Case No. 1:99CV02326, was filed in August 1999. On December 21, 1999, the court denied certain defendants' motions to dismiss in part, but granted the motion in part with respect to plaintiffs' failure to state a claim. Defendants appealed to the United States Court of Appeals for the District of Columbia. On April 7, 2000, the D.C. Court of Appeals ordered that the cases of Service Employees, SEIU Local 74, Holland and Sheet Metal Workers be consolidated as cross-appeals. On May 1, 2000, the federal district court entered an order, per the parties' agreement, that plaintiffs will advise defendants, within 14 days of a denial or final ruling on the appeal, whether they intend to amend their complaint. Defendants will have 30 days from notification to answer the existing or amended complaint. No party shall initiate discovery while the appeal is pending. Briefing on the appeal has been completed, and oral argument is set for February 21, 2001. -24- 25 Bergeron v. Philip Morris, Inc., United States District Court for the Eastern District of New York, Case No. CV 99 6142, was filed in September 1999. In a memorandum dated December 7, 2000, Judge Weinstein explained that "a series of disposition and discovery motions have been decided, but the [Bergeron] case is not yet ready for trial." This case is part of the Simon II consolidated class action complaint for declaratory relief which was filed on September 6, 2000. The cases underlying the consolidated Simon II complaint are (1) Simon, Case No. 99-CV-1988; (2) Decie v. American Tobacco Co., Inc., Case No. 00-CV-2340; (3) Ebert v. Philip Morris, Inc., Case No. 00-CV-4632; (4) Mason v. American Tobacco Co., Inc., Case No. 00-CV-4442; (5) Bergeron v. Philip Morris, Inc., Case No. 99-CV-6142; (6) National Asbestos Workers Medical Fund v. Philip Morris, Inc., Case No. 98-CV-1492; (7) Blue Cross and Blue Shield of New Jersey v. Philip Morris, Inc., Case No. 98-CV-3287; (8) H.K. Porter Co., Inc. v. American Tobacco Co., Inc., Case No. 97-CV-7658; (9) Raymark Industries, Inc. v. American Tobacco Co., Inc., Case No. 98-CV-675; and (10) Falise v. American Tobacco Co., Inc., Case No. 99-CV-7392. These cases are discussed separately. P&L Coal Holdings Corp. v. B.A.T. Ind., United States District Court for the District of Wyoming, Case No. 00-CV-050J, was filed in March 2000. Plaintiffs voluntarily dismissed their complaint on March 22, 2000. INSURERS/SELF-INSURERS HEALTH-CARE COST RECOVERY Claims for recovery of health costs also have been filed by four groups of health-care insurers, as well as a private entity that operates its employee health-care programs on a self-insured basis. The claims advanced in these cases are comparable to those advanced in the union health-care cost recovery actions. Group Health Plan v. Philip Morris, Inc., United States District Court for the District of Minnesota, Case No. 98-CV-1036, was filed in March 1998. On January 25, 2000, a federal district judge in Minnesota dismissed all claims, except a state antitrust claim and a conspiracy claim. Oral argument on questions certified to the Supreme Court of the State of Minnesota was heard on June 1, 2000. On January 11, 2001, the Supreme Court of Minnesota ruled that these claims can go forward. Defendants' motion for summary judgment on causation, injury and damages is pending. Regence Blueshield v. Philip Morris, Inc., United States District Court for the Western District of Washington, Case No. C98-559R, was filed in April 1998. In January 6, 1999, the court granted certain defendants' motion to dismiss. On February 4, 1999, plaintiffs appealed this ruling to the United States Court of Appeals for the Ninth Circuit where the case is currently pending. Blue Cross and Blue Shield of New Jersey, Inc. v. Philip Morris, Inc., United States District Court for the Eastern District of New York, Case No. CV 98 3287, was filed in April 1998. On February 25, 1999, the trial court denied certain defendants' motions to dismiss for failure to state a claim and failure to join necessary parties. Trial in this case is scheduled for March 19, 2001. This case is part of the Simon II consolidated class action complaint for declaratory relief which was filed on September 6, 2000. The cases underlying the consolidated Simon II complaint are (1) Simon, Case No. 99-CV-1988; (2) Decie v. American Tobacco Co., Inc., Case No. 00-CV-2340; (3) Ebert v. Philip Morris, Inc., Case No. 00-CV-4632; (4) Mason v. American Tobacco Co., Inc., Case No. 00-CV-4442; (5) Bergeron v. Philip Morris, Inc., Case No. 99-CV-6142; (6) National Asbestos Workers Medical Fund v. Philip Morris, Inc., Case No. 98-CV-1492; (7) Blue Cross and Blue Shield of New Jersey v. Philip Morris, Inc., Case No. 98-CV-3287; (8) H.K. Porter Co., Inc. v. American Tobacco Co., Inc., Case No. 97-CV-7658; (9) Raymark Industries, Inc. v. American Tobacco Co., Inc., Case No. 98-CV-675; and (10) Falise v. American Tobacco Co., Inc., Case No. 99-CV-7392. These cases are discussed separately. Arkansas Blue Cross and Blue Shield v. Philip Morris, Inc., United States District Court for the Northern District of Illinois, Case No. 98 C 2612, was filed in April 1998. On March 31, 1999, the trial court denied defendants' joint motion to dismiss. Defendants appealed this ruling to the United States Court of Appeals for the Seventh Circuit, which reversed and remanded the case to the trial court with instructions to dismiss the complaint. On December 21, 1999, the trial court entered an order dismissing plaintiffs' complaint. Plaintiffs filed a motion to amend their complaint and a motion to vacate the December 21, 1999 dismissal, which the trial court denied on January 20, 2000, pursuant to the order of the Seventh Circuit. -25- 26 Medica v. Philip Morris, Inc., United States District Court for the District of Minnesota, Case No. 99-1739 PAM/JGL, was filed in November 1999. On January 25, 2000, a federal district judge in Minnesota dismissed all claims, except a state antitrust claim and a conspiracy claim. Oral argument on questions certified to the Supreme Court of the State of Minnesota was heard on June 1, 2000. On January 11, 2001, the Supreme Court of Minnesota ruled that these claims can go forward. Defendants' motion for summary judgment on causation, injury and damages is pending. INDIAN TRIBES HEALTH-CARE COST RECOVERY Lower Brule Sioux Nation v. American Tobacco Co., Inc., Lower Brule Sioux Tribal Court, South Dakota, Case No. 97-12-0140, was filed in June 1997. On July 11, 2000, plaintiffs filed a motion for voluntary dismissal, which the tribal court granted on August 30, 2000. Crow Creek Sioux Tribe v. American Tobacco Co., Inc., Tribal Court of the Crow Creek Sioux, South Dakota, Case No. CV 97-9-82, was filed in September 1997. On January 29, 2000, the tribal court entered an order staying this case in its entirety for 540 days. Standing Rock Sioux Tribe v. American Tobacco Co., Inc., Standing Rock Sioux Tribal Court, North Dakota, was filed in May 1998. On March 1, 1999, defendants' motion to dismiss was denied. On January 21, 2000, the tribal court entered an order staying all proceedings until July 1, 2000. On May 1, 2000, the Standing Rock Sioux Supreme Court issued an order remanding the case to the tribal court. On May 24, 2000, the tribal court entered another stay order effective through November 30, 2000. There has been no further activity. Sisseton-Wahpeton Sioux Tribe v. American Tobacco Co., Inc., Sisseton-Wahpeton Sioux Tribal Court, North Dakota, Case No. C-98-89-54, was filed in May 1998. On November 2, 1999, the court granted in part, and denied in part, defendants' motion to dismiss plaintiffs' first amended complaint. On November 12, 1999, defendants filed a petition for intermediate appeal to the Northern Plains Intertribal Court of Appeals, which was granted on December 1, 1999. The appeals court issued a stay of these proceedings which is effective until March 31, 2001. Pechanga Band of Luiseno Mission Indians v. Philip Morris, Inc., Superior Court, San Diego County, California, Case No. 725419, was filed in October 1998. On January 7, 2000, plaintiffs filed a second amended complaint. On February 7, 2000, RJR Tobacco filed its answer. On September 25, 2000, plaintiffs filed their motion for class certification, which was denied by the court on December 8, 2000. On January 10, 2001, plaintiffs filed a request for dismissal. Acoma Pueblo v. American Tobacco Co., United States District Court for the District of New Mexico, Case No. CIV 991049 WWD, was filed in June 1999. On September 27, 1999, certain defendants filed a motion to dismiss. On November 18, 1999, the court entered an order staying this case until July 1, 2000. On December 14, 2000, plaintiffs filed a motion to remand which is pending before the court. Navajo Nation v. Philip Morris, Inc., Navajo Nation District Court, Arizona, Case No. WR-CV:449-99, was filed in August 1999. This case was filed on August 11, 1999. On October 20, 1999, defendants filed a motion to dismiss plaintiffs' complaint, to which plaintiffs have filed their opposition. Defendants filed a reply brief on January 21, 2000. No date has been set for oral argument on defendants' motion. Alabama Coushatta Tribe of Texas v. American Tobacco Co., United States District Court for the Eastern District of Texas, Case No. 1:00CV-596, was filed in August 2000. Defendants, including RJR Tobacco, filed a motion to dismiss on October 10, 2000. On October 13, 2000, Liggett Group filed joinder in certain defendants' motion to dismiss. -26- 27 INTERNATIONAL HEALTH-CARE COST RECOVERY A number of foreign countries have filed suit in state and federal courts in the United States against RJR Tobacco and other tobacco industry defendants to recover funds for health-care and medical and other assistance paid by those foreign governments to their citizens suffering from diseases and conditions allegedly related to tobacco use. Of the 18 cases currently pending, eight are pending in state court and 10 are pending in federal court. Six federal court cases have been transferred by the Panel on Multi-District Litigation ("MDL Panel") to the District Court of the District of Columbia. Other foreign governments and entities have stated that they are considering filing such actions in the United States. In addition, the Republic of the Marshall Islands has brought a health-care cost recovery lawsuit in the Marshall Islands against RJR Tobacco and other cigarette manufacturers. Pursuant to the terms of the 1999 sale of RJR's international tobacco business, Japan Tobacco Inc. assumed RJR Tobacco's liability, if any, in these cases. Panama v. American Tobacco Co., Inc., United States District Court for the District of Columbia, Case No. 00-2681, was filed in October 1998. This case was removed by defendants to the United States District Court for the Eastern District of Louisiana on November 15, 1998. On December 4, 1998, plaintiffs filed a motion to remand the case to state court, which was granted on May 28, 1999 (before the cases in federal court were consolidated under the Multi-District Litigation ("MDL") rules). Defendants appealed this ruling to the United States Court of Appeals for the Fifth Circuit on June 25, 1999, and further moved the federal district court, on August 30, 1999, for a stay pending the appeal. On July 17, 2000, the Fifth Circuit reversed the federal court's remand decision, and the case was returned to federal court. On August 21, 2000, a conditional MDL transfer order was issued, by which the case was moved to the United States District Court for the District of Columbia before Judge Friedman for inclusion in the MDL consolidation. On December 20, 2000, Judge Friedman stayed all proceedings in this case, pending the D.C. Court of Appeals' rulings on the appeals and mandamus petitions in other cases. British Columbia v. Imperial Tobacco, Ltd., Supreme Court, British Columbia, Vancouver Registry, Case No. C985776, was filed in November 1998. On February 21, 2000, the British Columbia Supreme Court declared the cost recovery act unconstitutional and dismissed the action. Bolivia v. Philip Morris, Cos., Inc., United States District Court for the District of Columbia, Case No. 1:99-0586-PLF, was filed in January 1999. On February 19, 1999, defendants removed this case to the United States District Court for the Southern District of Texas, Galveston Division. On March 1, 1999, the Texas federal court sua sponte transferred this case to Judge Friedman in the United States District Court for the District of Columbia. On March 18, 1999, plaintiff filed a motion to remand the case to the Texas state court. On June 10, 1999, this case was consolidated with the other foreign government cases pending in federal courts under the MDL procedures. RJR Tobacco filed its answer to plaintiff's complaint on September 3, 1999. On June 12, 2000, Judge Friedman ruled that diversity exists in this case, and ordered limited discovery on whether Liggett's failure to consent to removal should be disregarded. On January 3, 2001, Judge Friedman denied plaintiff's motion to add British American Tobacco Company as a defendant. He further ordered additional deposition discovery of Bolivia's and Liggett's counsel concerning Liggett's failure to consent to removal. Those depositions have been preliminarily noticed for late February and early March 2001. Venezuela v. Philip Morris Cos., Inc., Circuit Court, Dade County, Miami Division, Case No. 99-1943CA25, was filed in January 1999. Defendants (except Liggett) removed the case to the United States District Court for the Southern District of Florida on February 26, 1999. A conditional transfer order to the MDL Panel before Judge Friedman of the United States District Court for the District of Columbia was filed on June 10, 1999. Defendants answered plaintiff's complaint on January 3, 2000. Plaintiff moved to remand the case, which Judge Friedman granted on June 12, 2000. Defendants appealed the ruling to the United States Court of Appeals for the District of Columbia on July 12, 2000. On October 11, 2000, the D.C. Court of Appeals ordered that defendants' appeal be treated as a petition for a writ of mandamus, and that defendants submit a supporting memorandum by November 13, 2000. Identical orders were entered in the pending appeals of remand orders in the Espirito Santo, Goias and Venezuela cases. Defendants filed their memorandum on October 30, 2000. Defendants also petitioned for advisory mandamus in both the Russia and Mato Grosso do Sul cases, asking for appellate guidance from the D.C. Circuit with respect to federal jurisdiction, and requested consolidation of the mandamus petitions in the six pertinent cases: (1) Russia, (2) Mato Grosso do Sul, (3) Ecuador, (4) Venezuela, (5) Goias, and (6) Espirito Santo. On January 24, 2001, the D.C. Circuit reconverted the mandamus petitions in Ecuador, Espirito Santo, Goias and Venezuela into appeals, consolidated all six cases, and directed the clerk to set a briefing schedule and schedule oral argument. -27- 28 Rio de Janeiro v. Philip Morris Cos., Inc., District Court, Angelina County, Texas, Case No. 32198-99-7, was filed in July 1999. Defendants removed this case to federal district court on August 11, 1999. Plaintiffs filed a motion to remand on August 16, 1999. A conditional transfer order to the MDL Panel was filed on August 30, 1999. Defendants also filed a motion to stay the proceedings pending transfer of this case to the MDL Panel on August 30. On September 14, 1999, this case was remanded back to Angelina County District Court. On September 15, 1999, the conditional transfer order was vacated. On September 24, 1999, defendants appealed the remand ruling to the United States Court of Appeals for the Fifth Circuit, which, on January 22, 2001, dismissed defendants' appeal. Goias v. Philip Morris Cos., Inc., Circuit Court, Dade County, Florida, Case No. 99-24202 CA 02, was filed in October 1999. Defendants (except Liggett) removed this case to federal court, moved for a stay of the proceedings and initiated the process for MDL consolidation before Judge Friedman of the United States District Court for the District of Columbia, on November 10, 1999. On December 6, 1999, the federal court stayed the case, pending a ruling on the MDL consolidation. Defendants filed answers to the complaint on December 8, 1999. On December 10, 1999, the federal court stayed the case, pending a ruling on the MDL consolidation. The case was conditionally transferred to be consolidated into the MDL proceedings on December 22, 1999. Judge Friedman remanded the case to the Circuit Court of Dade County on July 10, 2000. Defendants appealed the remand decision to the United States Court of Appeals for the District of Columbia on July 20, 2000. On October 11, 2000, the D.C. Court of Appeals ordered that defendants' appeal be treated as a petition for a writ of mandamus, and that defendants submit a supporting memorandum by November 13, 2000. Identical orders were entered in the pending appeals of remand orders in the Espirito Santo, Goias and Venezuela cases. Defendants filed their memorandum on October 30, 2000. Defendants also petitioned for advisory mandamus in both the Russia and Mato Grosso do Sul cases, asking for appellate guidance from the D.C. Circuit with respect to federal jurisdiction, and requested consolidation of the mandamus petitions in the six pertinent cases: (1) Russia, (2) Mato Grosso do Sul, (3) Ecuador, (4) Venezuela, (5) Goias, and (6) Espirito Santo. On January 24, 2001, the D.C. Circuit reconverted the mandamus petitions in Ecuador, Espirito Santo, Goias and Venezuela into appeals, consolidated all six cases, and directed the clerk to set a briefing schedule and schedule oral argument. Ukraine v. American Brands, Inc., United States District Court for the District of Columbia, Case No. 99cv03080 PLF, was filed in November 1999. Defendants filed answers to the complaint on December 17, 1999. On December 23, 1999, this case was transferred to the United States District Court for the District of Columbia for inclusion in the consolidated MDL proceedings before Judge Friedman. Judge Friedman dismissed plaintiff's case on March 31, 2000. Ukraine appealed to the United States Court of Appeals for the District of Columbia on April 27, 2000, and this appeal was consolidated with the appeals in the Guatemala and Nicaragua cases on May 8, 2000. Briefing on the appeal is complete, and oral argument has been scheduled for February 21, 2001. Ecuador v. Philip Morris Cos., Inc., Circuit Court, Dade County, Florida, Case No. 00-1951 CA 27, was filed in January 2000. RJR Tobacco filed an answer to the complaint on May 17, 2000. Defendants removed this case to federal court on May 25, 2000. The case was conditionally transferred to Judge Friedman in the United States District Court for the District of Columbia, to be consolidated into the MDL proceedings. Judge Friedman remanded the case to the Circuit Court of Dade County on July 10, 2000. On July 20, 2000, defendants appealed the remand decision to the United States Court of Appeals for the District of Columbia. On October 11, 2000, the D.C. Court of Appeals ordered that defendants' appeal be treated as a petition for a writ of mandamus, and that defendants submit a supporting memorandum by November 13, 2000. Identical orders were entered in the pending appeals of remand orders in the Espirito Santo, Goias and Venezuela cases. Defendants filed their memorandum on October 30, 2000. Defendants also petitioned for advisory mandamus in both the Russia and Mato Grosso do Sul cases, asking for appellate guidance from the D.C. Circuit with respect to federal jurisdiction, and requested consolidation of the mandamus petitions in the six pertinent cases: (1) Russia, (2) Mato Grosso do Sul, (3) Ecuador, (4) Venezuela, (5) Goias, and (6) Espirito Santo. On January 24, 2001, the D.C. Circuit reconverted the mandamus petitions in Ecuador, Espirito Santo, Goias and Venezuela into appeals, consolidated all six cases, and directed the clerk to set a briefing schedule and schedule oral argument. Meanwhile, in Florida state court, defendants have filed motions for judgment on the pleadings and jurisdictional motions. Oral argument on the various defendants' motions, including for judgment on the pleadings, has been scheduled for March 27, 2001. Plaintiff has begun limited discovery concerning defendants' jurisdictional motions. -28- 29 Sao Paulo v. American Tobacco Co., Inc., District Court, Parish of Orleans, Louisiana, Case No.2000-2058, was filed in February 2000. On March 24, 2000, defendants removed the case to the United States District Court for the Eastern District of Louisiana, moved for a stay of the proceedings, moved to recuse Judge Barbier, and requested MDL consolidation. On April 7, 2000, the case was conditionally transferred to Judge Friedman in the United States District Court for the District of Columbia, to be consolidated into the MDL proceedings. Plaintiffs moved to remand the case to Louisiana state court on April 10, 2000. Defendants' motion for a stay, as well as their motion to recuse Judge Barbier, was denied on May 26, 2000. On May 30, 2000, defendants appealed the May 26 ruling to the United States Court of Appeals for the Fifth Circuit. The MDL Panel vacated its conditional transfer on June 1, 2000. The parties have agreed that responsive pleadings will not be due until 30 days after the mandate issues on the Fifth Circuit decision in the pending appeal. Obra Social de Empleados de la Marina Mercante v. American Tobacco Co., Inc., Superior Court, Washington, D.C., Case No. 00-1790, was filed in March 2000. On May 19, 2000, defendants filed a motion to dismiss, which was granted by the court on January 13, 2001. Ontario v. Imperial Tobacco Ltd., United States District Court for the District of Columbia, Case No. 00-0872, was filed in March 2000. On March 3, 2000, defendants requested MDL consolidation. On April 17, 2000, the case was conditionally transferred to Judge Friedman in the United States District Court for the District of Columbia, to be consolidated into the MDL proceedings. The principal defendants, including RJR Tobacco, filed answer to the complaint on April 25, 2000. On August 7, 2000, Judge Friedman dismissed this case. Plaintiff appealed this decision to the United States Court of Appeals for the District of Columbia on September 6, 2000. No briefing schedule has been set. Espirito Santo v. Brooke Group Ltd., Circuit Court, Dade County, Florida, Case No. 00-07472 CA 03, was filed in March 2000. On April 19, 2000, defendants removed this case to the United States District Court for the Southern District of Florida, requested MDL status and moved for a stay. Plaintiff moved to remand the case on April 24, 2000. The MDL Panel issued a conditional transfer order on May 3, 2000, and the Florida state court granted defendants' motion for a stay pending the MDL transfer and consolidation. RJR Tobacco filed answer to plaintiff's complaint on May 15, 2000. Judge Friedman remanded the case to the Circuit Court of Florida on August 10, 2000. Defendants appealed to the United States Court of Appeals for the District of Columbia on August 18, 2000. On October 11, 2000, the D.C. Court of Appeals ordered that defendants' appeal be treated as a petition for a writ of mandamus, and that defendants submit a supporting memorandum by November 13, 2000. Identical orders were entered in the pending appeals of remand orders in the Espirito Santo, Goias and Venezuela cases. Defendants filed their memorandum on October 30, 2000. Defendants also petitioned for advisory mandamus in both the Russia and Mato Grosso do Sul cases, asking for appellate guidance from the D.C. Circuit with respect to federal jurisdiction, and requested consolidation of the mandamus petitions in the six pertinent cases: (1) Russia, (2) Mato Grosso do Sul, (3) Ecuador, (4) Venezuela, (5) Goias, and (6) Espirito Santo. On January 24, 2001, the D.C. Circuit reconverted the mandamus petitions in Ecuador, Espirito Santo, Goias and Venezuela into appeals, consolidated all six cases, and directed the clerk to set a briefing schedule and schedule oral argument. Mato Grosso do Sul Do Sul v. Philip Morris Cos., Inc., United States District Court for the District of Columbia, Case No. 00-2655, was filed in July 2000. Defendants removed the case to the United States District Court for the Southern District of Florida on August 16, 2000. Plaintiff filed a motion to remand on September 14, 2000. The MDL transfer order to Judge Friedman of the United States District Court for the District of Columbia was effective as of October 27, 2000. On October 30, 2000, defendants petitioned for advisory mandamus in both the Russia and Mato Grosso do Sul cases, asking for appellate guidance from the D.C. Circuit with respect to federal jurisdiction, and requested consolidation of the mandamus petitions in the six pertinent cases: (1) Russia, (2) Mato Grosso do Sul, (3) Ecuador, (4) Venezuela, (5) Goias, and (6) Espirito Santo. On January 24, 2001, the D.C. Circuit reconverted the mandamus petitions in Ecuador, Espirito Santo, Goias and Venezuela into appeals, consolidated all six cases, and directed the clerk to set a briefing schedule and schedule oral argument. Defendants filed answer to the complaint on December 4, 2000. Russian Federation v. Philip Morris Cos., Inc., United States District Court for the District of Columbia, Case No 00-2655, was filed in August 2000. On September 1, 2000, defendants removed the case to the United States District Court for the Southern District of Florida and sought MDL transfer. The MDL transfer order to Judge Friedman of the United States District Court for the District of Columbia became effective as of October 27, -29- 30 2000. Plaintiff filed a motion to remand on September 28, 2000. On October 30, 2000, defendants petitioned for advisory mandamus in both the Russia and Mato Grosso do Sul cases, asking for appellate guidance from the D.C. Circuit with respect to federal jurisdiction, and requested consolidation of the mandamus petitions in the six pertinent cases: (1) Russia, (2) Mato Grosso do Sul, (3) Ecuador, (4) Venezuela, (5) Goias, and (6) Espirito Santo. Defendants also moved for a stay before Judge Friedman, which he granted on December 20, 2000. Defendants' answers will not be due before the stay is lifted. On January 24, 2001, the D.C. Circuit reconverted the mandamus petitions in Ecuador, Espirito Santo, Goias and Venezuela into appeals, consolidated all six cases, and directed the clerk to set a briefing schedule and schedule oral argument. Betriebskrankenkasse aktiv v. Philip Morris, Inc., United States District Court for the Eastern District of New York, Case No. 1:00cv05413, was filed in September 2000. RJR Tobacco filed its answer on January 5, 2001. Defendants have two pending motions before the court: (1) to transfer the case to another judge in the Eastern District of New York (which motion Judge Weinstein has referred to the chief judge of the Eastern District); or (2) to transfer the case to the Southern District of New York. Chief Judge Korman will hear argument on the first motion on February 23, 2001. Honduras v. Philip Morris Cos., Inc., United States District Court for the District of Columbia, Case No. 00-3859, was filed in October 2000. Defendants removed this case to the United States District Court for the Southern District of Florida, and sought transfer to the MDL Panel on October 12, 2000. Plaintiff moved to remand the case to Florida state court on October 16, 2000. The MDL transfer order to Judge Friedman of the United States District Court for the District of Columbia became effective November 24, 2000. RJR Tobacco filed its answer to the complaint on November 28, 2000. Plaintiffs' remand motion remains pending, but is subject to a stay order entered by Judge Friedman. Tocantins v. Brooke Group, Ltd., Inc., United States District Court for the District of Columbia, Case No. 00-4462, was filed in October 2000. Defendants removed this case to the United States District Court for the Southern District of Florida on November 22, 2000, and sought transfer to the MDL Panel on December 5, 2000. RJR Tobacco filed its answer to the complaint on December 27, 2000. The MDL transfer order to Judge Friedman of the United States District Court for the District of Columbia became effective January 17, 2001. On January 19, 2001, defendants moved for a stay, which Judge Friedman granted on January 23, 2001. Piaui v. Philip Morris Cos., Inc., United States District Court for the District of Columbia, Case No. 01-0114, was filed in December 2000. Defendants removed this case to the United States District Court for the Southern District of Florida, and sought transfer to the MDL Panel on January 9, 2001. Plaintiff moved to remand the case to Florida state court on January 22, 2001. The MDL transfer order to Judge Friedman of the United States District Court for the District of Columbia became effective February 14, 2001. Kyrgyz v. Brooke Group Ltd. Inc., United States District Court for the Southern District of Florida, Case No. 01-cv-605, was filed in January 2001. On February 13, 2001, defendants removed the case to the United States District Court for the Southern District of Florida. Defendants intend to request MDL consolidation. Tajikistan v. Brooke Group Ltd. Inc., United States District Court for the Southern District of Florida, Case No. 01-cv-607, was filed in January 2001. On February 13, 2001, defendants removed the case to the United States District Court for the Southern District of Florida. Defendants intend to request MDL consolidation. TAXPAYER HEALTH-CARE COST RECOVERY Coyne v. American Tobacco Co., Inc., Court of Common Pleas, Cuyahoga County, Ohio, Case No. 315249, was filed in September 1996. On October 16, 1996, defendants removed this case to the United States District Court for the Northern District of Ohio, Eastern Division. On February 12, 1998, the district court granted defendants' motion to dismiss. On March 20, 1998, plaintiffs appealed the trial court's dismissal to the United States Court of Appeals for the Sixth Circuit. On July 12, 1999, the Sixth Circuit remanded this case to the federal with instructions to remand the matter to the state court from which it came. -- Common Pleas Court of Cuyahoga County, Ohio. On February 22, 2000, RJR Tobacco filed a motion to dismiss, which was granted on November 22, 2000. Plaintiffs appealed the ruling to the Ohio Court of Appeals where the case is pending. -30- 31 State of Tenneessee, ex. rel. Beckom v. American Tobacco Co., Inc., Chancery Court, Monroe County, Tennessee, Case No. 12,263, was filed in May 1997. On June 6, 1997, defendants removed this case to the United States District Court for the Middle District of Tennessee. On May 9, 2000, the federal court remanded this action to the Tennessee state court, pursuant to the mandate of the United States Court of Appeals for the Sixth Circuit. Defendants filed a motion to dismiss on May 23, 2000. Certain Defendants, including RJR Tobacco, filed their motion for judgment on the pleadings on August 18, 2000. North Carolina v. American Tobacco Co., United States District Court for the Middle District of North Carolina, Case No. 1:98 CV 138, was filed in February 1998. On March 17, 2000, the parties stipulated to a dismissal. UNIVERSITY HEALTH-CARE COST RECOVERY University of South Alabama v. American Tobacco Co., Inc., United States District Court for the District of Alabama, Case No. 97-552-BH-S, was filed in May 1997. In March 1999, the Court of Appeals reversed the trial court's dismissal of this case. On January 13, 2000, a stipulation of dismissal was filed. HOSPITAL HEALTH-CARE COST RECOVERY City of St. Louis v. American Tobacco Co., Inc., Circuit Court, St. Louis County, Missouri, Case No. 982-9652, was filed in November 1998. Defendants removed this case to the United States District Court for the Eastern District of Missouri on December 17, 1998. Plaintiffs filed a motion to remand, which was granted on July 2, 1999. On December 16, 1999, certain defendants filed a motion to dismiss the first amended petition. Oral argument was heard on December 12, 2000. The court has not yet ruled. Association of Washington Public Hospital Districts v. Philip Morris, Inc., United States District Court for the Western District of Washington, Case No. C98-1675, was filed in November 1998. On December 14, 1999, the trial court granted defendants' motion to dismiss plaintiffs' complaint. On January 15, 2000, plaintiffs appealed this ruling to the United States Court of Appeal for the Ninth Circuit. The Ninth Circuit heard oral argument on December 14, 2000. Allegheny General Hospital v. Philip Morris, Inc., United States District Court for the Western District of Pennsylvania, Case No. 98-18956, was filed in December 1998. On November 4, 1999, the trial court granted defendants' motion to dismiss plaintiffs' first amended complaint. On December 3, 1999, plaintiffs appealed this ruling to the United States Court of Appeals for the Third Circuit, which affirmed the trial court's dismissal on October 6, 2000. A.O. Fox Memorial v. American Tobacco Co., Inc., Supreme Court, Nassau County, New York, Case No. 005193/00, was filed in May 2000. On November 13, 2000, defendants filed a motion to dismiss. A hearing on defendants' motion is scheduled for May 25, 2001. County of McHenry v. Philip Morris, Inc., Circuit Court, Cook County, Illinois, Case No. 00L 007949, was filed in July 2000. Defendants removed the case to the United States District Court for the Northern District of Illinois on August 18, 2000. Plaintiffs moved to remand on August 30, 2000. On February 6, 2001, the federal court granted plaintiffs' motion to remand. FEDERAL HEALTH-CARE COST RECOVERY United States v. Philip Morris, Inc., United States District Court for the District of Columbia, Case No. 99-CV-2496 (GK), was filed in September 1999. The U.S. Department of Justice brought this action against various industry members, including RJR Tobacco. The government seeks to recover federal funds expended in providing health-care to smokers who have developed diseases and injuries alleged to be smoking-related, and, in addition, -31- 32 seeks, pursuant to the federal RICO statute, disgorgement of profits the government contends were earned as a consequence of a RICO racketeering "enterprise." On December 31, 1999, defendants filed a motion to dismiss challenging all counts included in the complaint. The court heard oral arguments were heard on the motion to dismiss on June 2, 2000. On September 28, 2000, Judge Gladys Kessler of the U.S. District Court for the District of Columbia granted the non-Liggett defendants' motion to dismiss the following: (1) Medical Care Recovery Act claim; and (2) Medicare Secondary Payer claim; she denied, however, the motion with respect to the RICO claims. Judge Kessler also granted British American Tobacco Industry's separate motion to dismiss in its entirety on September 28, 2000. Trial is scheduled to begin July 15, 2003. ASBESTOS CONTRIBUTION Twelve lawsuits, of which 10 remain pending, have been served on RJR Tobacco by asbestos companies and/or related asbestos-related trust funds asserting claims for unjust enrichment, restitution, contribution, indemnity and unfair contribution. These theories are based on the assertion that the asbestos entities have "overpaid" claims brought against them to the extent that tobacco use, not asbestos exposure, was the cause of the alleged personal injuries with respect to which they have paid compensation. As with the other health-care cost recovery actions, the complaints typically seek to aggregate the alleged damages associated with tens of thousands of underlying claims, without specifically identifying a single individual who claims injury by virtue of tobacco use. Thomas v. R. J. Reynolds Tobacco Co., Circuit Court, Jefferson County, Mississippi, Case No. 96-65, was filed in August 1996. The claims of plaintiff Owens Corning have been severed from those of the individual plaintiffs in this case. Trial in the Owens Corning portion of the case is scheduled to begin June 18, 2001. Raymark Industries, Inc. v. R. J. Reynolds Tobacco Co., Circuit Court, Duval County, Florida, Case No. 97-5254 CA-F, was filed in September 1997. The case remains effectively stayed following Raymark's March 1998 bankruptcy filing. Raymark Industries, Inc. v. American Tobacco Co., Inc., United States District Court for the Northern District of Georgia, Case No. 1 97-CV-2711, was filed in September 1997. On August 7, 1998, federal district court Judge Story entered an order staying this case pending further order of the court. The clerk was directed to administratively close the case pending completion of the bankruptcy proceedings. There has been no other activity since the August 7, 1998 order. Falise v. American Tobacco Co., Inc., United States District Court for the Eastern District of New York, Case No. 97 CV 7640, was originally filed in November 1997. However, on November 2, 1999, the court entered an order dismissing this case due to jurisdictional grounds. On November 11, 1999, plaintiffs filed a new complaint in the same court -- Falise v. American Tobacco Co., Inc., United States District Court for the Eastern District of New York, Case No. CV 99-7392 -- and amended it on December 17, 1999. Trial began on November 27, 2000. On January 22, 2001, the judge declared a mistrial. No date has yet been set for the re-trial of this case. This case is part of the Simon II consolidated class action complaint for declaratory relief which was filed on September 6, 2000. The cases underlying the consolidated Simon II complaint are (1) Simon, Case No. 99-CV-1988; (2) Decie v. American Tobacco Co., Inc., Case No. 00-CV-2340; (3) Ebert v. Philip Morris, Inc., Case No. 00-CV-4632; (4) Mason v. American Tobacco Co., Inc., Case No. 00-CV-4442; (5) Bergeron v. Philip Morris, Inc., Case No. 99-CV-6142; (6) National Asbestos Workers Medical Fund v. Philip Morris, Inc., Case No. 98-CV-1492; (7) Blue Cross and Blue Shield of New Jersey v. Philip Morris, Inc., Case No. 98-CV-3287; (8) H.K. Porter Co., Inc. v. American Tobacco Co., Inc., Case No. 97-CV-7658; (9) Raymark Industries, Inc. v. American Tobacco Co., Inc., Case No. 98-CV-675; and (10) Falise v. American Tobacco Co., Inc., Case No. 99-CV-7392. These cases are discussed separately. Fibreboard Corp. v. R. J. Reynolds Tobacco Co., Superior Court, Alameda County, California, Case No. 791919-8, was filed in November 1997. Trial is scheduled for July 20, 2001. Keene Creditors Trust v. Brown & Williamson Tobacco Corp., Supreme Court, New York County, New York, Case No. 606479/97, was filed in December 1997. Defendants' answer or other response to plaintiffs' complaint is due on March 23, 2001. -32- 33 Raymark Industries, Inc. v. American Tobacco Co., Inc., United States District Court for the Eastern District of New York, Case No. 98-CV-675, was filed in May 1998. Raymark had been assigned to the MDL Panel, but the Panel recently ordered that the case be remanded to the Eastern District of New York. This case is part of the Simon II consolidated class action complaint for declaratory relief which was filed on September 6, 2000. The cases underlying the consolidated Simon II complaint are (1) Simon, Case No. 99-CV-1988; (2) Decie v. American Tobacco Co., Inc., Case No. 00-CV-2340; (3) Ebert v. Philip Morris, Inc., Case No. 00-CV-4632; (4) Mason v. American Tobacco Co., Inc., Case No. 00-CV-4442; (5) Bergeron v. Philip Morris, Inc., Case No. 99-CV-6142; (6) National Asbestos Workers Medical Fund v. Philip Morris, Inc., Case No. 98-CV-1492; (7) Blue Cross and Blue Shield of New Jersey v. Philip Morris, Inc., Case No. 98-CV-3287; (8) H.K. Porter Co., Inc. v. American Tobacco Co., Inc., Case No. 97-CV-7658; (9) Raymark Industries, Inc. v. American Tobacco Co., Inc., Case No. 98-CV-675; and (10) Falise v. American Tobacco Co., Inc., Case No. 99-CV-7392. These cases are discussed separately. Trial is scheduled for May 14, 2001. H.K. Porter Co., Inc. v. American Tobacco Co., Inc., United States District Court for the Eastern District of New York, Case No. CV 97-7658 (JBW), was filed in June 1998. Trial is scheduled for September 11, 2000, although Judge Weinstein ordered that all proceedings were stayed until 90 days after completion of the trial in Falise (discussed above). This case is part of the Simon II consolidated class action complaint for declaratory relief which was filed on September 6, 2000. The cases underlying the consolidated Simon II complaint are (1) Simon, Case No. 99-CV-1988; (2) Decie v. American Tobacco Co., Inc., Case No. 00-CV-2340; (3) Ebert v. Philip Morris, Inc., Case No. 00-CV-4632; (4) Mason v. American Tobacco Co., Inc., Case No. 00-CV-4442; (5) Bergeron v. Philip Morris, Inc., Case No. 99-CV-6142; (6) National Asbestos Workers Medical Fund v. Philip Morris, Inc., Case No. 98-CV-1492; (7) Blue Cross and Blue Shield of New Jersey v. Philip Morris, Inc., Case No. 98-CV-3287; (8) H.K. Porter Co., Inc. v. American Tobacco Co., Inc., Case No. 97-CV-7658; (9) Raymark Industries, Inc. v. American Tobacco Co., Inc., Case No. 98-CV-675; and (10) Falise v. American Tobacco Co., Inc., Case No. 99-CV-7392. These cases are discussed separately. UNR Asbestos-Disease Claims Trust v. Brown & Williamson Tobacco Corp., Supreme Court, New York County, New York, Case No. 105152/99, was filed in March 1999. Defendants' answer or other response to plaintiffs' complaint is due on March 23, 2001. Kaiser Aluminum & Chemical Corp. v. RJR Nabisco, Inc., Circuit Court, Jefferson County, Mississippi, Case No. 2000-615, was filed in December 2000. Defendants have until February 28, 2001 to file an answer to plaintiffs' complaint. CERTAIN OTHER NON-INDIVIDUAL CASES PROPOSITION 65 California v. Brown & Williamson Tobacco Corp., Superior Court, San Francisco County, California, Case No. 996781, was filed in July 1998. The parties entered into a settlement agreement on July 25, 2000. The court approved the settlement and entered final judgment on November 20, 2000. California v. Philip Morris, Inc., Superior Court, Los Angeles County, California, Case No. BC 19427, was filed in July 1998. The parties entered into a settlement agreement on July 25, 2000. The court approved the settlement and entered final judgment on November 20, 2000. CERTAIN OTHER NON-INDIVIDUAL CASES MSA-RELATED In Re Senator Troy Fraser, United States District Court for the Eastern District of Texas, Case No. 5:98-CV-0045, was filed in January 1998. This case challenges the authority of former Attorney General Dan Morales to enter into a contingency fee agreement on behalf of the State of Texas for services rendered in State of Texas v. American Tobacco Co., Inc. The case is currently in the United States Court of Appeals for the Fifth Circuit. Hise v. Philip Morris, Inc., United States District Court for the Northern District of Oklahoma, Case No. 98CV947 C (E), was filed in December 1998. On April 29, 1999, the trial court granted defendants' motion for -33- 34 summary judgment. On May 27, 1999, plaintiffs appealed the trial court's dismissal to the United States Court of Appeals for the Tenth Circuit, which affirmed the federal district court's ruling on February 17, 2000. On June 21, 2000, plaintiffs filed a petition for writ of certiorari in the U.S. Supreme Court, which was denied on October 30, 2000. Perry v. Walkup, Chancery Court, Davidson County, Tennessee, Case No. 98-3771-II, was filed in December 1998. Plaintiffs' complaint for declaratory judgment was filed on December 18, 1998. The plaintiffs appealed denial of their motion to intervene in the Tennessee attorney general action. On December 14, 1999, the State of Tennessee requested that the Tennessee Supreme Court assume jurisdiction over the consolidated appeals. On January 10, 2000, the Tennessee Supreme Court granted the state's motion, and assumed jurisdiction. On April 19, 2000, the Supreme Court of Tennessee affirmed the decisions of the trial court and denied the intervenors' motions to consider post-judgment facts, thereby dismissing the case. Forces Action Project v. California, United States District Court for the Northern District of California, Case No. C 99-607 EDL, was filed in February 1999. On January 5, 2000, the trial court granted defendants' motion to dismiss. Plaintiffs appealed this ruling to the United States Court of Appeals for the Ninth Circuit. The appeal has been briefed; however, the appellate court has not set a date for oral argument. Table Bluff Reservation v. Philip Morris, Inc., United States District Court for the Northern District of California, Case No. C 99-2621, was filed in June 1999. On November 12, 1999, the trial court granted defendants' motion to dismiss the complaint. On November 18, 1999, plaintiffs appealed the trial court's dismissal to the United States Court of Appeals for the Ninth Circuit. Briefing has been completed, but oral argument has not been scheduled. Turner W. Branch, P.A. v. Brown & Williamson Tobacco Corp., United States District Court for the District of New Mexico, Case No. CV-99 08036, was filed in August 1999. On September 7, 1999, defendants removed this case to federal court. On October 29, 1999, the court granted defendants' motion to complete arbitration and for a stay pending the completion of the arbitration. On August 31, 2000, the court entered an order granting plaintiffs' unopposed motion to dismiss. PTI, Inc., v. Philip Morris, Inc., United States District Court for the Central District of California, Case No. 99-8235 NM (Ex), was filed in August 1999. On November 1, 1999, certain defendants filed a motion to dismiss. On May 26, 2000, the court granted defendants' motion to dismiss. No appeal was taken. F. Thomas Ament v. Tommy G. Thompson, Circuit Court, Dane County, Wisconsin, Case No. 00CV1159, was filed in April 2000. On December 28, 2000, the court granted the parties' stipulation staying all discovery pending the court's ruling on the defendants' motions to dismiss plaintiffs' amended complaint. Certain defendants, including RJR Tobacco, filed their motion to dismiss plaintiffs' amended complaint on January 12, 2001. Lapean v. Thompson, Circuit Court, Dane County, Wisconsin, Case No. 00CV1162, was filed in April 2000. On December 28, 2000, the court granted the parties' stipulation staying all discovery pending the court's ruling on the defendants' motions to dismiss plaintiffs' amended complaint. Certain defendants, including RJR Tobacco, filed their motion to dismiss plaintiffs' amended complaint on January 12, 2001. Gomer v. Philip Morris, Inc., United States District Court for the Middle District of Alabama, Case No. 00-A-526-N, was filed in April 2000. On July 31, 2000, the court granted defendants' motion to dismiss. Myers v. Hayes, Circuit Court, Davidson County, Tennessee, Case No. 00C-1773, was filed in June 2000. This case is stayed until the parties participate in a status conference with the court. -34- -----END PRIVACY-ENHANCED MESSAGE-----