North Carolina | 20-0546644 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
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 $.0001 per share
|
New York |
Rights to Purchase Series A Junior
Participating Preferred Stock |
New York |
Large accelerated
filer
þ
|
Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
2
Item 1.
Business
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6
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significantly increase their taxes on tobacco products;
restrict displays, advertising and sampling of tobacco products;
establish fire standards compliance for cigarettes;
raise the minimum age to possess or purchase tobacco products;
restrict or ban the use of certain flavorings or flavor
descriptors in tobacco products;
require the disclosure of ingredients used in the manufacture of
tobacco products;
require the disclosure of nicotine yield information for
cigarettes based on a machine test method different from that
required by the U.S. Federal Trade Commission;
impose restrictions on smoking in public and private
areas; and
restrict the sale of tobacco products directly to consumers or
other unlicensed recipients, including over the Internet.
9
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regulation of environmental tobacco smoke;
additional warnings on tobacco packaging and advertising;
reduction or elimination of the tax deductibility of advertising
expenses;
implementation of a national fire standards compliance for
cigarettes;
regulation of the retail sale of tobacco products over the
Internet and in other non-face-to-face retail transactions, such
as by mail order and telephone; and
banning the delivery of tobacco products by the U.S. Postal
Service.
Item 1A.
Risk
Factors
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its ability to obtain additional financing for working capital,
capital expenditures, acquisitions, debt service requirements or
general corporate purposes, and its ability to satisfy its
obligations with respect to its indebtedness, may be impaired in
the future;
a substantial portion of its cash flow from operations must be
dedicated to the payment of principal and interest on its
indebtedness, thereby reducing the funds available to it for
other purposes;
it may be at a disadvantage compared to its competitors with
less debt or comparable debt at more favorable interest
rates; and
its flexibility to adjust to changing market conditions and
ability to withstand competitive pressures could be limited, and
it may be more vulnerable to a downturn in general economic
conditions or its business, or be unable to carry out capital
spending that is necessary or important to its growth strategy
and its efforts to improve operating margins.
15
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the sale or transfer of certain RAI intellectual property
associated with B&W brands having an international
presence, other than in connection with a sale of RAI;
RAIs adoption of any takeover defense measures that would
apply to the acquisition of equity securities of RAI by B&W
or its affiliates, other than the adoption of the RAI rights
plan; and
RAIs participation in any transaction, effected before
July 30, 2009, that would reasonably be expected to
jeopardize B&Ws tax ruling obtained in connection
with, or B&Ws tax-free treatment of, the B&W
business combination.
16
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any issuance of RAI securities in excess of 5% of its
outstanding voting stock, unless at such time B&Ws
ownership interest in RAI is less than 32%; and
any repurchase of RAI common stock, subject to a number of
exceptions, unless at such time B&Ws ownership
interest in RAI is less than 25%.
17
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Item 1B.
Unresolved
Staff Comments
Item 2.
Properties
Item 3.
Legal
Proceedings
Item 4.
Submission
of Matters to a Vote of Security Holders
18
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89
91
92
93
125
132
137
139
141
Item 5.
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
Cash
Dividends
Price Per Share
Declared per
High
Low
Share
$
66.19
$
58.55
$
0.750
67.60
60.15
0.750
67.02
60.34
0.850
71.72
60.68
0.850
$
54.97
$
47.48
$
0.625
58.06
51.82
0.625
66.26
56.78
0.750
67.09
60.87
0.750
(1)
All per share amounts have been retroactively adjusted to
reflect the August 14, 2006, two-for-one stock split.
21
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Total Number of
Approximate Dollar
Shares purchased
Value that May
Total Number
as Part of Publicly
Yet Be Purchased
of Shares
Average Price
Announced Plans
Under the Plans
Purchased
Paid Per Share
or Programs
or Programs
511
$
63.78
$
15
$
15
1,546
66.43
$
15
2,057
$
65.77
$
15
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Among
Reynolds American Inc. Common Stock, the S&P 500 Index
and the S&P Tobacco Index
7/30/04(1)
12/31/04
12/31/05
12/31/06
12/31/07
100.00
108.49
138.18
198.80
210.52
100.00
110.86
116.31
134.68
142.08
100.00
129.88
162.60
198.64
238.07
(1)
Assumes that $100 was invested in RAI common stock on
August 2, 2004 (the first day of trading of RAI common
stock), or in each index on July 30, 2004, and that in each
case all dividends were reinvested.
23
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Item 6.
Selected
Financial Data
For the Years Ended December 31,
2007
2006
2005
2004
2003
(Dollars in Millions, Except Per Share Amounts)
$
9,023
$
8,510
$
8,256
$
6,437
$
5,267
1,307
1,136
985
627
(3,689
)
2
12
122
1
74
55
49
121
1,308
1,210
1,042
688
(3,446
)
4.44
3.85
3.34
2.83
(22.04
)
4.43
3.85
3.34
2.81
(22.04
)
0.01
0.06
0.73
0.01
0.06
0.73
0.25
0.18
0.22
0.72
0.25
0.18
0.22
0.72
4.44
4.10
3.53
3.11
(20.59
)
4.43
4.10
3.53
3.09
(20.59
)
294,385
295,033
294,790
221,556
167,394
294,889
295,384
295,172
222,873
167,394
$
3.20
$
2.75
$
2.10
$
1.90
$
1.90
18,629
18,178
14,519
14,428
9,677
4,515
4,389
1,558
1,595
1,671
7,466
7,043
6,553
6,176
3,057
1,331
1,457
1,273
736
581
763
(3,531
)
(989
)
260
641
(1,312
)
2,174
(450
)
(467
)
(1,122
)
7.0
7.4
12.2
9.5
$
$
$
$
$
(3,913
)
24
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(1)
Net sales and cost of products sold exclude excise taxes of
$2,026 million, $2,124 million, $2,175 million,
$1,850 million and $1,572 million for the years ended
December 31, 2007, 2006, 2005, 2004 and 2003, respectively.
(2)
All share and per share amounts have been retroactively adjusted
to reflect the August 14, 2006, two-for-one stock split.
(3)
Earnings consist of income from continuing operations before
equity earnings, 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.
Item 7.
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
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1-Percentage Point
Increase
1-Percentage Point Decrease
Pension
Postretirement
Pension
Postretirement
Plans
Plans
Plans
Plans
$
(22
)
$
(4
)
$
11
$
3
(512
)
(136
)
572
150
1-Percentage Point Increase
1-Percentage Point Decrease
Pension
Postretirement
Pension
Postretirement
Plans
Plans
Plans
Plans
$
(50
)
$
(3
)
$
50
$
3
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For the Twelve Months Ended December 31,
2007
2006
% Change
$
7,918
$
7,708
2.7
%
670
409
NM
(3)
435
393
10.7
%
9,023
8,510
6.0
%
4,960
4,803
3.3
%
1,687
1,658
1.7
%
23
28
(17.9
)%
1
NM
(3)
65
90
(27.8
)%
1,934
1,693
14.2
%
312
181
NM
(3)
148
154
(3.9
)%
(106
)
(98
)
8.2
%
$
2,288
$
1,930
18.5
%
(1)
Excludes excise taxes of:
2007
2006
$
1,850
$
1,971
18
13
158
140
$
2,026
$
2,124
(2)
See below for further information related to MSA settlement and
federal tobacco buyout expense included in cost of products sold.
(3)
Percentage change is not meaningful.
31
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For the Twelve Months Ended December 31,
2007
2006
% Change
24.2
23.5
3.1
%
11.1
11.7
(5.3
)%
7.1
6.4
10.3
%
42.4
41.6
1.9
%
40.9
44.1
(7.2
)%
14.4
18.3
(20.9
)%
97.8
104.0
(6.0
)%
61.0
64.0
(4.7
)%
36.7
40.0
(8.1
)%
62.4
%
61.6
%
259.9
270.4
(3.9
)%
97.3
105.6
(7.9
)%
357.2
376.0
(5.0
)%
72.8
%
71.9
%
(1)
Amounts presented in this table are rounded on an individual
basis and, accordingly, may not sum on an aggregate basis.
(2)
Based on information from MSAi. Prior year amounts have been
restated to reflect current methodology.
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For the Twelve Months Ended December 31,(2)
Share Point
2007
2006
Change
7.8
%
7.4
%
0.4
3.1
%
3.1
%
2.1
%
1.9
%
0.3
13.0
%
12.4
%
0.6
11.6
%
12.1
%
(0.5
)
4.4
%
5.3
%
(0.8
)
29.0
%
29.8
%
(0.7
)
(1)
Retail share of U.S. cigarette sales data is included in this
document because it is used by RJR Tobacco primarily as an
indicator of the relative performance of industry participants,
and brands and market trends. You should not rely on the market
share data reported by IRI as being a precise measurement of
actual market share because IRI is not able to effectively track
all volume. Moreover, you should be aware that in a product
market experiencing overall declining consumption, a particular
product can experience increasing market share relative to
competing products, yet still be subject to declining
consumption volumes.
(2)
Amounts presented in this table are rounded on an individual
basis and, accordingly, may not sum on an aggregate basis.
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For the Twelve Months Ended December 31,
2007
2006
$
2,796
$
2,589
247
258
(9
)
$
247
$
249
Individual Smoking and Health;
Engle
Progeny;
Broin II
;
Class Actions; and
Health-Care Cost Recovery Claims.
direct and indirect compensation, fees and related costs and
expenses for internal legal and related administrative staff
administering product liability claims;
fees and cost reimbursements paid to outside attorneys;
direct and indirect payments to third party vendors for
litigation support activities;
expert witness costs and fees; and
payments to fund legal defense costs for the now dissolved
Council for Tobacco Research U.S.A.
34
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For the Twelve Months Ended December 31,(1)
2007
2006
% Change
53.2
56.7
(6.2
)%
3.2
3.5
(8.6
)%
56.4
60.2
(6.3
)%
237.0
202.1
17.3
%
2.2
3.1
(29.0
)%
239.2
205.2
16.6
%
295.6
265.4
11.4
%
(1)
Amounts presented in this table are rounded on an individual
basis and, accordingly, may not sum on an aggregate basis.
35
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For the Twelve Months Ended December 31,(2)
Share
2007
2006
Point Change
4.5
%
5.1
%
(0.6
)
0.2
%
0.3
%
(0.1
)
4.7
%
5.4
%
(0.7
)
21.1
%
19.4
%
1.7
0.2
%
0.3
%
(0.1
)
21.3
%
19.7
%
1.6
26.0
%
25.1
%
0.9
(1)
Distributor
shipments-to-retail
share of U.S. moist snuff is included in this document because
it is used by Conwood primarily as an indicator of the relative
performance of industry participants, and brands and market
trends. You should not rely on the market share data reported by
distributors and processed by MSAi as being a precise
measurement of actual market share because this distributor data
set is not able to effectively track all volume.
(2)
Amounts presented in this table are rounded on an individual
basis and, accordingly, may not sum on an aggregate basis.
36
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For the Twelve Months Ended December 31,
2006
2005
% Change
$
7,708
$
7,723
(0.2
)%
409
152
NM
(4)
393
381
(3.1
)%
8,510
8,256
3.1
%
4,803
4,919
(2.4
)%
1,658
1,611
2.9
%
28
41
(31.7
)%
24
NM
(4)
1
2
(50.0
)%
90
200
(55.0
)%
1,693
1,399
21.0
%
181
18
NM
(4)
154
110
40.0
%
(98
)
(68
)
(44.1
)%
$
1,930
$
1,459
32.3
%
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(1)
Excludes excise taxes of:
2006
2005
$
1,971
$
2,045
13
12
140
118
$
2,124
$
2,175
(2)
In addition to the results of operations of Lane, Conwoods
net sales and operating income include results of operations of
the Conwood companies for the months of June through December
2006.
(3)
See below for further information related to MSA settlement and
federal tobacco buyout expense included in cost of products sold.
(4)
Percent change is not meaningful.
For the Twelve Months Ended December 31,
2006
2005
% Change
23.5
22.0
6.5
%
11.7
11.8
(0.4
)%
6.4
5.8
10.5
%
41.6
39.6
5.1
%
44.1
46.6
(5.5
)%
18.3
21.1
(13.3
)%
104.0
107.4
(3.2
)%
64.0
64.8
(1.2
)%
40.0
42.6
(6.1
)%
270.4
271.4
(0.4
)%
105.6
110.4
(4.3
)%
376.0
381.7
(1.5
)%
61.5
%
60.4
%
(1)
Amounts presented in this table are rounded on an individual
basis and, accordingly, may not sum on an aggregate basis.
(2)
Based on information from MSAi. These amounts, including the
restatement of prior periods, reflect MSAis revised
methodology adopted to better estimate industry volume.
38
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For the Twelve Months Ended December 31,(2),(3)
Share Point
2006
2005
Change
7.4
%
6.7
%
0.7
3.1
%
3.0
%
0.1
1.9
%
1.6
%
0.3
12.4
%
11.3
%
1.1
12.1
%
12.8
%
(0.7
)
5.3
%
6.1
%
(0.9
)
29.8
%
30.3
%
(0.5
)
(1)
Retail share of U.S. cigarette sales data is included in this
document because it is used by RJR Tobacco primarily as an
indicator of the relative performance of industry participants
and brands and market trends. You should not rely on the market
share data reported by IRI as being a precise measurement of
actual market share because IRI is not able to effectively track
all volume. Moreover, you should be aware that in a product
market experiencing overall declining consumption, a particular
product can experience increasing market share relative to
competing products, yet still be subject to declining
consumption volumes.
(2)
These amounts, including the restatement of prior periods,
reflect IRIs revised methodology adopted to better reflect
industry dynamics.
(3)
Amounts presented in this table are rounded on an individual
basis and, accordingly, may not sum on an aggregate basis.
39
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2006
2005
$
2,589
$
2,618
(79
)
38
$
2,589
$
2,577
$
258
$
259
(9
)
79
$
249
$
338
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For the Twelve Months Ended December 31,(2)
Share Point
2006
2005
Change
5.1
%
5.8
%
(0.7
)
0.3
%
0.4
%
(0.1
)
5.4
%
6.2
%
(0.8
)
19.4
%
16.0
%
3.4
0.3
%
0.4
%
(0.1
)
19.7
%
16.4
%
3.3
25.1
%
22.7
%
2.5
(1)
Distributor shipments to retail share of U.S. moist snuff is
included in this document because it is used by Conwood
primarily as an indicator of the relative performance of
industry participants and brands and market trends. You should
not rely on the market share data reported by distributors and
processed by MSAi as being a precise measurement of actual
market share because this distributor data set is not able to
effectively track all volume.
(2)
Amounts presented in this table are rounded on an individual
basis and, accordingly, may not sum on an aggregate basis.
41
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42
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Payments Due by Period
Less than 1
1-3 Years
4-5 Years
Total
Year-2008
2009-2010
2011-2012
Thereafter
$
4,410
$
$
500
$
850
$
3,060
2,617
287
546
458
1,326
72
16
27
16
13
72
6
14
14
38
809
79
160
164
406
1
1
3,224
714
1,102
760
648
66
N/A
52
3
11
14,110
2,830
5,580
5,700
111
1,820
260
520
520
520
$
27,312
$
4,193
$
8,501
$
8,485
$
6,022
(1)
For more information about RAIs long-term notes, see
Debt below and Item 8, note 12
to consolidated financial statements.
(2)
Operating lease obligations represent estimated lease payments
primarily related to office space, automobiles, warehouse space
and computer equipment. See Item 8, note 14 to
consolidated financial statements for additional information.
(3)
For more information about RAIs pension plans and
postretirement benefits, see Item 8, note 17 to
consolidated financial statements. Non-qualified pension and
postretirement benefit obligations captioned under
Thereafter include obligations during the next five
years only. These obligations are not reasonably estimable
beyond ten years. Qualified pension plan funding is based on
Pension Benefit Guaranty Corporation requirements, the Pension
Protection Act and tax deductibility and is not reasonably
estimable beyond one year.
(4)
Purchase obligations include commitments to acquire tobacco
leaf, leaf processing, direct materials, media services, capital
expenditures and software maintenance.
(5)
Other noncurrent liabilities include primarily restructuring and
bonus compensation. Certain other noncurrent liabilities are
excluded from the table above, including RJRs liabilities
recorded in 1999 related to certain indemnification claims, for
which timing of payments are not estimable. For more information
about RJRs indemnification obligations, see Item 8,
note 14 to consolidated financial statements.
(6)
MSA obligation amounts in the aggregate beyond five years are
not meaningful as these are obligations into perpetuity. For
more information about the MSA, see Item 8, note 14 to
consolidated financial statements.
(7)
Gross unrecognized tax benefit of $111 million relates to the
adoption of FIN No. 48. For more information, see Item 8, note
10 to consolidated financial statements. Due to inherent
uncertainties regarding the timing of payment of these amounts,
RAI cannot reasonably estimate the payment period.
(8)
For more information about the tobacco buyout legislation, see
Governmental Activity below and
Item 8, note 14 to consolidated financial statements.
Commitment Expiration
Period
Less than
Total
1 Year
$
22
$
22
$
22
$
22
43
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44
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incur or guarantee additional debt;
pay dividends;
make capital expenditures, investments or other restricted
payments;
engage in transactions with shareholders and affiliates;
create, incur or assume liens;
engage in mergers, acquisitions and consolidations;
sell assets;
issue or sell capital stock of subsidiaries;
exceed a Consolidated Total Leverage Ratio of 3.25:1.00; and
fall below a Consolidated Interest Coverage Ratio of 3.00:1.00.
45
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46
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47
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significantly increase their taxes on tobacco products;
restrict displays, advertising and sampling of tobacco products;
establish fire standards compliance for cigarettes;
raise the minimum age to possess or purchase tobacco products;
restrict or ban the use of certain flavorings or flavor
descriptors in tobacco products;
require the disclosure of ingredients used in the manufacture of
tobacco products;
require the disclosure of nicotine yield information for
cigarettes based on a machine test method different from that
required by the U.S. Federal Trade Commission;
impose restrictions on smoking in public and private
areas; and
restrict the sale of tobacco products directly to consumers or
other unlicensed recipients, including over the Internet.
regulation of environmental tobacco smoke;
additional warnings on tobacco packaging and advertising;
reduction or elimination of the tax deductibility of advertising
expenses;
implementation of national fire standards compliance for
cigarettes;
regulation of the retail sale of tobacco products over the
Internet and in other non-face-to-face retail transactions, such
as by mail order and telephone; and
banning of the delivery of tobacco products by the
U.S. Postal Service.
48
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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;
49
Table of Contents
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.
SURGEON GENERALS WARNING: Smoking Causes Lung
Cancer, Heart Disease, Emphysema, And May Complicate
Pregnancy;
SURGEON GENERALS WARNING: Quitting Smoking Now
Greatly Reduces Serious Risks to Your Health;
SURGEON GENERALS WARNING: Smoking By Pregnant Women
May Result in Fetal Injury, Premature Birth, And Low Birth
Weight; and
SURGEON GENERALS WARNING: Cigarette Smoke Contains
Carbon Monoxide.
WARNING: THIS PRODUCT MAY CAUSE MOUTH CANCER;
WARNING: THIS PRODUCT MAY CAUSE GUM DISEASE AND TOOTH
LOSS; and
WARNING: THIS PRODUCT IS NOT A SAFE ALTERNATIVE TO
CIGARETTES.
SURGEON GENERAL WARNING: Cigar Smoking Can Cause Cancers
Of The Mouth And Throat, Even If You Do Not Inhale;
SURGEON GENERAL WARNING: Cigar Smoking Can Cause Lung
Cancer And Heart Disease;
SURGEON GENERAL WARNING: Tobacco Use Increases The Risk Of
Infertility, Stillbirth And Low Birth Weight;
SURGEON GENERAL WARNING: Cigars Are Not A Safe Alternative
To Cigarettes; and
50
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SURGEON GENERAL WARNING: Tobacco Smoke Increases The Risk
Of Lung Cancer And Heart Disease, Even In Nonsmokers.
51
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53
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the substantial and increasing regulation and taxation of
tobacco products;
various legal actions, proceedings and claims relating to the
sale, distribution, manufacture, development, advertising,
marketing and claimed health effects of tobacco products that
are pending or may be instituted against RAI or its subsidiaries;
the possibility of bonding issues as a result of litigation
outcomes;
the substantial payment obligations and limitations on the
advertising and marketing of cigarettes under the MSA;
the continuing decline in volume in the domestic cigarette
industry and RAIs dependence on the U.S. cigarette
industry;
concentration of a material amount of sales with a single
customer or distributor;
competition from other manufacturers, including any new entrants
in the marketplace;
increased promotional activities by competitors, including
deep-discount cigarette brands;
the success or failure of new product innovations and
acquisitions;
the responsiveness of both the trade and consumers to new
products, marketing strategies and promotional programs;
the ability to achieve efficiencies in manufacturing and
distribution operations, including outsourcing functions,
without negatively affecting sales;
the reliance on a limited number of raw material suppliers;
the cost of tobacco leaf and other raw materials and other
commodities used in products, including future market pricing of
tobacco leaf which could adversely impact inventory valuations;
the effect of market conditions on foreign currency exchange
rate risk, interest rate risk and the return on corporate cash;
declining liquidity in the financial markets;
the impairment of goodwill and other intangible assets,
including trademarks;
the effect of market conditions on the performance of pension
assets or any adverse effects of any new legislation or
regulations changing pension expense accounting or required
pension funding levels;
the substantial amount of RAI debt;
the rating of RAIs securities;
any restrictive covenants imposed under RAIs debt
agreements;
the possibility of fire, violent weather and other disasters
that may adversely affect manufacturing and other facilities;
54
Table of Contents
the significant ownership interest of B&W, RAIs
largest shareholder, in RAI and the rights of B&W under the
governance agreement;
the expiration of the standstill provisions of the governance
agreement; and
the potential existence of significant deficiencies or material
weaknesses in internal control over financial reporting that may
be identified during the performance of testing required under
Section 404 of the Sarbanes-Oxley Act of 2002.
Item 7A.
Quantitative
and Qualitative Disclosures about Market Risk
Fair
2008
2009
2010
2011
2012
Thereafter
Total
Value(1)
$
2,592
$
2,592
$
2,592
4.6
%
4.6
%
$
200
$
300
$
450
$
3,060
$
4,010
$
4,208
7.9
%
6.5
%
7.3
%
7.3
%
7.3
%
$
400
$
400
$
391
4.8
%
4.8
%
$
450
$
1,150
$
1,600
$
119
5.2
%
5.5
%
5.4
%
7.3
%
7.1
%
7.1
%
(1)
Fair values are based on current market rates available or on
rates available for instruments with similar terms and
maturities and quoted market values.
(2)
Based upon contractual interest rates for fixed rate
indebtedness or current market rates for LIBOR plus negotiated
spreads for variable rate indebtedness.
(3)
RAI has swapped $1.6 billion of fixed rate debt to variable
rate debt.
55
Table of Contents
Item 8.
Financial
Statements and Supplementary Data
56
Table of Contents
57
Table of Contents
58
Table of Contents
For the Years Ended
December 31,
2007
2006
2005
$
8,516
$
8,010
$
7,779
507
500
477
9,023
8,510
8,256
4,960
4,803
4,919
1,687
1,658
1,611
24
23
28
41
1
2
65
90
200
2,288
1,930
1,459
338
270
113
(134
)
(136
)
(85
)
11
(13
)
15
2,073
1,809
1,416
766
673
431
1,307
1,136
985
2
1,307
1,136
987
1
74
55
$
1,308
$
1,210
$
1,042
$
4.44
$
3.85
$
3.34
0.01
0.25
0.18
$
4.44
$
4.10
$
3.53
$
4.43
$
3.85
$
3.34
0.01
0.25
0.18
$
4.43
$
4.10
$
3.53
$
3.20
$
2.75
$
2.10
(1)
Excludes excise taxes of $2,026 million,
$2,124 million and $2,175 million during 2007, 2006
and 2005, respectively.
(2)
See Master Settlement Agreement and Federal Tobacco Buyout
Expenses in note 1.
(3)
All per share amounts have been retroactively adjusted to
reflect the August 14, 2006,
two-for-one
stock split.
59
Table of Contents
For the Years Ended
December 31,
2007
2006
2005
$
1,308
$
1,210
$
1,042
(2
)
143
162
195
(4
)
(14
)
(62
)
(8
)
(81
)
(59
)
65
90
200
69
105
32
19
(1
)
(74
)
(55
)
8
151
(101
)
(41
)
58
200
(47
)
(24
)
113
(57
)
226
(25
)
(72
)
(124
)
59
94
24
16
205
(20
)
(131
)
(328
)
(265
)
(211
)
(22
)
33
62
1,331
1,457
1,273
(3,764
)
(7,677
)
(10,883
)
4,655
7,760
9,985
(5
)
(142
)
(136
)
(105
)
15
18
12
(3
)
(3,519
)
(45
)
3
48
3
24
4
(1
)
(4
)
763
(3,531
)
(989
)
(916
)
(775
)
(575
)
1
4
3
2
4
(60
)
(3
)
(329
)
(190
)
(360
)
(1,542
)
(8
)
1,547
1,641
499
1,550
(15
)
(52
)
(7
)
(7
)
(1,312
)
2,174
(450
)
782
100
(166
)
1,433
1,333
1,499
$
2,215
$
1,433
$
1,333
$
655
$
573
$
306
$
334
$
238
$
92
60
Table of Contents
December 31,
2007
2006
$
2,215
$
1,433
377
1,293
99
107
80
62
1,196
1,155
845
793
4
176
92
4,992
4,935
96
97
682
675
1,738
1,689
74
50
2,590
2,511
1,517
1,449
1,073
1,062
3,407
3,479
8,174
8,175
202
215
781
312
$
18,629
$
18,178
$
218
$
275
2,449
2,237
7
9
35
62
344
1,194
1,165
3,903
4,092
4,515
4,389
1,184
1,167
1,167
1,227
394
260
8,653
8,702
(873
)
(1,241
)
(314
)
(418
)
7,466
7,043
$
18,629
$
18,178
61
Table of Contents
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND
COMPREHENSIVE INCOME
(Dollars in Millions)
Retained
Accumulated
Earnings
Other
Total
Common
Paid-In
(Accumulated
Comprehensive
Shareholders
Comprehensive
Stock
Capital
Deficit)
Income (Loss)
Equity
Income
$
$
8,682
$
(2,061
)
$
(445
)
$
6,176
1,042
1,042
$
1,042
(56
)
(56
)
(56
)
(2
)
(2
)
(2
)
$
984
(619
)
(619
)
3
3
12
12
(3
)
(3
)
8,694
(1,638
)
(503
)
6,553
1,210
1,210
$
1,210
491
491
491
1
1
1
$
1,702
(407
)
(407
)
(813
)
(813
)
4
4
4
4
8,702
(1,241
)
(418
)
7,043
5
5
8,702
(1,236
)
(418
)
7,048
1,308
1,308
$
1,308
112
112
112
(11
)
(11
)
(11
)
3
3
3
$
1,412
(945
)
(945
)
9
9
(60
)
(60
)
2
2
$
$
8,653
$
(873
)
$
(314
)
$
7,466
62
Table of Contents
Note 1
Business
and Summary of Significant Accounting Policies
63
Table of Contents
2007
2006
2005
$
2,821
$
2,611
$
2,641
(79
)
38
$
2,821
$
2,611
$
2,600
$
255
$
265
$
264
(9
)
81
$
255
$
256
$
345
64
Table of Contents
$
7
1
(1
)
7
1
(2
)
(2
)
4
(2
)
(1
)
$
1
65
Table of Contents
66
Table of Contents
67
Table of Contents
Note 2
Acquisitions
Note 3
Intangible Assets
RJR
Tobacco
Conwood
All Other
Consolidated
$
5,309
$
139
$
224
$
5,672
(6
)
(6
)
2,509
2,509
5,303
2,648
224
8,175
(1
)
(1
)
$
5,302
$
2,648
$
224
$
8,174
68
Table of Contents
RJR Tobacco
Conwood
All Other
Indefinite
Finite
Indefinite
Finite
Indefinite
Life
Life
Life
Life
Life
Consolidated
$
1,947
$
61
$
25
$
$
155
$
2,188
1,390
4
1,394
(88
)
(2
)
(90
)
(12
)
(1
)
(13
)
1,859
47
1,415
3
155
3,479
(33
)
(32
)
(65
)
(6
)
(1
)
(7
)
(9
)
9
$
1,826
$
41
$
1,374
$
11
$
155
$
3,407
RJR Tobacco
Conwood
All Other
Indefinite
Finite
Indefinite
Indefinite
Life
Life
Life
Life
Consolidated
$
16
$
131
$
35
$
44
$
226
4
4
(15
)
(15
)
20
116
35
44
215
35
(35
)
3
3
(16
)
(16
)
$
55
$
100
$
$
47
$
202
69
Table of Contents
Accumulated
Gross
Amortization
Net
$
151
$
52
$
99
3
2
1
154
54
100
95
43
52
$
249
$
97
$
152
Amount
$
22
22
20
20
19
49
$
152
70
Table of Contents
Note 4
B&W
Business Combination Restructuring Costs
Employee
Severance
Relocation/
and Benefits
Exit Costs
Total
$
171
$
101
$
272
(60
)
(26
)
(86
)
111
75
186
(40
)
(28
)
(68
)
9
9
1
(16
)
(15
)
72
40
112
(69
)
(12
)
(81
)
(2
)
(8
)
(10
)
1
20
21
(1
)
(7
)
(8
)
(1
)
(1
)
$
$
12
$
12
71
Table of Contents
Note 5
Extraordinary
Item
Note 6
Income
Per Share
For the Years Ended December 31,
2007
2006
2005
$
1,307
$
1,136
$
985
2
1
74
55
$
1,308
$
1,210
$
1,042
294,385
295,033
294,790
246
58
382
258
293
294,889
295,384
295,172
(1)
Outstanding contingently issuable restricted stock of
0.8 million shares and 0.5 million shares were
excluded from the basic share calculation for the years ended
December 31, 2007, and 2006, respectively, as the related
vesting provisions had not been met.
Note 7
Short-Term
Investments
2007
2006
Gross
Gross
Unrealized
Estimated
Unrealized
Estimated
Cost
Loss
Fair Value
Cost
Loss
Fair Value
$
145
$
(18
)
$
127
$
659
$
$
659
45
(1
)
44
29
29
87
87
206
206
79
79
416
416
23
23
$
396
$
(19
)
$
377
$
1,293
$
$
1,293
72
Table of Contents
Note 8
Inventories
2007
2006
$
967
$
938
45
44
48
54
163
156
24
26
1,247
1,218
51
63
$
1,196
$
1,155
Note 9
Other
Current Liabilities
2007
2006
$
233
$
189
86
72
165
263
251
222
80
77
379
342
$
1,194
$
1,165
73
Table of Contents
Note 10
Income
Taxes
$
115
15
3
(9
)
(9
)
(4
)
$
111
74
Table of Contents
For the Years Ended December 31,
2007
2006
2005
$
588
$
501
$
328
109
67
71
697
568
399
42
50
6
27
55
26
69
105
32
$
766
$
673
$
431
2007
2006
$
(246
)
$
(227
)
42
72
966
885
83
63
$
845
$
793
2007
2006
$
696
$
653
149
140
$
845
$
793
2007
2006
$
293
$
490
96
56
389
546
(246
)
(261
)
(1,318
)
(1,342
)
(9
)
(110
)
(1,573
)
(1,713
)
$
(1,184
)
$
(1,167
)
75
Table of Contents
2007
2006
$
(1,042
)
$
(914
)
(142
)
(253
)
$
(1,184
)
$
(1,167
)
For the Years Ended December 31,
2007
2006
2005
$
2,043
$
1,768
$
1,373
30
41
43
$
2,073
$
1,809
$
1,416
For the Years Ended December 31,
2007
2006
2005
$
725
$
633
$
496
86
58
59
(1
)
(17
)
(78
)
(44
)
(1
)
(46
)
$
766
$
673
$
431
37.0
%
37.2
%
30.4
%
76
Table of Contents
Note 11
Borrowing
Arrangements
incur or guarantee additional debt;
pay dividends;
make capital expenditures, investments or other restricted
payments;
engage in transactions with shareholders and affiliates;
create, incur or assume liens;
engage in mergers, acquisitions and consolidations;
sell assets;
issue or sell capital stock of subsidiaries;
exceed a Consolidated Total Leverage Ratio of 3.25:1.00; and
fall below a Consolidated Interest Coverage Ratio of 3.00:1.00.
77
Table of Contents
the reference rate, which is the higher of (1) the federal
funds effective rate from time to time plus 0.5% and
(2) the prime rate; or
the eurodollar rate, which is the rate at which eurodollar
deposits for one, two, three or six months are offered in the
interbank eurodollar market.
78
Table of Contents
Note 12
Long-Term
Debt
2007
2006
$
$
7
22
60
60
63
1
60
84
1
1
11
14
132
252
236
299
299
754
418
379
622
621
447
199
199
806
771
249
249
189
185
400
1,542
4,383
4,481
4,515
4,733
(344
)
$
4,515
$
4,389
RAI
RJR
Total
$
$
$
189
11
200
299
299
400
400
391
57
448
2,989
60
3,049
$
4,268
$
128
$
4,396
79
Table of Contents
Note 13
Financial
Instruments
80
Table of Contents
2007
2006
$
$
63
57
82
57
145
237
393
368
450
700
1,543
605
$
1,600
$
750
Note 14
Commitments
and Contingencies
81
Table of Contents
82
Table of Contents
the Master Settlement Agreement and other settlement agreements
with the states of Mississippi, Florida, Texas and Minnesota,
and the funding by various tobacco companies of a
$5.2 billion trust fund contemplated by the Master
Settlement Agreement to benefit tobacco growers; and
the original
Broin
flight attendant case discussed below
under Litigation Affecting the Cigarette
Industry
Class-Action
Suits.
83
Table of Contents
84
Table of Contents
85
Table of Contents
Number of
U.S. Cases
692
*
52
30
28
25
24
17
12
8
6
4
4
4
3
3
3
3
3
2
2
2
2
2
2
2
2
2
2
2
2
2
2
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
968
**
*
687 of the 692 cases are pending as a consolidated action
In
re: Tobacco Litigation Personal Injury Cases
, Circuit Court,
Ohio County, West Virginia, consolidated January 11, 2000.
The initial phase of the trial of these cases was scheduled to
begin on March 18, 2008, but on February 11, 2008, the
trial court stayed the trial of the initial phase indefinitely
pending the U.S. Supreme Court review in
Good v. Altria
Group, Inc.,
a lights class action filed in
August 2005 in the United States District Court for the District
of Maine. On February 25, 2008, the U.S. Supreme Court
denied the defendants petition for certiorari asking the
Court to review the trial plan.
**
Of the 968 pending U.S. cases, 42 are pending in federal
court, 925 in state court and 1 in tribal court.
86
Table of Contents
Change in
Number of
RJR Tobaccos
Cases Since
Case Numbers as
October 12, 2007
Page
of February 1, 2008
Increase/(Decrease)
Reference
872
(210
)
93
866 (2,366
)
716
94
2,662
39
95
18
1
95
3
No Change
101
61
9
105
3
No Change
107
11
2
109
*
The
Engle
Progeny Cases have been separated from the
Individual Smoking and Health cases for reporting purposes.
Plaintiffs counsel are attempting to include multiple
plaintiffs in most of the cases filed.
87
Table of Contents
settled all health-care cost recovery actions brought by, or on
behalf of, the settling jurisdictions;
released the major U.S. cigarette manufacturers from
various additional present and potential future claims;
imposed future payment obligations on RJR Tobacco, B&W and
other major U.S. cigarette manufacturers; and
placed significant restrictions on their ability to market and
sell cigarettes.
Case Name/Type
Defendant(s)
Jurisdiction
Washington v. R. J. Reynolds Tobacco Co.
[MSA
Enforcement]
RJR Tobacco
Superior Court King County (Seattle, WA)
Goldberg v. Brown & Williamson
[Individual]
RJR Tobacco, B&W
U.S. District Court Southern District of Florida (West Palm
Beach, FL)
Smith v. R. J. Reynolds Tobacco Co.
[Individual]
RJR Tobacco
U.S. District Court Eastern District (New Orleans, LA)
Nichols v. Philip Morris USA, Inc.
[Individual]
RJR Tobacco
Superior Court San Diego County (San Diego, CA)
Vermont v. R. J. Reynolds Tobacco Co.
[MSA
Enforcement (Eclipse)]
RJR Tobacco
Superior Court Chittenden County (Burlington, VT)
Fabiano v. Philip Morris, Inc.
[Individual]
RJR Tobacco, B&W
NY Supreme Court New York County (New York, NY)
Hausrath v. Philip Morris USA, Inc.
[Individual]
B&W
NY Supreme Court Erie County (Buffalo, NY)
Frye v. Philip Morris USA, Inc.
[Individual]
RJR Tobacco, B&W
Circuit Court Jefferson County (Fayette, MS)
88
Table of Contents
Case Name/Type
Defendant(s)
Jurisdiction
Janoff v. Philip Morris, Inc.
[
Broin
II]
RJR Tobacco, B&W
Circuit Court
11
th
Judicial Circuit Miami-Dade County (Miami, FL)
Table of Contents
Case Name/Type
Jurisdiction
Verdict
Post-Trial Status
July 7, 1999-Phase I
April 7, 2000-Phase II July 14, 2000-Phase III
Engle v. R. J. Reynolds Tobacco Co.
[Class Action]
Circuit Court, Miami-Dade County
(Miami, FL)
$12.7 million compensatory damages against all the defendants;
$145 billion punitive damages against all the defendants, of
which approximately $36.3 billion and $17.6 billion was assigned
to RJR Tobacco and B&W, respectively.
On May 21, 2003, Floridas Third District Court of Appeal
reversed the trial court and remanded the case to the Miami-Dade
County Circuit Court with instructions to decertify the class.
The Florida Supreme Court on July 6, 2006, affirmed the
dismissal of the punitive damages award and decertified, on a
going-forward basis, the class. The court preserved a number of
classwide findings from Phase I of the
Engle
trial, and
authorized class members to avail themselves of those findings
in individual lawsuits, provided they commence those lawsuits
within one year of the date the courts decision becomes
final. In addition, the court reinstated compensatory damage
verdicts in favor of two plaintiffs in the amounts of $2.85
million and $4.023 million, respectively. On October 1, 2007,
the U.S. Supreme Court denied the defendants petition for
writ of certiorari. On November 26, 2007, the
defendants petition for rehearing with the U.S. Supreme
Court was denied. As a result, on February 8, 2008, RJR Tobacco
paid approximately $5.9 million relating to the damages verdicts
mentioned above, which amount was determined using the total
amount of the verdicts together with accrued interest beginning
November 7, 2000.
90
Table of Contents
Case Name/Type
Jurisdiction
Verdict
Post-Trial Status
June 11, 2002
Lukacs v. R. J. Reynolds Tobacco Co.
[
Engle
class member]
Circuit Court, Miami-Dade County
(Miami, FL)
$500,000 economic damages, $24.5 million non-economic damages
and $12.5 million loss of consortium damages against Philip
Morris, B&W and Lorillard, of which B&W was assigned
22.5% of liability. Court has not entered final judgment for
damages. RJR Tobacco was dismissed from the case in May 2002,
prior to trial.
Judge reduced damages to $25.125 million of which
B&Ws share is approximately $6 million. On January
2, 2007, the defendants moved to set aside the June 11, 2002,
verdict and to dismiss the plaintiffs punitive damages
claim. On January 3, 2007, the plaintiffs filed a motion for
entry of judgment, which the court deferred until the U.S.
Supreme Court completed review of
Engle
and after further
submissions by the parties. On January 28, 2008, the defendants
filed a submission asking the court to set aside the verdict and
to dismiss the case.
December 18, 2003
Frankson v. Brown & Williamson Tobacco Corp.
[Individual]
Supreme Court, Kings County
(Brooklyn, NY)
$350,000 compensatory damages; 50% fault assigned to B&W
and two industry organizations; $20 million in punitive damages,
of which $6 million was assigned to B&W, $2 million to a
predecessor company and $12 million to two industry
organizations.
On January 21, 2005, the plaintiff stipulated to the
courts reduction in the amount of punitive damages from
$20 million to $5 million, apportioned as follows: $0
to American Tobacco; $4 million to B&W; $500,000 to the
Council for Tobacco Research and $500,000 to the Tobacco
Institute. On June 26, 2007, final judgment was entered in the
amount of approximately $6.8 million, including interest and
costs. The defendants filed a notice of appeal on July 3, 2007.
Briefing is underway. Pursuant to its agreement to indemnify
B&W, RJR Tobacco posted a supersedeas bond in the amount of
$8.018 million on July 5, 2007.
Table of Contents
Case Name/Type
Jurisdiction
Verdict
Post-Trial Status
May 21, 2004
Scott v. American Tobacco Co.
[Class Action]
District Court, Orleans Parish
(New Orleans, LA)
$591 million against RJR Tobacco, B&W, Philip Morris,
Lorillard, and the Tobacco Institute, jointly and severally, for
a smoking cessation program.
On September 29, 2004, the defendants posted a $50 million
bond and noticed their appeal to the Louisiana Court of Appeal.
RJR Tobacco posted $25 million toward the bond. On February 7,
2007, the Louisiana Court of Appeal limited the size of the
class, and rejected the award of pre-judgment interest and most
of the specific components of the smoking cessation program.
However, the court upheld the class certification and found the
defendants responsible for funding smoking cessation for
eligible class members. The defendants application for writ
of certiorari with the Louisiana Supreme Court was denied on
January 7, 2008. The deadline for the defendants to file a writ
of certiorari with the U.S. Supreme Court is April 7, 2008.
February 2, 2005
Smith v. Brown & Williamson Tobacco Corp.
[Individual]
Circuit Court, Jackson County
(Independence, MO)
$2 million in compensatory damages which was reduced to $500,000
because of jurys findings that the plaintiff was 75% at
fault; $20 million in punitive damages.
On June 1, 2005, B&W filed its notice of appeal. On
July 31, 2007, the Missouri Court of Appeals affirmed the
compensatory damages award but ordered a new trial on punitive
damages. The Missouri Supreme Court accepted transfer of the
case from the court of appeals. Oral argument was heard on
February 13, 2008. A decision is pending.
March 18, 2005
Rose v. Brown & Williamson Tobacco Corp.
[Individual]
Supreme Court, New York County
(Manhattan, NY)
RJR Tobacco found not liable; $3.42 million in compensatory
damages against B&W and Philip Morris, of which
$1.71 million was assigned to B&W; $17 million in
punitive damages against Philip Morris only.
On August 18, 2005, B&W filed its notice of appeal. A
decision is pending. Pursuant to its agreement to indemnify
B&W, RJR Tobacco posted a supersedeas bond in the amount of
$2.058 million on February 7, 2006. Oral argument occurred on
December 12, 2006.
Table of Contents
Case Name/Type
Jurisdiction
Verdict
Post-Trial Status
August 17, 2006
United States v. Philip Morris USA, Inc.
[Governmental Health-Care Cost Recovery]
U.S. District Court, District of Columbia (Washington, DC)
RJR Tobacco and B&W were found liable for civil RICO
claims; were enjoined from using certain brand descriptors and
from making certain misrepresentations; and were ordered to make
corrective communications on five subjects, including smoking
and health and addiction, to reimburse the U.S. Department of
Justice appropriate costs associated with the lawsuit, and to
maintain document web sites.
On September 11, 2006, RJR Tobacco and B&W filed their
notices of appeal. On October 16, 2006, the government filed its
notice of appeal. The government has requested the defendants
pay a total of approximately $1.9 million in costs. The court of
appeals granted the defendants motion to stay the district
courts order on October 31, 2006. In May 2007, the court
of appeals issued a briefing schedule that extends through May
19, 2008. Briefing is scheduled to conclude on May 19, 2008.
May 2, 2007
Whiteley v. R. J. Reynolds Tobacco Co.
[Individual]
Superior Court, San Francisco County, (San Francisco,
CA)
$2.46 million in compensatory damages jointly against RJR
Tobacco and Philip Morris; $250,000 punitive damages against RJR
Tobacco only.
On September 5, 2007, the court denied RJR Tobaccos motion
for judgment notwithstanding the verdict or, in the alternative,
for a new trial. RJR Tobacco filed its notice of appeal on
October 3, 2007.
Table of Contents
94
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95
Table of Contents
96
Table of Contents
97
Table of Contents
98
Table of Contents
99
Table of Contents
100
Table of Contents
101
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all claims of the settling states and their respective political
subdivisions and other recipients of state health-care funds,
relating to past conduct arising out of the use, sale,
distribution, manufacture, development, advertising, marketing
or health effects of, the exposure to, or research, statements
or warnings about, tobacco products; and
all monetary claims of the settling states and their respective
political subdivisions and other recipients of state health-care
funds, relating to future conduct arising out of the use of or
exposure to, tobacco products that have been manufactured in the
ordinary course of business.
2011 and
2005
2006
2007
2008
2009
2010
thereafter
$
136
$
136
$
136
$
136
$
136
$
136
$
136
440
440
440
440
440
440
440
580
580
580
580
580
580
580
204
204
204
204
204
204
204
7,004
7,004
7,004
8,004
8,004
8,004
8,004
25
25
25
25
500
500
500
500
295
295
(500
)
(500
)
(500
)
(500
)
(295
)
(295
)
$
8,389
$
8,389
$
8,389
$
9,389
$
9,364
$
9,364
$
9,364
$
2,600
$
2,611
$
2,821
$
2,732
$
2,631
$
2,616
$
>2,750
$
>2,800
$
>2,800
$
>2,800
$
>2,800
$
>2,750
$
>2,800
$
>2,800
(1)
Subject to adjustments for changes in sales volume, inflation
and other factors. All payments are to be allocated among the
companies on the basis of relative market share.
(2)
The Growers Trust payments scheduled to expire in 2010
will be offset by obligations resulting from the federal tobacco
buyout legislation, not included in this table, signed in
October 2004. See Tobacco Buyout Legislation
and Related Litigation.
102
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103
Table of Contents
104
Table of Contents
105
Table of Contents
106
Table of Contents
107
Table of Contents
108
Table of Contents
In February 2003, the RCMP filed criminal charges in the
Province of Ontario against, and purported to serve summonses
on, JTI-Macdonald Corp., referred to as JTI-MC, Northern Brands,
R. J. Reynolds Tobacco International, Inc., referred to as
RJR-TI, R. J. Reynolds Tobacco Co., Puerto Rico, referred to as
RJR-PR, and eight individuals associated with RJR-MI
and/or
RJR-TI during the period January 1, 1991, through
December 31, 1996. The charges allege fraud and conspiracy
to defraud Canada and the Provinces of Ontario and Quebec in
connection with the purchase, sale, export, import
and/or
re-export of cigarettes
and/or
fine
cut tobacco. In October 2003, Northern Brands, RJR-TI and RJR-PR
each challenged both the propriety of the service of the
summonses and the jurisdiction of the court. On February 9,
2004, the Superior Court of Justice ruled in favor of these
companies. The government filed a notice of appeal from that
ruling on February 18, 2004, but did not perfect its appeal
until May 8, 2007. At the oral argument on October 29,
2007, the Court of Appeal announced a unanimous decision in
favor of the companies position and dismissed the
governments appeal. A final written order dismissing the
appeal was entered by the Court of Appeal on December 3,
2007.
109
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In July 2003, a Statement of Claim was filed against JTI-MC and
others in the Superior Court of Justice, Ontario, Canada by
Leslie and Kathleen Thompson. Mr. Thompson is a former
employee of Northern Brands and JTI-MCs predecessor,
RJR-MI. Mr. and Mrs. Thompson have alleged breach of
contract, breach of fiduciary duty and negligent
misrepresentation, among other claims. They are seeking lost
wages and other damages, including punitive damages, in an
aggregate amount exceeding $12 million.
On September 18, 2003, RJR, RJR Tobacco, RJR-TI, RJR-PR,
and Northern Brands were served with a Statement of Claim filed
in August 2003 by the Attorney General of Canada in the Superior
Court of Justice, Ontario, Canada. Also named as defendants are
JTI and a number of its affiliates. The Statement of Claim seeks
to recover taxes and duties allegedly not paid as a result of
cigarette smuggling and related activities. As filed, the
Attorney Generals Statement of Claim seeks to recover
$1.5 billion Canadian in compensatory damages and
$50 million Canadian in punitive damages, as well as
equitable and other forms of relief. However, in the
Companies Creditor Arrangement Act proceeding described
below, the Attorney General amended and increased Canadas
claim to $4.3 billion Canadian. The parties have agreed to
a stay of all proceedings pending in the Superior Court of
Justice, subject to notice by one of the parties that it wishes
to terminate the stay. On January 19, 2007, the court
ordered that the case be scheduled for trial no later than
December 31, 2008, subject to further order of the court.
In August 2004, the Quebec Ministry of Revenue (1) issued a
tax assessment, covering the period January 1, 1990,
through December 31, 1998, against JTI-MC for alleged
unpaid duties, penalties and interest in an amount of about
$1.36 billion Canadian; (2) issued an order for the
immediate payment of that amount; and (3) obtained an ex
parte judgment to enforce the payment of that amount. On
August 24, 2004, JTI-MC applied for protection under the
Companies Creditor Arrangement Act in the Ontario Superior
Court of Justice, Toronto, Canada, referred to as CCAA
Proceedings, and the court entered an order staying the Quebec
Ministry of Revenues proceedings as well as other claims
and proceedings against JTI-MC. The stay has been extended to
May 30, 2008. In November 2004, JTI-MC filed a motion in
the Superior Court, Province of Quebec, District of Montreal,
seeking a declaratory judgment to set aside, annul and declare
inoperative the tax assessment and all ancillary enforcement
measures and to require the Quebec Minister of Revenue to
reimburse JTI-MC for funds unduly appropriated, along with
interest and other relief. Pursuant to a court-imposed deadline,
Canada and several Provinces filed Crown claims against JTI-MC
in the CCAA Proceedings in the following amounts: Canada,
$4.3 billion Canadian; Ontario, $1.5 billion Canadian;
New Brunswick, $1.5 billion Canadian; Quebec,
$1.4 billion Canadian; British Columbia, $450 million
Canadian; Nova Scotia, $326 million Canadian; Prince Edward
Island, $75 million Canadian and Manitoba, $23 million
Canadian. In the CCAA Proceedings, the Canadian federal
government and some of the provincial governments have asserted
that they can make the same tax and related claims against RJR
and certain of its subsidiaries, including RJR Tobacco. To date,
none of those provincial governments have filed and served RJR
or any of its affiliates with a formal Statement of Claim like
the Canadian federal government did in August and September 2003.
On November 17, 2004, a Statement of Claim was filed
against JTI-MC in the Supreme Court of British Columbia by
Stanley Smith, a former executive of RJR-MI, for alleged breach
of contract and other legal theories. Mr. Smith is claiming
$840,000 Canadian for salary allegedly owed under his severance
agreement with RJR-MI, as well as other unspecified compensatory
and punitive damages.
In a letter dated March 31, 2006, counsel for JTI stated
that JTI would be seeking indemnification under the 1999
Purchase Agreement for any damages it may incur or may have
incurred arising out of a Southern District of New York grand
jury investigation, a now-terminated Eastern District of North
Carolina grand jury investigation, and various actions filed by
the European Community and others in the U.S. District
Court for the Eastern District of New York, referred to as the
EDNY, against RJR Tobacco and certain of its affiliates on
November 3, 2000, August 6, 2001, and October 30,
2002, see below, and against JTI on January 11, 2002.
110
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On December 14, 2007, the European Community and 26 Member
States entered into a series of agreements with JTI
and/or
its
subsidiaries regarding, principally, contraband and counterfeit
cigarettes bearing JTI trademarks in the European Community.
Collectively, those agreements resolved, in pertinent part, all
claims that the European Community and Member States either had
or might have had prior to December 14, 2007 against JTI
and/or
its
subsidiaries with respect to any such contraband and counterfeit
cigarettes and claims for which JTI could become the subject of
a claim for indemnity by RJR under the terms of the 1999
Purchase Agreement. In addition, the European Community and
signatory Member States agreed to release RJR and its affiliates
from those same claims.
111
Table of Contents
112
Table of Contents
113
Table of Contents
114
Table of Contents
any liabilities, costs and expenses arising out of the
imposition or assessment of any tax with respect to the
international tobacco business arising prior to the sale, other
than as reflected on the closing balance sheet;
any liabilities, costs and expenses that JTI or any of its
affiliates, including the acquired entities, may incur after the
sale with respect to any of RJRs or RJR Tobaccos
employee benefit and welfare plans; and
any liabilities, costs and expenses incurred by JTI or any of
its affiliates arising out of certain activities of Northern
Brands.
115
Table of Contents
Noncancellable
Operating Leases
$
16
14
12
9
6
13
$
70
Note 15
Shareholders
Equity
ten days following an announcement that a person or group, other
than BAT and its subsidiaries, except in certain circumstances,
has acquired beneficial ownership of at least 15% of RAIs
common stock, and
ten business days, or such later date as may be determined by
the board, following the announcement of a tender offer which
would result in a person becoming an acquiring person.
116
Table of Contents
2007
2006
2005
$
0.75
$
0.625
$
0.475
$
0.75
$
0.625
$
0.475
$
0.85
$
0.75
$
0.525
$
0.85
$
0.75
$
0.625
Note 16
Stock
Plans
117
Table of Contents
Number
Number
Number
of
of
of
Shares
Shares
Shares
Granted
Grant Price
Type
Vesting Date
Cancelled
Vested
972,432
N/A
Phantom Stock
Ratably over three years
152,770
819,662
552,194
N/A
Phantom Stock
March 2, 2008
55,448
56,354
507,060
$52.60
Restricted Stock
March 6, 2009
38,794
18,364
9,084
$66.05
Restricted Stock
March 6, 2009
373,082
$59.50
Restricted Stock
March 6, 2010
15,403
1,666
1,244
$64.14
Restricted Stock
March 6, 2010
34,825
N/A
Phantom Stock
34% on December 31, 2007
11,841
66% on December 31, 2008
Weighted Average
Restricted
Grant Date
Stock
Fair Value
511,670
$
52.84
374,326
59.52
(50,273
)
54.71
(19,480
)
53.19
816,243
$
55.78
118
Table of Contents
2007
2006
2005
$
3
$
17
$
21
11
15
8
10
10
8
$
32
$
42
$
29
$
12
$
16
$
12
2007
2006
$
29
$
14
19
30
6
Average
Remaining
Weighted
Contractual
Average
Shares
Life (Years)
Exercise Price
444,273
2.1
$
13.65
2,074
19.93
20,000
4.4
34.90
119
Table of Contents
2007
2006
2005
Weighted
Weighted
Weighted
Average
Average
Average
Exercise
Exercise
Exercise
Options
Price
Options
Price
Options
Price
513,924
$
14.59
817,994
$
14.90
1,026,022
$
14.71
(2,588
)
24.16
(61,232
)
16.90
(44,989
)
14.13
(242,838
)
15.05
(208,028
)
13.94
466,347
14.59
513,924
14.59
817,994
14.90
466,347
14.59
513,924
14.59
817,994
14.90
2007
2006
2005
$
1
$
4
$
3
2
4
12
Number of Securities
Remaining Available for
Number of Securities
Weighted-Average
Future Issuance under
to be Issued Upon
Exercise Price of
Equity Compensation
Exercise of
Outstanding
Plans (Excluding
Outstanding Options,
Options, Warrants
Securities Reflected in
Warrants and Rights
and Rights
Column (a))
(a)
(b)
(c)
423,547
$
13.54
9,453,572
42,800
24.95
628,378
466,347
14.59
10,081,950
(1)
The EIAP is the only equity compensation plan not approved by
RAIs or RJRs public shareholders. The EIAP was
approved by RJRs sole shareholder, NGH, prior to
RJRs spin-off on June 15, 1999.
Note 17
Retirement
Benefits
120
Table of Contents
Pension Benefits
Postretirement Benefits
2007
2006
2007
2006
$
5,293
$
5,348
$
1,490
$
1,516
45
37
40
40
6
5
313
308
91
86
(182
)
(76
)
(45
)
2
(3
)
(379
)
(374
)
(102
)
(106
)
1
2
$
5,088
$
5,293
$
1,485
$
1,490
$
5,110
$
4,469
$
374
$
350
35
391
667
22
52
299
313
70
78
(379
)
(374
)
(102
)
(106
)
$
5,421
$
5,110
$
364
$
374
$
333
$
(183
)
$
(1,121
)
$
(1,116
)
$
465
$
$
$
(6
)
(6
)
(80
)
(66
)
(126
)
(177
)
(1,041
)
(1,050
)
333
(183
)
(1,121
)
(1,116
)
302
481
196
201
$
635
$
298
$
(925
)
$
(915
)
Pension
Postretirement
Pension
Postretirement
Benefits
Benefits
Total
Benefits
Benefits
Total
2007
2007
2007
2006
2006
2006
$
17
$
(28
)
$
(11
)
$
17
$
(40
)
$
(23
)
285
224
509
464
241
705
(116
)
(76
)
(192
)
(186
)
(78
)
(264
)
$
186
$
120
$
306
$
295
$
123
$
418
121
Table of Contents
Pension
Postretirement
Benefits
Benefits
Total
$
2
$
$
2
(137
)
6
(131
)
(2
)
12
10
(42
)
(23
)
(65
)
70
2
72
$
(109
)
$
(3
)
$
(112
)
Postretirement
Pension Benefits
Benefits
2007
2006
2007
2006
6.50
%
6.10
%
6.50
%
6.10
%
4.97
%
4.98
%
5.00
%
5.00
%
December 31,
2007
2006
$
122
$
613
$
103
$
585
$
$
486
Pension Benefits
Postretirement Benefits
2007
2006
2005
2007
2006
2005
$
40
$
40
$
51
$
5
$
5
$
6
314
308
305
91
86
85
(436
)
(368
)
(334
)
(27
)
(28
)
(25
)
2
2
2
(12
)
(12
)
(15
)
42
70
71
23
21
21
(38
)
52
95
80
72
72
1
2
3
(13
)
9
2
$
(37
)
$
54
$
100
$
80
$
72
$
68
122
Table of Contents
Pension Benefits
Postretirement Benefits
2007
2006
2005
2007
2006
2005
6.10%
5.90%
6.05%;5.70%(1)
6.10%
5.91%
6.05%;5.70%;5.75%(2)
8.74%
8.74%
8.79%
8.00%
8.00%
8.50%
4.97%
4.98%
4.97%
5.00%
5.00%
5.00%
(1)
The January 1, 2005 overall beginning discount rate of
6.05% was changed to 5.70% for the period from April 30,
2005 to December 31, 2005, for plans impacted by the sale
of the packaging operations.
(2)
The January 1, 2005 overall beginning discount rate of
6.05% was changed for only the RJR Tobacco benefit plans prior
to the B&W business combination, to a discount rate of
5.70% for the period from April 30, 2005 to
September 15, 2005, and a discount rate of 5.75% was used
for the period from September 16, 2005 to December 31,
2005.
123
Table of Contents
Pension Plans
2007
2006
58
%
60
%
27
%
25
%
11
%
11
%
4
%
4
%
100
%
100
%
124
Table of Contents
Postretirement
Plans
2007
2006
43
%
44
%
36
%
35
%
18
%
19
%
1
%
1
%
2
%
1
%
100
%
100
%
2007
2006
9.47
%
9.27
%
5.00
%
5.00
%
2017
2016
1-Percentage
1-Percentage
Point
Point
Increase
Decrease
$
6
$
(5
)
89
(76
)
Postretirement Benefits
Gross Projected
Expected
Net Projected
Benefit Payments
Medicare
Benefit Payments
Pension
Before Medicare
Part D
After Medicare
Benefits
Part D Subsidies
Subsidies
Part D Subsidies
$
389
$
120
$
3
$
117
386
124
3
121
380
128
4
124
372
130
4
126
374
130
4
126
2,006
630
24
606
Table of Contents
Note 18
Segment
Information
126
Table of Contents
2007
2006
2005
$
7,918
$
7,708
$
7,723
670
409
152
435
393
381
$
9,023
$
8,510
$
8,256
$
1,934
$
1,693
$
1,399
312
181
18
148
154
110
(106
)
(98
)
(68
)
$
2,288
$
1,930
$
1,459
$
15,956
$
14,955
$
15,885
4,559
4,578
296
1,104
996
1,174
16,336
17,818
14,765
(19,326
)
(20,169
)
(17,601
)
$
18,629
$
18,178
$
14,519
$
93
$
116
$
102
23
6
3
26
11
5
$
142
$
133
$
110
$
125
$
149
$
188
11
7
2
7
6
5
$
143
$
162
$
195
$
2,288
$
1,930
$
1,459
338
270
113
(134
)
(136
)
(85
)
11
(13
)
15
$
2,073
$
1,809
$
1,416
127
Table of Contents
Note 19
Related
Party Transactions
2007
2006
$
80
$
62
7
9
35
62
2007
2006
2005
$
507
$
498
$
472
2
5
7
1
3
5
4
1
4
36
18
7
18
1
1
1
2
2
128
Table of Contents
Note 20
RAI
Guaranteed, Secured Notes Condensed Consolidating
Financial Statements
129
Table of Contents
Parent
Non-
Issuer
Guarantors
Guarantors
Eliminations
Consolidated
$
$
8,494
$
123
$
(101
)
$
8,516
507
507
5,005
54
(99
)
4,960
53
1,583
51
1,687
23
23
65
65
(53
)
2,325
18
(2
)
2,288
324
14
338
(4
)
(126
)
(4
)
(134
)
(114
)
109
5
(43
)
43
24
(13
)
11
(283
)
2,371
30
(45
)
2,073
(100
)
864
2
766
1,491
28
(1,519
)
1,308
1,535
28
(1,564
)
1,307
1
1
$
1,308
$
1,536
$
28
$
(1,564
)
$
1,308
$
$
7,984
$
90
$
(64
)
$
8,010
500
500
4,838
30
(65
)
4,803
48
1,575
35
1,658
28
28
1
1
90
90
(48
)
1,952
25
1
1,930
194
76
270
(2
)
(133
)
(1
)
(136
)
(118
)
116
2
(43
)
43
7
(3
)
(17
)
(13
)
(129
)
1,939
41
(42
)
1,809
(44
)
712
5
673
1,295
36
(1,331
)
1,210
1,263
36
(1,373
)
1,136
74
74
$
1,210
$
1,337
$
36
$
(1,373
)
$
1,210
$
$
7,758
$
87
$
(66
)
$
7,779
477
477
4,960
26
(67
)
4,919
28
1,556
26
1
1,611
24
24
41
41
2
2
200
200
(28
)
1,452
35
1,459
113
113
(1
)
(82
)
(2
)
(85
)
24
(25
)
1
(60
)
60
25
(10
)
15
(51
)
1,481
46
(60
)
1,416
(34
)
459
6
431
1,059
40
(1,099
)
1,042
1,062
40
(1,159
)
985
2
2
1,042
1,064
40
(1,159
)
987
55
55
$
1,042
$
1,119
$
40
$
(1,159
)
$
1,042
130
Table of Contents
(Dollars in Millions)
Parent
Non-
Issuer
Guarantors
Guarantors
Eliminations
Consolidated
$
356
$
1,067
$
6
$
(98
)
$
1,331
(3,764
)
(3,764
)
4,655
4,655
(8
)
(126
)
(8
)
(142
)
5
10
15
(3
)
(3
)
1
2
3
(1
)
(1
)
40
(847
)
807
32
(77
)
1
807
763
(916
)
(55
)
55
(916
)
(43
)
43
1
1
2
2
(254
)
(75
)
(329
)
(1,542
)
(1,542
)
1,547
1,547
(60
)
(60
)
(15
)
(15
)
839
(40
)
8
(807
)
(441
)
(170
)
8
(709
)
(1,312
)
(53
)
820
15
782
296
1,065
72
1,433
$
243
$
1,885
$
87
$
$
2,215
$
1,023
$
1,946
$
25
$
(1,537
)
$
1,457
(7,677
)
(7,677
)
7,760
7,760
(132
)
(4
)
(136
)
18
18
(3,519
)
(3,519
)
(211
)
211
22
2
24
3
3
(4
)
(4
)
(3,168
)
(105
)
3,273
(3,379
)
(3,441
)
16
3,273
(3,531
)
131
Table of Contents
Parent
Non-
Issuer
Guarantors
Guarantors
Eliminations
Consolidated
(775
)
(1,494
)
1,494
(775
)
(43
)
43
4
4
4
4
(190
)
(190
)
(8
)
(8
)
1,641
1,641
1,550
1,550
(52
)
(52
)
104
3,168
1
(3,273
)
2,425
1,484
1
(1,736
)
2,174
69
(11
)
42
100
227
1,076
30
1,333
$
296
$
1,065
$
72
$
$
1,433
$
726
$
1,107
$
28
$
(588
)
$
1,273
(10,883
)
(10,883
)
9,985
9,985
(5
)
(5
)
(103
)
(2
)
(105
)
12
12
(45
)
(45
)
48
48
4
4
16
(16
)
(983
)
10
(16
)
(989
)
(575
)
(463
)
(76
)
539
(575
)
(49
)
49
3
3
(3
)
(3
)
(360
)
(360
)
499
499
(7
)
(7
)
(7
)
(7
)
(16
)
16
(640
)
(338
)
(76
)
604
(450
)
86
(214
)
(38
)
(166
)
141
1,290
68
1,499
$
227
$
1,076
$
30
$
$
1,333
Table of Contents
(Dollars in Millions)
Parent
Non-
Issuer
Guarantors
Guarantors
Eliminations
Consolidated
$
243
$
1,885
$
87
$
$
2,215
377
377
7
80
12
99
80
80
1,167
31
(2
)
1,196
11
833
1
845
4
4
6
165
3
2
176
82
127
(209
)
153
23
(176
)
502
4,718
157
(385
)
4,992
8
1,046
20
(1
)
1,073
3,407
3,407
8,166
8
8,174
199
3
202
2,120
1,310
(3,430
)
10,848
104
(10,952
)
186
571
49
(25
)
781
$
13,664
$
19,521
$
237
$
(14,793
)
$
18,629
$
$
2,449
$
$
$
2,449
391
993
27
1
1,412
5
2
7
35
35
34
82
93
(209
)
176
(176
)
425
3,740
122
(384
)
3,903
1,310
2,120
(3,430
)
4,383
132
4,515
1,209
(25
)
1,184
44
1,112
11
1,167
36
358
394
7,466
10,850
104
(10,954
)
7,466
$
13,664
$
19,521
$
237
$
(14,793
)
$
18,629
133
Table of Contents
Parent
Non-
Issuer
Guarantors
Guarantors
Eliminations
Consolidated
$
296
$
1,065
$
72
$
$
1,433
1,293
1,293
4
98
5
107
59
3
62
1,135
20
1,155
3
790
793
6
94
3
(11
)
92
83
97
(180
)
522
6
(528
)
914
4,631
109
(719
)
4,935
1,046
16
1,062
3,479
3,479
8,167
8
8,175
215
215
2,160
472
(2,632
)
9,253
69
(9,322
)
96
204
38
(26
)
312
$
12,423
$
18,283
$
171
$
(12,699
)
$
18,178
$
$
2,237
$
$
$
2,237
323
1,111
17
(11
)
1,440
9
9
62
62
252
92
344
26
83
71
(180
)
528
(528
)
601
4,122
88
(719
)
4,092
472
2,160
(2,632
)
4,229
160
4,389
1,193
(26
)
1,167
41
1,172
14
1,227
37
222
1
260
7,043
9,254
68
(9,322
)
7,043
$
12,423
$
18,283
$
171
$
(12,699
)
$
18,178
134
Table of Contents
Note 21
RJR
Guaranteed, Unsecured Notes Condensed Consolidating
Financial Statements
135
Table of Contents
(Dollars in Millions)
Parent
Other
Non-
Guarantor
Issuer
Guarantors
Guarantors
Eliminations
Consolidated
$
$
$
7,677
$
1,002
$
(163
)
$
8,516
492
15
507
4,784
338
(162
)
4,960
53
1
1,395
238
1,687
22
1
23
33
32
65
(53
)
(1
)
1,935
408
(1
)
2,288
324
14
338
(4
)
(6
)
(109
)
(15
)
(134
)
(114
)
(4
)
(75
)
193
(43
)
43
24
(8
)
4
(9
)
11
(283
)
46
2,115
239
(44
)
2,073
(100
)
(1
)
795
72
766
1,491
1,350
29
(2,870
)
1,308
1,397
1,349
167
(2,914
)
1,307
1
1
$
1,308
$
1,397
$
1,350
$
167
$
(2,914
)
$
1,308
$
$
$
7,421
$
747
$
(158
)
$
8,010
487
13
500
4,678
283
(158
)
4,803
48
2
1,436
172
1,658
27
1
28
1
1
90
90
(48
)
(2
)
1,676
304
1,930
194
70
2
4
270
(2
)
(9
)
(121
)
(4
)
(136
)
(118
)
23
(49
)
144
(43
)
43
7
(4
)
1
(17
)
(13
)
(129
)
(39
)
1,843
177
(43
)
1,809
(44
)
(52
)
703
66
673
1,295
1,246
32
(2,573
)
136
Table of Contents
Parent
Other
Non-
Guarantor
Issuer
Guarantors
Guarantors
Eliminations
Consolidated
1,210
1,259
1,172
111
(2,616
)
1,136
74
74
$
1,210
$
1,259
$
1,246
$
111
$
(2,616
)
$
1,210
$
$
$
7,450
$
449
$
(120
)
$
7,779
463
14
477
4,811
230
(122
)
4,919
28
2
1,492
88
1
1,611
24
24
41
41
2
2
198
2
200
(28
)
(2
)
1,345
143
1
1,459
112
1
113
(1
)
(8
)
(74
)
(2
)
(85
)
24
(5
)
(35
)
16
(60
)
60
25
1
(11
)
15
(51
)
(66
)
1,452
140
(59
)
1,416
(34
)
(167
)
591
41
431
1,059
958
31
(2,048
)
1,042
1,059
892
99
(2,107
)
985
2
2
1,042
1,059
894
99
(2,107
)
987
55
55
$
1,042
$
1,059
$
949
$
99
$
(2,107
)
$
1,042
Table of Contents
(Dollars in Millions)
Parent
Other
Non-
Guarantor
Issuer
Guarantors
Guarantors
Eliminations
Consolidated
$
356
$
224
$
808
$
180
$
(237
)
$
1, 331
5
10
15
(2
)
(3,660
)
(102
)
(3,764
)
120
4,437
98
4,655
40
(844
)
804
(260
)
260
(8
)
(93
)
(41
)
(142
)
(3
)
(3
)
1
2
3
(1
)
(1
)
32
(143
)
106
(36
)
804
763
(916
)
(139
)
(55
)
194
(916
)
(43
)
43
1
1
2
2
(254
)
(75
)
(329
)
(1,542
)
(1,542
)
1,547
1,547
(60
)
(60
)
(15
)
(15
)
839
(3
)
(32
)
(804
)
(441
)
(78
)
(139
)
(87
)
(567
)
(1,312
)
(53
)
3
775
57
782
296
22
848
267
1,433
$
243
$
25
$
1,623
$
324
$
$
2,215
$
1,023
$
1,364
$
1,915
$
212
$
(3,057
)
$
1,457
18
18
(5
)
(7,672
)
(7,677
)
7,760
7,760
(3,168
)
(3,153
)
(110
)
1
6,430
(211
)
294
(464
)
381
(119
)
(17
)
(136
)
(3,519
)
(3,519
)
3
3
20
4
24
(4
)
(4
)
(3,379
)
(2,864
)
(589
)
(3,129
)
6,430
(3,531
)
(775
)
(1,494
)
(1,520
)
3,014
(775
)
(43
)
43
4
4
4
4
(190
)
(190
)
(8
)
(8
)
1,641
1,641
1,550
1,550
(52
)
(52
)
104
3,173
(1
)
3,154
(6,430
)
2,425
1,489
(1,521
)
3,154
(3,373
)
2,174
69
(11
)
(195
)
237
100
227
33
1,043
30
1,333
$
296
$
22
$
848
$
267
$
$
1,433
138
Table of Contents
Parent
Other
Non-
Guarantor
Issuer
Guarantors
Guarantors
Eliminations
Consolidated
$
726
$
343
$
1,147
$
79
$
(1,022
)
$
1,273
(10,883
)
(10,883
)
9,985
9,985
(5
)
(5
)
(97
)
(10
)
2
(105
)
12
12
(22
)
7
15
(45
)
(45
)
48
48
6
(2
)
4
18
11
(29
)
(9
)
(923
)
(28
)
(29
)
(989
)
(575
)
(463
)
(435
)
(75
)
973
(575
)
(49
)
49
3
3
(3
)
(3
)
(360
)
(360
)
499
499
(7
)
(7
)
(7
)
(7
)
(16
)
6
(2
)
(17
)
29
(640
)
(332
)
(437
)
(92
)
1,051
(450
)
86
2
(213
)
(41
)
(166
)
141
31
1,256
71
1,499
$
227
$
33
$
1,043
$
30
$
$
1,333
Table of Contents
(Dollars in Millions)
Parent
Other
Non-
Guarantor
Issuer
Guarantors
Guarantors
Eliminations
Consolidated
$
243
$
25
$
1,623
$
324
$
$
2,215
377
377
7
2
55
35
99
75
5
80
908
290
(2
)
1,196
11
1
814
19
845
4
4
6
164
6
176
82
109
446
(637
)
153
29
(182
)
502
137
4,466
708
(821
)
4,992
8
936
130
(1
)
1,073
1,867
1,540
3,407
5,302
2,872
8,174
199
3
202
2,120
225
1,310
(3,655
)
10,848
9,240
87
(20,175
)
186
34
534
51
(24
)
781
$
13,664
$
9,636
$
14,701
$
5,304
$
(24,676
)
$
18,629
$
$
$
2,425
$
24
$
$
2, 449
391
5
873
143
1,412
4
3
7
35
35
34
403
3
197
(637
)
14
168
(182
)
425
422
3,508
367
(819
)
3,903
1,310
2
2,343
(3,655
)
4,383
132
4,515
2
643
563
(24
)
1,184
44
18
1,046
59
1,167
36
92
262
4
394
7,466
8,970
9,240
1,968
(20,178
)
7,466
$
13,664
$
9,636
$
14,701
$
5,304
$
(24,676
)
$
18,629
140
Table of Contents
Parent
Other
Non-
Guarantor
Issuer
Guarantors
Guarantors
Eliminations
Consolidated
$
296
$
22
$
848
$
267
$
$
1,433
117
1,176
1,293
4
3
70
30
107
51
11
62
910
246
(1
)
1,155
3
1
768
21
793
6
96
6
(16
)
92
83
99
433
(615
)
522
38
29
(589
)
914
280
4,352
610
(1,221
)
4,935
955
107
1,062
1,906
1,573
3,479
5,303
2,872
8,175
180
35
215
2,160
244
472
(2,876
)
9,253
7,684
52
(16,989
)
96
29
173
40
(26
)
312
$
12,423
$
8,237
$
13,393
$
5,237
$
(21,112
)
$
18,178
$
$
$
2,216
$
21
$
$
2,237
323
8
998
127
(16
)
1,440
9
9
62
62
252
92
344
26
407
3
179
(615
)
589
(589
)
601
507
3,877
327
(1,220
)
4,092
472
4
2,400
(2,876
)
4,229
160
4,389
605
588
(26
)
1,167
41
19
1,101
66
1,227
37
91
123
9
260
7,043
7,460
7,683
1,847
(16,990
)
7,043
$
12,423
$
8,237
$
13,393
$
5,237
$
(21,112
)
$
18,178
Table of Contents
Note 22
Quarterly
Results of Operations (Unaudited)
First
Second
Third
Fourth(2)
$
2,148
$
2,348
$
2,297
$
2,230
973
1,005
1,047
1,038
328
324
358
297
1
328
325
358
297
1.11
1.10
1.22
1.01
1.11
1.10
1.22
1.01
1.11
1.10
1.21
1.01
1.11
1.10
1.21
1.01
$
1,960
$
2,291
$
2,190
$
2,069
795
1,015
988
909
280
367
309
180
65
9
345
376
309
180
0.95
1.24
1.05
0.61
0.22
0.03
1.17
1.27
1.05
0.61
0.95
1.24
1.05
0.61
0.22
0.03
1.17
1.27
1.05
0.61
(1)
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.
(2)
Fourth quarter 2007 net income from continuing operations
includes a $65 million trademark impairment. Fourth quarter
2006 net income from continuing operations includes a
$90 million trademark impairment.
Note 23
Subsequent
Event
142
Table of Contents
143
Table of Contents
Item 9.
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
Item 9A.
Controls
and Procedures
Item 9B.
Other
Information
144
Table of Contents
Item 10.
Directors,
Executive Officers and Corporate Governance
Item 11.
Executive
Compensation
Item 12.
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
Item 13.
Certain
Relationships and Related Transactions, and Director
Independence
Item 14.
Principal
Accountant Fees and Services
145
Table of Contents
147
148
149
150
151
152
153
154
Item 15.
Exhibits
and Financial Statement Schedules
(1)
Consolidated Statements of Income for the years ended
December 31, 2007, 2006 and 2005.
(2)
Financial Statement Schedules have been omitted because the
information required has been separately disclosed in the
consolidated financial statements or notes.
(3)
See (b) below.
(b)
Exhibit Numbers 10.39 through 10.78 below are management
contracts, compensatory plans or arrangements. The following
exhibits are filed or furnished, as the case may be, as part of
this report:
Exhibit
2
.1
Purchase Agreement, dated April 24, 2006, by and
among(i) Reynolds American Inc., (ii) Reynolds
American Inc.s direct, wholly owned acquisition
subsidiary, Pinch Acquisition Corporation,
(iii) Karl J. Breyer, Marshall E. Eisenberg and
Thomas J. Pritzker, not individually, but solely as co-trustees
of those certain separate and distinct trusts listed therein,
and (iv) GP Investor, L.L.C. (incorporated by reference to
Exhibit 2.1 to Reynolds American Inc.s
Form 8-K
dated April 24, 2006).
2
.2
Amendment No. 1, dated as of May 31, 2006, to the
Purchase Agreement, dated as of April 24, 2006, by and
among Karl J. Breyer, Marshall E. Eisenberg and Thomas J.
Pritzker, not individually, but solely as co-trustees of those
certain separate and distinct trusts listed therein, GP
Investor, L.L.C., Reynolds American Inc. and Conwood Holdings,
Inc. (f/k/a Pinch Acquisition Corporation) (incorporated by
reference to Exhibit 2.1 to Reynolds American Inc.s
Form 8-K
dated May 31, 2006).
3
.1
Amended and Restated Certificate of Incorporation of Reynolds
American Inc. (incorporated by reference to Exhibit 1 to
Reynolds American Inc.s
Form 8-A
filed July 29, 2004).
3
.2
Articles of Amendment of Amended and Restated Articles of
Incorporation of Reynolds American Inc. (incorporated by
reference to Exhibit 3.1 to Reynolds American Inc.s
Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2007).
3
.3
Amended and Restated Bylaws of Reynolds American Inc.
(incorporated by reference to Exhibit 3.1 to Reynolds
American Inc.s
Form 8-K
dated November 29, 2006).
4
.1
Rights Agreement, between Reynolds American Inc. and The Bank of
New York, as rights agent (incorporated by reference to
Exhibit 3 to Reynolds American Inc.s
Form 8-A
filed July 29, 2004).
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 RJR Nabisco, Inc.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 R.J. Reynolds Tobacco Holdings, Inc.s
Form 8-A
filed May 19, 1999).
4
.4
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 R.J.
Reynolds Tobacco Holdings, Inc.s
Form 8-A
filed May 19, 1999).
4
.5
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 R.J. Reynolds
Tobacco Holdings, Inc.s
Form 8-A
filed May 19, 1999).
146
Table of Contents
Exhibit
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 (incorporated by reference to
Exhibit 4.6 to R.J. Reynolds Tobacco Holdings, Inc.s
Annual Report on
Form 10-K
for the year ended December 31, 2000, filed March 1,
2001).
4
.7
Second Supplemental Indenture, dated as of June 30, 2003,
among GMB, Inc., FSH, Inc., R.J. Reynolds Tobacco Co., Santa Fe
Natural Tobacco Company, Inc., RJR Packaging, LLC, R.J. Reynolds
Tobacco Holdings, Inc., R.J. Reynolds Tobacco Company, RJR
Acquisition Corp. and The Bank of New York, as Trustee, to the
Indenture, dated 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 4.1 to R.J.
Reynolds Tobacco Holdings, Inc.s Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2003, filed August 8,
2003).
4
.8
Third Supplemental Indenture, dated as of July 30, 2004,
among R.J. Reynolds Tobacco Holdings, Inc., Reynolds American
Inc., R.J. Reynolds Tobacco Company, RJR Acquisition Corp., GMB,
Inc., FHS, Inc., R.J. Reynolds Tobacco Co., RJR Packaging, LLC,
BWT Brands, Inc. and The Bank of New York, as Trustee, to the
Indenture dated 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 4.2 to Reynolds
American Inc.s
Form 8-K
dated July 30, 2004).
4
.9
Fourth Supplemental Indenture, dated July 6, 2005, by and
among R.J. Reynolds Tobacco Holdings, Inc., Reynolds American
Inc. and various subsidiaries of Reynolds American Inc. as
guarantors, and The Bank of New York, as Trustee (incorporated
by reference to Exhibit 4.1 to Reynolds American
Inc.s From
8-K
dated
July 11, 2005).
4
.10
Fifth Supplemental Indenture, dated May 31, 2006, to
Indenture dated May 15, 1999, among R.J. Reynolds Tobacco
Holdings, Inc., Reynolds American Inc. and certain subsidiaries
of R.J. Reynolds Tobacco Holdings, Inc. as guarantors and The
Bank of New York Trust Company, N.A. as Trustee
(incorporated by reference to Exhibit 4.5 to Reynolds
American Inc.s
Form 8-K
dated May 31, 2006).
4
.11
Sixth Supplemental Indenture, dated June 20, 2006, to
Indenture, dated May 15, 1999, among R.J. Reynolds Tobacco
Holdings, Inc., Reynolds American Inc. and certain subsidiaries
of R.J. Reynolds Tobacco Holdings, Inc. as guarantors and The
Bank of New York Trust Company, N.A. as Trustee
(incorporated by reference to Exhibit 4.6 to Reynolds
American Inc.s
Form 8-K
dated June 20, 2006).
4
.12
Seventh Supplemental Indenture, dated September 30, 2006,
to Indenture, dated May 15, 1999, among R.J. Reynolds
Tobacco Holdings, Inc., Reynolds American Inc. and certain
subsidiaries of R.J. Reynolds Tobacco Holdings, Inc. as
guarantors, and The Bank of New York Trust Company, N.A.,
as successor to The Bank of New York, as Trustee, as amended
(incorporated by reference to Exhibit 4.3 to Reynolds
American Inc.s
Form 8-K
dated September 30, 2006).
4
.13
Indenture, dated as of May 20, 2002, by and among R.J.
Reynolds Tobacco Holdings, Inc., R. J. Reynolds Tobacco Company,
RJR Acquisition Corp. and The Bank of New York (incorporated by
reference to Exhibit 4.3 to R.J. Reynolds Tobacco Holdings,
Inc.s
Form 8-K
dated May 15, 2002).
4
.14
First Supplemental Indenture dated as of June 30, 2003,
among GMB, Inc., FSH, Inc., R. J. Reynolds Tobacco Co., Santa Fe
Natural Tobacco Company, Inc., RJR Packaging, LLC, R. J.
Reynolds Tobacco Holdings, Inc., R.J. Reynolds Tobacco Company,
RJR Acquisition Corp. and The Bank of New York, as Trustee, to
the Indenture dated as of May 20, 2002, among R. J.
Reynolds Tobacco Holdings, Inc., R.J. Reynolds Tobacco Company,
RJR Acquisition Corp. and The Bank of New York, as Trustee
(incorporated by reference to Exhibit 4.2 to R.J. Reynolds
Tobacco Holdings, Inc.s Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2003, filed August 8,
2003).
4
.15
Second Supplemental Indenture, dated as of July 30, 2004,
among R.J. Reynolds Tobacco Holdings, Inc., Reynolds American
Inc., R.J. Reynolds Tobacco Company, RJR Acquisition Corp., GMB,
Inc., FSH, Inc., R.J. Reynolds Tobacco Co., RJR Packaging, LLC,
BWT Brands, Inc. and The Bank of New York, as Trustee, to the
Indenture dated May 20, 2002, among R.J. Reynolds Tobacco
Holdings, Inc., R.J. Reynolds Tobacco Company, RJR Acquisition
Corp. and The Bank of New York (incorporated by reference to
Exhibit 4.3 to Reynolds American Inc.s
Form 8-K
dated July 30, 2004).
Table of Contents
Exhibit
4
.16
Third Supplemental Indenture, dated May 31, 2006, to
Indenture, dated May 20, 2002, among R.J. Reynolds Tobacco
Holdings, Inc., Reynolds American Inc. and certain subsidiaries
of R.J. Reynolds Tobacco Holdings, Inc. as guarantors and The
Bank of New York Trust Company, N.A. as Trustee
(incorporated by reference to Exhibit 4.6 to Reynolds
American Inc.s
Form 8-K
dated May 31, 2006).
4
.17
Fourth Supplemental Indenture, dated June 20, 2006, to
Indenture, dated May 20, 2002, among R.J. Reynolds Tobacco
Holdings, Inc., Reynolds American Inc. and certain subsidiaries
of R.J. Reynolds Tobacco Holdings, Inc. as guarantors and The
Bank of New York Trust Company, N.A. as Trustee
(incorporated by reference to Exhibit 4.7 to Reynolds
American Inc.s
Form 8-K
dated June 20, 2006).
4
.18
Fifth Supplemental Indenture, dated September 30, 2006, to
Indenture, dated May 20, 2002, among R.J. Reynolds Tobacco
Holdings, Inc., Reynolds American Inc. and certain subsidiaries
of R.J. Reynolds Tobacco Holdings, Inc. as guarantors, and The
Bank of New York Trust Company, N.A., as successor to The
Bank of New York, as Trustee, as amended (incorporated by
reference to Exhibit 4.2 to Reynolds American Inc.s
Form 8-K
dated September 30, 2006).
4
.19
Indenture, dated May 31, 2006, among Reynolds American Inc.
and certain of its subsidiaries as guarantors and The Bank of
New York Trust Company, N.A. as Trustee (incorporated by
reference to Exhibit 4.1 to Reynolds American Inc.s
Form 8-K
dated May 31, 2006).
4
.20
First Supplemental Indenture, dated September 30, 2006, to
Indenture, dated May 31, 2006, among Reynolds American Inc.
and certain of its subsidiaries as guarantors and The Bank of
New York Trust Company, N.A., as successor to The Bank of
New York, as Trustee (incorporated by reference to
Exhibit 4.1 to Reynolds American Inc.s
Form 8-K
dated September 30, 2006).
4
.21
In accordance with Item 601(b)(4)(iii) of
Regulation S-K,
Reynolds American Inc. agrees to furnish to the SEC, upon
request, a copy of each instrument that defines the rights of
holders of such long term debt not filed or incorporated by
reference as an exhibit to this Annual Report on
Form 10-K
for the fiscal year ended December 31, 2006.
10
.1
Fifth Amended and Restated Credit Agreement, dated as of
June 28, 2007, among Reynolds American Inc., the agents and
other parties named therein, and the lending institutions listed
from time to time on Annex I thereto (incorporated by
reference to Exhibit 10.1 to Reynolds American Inc.s
Form 8-K,
filed July 3, 2007).
10
.2
Third Amended and Restated Pledge Agreement, dated as of
June 28, 2007, among Reynolds American Inc., certain of its
subsidiaries as pledgors and JPMorgan Chase Bank, N.A. as
collateral agent and pledge (incorporated by reference to
Exhibit 10.2 to Reynolds American Inc.s
Form 8-K,
filed July 3, 2007).
10
.3
Third Amended and Restated Security Agreement, dated as of
June 28, 2007, among Reynolds American Inc., certain of its
subsidiaries as assignors and JPMorgan Chase Bank, N.A. as
collateral agent and assignee (incorporated by reference to
Exhibit 10.3 to Reynolds American Inc.s
Form 8-K,
filed July 3, 2007).
10
.4
Sixth Amended and Restated Subsidiary Guaranty, dated as of
June 28, 2007, among certain of the subsidiaries of
Reynolds American Inc. as guarantors and JPMorgan Chase Bank,
N.A. as administrative agent (incorporated by reference to
Exhibit 10.4 to Reynolds American Inc.s
Form 8-K,
filed July 3, 2007).
10
.5
Form of First Amended and Restated Deed of Trust, Security
Agreement, Assignment of Leases, Rents and Profits, Financing
Statement and Fixture Filing (North Carolina) made as of
May 31, 2006, by R. J. Reynolds Tobacco Company, as the
Trustor, to The Fidelity Company, as Trustee (incorporated by
reference to Exhibit 10.5 to Reynolds American Inc.s
Form 8-K
dated May 31, 2006).
10
.6
Form of First Amended and Restated Deed to Secure Debt, Security
Agreement, Assignment of Leases, Rents and Profits (Bibb County,
Georgia) made as of May 31, 2006, by R. J. Reynolds Tobacco
Company, as the Grantor, to JPMorgan Chase Bank, N.A., as
Administrative Agent and Collateral Agent for the Secured
Creditors, as the Grantee (incorporated by reference to
Exhibit 10.6 to Reynolds American Inc.s
Form 8-K
dated May 31, 2006).
Table of Contents
Exhibit
10
.7
Form of First Amended and Restated Mortgage, Security Agreement,
Assignment of Leases, Rents and Profits, Financing Statement and
Fixture Filing (Cherokee County, South Carolina) made as of
May 31, 2006, by R. J. Reynolds Tobacco Company, as the
Mortgagor, to JPMorgan Chase Bank, N.A., as Administrative Agent
and Collateral Agent for the Secured Creditors, as the Mortgagee
(incorporated by reference to Exhibit 10.7 to Reynolds
American Inc.s
Form 8-K
dated May 31, 2006).
10
.8
Form of Deed of Trust, Security Agreement, Assignment of Leases,
Rents and Profits, Financing Statement and Fixture Filing
(Tennessee), dated as of October 2, 2006, by Conwood
Company, L.P., as the Trustor, to Richard F. Warren, as Trustee,
for the benefit of JPMorgan Chase Bank, N.A., as Administrative
Agent and Collateral Agent, as the Beneficiary for the benefit
of the Secured Creditors (incorporated by reference to
Exhibit 10.11 to Reynolds American Inc.s Quarterly
Report on
Form 10-Q
for the quarter ended June 30, 2007).
10
.9
Purchase Agreement, dated June 22, 2005, by and among R.J.
Reynolds Tobacco Holdings, Inc., the guarantors listed therein
and Citigroup Global Markets Inc. and J.P. Morgan
Securities, Inc., as representatives of the initial purchasers
listed therein (incorporated by reference to Exhibit 10.1
to Reynolds American Inc.s
Form 8-K
dated June 22, 2005).
10
.10
Purchase Agreement, dated May 18, 2006, by and among
Reynolds American Inc., the guarantors listed therein, and
Lehman Brothers Inc., J.P. Morgan Securities Inc. and
Citigroup Global Markets Inc., for themselves and as
representatives of the initial purchasers listed therein
(incorporated by reference to Exhibit 10.1 to Reynolds
American Inc.s Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2006).
10
.11
Registration Rights Agreement, dated May 31, 2006, by and
among Reynolds American Inc., the guarantors listed in
Schedule 1 thereto, Lehman Brothers Inc., J.P. Morgan
Securities Inc. and Citigroup Global Markets Inc., and the
initial purchasers named in Schedule 2 thereto
(incorporated by reference to Exhibit 10.8 to Reynolds
American Inc.s
Form 8-K
dated May 31, 2006).
10
.12
Registration Rights Agreement, dated June 20, 2006, by and
among Reynolds American Inc., the guarantors listed in
Schedule 1 thereto, and The Bank of New York
Trust Company, N.A. (incorporated by reference to
Exhibit 10.1 to Reynolds American Inc.s
Form 8-K
dated June 20, 2006).
10
.13
Subsidiary Assumption and Joinder Agreement dated as of
September 30, 2006 among JPMorgan Chase Bank, N.A., as
Administrative Agent, R. J. Reynolds Global Products, Inc., RJR
Packaging, LLC and Scott Tobacco LLC (incorporated by reference
to Exhibit 10.1 to Reynolds American Inc.s
Form 8-K
dated September 30, 2006).
10
.14
Underwriting Agreement, dated June 18, 2007, by and among
Reynolds American Inc., as issuer, Reynolds American Inc.s
subsidiaries that are guaranteeing the Notes and Citigroup
Global Markets Inc., J.P. Morgan Securities Inc., Lehman
Brothers Inc. and Morgan Stanley & Co. Incorporated,
as representatives of the several underwriters named therein
(incorporated by reference to Exhibit 1.1 to Reynolds
American Inc.s
Form 8-K,
filed June 22, 2007).
10
.15
Formation Agreement, dated as of July 30, 2004, among
Brown & Williamson Tobacco Corporation (n/k/a
Brown & Williamson Holdings, Inc.), Brown &
Williamson U.S.A., Inc. (n/k/a R. J. Reynolds Tobacco Company)
and Reynolds American Inc. (incorporated by reference to
Exhibit 10.1 to Reynolds American Inc.s
Form 8-K
dated July 30, 2004).
10
.16
Governance Agreement, dated as of July 30, 2004, among
British American Tobacco p.l.c., Brown & Williamson
Tobacco Corporation (n/k/a Brown & Williamson
Holdings, Inc.) and Reynolds American Inc. (incorporated by
reference to Exhibit 10.2 to Reynolds American Inc.s
Form 8-K
dated July 30, 2004).
10
.17
Amendment No. 1 to the Governance Agreement, dated as of
November 18, 2004, among British American Tobacco p.l.c.,
Brown & Williamson Holdings, Inc. and Reynolds
American Inc. (incorporated by reference to Exhibit 10.1 to
Reynolds American Inc.s
Form 8-K
dated November 18, 2004).
10
.18
Non-Competition Agreement, dated as of July 30, 2004,
between Reynolds American Inc. and British American Tobacco
p.l.c. (incorporated by reference to Exhibit 10.3 to
Reynolds American Inc.s
Form 8-K
dated July 30, 2004).
Table of Contents
Exhibit
10
.19
Contract Manufacturing Agreement, dated as of July 30,
2004, by and between R. J. Reynolds Tobacco Company and BATUS
Japan, Inc. (incorporated by reference to Exhibit 10.4 to
Reynolds American Inc.s
Form 8-K
dated July 30, 2004).
10
.20
October 2005 Amendments to the Contract Manufacturing Agreement,
dated as of July 30, 2004, by and between R. J. Reynolds
Tobacco Company and BATUS Japan, Inc. (incorporated by reference
to Exhibit 10.2 to Reynolds American Inc.s Quarterly
Report on
Form 10-Q
for the quarter ended September 30, 2005, filed
November 3, 2005).
10
.21
April 30, 2007 Amendments to the Contract Manufacturing
Agreement, dated July 30, 2004, by and between R. J.
Reynolds Tobacco Company and BATUS Japan, Inc. (incorporated by
reference to Exhibit 10.9 to Reynolds American Inc.s
Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2007).
10
.22
June 12, 2007 Amendments to the Contract Manufacturing
Agreement, dated July 30, 2004, by and between R. J.
Reynolds Tobacco Company and BATUS Japan, Inc. (incorporated by
reference to Exhibit 10.10 to Reynolds American Inc.s
Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2007).
10
.23
Contract Manufacturing Agreement, dated as of July 30,
2004, by and between R. J. Reynolds Tobacco Company and B.A.T.
(U.K. & Export) Limited (incorporated by reference to
Exhibit 10.5 to Reynolds American Inc.s
Form 8-K
dated July 30, 2004).
10
.24
Amendment, effective January 2, 2007, to Contract
Manufacturing Agreement, dated as of July 30, 2004, by and
between R. J. Reynolds Tobacco Company and B.A.T. (U.K. &
Export) Limited (incorporated by reference to Exhibit 10.2
to Reynolds American Inc.s Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2007).
10
.25
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 R. J. Reynolds
Tobacco Holdings, Inc.s
Form 8-K
dated May 12, 1999).
10
.26
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 R. J.
Reynolds Tobacco Holdings, Inc.s
Form 8-K
dated June 14, 1999).
10
.27
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 R. J. Reynolds Tobacco Holdings, Inc.s Quarterly Report
on
Form 10-Q
for the quarter ended June 30, 2000, filed August 7,
2000).
10
.28
Amended and Restated Agreement, effective as of
December 31, 2007, among Pension Benefit Guaranty
Corporation, Reynolds American Inc., R.J. Reynolds Tobacco
Holdings, Inc. and R. J. Reynolds Tobacco Company.
10
.29
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 R. J. Reynolds Tobacco Holdings,
Inc.s
Form 8-K
dated August 25, 1997).
10
.30
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 R. J. Reynolds
Tobacco Holdings, Inc.s
Form 8-K
dated January 16, 1998).
10
.31
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 R. J. Reynolds Tobacco Holdings, Inc.s Quarterly Report
on
Form 10-Q
for the quarter ended March 30, 1998, filed May 15,
1998).
10
.32
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 R. J. Reynolds Tobacco
Holdings, Inc.s Quarterly Report on
Form 10-Q
for the quarter ended March 30, 1998, filed May 15,
1998).
Table of Contents
Exhibit
10
.33
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
R. J. Reynolds Tobacco Holdings, Inc.s Quarterly Report on
Form 10-Q
for the quarter ended March 30, 1998, filed May 15,
1998).
10
.34
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 R. J. Reynolds Tobacco
Holdings, Inc.s Quarterly Report on
Form 10-Q
for the quarter ended June 30, 1998, filed August 14,
1998).
10
.35
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 R. J. Reynolds Tobacco Holdings, Inc.s Quarterly Report
on
Form 10-Q
for the quarter ended June 30, 1998, filed August 14,
1998).
10
.36
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 R. J.
Reynolds Tobacco Holdings, Inc.s Quarterly Report on
Form 10-Q
for the quarter ended September 30, 1998, filed
November 12, 1998).
10
.37
Master Settlement Agreement, referred to as 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 R. J. Reynolds
Tobacco Holdings, Inc.s
Form 8-K
dated November 23, 1998).
10
.38
Amended and Restated Directors and Officers Indemnification
Agreement (incorporated by reference to Exhibit 10.1 to
Reynolds American Inc.s
Form 8-K
dated February 1, 2005).
10
.39
Reynolds American Inc. Outside Directors Compensation
Summary, effective January 1, 2008.
10
.40
Equity Incentive Award Plan for Directors of Reynolds American
Inc. (Amended and Restated Effective November 30, 2007).
10
.41
Form of Deferred Stock Unit Agreement between Reynolds American
Inc. and the Director named therein, pursuant to the EIAP
(incorporated by reference to Exhibit 10.1 to Reynolds
American Inc.s
Form 8-K
dated August 30, 2004).
10
.42
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
R. J. Reynolds Tobacco Holdings, Inc.s Quarterly Report on
Form 10-Q
for the quarter ended June 30, 1999, filed August 16,
1999).
10
.43
Deferred Compensation Plan for Directors of Reynolds American
Inc. (Amended and Restated Effective November 30, 2007).
10
.44
Amended and Restated (effective as of May 11,
2007) Reynolds American Inc. Long-Term Incentive Plan
(incorporated by reference to Exhibit 10.6 to Reynolds
American Inc.s Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2007).
10
.45
Form of Performance Unit Agreement (one-year vesting), dated
February 6, 2007, between Reynolds American Inc. and the
grantee named therein (incorporated by reference to
Exhibit 10.45 to Reynolds American Inc.s Annual
Report on
Form 10-K
for the fiscal year ended December 31, 2006 filed
February 27, 2007).
10
.46
Form of Performance Unit Agreement (three-year vesting), dated
March 2, 2005, between Reynolds American Inc. and the
grantee named therein (incorporated by reference to
Exhibit 10.1 to Reynolds American Inc.s
Form 8-K
dated March 2, 2005).
10
.47
Form of Performance Unit Agreement (three-year vesting), dated
March 6, 2006, between Reynolds American Inc. and the
grantee named therein (incorporated by reference to
Exhibit 10.3 to Reynolds American Inc.s Quarterly
Report on
Form 10-Q
for the quarter ended March 31, 2006, filed May 5,
2006).
10
.48
Form of Performance Unit Agreement (three-year vesting), dated
March 6, 2007, between Reynolds American Inc. and the
grantee named therein (incorporated by reference to
Exhibit 10.9 to Reynolds American Inc.s Quarterly
Report on
Form 10-Q
for the quarter ended March 31, 2007).
Table of Contents
Exhibit
10
.49
Performance Unit Agreement (three-year vesting), dated
March 6, 2007, between Reynolds American Inc. and Jeffrey
A. Eckmann (incorporated by reference to Exhibit 10.10 to
Reynolds American Inc.s Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2007).
10
.50
Performance Share Agreement, dated January 1, 2007, between
Reynolds American Inc. and Daniel M. Delen (incorporated by
reference to Exhibit 10.48 to Reynolds American Inc.s
Annual Report on
Form 10-K
for the fiscal year ended December 31, 2006, filed
February 27, 2007).
10
.51
Form of Performance Share Agreement, dated August 31, 2004,
between Reynolds American Inc. and the grantee named therein
(incorporated by reference to Exhibit 10.1 to Reynolds
American Inc.s
Form 8-K
dated August 31, 2004).
10
.52
Form of Performance Share Agreement, dated March 2, 2005,
between Reynolds American Inc. and the grantee named therein
(incorporated by reference to Exhibit 10.2 to Reynolds
American Inc.s
Form 8-K
dated March 2, 2005).
10
.53
Form of Restricted Stock Agreement, dated March 6, 2006,
between Reynolds American Inc. and the grantee named therein
(incorporated by reference to Exhibit 10.4 to Reynolds
American Inc.s Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2006, filed May 5,
2006).
10
.54
Form of Restricted Stock Agreement, dated March 6, 2007,
between Reynolds American Inc. and the grantee named therein
(incorporated by reference to Exhibit 10.11 to Reynolds
American Inc.s Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2007).
10
.55
Restricted Stock Agreement, dated March 6, 2007, between
Reynolds American Inc. and Jeffrey A. Eckmann (incorporated by
reference to Exhibit 10.12 to Reynolds American Inc.s
Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2007).
10
.56
Offer of Employment Letter, dated July 29, 2004, by
Reynolds American Inc. and Susan M. Ivey, accepted by
Ms. Ivey on July 30, 2004 (incorporated by reference
to Exhibit 10.22 to Reynolds American Inc.s Quarterly
Report on
Form 10-Q
for the quarter ended September 30, 2004, filed
November 5, 2004).
10
.57
Letter Agreement, dated December 19, 2007, regarding
Severance Benefits and Change of Control Protections and
amending July 29, 2004 offer of employment letter, between
Reynolds American Inc. and Susan M. Ivey.
10
.58
Offer of Employment Letter dated July 29, 2004, by Reynolds
American Inc. and Jeffrey A. Eckmann, accepted by
Mr. Eckmann on July 29, 2004 (incorporated by
reference to Exhibit 10.24 to Reynolds American Inc.s
Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2004, filed
November 5, 2004).
10
.59
Letter Agreement, dated February 2, 2005, between Reynolds
American Inc. and Jeffrey A. Eckmann, amending July 29,
2004 offer letter (incorporated by reference to
Exhibit 10.5 to Reynolds American Inc.s
Form 8-K
dated February 1, 2005).
10
.60
Letter Agreement, dated December 19, 2007, regarding
Severance Benefits and Change of Control Protections and
amending certain prior letter agreements, between Reynolds
American Inc. and Jeffrey A. Eckmann.
10
.61
Offer of Employment Letter, dated August 18, 2006, by
Reynolds American Inc. and E. Julia (Judy) Lambeth, accepted by
Ms. Lambeth on August 19, 2006 (incorporated by
reference to Exhibit 10.1 to Reynolds American Inc.s
Form 8-K
dated August 19, 2006).
10
.62
Offer of Employment Letter, dated December 4, 2006, between
R. J. Reynolds Tobacco Company and Daniel M. Delen (incorporated
by reference to Exhibit 10.1 to Reynolds American
Inc.s Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2007).
10
.63
Retention Bonus Letter, dated February 20, 2007, between
Reynolds American Inc. and McDara P. Folan, III
(incorporated by reference to Exhibit 10.58 to Reynolds
American Inc.s
Form 10-K
for the year ended December 31, 2006, filed
February 27, 2007).
10
.64
May 24, 1999, July 21, 1999 and June 16, 2000 Letter Agreements
between R.J. Reynolds Tobacco Company and Thomas R.
Adams.
10
.65
Retention Bonus Letter, dated March 22, 2007, between
Reynolds American Inc. and Thomas R. Adams.
Table of Contents
Exhibit
10
.66
Letter Agreement, dated December 5, 2007, between Reynolds
American Inc. and Dianne M. Neal (incorporated by reference to
Exhibit 10.1 to Reynolds American Inc.s
Form 8-K
dated November 30, 2007).
10
.67
Form of Amended Letter Agreement regarding Severance Benefits
and Change of Control Protections between Reynolds American Inc.
and the officer named therein.
10
.68
Reynolds American Inc. Executive Severance Plan, as amended and
restated effective January 1, 2008.
10
.69
Reynolds American Inc. Annual Incentive Award Plan, as amended
and restated as of January 1, 2008.
10
.70
Retention Trust Agreement dated May 13, 1998, by and
between RJR Nabisco, Inc. and Wachovia Bank, N.A. (incorporated
by reference to Exhibit 10.6 to RJR Nabisco Holdings,
Inc.s Quarterly Report on
Form 10-Q
for the quarter ended June 30, 1998, filed August 14,
1998).
10
.71
Amendment No. 1 to Retention Trust Agreement, dated
May 13, 1998, by and between RJR Nabisco, Inc. and Wachovia
Bank, N.A., dated October 1, 2006 (incorporated by
reference to Exhibit 10.56 to Reynolds American Inc.s
S-4
filed
October 3, 2006).
10
.72
Amendment No. 2 to Retention Trust Agreement, dated
May 13, 1998, as amended, by and between R.J. Reynolds
Tobacco Holdings, Inc., as successor to RJR Nabisco, Inc., and
Wachovia Bank, N.A. (incorporated by reference to
Exhibit 10.66 to Reynolds American Inc.s Annual
Report on
Form 10-K
for the year ended December 31, 2006, filed
February 27, 2007).
10
.73
Supplemental Pension Plan for Executives of Brown &
Williamson Tobacco Corporation (n/k/a Brown &
Williamson Holdings, Inc.) (as amended through July 29,
2004) (incorporated by reference to Exhibit 10.67 to
Reynolds American Inc.s Annual Report on
Form 10-K
for the fiscal year ended December 31, 2004, filed
March 9, 2005).
10
.74
Form of Brown & Williamson Tobacco Corporation (n/k/a
Brown & Williamson Holdings, Inc.)
Trust Agreement for the executive officer named therein
(incorporated by reference to Exhibit 10.68 to Reynolds
American Inc.s Annual Report on
Form 10-K
for the fiscal year ended December 31, 2004, filed
March 9, 2005).
10
.75
Brown & Williamson Tobacco Corporation (n/k/a
Brown & Williamson Holdings, Inc.) Health Care Plan
for Salaried Employees (as amended through July 29, 2004 by
Amendment Nos. 1 and 2) (incorporated by reference to
Exhibit 10.69 to Reynolds American Inc.s Annual
Report on
Form 10-K
for the fiscal year ended December 31, 2004, filed
March 9, 2005).
10
.76
Amendment No. 3, entered into as of December 31, 2004,
to the Brown & Williamson Tobacco Corporation (n/k/a
Brown & Williamson Holdings, Inc.) Health Care Plan
for Salaried Employees (incorporated by reference to
Exhibit 10.70 to Reynolds American Inc.s Annual
Report on
Form 10-K
for the fiscal year ended December 31, 2004, filed
March 9, 2005).
10
.77
Amendment No. 4, entered into as of April 20, 2005, to
the Brown & Williamson Tobacco Corporation Health Care
Plan for Salaried Employees (incorporated by reference to
Exhibit 10.71 to Reynolds American Inc.s Annual
Report on
Form 10-K
for the year ended December 31, 2006, filed
February 27, 2007).
10
.78
Amendment No. 5, entered into as of December 29, 2006,
to the Brown & Williamson Tobacco Corporation Health
Care Plan for Salaried Employees (incorporated by reference to
Exhibit 10.72 to Reynolds American Inc.s Annual
Report on
Form 10-K
for the year ended December 31, 2006, filed
February 27, 2007).
10
.79
Supply Agreement, dated May 2, 2005, by and between R. J.
Reynolds Tobacco Company and Alcan Packaging Food and Tobacco
Inc. (incorporated by reference to Exhibit 10.1 to Reynolds
American Inc.s
Form 8-K
dated May 2, 2005).
10
.80
First Amendment to Supply Agreement, dated September 16,
2005, by and between R. J. Reynolds Tobacco Company and Alcan
Packaging Food and Tobacco Inc. (incorporated by reference to
Exhibit 10.1 to Reynolds American Inc.s Quarterly
Report on
Form 10-Q
for the quarter ended September 30, 2005, filed
November 3, 2005).
10
.81
Supply Agreement, dated May 2, 2005, by and between R. J.
Reynolds Tobacco Company and Alcoa Flexible Packaging, LLC
(incorporated by reference to Exhibit 10.2 to Reynolds
American Inc.s
Form 8-K
dated May 2, 2005).
Table of Contents
Exhibit
10
.82
Supply Agreement, dated May 2, 2005, by and between R. J.
Reynolds Tobacco Company and Mundet Inc. (incorporated by
reference to Exhibit 10.3 to Reynolds American Inc.s
Form 8-K
dated May 2, 2005).
10
.83
Valuation Payment Settlement Agreement, dated February 20,
2008, by and between R. J. Reynolds Tobacco C.V. and
Gallaher Limited (incorporated by reference to Exhibit 10.1
to Reynolds American Inc.s Form 8-K dated
February 20, 2008).
10
.84
Guarantee of JT International Holding B.V., dated
February 20, 2008, in favor of R. J. Reynolds
Tobacco C.V. (incorporated by reference to Exhibit 10.2 to
Reynolds American Inc.s
Form 8-K
dated February 20, 2008).
12
.1
Computation of Ratio of Earnings to Fixed Charges/Deficiency in
the Coverage of Fixed Charges by Earnings Before Fixed Charges
for each of the five years within the period ended
December 31, 2007.
21
.1
Subsidiaries of the Registrant.
23
.1
Consent of Independent Registered Public Accounting Firm.
23
.2
Consent of Independent Auditors.
31
.1
Certification of Chief Executive Officer relating to RAIs
Annual Report on
Form 10-K
for the fiscal year ended December 31, 2007.
31
.2
Certification of Chief Financial Officer relating to RAIs
Annual Report on
Form 10-K
for the fiscal year ended December 31, 2007.
32
.1
Certification of Chief Executive Officer and Chief Financial
Officer relating to RAIs Annual Report on
Form 10-K
for the fiscal year ended December 31, 2007, pursuant to
Section 18 U.S.C. §1350, adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (furnished
herewith).
99
.1
R. J. Reynolds Tobacco Company and Subsidiaries Audited
Financial Statements as of December 31, 2007.
Table of Contents
156
(Registrant)
By:
President and Chief Executive Officer
Chairman of the Board, President and Chief Executive Officer
(principal executive officer)
February 27, 2008
Executive Vice President and
Chief Financial Officer
(principal financial officer)
February 27, 2008
Senior Vice President and
Chief Accounting Officer
(principal accounting officer)
February 27, 2008
Director
February 27, 2008
Director
February 27, 2008
Director
February 27, 2008
Director
February 27, 2008
Director
February 27, 2008
Director
February 27, 2008
Director
February 27, 2008
Director
February 27, 2008
Director
February 27, 2008
155
Table of Contents
Director
February 27, 2008
Director
February 27, 2008
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To RAI:
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Corporate Secretary
Reynolds American Inc. 401 North Main Street Winston-Salem, NC 27101 Telephone: (336) 741-5162 Facsimile: (336) 741-2998 |
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To PBGC:
|
Department of Insurance Supervision and Compliance
Pension Benefit Guaranty Corporation 1200 K Street, N.W. Washington, D.C. 20005-4026 Telephone: (202) 326-4070 Facsimile: (202) 842-2643 |
|
|
||
|
Office of the Chief Counsel
Pension Benefit Guaranty Corporation 1200 K Street, N.W. Washington, D.C. 20005-4026 Telephone: (202) 326-4020 Facsimile: (202) 326-4112 |
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REYNOLDS AMERICAN INC. | PENSION BENEFIT GUARANTY CORPORATION | |||||||||||
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By: | /s/ McDara P. Folan, III | By: | /s/ Robert D. Bacon | |||||||||
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McDara P. Folan, III
Senior Vice President, Deputy General Counsel, and Secretary |
Title: | Acting Director, DISC | |||||||||
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Date: | January 15, 2008 | Date: | January 15, 2008 | |||||||||
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R.J. REYNOLDS TOBACCO
HOLDINGS, INC. |
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By:
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/s/ McDara P. Folan, III | |||||||||||
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McDara P. Folan, III
Senior Vice President, Deputy General Counsel, and Secretary |
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Date:
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January 15, 2008 | |||||||||||
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R. J. REYNOLDS TOBACCO COMPANY | ||||||||||||
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By:
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/s/ Daniel A. Fawley | |||||||||||
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Daniel A. Fawley
Treasurer |
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Date:
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January 15, 2008 | |||||||||||
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6
1. | Fees/Expense Reimbursement |
| Fees: | | Board Retainer fee of $60,000 per year. | |
| | Lead Director Retainer fee of $20,000 per year. | ||
| | Chairperson Retainer fees of $20,000 per year for the audit committee chair, $10,000 per year for the Compensation Committee chair, and $10,000 per year for the Corporate Governance, Nominating and Leadership Development Committee chair. | ||
| | Committee meeting attendance fees per meeting of $1,500. | ||
| | Board meeting attendance fees of $1,500 per meeting. |
| All fees payable quarterly in arrears, but may be deferred in 25% increments in cash and/or in deferred stock units until termination of active directorship or until a selected year in the future. | ||
| To be tax effective, deferral elections must be made in the year prior to the year fees would otherwise be payable, or otherwise in accordance with IRS Code Section 409A. | ||
| Expenses: Directors are reimbursed for actual expenses incurred in connection with attendance at Board meetings, including transportation and lodging expenses. |
2. | Deferred Stock Units |
| Upon election to the Board, an Outside Director receives an initial grant of 3,500 deferred stock units or, at the Directors election, 3,500 shares of RAI common stock. | ||
| On the date of each Annual Meeting, an Outside Director receives an annual grant of 2,000 deferred stock units or, at the Directors election, 2,000 shares of RAI common stock. | ||
| Quarterly grant of deferred stock units is made on the last day of each calendar quarter to each Outside Director. The number of deferred stock units is equal to $10,000 divided by the average of the closing price of a share of RAI common stock (as reported on the NYSE) for each business day during the last month of such calendar quarter. | ||
| Initial and annual deferred stock units are paid in cash or RAI common stock, and quarterly deferred units paid in cash only, following termination of active directorship or until a selected year in the future, whichever is later, in either a lump sum or in up to ten annual installments, per Directors election. | ||
| To be tax effective, deferred elections must be made in the year prior to the year of a grant, or otherwise in accordance with IRS Code Section 409A. |
3. | Life Insurance |
| Option to receive up to $100,000 non-contributory coverage while an active Director. Imputed income will be calculated based on your end-of-year age and coverage amount. |
4. | Excess Liability Insurance |
| Eligible to receive $10,000,000 in Excess Liability coverage. No cash payment required; the fair market value will be imputed income to you each year. Policy requires that you have certain underlying liability limits under your homeowners or other personal liability policy. Obligation to pay for claims up to such liability limits not covered by this policy. |
5. | Business Travel Accident Insurance |
| $500,000 non-contributory coverage while an active Director. |
6. | Matching Grants |
| 1:1 for Educational/Arts/Cultural/Charitable Organizations combined $10,000 maximum. |
7. | Director Education Programs |
| Directors may attend one outside director education program per year at RAIs expense. |
| Directors are reimbursed for actual expenses incurred in connection with attendance at director education programs, including transportation and lodging expenses. |
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(a) | Closing Price means the final closing price of a share of the Companys Common Stock (as reported on the New York Stock Exchange consolidated tape). | ||
(b) | Code means the Internal Revenue Code of 1986, as amended. | ||
(c) | Common Stock means the Common Stock, par value $0.0001 per share, of the Company. | ||
(d) | Company means Reynolds American Inc., a North Carolina corporation. | ||
(e) | Compensation means all cash remuneration paid to a Director for service as a Director other than reimbursement for expenses and shall include, but not be limited to, Board of Directors retainer fees, Board of Directors committee chairmanship and/or committee attendance fees, and any fees for attendance at Board of Directors meetings. | ||
(f) | Director means any individual serving on the Board of Directors of the Company who is not an employee of the Company or any of its subsidiaries. | ||
(g) | Participant means a Director who has filed an election to participate under Section 3.1 with regard to any Plan Year. | ||
(h) | Plan Administrator means the Corporate Governance, Nominating and Leadership Development Committee of the Board of Directors of the Company. |
(i) | Plan Year means the calendar year except the first Plan Year is the period July 30, 2004 through December 31, 2004. |
(a) | CASH CREDITS. If the deferral is wholly or partly by means of a cash credit, the Participants cash credit account shall be credited, as of the last day of the calendar quarter, with the dollar amount of Compensation deferred during the quarter. As of the last day of each calendar quarter, the Participants cash credit account shall also be credited with interest equivalent in an amount determined by applying to the balance in the account as of the first day of the quarter (less any distributions during the quarter) an interest rate for such quarter which, when annualized, shall be the prime rate of JPMorgan Chase & Co. as of the first |
2
business day of the quarter. Interest shall be calculated on the actual number of days in the quarter based upon a 360-day year. | |||
(b) | STOCK CREDITS. If the deferral is wholly or partly by means of a stock credit, the Participants stock credit account shall be credited, as of the last day of the calendar quarter, with a Common Stock equivalent equal to the number of shares of Common Stock (including fractions of a share) that could have been purchased at the average of the Closing Price on each business day during the last month of the calendar quarter with the amount of the Compensation deferred during the quarter. As of the date any dividend is paid to shareholders of Common Stock, the Participants stock credit account shall also be credited with an additional Common Stock equivalent equal to the number of shares of Common Stock (including fractions of a share) that could have been purchased at the Closing Price on such date with the dividend paid on the number of shares of Common Stock to which the Participants stock credit account is equivalent on the record date for such dividend. In case of dividends paid in property, the dividend shall be deemed to be the fair market value of the property at the time of distribution of the dividend, as determined by the Plan Administrator. | ||
(c) | A Participant may elect in writing that all or any designated portion of his stock credit account or his cash credit account be changed to, and such Participant shall instead be credited with, the other type of account as of the first day of the month following the month in which the election is received by the Plan Administrator. For this purpose, the value of a participants stock credit account will be determined using the average of the Closing Price on each business day during the month preceding the effective date of the election. Notwithstanding the foregoing, any election to transfer between accounts may be made no more frequently than once in any six (6) month period and no such election may be made unless the transfer would be an exempt transaction for purposes of Section 16(b) of the Securities Exchange Act of 1934. |
(a) | For all Compensation deferred under this Plan prior to December 31, 2004, the distribution of a Participants stock credit account or cash credit account will be made as follows: |
3
(b) | For all Compensation deferred under this Plan after December 31, 2004, the distribution of a Participants stock credit account or cash credit account will be made as follows: |
(c) | Distribution of a Participants cash credit and stock credit accounts shall be made in cash. For this purpose, the value of a Participants stock credit account shall be determined by multiplying the number of shares of Common Stock attributable to the payment by the average of the Closing Price on each business day in the month of December immediately prior to the Plan Year in which the payment is to be paid. |
4
5
6
Re: Special Severance Benefits and Change of Control Protections |
1. | Special Severance Benefits . |
(a) | If, during the course of your employment with the Company or any of its affiliates, you incur a Separation from Service other than (1) by reason of disability or death, (2) by the Company or any of its affiliates for Cause or (3) by you without General Good Reason, you will receive: |
(i) | An amount equal to three (3) years pay (defined as base pay and target bonus at the time of your Termination Date (as defined below)), payable as follows: |
(A) | If your Termination Date occurs prior to January 1, 2010, such amount shall be paid in cash to you in equal monthly installments (or more frequent installments as determined by the Company) over the Severance Period (as defined below) commencing on the last day of the month after the sixtieth (60th) calendar day following the Termination Date (the Payment Date); or | ||
(B) | If your Termination Date occurs on or after January 1, 2010, such amount shall be paid in cash to you in a single lump sum on your Payment Date. |
For purposes of this agreement, (x) Termination Date means the date on which you incur a Separation from Service in accordance with this Section 1(a)(i) and (y) Severance Period means the three (3) year period following your Termination Date. A Separation from Service shall be deemed to have occurred on the date on which the level of bona fide |
services reasonably anticipated to be performed by you is forty-five percent (45%) or less of the average level of bona fide services performed by you during the immediately preceding thirty-six (36) month period (or your full period of service if you have been providing services for less than thirty-six (36) months). |
(ii) | An amount equal to the matching contributions and/or retirement enhancement contributions, if any, that would be contributed by the Company on your behalf under the Companys qualified defined contribution plan (the CIP) and nonqualified defined contribution benefit plans assuming that (A) you had continued to be employed as an active participant in the CIP throughout the Severance Period, (B) your pay was equal to the amount determined in Section 1(a)(i) above and (C) you contributed in an amount that would have provided for the maximum matching contributions during the Severance Period (without regard to any amendment to the CIP made subsequent to your Termination Date which reduces the matching contributions and/or retirement enhancement contributions thereunder). The benefit described in this Section 1(a)(ii) shall be paid in cash to you in a single lump sum on your Payment Date. | ||
(iii) | If you are eligible to participate in the Companys defined benefit pension plan as of your Termination Date, an additional pension benefit determined as if your employment with the Company or an affiliated company had continued throughout the Severance Period, and calculated as if your base pay and target bonus for such additional period remained at the level in effect on your Termination Date, which benefit shall be provided under and paid pursuant to the terms of the Companys qualified retirement plans to the extent permitted thereunder or under a nonqualified plan established and maintained by the Company or an affiliated company. | ||
(iv) | Continuation of the coverage of you (and where applicable, your eligible dependents) under the Companys medical, life, dental and vision insurance benefit plans until the end of the month in which your Severance Period ends, at the same cost structure as active employees; provided, however, that following your Termination Date you will be covered by the fully insured medical, dental and vision plans maintained by the Company. Your required payments, if any, towards the cost for such continuation coverage shall be made on an after-tax basis. | ||
(v) | If you are eligible for retiree health and life insurance coverage on your Termination Date, additional age and service credit towards eligibility for retiree health and life insurance coverage determined as if your employment with the Company or an affiliated company had continued throughout the Severance Period. | ||
(vi) | If you participate in an executive supplemental payment plan on your Termination Date, you will continue to receive the annual executive |
2
supplemental payment that you were entitled to receive on your Termination Date until the end of your Severance Period. Such annual payment shall be made (A) in January of each year of the Severance Period if your Termination Date occurs prior to January 1, 2010, or (B) in a single lump sum on your Payment Date if your Termination Date occurs on or after January 1, 2010. | |||
(vii) | If you are eligible to participate in the Companys MedSave Plan as of your Termination Date, an amount equal to the contributions that would have been credited as Company contributions to your notional account under the MedSave Plan assuming that (A) you had continued to be employed as an active participant in the MedSave Plan throughout the Severance Period and (B) the Company had credited your notional account thereunder with the maximum amount of matching contributions each year during the Severance Period, shall be paid in cash to you in a single lump sum on your Payment Date. | ||
(viii) | If you actively participate in any of the Companys voluntary, employee pay-all plans or programs on your Termination Date, you may continue to participate in such plan or program, pursuant to the terms and conditions set forth therein, until the end of your Severance Period. | ||
(ix) | These special severance benefits replace any compensation or benefits under the Reynolds American Salary and Benefits Continuation Program (SBC). It is intended that you will not receive any less pay or benefits than provided under the SBC; provided, however, that any payment or benefit provided under this Section 1(a) is conditioned upon your execution of the release described in Section 5(a) and the expiration of any applicable revocation period occurring on or before your Payment Date. In the event that you do not execute the release described in Section 5(a), you will not be entitled to any benefits under this agreement and will be entitled only to those benefits provided under the SBC. | ||
(x) | If you should die during your Severance Period, any cash amounts under this Section 1(a) that remain unpaid as of the date of your death shall be paid in cash to your estate in a single lump sum within ninety (90) days following the date of your death, provided that your estate shall not have the right to designate the payment date. |
(b) | For purposes of this agreement, Cause means the occurrence of any one or more of the following : (i) your criminal conduct; (ii) your deliberate and continual refusal to perform employment duties on substantially a full time basis; (iii) your deliberate and continual refusal to act in accordance with any specific lawful instructions of an authorized officer or employee more senior than you or a majority of the Board of Directors of the Company; or (iv) your deliberate misconduct which could be materially damaging to the Company or any of its business operations without a reasonable good faith belief by you that such |
3
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 (or the Chief Executive Officer of the Company, in the case of the termination of employment of 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 you in anticipation of an involuntary termination of employment for Cause shall be deemed to be a termination of employment for Cause. |
(c) | Notwithstanding any provision to the contrary contained herein, in the event that you are deemed to be a specified employee on your Termination Date, determined pursuant to procedures adopted by the Company in compliance with Section 409A of the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder ((Section 409A) and (the Code), respectively), and if any portion of the payments or benefits to be received by you upon separation from service would constitute a deferral of compensation subject to Section 409A, then to the extent necessary to comply with Section 409A, amounts that would otherwise be payable pursuant to this agreement during the six-month period immediately following your Termination Date and benefits that would otherwise be provided pursuant to this agreement during the six-month period immediately following your Termination Date will instead be paid or made available on the earlier of (i) within ten (10) days following the first business day of the seventh month after your Termination Date, provided that you shall not have the right to designate the payment date; or (ii) your death. | ||
(d) | For purposes of this agreement, General Good Reason means the occurrence of one (1) or more of the following events: |
(i) | the total amount of your base salary and targeted awards under the Companys Long-Term Incentive Plan (the LTIP) and the Companys Annual Incentive Award Plan (the AIAP), or successor plans, is at any time reduced by more than twenty percent (20%) without your consent; provided , however , that nothing herein will be construed to guarantee your target award if performance is below target; | ||
(ii) | your responsibilities are substantially reduced in importance without your consent; or | ||
(iii) | you are at any time required as a condition of continued employment to become based at any office or location more than the minimum number of miles required by the Internal Revenue Service for you to claim a moving expense deduction, from your then current place of employment without your consent, except for travel reasonably required in the performance of your responsibilities. | ||
Unless you provide written notification of your non-consent to any of the events described in (i), (ii) or (iii) above within ninety (90) days after the |
4
occurrence of any such event, you will be deemed to have consented to the occurrence of such event or events and no General Good Reason will exist. If you provide written notice of your non-consent to any of the events described in (i), (ii) or (iii) above within ninety (90) days after the occurrence of any such events, your employment by the Company or any of its affiliates will be deemed to have been terminated for General Good Reason ninety (90) days after receipt of such written notice by the Company or any of its affiliates. |
(e) | Each payment and each provision of benefits pursuant to this Section 1 shall be considered a separate payment and not one of a series of payments for purposes of Section 409A. |
2. | Change of Control . In the event of a Change of Control of the Company (as such Change of Control is defined in the LTIP), or any successor plan, the following will occur: |
(a) | The Company will hold you harmless from any golden parachute tax imposed by any federal, state or local taxing authority as a result of any payments made by the Company or any of its affiliates. In the event that it is determined that any payment or distribution by the Company or any of its affiliates to or for you (a Payment) would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the Excise Tax), then you will be entitled to receive from the Company or any of its affiliates an additional payment (an Excise Tax Adjustment Payment) in an amount such that after payment by you of all applicable federal, state and local taxes (computed at the maximum marginal rates and including any interest or penalties imposed with respect to such taxes), including any Excise Tax, imposed upon the Excise Tax Adjustment Payment, you retain an amount of the Excise Tax Adjustment Payment equal to the Excise Tax imposed upon the Payments. You agree to cooperate fully with the Company and its affiliates in any protester appeal by the Company or any of its affiliates in the event of the imposition of any golden parachute tax. Such Excise Tax Adjustment Payment shall be made no later than December 31 of the year following the year in which you incur the Excise Tax. Any expenses, including interest and penalties assessed on the Excise Tax described in this Section 2(a), incurred by you shall be reimbursed promptly after you submit evidence of the incurrence of such expenses, which reimbursement in no event will be later than December 31 of the year following the year in which you incur the expense, provided that in no event will the amount of expenses eligible for reimbursement in one year affect the amount of expenses to be reimbursed, or in-kind benefits to be provided, in any other taxable year. Each provision of reimbursements pursuant to this Section 2(a) shall be considered a separate payment and not one of a series of payments for purposes of Section 409A. | ||
(b) | If your employment is terminated without Cause following such Change of Control, the Company or any of its affiliates will pay to you as incurred all legal |
5
and accounting fees and expenses incurred by you as a result of such termination (including all such fees and expenses, if any, in seeking to obtain or enforce any right or benefit provided by any compensation-related plan, agreement or arrangement of the Company or any of its affiliates), unless your claim is found by an arbitral tribunal of competent jurisdiction to have been frivolous. Any such payments shall be made no later than December 31 of the year following the year in which you incur the expenses, provided that in no event will the amount of expenses eligible for reimbursement in one year affect the amount of expenses to be reimbursed, or in-kind benefits to be provided, in any other taxable year. Each provision of reimbursements pursuant to this Section 2(b) shall be considered a separate payment and not one of a series of payments for purposes of Section 409A. | |||
(c) | During the 24-month period following a Change of Control, you will be entitled to terminate your employment for Change of Control Good Reason and receive the severance benefits set forth in Section 1 of this agreement as if you had incurred a Separation from Service other than for Cause. | ||
(d) | For purposes of this agreement, Change of Control Good Reason means, without your express written consent, any of the following events occurring after a Change of Control: |
(i) | a material reduction in your duties, a material diminution in your position or a material adverse change in your reporting relationship from those in effect immediately prior to the Change of Control; | ||
(ii) | a reduction in your pay grade or bonus opportunity as in effect immediately prior to the Change of Control or as the same may thereafter be increased from time to time during the term of this agreement; | ||
(iii) | the failure to continue in effect any compensation plan in which you participate at the time of the Change of Control, including but not limited to the LTIP and AIAP, or any substitute plans adopted prior to the Change of Control, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan providing you with substantially similar benefits) has been made with respect to such plan in connection with the Change of Control, or the failure to continue your participation therein on substantially the same basis, both in terms of the amount of benefits provided and the level of your participation relative to other participants, as existed at the time of the Change of Control; | ||
(iv) | the taking of any action which would directly or indirectly materially reduce any of the benefits to be provided to you under the retirement or savings plans of the Company or any of its affiliates (unless such reduction is required by law) or deprive you of any material fringe benefit enjoyed by you at the time of the Change of Control, or the failure to provide you with the number of paid vacation days to which you are |
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entitled on the basis of your employers practice with respect to you as in effect at the time of the Change of Control; | |||
(v) | any material breach by the Company or its affiliates of any provision of this agreement or any other of your contractual arrangements with the Company or its affiliates; or | ||
(vi) | requiring you to be become based at any office or location more than the minimum number of miles required by the Code for you to claim a moving expense deduction, from the office or location at which you were based immediately prior to such Change of Control, except for travel reasonably required in the performance of your responsibilities. |
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3. | Amendment to 2004 Offer Letter . |
(a) | The third paragraph of the Section of your Offer Letter entitled Additional individualized benefits is hereby replaced by the following paragraphs: | ||
Upon your Separation from Service, you will be eligible for reimbursement of tax preparation/financial planning costs, up to a maximum of $12,000 a year, until your death. Income will be imputed on this amount, but the company will gross-up the taxes. Any such expenses and tax gross-up payments incurred by you shall be reimbursed promptly after you submit evidence of the incurrence of such expenses, which reimbursement in no event will be later than December 31 of the year following the year in which you incur the expense or pay the tax, as the case may be, provided that in no event will the amount of expenses eligible for reimbursement in one year affect the amount of expenses to be reimbursed, or in-kind benefits to be provided, in any other taxable year. Each provision of reimbursements hereunder shall be considered a separate payment and not one of a series of payments for purposes of Section 409A. | |||
Notwithstanding any provision to the contrary contained herein, in the event that you are deemed to be a specified employee on your Termination Date, determined pursuant to procedures adopted by the Company in compliance with Section 409A, and if any portion of the payments or benefits to be received by you upon separation from service would constitute a deferral of compensation subject to Section 409A, then to the extent necessary to comply with Section 409A, amounts that would otherwise be payable pursuant to this offer letter during the six-month period immediately following your Termination Date and benefits that would otherwise be provided pursuant to this offer letter during the six-month period immediately following your Termination Date will instead be paid or made available on the earlier of (i) within ten (10) days following the first business day of the seventh month after your Termination Date, provided that you shall not have the right to designate the payment date; or (ii) your death. | |||
To the extent applicable, it is intended that this offer letter comply with the provisions of Section 409A. This offer letter shall be administered in a manner consistent with this intent. References to Section 409A shall include any proposed, temporary or final regulation, or any other guidance, promulgated with respect to such section by the U.S. Department of Treasury or the Internal Revenue Service. | |||
(b) | Except as amended in Section 3(a) above, your Offer Letter shall remain unchanged and in full force and effect. |
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4. | Retiree Health Coverage . If you remain actively employed by the Company or any of its affiliates until you reach age fifty (50), upon your termination of employment with the Company and all of its affiliates, you shall be entitled to vested retiree health coverage under the Brown & Williamson Tobacco Corporation Health Care Plan for Salaried Employees (the B&W Plan) in lieu of the retiree health benefits generally provided by the Company. By your signature below, you acknowledge and agree that your retiree health coverage is subject to the terms of the B&W Plan. |
5. | Miscellaneous . |
(a) | In further consideration for these special severance and change of control benefits, and should an involuntary termination of your employment ever occur, the Company will expect your cooperation in transitioning your responsibilities, and, prior to the 60 th day following your Termination Date, you will execute a letter containing a release of claims and a reaffirmation of your Non-Competition, Non-Disclosure of Confidential Information and Commitment to Provide Assistance Agreement each in a form reasonably satisfactory to the Company and any period for revocation will have expired. | ||
(b) | You acknowledge and agree that nothing contained in this agreement obligates the Company or any one of its affiliates (i) to employ you for any specific term or (ii) to grant you any short-term or long-term incentive awards under the plans and programs of the Company or any of its affiliates. | ||
(c) | To the extent applicable, it is intended that this agreement comply with the provisions of Section 409A. This agreement shall be administered in a manner consistent with this intent. References to Section 409A shall include any proposed, temporary or final regulation, or any other guidance, promulgated with respect to such section by the U.S. Department of Treasury or the Internal Revenue Service. | ||
(d) | This agreement may not be modified, amended or waived in any manner other than by an instrument in writing signed by you and the Company. | ||
(e) | This agreement, including the Non-Competition, Non-Disclosure of Confidential Information and Commitment to Provide Assistance Agreement attached hereto as Exhibit A , shall be governed, controlled and determined in accordance with the applicable provisions of federal law and, to the extent not preempted by federal law, the laws of the State of North Carolina, without regard to the conflicts of law rules of such state. | ||
(f) | The Company may withhold from any amounts payable under this agreement all federal, state, city or other taxes as the Company is required to withhold pursuant to any applicable law, regulation or ruling. | ||
(g) | This agreement (including the Non-Competition, Non-Disclosure of Confidential Information and Commitment to Provide Assistance Agreement attached hereto as Exhibit A ) and the Offer Letter attached hereto as Exhibit B , embody the |
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complete agreement and understanding between you and the Company with respect to the subject matter hereof and effective as of its date supersedes and preempts any prior understandings, agreements or representations by or between the parties, written or oral (including, without limitation, the Prior Agreement), which may have related to the subject matter hereof in any way. |
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REYNOLDS AMERICAN INC.
|
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By: | /s/ Lisa J. Caldwell | |||
Its: | Senior Vice President Human Resources | |||
Accepted and agreed to as of this 20th day
of December, 2007 |
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/s/ Susan M. Ivey | ||||
Susan Ivey | ||||
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(a) | If, during the course of your employment with the Company or any of its affiliates, you incur a Separation from Service other than by the Company or any of its affiliates for Cause, you will receive: |
(i) | An amount equal to two (2) years pay (defined as base pay and target bonus at the time of your Termination Date (as defined below)), payable as follows: |
(A) | If your Termination Date occurs prior to January 1, 2010, such amount shall be paid in cash to you in equal monthly installments (or more frequent installments as determined by the Company) over the Severance Period (as defined below) commencing on the last day of the month after the sixtieth (60th) |
calendar day following the Termination Date (the Payment Date); or |
(B) | If your Termination Date occurs on or after January 1, 2010, such amount shall be paid in cash to you in a single lump sum on your Payment Date. |
For purposes of this agreement, (x) Termination Date means the date on which you incur a Separation from Service in accordance with this Section 1(a)(i) and (y) Severance Period means the three (3) year period following your Termination Date. A Separation from Service shall be deemed to have occurred on the date on which the level of bona fide services reasonably anticipated to be performed by you is forty-five percent (45%) or less of the average level of bona fide services performed by you during the immediately preceding thirty-six (36) month period (or your full period of service if you have been providing services for less than thirty-six (36) months). | |||
(ii) | An amount equal to the matching contributions and/or retirement enhancement contributions, if any, that would be contributed by the Company on your behalf under the Companys qualified defined contribution plan (the CIP) and nonqualified defined contribution benefit plans assuming that (A) you had continued to be employed as an active participant in the CIP throughout the Severance Period, (B) your pay was equal to the amount determined in Section 1(a)(i) above and (C) you contributed in an amount that would have provided for the maximum matching contributions during the Severance Period (without regard to any amendment to the CIP made subsequent to your Termination Date which reduces the matching contributions and/or retirement enhancement contributions thereunder). The benefit described in this Section 1(a)(ii) shall be paid in cash to you in a single lump sum on your Payment Date. | ||
(iii) | If you are eligible to participate in the Companys defined benefit pension plan as of your Termination Date, an additional pension benefit determined as if your employment with the Company or an affiliated company had continued throughout the Severance Period, and calculated as if your base pay and target bonus for such additional period remained at the level in effect on your Termination Date, which benefit shall be provided under and paid pursuant to the terms of the Companys qualified retirement plans, including the Reynolds American Retirement Plan, Reynolds American Supplemental Benefits Plan, Reynolds American Additional Benefits Plan, Retirement Plan for Salaried Employees of Brown & Williamson Tobacco Corporation, and Supplemental Pension Plan for Executive of Brown & Williamson Tobacco Corporation to the extent permitted thereunder or under a nonqualified plan established and maintained by the Company or an affiliated company. |
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(iv) | Continuation of the coverage of you (and where applicable, your eligible dependents) under the Companys medical, life, dental and vision insurance benefit plans until the end of the month in which your Severance Period ends, at the same cost structure as active employees; provided, however, that following your Termination Date you will be covered by the fully insured medical, dental and vision plans maintained by the Company. Your required payments, if any, towards the cost for such continuation coverage shall be made on an after-tax basis. | ||
(v) | If you are eligible for retiree health and life insurance coverage on your Termination Date, additional age and service credit towards eligibility for retiree health and life insurance coverage determined as if your employment with the Company or an affiliated company had continued throughout the Severance Period. | ||
(vi) | If you participate in an executive supplemental payment plan on your Termination Date, you will continue to receive the annual executive supplemental payment that you were entitled to receive on your Termination Date until the end of your Severance Period. Such annual payment shall be made (A) in January of each year of the Severance Period if your Termination Date occurs prior to January 1, 2010, or (B) in a single lump sum on your Payment Date if your Termination Date occurs on or after January 1, 2010. | ||
(vii) | If you are eligible to participate in the Companys MedSave Plan as of your Termination Date, an amount equal to the contributions that would have been credited as Company contributions to your notional account under the MedSave Plan assuming that (A) you had continued to be employed as an active participant in the MedSave Plan throughout the Severance Period and (B) the Company had credited your notional account thereunder with the maximum amount of matching contributions each year during the Severance Period, shall be paid in cash to you in a single lump sum on your Payment Date. | ||
(viii) | If you actively participate in any of the Companys voluntary, employee pay-all plans or programs on your Termination Date, you may continue to participate in such plan or program, pursuant to the terms and conditions set forth therein, until the end of your Severance Period. | ||
(ix) | These special severance benefits replace any compensation or benefits under the Reynolds American Salary and Benefits Continuation Program (SBC). It is intended that you will not receive any less pay or benefits than provided under the SBC; provided, however, that any payment or benefit provided under this Section 1(a) is conditioned upon your execution of the release described in Section 6(a) and the expiration of any applicable revocation period occurring on or before your Payment Date. In the event that you do not execute the release described in Section 6(a), |
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you will not be entitled to any benefits under this agreement and will be entitled only to those benefits provided under the SBC. |
(x) | If you should die during your Severance Period, any cash amounts under this Section 1(a) that remain unpaid as of the date of your death shall be paid in cash to your estate in a single lump sum within ninety (90) days following the date of your death, provided that your estate shall not have the right to designate the payment date. |
(b) | For purposes of this agreement, Cause means the occurrence of any one or more of the following : (i) your criminal conduct; (ii) your deliberate and continual refusal to perform employment duties on substantially a full time basis; (iii) your deliberate and continual refusal to act in accordance with any specific lawful instructions of an authorized officer or employee more senior than you or a majority of the Board of Directors of the Company; or (iv) your deliberate misconduct which could be materially damaging to the Company or any of its business operations without a reasonable good faith belief by you 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 (or the Chief Executive Officer of the Company, in the case of the termination of employment of 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 you in anticipation of an involuntary termination of employment for Cause shall be deemed to be a termination of employment for Cause. | ||
(c) | Notwithstanding any provision to the contrary contained herein, in the event that you are deemed to be a specified employee on your Termination Date, determined pursuant to procedures adopted by the Company in compliance with Section 409A of the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder ((Section 409A) and (the Code), respectively), and if any portion of the payments or benefits to be received by you upon separation from service would constitute a deferral of compensation subject to Section 409A, then to the extent necessary to comply with Section 409A, amounts that would otherwise be payable pursuant to this agreement during the six-month period immediately following your Termination Date and benefits that would otherwise be provided pursuant to this agreement during the six-month period immediately following your Termination Date will instead be paid or made available on the earlier of (i) within ten (10) days following the first business day of the seventh month after your Termination Date, provided that you shall not have the right to designate the payment date; or (ii) your death. | ||
(d) | For purposes of this agreement, General Good Reason means the occurrence of one (1) or more of the following events: |
(i) | the total amount of your base salary and targeted awards under the Companys Long-Term Incentive Plan (the LTIP) and the Companys |
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Annual Incentive Award Plan (the AIAP), or successor plans, is at any time reduced by more than twenty percent (20%) without your consent; provided , however , that nothing herein will be construed to guarantee your target award if performance is below target; |
(ii) | your responsibilities are substantially reduced in importance without your consent; or | ||
(iii) | you are at any time required as a condition of continued employment to become based at any office or location more than the minimum number of miles required by the Internal Revenue Service for you to claim a moving expense deduction, from your then current place of employment without your consent, except for travel reasonably required in the performance of your responsibilities. | ||
Unless you provide written notification of your non-consent to any of the events described in (i), (ii) or (iii) above within ninety (90) days after the occurrence of any such event, you will be deemed to have consented to the occurrence of such event or events and no General Good Reason will exist. If you provide written notice of your non-consent to any of the events described in (i), (ii) or (iii) above within ninety (90) days after the occurrence of any such events, your employment by the Company or any of its affiliates will be deemed to have been terminated for General Good Reason ninety (90) days after receipt of such written notice by the Company or any of its affiliates. |
(e) | Each payment and each provision of benefits pursuant to this Section 1 shall be considered a separate payment and not one of a series of payments for purposes of Section 409A. |
2. | Change of Control . In the event of a Change of Control of the Company (as such Change of Control is defined in the LTIP), or any successor plan, the following will occur: |
(a) | The Company will hold you harmless from any golden parachute tax imposed by any federal, state or local taxing authority as a result of any payments made by the Company or any of its affiliates. In the event that it is determined that any payment or distribution by the Company or any of its affiliates to or for you (a Payment) would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the Excise Tax), then you will be entitled to receive from the Company or any of its affiliates an additional payment (an Excise Tax Adjustment Payment) in an amount such that after payment by you of all applicable federal, state and local taxes (computed at the maximum marginal rates and including any interest or penalties imposed with respect to such taxes), including any Excise Tax, imposed upon the Excise Tax Adjustment Payment, |
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you retain an amount of the Excise Tax Adjustment Payment equal to the Excise Tax imposed upon the Payments. You agree to cooperate fully with the Company and its affiliates in any protester appeal by the Company or any of its affiliates in the event of the imposition of any golden parachute tax. Such Excise Tax Adjustment Payment shall be made no later than December 31 of the year following the year in which you incur the Excise Tax. Any expenses, including interest and penalties assessed on the Excise Tax described in this Section 2(a), incurred by you shall be reimbursed promptly after you submit evidence of the incurrence of such expenses, which reimbursement in no event will be later than December 31 of the year following the year in which you incur the expense, provided that in no event will the amount of expenses eligible for reimbursement in one year affect the amount of expenses to be reimbursed, or in-kind benefits to be provided, in any other taxable year. Each provision of reimbursements pursuant to this Section 2(a) shall be considered a separate payment and not one of a series of payments for purposes of Section 409A. |
(b) | If your employment is terminated without Cause following such Change of Control, the Company or any of its affiliates will pay to you as incurred all legal and accounting fees and expenses incurred by you as a result of such termination (including all such fees and expenses, if any, in seeking to obtain or enforce any right or benefit provided by any compensation-related plan, agreement or arrangement of the Company or any of its affiliates), unless your claim is found by an arbitral tribunal of competent jurisdiction to have been frivolous. Any such payments shall be made no later than December 31 of the year following the year in which you incur the expenses, provided that in no event will the amount of expenses eligible for reimbursement in one year affect the amount of expenses to be reimbursed, or in-kind benefits to be provided, in any other taxable year. Each provision of reimbursements pursuant to this Section 2(b) shall be considered a separate payment and not one of a series of payments for purposes of Section 409A. | ||
(c) | During the 24-month period following a Change of Control, you will be entitled to terminate your employment for Change of Control Good Reason and receive the severance benefits set forth in Section 1 of this agreement as if you had incurred a Separation from Service other than for Cause. | ||
(d) | For purposes of this agreement, Change of Control Good Reason means, without your express written consent, any of the following events occurring after a Change of Control: |
(i) | a material reduction in your duties, a material diminution in your position or a material adverse change in your reporting relationship from those in effect immediately prior to the Change of Control; | ||
(ii) | a reduction in your pay grade or bonus opportunity as in effect immediately prior to the Change of Control or as the same may thereafter be increased from time to time during the term of this agreement; |
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(iii) | the failure to continue in effect any compensation plan in which you participate at the time of the Change of Control, including but not limited to the LTIP and AIAP, or any substitute plans adopted prior to the Change of Control, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan providing you with substantially similar benefits) has been made with respect to such plan in connection with the Change of Control, or the failure to continue your participation therein on substantially the same basis, both in terms of the amount of benefits provided and the level of your participation relative to other participants, as existed at the time of the Change of Control; | ||
(iv) | the taking of any action which would directly or indirectly materially reduce any of the benefits to be provided to you under the retirement or savings plans of the Company or any of its affiliates (unless such reduction is required by law) or deprive you of any material fringe benefit enjoyed by you at the time of the Change of Control, or the failure to provide you with the number of paid vacation days to which you are entitled on the basis of your employers practice with respect to you as in effect at the time of the Change of Control; | ||
(v) | any material breach by the Company or its affiliates of any provision of this agreement or any other of your contractual arrangements with the Company or its affiliates; or | ||
(vi) | requiring you to be become based at any office or location more than the minimum number of miles required by the Code for you to claim a moving expense deduction, from the office or location at which you were based immediately prior to such Change of Control, except for travel reasonably required in the performance of your responsibilities. |
3. | Additional Benefits . In addition to the special severance benefits and certain change of control protections described in Sections 1 and 2 of this agreement, you will be eligible for the following additional benefits: |
(a) | Retention Bonus . If you remain actively employed by the Company or any of its affiliates until April 30, 2008, you shall receive a lump sum amount equal to $1,000,000 (the Retention Bonus), in accordance with the terms of the Trust. Subject to the terms of the Trust, including, but not limited to Appendix A thereto, the Retention Bonus shall be paid in cash to you as soon as practicable following April 30, 2008, but in no event later than March 15, 2009. By your signature below, you acknowledge and agree that the payment of your Retention Bonus is subject to the terms of the Trust. | ||
(b) | Vesting of LTIP Awards . If, during the course of your employment with the Company or any of its affiliates, you incur a Separation from Service other than by the Company or any of its affiliates for Cause, any LTIP award that you received with a performance period greater than one (1) year shall become |
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immediately and fully vested on your Termination Date, if not cancelled during the relevant performance period due to the Companys failure to satisfy any threshold performance requirement, as provided in your 2004 Offer Letter. |
(c) | Retiree Health Coverage . Upon your termination of employment with the Company and all of its affiliates, you shall be entitled to vested retiree health coverage under the Brown & Williamson Tobacco Corporation Health Care Plan for Salaried Employees (the B&W Plan) in lieu of the retiree health benefits generally provided by the Company. By your signature below, you acknowledge and agree that your retiree health coverage is subject to the terms of the B&W Plan. |
4. | Amendment to 2003 Letter Agreement . |
(a) | Section 3 of your 2003 Letter Agreement is hereby amended in its entirety to read as follows: |
3. | The Company will pay you an enhanced pension benefit equal to the difference between (i) the present value of the pension benefits you would have received under the B&W defined benefit pension plan and the B&W supplemental pension plan based on your total pensionable service at B&W and the Company and the terms of these plans in effect as of the closing, and (ii) the sum of (A) the present value of your pension benefits, determined as of the Termination Date, under the qualified and excess plans of B&W and the Company and (B) the B&W supplemental pension plan liability retained by B&W. Subject to Section 8 below, this enhanced pension benefit will be paid to you on your Payment Date in a lump sum payment. | ||
For clarification and restatement, the terms of your 2003 Letter Agreement and other exhibits attached to this agreement are incorporated as the terms and agreements between you and the company. Specifically, your salary at the time you retire from the company will be used in determining your final pension payment and your pension will be based on Brown & Williamsons average performance rating percentage for 2001, 2002, and 2003 as stated in paragraph 3 of your December 2, 2003 Letter Agreement as attached as Exhibit C. |
(b) | Your 2003 Letter Agreement is hereby amended by adding a new Section 8 to the end thereof, to read as follows: |
8. | Notwithstanding any provision to the contrary contained herein, in the event that you are deemed to be a specified employee on your Termination Date, determined pursuant to procedures adopted by the Company in compliance with Section 409A, and if any portion of the payments or benefits to be received by you upon separation from service would constitute a deferral of compensation subject to Section 409A, |
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then to the extent necessary to comply with Section 409A, amounts that would otherwise be payable pursuant to this offer letter during the six-month period immediately following your Termination Date and benefits that would otherwise be provided pursuant to this offer letter during the six-month period immediately following your Termination Date will instead be paid or made available on the earlier of (i) within ten (10) days following the first business day of the seventh month after your Termination Date, provided that you shall not have the right to designate the payment date; or (ii) your death. |
To the extent applicable, it is intended that this letter agreement comply with the provisions of Section 409A. This letter agreement shall be administered in a manner consistent with this intent. References to Section 409A shall include any proposed, temporary or final regulation, or any other guidance, promulgated with respect to such section by the U.S. Department of Treasury or the Internal Revenue Service. |
(c) | Except as amended in Sections 4(a) and 4(b) above, your 2003 Letter Agreement shall remain unchanged and in full force and effect. |
5. | Amendment to 2004 Offer Letter . |
(a) | The third paragraph of the Section of your 2004 Offer Letter entitled Additional individualized benefits is replaced by the following paragraphs: | ||
Beginning with the calendar year immediately following the end of your Severance Period, you will be eligible for reimbursement of tax preparation/financial planning costs, up to a maximum of $6,000 a year, until your death. Income will be imputed on this amount, but the company will gross-up the taxes. Subject to the following paragraph, any such expenses and tax gross-up payments incurred by you shall be reimbursed promptly after you submit evidence of the incurrence of such expenses, which reimbursement in no event will be later than December 31 of the year following the year in which you incur the expense or pay the tax, as the case may be, provided that in no event will the amount of expenses eligible for reimbursement in one year affect the amount of expenses to be reimbursed, or in-kind benefits to be provided, in any other taxable year. Each provision of reimbursements hereunder shall be considered a separate payment and not one of a series of payments for purposes of Section 409A. | |||
Notwithstanding any provision to the contrary contained herein, in the event that you are deemed to be a specified employee on your Termination Date, determined pursuant to procedures adopted by the Company in compliance with Section 409A, and if any portion of the payments or benefits to be received by you upon separation from service would constitute a deferral of compensation subject to Section 409A, then to the extent necessary to comply with Section 409A, amounts that would otherwise be payable pursuant to this offer letter during the six-month period immediately following your Termination Date and |
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benefits that would otherwise be provided pursuant to this offer letter during the six-month period immediately following your Termination Date will instead be paid or made available on the earlier of (i) within ten (10) days following the first business day of the seventh month after your Termination Date, provided that you shall not have the right to designate the payment date; or (ii) your death. |
To the extent applicable, it is intended that this offer letter comply with the provisions of Section 409A. This offer letter shall be administered in a manner consistent with this intent. References to Section 409A shall include any proposed, temporary or final regulation, or any other guidance, promulgated with respect to such section by the U.S. Department of Treasury or the Internal Revenue Service. | |||
(b) | Except as amended in Section 5(a) above, your 2004 Offer Letter shall remain unchanged and in full force and effect. |
6. | Miscellaneous . |
(a) | In further consideration for these special severance and change of control benefits, and should an involuntary termination of your employment ever occur, the Company will expect your cooperation in transitioning your responsibilities, and, prior to the 60th day following your Termination Date, you will execute a letter containing a release of claims and a reaffirmation of your Non-Competition, Non-Disclosure of Confidential Information and Commitment to Provide Assistance Agreement each in a form reasonably satisfactory to the Company and any period for revocation will have expired. | ||
(b) | You acknowledge and agree that nothing contained in this agreement obligates the Company or any one of its affiliates (i) to employ you for any specific term or (ii) to grant you any short-term or long-term incentive awards under the plans and programs of the Company or any of its affiliates. | ||
(c) | To the extent applicable, it is intended that this agreement comply with the provisions of Section 409A. This agreement shall be administered in a manner consistent with this intent. References to Section 409A shall include any proposed, temporary or final regulation, or any other guidance, promulgated with respect to such section by the U.S. Department of Treasury or the Internal Revenue Service. | ||
(d) | This agreement may not be modified, amended or waived in any manner other than by an instrument in writing signed by you and the Company. | ||
(e) | This agreement, including the Non-Competition, Non-Disclosure of Confidential Information and Commitment to Provide Assistance Agreement attached hereto as Exhibit A , shall be governed, controlled and determined in accordance with the applicable provisions of federal law and, to the extent not preempted by federal law, the laws of the State of North Carolina, without regard to the conflicts of law rules of such state. |
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(f) | The Company may withhold from any amounts payable under this agreement all federal, state, city or other taxes as the Company is required to withhold pursuant to any applicable law, regulation or ruling. | ||
(g) | This agreement (including the Non-Competition, Non-Disclosure of Confidential Information and Commitment to Provide Assistance Agreement attached hereto as Exhibit A ), the 2004 Offer Letter attached hereto as Exhibit B and the 2003 Letter Agreement attached hereto as Exhibit C embody the complete agreement and understanding between you and the Company with respect to the subject matter hereof and effective as of its date supersedes and preempts any prior understandings, agreements or representations by or between the parties, written or oral (including, without limitation, the Prior Agreement), which may have related to the subject matter hereof in any way. |
REYNOLDS AMERICAN INC.
|
||||
By: | /s/ Lisa J. Caldwell | |||
Its: Senior Vice President Human Resources | ||||
Accepted and agreed to as of this 28th day
of December , 2007 |
||||
/s/ Jeffrey A. Eckmann | ||||
Jeffrey A. Eckmann | ||||
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1. | Effective at the closing, you would become Executive Vice President Strategy, Planning & Integration for the new company. Your salary will have to be approved by the Compensation Committee of the new company. It will be comparable to other members of the senior team but in no event will the recommendation be less than $450,000. | ||
2. | You agree to be employed in this position for the later of two years after the closing or August 31, 2006, at which time you will retire and receive two years pay as severance, along with the target annual bonus for two years. | ||
3. | Your pension will be based on your total pensionable service at B&W and the new company. Your salary at the time you retire from the new company will be used in determining your final pension payout. Your qualified plan and excess plan pension payout will be no less than the pension you would have received under B&Ws plan for the entire length of your service with B&W and RJR. The bonus portion of your pension will be paid in accordance with B&Ws Supplemental Pension Plan. Specifically, your pension will be based on B&Ws average performance rating percentage for 2001, 2002 and 2003. | ||
4. | Any share plans you receive at the new company will vest at your retirement date. | ||
5. | During this two-year period, you will participate in all benefit and perquisite programs of the new company on a basis comparable to other members of the senior management team. | ||
6. | Upon retirement, you will participate in the benefit and perquisite programs currently available to you as a Senior Vice President of B&W. |
7. | In connection with moving to Winston-Salem, you can elect to either relocate under B&Ws relocation policy or be provided with a company-paid apartment during this two-year period. |
/s/ Jeff Eckmann
|
/s/ Susan M. Ivey | |
|
||
Jeff Eckmann
|
Susan Ivey
President & Chief Executive Officer Brown & Williamson Tobacco Corp. |
3
/s/ Henry C. Frick | Date: March 19, 2004 | ||||
Henry C. Frick | |||||
V.P. Human Resources |
| In the event of your death prior to your termination of employment, your surviving spouse will be entitled to payment of a 50% survivor annuity under the special retirement benefit. Such benefit will be calculated as if you had been involuntarily terminated for a reason other than cause on the day before your death, with a standard 50% joint and survivor annuity (as described in the Companys qualified retirement plan) in effect. Alternatively, your surviving spouse may elect another payment form or timing of payment that is actuarially equivalent to the 50% joint and survivor annuity. | ||
If your death is prior to termination of your employment but after you reach age 50, your surviving spouse and other eligible dependents will be eligible to participate in the Companys retiree health programs as they exist as of the date of your death, providing such eligible dependents are covered under the corresponding active employee health programs at the time of your death. | |||
| In the event of your death after you have commenced receiving the special retirement benefit, any survivor benefit will be in accordance with your election among all of the forms of payment provided in the Companys qualified plan. |
Cc:
|
Ms. K.A. Cissna
Ms. D.S. Harris |
Cc:
|
Ms. K.A. Cissna
Ms. D.S. Harris |
| Your gross retirement benefit will be calculated according to the following formula: |
|
Gross Annual Retirement Benefit
= Final Average
Compensation X total years of credited service X 0.0175. |
| For this purpose, Final Average Compensation will be defined as the highest consecutive three years of pay (base salary plus actual bonus) out of the last five years. If your employment ends before the completion of three years of service, and you are not eligible for severance, Final Average Compensation will be your actual average annual pay for your period of employment. | ||
| At age 55, you will be credited with additional service credit so that the total of your actual and additional service credit will equal 20 years. | ||
| You will vest in this special retirement benefit at the earlier of your age 55 or the effective date of your involuntary termination for any reason except cause; provided however, that if you are involuntarily terminated for any reason except cause prior to age 55, service for calculation of this special retirement benefit will be 20 years less two times the number of full and partial years between the end of any period of salary continuation (see description of severance eligibility below) and age 55. | ||
| This special retirement benefit will be offset by any amounts paid from the Companys qualified retirement plan. All benefits earned under this special retirement benefit, except those paid from the Companys qualified retirement plan, will be unfunded and will be a general obligation of the Company. |
1. | Special Severance Benefits . |
(a) | If, during the course of your employment with the Company or any of its affiliates, you incur a Separation from Service other than (1) by reason of disability or death, (2) by the Company or any of its affiliates for Cause or (3) by you without General Good Reason, you will receive: |
(i) | An amount equal to two (2) years pay (defined as base pay and target bonus at the time of your Termination Date (as defined below)), payable as follows: |
(ii) | An amount equal to the matching contributions and/or retirement enhancement contributions, if any, that would be contributed by the Company on your behalf under the Companys qualified defined contribution plan (the CIP) and nonqualified defined contribution benefit plans assuming that (A) you had continued to be employed as an active participant in the CIP throughout the Severance Period, (B) your pay was equal to the amount determined in Section 1(a)(i) above and (C) you contributed in an amount that would have provided for the maximum matching contributions during the Severance Period (without regard to any amendment to the CIP made subsequent to your Termination Date which reduces the matching contributions and/or retirement enhancement contributions thereunder). The benefit described in this Section 1(a)(ii) shall be paid in cash to you in a single lump sum on your Payment Date. | ||
(iii) | If you are eligible to participate in the Companys defined benefit pension plan as of your Termination Date, an additional pension benefit determined as if your employment with the Company or an affiliated company had continued throughout the Severance Period, and calculated as if your base pay and target bonus for such additional period remained at the level in effect on your Termination Date, which benefit shall be provided under and paid pursuant to the terms of the Companys qualified retirement plans to the extent permitted thereunder or under a nonqualified plan established and maintained by the Company or an affiliated company. | ||
(iv) | Continuation of the coverage of you (and where applicable, your eligible dependents) under the Companys medical, life, dental and vision insurance benefit plans until the end of the month in which your Severance Period ends, at the same cost structure as active employees; provided, however, that following your Termination Date you will be covered by the fully insured medical, dental and vision plans maintained by the Company. Your required payments, if any, towards the cost for such continuation coverage shall be made on an after-tax basis. | ||
(v) | If you are eligible for retiree health and life insurance coverage on your Termination Date, additional age and service credit towards eligibility for retiree health and life insurance coverage determined as if your employment with the Company or an affiliated company had continued throughout the Severance Period. |
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(vi) | If you participate in an executive supplemental payment plan on your Termination Date, you will continue to receive the annual executive supplemental payment that you were entitled to receive on your Termination Date until the end of your Severance Period. Such annual payment shall be made (A) in January of each year of the Severance Period if your Termination Date occurs prior to January 1, 2010, or (B) in a single lump sum on your Payment Date if your Termination Date occurs on or after January 1, 2010. | ||
(vii) | If you are eligible to participate in the Companys MedSave Plan as of your Termination Date, an amount equal to the contributions that would have been credited as Company contributions to your notional account under the MedSave Plan assuming that (A) you had continued to be employed as an active participant in the MedSave Plan throughout the Severance Period and (B) the Company had credited your notional account thereunder with the maximum amount of matching contributions each year during the Severance Period, shall be paid in cash to you in a single lump sum on your Payment Date. | ||
(viii) | If you actively participate in any of the Companys voluntary, employee pay-all plans or programs on your Termination Date, you may continue to participate in such plan or program, pursuant to the terms and conditions set forth therein, until the end of your Severance Period. | ||
(ix) | These special severance benefits replace any compensation or benefits under the Reynolds American Salary and Benefits Continuation Program (SBC). It is intended that you will not receive any less pay or benefits than provided under the SBC; provided, however, that any payment or benefit provided under this Section 1(a) is conditioned upon your execution of the release described in Section 3(a) and the expiration of any applicable revocation period occurring on or before your Payment Date. In the event that you do not execute the release described in Section 3(a), you will not be entitled to any benefits under this agreement and will be entitled only to those benefits provided under the SBC. | ||
(x) | If you should die during your Severance Period, any cash amounts under this Section 1(a) that remain unpaid as of the date of your death shall be paid in cash to your estate in a single lump sum within ninety (90) days following the date of your death, provided that your estate shall not have the right to designate the payment date. |
(b) | For purposes of this agreement, Cause means the occurrence of any one or more of the following : (i) your criminal conduct; (ii) your deliberate and continual refusal to perform employment duties on substantially a full time basis; (iii) your deliberate and continual refusal to act in accordance with any specific lawful instructions of an authorized officer or employee more senior than you or a majority of the Board of Directors of the Company; or (iv) your deliberate |
-3-
misconduct which could be materially damaging to the Company or any of its business operations without a reasonable good faith belief by you 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 (or the Chief Executive Officer of the Company, in the case of the termination of employment of 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 you in anticipation of an involuntary termination of employment for Cause shall be deemed to be a termination of employment for Cause. |
(c) | Notwithstanding any provision to the contrary contained herein, in the event that you are deemed to be a specified employee on your Termination Date, determined pursuant to procedures adopted by the Company in compliance with Section 409A of the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder ((Section 409A) and (the Code), respectively), and if any portion of the payments or benefits to be received by you upon separation from service would constitute a deferral of compensation subject to Section 409A, then to the extent necessary to comply with Section 409A, amounts that would otherwise be payable pursuant to this agreement during the six-month period immediately following your Termination Date and benefits that would otherwise be provided pursuant to this agreement during the six-month period immediately following your Termination Date will instead be paid or made available on the earlier of (i) within ten (10) days following the first business day of the seventh month after your Termination Date, provided that you shall not have the right to designate the payment date; or (ii) your death. | ||
(d) | For purposes of this agreement, General Good Reason means the occurrence of one (1) or more of the following events: |
(i) | the total amount of your base salary and targeted awards under the Companys Long-Term Incentive Plan (the LTIP) and the Companys Annual Incentive Award Plan (the AIAP), or successor plans, is at any time reduced by more than twenty percent (20%) without your consent; provided , however , that nothing herein will be construed to guarantee your target award if performance is below target; | ||
(ii) | your responsibilities are substantially reduced in importance without your consent; or | ||
(iii) | you are at any time required as a condition of continued employment to become based at any office or location more than the minimum number of miles required by the Internal Revenue Service for you to claim a moving expense deduction, from your then current place of employment without your consent, except for travel reasonably required in the performance of your responsibilities. |
-4-
Unless you provide written notification of your non-consent to any of the events described in (i), (ii) or (iii) above within ninety (90) days after the occurrence of any such event, you will be deemed to have consented to the occurrence of such event or events and no General Good Reason will exist. If you provide written notice of your non-consent to any of the events described in (i), (ii) or (iii) above within ninety (90) days after the occurrence of any such events, your employment by the Company or any of its affiliates will be deemed to have been terminated for General Good Reason ninety (90) days after receipt of such written notice by the Company or any of its affiliates. |
(e) | Each payment and each provision of benefits pursuant to this Section 1 shall be considered a separate payment and not one of a series of payments for purposes of Section 409A. |
2. | Change of Control . In the event of a Change of Control of the Company (as such Change of Control is defined in the LTIP), or any successor plan, the following will occur: |
(a) | The Company will hold you harmless from any golden parachute tax imposed by any federal, state or local taxing authority as a result of any payments made by the Company or any of its affiliates. In the event that it is determined that any payment or distribution by the Company or any of its affiliates to or for you (a Payment) would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the Excise Tax), then you will be entitled to receive from the Company or any of its affiliates an additional payment (an Excise Tax Adjustment Payment) in an amount such that after payment by you of all applicable federal, state and local taxes (computed at the maximum marginal rates and including any interest or penalties imposed with respect to such taxes), including any Excise Tax, imposed upon the Excise Tax Adjustment Payment, you retain an amount of the Excise Tax Adjustment Payment equal to the Excise Tax imposed upon the Payments. You agree to cooperate fully with the Company and its affiliates in any protester appeal by the Company or any of its affiliates in the event of the imposition of any golden parachute tax. Such Excise Tax Adjustment Payment shall be made no later than December 31 of the year following the year in the which you incur the Excise Tax. Any expenses, including interest and penalties assessed on the Excise Tax described in this Section 2(a), incurred by you shall be reimbursed promptly after you submit evidence of the incurrence of such expenses, which reimbursement in no event will be later than December 31 of the year following the year in the which you incur the expense, provided that in no event will the amount of expenses eligible for reimbursement in one year affect the amount of expenses to be reimbursed, or in-kind benefits to be provided, in any other taxable year. Each provision of reimbursements pursuant to this Section 2(a) shall be considered a separate payment and not one of a series of payments for purposes of Section 409A. |
-5-
(b) | If your employment is terminated without Cause following such Change of Control, the Company or any of its affiliates will pay to you as incurred all legal and accounting fees and expenses incurred by you as a result of such termination (including all such fees and expenses, if any, in seeking to obtain or enforce any right or benefit provided by any compensation-related plan, agreement or arrangement of the Company or any of its affiliates), unless your claim is found by an arbitral tribunal of competent jurisdiction to have been frivolous. Any such payments shall be made no later than December 31 of the year following the year in the which you incur the expenses, provided that in no event will the amount of expenses eligible for reimbursement in one year affect the amount of expenses to be reimbursed, or in-kind benefits to be provided, in any other taxable year. Each provision of reimbursements pursuant to this Section 2(b) shall be considered a separate payment and not one of a series of payments for purposes of Section 409A. | ||
(c) | During the 24-month period following a Change of Control, you will be entitled to terminate your employment for Change of Control Good Reason and receive the severance benefits set forth in Section 1 of this agreement as if you had incurred a Separation from Service other than for Cause. | ||
(d) | For purposes of this agreement, Change of Control Good Reason means, without your express written consent, any of the following events occurring after a Change of Control: |
(i) | a material reduction in your duties, a material diminution in your position or a material adverse change in your reporting relationship from those in effect immediately prior to the Change of Control; | ||
(ii) | a reduction in your pay grade or bonus opportunity as in effect immediately prior to the Change of Control or as the same may thereafter be increased from time to time during the term of this agreement; | ||
(iii) | the failure to continue in effect any compensation plan in which you participate at the time of the Change of Control, including but not limited to the LTIP and AIAP, or any substitute plans adopted prior to the Change of Control, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan providing you with substantially similar benefits) has been made with respect to such plan in connection with the Change of Control, or the failure to continue your participation therein on substantially the same basis, both in terms of the amount of benefits provided and the level of your participation relative to other participants, as existed at the time of the Change of Control; | ||
(iv) | the taking of any action which would directly or indirectly materially reduce any of the benefits to be provided to you under the retirement or savings plans of the Company or any of its affiliates (unless such reduction is required by law) or deprive you of any material fringe |
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benefit enjoyed by you at the time of the Change of Control, or the failure to provide you with the number of paid vacation days to which you are entitled on the basis of your employers practice with respect to you as in effect at the time of the Change of Control; |
(v) | any material breach by the Company or its affiliates of any provision of this agreement or any other of your contractual arrangements with the Company or its affiliates; or | ||
(vi) | requiring you to be become based at any office or location more than the minimum number of miles required by the Code for you to claim a moving expense deduction, from the office or location at which you were based immediately prior to such Change of Control, except for travel reasonably required in the performance of your responsibilities. |
3. | Miscellaneous . |
(a) | In further consideration for these special severance and change of control benefits, and should an involuntary termination of your employment ever occur, the Company will expect your cooperation in transitioning your responsibilities, and, prior to the 60th day following your Termination Date, you will execute a letter containing a release of claims and a reaffirmation of your Non-Competition, Non-Disclosure of Confidential Information and Commitment to Provide Assistance Agreement each in a form reasonably satisfactory to the Company and any period for revocation will have expired. | ||
(b) | You acknowledge and agree that nothing contained in this agreement obligates the Company or any one of its affiliates (i) to employ you for any specific term or (ii) to grant you any short-term or long-term incentive awards under the plans and programs of the Company or any of its affiliates. | ||
(c) | To the extent applicable, it is intended that this agreement comply with the provisions of Section 409A. This agreement shall be administered in a manner consistent with this intent. References to Section 409A shall include any proposed, temporary or final regulation, or any other guidance, promulgated with respect to such section by the U.S. Department of Treasury or the Internal Revenue Service. | ||
(d) | This agreement may not be modified, amended or waived in any manner other than by an instrument in writing signed by you and the Company. | ||
(e) | This agreement, including the Non-Competition, Non-Disclosure of Confidential Information and Commitment to Provide Assistance Agreement attached hereto as Exhibit A , shall be governed, controlled and determined in accordance with the applicable provisions of federal law and, to the extent not preempted by federal law, the laws of the State of North Carolina, without regard to the conflicts of law rules of such state. |
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(f) | The Company may withhold from any amounts payable under this agreement all federal, state, city or other taxes as the Company is required to withhold pursuant to any applicable law, regulation or ruling. |
-8-
REYNOLDS AMERICAN INC.
|
||||
By: | ||||
Its: Senior Vice President Human Resources | ||||
Accepted and agreed to as of this ___day
of , 2007 |
||||
[Employee] | ||||
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Page | ||||||
|
||||||
Article 1.
|
Establishment and Term of the Plan | 1 | ||||
|
||||||
1.1
|
Establishment of the Plan | 1 | ||||
|
||||||
1.2
|
Plan Term | 1 | ||||
|
||||||
1.3
|
Change in Control and Plan Term | 1 | ||||
|
||||||
Article 2.
|
Definitions | 2 | ||||
|
||||||
Article 3.
|
Severance Benefits | 8 | ||||
|
||||||
3.1
|
Right to Severance Benefits | 8 | ||||
|
||||||
3.2
|
Qualifying Termination | 9 | ||||
|
||||||
3.3
|
Description of Change in Control Severance Benefits | 10 | ||||
|
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3.4
|
Description of General Severance Benefits | 13 | ||||
|
||||||
3.5
|
Notice of Termination | 15 | ||||
|
||||||
3.6
|
Disability | 15 | ||||
|
||||||
Article 4.
|
Excise Taxes | 16 | ||||
|
||||||
4.1
|
Applicable Provisions if Excise Tax Applies. | 16 | ||||
|
||||||
Article 5.
|
Contractual Rights and Legal Remedies | 18 | ||||
|
||||||
5.1
|
Payment Obligations Absolute | 18 | ||||
|
||||||
5.2
|
Contractual Rights to Benefits | 18 | ||||
|
||||||
5.3
|
Legal Fees and Expenses | 18 | ||||
|
||||||
Article 6.
|
Successors | 19 | ||||
|
||||||
6.1
|
Successors to the Company | 19 | ||||
|
||||||
6.2
|
Assignment by the Executive | 19 | ||||
|
||||||
Article 7.
|
Miscellaneous | 19 | ||||
|
||||||
7.1
|
Employment Status | 19 | ||||
|
||||||
7.2
|
Entire Plan | 19 | ||||
|
||||||
7.3
|
Adoption Procedure for a Participating Company | 19 | ||||
|
||||||
7.4
|
Notices | 20 | ||||
|
||||||
7.5
|
Includable Compensation | 20 | ||||
|
||||||
7.6
|
Tax Withholding | 20 | ||||
|
||||||
7.7
|
Internal Revenue Code Section 409A | 20 | ||||
|
||||||
7.8
|
Severability | 20 |
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Page | ||||||
|
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7.9
|
Modification | 21 | ||||
|
||||||
7.10
|
Gender and Number | 21 | ||||
|
||||||
7.11
|
Applicable Law | 21 |
-ii-
(a) | Accounting Firm means a nationally recognized accounting firm, or actuarial, benefits or compensation consulting firm (with experience in performing the calculations regarding the applicability of Section 280G of the Code and of the tax imposed by Section 4999 of the Code) selected by the Company. | ||
(b) | B&W means Brown & Williamson Tobacco Corporation. | ||
(c) | Base Salary means, at any time, the then regular annual rate of pay which the Executive is receiving as annual salary, excluding amounts: (i) received under short-term or long-term incentive or other bonus plans, regardless of whether the amounts are deferred, or (ii) designated by the Participating Company as payment toward reimbursement of expenses. | ||
(d) | BAT means, collectively, British American Tobacco, p.l.c., a public limited company incorporated under the laws of England and Wales, and its affiliates, other than the Participating Companies. | ||
(e) | BCA has the meaning set forth in Section 2(i). | ||
(f) | Beneficial Owner or Beneficial Ownership shall have the meaning ascribed to such term in Rule 13d-3 of the General Rules and Regulations under the Exchange Act. | ||
(g) | Board or Board of Directors means the Board of Directors of the Company. | ||
(h) | Cause means the occurrence of any one or more of the following: |
(i) | The Executives criminal conduct; | ||
(ii) | The Executives deliberate and continual refusal to perform employment duties on a substantially full-time basis; | ||
(iii) | The Executives deliberate and continual refusal to act in accordance with any specific lawful instructions of an authorized officer or employee more senior than the Executive or a majority of the Board of Directors of the Participating Company; or | ||
(iv) | The Executives deliberate misconduct which could be materially damaging to the Participating Company or any of its business operations without a reasonable good faith belief by the Executive that such conduct was in the best interests of the Participating Company. |
2
Notwithstanding the foregoing, a Tier I or Tier II Executive shall not be deemed to have been terminated for Cause hereunder unless and until there shall have been delivered to the Tier I or Tier II Executive a copy of a resolution duly adopted by the affirmative vote of not less than two thirds of the Board then in office at a meeting of the Board called and held for such purpose (after reasonable notice to the Tier I or Tier II Executive and an opportunity for the Tier I or Tier II Executive, together with the Tier I or Tier II Executives counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Tier I or Tier II Executive had committed an act constituting Cause as herein defined and specifying the particulars thereof in detail. Nothing herein will limit the right of the Tier I or Tier II Executive or his beneficiaries to contest the validity or propriety of any such determination. |
(i) | Change in Control shall occur if any of the following events occur: |
(i) | An individual, corporation, partnership, group, associate, or other entity or Person, other than any employee benefit plans sponsored by the Company, is or becomes the Beneficial Owner, directly or indirectly, of thirty percent (30%) or more of the combined voting power of the Companys outstanding securities ordinarily having the right to vote at elections of directors; provided, however, that the acquisition of Company securities by BAT pursuant to the Business Combination Agreement, dated as of October 27, 2003, between RJR and B&W, as thereafter amended (the BCA), or as expressly permitted by the Governance Agreement, dated as of July 30, 2004, among British American Tobacco, p.l.c., B&W, and the Company (the Governance Agreement), shall not be considered a Change in Control for purposes of this subsection (i); | ||
(ii) | Individuals who constitute the Board (or who have been designated as directors in accordance with Section 1.09 of the BCA) on July 30, 2004 (the Incumbent Board) cease for any reason to constitute at least a majority thereof, provided that any individual becoming a director subsequent to such date whose election, or nomination for election by the Companys shareholders, was: (A) approved by a vote of at least three-quarters (3/4) of the directors comprising the Incumbent Board (either by a specific vote or by approval of the proxy statement of the Company in which such individual is named as a nominee of the Company for director); or (B) made in accordance with Section 2.01 of the Governance Agreement, but excluding for this purpose any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-2(c) of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of an individual, corporation, partnership, group, associate, or other entity or Person other than the Companys Board, shall be, for purposes of this paragraph (ii), considered as though such person were a member of the Incumbent Board; or |
3
(iii) | The approval by the shareholders of the Company of a plan or agreement providing: (A) for a merger or consolidation of the Company other than with a wholly owned Subsidiary and other than a merger or consolidation that would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent, either by remaining outstanding or by being converted into voting securities of the surviving entity) more than fifty percent (50%) of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; or (B) for a sale, exchange, or other disposition of all or substantially all of the assets of the Company, other than any such transaction where the transferee of all or substantially all of the assets of the Company is a wholly owned Subsidiary or an entity more than fifty percent (50%) of the combined voting power of the voting securities of which is represented by voting securities of the Company outstanding immediately prior to the transaction (either remaining outstanding or by being converted into voting securities of the transferee entity). If any of the events enumerated in this paragraph (iii) occur, the Board shall determine the effective date of the Change in Control resulting there from for purposes of this Plan. |
(j) | Change in Control Good Reason means the occurrence after a Change in Control of any one (1) or more of the following: |
(i) | A material reduction of the Tier I or Tier II Executives authorities, duties, or responsibilities as an executive and/or officer of a Participating Company from those in effect as of ninety (90) calendar days prior to the Change in Control, other than an insubstantial or inadvertent reduction that is remedied by the Participating Company promptly after receipt of notice thereof given by the Tier I or Tier II Executive; provided, however, that any reduction in the foregoing resulting merely from the acquisition of the Participating Company and its existence as a subsidiary or division of another entity, such as a change in reporting relationship or title, shall not be sufficient to constitute a Change in Control Good Reason; | ||
(ii) | A Participating Companys requiring a Tier I or Tier II Executive to be based at a location that exceeds the minimum distance under Section 217(c) of the Code (for purposes of a moving expense deduction), from the location of the Tier I or Tier II Executives principal job location or office immediately prior to the Change in Control; except for required travel on the Participating Companys business to an extent substantially consistent with the Tier I or Tier II Executives then present business travel obligations; | ||
(iii) | A reduction by a Participating Company in excess of twenty percent (20%) of the aggregate value of (A) a Tier I or Tier II Executives Base Salary and target annual bonus amount (both as in effect on the date of the Change in Control) and (B) the long-term incentive opportunities provided |
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to a Tier I or Tier II Executive (as compared to the value of aggregate long-term incentive opportunities provided as of the date of the Change in Control), except for across-the-board reductions generally applicable to all Tier I or Tier II Executives; | |||
(iv) | A reduction by a Participating Company in aggregate employee benefits provided to a Tier I or Tier II Executive as compared to the value of aggregate employee benefits provided as of the date of the Change in Control, except for across-the-board reductions generally applicable to all Tier I or Tier II Executives; | ||
(v) | The failure of the Company to obtain a satisfactory agreement from any successor to the Company to assume and agree to perform the Companys obligations under this Plan, as contemplated in Article 6 herein; and | ||
(vi) | A material breach of this Plan by a Participating Company which is not remedied by the Participating Company within ten (10) business days of receipt of written notice of such breach delivered by a Tier I or Tier II Executive to the Participating Company. |
Notwithstanding the foregoing, Change in Control Good Reason shall cease to exist for an event on the ninetieth (90th) day following the later of its occurrence or a Tier I or Tier II Executives knowledge thereof, unless the Tier I or Tier II Executive has given a Participating Company written notice thereof prior to such date. Unless a Tier I or Tier II Executive becomes Disabled, a Tier I or Tier II Executives right to terminate employment for a Change in Control Good Reason shall not be affected by the Tier I or Tier II Executives incapacity due to physical or mental illness. A Tier I or Tier II Executives continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstance constituting a Change in Control Good Reason herein. Notwithstanding anything in this Plan to the contrary, a Tier III Executive shall have no right to terminate employment for a Change in Control Good Reason. | |||
(k) | Change in Control Severance Benefits mean the severance benefits as provided in Section 3.3(a) through 3.3(k). | ||
(l) | CIP has the meaning set forth in Section 3.3(h). | ||
(m) | Code means the U.S. Internal Revenue Code of 1986, as amended from time to time, and the regulations promulgated thereunder. | ||
(n) | Committee means the Compensation Committee of the Board of Directors, or another committee of Board members appointed by the Board to administer this Plan. | ||
(o) | Company means Reynolds American Inc., a North Carolina corporation, and any successor thereto as provided in Article 6. |
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(p) | Disability or Disabled shall have the meaning ascribed to such term in the Companys governing long-term disability plan, or if no such plan exists, at the discretion of the Board. | ||
(q) | Effective Date means January 1, 2008. The Plan was originally effective January 1, 2007. | ||
(r) | Effective Date of Termination means the date on which a Qualifying Termination occurs, as provided in Section 3.2, which triggers the payment of Severance Benefits, or such other date upon which the Executives employment with a Participating Company terminates for reasons other than a Qualifying Termination. | ||
(s) | Exchange Act means the Securities Exchange Act of 1934, as amended from time to time. | ||
(t) | Excise Tax means, collectively, (i) the tax imposed by Section 4999 of the Code by reason of being contingent on a change in ownership or control of the Company, within the meaning of Section 280G of the Code, or (ii) any similar tax imposed by state or local law, or (iii) any interest or penalties with respect to any excise tax described in clause (i) or (ii). | ||
(u) | Executive means a Tier I, Tier II or Tier III Executive who is initially hired or rehired by a Participating Company on or after January 1, 2007 or who was hired before that date and is not a party to an effective agreement with a Participating Company providing for severance benefits. | ||
(v) | General Severance Benefits mean the severance benefits as provided in Section 3.4(a) through 3.4(k). | ||
(w) | General Good Reason means a reduction by a Participating Company in excess of twenty percent (20%) of the aggregate value of (A) the Executives Base Salary and target annual bonus amount (both as in effect on the date the Executive first becomes covered by the Plan) and (B) the long-term incentive opportunities provided to the Executive (as compared to the value of aggregate long-term incentive opportunities provided as of the date the Executive first becomes covered by the Plan), except for across-the-board reductions generally applicable to all Executives. Notwithstanding the foregoing, General Good Reason shall cease to exist for an event on the ninetieth (90th) day following the later of its occurrence or the Executives knowledge thereof, unless the Executive has given a Participating Company written notice thereof prior to such date. Unless the Executive becomes Disabled, the Executives right to terminate employment for a General Good Reason shall not be affected by the Executives incapacity due to physical or mental illness. The Executives continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstance constituting a General Good Reason herein. | ||
(x) | Governance Agreement has the meaning set forth in Section 2(i). |
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(y) | Gross-Up Payment has the meaning set forth in Section 4.1. | ||
(z) | Incumbent Board has the meaning set forth in Section 2(i). | ||
(aa) | Insurance Adjustment Payment has the meaning set forth in Section 3.3(f). | ||
(bb) | Notice of Termination means a written notice which shall indicate the specific termination provision in this Plan relied upon, and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executives employment under the provision so indicated. | ||
(cc) | Participating Company or Participating Companies means the Company and/or any other entity that adopts this Plan in accordance with the provisions of Section 7.3. Participating Company includes any successor(s) to a Participating Company, whether by merger, consolidation or otherwise. All Participating Companies are listed on Appendix C . | ||
(dd) | Payment has the meaning set forth in Section 4.1. | ||
(ee) | Payment Date has the meaning set forth in Section 3.1(c)(i). | ||
(ff) | Person shall have the meaning ascribed to such term in Section 3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d) thereof, including a group as defined in Section 13(d). | ||
(gg) | Plan means this Reynolds American Inc. Executive Severance Plan. | ||
(hh) | Qualifying Termination means any of the events described in Section 3.2, the occurrence of which triggers the payment of Severance Benefits. | ||
(ii) | RJR means R.J. Reynolds Tobacco Holdings, Inc. | ||
(jj) | Separation from Service has the meaning set forth in Section 3.2. | ||
(kk) | Severance Benefits means the payout of Change in Control or General (as appropriate) Severance compensation as provided in Article 3. | ||
(ll) | Subsidiary means any corporation or other entity in which the Company has a significant equity or other interest as determined by the Committee. | ||
(mm) | Tier I Executive means the Chief Executive Officer of the Company. | ||
(nn) | Tier II Executive means an individual employed by a Participating Company at job level eleven (11) through fourteen (14), inclusive (within the meaning of the Companys payroll structure). | ||
(oo) | Tier III Executive means an individual employed by a Participating Company at job level ten (10) (within the meaning of the Companys payroll structure). |
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(a) | Change in Control Severance Benefits . The Executive shall be entitled to receive from the Company Change in Control Severance Benefits, as described in Section 3.3, if a Qualifying Termination of the Executives employment as described in Section 3.2(a) or 3.2(b) has occurred. | ||
(b) | General Severance Benefits . The Executive shall be entitled to receive from the Company General Severance Benefits, as described in Section 3.4, if a Qualifying Termination of the Executives employment as described in Section 3.2(c) has occurred. | ||
(c) | Severance Payment Schedule . |
(i) | The Severance Benefits described in Sections 3.3(a), 3.3(h), 3.3(j), 3.4(a), 3.4(h) and 3.4(j) shall be paid in cash to the Executive in a single lump sum on the last day of the month after the sixtieth (60th) calendar day following the date of the Executives Qualifying Termination (the Payment Date). | ||
(ii) | The Severance Benefits described in Sections 3.3(c), 3.3(e), 3.4(c) and 3.4(e) shall be paid in cash to the Executive in a single lump sum at the applicable time provided in the annual bonus plan then in effect. | ||
(iii) | The Severance Benefits described in Section 3.3(d) shall be paid out in cash in equal monthly installments (or more frequent installments as determined by the Company) over a period of: (i) thirty-six (36) months for Tier I Executives, (ii) twenty-four (24) months for Tier II Executives or (iii) eighteen (18) months for Tier III Executives, commencing on the Payment Date. In addition, the Severance Benefits described in Section 3.3(b) shall be paid in cash to the Executive in a single lump sum with the last payment described in the immediately preceding sentence. | ||
(iv) | The Severance Benefits described in Section 3.4(d) shall be paid out in cash in equal monthly installments (or more frequent installments as determined by the Company) over a period of: (i) thirty (30) months for Tier I Executives or (ii) eighteen (18) months for Tier II or Tier III Executives, commencing on the Payment Date. In addition, the Severance Benefits described in Section 3.4(b) shall be paid in cash to the Executive in a single lump sum with the last payment described in the immediately preceding sentence. | ||
(v) | Notwithstanding anything in this Plan to the contrary, in the event that the Executive is deemed to be a specified employee on the date of the Qualifying Termination, determined pursuant to procedures adopted by the Company in compliance with Code Section 409A, and if any portion |
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of the payments or benefits to be received by the Executive upon separation from service would constitute a deferral of compensation subject to Code Section 409A, then to the extent necessary to comply with Code Section 409A, amounts that would otherwise be payable pursuant to this Plan during the six (6) month period immediately following the date of the Executives Qualifying Termination and benefits that would otherwise be provided pursuant to this Plan during the six (6) month period immediately following the date of the Executives Qualifying Termination will instead be paid or made available on the earlier of (i) within ten (10) days following the first business day of the seventh month after the date of the Executives Qualifying Termination, provided that the Executive shall not have the right to designate the payment date; or (ii) the Executives death. |
(d) | No Severance Benefits . The Executive shall not be entitled to receive Severance Benefits if the Executives employment with a Participating Company ends for reasons other than a Qualifying Termination. | ||
(e) | General Release and Restrictive Covenant Agreement . As a condition to receiving Severance Benefits under either Section 3.3 or 3.4, the Executive shall, prior to the 60 th day following the date of the Executives Qualifying Termination, be obligated to execute (i) a general release of claims in favor of the Company, its current and former subsidiaries, affiliates and shareholders, and the current and former directors, officers, employees, and agents thereof in substantially the form attached hereto as Appendix A , and any period for revocation will have expired and (ii) a Reynolds American Non-Competition, Non-Disclosure of Confidential Information, and Commitment to Provide Assistance Agreement in substantially the form attached hereto as Appendix B (a Non-Competition Agreement) or, with respect to an Executive who has previously executed a Non-Competition Agreement, a written affirmation of the Executives obligations thereunder. | ||
(f) | No Duplication of Severance Benefits . If the Executive becomes entitled to Change in Control Severance Benefits, the benefits provided for under Section 3.3 shall be in lieu of the benefits provided to the Executive under Section 3.4. Similarly, except following a Qualifying Termination described in Section 3.2(b), if the Executive becomes entitled to General Severance Benefits, the Severance Benefits provided under Section 3.4 shall be in lieu of the benefits provided to the Executive under Section 3.3. |
(a) | Within twenty-four (24) calendar months following a Change in Control, the Executive incurs a Separation from Service other than: |
(i) | By a Participating Company for Cause; or |
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(ii) | By reason of death of Disability; or | ||
(iii) | By the Tier I or Tier II Executive without Change in Control Good Reason. |
(b) | Within twelve (12) calendar months prior to a Change in Control, the Executive incurs a Separation from Service by a Participating Company without Cause if such Separation from Service occurs at the request of any party involved in the Change in Control transaction; in such event, the date of the Qualifying Termination shall be deemed to be the date of the Change in Control. | ||
(c) | At any time other than as described in Section 3.2(a) or 3.2(b), the Executive incurs a Separation from Service other than: |
(i) | By a Participating Company for Cause; or | ||
(ii) | By reason of death of Disability; or | ||
(iii) | By the Executive without General Good Reason. |
(a) | An amount equal to the Executives unpaid Base Salary, unreimbursed business expenses, and all other items earned by and owed to the Executive through and including the date of the Qualifying Termination. Such payment shall constitute full satisfaction for these amounts owed to the Executive. | ||
(b) | An amount equal to the unpaid, accrued vacation pay owed to the Executive through and including the date of the Qualifying Termination. Such payment shall constitute full satisfaction for this amount owed to the Executive, and in no event shall the Executive accrue additional vacation time after the date of the Executives Qualifying Termination. | ||
(c) | Any amount payable to the Executive under the annual bonus plan then in effect in respect of the most recently completed fiscal year, to the extent not theretofore paid. Such payment shall constitute full satisfaction for these amounts owed to the Executive. |
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(d) | An amount equal to: (i) three (3) for Tier I Executives, (ii) two (2) for Tier II Executives or (iii) one and one-half (1 1 / 2 ) for Tier III Executives times the sum of: (A) the Executives annual rate of Base Salary in effect upon the date of the Qualifying Termination or, if greater, by the Executives annual rate of Base Salary in effect immediately prior to the occurrence of the Change in Control plus (B) the Executives then current target bonus opportunity established under the annual bonus plan in effect for the bonus plan year in which the date of the Executives Qualifying Termination occurs or, if greater, the Executives target bonus opportunity in effect prior to the occurrence of the Change in Control. | ||
(e) | An amount equal to the annual bonus the Executive would have earned under the annual bonus plan for the plan year in which the Qualifying Termination occurs, determined based on the actual performance achieved under such annual bonus plan for such plan year, adjusted on a pro rata basis based on the number of months the Executive was actually employed during such plan year (full credit is given for partial months of employment). Such payment shall constitute full satisfaction for these amounts owed to the Executive. | ||
(f) | Subject to the following paragraph, the Company shall provide, at the same cost structure as active employees, continuation of the coverage of the Executive (and the Executives eligible dependents) under the Companys medical, life, dental and vision insurance benefit plans for: (1) thirty-six (36) months for Tier I Executives, (2) twenty-four (24) months for Tier II Executives or (3) eighteen (18) months for Tier III Executives, from the date of the Qualifying Termination; provided, however, that following the date of the Qualifying Termination the Executive will be covered by the fully insured medical, dental and vision plans maintained by the Company. The Executives required payments, if any, towards the cost for such continuation coverage shall be made on an after-tax basis. The applicable COBRA medical insurance benefit continuation period shall begin at the end of the period of continued medical insurance coverage described in the preceding sentence. | ||
If the Executive becomes covered under the medical, dental and/or vision insurance coverage of a subsequent employer that does not contain any exclusion or limitation with respect to any preexisting condition of the Executive or the Executives eligible dependents, this medical, dental and/or vision insurance benefit coverage by the Company shall be discontinued prior to the end of the applicable benefit continuation period. | |||
In the event that any medical, life, dental and/or vision insurance benefit plan coverage provided under this Section 3.3(f) is subject to federal, state, or local income or employment taxes, the Company shall provide the Executive with an additional payment (the Insurance Adjustment Payment) in the amount necessary such that after payment by the Executive of all such taxes (calculated after assuming the Executive pays such taxes for the year in which the payment or benefit occurs at the highest marginal tax rate applicable), including the taxes imposed on the additional payments, the Executive effectively received coverage |
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on a tax-free basis. Such Insurance Adjustment Payment shall be made no later than December 31 of the year following the year in which the Executive incurs the tax. | |||
(g) | If the Executive is eligible to participate in a Participating Companys defined benefit pension plan as of the date of the Executives Qualifying Termination, the Participating Company shall provide the Executive with an additional pension benefit determined as if the Executives employment with the Participating Company had continued for an additional: (i) three (3) years for Tier I Executives, (ii) two (2) years for Tier II Executives or (iii) one and one-half (1 1 / 2 ) years for Tier III Executives, and calculated as if the Executives relevant base pay and target bonus for such additional period is at the same level as on the date of the Qualifying Termination, which benefit shall be provided under and paid pursuant to the Participating Companys qualified retirement plans to the extent permitted thereunder or under a nonqualified plan established and maintained by the Participating Company or an affiliated company. | ||
(h) | An amount equal to the matching contributions and/or retirement enhancement contributions, if any, that would be contributed by the Participating Company on the Executives behalf under the Participating Companys qualified defined contribution plan (the CIP) and nonqualified defined contribution benefit plans assuming that (i) the Executive had continued to be employed as an active participant in the CIP for an additional: (A) three (3) years for Tier I Executives, (B) two (2) years for Tier II Executives or (C) one and one-half (1 1 / 2 ) years for Tier III Executives following the date of the Qualifying Termination, (ii) the Executives pay was equal to the amount determined in Section 3.3(d) above and (iii) the Executive contributed in an amount that would have provided for the maximum matching contributions during such additional period (without regard to any amendment to the CIP made subsequent to the date of the Qualifying Termination which modifies the matching contributions and/or retirement enhancement contributions thereunder). | ||
(i) | If the Executive is eligible for retiree health and life insurance coverage on the date of the Executives Qualifying Termination, a Participating Company shall provide the Executive with additional age and service credit towards eligibility for retiree health and life insurance coverage determined as if the Executives employment with the Participating Company had continued for an additional: (i) three (3) years for Tier I Executives, (ii) two (2) years for Tier II Executives or (iii) one and one-half (1 1 / 2 ) years for Tier III Executives following the date of the Qualifying Termination. | ||
(j) | If the Executive is eligible to participate in the Companys MedSave Plan on the date of the Qualifying Termination, an amount equal to the contributions that would have been credited as Company contributions to the Executives notional account under the MedSave Plan assuming that (i) the Executive had continued to be employed as an active participant in the MedSave Plan for an additional: (A) three (3) years for Tier I Executives, (B) two (2) years for Tier II Executives or |
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(C) one and one-half (1 1 / 2 ) years for Tier III Executives following the date of the Qualifying Termination and (ii) the Company had credited the Executives notional account thereunder with the maximum amount of matching contributions each year during such additional period. | |||
(k) | If the Executive actively participates in any of the Companys voluntary, employee pay-all plans or programs on the date of the Executives Qualifying Termination, the Executive may continue to participate in such plan or program, pursuant to the terms and conditions set forth therein, for an additional: (i) three (3) years for Tier I Executives, (ii) two (2) years for Tier II Executives or (iii) one and one-half (1 1 / 2 ) years for Tier III Executives following the date of the Qualifying Termination. |
(a) | An amount equal to the Executives unpaid Base Salary, unreimbursed business expenses, and all other items earned by and owed to the Executive through and including the date of the Qualifying Termination. Such payment shall constitute full satisfaction for these amounts owed to the Executive. | ||
(b) | An amount equal to the unpaid, accrued vacation pay owed to the Executive through and including the date of the Qualifying Termination. Such payment shall constitute full satisfaction for this amount owed to the Executive, and in no event shall the Executive accrue additional vacation time after the date of the Executives Qualifying Termination. | ||
(c) | Any amount payable to the Executive under the annual bonus plan then in effect in respect of the most recently completed fiscal year, to the extent not theretofore paid. Such payment shall constitute full satisfaction for these amounts owed to the Executive. | ||
(d) | An amount equal to: (i) two and one-half (2 1 / 2 ) for Tier I Executives, or (ii) one and one-half (1 1 / 2 ) for Tier II and III Executives, times the sum of: (A) the Executives annual rate of Base Salary in effect upon the date of the Qualifying Termination plus (B) the Executives then current target bonus opportunity established under the annual bonus plan in effect for the bonus plan year in which the date of the Executives Qualifying Termination occurs. | ||
(e) | An amount equal to the annual bonus the Executive would have earned under the annual bonus plan for the plan year in which the Qualifying Termination occurs, determined based on the actual performance achieved under such annual bonus plan for such plan year, adjusted on a pro rata basis based on the number of months the Executive was actually employed during such plan year (full credit is given for partial months of employment). Such payment shall constitute full satisfaction for these amounts owed to the Executive. |
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(f) | Subject to the following paragraph, the Company shall provide, at the same cost structure as active employees, continuation of the coverage of the Executive (and the Executives eligible dependents) under the Companys medical, life, dental and vision insurance benefit plans for: (1) thirty (30) months for Tier I Executives, or (2) eighteen (18) months for Tier II and III Executives, from the date of the Qualifying Termination; provided, however, that following the date of the Qualifying Termination the Executive will be covered by the fully insured medical, dental and vision plans maintained by the Company. The Executives required payments, if any, towards the cost for such continuation coverage shall be made on an after-tax basis. The applicable COBRA medical insurance benefit continuation period shall begin at the end of the period of continued medical insurance coverage described in the preceding sentence. | ||
If the Executive becomes covered under the medical, dental and/or vision insurance coverage of a subsequent employer that does not contain any exclusion or limitation with respect to any preexisting condition of the Executive or the Executives eligible dependents, this medical, dental and/or vision insurance benefit coverage by the Company shall be discontinued prior to the end of the applicable benefit continuation period. | |||
In the event that any medical, life, dental and/or vision insurance benefit plan coverage provided under this Section 3.4(f) is subject to federal, state, or local income or employment taxes, the Company shall provide the Executive with an Insurance Adjustment Payment in the amount necessary such that after payment by the Executive of all such taxes (calculated after assuming the Executive pays such taxes for the year in which the payment or benefit occurs at the highest marginal tax rate applicable), including the taxes imposed on the additional payments, the Executive effectively received coverage on a tax-free basis. Such Insurance Adjustment Payment shall be made no later than December 31 of the year following the year in which the Executive incurs the tax. | |||
(g) | If the Executive is eligible to participate in a Participating Companys defined benefit pension plan as of the date of the Executives Qualifying Termination, the Participating Company shall provide the Executive with an additional pension benefit determined as if the Executives employment with the Participating Company had continued for an additional: (i) thirty (30) months for Tier I Executives, or (ii) eighteen (18) months for Tier II and III Executives, and calculated as if the Executives relevant base pay and target bonus for such additional period is at the same level as on the date of the Qualifying Termination, which benefit shall be provided under and paid pursuant to the Participating Companys qualified retirement plans to the extent permitted thereunder or under a nonqualified plan established and maintained by the Participating Company or an affiliated company. | ||
(h) | An amount equal to the matching contributions and/or retirement enhancement contributions, if any, that would be contributed by the Participating Company on the Executives behalf under the CIP and the Participating Companys |
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nonqualified defined contribution benefit plans assuming that (i) the Executive had continued to be employed as an active participant in the CIP for an additional: (A) thirty (30) months for Tier I Executives, or (B) eighteen (18) months for Tier II and III Executives following the date of the Qualifying Termination, (ii) the Executives pay was equal to the amount determined in Section 3.4(d) above and (iii) the Executive contributed in an amount that would have provided for the maximum matching contributions during such additional period (without regard to any amendment to the CIP made subsequent to the date of the Qualifying Termination which modifies the matching contributions and/or retirement enhancement contributions thereunder). | |||
(i) | If the Executive is eligible for retiree health and life insurance coverage on the date of the Executives Qualifying Termination, a Participating Company shall provide the Executive with additional age and service credit towards eligibility for retiree health and life insurance coverage determined as if the Executives employment with the Participating Company had continued for an additional: (i) thirty (30) months for Tier I Executives or (ii) eighteen (18) months for Tier II and III Executives, following the date of the Qualifying Termination. | ||
(j) | If the Executive is eligible to participate in the Companys MedSave Plan on the date of the Qualifying Termination, an amount equal to the contributions that would have been credited as Company contributions to the Executives notional account under the MedSave Plan assuming that (i) the Executive had continued to be employed as an active participant in the MedSave Plan for an additional: (A) thirty (30) months for Tier I Executives, or (B) eighteen (18) months for Tier II and III Executives following the date of the Qualifying Termination and (ii) the Company had credited the Executives notional account thereunder with the maximum amount of matching contributions each year during such additional period. | ||
(k) | If the Executive actively participates in any of the Companys voluntary, employee pay-all plans or programs on the date of the Executives Qualifying Termination, the Executive may continue to participate in such plan or program pursuant to the terms and conditions set forth therein, for an additional: (i) thirty (30) months for Tier I Executives, or (ii) eighteen (18) months for Tier II and III Executives following the date of the Qualifying Termination. |
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(a) | Anything in the Plan to the contrary notwithstanding, if it is determined (as hereafter provided) that any payment or distribution by or on behalf of a Participating Company to or for the benefit of a Tier I or Tier II Executive, whether paid or payable or distributed or distributable pursuant to the terms of the Plan or otherwise pursuant to or by reason of any other agreement, policy, plan, program or arrangement, including without limitation any stock option, stock appreciation right or similar right, or the lapse or termination of any restriction on or the vesting or exercisability of any of the foregoing (in the aggregate, the Payment), would be subject to the Excise Tax, the Participating Company shall pay an additional amount (the Gross-Up Payment) such that, after payment by the Tier I or Tier II Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax imposed upon the Gross-Up Payment, the Tier I or Tier II Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payment; provided , however , that the Participating Company shall only be required to pay the Gross-Up Payment if the Tier I or Tier II Executive receives total Parachute Payments within the meaning of Section 280G of the Code (without consideration of the Gross-Up Payment) that exceed one hundred and ten percent (110%) of the amount that the Tier I and Tier II Executive would be entitled to receive without being subject to the Excise Tax. Such Gross-Up Payment shall be made no later than December 31 of the year following the year in which the Tier I or Tier II Executive incurs the Excise Tax. Any expenses, including interest and penalties assessed on the Excise Tax described in this Section 4.1 resulting from the Companys actions, incurred by a Tier I or Tier II Executive shall be reimbursed promptly after the Tier I or Tier II Executive submits evidence of the incurrence of such expenses, which reimbursement in no event will be later than December 31 of the year following the year in which the Tier I or Tier II Executive incurs the expense, provided that in no event will the amount of expenses eligible for reimbursement in one year affect the amount of expenses to be reimbursed, or in-kind benefits to be provided, in any other taxable year. | ||
(b) | In the event that the Tier I and Tier II Executive is not entitled to receive a Gross-Up Payment, the Tier I and Tier II Executive shall be entitled to receive the Payment to which the Tier I and Tier II Executive is otherwise entitled to, unless reducing such Payment would result in an increase in the after-tax benefit to the Tier I and Tier II Executive (taking into account any Excise Tax, and any applicable federal, state and local income taxes). If reducing such Payment would result in an increase in the after-tax benefit to the Tier I and Tier II Executive, then the Payment shall be reduced to the minimum extent necessary so that no portion of any such Payment is subject to the Excise Tax. The fact that a Tier I or Tier II Executives right to a Payment may be reduced by reason of the limitations contained in this Section 4.1 shall not of itself limit or otherwise affect any other rights of the Tier I or Tier II Executive other than under the Plan. In the event |
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that a Payment intended to be provided under the Plan is required to be reduced pursuant to this Section 4.1, the payment required by Section 3.3(d) will be so reduced. | |||
(c) | All determinations required to be made under this Section 4.1, including whether an Excise Tax is payable by a Tier I or Tier II Executive and the amount of such Excise Tax, shall be made by the Accounting Firm. The Participating Company shall direct the Accounting Firm to submit its determination and detailed supporting calculations to the relevant Participating Company and the Tier I or Tier II Executive within fifteen (15) calendar days after the date of the Tier I or Tier II Executives termination, if applicable, and any other such time or times as may be requested by such Participating Company or the Tier I or Tier II Executive. If the Accounting Firm determines that no Excise Tax is payable by the Tier I or Tier II Executive, it shall, at the same time as it makes such determination, furnish the Tier I or Tier II Executive with an opinion that the Tier I or Tier II Executive has substantial authority not to report any Excise Tax on the Tier I or Tier II Executives federal, state, local income or other tax return. | ||
(d) | The Participating Company and the Tier I or Tier II Executive shall each provide the Accounting Firm access to and copies of any books, records and documents in the possession of the Participating Company or the Tier I or Tier II Executive, as the case may be, reasonably requested by the Accounting Firm, and otherwise cooperate with the Accounting Firm in connection with the preparation and issuance of the determination contemplated by Section 4.1(c). Any reasonable determination by the Accounting Firm of the type contemplated by Section 4.1(c) (and supported by the calculations done by the Accounting Firm) shall be binding upon such Participating Company and the Tier I or Tier II Executive. | ||
(e) | The federal, state and local income or other tax returns filed by the Tier I or Tier II Executive shall be prepared and filed on a consistent basis with the determination of the Accounting Firm with respect to the Excise Tax, if any, payable by the Tier I or Tier II Executive. The Tier I or Tier II Executive shall make proper payment of the amount of any Excise Tax, and upon request, provide to the Participating Company true and correct copies (with any amendments) of the Tier I or Tier II Executives federal income tax return as filed with the Internal Revenue Service and corresponding state and local tax returns, if relevant, as filed with the applicable taxing authority, and such other documents reasonably requested by the Participating Company, evidencing such filing and payment. | ||
(f) | The Participating Company will pay the fees and expenses of the Accounting Firm for its services in connection with the determinations and calculations contemplated by Section 4.1(c) and Section 4.1(e). If such fees and expenses are initially paid by the Tier I or Tier II Executive, the Participating Company shall reimburse the Tier I or Tier II Executive the full amount of such fees and expenses within ten (10) business days after receipt from the Tier I or Tier II Executive of reasonable evidence of payment; provided, however, that any such reimbursements shall be made no later than December 31 of the year following |
17
the year in which the Tier I or Tier II Executive incurs the fees and expenses. In no event will the amount of expenses eligible for reimbursement in one year affect the amount of expenses to be reimbursed, or in-kind benefits to be provided, in any other taxable year. |
18
(a) | Any Subsidiary of the Company may become a Participating Company under the Plan provided that by appropriate resolutions of the board of directors or other governing body of such Subsidiary, such Subsidiary agrees to become a Participating Company under the Plan and also agrees to be bound by any other terms and conditions which may be required by the Board or the Committee, |
19
provided that such terms and conditions are not inconsistent with the purposes of the Plan. | |||
(b) | A Participating Company may withdraw from participation in the Plan, subject to approval by the Committee, by providing written notice to the Committee that withdrawal has been approved by the board of directors or other governing body of the Participating Company. The Committee may at any time remove a Participating Company from participation in the Plan by providing written notice to the Participating Company that it has approved removal. The Committee will act in accordance with this Section 7.3 pursuant to unanimous written consent or by majority vote at a meeting. |
20
21
/s/ Lisa J. Caldwell | ||||
By: | Lisa Caldwell | |||
Senior Vice President Human Resources |
22
Page | ||||||
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1.
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Purpose | 2 | ||||
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2.
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Definitions | 2 | ||||
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3.
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Eligibility | 2 | ||||
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4.
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Company Performance Objectives | 2 | ||||
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5.
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Determination of Target Awards | 3 | ||||
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6.
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Determination of Employee Performance Rating Multipliers | 3 | ||||
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7.
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Determination of Cash Awards | 4 | ||||
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8.
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Determination of Cash Awards for SBC Program Participants | 5 | ||||
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9.
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Deferral | 6 | ||||
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10.
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Tax Withholding | 9 | ||||
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11.
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Adjustments, Amendments or Termination | 9 | ||||
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12.
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Adoption/Withdrawal by Participating Companies | 9 | ||||
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13.
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Miscellaneous | 10 | ||||
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14.
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Effective Date | 12 |
1. | Purpose | |
The Reynolds American Inc. Annual Incentive Award Plan is established to link corporate and business priorities with individual and group performance objectives for employees of RAI and its affiliated companies. The Plan is an amendment, restatement and continuation of the R.J. Reynolds Tobacco Holdings, Inc. Annual Incentive Award Plan. | ||
2. | Definitions | |
Capitalized terms have the meanings set forth in Exhibit A. | ||
3. | Eligibility | |
To be eligible to participate in the Plan and receive an award, an employee must: |
(a) | be employed by a Participating Company in an employment classification and at or above a job level or in a job category as designated by such Participating Company; | ||
(b) | except as otherwise provided in Section 7, be employed by a Participating Company for at least three months during the year; and | ||
(c) | except as otherwise provided herein, be actively employed by a Participating Company on the last day of the year. |
4. | Company Performance Objectives |
(a) | Subject to the approval of the Committee, the Chief Executive Officer of each Participating Company may establish specific objectives (the Company Performance Objectives) for each Participating Company for each year. Subject to the approval of the Chief Executive Officer of RAI, the Chief Executive Officers of the Participating Companies also may establish Company Performance Objectives for some or all of their respective subsidiaries. Company Performance Objectives may be based on any financial, operational or other criteria, such as market share. |
A-1
(b) | Each of the Company Performance Objectives will be weighted for the purpose of determining awards under the Plan. Different weights may be assigned to the objectives for different Participants and Participating Companies. However, the aggregate weights for the Company Performance Objectives will each range from 1-100% and together total 100%. | ||
(c) | Company Performance Objectives may be reviewed and revised during the year pursuant to the procedures used for their adoption. The Chief Human Resources Officer may change the weighting of any objective for any Participant below Senior Vice President (job level 11). |
5. | Determination of Target Awards |
(a) | Each Participants target award level is expressed as a percentage of Base Pay and falls within a range of target award levels set for the Participants salary grade. The Committee will periodically review and may modify the range of target award levels for each salary grade. Subject to the approval of the Chief Human Resources Officer, Reviewing Managers will periodically review and may modify specific target award levels for individual Participants. The Chief Executive Officer may modify the specific target award level for the Chief Human Resources Officer. | ||
(b) | Each Participants target award for each year equals the product of (i) the Participants highest annual rate of Base Pay in effect for three months or more during the year, multiplied by (ii) the Participants highest target award level for which he was eligible for three months or more during the year; provided, however, that with respect to employees of RAI, R. J. Reynolds Tobacco Company and R. J. Reynolds Global Products, Inc. (exclusive of any Puerto Rico based employees), if the product of (i) and (ii) is less than $1,000, the Participants target award will be $1,000. |
6. | Determination of Employee Performance Rating Multipliers | |
Each Participants Employee Performance Rating Multiplier will be determined by his performance rating under each Participating Companys Performance Management Center (PMC) process, as set forth in the following table; provided, that the Employee Performance Rating Multiplier shall never be greater than 1.0 for Participants above the vice president level: |
PMC
Performance Rating |
Employee Performance
Rating Multiplier If Company Performance Rating is 100% or greater |
Employee Performance
Rating Multiplier If Company Performance Rating is less than 100% |
||||||
Exceeds | 1.5 | 1.0 | ||||||
A-2
High Achieves | 1.2 | 1.0 | ||||||
Achieves | 1.0 | 1.0 | ||||||
Almost Achieves | 0.5 | 0.5 | ||||||
Fails to Meet | 0 | 0 | ||||||
7. | Determination of Cash Awards |
(a) | Promptly after the end of each year, the Chief Executive Officer of RAI will review the performance of each Participating Company with the Committee. Subject to the approval of the Committee, the Chief Executive Officers of the Participating Companies may give a rating to each Company Performance Objective for the year (a Company Performance Rating) ranging from 0-200% for each Company Performance Objective. | ||
(b) | The amount of each Cash Award is determined by the following formula: |
(i) | the product of the Company Performance Ratings multiplied by the respective weights assigned to the corresponding Company Performance Objectives pursuant to Section 4(c) | ||
multiplied by | |||
(ii) | the target award for the Participant established pursuant to Section 5 | ||
multiplied by | |||
(iii) | the Employee Performance Rating Multiplier established pursuant to Section 6. |
(c) | When a Participant becomes eligible to participate in the Plan after the start of the year, the Participants Cash Award will be prorated for the number of months of eligibility during the year. In the event a Participant is on a leave of absence during the year, the Participants Cash Award may be prorated, based on the number of full or partial months of active employment, at the discretion of the Chief Human Resources Officer. | ||
(d) | If a Participants employment is interrupted by the Participants death, Disability or Retirement at any time during the year, the Participant will receive a Cash Award equal to his or her target award, prorated for the number of full or partial months of employment during the year, as soon as practicable after such death, Disability or Retirement. The Chief Human Resources Officer shall determine |
A-3
whether such pro ration will be on a daily or monthly basis, and if on a monthly basis, whether a full months credit will be given for any partial month of work or short-term disability. | |||
(e) | If a Participant loses eligibility under the Plan as the result of a transfer to a non-Participating Company, the Participant will receive a Cash Award equal to his or her actual award determined in accordance with Section 7(b), prorated for the number of full and partial months as an eligible employee under the Plan. If the Participants employment has been for a period of less than three months, the Participants Cash Award shall be determined under this Plan at the Base Pay in effect on the date before the Participant loses eligibility under the Plan. | ||
(f) | If a Participant is reclassified into a job with a lower base job value as a result of a company-initiated redeployment (involuntary move for the Participant), the target award will equal the product of (i) the greater of the highest annual rate of Base Pay in effect for three months or more during the year or the Base Pay in effect prior to any reduction due to the redeployment, multiplied by (ii) the greater of the highest target award level in effect for three months or more during the year or the target award level in effect prior to any reduction due to the redeployment. | ||
(g) | After obtaining approval from the Committee and satisfying its requirements, the Companies will pay the Cash Award as soon as practicable after the end of the year, but in any event no later than March 15 (other than for employees on international assignment, who will be paid the Cash Award no later than June 30) or as otherwise required by Section 409A of the Internal Revenue Code of 1986, as amended, except as provided in the event of death, Disability or Retirement pursuant to Section 7(d). |
8. | Determination of Cash Awards for SBC Program Participants |
(a) | If a Participants employment terminates pursuant to the SBC Program at any time during the year, the Participant will receive a Cash Award for the year of termination of active employment equal to his or her actual award determined in accordance with Section 7(b), prorated for the number of full or partial months as an active employee, plus if the employment terminates in any of the first eleven months of the year an amount equal to the amount of matching contributions and/or retirement enhancement contributions, if any, that would be contributed by the Company to the Companys qualified defined contribution plan (the CIP) and nonqualified defined contribution benefit plans assuming that (A) the Participant was as an active participant in the CIP during the year of termination, (B) the Participants pay was equal to the amount of such Cash Award and (C) the Participant had elected to contribute in an amount that would have provided for the maximum matching contributions for such year. In addition, the SBC Program may provide the Participant with credit for some or all of the period of salary continuation and, if so, will establish criteria to determine the Company |
A-4
Performance Ratings for the Participant during this period. Payment of the resulting Cash Awards, if any, will be governed by the terms of the SBC Program. | |||
(b) | If an employee returns from the SBC Program to active employment for a Participating Company, where such employee received credit under the Plan in accordance with Section 8(a) for some or all of the period of salary continuation pursuant to the SBC Program, but the employees active employment for the Participating Companies does not satisfy the eligibility requirements of Section 3, the employee will receive a Cash Award equal to his or her target award, prorated for the period he or she received salary continuation pursuant to the SBC Program and was eligible for credit under the Plan. A Cash Award to be made pursuant to this Section 8(b) will be paid to the employee as soon as practicable following his or her return to active service. | ||
(c) | If an employee returns from the SBC Program to active employment for a Participating Company, where such employee received credit under the Plan in accordance with Section 8(a) for some or all of the period of salary continuation pursuant to the SBC Program and he or she continues to satisfy the eligibility requirements of Section 3, the Participant will receive (i) a Cash Award equal to his or her target award, prorated for the period he or she received salary continuation pursuant to the SBC Program and was eligible for credit under the Plan, and (ii) a Cash Award equal to his or her actual award determined in accordance with Section 7(b), prorated for the number of full or partial months as an active employee. Payment of the Participants Cash Award pursuant to Section 8(c)(i) will be paid as soon as practicable following his or her return to active service. Payment of the Participants Cash Award pursuant to Section 8(c)(ii) will be paid as provided in Section 7(g). | ||
(d) | If an employee has his or her SBC interrupted (short-term) and he or she received credit under the Plan in accordance with Section 8(a) for some or all of the period of salary continuation pursuant to the SBC Program, but the employees active employment for Participating Companies does not satisfy the eligibility requirements of Section 3, he or she will receive a Cash Award equal to his or her target award, prorated for the period he or she received salary continuation pursuant to the SBC Program and was eligible for credit under the Plan, to be paid at the end of the employees SBC period. | ||
(e) | If an employee has his or her SBC interrupted (short-term) and he or she returns to active employment for a Participating Company, where such employee received credit under the Plan in accordance with Section 8(a) for some or all of the period of salary continuation pursuant to the SBC Program and he or she continues to satisfy the eligibility requirements of Section 3, the Participant will receive (i) a Cash Award equal to his or her target award, prorated for the period he or she received salary continuation pursuant to the SBC Program and was eligible for credit under the Plan, and (ii) a Cash Award equal to his or her actual |
A-5
award determined in accordance with Section 7(b), prorated for the number of full or partial months as an active employee. Payment of the Participants Cash Award pursuant to Section 8(e)(i) will be paid at the end of the employees SBC period. Payment of the Participants Cash Award pursuant to Section 8(e)(ii) will be paid as provided in Section 7(g). |
9. | Deferral |
(a) | As of the last day of each year prior to 2004, each Participant who was on a U.S. dollar payroll could elect to defer payment of the Cash Award for that year. An election to defer was made pursuant to procedures established by the Committee and was made in writing, signed by the Participant and delivered to a Participating Company by December 15 of the year preceding payment. The election was irrevocable and specified the percentage of the Cash Awards (from 5% to 100%) to be paid (i) as soon as practicable after the year in which the Participants Retirement, Disability or other termination of employment occurs or, if earlier, (ii) in January of any designated future year. If the Participants employment with all Participating Companies terminates before the designated year, the award will be paid in January of the year following termination. If a Participant was eligible for CIP and elected to defer the proceeds of Cash Awards, the Participants Participating Company contributed an additional 3% to the amount deferred on account of the 3% Company match that the Participant would have received under CIP if the Participant had not deferred the Cash Award. | ||
(b) | Each Participant specified, on the notice electing deferred payment pursuant to Section 9(a), whether the Cash Award was deferred by cash credit, Common Stock credit, or a combination of the two. If a Participant elected to defer payment pursuant to Section 9(a) and failed to choose a mode of deferral, the Participants deferral was made by means of a cash credit. Cash credits and stock credits are recorded in accounts established in each Participants name on the books of the Participants Participating Company. At the direction of RAI, any Participants accounts may be consolidated on the books of RAI or any of its subsidiaries. |
(i) | If the deferral is wholly or partly a cash credit, the Participants cash credit account will be credited, as of the date(s) that payment of the Cash Awards would otherwise have been made, with the dollar amount of the portion of the Cash Awards deferred by means of a cash credit. In addition, the Participants cash credit account will be credited as of the last day of each calendar quarter with an interest equivalent in an amount determined by applying to the current balance in the account an interest rate equal to the average prime rate of JPMorgan Chase & Co. or its successor during the preceding quarter. Interest will be credited for the actual number of days in the quarter using a 365-day year. |
A-6
(ii) | If the deferral is wholly or partly a Common Stock credit, the Participants Common Stock credit account will be credited, as of the date(s) that payment of the Cash Awards would otherwise have been made, with the Common Stock equivalent of the number of shares of Common Stock (including fractions of a share) that could have been purchased with the portion of the Cash Awards deferred by means of a Common Stock credit at the Closing Price on the date that payment of the Cash Awards would otherwise have been made. As of the date any dividend is paid to shareholders of Common Stock, the Participants Common Stock credit account also will be credited with an additional Common Stock equivalent equal to the number of shares of Common Stock (including fractions of a share) that could have been purchased at the Closing Price on such date with the dividend paid on the number of shares of Common Stock to which the Participants Common Stock credit account is then equivalent. If dividends are paid in property, the dividend will be deemed to be the fair market value of the property at the time of distribution of the dividend, as determined by the Committee. |
(c) | Payment of deferred Cash Awards will be made in a single cash payment as soon as practicable in January of the appropriate year. If and to the extent that the deferral is by means of the Common Stock credit account the value of the payment will be based on the Closing Price of Common Stock on the last trading day of the year prior to payment. Notwithstanding the foregoing, if a Participant elects in writing before December 15 of the year his employment terminates due to Retirement or Disability, payment will be made in substantially equal annual installments (not to exceed ten) commencing in January following the Retirement or Disability. Notwithstanding any election under Section 9(a) to defer Cash Awards by means of a Common Stock credit, the Common Stock credit account of a Participant who elects to receive installment payments will be converted into a cash credit account as of January 1 of the year in which such installment payments commence. Any election by a Participant under this Section 9(c) will be irrevocable after December 15 of the year prior to commencement of payment. | ||
(d) | At the one-time election of a Participant made in writing to the Committee, all or any designated portion of the Common Stock credit account may be converted to, and such Participant will be credited with, a cash credit account as of the first business day of the calendar quarter following the quarter in which the election is made. The amount credited to the cash credit account will be determined by multiplying the number of shares of Common Stock to which the Participants Common Stock credit account is then equivalent and as to which such election has been made by the Closing Price on the last business day of the calendar quarter in which the election is made. Any Common Stock credits attributable to dividends paid on Common Stock during the calendar quarter in which the election is made will be credited before making the conversion. Such election may be made by a Participant at any time prior to the end of the calendar year in |
A-7
which termination of employment occurs. An election by a Participant under this Section 9(d) will be irrevocable. | |||
(e) | If the number of shares of Common Stock is increased or decreased as a result of any stock dividend, subdivision or reclassification of shares, the number of shares of Common Stock to which each Participants Common Stock credit account is equivalent shall be increased in proportion to the increase or decrease in the number of outstanding shares of Common Stock and the Closing Price on which payments hereunder is based will be proportionately decreased or increased. If the number of outstanding shares of Common Stock is decreased as the result of any combination or reclassification of shares, the number of shares of Common Stock to which each Participants Common Stock credit account is equivalent will be decreased in proportion to the decrease in the number of outstanding shares of Common Stock. In the event RAI is consolidated with or merged into any other corporation and holders of Common Stock receive common shares of the resulting or surviving corporation, each Participants Common Stock credit account, in place of the shares then credited thereto, will be credited with a stock equivalent determined by multiplying the number of common shares of stock given in exchange for a share of Common Stock upon such consolidation or merger, by the number of shares of Common Stock to which the Participants account is then equivalent. If in such a consolidation or merger, holders of Common Stock receive any consideration other than common shares of the resulting or surviving corporation, the Committee will determine the appropriate change in Participants accounts. In the event of an extraordinary dividend, including any spin-off, the Committee will make appropriate adjustments to each Participants Common Stock credit account. | ||
(f) | If a Participant dies, whether before or after termination of employment, any cash credit account and Common Stock credit account to which he or she is entitled, including any award approved after the Participants death as to which an election to defer was made and any remaining installment payments, will be distributed in cash as soon as practicable (unless the Committee otherwise provides) to the Participants beneficiaries pursuant to Section 13(i). |
10. | Tax Withholding | |
Each Participants employer will deduct any taxes required to be withheld by federal, state, local or foreign governments from payments and distributions under the Plan. | ||
11. | Adjustments, Amendments or Termination |
(a) | The Committee may make appropriate and equitable adjustments in the Company Performance Ratings and the number, terms and conditions of any Cash Awards if it determines that conditions warrant such adjustment. Such conditions may include, without limitation, changes in the economy, laws, regulations and |
A-8
generally accepted accounting principles, as well as corporate events such as a merger, consolidation, recapitalization, reclassification, stock split, stock dividend, spin-off, change of control or other event. Any adjustment made by the Committee shall be final and binding upon the Participating Companies and the Participants. | |||
(b) | The Committee may amend, suspend or terminate the Plan at will and at any time, but it will not take any action that would materially adversely affect the rights of Participants with respect to deferral accounts. |
12. | Adoption/Withdrawal by Participating Companies |
(a) | Adoption of Plan. Any entity may, with the consent of the Committee, adopt the Plan and thereby become a Participating Company hereunder by executing an instrument evidencing such adoption and filing a copy thereof with the Committee. By this adoption of the Plan, Participating Companies (other than RAI) shall be deemed to consent to actions taken by RAI in entering into any arrangements for the purpose of providing benefits under the Plan, and to authorize RAI and/or the Committee on behalf of RAI to take any actions within the authority of RAI under the terms of the Plan. | ||
(b) | Withdrawal/Effect of Termination. Notwithstanding the foregoing, in the case of any Participating Company that adopts the Plan and thereafter (i) ceases to exist or (ii) withdraws or is eliminated from the Plan, it shall not thereafter be considered a Participating Company thereunder and the employees of such Participating Company shall no longer be eligible to participate in the Plan. Any Participating Company (other than RAI) which adopts the Plan may elect separately to withdraw from the Plan and such withdrawal shall constitute a termination of the Plan as to it; provided, however, that such terminating Participating Company shall continue to be a Participating Company for the purposes hereof as to Participants to whom it owes obligations hereunder, unless RAI or the Committee directs otherwise. | ||
(c) | Expenses. The expenses of administering the Plan will be paid by RAI, unless RAI, in its sole and absolute discretion, directs the other Participating Companies to pay some or all of the expenses. | ||
(d) | Liability for Payment/Transfers of Employment. |
(i) | Subject to the provisions of subsections (ii) and (iii) hereof, each Participating Company shall be solely liable for and shall reimburse RAI for the Participating Companys appropriate share of any funding necessary to provide benefits to its employees who are Participants under this Plan; |
A-9
(ii) | Notwithstanding the foregoing, upon a transfer of employment among Participating Companies, any liability for the payment of a Cash Award to or on behalf of a Participant shall be transferred from the prior Participating Company to the new Participating Company. The last Participating Company of the Participant shall be responsible for the payment of any Cash Award payable hereunder after the Participants termination of employment, whether liability for such payment accrued before or after the Participants transfer of employment to such Participating Company; and | ||
(iii) | Notwithstanding the foregoing, in the event that RAI is unable or refuses to satisfy its obligation hereunder with respect to the payment of any Cash Award to or on behalf of its Participants, each of the Participating Companies (unless it is insolvent), other than RAI, shall guarantee and be jointly and severally liable for a portion of such Cash Award under the Plan, allocated based on a fraction, the numerator of which is equal to the number of Participants in the Plan who are current or former employees of the Participating Company and the denominator of which is the total number of Participants in the Plan, excluding current or former RAI employees (as in effect on the date of the determination). |
13. | Miscellaneous |
(a) | Except as determined by the Committee, no person will have any right to receive an award. | ||
(b) | The Committee has the power to interpret the Plan and, together with the officers of the Companies, has complete discretion in making determinations and taking action pursuant to the Plan. All interpretations, determinations and actions by the Committee will be final, conclusive and binding on all parties. Subject to the preceding sentence, the Chief Executive Officer of RAI will administer the Plan and will resolve all administrative questions and interpretations. The Committee and the Chief Executive Officer of RAI may delegate their authority to anyone. In such event, references in the Plan to the Committee or to the Chief Executive Officer of RAI will refer to their delegates when appropriate. | ||
(c) | The Participating Companies, their boards of directors, the Committee, the officers and the other employees of RAI and its subsidiaries will not be liable for any action taken in good faith in interpreting and administering the Plan. | ||
(d) | For purposes of the Plan, a Participant on leave of absence approved by a Participating Company will be considered an employee. Except as otherwise provided herein, a Participant on salary continuation under an SBC Program or agreement of severance will not be considered an employee but will be deemed to be terminated on his or her last day of active employment. A Participant absent |
A-10
due to short-term disability on the last day of a year is deemed to be actively employed if such Participant was actively employed at any time during the year. | |||
(e) | Nothing herein creates a vested right. The Cash Awards and the interest, dividends and other expenses on Cash Awards deferred under Section 9 are not funded and, except to the extent provided in Section 12(d)(iii), are paid from the general assets of the Company from which the Participant terminated employment. Nothing herein shall be construed to require the Participating Companies to maintain any fund or segregate any amount for the benefit of any Participant and no Participant or other person shall have any claim against, right to, or security or other interest in, any fund, account or asset of any Participating Company from which he or she terminated employment. Other benefits referred to herein may be funded or unfunded as provided for in the individual plans. | ||
(f) | The Plan does not create or confer on any Participant any right to employment, and the employment of any Participant may be terminated by the Participant or the Participants employer without regard to the effect that termination might have on the Participant with respect to the Plan. | ||
(g) | Participants may not transfer, pledge or encumber any benefit under the Plan prior to its receipt in cash. Except as required by law, creditors may not attach or seize any such benefit. | ||
(h) | The Plan will be governed by and subject to the laws of the State of North Carolina. | ||
(i) | In the event of the death of a Participant, any distribution to which such Participant is entitled under the Plan shall be made to the beneficiary designated by the Participant to receive the proceeds of any noncontributory group life insurance coverage provided for the Participant by the Participants Participating Company (Group Life Insurance Coverage). If the Participant has not designated such beneficiary, does not have any Group Life Insurance coverage or desires to designate a different beneficiary, the Participant may file with the Chief Human Resources Officer a written designation of a beneficiary under the Plan, which designation may be changed or revoked only by the Participant, in writing. If no designation of beneficiary has been made by a Participant under the Group Life Insurance Coverage or filed with the Chief Human Resources Officer under the Plan, distribution upon such Participants death shall be made in accordance with the provisions of the Group Life Insurance Coverage. If a Participant is no longer an employee of a Participating Company at the time of death, no longer has or never had any Group Life Insurance Coverage and has not filed a designation of beneficiary with the Chief Human Resources Officer under the Plan, distribution upon such Participants death shall be made to the Participants estate. |
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(j) | A Company may supersede some or all of the terms of the Plan with respect to individual Participants pursuant to an employment, termination or similar agreement. In case of conflict, the agreement will control. |
14. | Effective Date | |
The Plan is effective as of July 30, 2004. The Plan as set forth herein reflects amendments effective November 30, 2004, February 2, 2005, January 1, 2006, November 29, 2006, May 10, 2007, and January 1, 2008. |
A-12
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES/DEFICIENCY IN
THE
COVERAGE OF FIXED CHARGES BY EARNINGS BEFORE FIXED CHARGES
(Dollars in Millions)
(Unaudited)
For The Years Ended December 31,
2007
2006
2005
2004
2003
$
2,073
$
1,809
$
1,416
$
829
$
(3,918
)
(13
)
(17
)
(10
)
(9
)
5
2,060
1,792
1,406
820
(3,913
)
338
270
113
85
111
7
8
12
12
12
$
2,405
$
2,070
$
1,531
$
917
$
(3,790
)
$
338
$
270
$
113
$
85
$
111
7
8
12
12
12
$
345
$
278
$
125
$
97
$
123
7.0
7.4
12.2
9.5
$
$
$
$
$
(3,913
)
(As of 02/20/2008)
Name of Entity
Place of Incorporation
Delaware
Delaware
Delaware
Delaware
North Carolina
New York
Delaware
Netherlands
France
Delaware
Spain
Italy
Delaware
Netherlands
Cayman Islands
Delaware
North Carolina
Netherlands
Delaware
Delaware
Hong Kong
Delaware
Delaware
Delaware
Delaware
North Carolina
Delaware
Delaware
Germany
New Mexico
United Kingdom
Netherlands
Delaware
North Carolina
North Carolina
New Mexico
Delaware
Switzerland
Japan
1. | I have reviewed this annual report on Form 10-K of Reynolds American Inc.; | |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | |
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
c. | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d. | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and | |
b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
1. | I have reviewed this annual report on Form 10-K of Reynolds American Inc.; | |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | |
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
c. | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d. | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and | |
b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
1) | RAIs Annual Report on Form 10-K for the year ended December 31, 2007, fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and | |
2) | the information contained in RAIs Annual Report on Form 10-K for the year ended December 31, 2007, fairly presents, in all material respects, the financial condition and results of operations of RAI. |
CONSOLIDATED FINANCIAL STATEMENTS
1
2
3
4
5
6
For the Years Ended | ||||||||||||
December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Net sales
1
|
$ | 7,435 | $ | 7,296 | $ | 7,409 | ||||||
Net sales, related parties
|
699 | 572 | 505 | |||||||||
|
||||||||||||
Net Sales
|
8,134 | 7,868 | 7,914 | |||||||||
Costs and expenses:
|
||||||||||||
Cost of products sold
1, 2
|
4,752 | 4,611 | 4,763 | |||||||||
Selling, general and administrative expenses
|
1,410 | 1,454 | 1,514 | |||||||||
Loss on sale of assets
|
| | 24 | |||||||||
Amortization expense
|
22 | 27 | 41 | |||||||||
Restructuring and asset impairment charges
|
| 1 | 2 | |||||||||
Trademark impairment charges
|
33 | 90 | 198 | |||||||||
|
||||||||||||
Operating income
|
1,917 | 1,685 | 1,372 | |||||||||
Interest expense on notes due to affiliates
|
4 | 3 | 3 | |||||||||
Interest income on notes due from affiliates
|
(63 | ) | (37 | ) | (26 | ) | ||||||
Interest expense
|
| 1 | 1 | |||||||||
Interest income
|
(110 | ) | (116 | ) | (74 | ) | ||||||
Other income, net
|
(6 | ) | (15 | ) | (9 | ) | ||||||
|
||||||||||||
Income from continuing operations
before income taxes
|
2,092 | 1,849 | 1,477 | |||||||||
Provision for income taxes
|
777 | 709 | 641 | |||||||||
Minority interest
|
3 | 3 | 3 | |||||||||
|
||||||||||||
Income
from continuing operations
|
1,312 | 1,137 | 833 | |||||||||
Discontinued operations:
|
||||||||||||
Gain on sale of discontinued businesses,
net of income taxes (2005$1)
|
| | 2 | |||||||||
|
||||||||||||
Net income
|
$ | 1,312 | $ | 1,137 | $ | 835 | ||||||
|
1 | Excludes excise taxes of $1,963 million, $2,014 million and $2,092 million during 2007, 2006 and 2005, respectively. | |
2 | See Master Settlement Agreement and Federal Tobacco Buyout Expenses in note 1. |
2
For the Years Ended | ||||||||||||
December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Cash flows from (used in) operating activities:
|
||||||||||||
Net income
|
$ | 1,312 | $ | 1,137 | $ | 835 | ||||||
Less income from discontinued operations
|
| | (2 | ) | ||||||||
Adjustments to reconcile to net cash flows from (used in)
continuing operating activities:
|
||||||||||||
Depreciation and amortization
|
127 | 150 | 188 | |||||||||
Restructuring and asset impairment charges, net of cash
payments
|
(4 | ) | (13 | ) | (61 | ) | ||||||
Acquisition restructuring charges, net of cash payments
|
(8 | ) | (81 | ) | (59 | ) | ||||||
Trademark impairment charges
|
33 | 90 | 198 | |||||||||
Deferred income tax expense
|
88 | 115 | 127 | |||||||||
Other changes, that provided (used) cash:
|
||||||||||||
Accounts receivable
|
7 | 4 | 4 | |||||||||
Inventories
|
(8 | ) | 65 | 196 | ||||||||
Related party, net
|
(485 | ) | 423 | 181 | ||||||||
Accounts payable
|
(67 | ) | 219 | (27 | ) | |||||||
Accrued liabilities including income taxes and other
working capital
|
(132 | ) | 1 | (165 | ) | |||||||
Litigation bonds
|
94 | 24 | 16 | |||||||||
Tobacco settlement and related expenses
|
202 | (23 | ) | (135 | ) | |||||||
Pension and postretirement
|
(330 | ) | (264 | ) | (209 | ) | ||||||
Other, net
|
(20 | ) | 15 | 29 | ||||||||
|
||||||||||||
Net cash flows from operating activities
|
809 | 1,862 | 1,116 | |||||||||
|
||||||||||||
|
||||||||||||
Cash flows from (used in) investing activities:
|
||||||||||||
Purchases of short-term investments
|
(3,658 | ) | (7,550 | ) | (10,881 | ) | ||||||
Proceeds from short-term investments
|
4,312 | 7,760 | 9,983 | |||||||||
Capital expenditures
|
(100 | ) | (123 | ) | (97 | ) | ||||||
Net proceeds from the sale of businesses
|
| | 48 | |||||||||
Receipts (additional investments) in notes due from affiliates
|
(836 | ) | (113 | ) | 11 | |||||||
Distributions from equity investees
|
10 | 18 | 12 | |||||||||
Net proceeds from sales of fixed assets
|
3 | 23 | 6 | |||||||||
Other, net
|
| (4 | ) | | ||||||||
|
||||||||||||
Net cash flows from (used in) investing activities
|
(269 | ) | 11 | (918 | ) | |||||||
|
||||||||||||
|
||||||||||||
Cash flows from (used in) financing activities:
|
||||||||||||
Dividends paid on common stock
|
| (1,520 | ) | (435 | ) | |||||||
Dividends paid to minority stockholder
|
| | (8 | ) | ||||||||
Payments on notes due to affiliates
|
| | (2 | ) | ||||||||
Investment from (returned to) parent
|
260 | (464 | ) | 7 | ||||||||
|
||||||||||||
Net cash flows from (used in) financing activities
|
260 | (1,984 | ) | (438 | ) | |||||||
|
||||||||||||
|
||||||||||||
Net change in cash and cash equivalents
|
800 | (111 | ) | (240 | ) | |||||||
Cash and cash equivalents at beginning of year
|
891 | 1,002 | 1,242 | |||||||||
|
||||||||||||
Cash and cash equivalents at end of year
|
$ | 1,691 | $ | 891 | $ | 1,002 | ||||||
|
||||||||||||
|
||||||||||||
Income taxes paid, net of refunds
|
$ | 88 | $ | 68 | $ | 86 | ||||||
Income taxes paid to parent, net of refunds
|
$ | 593 | $ | 536 | $ | 444 | ||||||
Interest paid
|
$ | | $ | 1 | $ | |
3
December 31, | ||||||||
2007 | 2006 | |||||||
Assets
|
||||||||
Current assets:
|
||||||||
Cash and cash equivalents
|
$ | 1,691 | $ | 891 | ||||
Short-term investments
|
377 | 1,053 | ||||||
Accounts and other receivables, net of allowance (2007$1; 2006$3)
|
50 | 57 | ||||||
Accounts receivable, related party
|
75 | 53 | ||||||
Inventories
|
921 | 913 | ||||||
Deferred income taxes, net
|
812 | 767 | ||||||
Assets held for sale
|
4 | | ||||||
Prepaid expenses
|
166 | 100 | ||||||
Notes and interest receivable due from affiliates
|
159 | 154 | ||||||
|
||||||||
Total current assets
|
4,255 | 3,988 | ||||||
Property, plant and equipment, at cost:
|
||||||||
Land and land improvements
|
85 | 87 | ||||||
Buildings and leasehold improvements
|
651 | 650 | ||||||
Machinery and equipment
|
1,647 | 1,617 | ||||||
Construction-in-process
|
47 | 39 | ||||||
|
||||||||
Total property, plant and equipment
|
2,430 | 2,393 | ||||||
Less accumulated depreciation
|
1,477 | 1,425 | ||||||
|
||||||||
Property, plant and equipment, net
|
953 | 968 | ||||||
Trademarks, net of accumulated amortization (2007$523; 2006$517)
|
1,867 | 1,906 | ||||||
Goodwill
|
5,302 | 5,303 | ||||||
Other intangibles, net of accumulated amortization (2007$73; 2006$57)
|
155 | 136 | ||||||
Notes receivable due from affiliates
|
1,310 | 472 | ||||||
Other assets and deferred charges
|
556 | 189 | ||||||
|
||||||||
|
$ | 14,398 | $ | 12,962 | ||||
|
||||||||
|
||||||||
Liabilities and shareholders equity
|
||||||||
Current liabilities:
|
||||||||
Accounts payable
|
$ | 186 | $ | 253 | ||||
Tobacco settlement and related accruals
|
2,425 | 2,216 | ||||||
Due to related party
|
147 | 581 | ||||||
Deferred revenue, related party
|
35 | 62 | ||||||
Notes and interest due to affiliates
|
74 | 64 | ||||||
Other current liabilities
|
696 | 748 | ||||||
|
||||||||
Total current liabilities
|
3,563 | 3,924 | ||||||
Notes due to affiliates
|
2 | 4 | ||||||
Deferred income taxes, net
|
649 | 612 | ||||||
Long-term retirement benefits (less current portion)
|
1,042 | 1,098 | ||||||
Other noncurrent liabilities
|
245 | 106 | ||||||
|
||||||||
Total liabilities
|
5,501 | 5,744 | ||||||
|
||||||||
Minority interest (note 9)
|
8 | 5 | ||||||
|
||||||||
Commitments and contingencies:
|
||||||||
Shareholders equity:
|
||||||||
Common stock (2007 and 2006: $.01 par, 100 shares)
|
| | ||||||
Paid-in capital
|
8,835 | 8,566 | ||||||
Accumulated retained earnings (deficit)
|
356 | (961 | ) | |||||
Accumulated other comprehensive loss(Defined benefit pension and
post-retirement plans: 2007-($293) and 2006-($393), net of tax)
|
(302 | ) | (392 | ) | ||||
|
||||||||
Total shareholders equity
|
8,889 | 7,213 | ||||||
|
||||||||
|
$ | 14,398 | $ | 12,962 | ||||
|
4
Retained | Accumulated | |||||||||||||||||||||||
Earnings | Other | Total | ||||||||||||||||||||||
Common | Paid-In | (Accumulated | Comprehensive | Shareholders | Comprehensive | |||||||||||||||||||
Stock | Capital | Deficit) | Income (Loss) | Equity | Income | |||||||||||||||||||
Balance at December 31, 2004
|
$ | | $ | 9,345 | $ | (1,178 | ) | $ | (442 | ) | $ | 7,725 | ||||||||||||
Net income
|
| | 835 | | 835 | $ | 835 | |||||||||||||||||
Minimum pension liability, net
of $85 million tax benefit
|
| | | (52 | ) | (52 | ) | (52 | ) | |||||||||||||||
Other
|
| | | 1 | 1 | 1 | ||||||||||||||||||
|
||||||||||||||||||||||||
Total comprehensive income
|
$ | 784 | ||||||||||||||||||||||
|
||||||||||||||||||||||||
Additional investment from parent
|
| 7 | | | 7 | |||||||||||||||||||
Dividends declared
|
| | (435 | ) | | (435 | ) | |||||||||||||||||
|
||||||||||||||||||||||||
Balance at December 31, 2005
|
| 9,352 | (778 | ) | (493 | ) | 8,081 | |||||||||||||||||
Net income
|
| | 1,137 | | 1,137 | $ | 1,137 | |||||||||||||||||
Minimum pension liability, net
of $315 million tax expense
|
| | | 487 | 487 | 487 | ||||||||||||||||||
|
||||||||||||||||||||||||
Total comprehensive income
|
$ | 1,624 | ||||||||||||||||||||||
|
||||||||||||||||||||||||
Implementation of SFAS 158, net
of $246 million tax
|
| | | (386 | ) | (386 | ) | |||||||||||||||||
Additional investment from parent
|
| 6 | | | 6 | |||||||||||||||||||
Return of capital to parent
|
| (592 | ) | | | (592 | ) | |||||||||||||||||
Dividends declared
|
| (200 | ) | (1,320 | ) | | (1,520 | ) | ||||||||||||||||
|
||||||||||||||||||||||||
Balance at December 31, 2006
|
| 8,566 | (961 | ) | (392 | ) | 7,213 | |||||||||||||||||
Cumulative effect of adoption of
FIN No. 48
|
| | 5 | | 5 | |||||||||||||||||||
|
||||||||||||||||||||||||
Adjusted balance as of January
1, 2007
|
| 8,566 | (956 | ) | (392 | ) | 7,218 | |||||||||||||||||
Net income
|
| | 1,312 | | 1,312 | $ | 1,312 | |||||||||||||||||
Retirement
benefits SFAS 158, net
of $64 million tax expense
|
| | | 99 | 99 | 99 | ||||||||||||||||||
Unrealized loss on short-term
investments, net of $8 million
tax benefit
|
| | | (11 | ) | (11 | ) | (11 | ) | |||||||||||||||
Cumulative translation
adjustment and other
|
| | | 2 | 2 | 2 | ||||||||||||||||||
|
||||||||||||||||||||||||
Total comprehensive income
|
$ | 1,402 | ||||||||||||||||||||||
|
||||||||||||||||||||||||
Additional investment from parent
|
| 269 | | | 269 | |||||||||||||||||||
|
||||||||||||||||||||||||
Balance at December 31, 2007
|
$ | | $ | 8,835 | $ | 356 | $ | (302 | ) | $ | 8,889 | |||||||||||||
|
5
6
2007 | 2006 | 2005 | ||||||||||
Settlement
|
$ | 2,796 | $ | 2,591 | $ | 2,623 | ||||||
Phase II growers liability offset
|
| | (79 | ) | ||||||||
Phase II growers expense
|
| | 38 | |||||||||
|
||||||||||||
Total settlement expense
|
$ | 2,796 | $ | 2,591 | $ | 2,582 | ||||||
|
||||||||||||
|
||||||||||||
Federal tobacco quota buyout
|
$ | 247 | $ | 259 | $ | 259 | ||||||
Federal quota tobacco stock liquidation assessment
|
| (9 | ) | 79 | ||||||||
|
||||||||||||
Total quota buyout expense
|
$ | 247 | $ | 250 | $ | 338 | ||||||
|
7
Balance at December 31, 2004
|
$ | 5 | ||
Bad debt expense
|
1 | |||
Write-off of bad debt
|
(1 | ) | ||
|
||||
Balance at December 31, 2005
|
5 | |||
Bad debt expense
|
1 | |||
Bad debt recoveries
|
(2 | ) | ||
Write-off of bad debt
|
(1 | ) | ||
|
||||
Balance at December 31, 2006
|
3 | |||
Bad debt recoveries
|
(2 | ) | ||
|
||||
Balance at December 31, 2007
|
$ | 1 | ||
|
8
9
10
2007 | 2006 | |||||||
Balances:
|
||||||||
Accounts receivable, related party BAT affiliates
|
$ | 75 | $ | 53 | ||||
Short-term notes and interest receivable RAI and RJR
|
159 | 154 | ||||||
Long-term notes receivable from RAI and RJR
|
1,310 | 472 | ||||||
Due to related party RAI subsidiaries
|
141 | 572 | ||||||
Due to related party BAT affiliates
|
6 | 9 | ||||||
Deferred revenue BAT affiliates
|
35 | 62 | ||||||
Short-term notes and interest due to RJR
|
74 | 64 | ||||||
Long-term notes due to RJR
|
2 | 4 | ||||||
Minority interest
|
8 | 5 |
2007 | 2006 | 2005 | ||||||||||
Transactions:
|
||||||||||||
Dividends declared
|
$ | | $ | 1,520 | $ | 435 | ||||||
Dividends declared to minority shareholder
|
| | 7 | |||||||||
Income taxes paid to RAI, net of refunds
|
593 | 536 | 444 | |||||||||
Allocation of general and administrative expenses from RAI
|
50 | 35 | 26 | |||||||||
Net sales to other RAI operating subsidiaries
|
207 | 85 | 42 | |||||||||
Net sales to BAT affiliates
|
492 | 485 | 458 | |||||||||
Net sales to joint venture
|
| 2 | 5 | |||||||||
Fixed assets sales to related parties
|
| 7 | 1 | |||||||||
Research and development services billed to BAT
|
3 | 5 | 4 | |||||||||
BAT related legal indemnification expenses
|
1 | 4 | 36 | |||||||||
Purchases from BAT affiliates
|
15 | 4 | 15 | |||||||||
Secondee fees billed to BAT
|
2 | 2 | | |||||||||
Interest income RAI subsidiaries
|
63 | 37 | 26 | |||||||||
Interest expense RAI subsidiaries
|
4 | 3 | 3 | |||||||||
Minority interest
|
3 | 3 | 3 |
11
12
Balance as of December 31, 2005
|
$ | 5,309 | ||
Adjustment
to 2004 acquisition restructuring accrual, net of $4 million tax
|
(6 | ) | ||
|
||||
Balance as of December 31, 2006
|
5,303 | |||
Adjustment
to 2004 acquisition restructuring accrual, net of $0 million tax
|
(1 | ) | ||
|
||||
Balance as of December 31, 2007
|
$ | 5,302 | ||
|
Indefinite Life | Finite Life | Total | ||||||||||
Balance as of December 31, 2005
|
$ | 1,947 | $ | 61 | $ | 2,008 | ||||||
Impairment included in operating income
|
(88 | ) | (2 | ) | (90 | ) | ||||||
Amortization expense
|
| (12 | ) | (12 | ) | |||||||
|
||||||||||||
Balance as of December 31, 2006
|
1,859 | 47 | 1,906 | |||||||||
Impairment included in operating income
|
(33 | ) | | (33 | ) | |||||||
Amortization expense
|
| (6 | ) | (6 | ) | |||||||
|
||||||||||||
Balance as of December 31, 2007
|
$ | 1,826 | $ | 41 | $ | 1,867 | ||||||
|
Indefinite Life | Finite Life | Total | ||||||||||
Balance as of December 31, 2005
|
$ | 16 | $ | 131 | $ | 147 | ||||||
Intangible acquired
|
4 | | 4 | |||||||||
Amortization expense
|
| (15 | ) | (15 | ) | |||||||
|
||||||||||||
Balance as of December 31, 2006
|
20 | 116 | 136 | |||||||||
Intangible transferred
|
35 | | 35 | |||||||||
Amortization expense
|
| (16 | ) | (16 | ) | |||||||
|
||||||||||||
Balance as of December 31, 2007
|
$ | 55 | $ | 100 | $ | 155 | ||||||
|
13
Accumulated | ||||||||||||
Gross | Amortization | Net | ||||||||||
Contract manufacturing
|
$ | 151 | $ | 52 | $ | 99 | ||||||
Technology-based
|
3 | 2 | 1 | |||||||||
|
||||||||||||
Total other intangibles
|
154 | 54 | 100 | |||||||||
Trademarks
|
82 | 41 | 41 | |||||||||
|
||||||||||||
|
$ | 236 | $ | 95 | $ | 141 | ||||||
|
Year | Amount | |||
2008
|
$ | 21 | ||
2009
|
20 | |||
2010
|
20 | |||
2011
|
19 | |||
2012
|
19 | |||
Thereafter
|
42 | |||
|
||||
|
$ | 141 | ||
|
14
Employee | ||||||||||||
Severance and | Relocation/ | |||||||||||
Benefits | Exit Costs | Total | ||||||||||
Original accrual
|
$ | 171 | $ | 101 | $ | 272 | ||||||
Utilized in 2004
|
(60 | ) | (26 | ) | (86 | ) | ||||||
|
||||||||||||
Balance as of December 31, 2004
|
111 | 75 | 186 | |||||||||
Utilized in 2005
|
(40 | ) | (28 | ) | (68 | ) | ||||||
Adjusted in 2005
|
| 9 | 9 | |||||||||
Adjustment to goodwill
|
1 | (16 | ) | (15 | ) | |||||||
|
||||||||||||
Balance as of December 31, 2005
|
72 | 40 | 112 | |||||||||
Utilized in 2006
|
(69 | ) | (12 | ) | (81 | ) | ||||||
Adjustment to goodwill
|
(2 | ) | (8 | ) | (10 | ) | ||||||
|
||||||||||||
Balance as of December 31, 2006
|
1 | 20 | 21 | |||||||||
Utilized in 2007
|
(1 | ) | (7 | ) | (8 | ) | ||||||
Adjustment to goodwill
|
| (1 | ) | (1 | ) | |||||||
|
||||||||||||
Balance as of December 31, 2007
|
$ | | $ | 12 | $ | 12 | ||||||
|
15
2007 | 2006 | |||||||||||||||||||||||
Gross | Estimated | Gross | Estimated | |||||||||||||||||||||
Unrealized | Fair | Unrealized | Fair | |||||||||||||||||||||
Cost | Loss | Value | Cost | Loss | Value | |||||||||||||||||||
Auction rate notes
|
$ | 145 | $ | (18 | ) | $ | 127 | $ | 659 | $ | | $ | 659 | |||||||||||
Mortgage-backed securities
|
45 | (1 | ) | 44 | | | | |||||||||||||||||
Federal agency securities
and treasury bills and
notes
|
206 | | 206 | | | | ||||||||||||||||||
Fixed income funds
|
| | | 394 | | 394 | ||||||||||||||||||
|
||||||||||||||||||||||||
|
$ | 396 | $ | (19 | ) | $ | 377 | $ | 1,053 | $ | | $ | 1,053 | |||||||||||
|
2007 | 2006 | |||||||
Leaf tobacco
|
$ | 754 | $ | 754 | ||||
Other raw materials
|
33 | 32 | ||||||
Work in process
|
28 | 38 | ||||||
Finished products
|
137 | 130 | ||||||
Other
|
20 | 22 | ||||||
|
||||||||
Total
|
972 | 976 | ||||||
Less LIFO allowance
|
51 | 63 | ||||||
|
||||||||
|
$ | 921 | $ | 913 | ||||
|
2007 | 2006 | |||||||
Payroll and employee benefits
|
$ | 159 | $ | 140 | ||||
Pension and other post-retirement benefits
|
80 | 66 | ||||||
Marketing and advertising
|
160 | 257 | ||||||
Other
|
297 | 285 | ||||||
|
||||||||
|
$ | 696 | $ | 748 | ||||
|
16
Balance at January 1, 2007
|
$ | 115 | ||
Gross increases related to current period tax positions
|
15 | |||
Gross increases related to tax positions in prior periods
|
3 | |||
Gross decreases related to tax positions in prior periods
|
(9 | ) | ||
Audit settlements paid during 2007
|
(9 | ) | ||
Gross decreases related to lapse of applicable statute of limitations
|
(4 | ) | ||
|
||||
Balance at December 31, 2007
|
$ | 111 | ||
|
17
For the Years Ended | ||||||||||||
December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Current:
|
||||||||||||
Federal
|
$ | 595 | $ | 540 | $ | 449 | ||||||
State and other
|
94 | 54 | 65 | |||||||||
|
||||||||||||
|
689 | 594 | 514 | |||||||||
|
||||||||||||
|
||||||||||||
Deferred:
|
||||||||||||
Federal
|
59 | 59 | 100 | |||||||||
State and other
|
29 | 56 | 27 | |||||||||
|
||||||||||||
|
88 | 115 | 127 | |||||||||
|
||||||||||||
|
$ | 777 | $ | 709 | $ | 641 | ||||||
|
2007 | 2006 | |||||||
Deferred tax assets (liabilities):
|
||||||||
LIFO inventories
|
$ | (248 | ) | $ | (229 | ) | ||
Pension and other postretirement liabilities
|
39 | 67 | ||||||
Tobacco settlement related accruals
|
956 | 877 | ||||||
Other accrued liabilities
|
65 | 52 | ||||||
|
||||||||
|
$ | 812 | $ | 767 | ||||
|
2007 | 2006 | |||||||
Federal
|
$ | 665 | $ | 630 | ||||
State and other
|
147 | 137 | ||||||
|
||||||||
|
$ | 812 | $ | 767 | ||||
|
2007 | 2006 | |||||||
Deferred tax assets:
|
||||||||
Pension and other postretirement liabilities
|
$ | 251 | $ | 444 | ||||
Other accrued liabilities
|
80 | 38 | ||||||
|
||||||||
|
331 | 482 | ||||||
|
||||||||
Deferred tax liabilities:
|
||||||||
Property and equipment
|
(238 | ) | (253 | ) | ||||
Trademarks and other intangibles
|
(741 | ) | (739 | ) | ||||
Other
|
(1 | ) | (102 | ) | ||||
|
||||||||
|
(980 | ) | (1,094 | ) | ||||
|
||||||||
|
$ | (649 | ) | $ | (612 | ) | ||
|
2007 | 2006 | |||||||
Federal
|
$ | (598 | ) | $ | (453 | ) | ||
State and other
|
(51 | ) | (159 | ) | ||||
|
||||||||
|
$ | (649 | ) | $ | (612 | ) | ||
|
18
For the Years Ended | ||||||||||||
December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Domestic (includes U.S. exports)
|
$ | 2,062 | $ | 1,817 | $ | 1,441 | ||||||
Foreign
|
30 | 32 | 36 | |||||||||
|
||||||||||||
|
$ | 2,092 | $ | 1,849 | $ | 1,477 | ||||||
|
For the Years Ended | ||||||||||||
December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Income taxes computed at statutory U.S. federal income
tax rates
|
$ | 732 | $ | 647 | $ | 517 | ||||||
State and local income taxes, net of federal tax benefits
|
75 | 52 | 58 | |||||||||
Unfavorable
resolution of federal tax matters
|
| | 79 | |||||||||
Other items, net
|
(30 | ) | 10 | (13 | ) | |||||||
|
||||||||||||
Provision for income taxes from continuing operations
|
$ | 777 | $ | 709 | $ | 641 | ||||||
|
||||||||||||
Effective tax rate
|
37.1 | % | 38.3 | % | 43.4 | % | ||||||
|
19
20
| the Master Settlement Agreement and other settlement agreements with the states of Mississippi, Florida, Texas and Minnesota, and the funding by various tobacco companies of a $5.2 billion trust fund contemplated by the Master Settlement Agreement to benefit tobacco growers; and | ||
| the original Broin flight attendant case discussed below under Litigation Affecting the Cigarette Industry Class-Action Suits. |
21
22
Number of | ||||||||
State | U.S. Cases | |||||||
West Virginia
|
692 | * | ||||||
Maryland
|
52 | |||||||
Florida
|
30 | |||||||
Mississippi
|
28 | |||||||
New York
|
25 | |||||||
Missouri
|
24 | |||||||
Louisiana
|
17 | |||||||
California
|
12 | |||||||
Illinois
|
8 | |||||||
New Jersey
|
6 | |||||||
Connecticut
|
4 | |||||||
Ohio
|
4 | |||||||
Pennsylvania
|
4 | |||||||
Delaware
|
3 | |||||||
District of Columbia
|
3 | |||||||
Georgia
|
3 | |||||||
Kentucky
|
3 | |||||||
Washington
|
3 | |||||||
Alabama
|
2 | |||||||
Arizona
|
2 |
23
Number of | ||||||
State | U.S. Cases | |||||
Kansas
|
2 | |||||
Maine
|
2 | |||||
Michigan
|
2 | |||||
Minnesota
|
2 | |||||
New Mexico
|
2 | |||||
North Carolina
|
2 | |||||
Oregon
|
2 | |||||
South Carolina
|
2 | |||||
South Dakota
|
2 | |||||
Tennessee
|
2 | |||||
Vermont
|
2 | |||||
Wisconsin
|
2 | |||||
Alaska
|
1 | |||||
Arkansas
|
1 | |||||
Colorado
|
1 | |||||
Hawaii
|
1 | |||||
Idaho
|
1 | |||||
Indiana
|
1 | |||||
Iowa
|
1 | |||||
Mariana Islands
|
1 | |||||
Massachusetts
|
1 | |||||
Montana
|
1 | |||||
Nebraska
|
1 | |||||
Nevada
|
1 | |||||
New Hampshire
|
1 | |||||
North Dakota
|
1 | |||||
Oklahoma
|
1 | |||||
Rhode Island
|
1 | |||||
Utah
|
1 | |||||
Virginia
|
1 | |||||
Wyoming
|
1 | |||||
|
||||||
Total
|
968 | ** | ||||
|
* | 687 of the 692 cases are pending as a consolidated action, In re: Tobacco Litigation Personal Injury Cases , Circuit Court, Ohio County, West Virginia, consolidated January 11, 2000. The initial phase of the trial of these cases was scheduled to begin on March 18, 2008, but on February 11, 2008, the trial court stayed the trial of the initial phase indefinitely pending the U.S. Supreme Court review in Good v. Altria Group, Inc., a lights class action filed in August 2005 in the United States District Court for the District of Maine. On February 25, 2008, the U.S. Supreme Court denied the defendants petition for certiorari asking the Court to review the trial plan. | |
|
||
** | Of the 968 pending U.S. cases, 42 are pending in federal court, 925 in state court and 1 in tribal court. |
Change in Number | ||||||||
RJR Tobaccos | of Cases Since | |||||||
Case Numbers as of | October 12, 2007 | |||||||
Case Type | February 1, 2008 | Increase/(Decrease) | Page Reference | |||||
Individual Smoking and Health
|
872 | (210) | 30 | |||||
Engle
Progeny (Number of Plaintiffs)*
|
866 (2,366) | 716 | 31 | |||||
Broin II
|
2,662 | 39 | 32 | |||||
Class-Action
|
18 | 1 | 32 | |||||
Health-Care Cost Recovery
|
3 | No Change | 37 | |||||
MSA-Enforcement
and Validity
|
61 | 9 | 41 | |||||
Antitrust
|
3 | No Change | 43 | |||||
Other Litigation
|
11 | 2 | 44 |
24
* | The Engle Progeny Cases have been separated from the Individual Smoking and Health cases for reporting purposes. Plaintiffs counsel are attempting to include multiple plaintiffs in most of the cases filed. |
| settled all health-care cost recovery actions brought by, or on behalf of, the settling jurisdictions; | ||
| released the major U.S. cigarette manufacturers from various additional present and potential future claims; | ||
| imposed future payment obligations on RJR Tobacco, B&W and other major U.S. cigarette manufacturers; and | ||
| placed significant restrictions on their ability to market and sell cigarettes. |
25
Trial Date | Case Name/Type | Defendant(s) | Jurisdiction | |||
July 7, 2008
|
Washington v. R. J. Reynolds Tobacco Co.
[MSA Enforcement] |
RJR Tobacco |
Superior Court
King County (Seattle, WA) |
|||
|
||||||
August 4, 2008
|
Goldberg v. Brown & Williamson
[Individual] |
RJR Tobacco, B&W |
U.S. District Court
Southern District of Florida (West Palm Beach, FL) |
|||
|
||||||
August 25, 2008
|
Smith v. R. J. Reynolds Tobacco Co.
[Individual] |
RJR Tobacco |
U.S. District Court
Eastern District (New Orleans, LA) |
|||
|
||||||
August 29, 2008
|
Nichols v. Philip Morris USA, Inc.
[Individual] |
RJR Tobacco |
Superior Court
San Diego County (San Diego, CA) |
|||
|
||||||
September 8, 2008
|
Vermont v. R. J. Reynolds Tobacco Co.
[MSA Enforcement (Eclipse)] |
RJR Tobacco |
Superior Court
Chittenden County (Burlington, VT) |
|||
|
||||||
September 8, 2008
|
Fabiano v. Philip Morris, Inc.
[Individual] |
RJR Tobacco, B&W |
NY Supreme Court
New York County (New York, NY) |
|||
|
||||||
September 8, 2008
|
Hausrath v. Philip Morris USA, Inc.
[Individual] |
B&W |
NY Supreme Court
Erie County (Buffalo, NY) |
|||
|
||||||
October 7, 2008
|
Frye v. Philip Morris USA, Inc.
[Individual] |
RJR Tobacco, B&W |
Circuit Court
Jefferson County (Fayette, MS) |
|||
|
||||||
October 27, 2008
|
Janoff v. Philip Morris, Inc.
[ Broin II] |
RJR Tobacco, B&W |
Circuit Court
11 th Judicial Circuit Miami-Dade County (Miami, FL) |
|||
|
26
Date of Verdict | Case Name/Type | Jurisdiction | Verdict | Post-Trial Status | ||||
July 7, 1999-Phase I
April 7, 2000-Phase II
July 14, 2000-Phase
III
|
Engle v. R. J.
Reynolds Tobacco
Co.
[Class Action] |
Circuit Court,
Miami-Dade County (Miami, FL) |
$12.7 million compensatory damages against all the defendants; $145 billion punitive damages against all the defendants, of which approximately $36.3 billion and $17.6 billion was assigned to RJR Tobacco and B&W, respectively. | On May 21, 2003, Floridas Third District Court of Appeal reversed the trial court and remanded the case to the Miami-Dade County Circuit Court with instructions to decertify the class. The Florida Supreme Court on July 6, 2006, affirmed the dismissal of the punitive damages award and decertified, on a going-forward basis, the class. The court preserved a number of classwide findings from Phase I of the Engle trial, and authorized class members to avail themselves of those findings in individual lawsuits, provided they commence those lawsuits within one year of the date the courts decision becomes final. In addition, the court reinstated compensatory damage verdicts in favor of two plaintiffs in the amounts of $2.85 million and $4.023 million, respectively. On October 1, 2007, the U.S. Supreme Court denied the defendants petition for writ of certiorari. On November 26, 2007, the defendants petition for rehearing with the U.S. Supreme Court was denied. As a result, on February 8, 2008, RJR Tobacco paid approximately $5.9 million relating to the damages verdicts mentioned above, which amount was determined using the total amount of the verdicts together with accrued interest beginning November 7, 2000. |
27
Date of Verdict | Case Name/Type | Jurisdiction | Verdict | Post-Trial Status | ||||
June 11, 2002
|
Lukacs v. R. J.
Reynolds Tobacco
Co.
[ Engle class member] |
Circuit Court,
Miami-Dade County (Miami, FL) |
$500,000 economic damages, $24.5 million non-economic damages and $12.5 million loss of consortium damages against Philip Morris, B&W and Lorillard, of which B&W was assigned 22.5% of liability. Court has not entered final judgment for damages. RJR Tobacco was dismissed from the case in May 2002, prior to trial. | Judge reduced damages to $25.125 million of which B&Ws share is approximately $6 million. On January 2, 2007, the defendants moved to set aside the June 11, 2002, verdict and to dismiss the plaintiffs punitive damages claim. On January 3, 2007, the plaintiffs filed a motion for entry of judgment, which the court deferred until the U.S. Supreme Court completed review of Engle and after further submissions by the parties. On January 28, 2008, the defendants filed a submission asking the court to set aside the verdict and to dismiss the case. | ||||
|
||||||||
December 18, 2003
|
Frankson v. Brown &
Williamson Tobacco
Corp.
[Individual] |
Supreme Court,
Kings County (Brooklyn, NY) |
$350,000 compensatory damages; 50% fault assigned to B&W and two industry organizations; $20 million in punitive damages, of which $6 million was assigned to B&W, $2 million to a predecessor company and $12 million to two industry organizations. | On January 21, 2005, the plaintiff stipulated to the courts reduction in the amount of punitive damages from $20 million to $5 million, apportioned as follows: $0 to American Tobacco; $4 million to B&W; $500,000 to the Council for Tobacco Research and $500,000 to the Tobacco Institute. On June 26, 2007, final judgment was entered in the amount of approximately $6.8 million, including interest and costs. The defendants filed a notice of appeal on July 3, 2007. Briefing is underway. Pursuant to its agreement to indemnify B&W, RJR Tobacco posted a supersedeas bond in the amount of $8.018 million on July 5, 2007. | ||||
|
||||||||
May 21, 2004
|
Scott v. American
Tobacco Co.
[Class Action] |
District Court,
Orleans Parish (New Orleans, LA) |
$591 million against RJR Tobacco, B&W, Philip Morris, Lorillard, and the Tobacco Institute, jointly and severally, for a smoking cessation program. | On September 29, 2004, the defendants posted a $50 million bond and noticed their appeal to the Louisiana Court of Appeal. RJR Tobacco posted $25 million toward the |
28
Date of Verdict | Case Name/Type | Jurisdiction | Verdict | Post-Trial Status | ||||
|
bond. On February 7, 2007, the Louisiana Court of Appeal limited the size of the class, and rejected the award of pre-judgment interest and most of the specific components of the smoking cessation program. However, the court upheld the class certification and found the defendants responsible for funding smoking cessation for eligible class members. The defendants application for writ of certiorari with the Louisiana Supreme Court was denied on January 7, 2008. The deadline for the defendants to file a writ of certiorari with the U.S. Supreme Court is April 7, 2008. | |||||||
|
||||||||
February 2, 2005
|
Smith v. Brown &
Williamson Tobacco
Corp.
[Individual] |
Circuit Court,
Jackson County (Independence, MO) |
$2 million in compensatory damages which was reduced to $500,000 because of jurys findings that the plaintiff was 75% at fault; $20 million in punitive damages. | On June 1, 2005, B&W filed its notice of appeal. On July 31, 2007, the Missouri Court of Appeals affirmed the compensatory damages award but ordered a new trial on punitive damages. The Missouri Supreme Court accepted transfer of the case from the court of appeals. Oral argument was heard on February 13, 2008. A decision is pending. | ||||
|
||||||||
March 18, 2005
|
Rose v. Brown &
Williamson Tobacco
Corp.
[Individual] |
Supreme Court,
New York County (Manhattan, NY) |
RJR Tobacco found not liable; $3.42 million in compensatory damages against B&W and Philip Morris, of which $1.71 million was assigned to B&W; $17 million in punitive damages against Philip Morris only. | On August 18, 2005, B&W filed its notice of appeal. A decision is pending. Pursuant to its agreement to indemnify B&W, RJR Tobacco posted a supersedeas bond in the amount of $2.058 million on February 7, 2006. Oral argument occurred on December 12, 2006. | ||||
|
||||||||
August 17, 2006
|
United States v.
Philip Morris USA,
Inc.
[Governmental Health-Care Cost Recovery] |
U.S. District Court, District of Columbia (Washington, DC) | RJR Tobacco and B&W were found liable for civil RICO claims; were enjoined from using certain brand descriptors and from making certain | On September 11, 2006, RJR Tobacco and B&W filed their notices of appeal. On October 16, 2006, the government |
29
Date of Verdict | Case Name/Type | Jurisdiction | Verdict | Post-Trial Status | ||||
|
misrepresentations; and were ordered to make corrective communications on five subjects, including smoking and health and addiction, to reimburse the U.S. Department of Justice appropriate costs associated with the lawsuit, and to maintain document web sites. | filed its notice of appeal. The government has requested the defendants pay a total of approximately $1.9 million in costs. The court of appeals granted the defendants motion to stay the district courts order on October 31, 2006. In May 2007, the court of appeals issued a briefing schedule that extends through May 19, 2008. Briefing is scheduled to conclude on May 19, 2008. | ||||||
|
||||||||
May 2, 2007
|
Whiteley v. R.J.
Reynolds Tobacco
Co.
[Individual] |
Superior Court,
San Francisco County, (San Francisco, CA) |
$2.46 million in compensatory damages jointly against RJR Tobacco and Philip Morris; $250,000 punitive damages against RJR Tobacco only. | On September 5, 2007, the court denied RJR Tobaccos motion for judgment notwithstanding the verdict or, in the alternative, for a new trial. RJR Tobacco filed its notice of appeal on October 3, 2007. |
30
31
32
33
34
35
36
37
2011 and | ||||||||||||||||||||||||||||
2005 | 2006 | 2007 | 2008 | 2009 | 2010 | thereafter | ||||||||||||||||||||||
First Four States Settlements:
1
|
||||||||||||||||||||||||||||
Mississippi Annual Payment
|
$ | 136 | $ | 136 | $ | 136 | $ | 136 | $ | 136 | $ | 136 | $ | 136 | ||||||||||||||
Florida Annual Payment
|
440 | 440 | 440 | 440 | 440 | 440 | 440 | |||||||||||||||||||||
Texas Annual Payment
|
580 | 580 | 580 | 580 | 580 | 580 | 580 | |||||||||||||||||||||
Minnesota Annual Payment
|
204 | 204 | 204 | 204 | 204 | 204 | 204 | |||||||||||||||||||||
Remaining States Settlement:
|
||||||||||||||||||||||||||||
Annual Payments
1
|
7,004 | 7,004 | 7,004 | 8,004 | 8,004 | 8,004 | 8,004 | |||||||||||||||||||||
Base Foundation Funding
|
25 | 25 | 25 | 25 | | | | |||||||||||||||||||||
Growers Trust
2
|
500 | 500 | 500 | 500 | 295 | 295 | | |||||||||||||||||||||
Offset by federal tobacco buyout
2
|
(500 | ) | (500 | ) | (500 | ) | (500 | ) | (295 | ) | (295 | ) | | |||||||||||||||
|
||||||||||||||||||||||||||||
Total
|
$ | 8,389 | $ | 8,389 | $ | 8,389 | $ | 9,389 | $ | 9,364 | $ | 9,364 | $ | 9,364 | ||||||||||||||
|
1 | Subject to adjustments for changes in sales volume, inflation and other factors. All payments are to be allocated among the companies on the basis of relative market share. | |
2 | The Growers Trust payments scheduled to expire in 2010 will be offset by obligations resulting from the federal tobacco buyout legislation, not included in this table, signed in October 2004. See Tobacco Buyout Legislation and Related Litigation. |
38
2011 and | ||||||||||||||||||||||||||||
2005 | 2006 | 2007 | 2008 | 2009 | 2010 | thereafter | ||||||||||||||||||||||
Settlement expenses
|
$ | 2,582 | $ | 2,591 | $ | 2,796 | | | | | ||||||||||||||||||
Settlement cash payments
|
$ | 2,718 | $ | 2,614 | $ | 2,594 | | | | | ||||||||||||||||||
Projected settlement expenses
|
| | | >$2,700 | >$2,750 | >$2,750 | >$2,750 | |||||||||||||||||||||
Projected settlement cash payments
|
| | | >$2,800 | >$2,700 | >$2,750 | >$2,750 |
39
40
41
42
43
44
45
46
47
48
49
| any liabilities, costs and expenses arising out of the imposition or assessment of any tax with respect to the international tobacco business arising prior to the sale, other than as reflected on the closing balance sheet; | ||
| any liabilities, costs and expenses that JTI or any of its affiliates, including the acquired entities, may incur after the sale with respect to any of RJRs or RJR Tobaccos employee benefit and welfare plans; and | ||
| any liabilities, costs and expenses incurred by JTI or any of its affiliates arising out of certain activities of Northern Brands. |
Noncancellable Operating Leases | ||||
2008
|
$ | 15 | ||
2009
|
14 | |||
2010
|
12 | |||
2011
|
8 | |||
2012
|
6 | |||
Thereafter
|
13 | |||
|
||||
Total
|
$ | 68 | ||
|
50
Pension Benefits | Postretirement Benefits | |||||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
Change in benefit obligation:
|
||||||||||||||||
Obligation at beginning of year
|
$ | 5,081 | $ | 5,187 | $ | 1,427 | $ | 1,490 | ||||||||
Service cost
|
34 | 36 | 4 | 5 | ||||||||||||
Interest cost
|
300 | 297 | 87 | 84 | ||||||||||||
Actuarial (gain) loss
|
(176 | ) | (79 | ) | 4 | (46 | ) | |||||||||
Plan amendments
|
2 | | | (3 | ) | |||||||||||
Benefits paid
|
(368 | ) | (364 | ) | (99 | ) | (103 | ) | ||||||||
Transfer
|
(11 | ) | 2 | | | |||||||||||
Curtailment/special termination benefits
|
1 | 2 | | | ||||||||||||
|
||||||||||||||||
Obligation at end of year
|
$ | 4,863 | $ | 5,081 | $ | 1,423 | $ | 1,427 | ||||||||
|
||||||||||||||||
|
||||||||||||||||
Change in plan assets:
|
||||||||||||||||
Fair value of plan assets at beginning of year
|
$ | 4,969 | $ | 4,373 | $ | 375 | $ | 350 | ||||||||
Actual return on plan assets
|
369 | 656 | 21 | 52 | ||||||||||||
Employer contributions
|
289 | 304 | 67 | 75 | ||||||||||||
Benefits paid
|
(368 | ) | (364 | ) | (99 | ) | (102 | ) | ||||||||
Transfer
|
(8 | ) | | | | |||||||||||
|
||||||||||||||||
Fair value of plan assets at end of year
|
$ | 5,251 | $ | 4,969 | $ | 364 | $ | 375 | ||||||||
|
||||||||||||||||
|
||||||||||||||||
Funded status
|
$ | 388 | $ | (112 | ) | $ | (1,059 | ) | $ | (1,052 | ) | |||||
|
Pension Benefits | Postretirement Benefits | |||||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
Amounts recognized in the consolidated balance sheets
consist of:
|
||||||||||||||||
Noncurrent assetsother assets and deferred charges
|
$ | 451 | $ | | $ | | $ | | ||||||||
Accrued benefitcurrent liability
|
(4 | ) | (4 | ) | (76 | ) | (62 | ) | ||||||||
Accrued benefitlong-term liability
|
(59 | ) | (108 | ) | (983 | ) | (990 | ) | ||||||||
|
||||||||||||||||
Net amount recognized
|
388 | (112 | ) | (1,059 | ) | (1,052 | ) | |||||||||
Accumulated other comprehensive loss-SFAS No. 158
(excluding tax)
|
287 | 451 | 192 | 192 | ||||||||||||
|
||||||||||||||||
Net amounts recognized in the consolidated balance
sheets
|
$ | 675 | $ | 339 | $ | (867 | ) | $ | (860 | ) | ||||||
|
51
6
Pension | Postretirement | Pension | Postretirement | |||||||||||||||||||||
Benefits | Benefits | Total | Benefits | Benefits | Total | |||||||||||||||||||
2007 | 2007 | 2007 | 2006 | 2006 | 2006 | |||||||||||||||||||
Prior service cost (credit)
|
$ | 11 | $ | (27 | ) | $ | (16 | ) | $ | 11 | $ | (39 | ) | $ | (28 | ) | ||||||||
Net actuarial loss
|
276 | 219 | 495 | 440 | 231 | 671 | ||||||||||||||||||
Deferred income taxes
|
(111 | ) | (75 | ) | (186 | ) | (175 | ) | (75 | ) | (250 | ) | ||||||||||||
|
||||||||||||||||||||||||
Accumulated
other comprehensive loss
|
$ | 176 | $ | 117 | $ | 293 | $ | 276 | $ | 117 | $ | 393 | ||||||||||||
|
Pension | Postretirement | |||||||||||
Benefits | Benefits | Total | ||||||||||
Prior service cost
|
$ | 2 | $ | | $ | 2 | ||||||
Net actuarial (gain) loss
|
(123 | ) | 11 | (112 | ) | |||||||
Amortization
of prior service (cost) credit
|
(1 | ) | 11 | 10 | ||||||||
Amortization
of net loss
|
(40 | ) | (22 | ) | (62 | ) | ||||||
Transfer to RAI
|
(2 | ) | | (2 | ) | |||||||
Deferred income taxes
|
64 | | 64 | |||||||||
|
||||||||||||
Accumulated other comprehensive loss
|
$ | (100 | ) | $ | | $ | (100 | ) | ||||
|
Pension Benefits | Postretirement Benefits | |||||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
Weighted-average assumptions
used to determine benefit
obligations at December 31:
|
||||||||||||||||
Discount rate
|
6.50 | % | 6.10 | % | 6.50 | % | 6.10 | % | ||||||||
Rate of compensation increase
|
5.00 | % | 5.00 | % | 5.00 | % | 5.00 | % |
December 31, | ||||||||
2007 | 2006 | |||||||
Projected benefit obligation
|
$ | 63 | $ | 527 | ||||
Accumulated benefit obligation
|
$ | 55 | $ | 514 | ||||
Plan assets
|
$ | | $ | 456 |
Pension Benefits | Postretirement Benefits | |||||||||||||||||||||||
2007 | 2006 | 2005 | 2007 | 2006 | 2005 | |||||||||||||||||||
Components of total benefit cost
(income):
|
||||||||||||||||||||||||
Service cost
|
$ | 34 | $ | 36 | $ | 46 | $ | 4 | $ | 5 | $ | 6 | ||||||||||||
Interest cost
|
300 | 297 | 296 | 87 | 84 | 83 | ||||||||||||||||||
Expected return on plan assets
|
(422 | ) | (359 | ) | (326 | ) | (27 | ) | (29 | ) | (27 | ) | ||||||||||||
Amortization of transition asset
|
| | | | | 2 | ||||||||||||||||||
Amortization
of prior service cost (credit)
|
1 | 1 | 1 | (11 | ) | (11 | ) | (15 | ) | |||||||||||||||
Amortization of net loss
|
40 | 68 | 69 | 22 | 20 | 21 | ||||||||||||||||||
|
||||||||||||||||||||||||
Net periodic benefit cost (income)
|
(47 | ) | 43 | 86 | 75 | 69 | 70 | |||||||||||||||||
Curtailment/special benefits
|
1 | 2 | 3 | | | (13 | ) | |||||||||||||||||
Adjustment for deferring cap
|
| | | | | 9 | ||||||||||||||||||
|
||||||||||||||||||||||||
Total
benefit cost (income)
|
$ | (46 | ) | $ | 45 | $ | 89 | $ | 75 | $ | 69 | $ | 66 | |||||||||||
|
52
Weighted-average assumptions used to | ||||||||||||||||||||||||
determine net periodic benefit cost | Pension Benefits | Postretirement Benefits | ||||||||||||||||||||||
for years ended December 31: | 2007 | 2006 | 2005 | 2007 | 2006 | 2005 | ||||||||||||||||||
Discount rate
|
6.10 | % | 5.90 | % | 6.05%; 5.70 | % 1 | 6.10 | % | 5.90 | % | 6.05%; 5.70%; 5.75 | % 2 | ||||||||||||
Expected long-term return on plan assets
|
8.75 | % | 8.75 | % | 8.79 | % | 8.00 | % | 8.00 | % | 8.50 | % | ||||||||||||
Rate of compensation increase
|
5.00 | % | 5.00 | % | 5.00 | % | 5.00 | % | 5.00 | % | 5.00 | % |
1 | The January 1, 2005 overall beginning discount rate of 6.05% was changed to 5.70% for the period from April 30, 2005 to December 31, 2005, for plans impacted by the sale of the packaging operations. | |
2 | The January 1, 2005 overall beginning discount rate of 6.05% was changed for only the RJR Tobacco benefit plans prior to the B&W business combination, to a discount rate of 5.70% for the period from April 30, 2005 to September 15, 2005, and a discount rate of 5.75% was used for the period from September 16, 2005 to December 31, 2005. |
53
54
Pensions | ||||||||
2007 | 2006 | |||||||
Asset Category:
|
||||||||
Equities
|
58 | % | 60 | % | ||||
Fixed income
|
27 | % | 25 | % | ||||
Opportunistic
|
11 | % | 11 | % | ||||
Alternative
|
4 | % | 4 | % | ||||
|
||||||||
Total
|
100 | % | 100 | % | ||||
|
Postretirement | ||||||||
2007 | 2006 | |||||||
Asset Category:
|
||||||||
U.S. equity securities
|
43 | % | 44 | % | ||||
Debt securities
|
36 | % | 35 | % | ||||
Non-U.S. equity securities
|
18 | % | 19 | % | ||||
Hedge funds
|
1 | % | 1 | % | ||||
Real estate and other
|
2 | % | 1 | % | ||||
|
||||||||
Total
|
100 | % | 100 | % | ||||
|
2007 | 2006 | |||||||
Weighted-average health-care cost trend rate assumed for the following year
|
9.47 | % | 9.27 | % | ||||
Rate to
which the cost trend rate is assumed to decline (the ultimate trend rate)
|
5.00 | % | 5.00 | % | ||||
Year that the rate reaches the ultimate trend rate
|
2017 | 2016 |
1-Percentage | 1-Percentage | |||||||
Point Increase | Point Decrease | |||||||
Effect on total of service and interest cost components
|
$ | 5 | $ | (4 | ) | |||
Effect on benefit obligation
|
82 | (71 | ) |
Postretirement Benefits | ||||||||||||||||
Gross Projected | Expected | Net Projected | ||||||||||||||
Benefit Payments | Medicare | Benefit Payments | ||||||||||||||
Pension | Before Medicare | Part D | After Medicare | |||||||||||||
Year | Benefits | Part D Subsidies | Subsidies | Part D Subsidies | ||||||||||||
2008
|
$ | 378 | $ | 117 | $ | 3 | $ | 114 | ||||||||
2009
|
374 | 120 | 3 | 117 | ||||||||||||
2010
|
367 | 123 | 3 | 120 | ||||||||||||
2011
|
359 | 126 | 4 | 122 | ||||||||||||
2012
|
360 | 125 | 4 | 121 | ||||||||||||
2013-2017
|
1,925 | 606 | 23 | 583 |
55
56
2007 | 2006 | 2005 | ||||||||||
Net sales:
|
||||||||||||
RJR Tobacco
|
$ | 7,918 | $ | 7,675 | $ | 7,695 | ||||||
All Other
|
216 | 193 | 219 | |||||||||
|
||||||||||||
Consolidated net sales
|
$ | 8,134 | $ | 7,868 | $ | 7,914 | ||||||
|
||||||||||||
|
||||||||||||
Operating income:
|
||||||||||||
RJR Tobacco
|
$ | 1,934 | $ | 1,674 | $ | 1,381 | ||||||
All Other
|
33 | 59 | 28 | |||||||||
Corporate expense
|
(50 | ) | (48 | ) | (37 | ) | ||||||
|
||||||||||||
Consolidated operating income
|
$ | 1,917 | $ | 1,685 | $ | 1,372 | ||||||
|
||||||||||||
|
||||||||||||
Assets:
|
||||||||||||
RJR Tobacco
|
$ | 15,956 | $ | 14,955 | $ | 15,884 | ||||||
All Other
|
472 | 417 | 379 | |||||||||
Corporate
|
3,972 | 4,183 | 4,498 | |||||||||
Elimination adjustments
|
(6,002 | ) | (6,593 | ) | (7,180 | ) | ||||||
|
||||||||||||
Consolidated assets
|
$ | 14,398 | $ | 12,962 | $ | 13,581 | ||||||
|
||||||||||||
|
||||||||||||
Capital expenditures:
|
||||||||||||
RJR Tobacco
|
$ | 93 | $ | 116 | $ | 102 | ||||||
All Other
|
7 | 4 | | |||||||||
|
||||||||||||
Consolidated capital expenditures
|
$ | 100 | $ | 120 | $ | 102 | ||||||
|
||||||||||||
|
||||||||||||
Depreciation and amortization expense:
|
||||||||||||
RJR Tobacco
|
$ | 125 | $ | 149 | $ | 188 | ||||||
All Other
|
2 | 1 | | |||||||||
|
||||||||||||
Consolidated depreciation and
amortization expense
|
$ | 127 | $ | 150 | $ | 188 | ||||||
|
||||||||||||
|
||||||||||||
Reconciliation to income from continuing
operations before income taxes:
|
||||||||||||
Operating income
|
$ | 1,917 | $ | 1,685 | $ | 1,372 | ||||||
Interest and debt expense
|
4 | 4 | 4 | |||||||||
Interest income
|
(173 | ) | (153 | ) | (100 | ) | ||||||
Other income, net
|
(6 | ) | (15 | ) | (9 | ) | ||||||
|
||||||||||||
Income from continuing operations
before income taxes
|
$ | 2,092 | $ | 1,849 | $ | 1,477 | ||||||
|
57
58