Obligation Nippon Tobacco 4.5% ( XS0269190533 ) en EUR

Nippon Tobacco

100 % ▼

Japon

XS0269190533 ( en EUR )

4.5% par an ( paiement annuel )

02/04/2014 - Obligation échue

Prospectus brochure de l'obligation Japan Tobacco XS0269190533 en EUR 4.5%, échue

50 000 EUR

500 000 000 EUR

Japan Tobacco International (JTI) est une entreprise multinationale de tabac, filiale de Japan Tobacco Inc., produisant et commercialisant des cigarettes et autres produits du tabac dans le monde entier.

L'Obligation émise par Nippon Tobacco ( Japon ) , en EUR, avec le code ISIN XS0269190533, paye un coupon de 4.5% par an.
Le paiement des coupons est annuel et la maturité de l'Obligation est le 02/04/2014

LISTING MEMORANDUM DATED 3 DECEMBER 2007
500,000,000
4.50 per cent. Step Up Notes due 2 April 2014
issued by
JTI (UK) Finance PLC
(incorporated with limited liability in England and Wales with registered number 6371681)
unconditionally and irrevocably guaranteed by
Japan Tobacco Inc.
(incorporated with limited liability in Japan)
The 500,000,000 aggregate principal amount 4.50 per cent. Step Up Notes due 2 April 2014 (the
Bonds) were originally issued by Gallaher Group Plc (the Original Issuer) on 2 October 2006 (the
Issue Date) and unconditionally and irrevocably guaranteed by Gallaher Limited (the Original
Guarantor) under the £2,000,000,000 Medium Term Note Programme of the Original Issuer dated 26
September 2006 (the Programme).
Following an Extraordinary Resolution duly passed by the holders of the Bonds on 15 November 2007
and by virtue of the supplemental trust deed dated 3 December 2007 (the Supplemental Trust Deed)
executed by, inter alia, Gallaher Group Plc, Gallaher Limited, JTI (UK) Finance PLC (the Issuer),
Japan Tobacco Inc. (the Guarantor or JT) and HSBC Trustee (C.I.) Limited (the Trustee), the Issuer
has substituted the Original Issuer as principal debtor and the Guarantor has similarly substituted the
Original Guarantor as guarantor under the original trust deed in respect of the Bonds dated 8 February
2001, as amended by the First Supplemental Trust Deed dated 7 September 2001, the Second
Supplemental Trust Deed dated 21 May 2004 and the Third Supplemental Trust Deed dated 26
September 2006 (the Trust Deed).
Interest on the Bonds is payable annually in arrear on 2 April in each year from and including 2 April
2008. The rate of interest payable on the Bonds is subject to adjustment from time to time in the event
of a Step Up Rating Change or Step Down Rating Change, as the case may be, as more fully described
in the Annex to the Final Terms dated 29 September 2006 (the Final Terms) see Annex 2.
The Bonds may not be redeemed prior to 2 April 2014 (the Maturity Date) except as mentioned
below. The Issuer may, however, at its option redeem all (but not some only) of the Bonds at any time
at their principal amount if either the Issuer or the Guarantor becomes obliged to pay certain additional
amounts in respect of taxes, in either case together with interest accrued to but excluding the date of
redemption, as more fully described under "Terms and Conditions of the Bonds Redemption and
Purchase" in the Programme (see Annex 1) as modified by the Final Terms (see Annex 2).

Application has been made to the Société de la Bourse de Luxembourg in its capacity as the market
operator of the Euro MTF Market under the Luxembourg Act on Prospectuses for Securities (loi
relative aux prospectus pour valeurs mobilières) dated 10 July 2005 (the Law on Prospectuses for
Securities) for the Bonds to be listed on the official list of the Luxembourg Stock Exchange and to be
traded on the Euro MTF Market of the Luxembourg Stock Exchange (the Euro MTF Market). The
Euro MTF Market is not a regulated market for the purposes of the Law on Prospectuses for Securities
or the Investment Services Directive (93/22/EEC).
The Bonds are currently listed on the official list maintained by the UK Listing Authority (the UK
Official List) and admitted to trading on the London Stock Exchange plc. The Issuer intends to apply
for the removal of the Bonds from the UK Official List and from trading on the London Stock
Exchange (the De-listing) as soon as practicable following the listing of the Bonds on the official list
of the Luxembourg Stock Exchange and admission to trading on the Euro MTF Market.
This document (the Listing Memorandum) can only be used for the purposes for which it has been
published. It constitutes a prospectus pursuant to Part IV of the Law on Prospectuses for Securities.
However, this Listing Memorandum has not been approved as a prospectus for admission to trading of
the Bonds on any market in the European Economic Area which has been designated as a regulated
market for the purposes of Directive 2003/71/EC (the Prospectus Directive).
The Bonds have not been, and will not be, registered under the United States Securities Act of 1933
(the Securities Act) and are subject to United States tax law requirements. The Bonds may not be
offered, sold or delivered within the United States or to, or for the account or benefit of, U.S. persons
except pursuant to an exemption from, or in a transaction not subject to, the registration requirements
of the Securities Act.
The Bonds have not been and will not be registered under the Financial Instruments and Exchange
Law of Japan (Law No. 25 of 1948 as amended, the FIEL) and disclosure under the FIEL has not been
and will not be made with respect to the Bonds. Neither the Bonds nor any interest therein may be
offered, sold, resold or otherwise transferred, directly or indirectly, in Japan to or for the account of
any resident of Japan, except pursuant to an exemption from the registration requirements of, and
otherwise in compliance with, the FIEL and all other applicable laws, regulations and guidelines
promulgated by the relevant Japanese governmental and regulatory authorities. As used in this
paragraph, a "resident of Japan" means any person resident in Japan, including any corporation or
other entity organised under the laws of Japan.
This Listing Memorandum may not be used for the purpose of an offer or solicitation by anyone in any
jurisdiction in which such offer or solicitation is not authorised or to any person to whom it is unlawful
to make such an offer or solicitation.
The Bonds are in bearer form and in the denomination of 50,000 each. The Bonds were initially in
the form of a temporary global bond (the Temporary Global Bond), which was deposited with a
common depositary for Euroclear Bank, S.A./N.V. (Euroclear) and Clearstream Banking, société
anonyme, Luxembourg (Clearstream, Luxembourg). The Temporary Global Bond was exchanged
for interests in a permanent global bond (the Permanent Global Bond) in 2006. The Permanent
Global Bond will be exchangeable in certain limited circumstances in whole, but not in part, for the
Bonds in definitive form in the denomination of 50,000 each (each a Definitive Bond).
3 December 2007
ISIN XS0269190533
Page 2

IMPORTANT INFORMATION
Having taken all reasonable care to ensure that such is the case, the information contained in this
Listing Memorandum is, to the best of the Issuer's and the Guarantor's knowledge, in accordance with
the facts and contains no omissions likely to affect its import. The Issuer and, to the extent the
information relates to the business of the Guarantor, the Guarantor accept responsibility for the
information contained in this Listing Memorandum.
Neither the Issuer nor the Guarantor has authorised the making or provision of any representation or
information regarding the Issuer, the Guarantor and/or the Bonds other than as contained in this Listing
Memorandum or as approved for such purpose by the Issuer. Any such representation or information
should not be relied upon as having been authorised by the Issuer or the Guarantor.
Neither the delivery of this Listing Memorandum nor the listing of any Bonds shall in any
circumstances create any implication that there has been no adverse change, or any event reasonably
likely to involve any adverse change, in the condition (financial or otherwise) of the Issuer or the
Guarantor since the date of this Listing Memorandum.
This Listing Memorandum does not constitute an offer of, or an invitation to subscribe for or purchase,
any Bonds.
Before making an investment decision, prospective purchasers should inform themselves about, and
make a detailed evaluation of, the nature of, and financial risks associated with an investment in, the
Bonds. For further details see "Risk Factors".
The distribution of this Listing Memorandum in certain jurisdictions may be restricted by law. Persons
into whose possession this Listing Memorandum comes are required by the Issuer and the Guarantor to
inform themselves about and to observe any such restrictions.
In particular, the Bonds have not been and will not be registered under the Securities Act and are
subject to United States tax law requirements. Subject to certain exceptions, the Bonds may not be
offered, sold or delivered in the United States or to any U.S. persons.
In this Listing Memorandum, unless otherwise specified, references to "EUR", "Euro" and "" are to
the single currency introduced at the start of the Third Stage of European Economic and Monetary
Union pursuant to the Treaty establishing the European Community, as amended. References to
"sterling", "pound" and "£" are to the lawful currency of the United Kingdom and references to "yen"
and "JPY" are to the lawful currency of Japan.
Page 3

CONTENTS
Risk factors
5
Documents incorporated by reference
18
JTI (UK) Finance PLC
19
Japan Tobacco Inc.
20
Legal Proceedings
25
Regulations
29
Subscription and sale
37
Use of proceeds
38
Taxation
39
General information
43
Annex 1: Medium Term Note Programme dated 26 September 2006
Annex 2: Final Terms dated 29 September 2006
Annex 3: Terms and conditions of the Bonds, as amended
Page 4

RISK FACTORS
The Issuer and the Guarantor believe that the following factors may affect their ability to fulfil their
respective obligations under the Bonds. All of these factors are contingencies which may or may not
occur; neither the Issuer nor the Guarantor is in a position to express a view on the likelihood of any
such contingency occurring.
Factors which the Issuer and the Guarantor believe may be material for the purpose of assessing the
market risks associated with the Bonds are also described below.
The Issuer and the Guarantor believe that the factors described below represent the principal risks
inherent in investing in the Bonds, but the Issuer and/or the Guarantor may be unable to pay interest,
principal or other amounts on or in connection with any Bonds for other reasons and the Issuer and
the Guarantor do not represent that the statements below regarding the risks of holding any Bonds are
exhaustive. Investors should also read the detailed information set out elsewhere in this Listing
Memorandum and any documents deemed to be incorporated by reference herein and reach their own
views prior to making any investment decision.
Factors that may affect the Issuer's and the Guarantor's ability to fulfil their obligations under
the Bonds
The Guarantor operates in countries and regions that have a diverse range of political, legal,
economic, trade and regulatory structures
The Guarantor and its subsidiaries including the Issuer (the JT Group) are subject to the same risks as
any other diversified multinational manufacturing business. The JT Group has sales in approximately
120 countries worldwide. The JT Group's net sales, profit and financial condition are influenced by
the economic, regulatory and political situations in the countries and regions in which it has operations,
which can be unpredictable and outside the control of the JT Group. Some countries in which the JT
Group operates face the threat of increasing civil unrest and can be subject to regular changes in
regime. In others, unforeseen natural disasters, terrorism, conflict and the threat of war may have a
significant impact on the business environment. Some countries maintain trade barriers or adopt
policies that favour domestic producers, preventing or restricting sales by the JT Group. There can be
no assurance that political, social, legal, economic, trade or other developments will not have an
adverse impact on the JT Group's investments and businesses or on the JT Group's net sales, profits
and financial condition.
Because we derive the majority of our net sales and profits from sales of tobacco products in Japan,
reduction in tobacco consumption in Japan may adversely affect our results of operations
Prior to the acquisition of Gallaher Group Plc by the JT Group (see page 24 for further details), sales of
tobacco products in Japan, mostly cigarettes, accounted for a substantial majority of the Guarantor's
overall net sales and profits. For the year ended 31 March 2007, net sales and operating profit of the
Guarantor's domestic tobacco business constituted 71.6% and 73.9% of total net sales and operating
profit, respectively. While a portion of these figures included sales to China, Hong Kong and Macau,
most of the sales in the Guarantor's domestic tobacco business were attributable to sales in Japan. A
substantial majority of such sales in Japan represented sale of tobacco products manufactured by us,
with the rest relating to the Guarantor's distribution in Japan of products of foreign tobacco
manufacturers. Even after the acquisition of Gallaher Group Plc, the domestic tobacco business is
expected to continue to be a major contributor to the JT Group's net sales and profits.
The volume of unit sales of tobacco products in Japan has been declining and is expected to continue
to decline as a result of factors such as demographic changes in the adult population, increasing social
concern regarding the health effects of smoking, legislation and administrative and industry guidelines
on tobacco issues, and the impact of tax increases in the past resulting in higher retail prices for
cigarettes. The JT Group expects that demand in the Japanese tobacco market will continue to decline.
Page 5

Such decline in cigarette consumption in Japan may adversely affect the JT Group's results of
operations.
Increasing dependence on tobacco sales in the Commonwealth of Independent States and other
developing and emerging markets
The JT Group is increasing its tobacco sales in the Commonwealth of Independent States (CIS) and
other developing and emerging markets. The economic conditions in these countries have in the past
suffered from substantially depressed economies, devaluation of currencies and an unstable political
and commercial environment. Any change or deterioration in the current political and economic
conditions may affect the profitability of the JT Group's operations in these countries. The JT Group's
expansion into both developing and emerging markets may present more challenging operating
environments, where margins in general may be lower and in which commercial practices may be of a
lower standard than those in which it has historically operated.
Some of the countries in which the JT Group operates could be subject to certain international
sanctions. The JT Group seeks to comply fully with international sanctions to the extent they are
applicable to it. In doing so, the JT Group may be restricted in the sources of products that it supplies
to these countries or by the nationality of the personnel that it involves in these activities. Future
changes in international sanctions may prevent the JT Group from doing business in certain
jurisdictions entirely. Further, the JT Group may suffer from adverse public reaction or reputational
harm as a result of doing business in countries that have been identified as state sponsors of terrorism
by the US State Department or that are subject to international sanctions, notwithstanding that these
sanctions do not apply to the JT Group as a Japanese corporation and regardless of the materiality of its
operations in such countries to the JT Group's overall operations or financial condition. Any such
reaction could have a material adverse effect on the JT Group's net sales, profit and financial
condition.
Competition from other tobacco manufacturers may reduce share of the tobacco market in Japan
and in overseas markets and may adversely affect profitability
The Guarantor's principal competitors in Japan and worldwide are international tobacco manufacturers
such as Altria Group and British American Tobacco, as well as local manufacturers in various markets
in which the JT Group sells tobacco products.
In Japan, competition with foreign tobacco manufacturers has increased significantly since the
liberalisation of restrictions on the importation of tobacco products in 1985 and the suspension of
customs duties on imported tobacco in 1987. The Guarantor's share of cigarette market in Japan has
been declining it was 64.8% for the year ended 31 March 2007, down slightly from 66.4% for the
previous year. The decline reflects active marketing and promotion efforts by foreign tobacco
manufacturers as well as diversified consumer preferences in Japan. The Guarantor is required to
purchase substantially all domestically produced leaf tobacco, which in general is substantially more
expensive than foreign leaf tobacco due to higher domestic production costs. Such requirement could
become one of the factors which may adversely impact the JT Group's competitive position in Japan,
if foreign tobacco manufacturers continue to increase their market share by increasing marketing and
promotion efforts or lowering their unit prices in Japan.
Internationally, the JT Group has expanded its operations primarily through acquisitions, such as the
acquisition of non-U.S. tobacco operations of RJR Nabisco, Inc. in 1999 and that of Gallaher Group
Plc in 2007. As a result of these acquisitions, we now compete more extensively with major foreign
tobacco manufacturers as well as local manufacturers in markets outside of Japan. Market share
overseas fluctuates due to factors including competition, pricing strategy, changes in consumer
preferences, brand recognition and economic conditions in each market. Competition in those markets
may result in reduced market shares, and smaller margins because of downward pricing pressure and
higher sales promotion and advertising cost.
Increases in excise, consumption or other taxes on tobacco products in Japan or abroad may
adversely affect the JT Group's sales of tobacco products and profitability
Page 6

The sale of tobacco products in Japan is subject to national and local tobacco excise taxes and national
tobacco special excise taxes calculated on the basis of sales volume, as well as consumption tax
calculated based on the price of the product. The Japanese government reviews tax policy annually as
part of its budgetary process. Outside Japan, tobacco products are subject to taxes, the nature and rates
of which vary country by country. It is not possible to accurately predict any change or increase in
taxes applicable to tobacco products in Japan or abroad.
If an increase occurs in the tax applicable to tobacco products in Japan or abroad, the JT Group will
need to decide whether and to what extent such tax increase will be reflected in the retail price of
tobacco products. In considering any price increase, the JT Group takes into consideration various
market conditions, including the potential impact on cigarette consumption and expected reactions of
the competitors. Reflecting the tax increase in a retail price increase may reduce consumption or cause
demand to shift towards lower priced brands; on the other hand, absorbing the tax increase without a
retail price increase would reduce profitability. For further details on tobacco taxation, see
"Regulations".
Restrictions on promotion, marketing and usage of tobacco products in Japan and abroad might
reduce the demand for tobacco products and adversely affect the JT Group's results
The Tobacco Business Law of Japan and related regulations (the Tobacco Business Law) contain
restrictions on the sale of tobacco products in Japan, including restrictions on advertising activities and
in particular a requirement that cigarette packages contain cautionary statements with respect to the
effect of smoking on health. Pursuant to authority granted by the Tobacco Business Law, the Minister
of Finance has established guidelines concerning advertisements for tobacco products. The Tobacco
Institute of Japan has also established voluntary restrictions on advertisement and sales promotion of
tobacco products, including voluntary restrictions on television and radio advertisements. For further
details, see "Regulations".
In recent years, restrictions on smoking in public places and private facilities, including the creation of
designated smoking areas, have increased. The Japanese Ministry of Health, Labour and Welfare
recommended in its 2000 report that, among others, public awareness about the effects of smoking on
health should be further promoted; greater efforts be made to prevent smoking among minors; the
effect of passive smoking on non-smokers be reduced; and the efforts of smokers seeking to quit or
reduce smoking be supported. The Health Promotion Law, which came into effect on 1 May 2003,
requires that administrators of places accessed by many people such as schools and government offices
should be encouraged to take necessary measures to prevent passive smoking.
Abroad, there is a similar trend towards increasingly severe restrictions on promotion, marketing and
usage of tobacco products. The European Union (the EU) adopted a directive on tobacco products in
May 2001 requiring EU member states to approximate their laws and regulations concerning
maximum tar, nicotine and carbon monoxide levels, warning labels on individual packages and
measuring and reporting of ingredients and other product information. The Framework Convention on
Tobacco Control of the World Health Organization (the Framework Convention) was adopted by the
56th World Health Assembly in May 2003. This convention calls for, among other measures, price
and tax measures, measures for protection from exposure to smoke, regulations on the content and
emissions of tobacco products, regulation of tobacco product disclosures, advertising, promotion and
sponsorship restrictions, packaging and labelling restrictions, measures to prevent the illicit trade of
tobacco products and further restrictions on sales to minors.
In light of such restrictions and increasing social awareness regarding tobacco usage, tobacco
manufacturers worldwide including the JT Group have been adjusting their promotional and marketing
efforts, including cutbacks on print and television advertisements, outdoor advertisements, product
placements and promotional events. Although it is not always possible to predict future legislation,
regulation or industry guidelines relating to tobacco products, we expect that the level of restrictions on
the promotion, marketing and usage of tobacco products will continue to increase in Japan and
elsewhere. Trends towards tighter tobacco-related restrictions might have contributed to, and might
continue to contribute to, reduction in demand for tobacco products which may adversely affect the JT
Group's results of operations. Any change in marketing methods could furthermore impact the JT
Group's marketing expense.
Page 7

New labelling restrictions may make it difficult to market brands which include terms such as
"mild" or "light"
The Framework Convention contains a provision that each signatory shall, within a period of three
years after the convention comes into force, adopt and implement, in accordance with its national law,
effective measures to ensure that tobacco product packaging and labelling do not promote a tobacco
product by any means likely to create an erroneous impression about its characteristics or other
matters, including any term that creates the false impression that a particular tobacco product is less
harmful than other tobacco products. These may include terms such as `low tar', `light', `ultra light'
and/or `mild'. If ratified by governments worldwide, the Framework Convention or any other similar
restrictions could deprive the JT Group of the benefit of the intangible value attached to trademarks for
`mild' or `light' branded cigarettes, damage their value as global brands and require the JT Group to
expend significant resources on taking measures in response to the imposition of the restrictions. For
further details please see "Regulations".
Adverse litigation and regulatory results could have an impact on profits
There are a number of instances where litigation or regulatory proceedings, hearings or claims are
actual, pending or prospective or otherwise threatened against the JT Group. Historically, such claims
have focussed upon smoking and health related matters. More recently, regulatory, anti-trust and tax
related claims have become more prevalent.
The JT Group could incur substantial costs in connection with litigation in Japan or elsewhere in
the world alleging damages resulting from the usage of tobacco products or exposure to tobacco
smoke
The JT Group is subject to litigation in Japan and elsewhere alleging adverse health effects resulting
from the use of tobacco products or exposure to tobacco smoke. As at the date of this Listing
Memorandum, there was one case of tobacco-related proceedings brought against the Guarantor in
Japan. Lawsuits outside of Japan related to smoking and health that involve the JT Group as
defendants include claims filed by individuals, medical expense recovery lawsuits initiated by
governments and insurers and class actions for damages and injunctive relief. As at the date of this
Listing Memorandum, a total of 16 such lawsuits were brought against a company within the JT Group
or for which RJ Reynolds Tobacco Company (RJR) is seeking indemnification following the
Guarantor's acquisition of RJR Nabisco Inc.'s non-U.S. tobacco business.
Plaintiffs in smoking and health class action suits, health care recovery cases and other tobacco-related
litigation sometimes seek billions of U.S. dollars in compensation. While to date the JT Group has
never lost a case or paid any settlement in connection with any smoking and health-related litigation,
the JT Group cannot predict the outcome of any pending or future litigation in which the JT Group has
been named as a defendant. Whilst the Guarantor was itself not named in lawsuits brought by certain
U.S. states against major tobacco manufacturers, JT International U.S.A., Inc. (JTI USA), the
Guarantor's U.S. subsidiary, has been participating in the Master Settlement Agreement with such U.S.
states since 1999 in order to continue to market the JT Group's cigarette brands in the United States.
The Master Settlement Agreement requires, among other things, that JTI USA pay annual settlement
amounts calculated based on the JT Group's market share in the United States.
Regardless of the outcome of any litigation, the costs of defending claims may be substantial. There is
also no assurance that publicity regarding pending or future litigation against the JT Group and others
related to smoking will not affect the acceptance of, or cause an increase in government and other
restrictions on, smoking in Japan or elsewhere. The JT Group expects that new health-related claims
will continue to be made in the future. Class action lawsuits are currently not possible under Japanese
law, but there is no guarantee that such actions will not be introduced in the future. If the number of
lawsuits increases substantially, the JT Group may face large legal costs, negative publicity and/or
various product restrictions. If the outcome of any of these cases is unfavourable to the JT Group, not
only would it directly impact the JT Group's business and results of operations, but it could also attract
negative publicity, encourage further restrictions on smoking and induce similar lawsuits to be brought
Page 8

against the JT Group or third parties in favour of whom the Guarantor has given indemnity. Any such
development could have a material adverse effect on the JT Group's business and results of operations.
The JT Group may incur costs in connection with measures that may be taken to prevent smuggling
and counterfeiting of tobacco products and/or tax claims related to smuggling
There is widespread smuggling and counterfeiting of tobacco products, which is one of the major
issues that the tobacco industry is confronting. In 2004 Philip Morris International announced that
they had signed a 12-year cooperation agreement with the European Commission to combat the illegal
trade in cigarettes worldwide. Philip Morris International agreed to make funds available
(approximately US$1.25 billion over 12 years) for anti-contraband and anti-counterfeit measures,
whilst the Commission and the relevant member states terminated all prior disputes relating to historic
contraband.
The JT Group does not and will not supply cigarettes for the contraband market (and is committed to
measures to prevent the JT Group's products being traded in an illicit market). It is however not
possible to predict the outcome of any future measures that the JT Group may take to prevent tobacco
smuggling or counterfeit.
In Canada, there are Canadian federal and provincial contraband related claims and charges against
certain JT Group companies including JTI-Macdonald. In the event that JTI-Macdonald bears any
fines, damages or costs associated with these claims or charges, JT's view is that it will be entitled to
seek indemnification from RJR Nabisco Inc or its successors, based on the contract entered among JT,
RJR Nabisco Inc. and RJR at the time of JT's acquisition of RJR Nabisco Inc's non-US tobacco
operations in 1999. However, there is no assurance that the JT Group will be indemnified in whole or
in part for any fines, damages or costs associated with these cases. For further details please see
"Legal Proceedings".
Our operating results of tobacco business in Japan and abroad may be affected by fluctuations in
the price of leaf tobacco and non-tobacco material
Leaf tobacco is the most important raw material in the manufacture of tobacco products. As with other
agricultural commodities, the price of leaf tobacco tends to fluctuate. Different regions experience
variations in weather patterns which affect crop quality and yields. Though the effect of price
fluctuations on the JT Group's operating performance may be limited by the geographic spread of its
leaf tobacco sources and by certain months of inventory of leaf tobacco held by the JT Group, which
reduces the impact of price fluctuations on profit due to the adoption of the average cost method for
leaf tobacco costs, any significant increase in leaf tobacco prices could affect the JT Group's results of
operations.
In addition, the JT Group has to source non-tobacco material for use in its products, for example, filter
tow and papers. Any adverse fluctuations in prices or consolidation in the non-tobacco materials'
supply market could have adverse effects on the JT Group's pricing and ability to source these
materials efficiently and cost effectively.
Because the Guarantor has a statutory obligation to enter into contracts with domestic tobacco
growers to purchase all of the leaf tobacco produced, which is generally priced substantially higher
than imported leaf tobacco, the Guarantor's competitive position and profitability in Japan may be
adversely impacted by higher manufacturing costs
The Tobacco Business Law requires the Guarantor to enter into purchase contracts annually with each
domestic tobacco grower who intends to cultivate leaf tobacco for sale to the Guarantor. The
Guarantor is obliged to purchase all leaf tobacco produced pursuant to such contracts which is suitable
for the manufacture of tobacco products. The Tobacco Business Law also stipulates that a statutory
body (hatabako shingikai), composed of tobacco grower representatives and academic appointees
(approved by the Minister of Finance), be consulted to determine prices and the aggregate cultivation
area of leaf tobacco; the Guarantor is required to respect the opinions expressed by the body. For
further details see "Regulations".
Page 9

These statutory requirements adversely impact Guarantor's competitive position in Japan as against
foreign competitors which are under no such obligations. For the year ended 31 March 2007, the price
at which the Guarantor purchased unprocessed domestic leaf tobacco was approximately four times
that of foreign processed leaf tobacco. For the same period, approximately 40% of the Guarantor's
total production (i.e. volume by weight of leaf tobacco used for the manufacture of tobacco products in
Japan for the domestic market) were sourced within Japan. Any increase in the price of domestically
grown leaf tobacco or the volume of leaf tobacco the Guarantor is obliged to purchase could further
adversely affect its competitive position and profitability.
Uncertainty of identifying further acquisition opportunities
The JT Group has in recent years engaged in acquisitions, which have been complementary to the
organic growth of the JT Group. Additional acquisition is dependent on, among other things,
identifying suitable acquisition or investment opportunities and successfully consummating those
transactions. Anti-trust or similar laws may make it difficult for the JT Group to pursue additional
acquisitions if regulators in countries where the JT Group and potential acquisition targets operate
believe that a proposed transaction will have an adverse effect on competition in the relevant market or
economic region. Even if the JT Group is able to identify candidates for acquisition, it may be difficult
to complete transactions. Competition for acquisitions could limit the JT Group's ability to grow by
this method or could raise the price of acquisitions and make them less attractive to it. In addition, if
the JT Group is unable to secure necessary financing, it may not be able to grow its business through
acquisition.
Any acquisitions or similar investments may not yield the anticipated results and may adversely
affect the Guarantor's financial condition and results of operations
The JT Group has made a number of acquisitions in recent years to expand its business. The non-U.S.
tobacco operations of RJR Nabisco, Inc. in 1999 and Gallaher Group Plc in 2007 are the most notable
acquisitions, but the JT Group has also made other acquisitions in the area of tobacco, pharmaceutical
and foods businesses. It may consider further acquisitions, investments in other companies, joint
ventures or similar arrangements in the tobacco, pharmaceutical or foods industries if suitable
opportunities arise. To the extent that any acquisition or similar investments does not generate the
operational and financial results expected, the JT Group may be required to expend additional financial
or managerial resources. There can be no assurance that the Guarantor's expansion strategy in Japan
or abroad will be successful in yielding anticipated results.
Also, the goodwill arising out of an acquisition by a JT Group company which adopts US GAAP may
be subject to impairment if the fair value of goodwill falls below its book value. As of 30 September
2007, such goodwill accounted for approximately 40% of the Guarantor's consolidated assets
primarily because JTI (UK) Management Limited, a subsidiary of the Guarantor and the acquiring
vehicle for Gallaher Group Plc adopts US GAAP. The impairment of goodwill may adversely affect
the JT Group's financial condition and results of operations.
Termination of joint venture agreement with Reynolds American, Inc.
Certain subsidiaries of Gallaher Group Plc and Reynolds American, Inc. (i.e. Austria Tabak GmbH and
R.J. Reynolds Tobacco C.V., respectively) are parties to a joint venture involving the manufacture,
marketing, distribution and sale of American blend cigarettes in certain European countries including
France, Italy and Spain. Each party holds a 50% interest in the joint venture entity, R.J. Reynolds-
Gallaher International Sàrl (a Swiss limited liability company).
Under the terms of the agreement each party can terminate the joint venture upon the occurrence of
certain events, including change of control in the other party. Following the Guarantor's acquisition of
Gallaher Group Plc in April 2007, R.J. Reynolds Tobacco C.V. gave notice on 15 May 2007 that it
wished to terminate the joint venture due to the Gallaher change of control and specifying 30
November 2007 as the effective date of termination. The termination negotiation is underway and may
result in a payment of a significant amount by the JT Group.
Page 10