-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, M1MYsMLwSktozc1jlKPSegL35jx3BZPfrH/dDWm09EPbOXn80fQ3dZ/3cBbWPbsy JrJJ2+sVXTS6NZRCivAfBQ== 0001047469-98-041122.txt : 19981118 0001047469-98-041122.hdr.sgml : 19981118 ACCESSION NUMBER: 0001047469-98-041122 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PHILIP MORRIS COMPANIES INC CENTRAL INDEX KEY: 0000764180 STANDARD INDUSTRIAL CLASSIFICATION: FOOD & KINDRED PRODUCTS [2000] IRS NUMBER: 133260245 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-08940 FILM NUMBER: 98751167 BUSINESS ADDRESS: STREET 1: 120 PARK AVE CITY: NEW YORK STATE: NY ZIP: 10017 BUSINESS PHONE: 2128805000 MAIL ADDRESS: STREET 1: 120 PARK AVE CITY: NEW YORK STATE: NY ZIP: 10017 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1998 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-8940 Philip Morris Companies Inc. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Virginia 13-3260245 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 120 Park Avenue, New York, New York 10017 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (917) 663-5000 ----------------------------- - -------------------------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- At October 30, 1998, there were 2,434,668,752 shares outstanding of the registrant's common stock, par value $0.33 1/3 per share. PHILIP MORRIS COMPANIES INC. TABLE OF CONTENTS
Page No ------- PART I - FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited). Condensed Consolidated Balance Sheets at September 30, 1998 and December 31, 1997 3 - 4 Condensed Consolidated Statements of Earnings for the Nine Months Ended September 30, 1998 and 1997 5 Three Months Ended September 30, 1998 and 1997 6 Condensed Consolidated Statements of Stockholders' Equity for the Year Ended December 31, 1997 and the Nine Months Ended September 30, 1998 7 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1998 and 1997 8 - 9 Notes to Condensed Consolidated Financial Statements 10 - 23 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 24 - 46 PART II - OTHER INFORMATION Item 1. Legal Proceedings. 47 Item 6. Exhibits and Reports on Form 8-K. 47 Signature 48
2 PART I - FINANCIAL INFORMATION Item 1. Financial Statements. Philip Morris Companies Inc. and Subsidiaries Condensed Consolidated Balance Sheets (in millions of dollars) (Unaudited)
September 30, December 31, 1998 1997 ------------- ------------ ASSETS Consumer products Cash and cash equivalents $ 5,524 $ 2,282 Receivables, net 5,122 4,294 Inventories: Leaf tobacco 4,257 4,348 Other raw materials 1,950 1,689 Finished product 3,039 3,002 ------- ------- 9,246 9,039 Other current assets 1,846 1,825 ------- ------- Total current assets 21,738 17,440 Property, plant and equipment, at cost 21,158 20,002 Less accumulated depreciation 9,045 8,381 ------- ------- 12,113 11,621 Goodwill and other intangible assets (less accumulated amortization of $5,277 and $4,814) 17,653 17,789 Other assets 3,083 3,211 ------- ------- Total consumer products assets 54,587 50,061 Financial services Finance assets, net 6,127 5,712 Other assets 161 174 ------- ------- Total financial services assets 6,288 5,886 ------- ------- TOTAL ASSETS $60,875 $55,947 ------- ------- ------- -------
See notes to condensed consolidated financial statements. Continued 3 Philip Morris Companies Inc. and Subsidiaries Condensed Consolidated Balance Sheets (Continued) (in millions of dollars) (Unaudited)
September 30, December 31, 1998 1997 ------------- ------------- LIABILITIES Consumer products Short-term borrowings $ 681 $ 157 Current portion of long-term debt 1,623 1,516 Accounts payable 2,692 3,318 Accrued marketing 2,354 2,149 Accrued taxes, except income taxes 1,476 1,234 Accrued settlement charges 1,375 886 Other accrued liabilities 3,324 3,977 Income taxes 1,494 862 Dividends payable 1,073 972 ------- ------- Total current liabilities 16,092 15,071 Long-term debt 12,412 11,585 Deferred income taxes 918 889 Accrued postretirement health care costs 2,528 2,432 Other liabilities 6,685 6,218 ------- ------- Total consumer products liabilities 38,635 36,195 Financial services Long-term debt 880 845 Deferred income taxes 3,984 3,877 Other liabilities 142 110 ------- ------- Total financial services liabilities 5,006 4,832 ------- ------- Total liabilities 43,641 41,027 Contingencies (Note 3) STOCKHOLDERS' EQUITY Common stock, par value $0.33 1/3 per share (2,805,961,317 shares issued) 935 935 Earnings reinvested in the business 27,033 24,924 Accumulated other comprehensive earnings: Currency translation adjustments (1,096) (1,109) ------- ------- 26,872 24,750 Less cost of repurchased stock (372,648,588 and 380,474,028 shares) 9,638 9,830 ------- ------- Total stockholders' equity 17,234 14,920 ------- ------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $60,875 $55,947 ------- ------- ------- -------
See notes to condensed consolidated financial statements. 4 Philip Morris Companies Inc. and Subsidiaries Condensed Consolidated Statements of Earnings (in millions of dollars, except per share data) (Unaudited)
For the Nine Months Ended September 30, ------------------------------- 1998 1997 -------- ------ Operating revenues $55,948 $54,722 Cost of sales 20,119 19,978 Excise taxes on products 12,635 12,348 ------- ------- Gross profit 23,194 22,396 Marketing, administration and research costs 12,440 11,904 Settlement charges (Note 3) 1,116 812 Amortization of goodwill 433 438 ------- ------- Operating income 9,205 9,242 Interest and other debt expense, net 682 815 ------- ------- Earnings before income taxes 8,523 8,427 Provision for income taxes 3,425 3,412 ------- ------- Net earnings $ 5,098 $ 5,015 ------- ------- ------- ------- Per share data: Basic earnings per share $ 2.10 $ 2.07 ------- ------- ------- ------- Diluted earnings per share $ 2.09 $ 2.05 ------- ------- ------- ------- Dividends declared $ 1.24 $ 1.20 ------- ------- ------- -------
See notes to condensed consolidated financial statements. 5 Philip Morris Companies Inc. and Subsidiaries Condensed Consolidated Statements of Earnings (in millions of dollars, except per share data) (Unaudited)
For the Three Months Ended September 30, ---------------------------------- 1998 1997 ------- ------ Operating revenues $18,587 $18,092 Cost of sales 6,529 6,571 Excise taxes on products 4,216 4,101 ------- ------- Gross profit 7,842 7,420 Marketing, administration and research costs 4,086 3,854 Settlement charges (Note 3) 111 812 Amortization of goodwill 143 142 ------- ------- Operating income 3,502 2,612 Interest and other debt expense, net 200 249 ------- ------- Earnings before income taxes 3,302 2,363 Provision for income taxes 1,322 957 ------- ------- Net earnings $ 1,980 $ 1,406 ------- ------- ------- ------- Per share data: Basic earnings per share $ 0.81 $ 0.58 ------- ------- ------- ------- Diluted earnings per share $ 0.81 $ 0.58 ------- ------- ------- ------- Dividends declared $ 0.44 $ 0.40 ------- ------- ------- -------
See notes to condensed consolidated financial statements. 6 Philip Morris Companies Inc. and Subsidiaries Condensed Consolidated Statements of Stockholders' Equity for the Year Ended December 31, 1997 and the Nine Months Ended September 30, 1998 (in millions of dollars, except per share data) (Unaudited)
Earnings Accumulated Total Reinvested Currency Other Cost of Stock- Common in the Translation Comprehensive Repurchased holders' Stock Business Adjustments Earnings Stock Equity ------ ------------ ----------- ------------- ----------- -------- Balances, January 1, 1997 $ 935 $22,480 $ 192 $ 190 $(9,387) $14,218 Comprehensive earnings: Net earnings 6,310 6,310 Other comprehensive earnings, net of income taxes: Currency translation adjustments (1,301) (1,301) (1,301) Net unrealized appreciation on securities 2 2 ------- ------- ------- Total other comprehensive earnings (1,301) (1,299) (1,299) ------- ------- ------- Total comprehensive earnings 5,011 Exercise of stock options and issuance of other stock awards 14 300 314 Cash dividends declared($1.60 per share) (3,880) (3,880) Stock repurchased (743) (743) ----- ------- ------- ------- ------- ------- Balances, December 31, 1997 935 24,924 (1,109) (1,109) (9,830) 14,920 Comprehensive earnings: Net earnings 5,098 5,098 Other comprehensive earnings, net of income taxes: Currency translation adjustments 13 13 13 ------- ------- ------- Total other comprehensive earnings 13 13 13 ------- ------- ------- Total comprehensive earnings 5,111 Exercise of stock options and issuance of other stock awards 25 192 217 Cash dividends declared($1.24 per share) (3,014) (3,014) ----- ------- ------- ------- ------- ------- Balances, September 30, 1998 $ 935 $27,033 $(1,096) $(1,096) $(9,638) $17,234 ----- ------- ------- ------- ------- ------- ----- ------- ------- ------- ------- -------
Total comprehensive earnings, which primarily represent net earnings partially offset by currency translation adjustments, were $2,214 million and $1,117 million, respectively, for the quarters ended September 30, 1998 and 1997, and $3,878 million for the first nine months of 1997. See notes to condensed consolidated financial statements. 7 Philip Morris Companies Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (in millions of dollars) (Unaudited)
For the Nine Months Ended September 30, ---------------------------- 1998 1997 ------- ------ CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES Net earnings - Consumer products $ 5,010 $ 4,881 - Financial services and real estate 88 134 ------- ------- Net earnings 5,098 5,015 Adjustments to reconcile net earnings to operating cash flows: Consumer products Depreciation and amortization 1,291 1,246 Deferred income tax provision 135 130 Gains on sales of businesses (182) Cash effects of changes, net of the effects from acquired and divested companies: Receivables, net (875) (942) Inventories (28) (331) Accounts payable (811) (972) Income taxes 656 (40) Other working capital items 136 663 Other 633 335 Financial services and real estate Deferred income tax provision 111 113 Gain on sale of business (103) Other 70 156 ------- ------- Net cash provided by operating activities 6,416 5,088 ------- ------- CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES Consumer products Capital expenditures (1,228) (1,176) Purchases of businesses, net of acquired cash (13) (628) Proceeds from sales of businesses 6 402 Other 40 Financial services and real estate Investments in finance assets (568) (501) Proceeds from finance assets 133 256 Proceeds from sale of a business 427 ------- ------- Net cash used in investing activities (1,630) (1,220) ------- -------
See notes to condensed consolidated financial statements. Continued 8 Philip Morris Companies Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (Continued) (in millions of dollars) (Unaudited)
For the Nine Months Ended September 30, ---------------------------- 1998 1997 -------- ------ CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES Consumer products Net issuance(repayment)of short-term borrowings $ 526 $(1,006) Long-term debt proceeds 2,037 2,852 Long-term debt repaid (1,244) (1,330) Financial services and real estate Net issuance of short-term borrowings 146 Long-term debt proceeds 175 Long-term debt repaid (387) Dividends paid (2,913) (2,916) Issuance of shares 157 97 Repurchase of outstanding stock (805) Other (166) (72) ------ ------- Net cash used in financing activities (1,603) (3,246) ------ ------ Effect of exchange rate changes on cash and cash equivalents 59 (83) ------ ------ Cash and cash equivalents: Increase 3,242 539 Balance at beginning of period 2,282 240 ------ ------ Balance at end of period $5,524 $ 779 ------ ------ ------ ------
See notes to condensed consolidated financial statements. 9 Philip Morris Companies Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) Note 1. Accounting Policies: - ----------------------------- The interim condensed consolidated financial statements of Philip Morris Companies Inc. (the "Company") are unaudited. It is the opinion of the Company's management that all adjustments necessary for a fair statement of the interim results presented have been reflected therein. All such adjustments were of a normal recurring nature. Operating revenues and net earnings for any interim period are not necessarily indicative of results that may be expected for the entire year. These statements should be read in conjunction with the consolidated financial statements and related notes which appear in the Company's Annual Report to Stockholders and which are incorporated by reference into the Company's Annual Report on Form 10-K for the year ended December 31, 1997 (the "1997 Form 10-K"). Balance sheet accounts are segregated by two broad types of business. Consumer products assets and liabilities are classified as either current or non-current, whereas financial services assets and liabilities are unclassified, in accordance with respective industry practices. Note 2. Recently Adopted Accounting Standards: - ----------------------------------------------- Effective December 31, 1997, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share" ("EPS") which establishes standards for computing and presenting EPS and requires the presentation of both basic and diluted EPS. Prior period EPS have been restated to conform with the standards established by SFAS No. 128. Basic and diluted EPS were calculated using the following:
For the Nine Months Ended September 30, ---------------------------- 1998 1997 ------- ------- (in millions) Net earnings $5,098 $5,015 ------- ------- ------- ------- Weighted average shares for basic EPS 2,428 2,419 Plus incremental shares from conversions: Restricted stock and stock rights 1 1 Stock options 15 21 ------- ------- Weighted average shares for diluted EPS 2,444 2,441 ------- ------- ------- -------
For the Three Months Ended September 30, ---------------------------- 1998 1997 ------- ------- (in millions) Net earnings $1,980 $1,406 ------- ------- ------- ------- Weighted average shares for basic EPS 2,430 2,421 Plus incremental shares from conversions: Restricted stock and stock rights 1 1 Stock options 17 21 ------- ------- Weighted average shares for diluted EPS 2,448 2,443 ------- ------- ------- -------
10 Philip Morris Companies Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) Options on shares of common stock were excluded from the calculation of weighted average shares for diluted EPS because their effects were antidilutive, as follows:
1998 1997 ----- ----- (in millions) For the three months ended September 30, 15 16 For the nine months ended September 30, 15 11
In 1998, the American Institute of Certified Public Accountants' Accounting Standards Executive Committee ("AcSEC") issued Statement of Position ("SOP") No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP No. 98-1 requires certain costs incurred in connection with developing or obtaining internal-use software to be capitalized and other costs to be expensed. The Company adopted SOP No. 98-1 effective January 1, 1998, and its application for the three and nine month periods ended September 30, 1998 had no material effect on the Company's financial position or results of operations. Note 3. Contingencies: - ----------------------- Legal proceedings covering a wide range of matters are pending in various U.S. and foreign jurisdictions against the Company, its subsidiaries and affiliates, including Philip Morris Incorporated ("PM Inc."), the Company's domestic tobacco subsidiary, Philip Morris International Inc. ("PMI"), the Company's international tobacco subsidiary, and their respective indemnitees. Various types of claims are raised in these proceedings, including products liability, consumer protection, antitrust, securities law, tax, patent infringement, employment matters and claims for contribution. OVERVIEW OF TOBACCO-RELATED LITIGATION Types and Number of Cases Pending claims related to tobacco products generally fall within three categories: (i) smoking and health cases alleging personal injury brought on behalf of individual plaintiffs, (ii) smoking and health cases alleging personal injury and purporting to be brought on behalf of a class of individual plaintiffs, and (iii) health care cost recovery cases brought by state and local governments seeking reimbursement for Medicaid and/or other health care expenditures allegedly caused by cigarette smoking, as well as other reimbursement cases, including class actions, brought by non-governmental plaintiffs such as unions, health maintenance organizations ("HMOs"), native American tribes, federal and state taxpayers and others. Damages claimed in some of the smoking and health class actions and health care cost recovery cases range into the billions of dollars. Exhibit 99.1 hereto lists the smoking and health class actions and the health care cost recovery cases pending as of November 1, 1998, and discusses certain developments in these cases since July 1, 1998. In recent years there has been a substantial increase in the number of smoking and health cases being filed in the United States. As of November 1, 1998, there were approximately 450 smoking and health cases filed and served on behalf of individual plaintiffs in the United States against PM Inc. and, in some cases, the Company (excluding approximately 50 cases in Texas that were voluntarily dismissed but which may be refiled under certain 11 Philip Morris Companies Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) conditions), compared with approximately 375 such cases on December 31, 1997, and 185 such cases on December 31, 1996. Many of these cases are pending in Florida, West Virginia and New York. Seventeen of the individual cases involve allegations of various personal injuries allegedly related to exposure to environmental tobacco smoke ("ETS"). In addition, as of November 1, 1998, there were approximately 65 purported smoking and health class actions pending in the United States against PM Inc. and, in some cases, the Company (including nine that involve allegations of various personal injuries related to exposure to ETS), compared with approximately 50 such cases on December 31, 1997, and 20 such cases on December 31, 1996. Most of these actions purport to constitute statewide class actions and were filed after May 1996 when the Fifth Circuit Court of Appeals, in the Castano case, reversed a federal district court's certification of a purported nationwide class action on behalf of persons who were allegedly "addicted" to tobacco products. The number of health care cost recovery actions in the United States also increased, with approximately 140 such cases pending as of November 1, 1998, compared with approximately 105 such cases on December 31, 1997, and 25 such cases on December 31, 1996. There are also a number of tobacco-related actions pending outside the United States against affiliates and subsidiaries of PMI including, as of November 1, 1998, approximately 20 smoking and health cases initiated by one or more individuals (Argentina (13), Brazil (1), Canada (1), Italy (1), Japan (1), Scotland (1) and Turkey (2)) and four smoking and health class actions (Brazil (2), Canada (1) and Nigeria (1)). In addition, health care cost recovery actions have been brought in Israel and by the Republic of the Marshall Islands, the Commonwealth of Puerto Rico, and British Columbia, Canada in their respective jurisdictions and by the Republic of Guatemala and the Republic of Panama in the United States. Litigation Settlements During 1997 and 1998, PM Inc. and other companies in the United States tobacco industry settled an ETS smoking and health class action brought on behalf of airline flight attendants and health care cost recovery actions brought by the States of Mississippi, Florida, Texas and Minnesota. The Florida health care cost recovery settlement agreement was recently amended pursuant to its "most favored nations" ("MFN") clause to reflect the terms of the Minnesota health care cost recovery settlement. The Florida MFN amendment, which is similar to MFN amendments previously entered into with Mississippi and Texas, is discussed below under the heading "Health Care Cost Recovery Litigation - Most Favored Nation Provisions." The Mississippi and Texas MFN amendments are discussed in Note 3 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998. The Minnesota settlement agreement is discussed in Note 3 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998. The health care cost recovery settlement agreements, the MFN amendments thereto and certain ancillary agreements are filed as exhibits to various of the Company's reports filed with the Securities and Exchange Commission. Since the beginning of the third quarter of 1997, PM Inc. has recorded charges totaling $2.573 billion to accrue for its share of all fixed and determinable portions of its obligations under the foregoing settlements. $1.116 billion of these charges were taken during the first nine months of 1998, of which $111 million were taken during the third quarter. Accrued settlement costs for which 12 Philip Morris Companies Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) payments have not yet been made, totaling $1.598 billion, are payable principally before the end of the year 2000. As discussed in the last paragraph of this Note 3, PM Inc. and other companies in the United States tobacco industry have discussed with a number of state attorneys general an agreement that could settle the asserted and unasserted health care cost recovery claims of all of the states. Discussions have reached the stage where those attorneys general are reporting to the remaining states the terms of a proposed agreement. The proposed agreement is contingent upon a sufficient number of states accepting the agreement. No assurance can be given that the proposed agreement will be accepted by a sufficient number of states as to cause the industry to conclude an agreement. (A copy of the proposed agreement is filed as Exhibit 99.3 hereto and is incorporated herein by reference thereto.) Verdicts in Individual Cases During the last two and one-half years, juries have returned verdicts for defendants in three smoking and health cases in Florida and in one individual ETS smoking and health case in Indiana. In June 1998, a Florida appeals court reversed a $750,000 jury verdict awarded in August 1996 against another United States cigarette manufacturer. Also in June 1998, a Florida jury awarded the estate of a deceased smoker in a smoking and health case against another United States cigarette manufacturer $500,000 in compensatory damages, $52,000 for medical expenses and $450,000 in punitive damages. In Brazil, a court in 1997 awarded plaintiffs in a smoking and health case the Brazilian currency equivalent of $81,000, attorneys' fees (in an amount to be determined by the court) and a monthly annuity for 35 years equal to two-thirds of the deceased smoker's last monthly salary. Neither the Company nor its affiliates were parties to that action. Several of the above verdicts and decisions are under appeal. Pending Trials Trial is underway in a smoking and health class action in Florida (Engle, et al. v. R.J. Reynolds Tobacco Company, et al.) and in the State of Washington's health care cost recovery action. These cases are discussed below. 13 Philip Morris Companies Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) Upcoming Trial Dates Exhibit 99.2 hereto lists the smoking and health class actions and health care cost recovery actions that are currently scheduled for trial through 2000. Except for the Engle and State of Washington trials, no other smoking and health cases or health care cost recovery actions are scheduled for trial during 1998. As noted in Exhibit 99.2, four smoking and health class actions and 14 health care cost recovery actions, including three brought on behalf of unions, are scheduled for trial in 1999 against PM Inc. and, in some cases, the Company. During 1999, 15 individual smoking and health cases are scheduled for trial against PM Inc., including two in which the Company is a defendant. Trial dates, however, are subject to change. A description of the smoking and health litigation, health care cost recovery litigation and certain other proceedings pending against the Company and/or its subsidiaries and affiliates follows. SMOKING AND HEALTH LITIGATION Plaintiffs' allegations of liability in smoking and health cases are based on various theories of recovery, including negligence, gross negligence, strict liability, fraud, misrepresentation, design defect, failure to warn, breach of express and implied warranties, breach of special duty, conspiracy, concert of action, violations of deceptive trade practice laws and consumer protection statutes, and claims under the federal Racketeer Influenced and Corrupt Organization Act ("RICO") and state RICO statutes. In certain of these cases, plaintiffs claim that cigarette smoking exacerbated the injuries caused by their exposure to asbestos. Plaintiffs in the smoking and health actions seek various forms of relief, including compensatory and punitive damages, treble/multiple damages and other statutory damages and penalties, creation of medical monitoring funds, disgorgement of profits, and injunctive and equitable relief. Defenses raised in these cases include lack of proximate cause, assumption of the risk, comparative fault and/or contributory negligence, statutes of limitations, and preemption by the Federal Cigarette Labeling and Advertising Act (the "Labeling Act"). In June 1992, the United States Supreme Court held that the Labeling Act, as enacted in 1965, does not preempt common law damage claims, but that the Labeling Act, as amended in 1969, preempts claims arising after July 1969 against cigarette manufacturers "based on failure to warn and the neutralization of federally mandated warnings to the extent that those claims rely on omissions or inclusions in advertising or promotions." The Court also held that the 1969 Labeling Act does not preempt claims based on express warranty, fraudulent misrepresentation or conspiracy. The Court further held that claims for fraudulent concealment were preempted except "insofar as those claims relied on a duty to disclose...facts through channels of communication other than advertising or promotion." (The Court did not consider whether such common law damage claims were valid under state law.) The Court's decision was announced by a plurality opinion. The effect of the decision on pending and future cases will be the subject of further proceedings in the lower federal and state courts. Additional similar litigation could be encouraged if legislation to eliminate the federal preemption defense, proposed in Congress in recent years, were enacted. It is not possible to predict whether any such legislation will be enacted. In May 1996, the Fifth Circuit Court of Appeals held that a purported class consisting of all "addicted" smokers nationwide did not meet the standards and requirements of the federal rules governing class actions (Castano, et al. v. The 14 Philip Morris Companies Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) American Tobacco Company, et al.). Since this class decertification, lawyers for plaintiffs have filed numerous smoking and health class action suits in various state and federal courts. In general, these cases purport to be brought on behalf of residents of a particular state or states and raise "addiction" claims similar to those raised in the Castano case and, in some cases, claims of physical injury as well. As of November 1, 1998, smoking and health class actions were pending in Alabama, Arkansas, California, the District of Columbia, Florida, Georgia, Hawaii, Illinois, Indiana, Iowa, Kansas, Louisiana, Maryland, Michigan, Minnesota, Mississippi, Nevada, New Jersey, New Mexico, New York, North Carolina, Ohio, Oklahoma, Pennsylvania, Puerto Rico, South Carolina, Tennessee, Texas, Utah, Virginia, West Virginia and Wisconsin, as well as in Canada, Brazil and Nigeria. As of November 1, 1998, class certification had been denied or reversed by courts in 11 smoking and health class actions involving PM Inc., in Louisiana, the District of Columbia, New York (2), Pennsylvania, Puerto Rico and New Jersey (5), while classes remained certified in three cases in Florida, Louisiana and Maryland. A number of the foregoing decisions relating to class certification are under appeal. Class certification motions are pending in a number of the other purported smoking and health class actions. One ETS smoking and health class action was settled in 1997 as discussed in the Company's 1997 Form 10-K. Engle Trial - ----------- Trial in this Florida class action case began in July 1998. Plaintiffs seek compensatory and punitive damages ranging into the billions of dollars, as well as equitable relief including, but not limited to, a medical fund for future health care costs, attorneys' fees and court costs. The class consists of all Florida residents and citizens and their survivors, who have suffered, presently suffer or have died from diseases and medical conditions caused by their addiction to cigarettes that contain nicotine. The current trial plan calls for the case to be tried in three "Phases." The court has stated, however, that the trial plan may be modified. Phase One will involve two "Stages." Phase One, Stage One will involve evidence concerning common issues of liability and general causation for all class members, including scientific and statistical evidence and "common" class issues concerning plaintiffs' causes of action. Entitlement to punitive damages will be decided at the end of Phase One, Stage Two, but no amount will be set at that time. If the jury determines that plaintiffs are entitled to punitive damages, the assessment of punitive damages will be addressed in Phase Two. If plaintiffs prevail in Phase One, Phase Two will involve individual determination of specific causation and other individual issues regarding entitlement to compensatory damages for the class representatives. Phase Three of the trial will be held before separate juries to address absent class members' determination of specific causation and other individual issues regarding entitlement to compensatory damages. HEALTH CARE COST RECOVERY LITIGATION In certain of the pending proceedings, foreign, state and local government entities, unions, HMOs, native American tribes, federal and state taxpayers and others seek reimbursement for Medicaid and/or other health care expenditures allegedly caused by tobacco products and, in some cases, for future expenditures and damages as well. Certain of these cases purport to be brought on behalf of a 15 Philip Morris Companies Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) class of plaintiffs, and in some cases, the class has been certified by the court. In one health care cost recovery case, private citizens seek recovery of alleged tobacco-related health care expenditures incurred by the federal Medicare program. In others, Blue Cross subscribers seek reimbursement of allegedly increased medical insurance premiums caused by tobacco products. In the native American cases, claims are also asserted for alleged lost productivity of tribal government employees. Other relief sought by some but not all plaintiffs includes punitive damages, treble/multiple damages and other statutory damages and penalties, injunctions prohibiting alleged marketing and sales to minors, disclosure of research, disgorgement of profits, funding of anti-smoking programs, disclosure of nicotine yields, and payment of attorney and expert witness fees. The claims asserted in these health care cost recovery actions vary. In most cases, plaintiffs assert the equitable claim that the tobacco industry was "unjustly enriched" by plaintiffs' payment of health care costs allegedly attributable to smoking, and seek reimbursement of those costs. Other claims made by some but not all plaintiffs include the equitable claim of indemnity, common law claims of negligence, strict liability, breach of express and implied warranty, violation of a voluntary undertaking or special duty, fraud, negligent misrepresentation, conspiracy, public nuisance, claims under federal and state statutes governing consumer fraud, antitrust, deceptive trade practices and false advertising, and claims under federal and state RICO statutes. Defenses raised include failure to state a valid claim, lack of benefit, adequate remedy at law, "unclean hands" (namely, that plaintiffs cannot obtain equitable relief because they participated in, and benefited from, the sale of cigarettes), lack of antitrust injury, federal preemption, lack of proximate cause, remoteness and statute of limitations. In addition, defendants argue that they should be entitled to "set-off" any alleged damages to the extent the plaintiff benefits economically from the sale of cigarettes through the receipt of excise taxes or otherwise. Defendants also argue that these cases are improper because plaintiffs must proceed under principles of subrogation and assignment. Under traditional theories of recovery, a payor of medical costs (such as an insurer or a state) can seek recovery of health care costs from a third party solely by "standing in the shoes" of the injured party. Defendants argue that plaintiffs should be required to bring an action on behalf of each individual health care recipient and should be subject to all defenses available against the injured party. In certain of these cases, defendants have also challenged the ability of the plaintiffs to use contingency fee counsel to prosecute these actions. Further, certain cigarette companies, including PM Inc., have filed declaratory judgment actions in a number of states seeking to block the state's health care cost recovery action and/or to prevent the state from hiring contingency fee counsel. Certain states have enacted, and others are considering enacting, statutes that are intended to facilitate the state's ability to recover Medicaid and/or other health care cost expenditures allegedly caused by cigarette smoking. These statutes and proposed bills vary by jurisdiction, but generally include provisions that purport to abrogate certain affirmative defenses, create a direct cause of action for the state (thus avoiding the need to proceed via subrogation) and authorize the use of statistical models to prove damages and/or causation. These statutes are being challenged in court by PM Inc. and other domestic tobacco manufacturers. As of November 1, 1998, there were approximately 140 health care cost recovery cases pending against PM Inc. and, in some cases, the Company. Thirty-nine 16 Philip Morris Companies Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) health care cost recovery cases were filed by states, through their attorneys general and/or other state agencies, in Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Louisiana, Maine, Maryland, Massachusetts, Michigan, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, New York, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Utah, Vermont, Washington, West Virginia and Wisconsin, and eight were filed by city and county governments. Approximately 70 of the pending health care cost recovery actions were filed by unions, six by HMOs, six by native American tribes and five by federal and state taxpayers. Health care cost recovery actions have also been brought in Israel and by the Republic of the Marshall Islands, the Commonwealth of Puerto Rico, and British Columbia, Canada in their respective jurisdictions and by the Republic of Guatemala and the Republic of Panama in the United States. The press has reported that the Clinton Administration is reviewing the possibility of filing a Medicare health care cost recovery action on behalf of the federal government. Courts have ruled on preliminary motions to dismiss various claims in approximately 45 of the health care cost recovery actions brought by or on behalf of governmental entities and unions. Although many of these rulings have been favorable to the industry, a number have been adverse, including recent rulings in union cases pending in Ohio and New York (Iron Workers Local Union No. 17 Insurance Fund, et al. and National Asbestos Workers Medical Fund, et al.), which are scheduled for trial in February 1999 and May 1999, respectively. Recent rulings in these cases are further discussed in Exhibit 99.1. Washington Trial - ---------------- Trial in the Washington health care cost recovery action is currently underway. Plaintiff seeks damages in unspecified amounts, funding of smoking cessation and public education programs, civil penalties of $2,000 for each violation of the state's unfair business practices statute, civil penalties of $100,000 against each individual defendant and $500,000 against each corporate defendant for each violation of the state's antitrust statute, costs and attorneys' fees, various forms of non-monetary relief and such other relief as the court deems appropriate. For a discussion of certain recent rulings in this case, see Exhibit 99.1 hereto. Most Favored Nation Provisions - ------------------------------ Following the settlement of Minnesota's health care cost recovery action in May 1998, previous health care cost recovery settlements with the States of Mississippi, Texas and Florida were amended pursuant to the MFN provision of those settlements. The MFN provision provided that, in the event the settling defendants entered into a subsequent pre-verdict settlement with a non-federal governmental entity on terms more favorable to such entity than the terms of the prior state settlements (after due consideration of relevant differences in population or other appropriate factors), the terms of the prior state settlements would be revised to provide treatment at least as relatively favorable. The Mississippi and Texas settlement agreements were amended pursuant to this provision in July 1998. These MFN amendments are described in the Company's June 30, 1998 Form 10-Q. The Florida MFN amendment was signed in September 1998 and is 17 Philip Morris Companies Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) described below. (A copy of the Florida MFN amendment is filed as an Exhibit to this Form 10-Q, and the discussion herein is qualified by reference thereto.) The Florida MFN amendment calls for the industry to make additional payments to Florida over a five-year period aggregating $1.75 billion. These amounts are payable in January of the year indicated and, for payments after 1999, are to be adjusted for inflation, changes in domestic sales volume and, under specified circumstances, increases in net operating profits from domestic sales:
(in millions) 1999 2000 2001 2002 2003 Total ---- ---- ---- ---- ---- ----- $ 123.470 $ 464.590 $ 464.590 $ 464.590 $ 232.760 $ 1,750.000
These payments will be allocated among the settling defendants in accordance with their relative unit volume of domestic cigarette shipments in the year preceding payment. In the event a settling defendant defaults on its obligation to make timely payment of the above amounts, the remaining settling defendants may, in their absolute discretion, pay the missing payment. If they elect not to make up the missing payment, each settling defendant can be required by the state to pay its share of the remaining payments scheduled above within 30 days of the default, subject to inflation and volume adjustments. The obligations of the settling defendants under the amended settlement agreement are several and not joint; the amended settlement agreement does not obligate any settling defendant to pay the share of another settling defendant. The stated amounts of the ongoing annual payments (the "Ongoing Annual Payments") contemplated by the original Florida settlement agreement are unchanged by the MFN amendment. The MFN amendment modifies the provision of the original settlement agreement that address the impact that enactment of federal tobacco legislation before November 30, 2000, would have on such settlement. Under the MFN amendment, the settling defendants will be entitled to receive a dollar-for-dollar offset against their Ongoing Annual Payments for amounts that Florida could elect to receive pursuant to any such federal tobacco legislation ("Federal Settlement Funds"), except to the extent that: (i) such Federal Settlement Funds are required to be used for purposes other than health care or tobacco-related purposes; (ii) such federal tobacco legislation does not provide for the abrogation, settlement or relinquishment of state tobacco-related claims; or (iii) state receipt of such Federal Settlement Funds is conditioned upon (A) the relinquishment of rights or benefits under that respective state's settlement (excepting any Ongoing Annual Payment amounts subject to the offset); or (B) actions or expenditures by such state unrelated to health care or tobacco (including but not limited to tobacco education, cessation, control or enforcement). The MFN amendment also supersedes the MFN provision contained in the original settlement agreement. Under the MFN amendment, if the settling defendants enter into any future pre-verdict settlement agreement of similar health care cost recovery litigation on terms more favorable to a non-federal governmental plaintiff, the Florida settlement will not otherwise be revised except to the extent such future settlement provides for: (i) joint and several liability for monetary payments, (ii) a parent company guaranty or other credit assurance, (iii) the implementation of different non-economic tobacco-related public health 18 Philip Morris Companies Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) measures, or (iv) monetary offsets in the event of federal tobacco legislation that are more favorable to such plaintiff than those described above. The settling defendants agreed as part of the MFN amendment to disclose specified future payments for lobbying or related purposes in Florida, to support enumerated legislative and regulatory proposals and not to support legislation, rules or policies that would diminish Florida's rights under the amended settlement agreement. The settling defendants further agreed not to make any payments for tobacco product placement in motion pictures made in the United States. The settling defendants have also agreed to submit to a Consent Judgment enjoining the industry from (i) offering or selling non-tobacco services or merchandise (e.g., caps, jackets or bags) in Florida bearing the name or logo of a tobacco brand other than tobacco products or items with the sole function of advertising; (ii) making any material misrepresentation of fact regarding the health consequences of using tobacco products; (iii) entering into any contract, combination or conspiracy to limit health information or research into smoking and health or product development; and (iv) taking any action to target children in Florida in the advertising, promotion or marketing of cigarettes. In connection with the MFN amendment, the parties executed an agreement governing settling defendants' payment of attorneys' fees to counsel for Florida. (A copy of this agreement is filed as an Exhibit to this Form 10-Q, and the discussion herein is qualified by reference thereto.) The agreement provides that beginning in November 1998, a three-member arbitration panel will consider and determine the amount of attorneys' fees to be awarded. These awards will be allocated among the settling defendants in accordance with their relative unit volume of domestic cigarette shipments in the period immediately preceding the period with respect to which such payment is made. Under the agreement, there is an annual cap of $500 million on aggregate attorneys' fees to be paid pursuant to arbitration awards, including those to be paid for counsel for Florida. A one-time $250 million payment may be paid for cases that were settled in 1997. The aggregate annual cap includes: (i) all attorneys' fees paid pursuant to an award by the panel in connection with settlements of any smoking and health cases (other than individual cases), (ii) all attorneys' fees paid pursuant to an award by the panel for activities in connection with smoking and health cases resolved by operation of federal legislation provided such legislation imposes an obligation on the settling defendants to pay attorneys' fees, and (iii) all attorneys' and professional fees paid pursuant to an award by the panel for contributions made toward the enactment of certain federal tobacco legislation. The settling defendants have made payments on account of counsel for Florida totaling $100 million as advances against awards of attorneys' fees by the arbitration panel, such advances to be credited against the annual cap over several years commencing in 1999. The Company has recorded charges of $111 million in the third quarter of 1998 to accrue for PM Inc.'s share of all fixed and determinable portions of the obligations with respect to the Florida MFN amendment. CERTAIN OTHER TOBACCO-RELATED LITIGATION Since September 1997, a number of suits have been filed by former asbestos manufacturers and asbestos manufacturers' personal injury settlement trusts against domestic tobacco manufacturers, including PM Inc., and others (Raymark 19 Philip Morris Companies Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) Industries, Inc. v. Brown & Williamson Tobacco Corporation, et al.; Raymark Industries, Inc. v. R.J. Reynolds Tobacco Company, et al.; Fibreboard Corporation and Owens Corning v. The American Tobacco Company, et al.; Robert A. Falise, et al., Trustees of the Manville Personal Injury Settlement Trust v. The American Tobacco Company, et al.; Keene Creditors Trust v. Brown & Williamson Tobacco Corporation, et al.; Raymark Industries, Inc. v. The American Tobacco Company, et al.; H.K. Porter Company, Inc. v. The American Tobacco Company, et al.). These cases seek, among other things, contribution or reimbursement for amounts expended for the defense and payment of asbestos claims that were allegedly caused in whole or in part by cigarette smoking. Plaintiffs in most of these cases also seek punitive damages. Since June 1998, three class actions have been filed against PM Inc. and the Company, in Florida, New Jersey and Pennsylvania on behalf of individuals who purchased and consumed Marlboro Lights (Hogue, et al. v. Philip Morris Companies, Inc., et al., Circuit Court, Thirteenth Judicial Circuit Hillsborough County, Florida, filed June 30, 1998; Cummis, et al. v. Philip Morris Companies, Inc., et al., Superior Court of New Jersey, Law Division, Morris County, filed July 9, 1998; McNamara, et al. v. Philip Morris Companies, Inc., et al., Court of Common Pleas, Montgomery County, Pennsylvania, filed July 16, 1998). These cases allege in connection with the use of the term "Lights," among other things, deceptive and unfair trade practices, unjust enrichment, and seek injunctive and equitable relief. Similar class actions have been threatened in Massachusetts. Since July 1998, two suits have been filed in California courts alleging that domestic cigarette manufacturers, including PM Inc., and others have violated the California statute known as "Proposition 65" by not informing the public of the alleged risks of ETS to non-smokers. Plaintiffs also allege violations of California's Business and Professions Code regarding unfair and fraudulent business practices. Plaintiffs seek statutory penalties, injunctions barring the sale of cigarettes, restitution, disgorgement of profits and other relief (People of the State of California, et al. v. Philip Morris Incorporated, et al., Superior Court, Los Angeles, California, filed July 14, 1998; People of the State of California, et al. v. Brown & Williamson, et al., Superior Court, San Francisco, California, filed July 28, 1998). In October 1998, the court denied defendants' motion to dismiss the complaint in People of the State of California, et al. v. Brown & Williamson, et al. CERTAIN OTHER ACTIONS In March 1994, the Company and certain officers and directors were named as defendants in a complaint filed as a purported class action in the United States District Court for the Eastern District of New York (Lawrence, et al. v. Philip Morris Companies Inc., et al.). Plaintiffs allege that defendants violated the federal securities laws by maintaining artificially high levels of profitability through an inventory management practice pursuant to which PM Inc. allegedly shipped more inventory to customers than was necessary to satisfy market demand. The plaintiff class consists of all persons who purchased common stock of the Company between July 10, 1991, and April 1, 1993, and who held such stock at the close of business on April 1, 1993. In April 1994, the Company and certain officers and directors were named as defendants in several other purported class actions that were later consolidated in the United States District Court in the Southern District of New York (Kurzweil, et al. v. Philip Morris Companies Inc., et al.). In those cases, 20 Philip Morris Companies Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) plaintiffs assert that defendants violated the federal securities laws by making allegedly false and misleading statements regarding the allegedly "addictive" qualities of cigarettes. The plaintiff class consists of all persons who purchased common stock of the Company between June 11, 1991, and May 6, 1994. On November 13, 1998, the United States District Court for the Southern District of New York approved a settlement agreement relating to the Kurzweil class action. Pursuant to the agreement, the Company deposited into escrow $115.5 million to create a fund for the benefit of class members. This fund will also cover any attorneys' fees and other expenses ordered by the court. The settlement will also result in a release of all claims in the Lawrence action by class members who have not requested exclusion from the Kurzweil class. The parties to the Lawrence action intend to seek the dismissal of that action in the fourth quarter of 1998. In September 1997, a purported class action suit consolidating several previously filed class actions was filed in Wisconsin alleging that Kraft Foods, Inc. ("Kraft") and others engaged in a conspiracy to fix and depress the prices of bulk cheese and milk through their trading activity on the National Cheese Exchange (Servais, et al. v. Kraft Foods, Inc., et al.). Plaintiffs seek injunctive and equitable relief and treble damages. In June 1998, the court denied Kraft's motion to dismiss as to the antitrust and tortious interference claims and granted Kraft's motion to dismiss on breach of contract and false advertising claims. In October 1997, a purported class action suit was filed in Illinois against Kraft only (Vincent, et al. v. Kraft Foods, Inc.), and in April 1998, a purported class action suit was filed in California against Kraft and others (Knevelboard Dairies, et al. v. Kraft Foods, Inc., et al.). Both of these suits contain allegations similar to those in the Wisconsin class action, but the Vincent case seeks a class comprising all of Kraft's milk suppliers, and the Knevelboard case seeks a class comprising all of defendants' milk suppliers in California. In June 1998, the Illinois court in the Vincent case granted Kraft's motion to dismiss, but has allowed plaintiffs to file an amended complaint. Tax assessments alleging the nonpayment of taxes in Italy (value-added taxes for the years 1988 to 1995 and income taxes for the years 1987 to 1995) have been served upon certain affiliates of the Company. The aggregate amount of unpaid taxes assessed to date is alleged to be the Italian lira equivalent of $2.7 billion. In addition, the Italian lira equivalent of $3.7 billion in interest and penalties has been assessed. The Company anticipates that value-added and income tax assessments may also be received in respect of 1996 and 1997. All of the assessments are being vigorously contested. To date, the Italian administrative tax court in Milan has overturned 65 of the assessments. The decisions to overturn two assessments have been appealed by the tax authorities. In a separate proceeding in Naples, in October 1997, a court dismissed charges of criminal association against certain present and former officers and directors of affiliates of the Company, but permitted charges of tax evasion to remain pending. In February 1998, the tax evasion charges were dismissed by the criminal court in Naples following a determination that jurisdiction was not proper, and the case file was transmitted to the public prosecutor in Milan, who will determine whether to bring charges, in which case a preliminary investigations judge will make a new 21 Philip Morris Companies Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) finding as to whether there should be a trial on these charges. The Company, its affiliates and the officers and directors who are subject to the proceedings believe they have complied with applicable Italian tax laws and are vigorously contesting the pending assessments and proceedings. ------------------------- In June 1997, PM Inc. and other companies in the United States tobacco industry entered into a Memorandum of Understanding (the "Resolution") to support the adoption of federal legislation and ancillary undertakings that would resolve many of the regulatory and litigation issues affecting the United States tobacco industry and, thereby, reduce uncertainties facing the industry and increase stability in business and capital markets. (The proposed Resolution is discussed in the Company's 1997 Form 10-K, and a copy of the proposed Resolution is filed as Exhibit 10.17 thereto.) Such legislation has not been enacted. Bills substantially different and significantly more adverse to the domestic tobacco industry and the Company than the proposed Resolution have been introduced in Congress. The Company cannot predict whether federal tobacco legislation will be enacted or the form any such enactment might take. ------------------------- It is not possible to predict the outcome of the litigation pending against the Company and its subsidiaries. Litigation is subject to many uncertainties, and it is possible that some of these actions could be decided unfavorably. An unfavorable outcome or settlement of a pending smoking and health or health care cost recovery case could encourage the commencement of additional similar litigation. There have also been a number of adverse legislative, regulatory, political and other developments concerning cigarette smoking and the tobacco industry that have received widespread media attention. These developments may negatively affect the perception of potential triers of fact with respect to the tobacco industry, possibly to the detriment of certain pending litigation, and may prompt the commencement of additional similar litigation. Management is unable to make a meaningful estimate of the amount or range of loss that could result from an unfavorable outcome of pending litigation. The present legislative and litigation environment is substantially uncertain and it is possible that the Company's business, results of operations, cash flows or financial position could be materially affected by an unfavorable outcome or settlement of certain pending litigation or by the enactment of federal tobacco legislation. The Company and each of its subsidiaries named as a defendant believe, and each has been so advised by counsel handling the respective cases, that it has a number of valid defenses to all litigation pending against it. All such cases are, and will continue to be, vigorously defended. However, the Company and its subsidiaries periodically may enter into discussions in an attempt to settle various cases when they believe it is in the best interests of the Company's stockholders to do so. In that regard, PM Inc. and other companies in the United States tobacco industry have discussed with a number of state attorneys general an agreement that could settle the asserted and unasserted health care cost recovery claims of all of the states. Discussions have reached the stage where those attorneys general are reporting to the remaining states the terms of a proposed agreement. The proposed agreement is contingent upon a sufficient number of states accepting the agreement. No assurance can be given that the proposed agreement will be accepted by a sufficient number of states as to cause the industry to conclude an agreement. The proposed agreement would effect significant changes in the advertising and marketing of tobacco products. It would also require the industry to pay more than $206 billion through 2025, including (i) more than $12.7 billion in initial payments over the first five years (including $2.4 billion immediately); (ii) annual payments commencing in 2000 in the original amount of $4.5 billion and increasing periodically to $9 billion in 2018 and thereafter in perpetuity, and (iii) $1.7 billion over ten years, the great preponderance of which is due during the first five years. PM Inc.'s share of the $2.4 billion payment due immediately would be 68% (based on relative market capitalization). All other payments would be allocated among the original participating manufacturers based on their relative unit volume of domestic cigarette shipments and would be subject to adjustment for inflation and volume changes and for participation by less than all the states and for other adjustments and offsets described in the proposed agreement. The Company anticipates that its share of the $2.4 billion payment due immediately would be charged to expense in the fiscal quarter and year during which the agreement is concluded and would be paid from available cash or through commercial paper borrowings as the Company deems appropriate. The Company further anticipates that PM Inc.'s share of future annual industry payments related to cigarette sales would be charged to expense as the related sales occur and would be funded through price increases. Any such agreement would have a material adverse effect on the operating income and cash flows of the Company and PM Inc. in the fiscal quarter and year the agreement was concluded and would likely materially adversely affect the business, volume, cash flows and/or operating income and financial position of the Company and PM Inc. in future years. The degree of the adverse impact would depend, among other things, on the rates of decline in United States cigarette sales in the premium and discount segments, PM Inc.'s shares of the domestic premium and discount segments, and the effect of any resulting cost advantage of manufacturers not subject to the agreement. The proposed agreement is filed as an Exhibit to this Quarterly Report on Form 10-Q and the foregoing discussion is qualified by reference thereto. Note 4. Recently Issued Accounting Standards: - ---------------------------------------------- During the second quarter of 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," 22 Philip Morris Companies Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) which must be adopted by the Company by January 1, 2000, with early adoption permitted. SFAS No. 133 requires that all derivative instruments be recorded on the consolidated balance sheet at their fair value. Changes in the fair value of derivatives will be recorded each period in earnings or other comprehensive earnings, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. Gains and losses on derivative instruments reported in other comprehensive earnings will be reclassified as earnings in the periods in which earnings are affected by the hedged item. The Company has not yet determined the timing of adoption or the impact that adoption or subsequent application of SFAS No. 133 will have on its financial position or results of operations. In 1998, AcSEC issued SOP No. 98-5, "Reporting on the Costs of Start-Up Activities." SOP No. 98-5 establishes standards on accounting for start-up and organization costs and, in general, requires such costs to be expensed as incurred. This standard is required to be adopted on January 1, 1999. Adoption of SOP No. 98-5 will have no material effect on the Company's financial position or results of operations. 23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Consolidated Operating Results - ------------------------------ For the Nine Months Ended September 30,
Operating Revenues ------------------------------------- (in millions) 1998 1997 ------- ------- Tobacco $32,457 $30,506 Food 20,036 20,619 Beer 3,247 3,318 Financial services and real estate 208 279 ------- ------- Operating revenues $55,948 $54,722 ------- ------- ------- -------
Operating Income ------------------------------------- (in millions) 1998 1997 ------- ------- Tobacco $ 6,384 $ 6,339 Food 3,177 3,065 Beer 404 410 Financial services and real estate 137 256 ------- ------- Operating companies income 10,102 10,070 Amortization of goodwill (433) (438) General corporate expenses (370) (334) Minority interest in earnings of consolidated subsidiaries (94) (56) ------- ------- Operating income $ 9,205 $ 9,242 ------- ------- ------- -------
For the Three Months Ended September 30,
Operating Revenues ------------------------------------- (in millions) 1998 1997 ------- ------- Tobacco $11,121 $10,433 Food 6,326 6,455 Beer 1,071 1,125 Financial services and real estate 69 79 ------- ------- Operating revenues $18,587 $18,092 ------- ------- ------- -------
Operating Income ------------------------------------- (in millions) 1998 1997 ------- ------- Tobacco $ 2,653 $ 1,667 Food 984 947 Beer 118 125 Financial services and real estate 44 150 ------- ------- Operating companies income 3,799 2,889 Amortization of goodwill (143) (142) General corporate expenses (122) (112) Minority interest in earnings of consolidated subsidiaries (32) (23) ------- ------- Operating income $ 3,502 $ 2,612 ------- ------- ------- -------
24 Results of Operations Operating revenues for the first nine months of 1998 increased 2.2% over the first nine months of 1997, and operating revenues for the third quarter of 1998 increased 2.7% over the comparable 1997 period. These increases were primarily due to the domestic and international tobacco operations. Operating revenues were affected by the 1998 sale of an Italian pasta business and the 1997 sales of Brazilian ice cream businesses, North American maple-flavored syrup businesses and a Scandinavian sugar confectionery business. Financial services and real estate operating revenues decreased due to the 1997 sale of the real estate business. Excluding the operating revenues of these and other smaller operations divested in 1997 and 1998, underlying operating revenues for the first nine months of 1998 increased $1.7 billion (3.2%) over the first nine months of 1997, and underlying operating revenues for the third quarter of 1998 increased $583 million (3.2%) over the comparable 1997 period. Operating income decreased 0.4% for the first nine months of 1998 and increased 34.1% for the third quarter of 1998 from the comparable 1997 periods. Both comparisons were affected by charges for the settlement of tobacco litigation ("Tobacco Settlements"), separation charges and the 1997 pre-tax gain on the sale of real estate operations ($103 million). Nine-month results for 1998 reflect first-quarter pre-tax charges of $806 million related to settling health care cost recovery litigation in Minnesota, second quarter charges of $199 million and a third quarter charge of $111 million related to "Most Favored Nation" clauses in previous settlement agreements with the states of Mississippi and Texas and Florida, respectively, as previously discussed in Note 3 to the Condensed Consolidated Financial Statements. In February 1998, the Company announced voluntary early retirement and separation programs for salaried and hourly employees, primarily at PM Inc. The programs resulted in pre-tax charges of $327 million during the first nine months of 1998. In addition to the voluntary programs, a pre-tax charge of $10 million related to severance at the Company's domestic tobacco operation was recorded during the third quarter of 1998. During the third quarter of 1997, PM Inc. recorded Tobacco Settlements of $812 million related to health care cost recovery litigation in Mississippi and Florida, as well as a class action settlement. Excluding the aforementioned items, as well as results from operations divested since the beginning of 1997 and the 1997 gain on sale of real estate operations, underlying operating income increased $809 million (8.2%) and $325 million (9.9%) over the first nine months and third quarter of 1997, respectively, reflecting favorable results in domestic tobacco, international tobacco and North American food during the first nine months and favorable results in all operations during the third quarter. Currency movements, primarily the strengthening of the U.S. dollar versus European and Asian currencies, decreased operating revenues by $2.2 billion ($1.4 billion, excluding excise taxes) and operating income by $331 million in the first nine months of 1998 versus the comparable 1997 period. During the third quarter, currency movements decreased operating revenues by $485 million ($328 million, excluding excise taxes) and operating income by $107 million versus the comparable 1997 period. However, early in the fourth quarter of 1998, the dollar began to weaken against certain European currencies and the Japanese yen. Although the Company cannot predict future movements in currency rates, the weakening of the dollar, if sustained over the fourth quarter, may partially mitigate unfavorable currency movements in that quarter. In addition, the Company's businesses in certain Asian markets and, more recently, in Russia have been adversely affected by economic instability in those areas. Although the 25 Company cannot predict future economic developments, the Company anticipates that economic instability will continue to slow its businesses in those markets. Interest and other debt expense, net, decreased $133 million (16.3%) in the first nine months of 1998 and $49 million (19.7%) in the third quarter of 1998 from the respective comparable 1997 periods. These decreases were due primarily to higher interest income, reflecting increased cash and cash equivalents and lower average debt outstanding during 1998. Effective December 31, 1997, the Company adopted SFAS No. 128, "Earnings per Share." SFAS No. 128 establishes standards for computing and presenting EPS and requires the presentation of both basic and diluted EPS. Prior period EPS have been restated to conform with the standards established by SFAS No. 128. Diluted and basic EPS, which were $2.09 and $2.10, respectively, for the first nine months of 1998, increased by 2.0% and 1.4%, respectively, from the comparable 1997 period. These results include previously discussed Tobacco Settlements, voluntary early retirement and separation programs and severance, as well as the 1997 gain on sale of real estate operations. Excluding the after-tax impact of these items, underlying net earnings increased 9.3% to $6.0 billion, diluted EPS increased 9.4% to $2.45 and basic EPS increased 9.3% to $2.47. Reported diluted and basic EPS of $0.81 in the third quarter of 1998 each increased by 39.7% from the comparable 1997 period due primarily to lower Tobacco Settlements in 1998. Excluding the after-tax impact of Tobacco Settlements, and charges for severance as well as the 1997 gain on sale of the real estate operations, third quarter underlying net earnings increased 10.0% to $2.1 billion, diluted EPS increased 10.5% to $0.84 and basic EPS increased 10.4%, to $0.85. Year 2000 - --------- As many computer systems and other equipment with embedded chips or processors (collectively, "Business Systems") use only two digits to represent the year, they may be unable to process accurately certain data before, during or after the year 2000. As a result, business and governmental entities are at risk for possible miscalculations or systems failures causing disruptions in their business operations. This is commonly known as the Year 2000 ("Y2K") issue or Century Date Change ("CDC") issue. The CDC issue can arise at any point in the Company's supply, manufacturing, processing, distribution, and financial chains. The Company and each of its operating subsidiaries are in the process of implementing a CDC readiness program with the objectives of having all of their significant Business Systems, including those that affect facilities and manufacturing activities, functioning properly with respect to the CDC issue before January 1, 2000, and taking other appropriate measures to minimize disruptions to their business operations due to the CDC issue. This program is well underway. Generally, however, those subsidiaries with primarily North American operations (Philip Morris USA, Kraft Foods North America, Miller Brewing Company and Philip Morris Capital Corporation) are closer to CDC readiness than those with extensive international operations (Philip Morris International and Kraft Foods International). The first phase of the CDC readiness program is to identify and assess the internal Business Systems of the Company and its operating subsidiaries that are susceptible to system failures or processing errors as a result of the CDC issue. This effort is substantially complete with all operating subsidiaries having identified the Business Systems that may require remediation or replacement and established priorities for repair or replacement. 26 The second phase of the CDC readiness program involves the actual remediation and replacement of Business Systems. The Company and its operating subsidiaries are using both internal and external resources to complete this process. Business Systems ranked highest in priority have either been remediated or replaced or scheduled for remediation or replacement. Business Systems previously earmarked for retirement and replacement without regard to the CDC issue have been evaluated for early replacement with CDC compliant systems or programs or, in the alternative, remediation. The Company's objective is to complete substantially all remediation and replacement of its internal Business Systems by March 1999, although further remediation efforts may be required thereafter to address CDC issues discovered during the testing and certification process discussed below. Individual Business Systems are being tested and certified for CDC readiness as they are being remediated and replaced. The Company's goal is substantially to complete this process by September 1999. Integration testing and certification (i.e., the testing and certification of the interfaces between individual Business Systems previously certified as Year 2000 ready as well as the testing and certification of the external linkages between the Company's systems with those of third parties) will commence in early 1999 and is expected to be substantially completed by September 1999. As part of the CDC readiness program, significant service providers, vendors, suppliers, customers and governmental entities ("Key Business Partners") that are believed to be critical to business operations after January 1, 2000, have been identified and steps are being undertaken in an attempt to reasonably ascertain their stage of CDC readiness through questionnaires, interviews, on-site visits and other available means. In many cases, governmental agencies and utilities (particularly outside North America) have a lower level of CDC awareness and are less willing to provide information concerning their state of CDC readiness. The CDC readiness of Key Business Partners will continue to be monitored and contingency plans will be developed, as appropriate, for those considered to have a significant risk of CDC failure. Because of the vast number of Business Systems used by the Company and its operating subsidiaries, the significant number of Key Business Partners, the extent of the Company's foreign operations, including operations within countries that are not actively promoting remediation of the CDC issue, the Company presently believes that it may experience some disruption in its business due to the CDC issue. More specifically, because of the interdependent nature of Business Systems, the Company and its operating subsidiaries could be materially adversely affected if utilities, private businesses and governmental entities with which they do business or that provide essential services are not CDC ready. The Company currently believes that the greatest risks of disruption in its businesses exist in certain international markets and with respect to the CDC readiness of certain of its Key Business Partners. Each of the Company's operating subsidiaries is developing its own risk assessment of the possible impact of the CDC issue on its business operations. Although it is not currently possible to quantify the most reasonably likely worst case scenario, the possible consequences of the Company or Key Business Partners not being fully CDC ready in a timely manner include, among other things, temporary plant closings, delays in the delivery of products, delays in the receipt of supplies, invoice and collection errors, and inventory and supply obsolescence. Consequently, the business and results of operations of the Company could be materially adversely affected by a temporary inability of the Company and its operating subsidiaries to conduct their businesses in the ordinary course for periods of time due to the CDC issue. However, the Company believes that its CDC readiness program, 27 including the contingency planning discussed below, should significantly reduce the adverse effect any such disruptions may have. Concurrently with the CDC readiness measures described above, the Company and its operating subsidiaries are developing contingency plans intended to mitigate the possible disruption in business operations that may result from the CDC issue. Contingency plans may include stockpiling raw and packaging materials, increasing inventory levels, securing alternate sources of supply and distribution, adjusting facility shut-down and start-up schedules, manual workarounds, additional staffing and other appropriate measures. The Company's objective is to substantially complete its initial contingency planning effort by March 1999. These plans will continue to be evaluated and modified throughout the Year 2000 transition period as additional information becomes available. It is currently estimated that the aggregate cost of the Company's CDC efforts will be approximately $550 million. Approximately $250 million of this amount has been spent. Generally, these costs are being expensed as they are incurred and are being funded through operating cash flow. These amounts do not include any costs associated with the implementation of contingency plans, which are in the process of being developed. The costs associated with the replacement of computerized systems, hardware or equipment (currently estimated to be approximately $150 million), substantially all of which would be capitalized, are not included in the above estimates. Other non-Year 2000 information technology projects have not been materially delayed or impacted by the Company's Year 2000 initiatives. The Company's CDC readiness program is an ongoing process and the risk assessments and estimates of costs and completion dates for various components of the CDC readiness program described above are forward looking statements and are subject to change. Factors that may cause such changes include, among others, the continued availability of qualified personnel and other information technology resources; the ability to identify and remediate all date sensitive lines of computer code and embedded chips; the timely receipt and installation of CDC-ready replacement systems; the actions of governmental agencies, utilities and other third parties with respect to the Year 2000 issue; the ability to implement contingency plans (for example, the availability of additional warehouse space); and the occurrence of broad-based or systemic economic failures. Euro - ---- On January 1, 1999, eleven of the fifteen member countries of the European Union are scheduled to establish fixed conversion rates between their existing currencies ("legacy currencies") and one common currency - the euro. The euro will then trade on currency exchanges and may be used in business transactions. Beginning in January 2002, new euro-denominated bills and coins will be issued, and legacy currencies will be withdrawn from circulation. The Company's operating subsidiaries affected by the euro conversion have established plans to address the systems and business issues raised by the euro currency conversion. These issues include, among others, (1) the need to adapt computer and other business systems and equipment to accommodate euro-denominated transactions; and (2) the competitive impact of cross-border price transparency, which may make it more difficult for businesses to charge different prices for the same products on a country-by-country basis particularly once the euro currency is issued in 2002. The Company currently anticipates that the euro conversion will not have a material adverse impact on its financial condition or results of operations. 28 Operating Results by Business Segment - ------------------------------------- Tobacco - ------- Business Environment The tobacco industry, both in the United States and abroad, has faced, and continues to face, a number of issues that may adversely affect the business, volume, operating revenues, cash flows, operating income and financial position of PM Inc., PMI and the Company. In the United States, these issues include actual and proposed excise tax increases; proposed federal regulatory controls (including, as discussed below, the issuance of final regulations by the FDA that regulate cigarettes as "drugs" or "medical devices"); actual and proposed requirements regarding disclosure of cigarette ingredients and other proprietary information; actual and proposed requirements regarding disclosure of the yields of "tar", nicotine and other constituents found in cigarette smoke; governmental and grand jury investigations; increased smoking and health litigation, including private plaintiff class action litigation, health care cost recovery actions brought by state and local governments, unions and others seeking reimbursement for Medicaid and/or other health care expenditures allegedly caused by cigarette smoking and suits on behalf of former asbestos manufacturers for amounts expended in connection with asbestos claims that were allegedly caused in whole or in part by cigarette smoking; actual and proposed federal, state and local governmental and private bans and restrictions on smoking (including in workplaces and in buildings permitting public access); actual and proposed restrictions on tobacco manufacturing, marketing, advertising (including decisions by certain companies to limit or not accept tobacco advertising) and sales; actual and proposed legislation and regulations to require substantial additional health warnings on cigarette packages and in advertising, and to eliminate the tax deductibility of tobacco advertising and promotional costs; proposed legislation to require the establishment of ignition propensity performance standards for cigarettes; increased assertions of adverse health effects associated with both smoking and exposure to ETS; legislation or other governmental action seeking to ascribe to the industry responsibility and liability for the purported adverse health effects associated with both smoking and exposure to ETS; the diminishing social acceptance of smoking; increased pressure from anti-smoking groups; unfavorable press reports; and federal tobacco legislation that may be considered by Congress. Cigarettes are subject to substantial excise taxes in the United States and to similar taxes in most foreign markets. The United States federal excise tax on cigarettes is currently $12 per 1,000 cigarettes ($0.24 per pack of 20 cigarettes). In August 1997, legislation was enacted that will raise the federal excise tax to $17 per 1,000 cigarettes ($0.34 per pack of 20 cigarettes) starting in the year 2000 and then to $19.50 per 1,000 cigarettes ($0.39 per pack of 20 cigarettes) in 2002. In general, excise taxes and other cigarette-related taxes levied by federal, state and local governments have been increasing. These taxes vary considerably and, when combined with sales taxes and the current federal excise tax, may be as high as $1.50 per pack in a given locality. Congress has been considering a number of bills that provide for significant increases in the federal excise tax or other payments from tobacco manufacturers. Increases in other cigarette-related taxes have been proposed at the state and local level. 29 In the opinion of PM Inc. and PMI, past increases in excise and similar taxes have had an adverse impact on sales of cigarettes. Any future increases, the extent of which cannot be predicted, could result in volume declines for the cigarette industry, including PM Inc. and PMI, and might cause sales to shift from the premium segment to the discount segment. In August 1996, the FDA issued final regulations pursuant to which it asserts jurisdiction over cigarettes as "drugs" or "medical devices" under the provisions of the Food, Drug and Cosmetic Act. The final regulations include severe restrictions on the distribution, marketing and advertising of cigarettes, and would require the industry to comply with a wide range of labeling, reporting, recordkeeping, manufacturing and other requirements applicable to medical devices and their manufacturers. For the most part, the regulations were scheduled to become effective on August 28, 1997. The FDA's exercise of jurisdiction, if not reversed by judicial or legislative action, could lead to more expansive FDA-imposed restrictions on cigarette operations than those set forth in the final regulations, and could materially adversely affect the volume, operating revenues, cash flows and operating income of PM Inc. and the Company. PM Inc. and others challenged in the courts the FDA's authority to regulate cigarettes. In August 1998, the U.S. Fourth Circuit Court of Appeals ruled that the FDA does not have the authority to regulate tobacco products, and declared the FDA's regulations invalid. In September 1998, the FDA filed a petition for a rehearing before the full Fourth Circuit Court of Appeals. In November 1998, the court denied the FDA's petition for rehearing. The ultimate outcome of this litigation cannot be predicted. In August 1996, the Commonwealth of Massachusetts enacted legislation to require cigarette manufacturers to disclose to the Massachusetts Department of Public Health ("DPH") the flavorings and other ingredients used in each brand of cigarettes sold in the Commonwealth, and to provide "nicotine-yield ratings" for their products based on standards to be established by the DPH. PM Inc. believes that enforcement of the ingredient disclosure provisions of the statute could permit the disclosure by DPH to the public of valuable proprietary information concerning its brands. PM Inc. and three other domestic cigarette manufacturers have filed suit in federal district court in Boston challenging the legislation. In December 1997, the court granted a preliminary injunction to the tobacco company plaintiffs and enjoined the Commonwealth from enforcing the ingredient disclosure provisions of the legislation until further order of the court. The Commonwealth appealed this ruling and in November 1998 the First Circuit Court of Appeals affirmed the district court's decision granting the preliminary injunction. In addition, both parties' cross-motions for summary judgment were argued before the district court earlier this year. The ultimate outcome of this lawsuit cannot be predicted. The enactment of this legislation has encouraged efforts to enact, and the enactment of, ingredient disclosure legislation in other states, such as Texas and Minnesota. In December 1997, PM Inc. disclosed to the DPH "nicotine-yield ratings" for its products sold in the Commonwealth based on standards established by the DPH for determining "nicotine delivery under average smoking conditions." The "nicotine-yield ratings" produced using the DPH standards are higher than the yields produced using the standards established by a 1970 voluntary agreement between the Federal Trade Commission ("FTC") and domestic cigarette manufacturers, including PM Inc., and which are required to be included in all cigarette advertising. In September 1997, the FTC issued a request for public comments on its proposed revision of the "tar" and nicotine testing and reporting standards established by the 1970 voluntary agreement. In February 1998, PM Inc. and three other domestic cigarette manufacturers filed comments on the proposed revisions in which they stressed the value of historical continuity with respect to "tar" 30 and nicotine testing and disclosure; expressed the opinion that the proposed revisions are unnecessary; but, agreed to assist the FTC in its efforts to improve consumer understanding of the meaning of routine testing results. In June 1995, PM Inc. announced that it had voluntarily undertaken a program to limit minors' access to cigarettes. Elements of the program include discontinuing free cigarette sampling to consumers in the United States, discontinuing the distribution of cigarettes by mail to consumers in the United States, placing a notice on cigarette cartons and packs for sale in the United States stating "Underage Sale Prohibited," working with others in support of state legislation to prevent youth access to tobacco products, taking measures to encourage retailer compliance with minimum-age laws, and independent auditing of the program. In October 1997, at the request of the United States Senate Judiciary Committee, PM Inc. provided the Committee with a document setting forth the Company's position on a number of issues. On the issues of the causal role played by cigarette smoking in the development of lung cancer and other diseases in smokers, and whether nicotine, as found in cigarette smoke, is "addictive", the Company stated that despite the differences that may exist between its views and those of the public health community, it would, in order to ensure that there will be a single, consistent public health message on these issues, refrain from debating the issues other than as necessary to defend itself and its opinions in the courts and other forums in which it is required to do so. The Company also stated that in relation to these issues, and the alleged health effects of exposure to ETS, the Company is prepared to defer to the judgment of public health authorities as to what health warning messages will best serve the public interest. In 1993, the U.S. Environmental Protection Agency ("EPA") issued a report relating to certain alleged health effects of ETS. The report included, among other things, a risk assessment relating to the alleged association between ETS and lung cancer in nonsmokers, and a determination by EPA to classify ETS as a "Group A" carcinogen. The risk assessment and classification has been one of the primary sources cited in support of smoking restrictions in workplaces and public places around the world. PM Inc. and others challenged the risk assessment and classification on several grounds in a U.S. district court. In July 1998, the court vacated those sections of the EPA report relating to lung cancer, finding, among other things, that, although the agency has been authorized by Congress to conduct a risk assessment and classification of ETS, EPA may have reached different conclusions had it complied with certain relevant statutory requirements. The federal government has appealed the court's ruling. It is not possible to predict what impact, if any, the ruling will have on existing or proposed regulations banning or restricting smoking in workplaces and public places. In late January 1998, the chief executive officers of the four leading domestic tobacco companies or their parent corporations, including the Company, pledged to Congress to publicly release millions of pages of industry documents placed into the document depository established in connection with Minnesota's health care cost recovery action. The documents comprise a wide range of smoking and health issues covered in scientific and marketing research reports, memoranda, executive correspondence, handwritten notes and other materials. They do not include highly sensitive trade secret information, certain third-party and personnel information, or documents for which attorney client privilege or work product doctrine claims have been asserted. Several installments of these documents have been made available via the Internet. The remaining installments are expected to be posted on the Internet before year end. 31 Many foreign countries, as well as the European Union, have also taken a number of different steps to regulate the manufacture and/or marketing of cigarettes. Most prominently, these steps include: restricting or prohibiting cigarette advertising and promotion, banning or severely restricting smoking in workplaces and public places or otherwise discouraging cigarette smoking and increasing taxes on cigarettes. Some countries have taken further steps, including requiring disclosure of cigarette ingredients and of yields of "tar" and other constituents found in cigarette smoke, imposing maximum constituent levels, controlling prices, and restricting imports. It is not possible to predict what, if any, other foreign governmental legislation or regulations will be adopted relating to the manufacturing, advertising, sale or use of cigarettes or to the tobacco industry generally. In June 1998, a European Communities Directive was published in the Official Journal of the European Communities. The directive bans virtually all forms of tobacco advertising and sponsorship in the European Union. Member States must enact implementing legislation by July 2001. However, Member States may delay full implementation of the ban for additional periods (one year for print advertising, two years for sponsorships generally, and until October 2006 for sponsorship of events such as Formula One racing). The directive does not apply to a few limited types of advertising such as point of sale displays which may be regulated by Member States as they see fit. In March 1998, pursuant to a regulation in Thailand that requires manufacturers and importers of tobacco products to disclose to the Ministry of Public Health ("MPH") the ingredients of their products to be sold in Thailand on a by-brand basis, a subsidiary of PMI disclosed to the MPH by-brand ingredient lists for its products imported into Thailand for sale in that country. The disclosure was accompanied by a claim of confidentiality under applicable Thai and international law. Although this Thai regulation does not require the MPH to make public the submitted ingredient lists, there are no assurances that the confidentiality of the lists submitted will be maintained. PM Inc. has received requests for information (including grand jury subpoenas) in connection with governmental investigations of the tobacco industry, and is cooperating with respect to such requests. Certain present and former employees of PM Inc. have testified or have been asked to testify in connection with certain of these matters. The investigations include four grand jury investigations being conducted by: the United States Attorney for the Eastern District of New York relating to The Council for Tobacco Research-U.S.A., Inc., a research organization of which PM Inc. was a sponsor; the United States Department of Justice in Washington, D.C. relating to issues raised in testimony provided by tobacco industry executives before Congress and other related matters; the United States Department of Justice Antitrust Division in the Eastern District of Pennsylvania relating to tobacco leaf purchases; and the United States Attorney for the Northern District of New York relating to alleged contraband transactions in primarily Canadian-brand tobacco products. PMI and its subsidiary, PM Duty Free Inc., have also received subpoenas in the last referenced investigation. While the outcomes of these investigations cannot be predicted, PM Inc., PMI and PM Duty Free Inc. believe they have acted lawfully. As further discussed above in Note 3 to the Condensed Consolidated Financial Statements, there is litigation pending in various U.S. and foreign jurisdictions related to tobacco products. These cases generally fall within three categories: (i) smoking and health cases alleging personal injury brought on behalf of individual plaintiffs, (ii) smoking and health cases alleging personal injury and purporting to be brought on behalf of a class of individual plaintiffs, and (iii) 32 health care cost recovery cases brought by state and local governments seeking reimbursement for Medicaid and/or other health care expenditures allegedly caused by cigarette smoking, as well as other reimbursement cases, including class actions, brought by non-governmental plaintiffs such as unions, HMOs, native American tribes, federal and state taxpayers and others. Damages claimed in some of the smoking and health class actions and health care cost recovery cases range into the billions of dollars. In recent years there has been a substantial increase in the number of smoking and health cases being filed in the United States. As of November 1, 1998, there were approximately 450 smoking and health cases filed and served on behalf of individual plaintiffs in the United States against PM Inc. and, in some cases, the Company (excluding approximately 50 cases in Texas that were voluntarily dismissed but which may be refiled under certain conditions), compared with approximately 375 such cases on December 31, 1997, and 185 such cases on December 31, 1996. Many of these cases are pending in Florida, West Virginia and New York. Seventeen of the individual cases involve allegations of various personal injuries allegedly related to exposure to ETS. In addition, as of November 1, 1998, there were approximately 65 purported smoking and health class actions pending in the United States against PM Inc. and, in some cases, the Company (including nine that involve allegations of various personal injuries related to exposure to ETS), compared with approximately 50 such cases on December 31, 1997, and 20 such cases on December 31, 1996. Most of these actions purport to constitute statewide class actions and were filed after May 1996 when the Fifth Circuit Court of Appeals, in the Castano case, reversed a federal district court's certification of a purported nationwide class action on behalf of persons who were allegedly "addicted" to tobacco products. The number of health care cost recovery actions in the United States also increased, with approximately 140 such cases pending as of November 1, 1998, compared with approximately 105 such cases on December 31, 1997, and 25 such cases on December 31, 1996. There are also a number of tobacco-related actions pending outside the United States against affiliates and subsidiaries of PMI including, as of November 1, 1998, approximately 20 smoking and health cases initiated by one or more individuals (Argentina (13), Brazil (1), Canada (1), Italy (1), Japan (1), Scotland (1) and Turkey (2)) and four smoking and health class actions (Brazil (2), Canada (1) and Nigeria (1)). In addition, health care cost recovery actions have been brought in Israel and by the Republic of the Marshall Islands, the Commonwealth of Puerto Rico, and British Columbia, Canada in their respective jurisdictions and by the Republic of Guatemala and the Republic of Panama in the United States. During 1997 and 1998, PM Inc. and other companies in the United States tobacco industry settled health care cost recovery actions brought by the States of Mississippi, Florida, Texas and Minnesota and an ETS smoking and health class action brought on behalf of airline flight attendants. As discussed above in Note 3, the Mississippi, Texas and Florida settlement agreements have been amended pursuant to their "most favored nation" clause to reflect the terms of the Minnesota settlement. ------------------------- In June 1997, PM Inc. and other companies in the United States tobacco industry entered into a Memorandum of Understanding (the "Resolution") to support the 33 adoption of federal legislation and ancillary undertakings that would resolve many of the regulatory and litigation issues affecting the United States tobacco industry and, thereby, reduce uncertainties facing the industry and increase stability in business and capital markets. (The proposed Resolution is discussed in the Company's 1997 Form 10-K, and a copy of the proposed Resolution is filed as Exhibit 10.17 thereto.) Such legislation has not been enacted. Bills substantially different and significantly more adverse to the domestic tobacco industry and the Company than the proposed Resolution have been introduced in Congress. The Company cannot predict whether federal tobacco legislation will be enacted or the form any such enactment might take. ------------------------- It is not possible to predict the outcome of the litigation pending against the Company and its subsidiaries. Litigation is subject to many uncertainties, and it is possible that some of these actions could be decided unfavorably. An unfavorable outcome or settlement of a pending smoking and health or health care cost recovery case could encourage the commencement of additional similar litigation. There have also been a number of adverse legislative, regulatory, political and other developments concerning cigarette smoking and the tobacco industry that have received widespread media attention. These developments may negatively affect the perception of potential triers of fact with respect to the tobacco industry, possibly to the detriment of certain pending litigation, and may prompt the commencement of additional similar litigation. Management is unable to make a meaningful estimate of the amount or range of loss that could result from an unfavorable outcome of pending litigation. The present legislative and litigation environment is substantially uncertain and it is possible that the Company's business, results of operations, cash flows or financial position could be materially affected by an unfavorable outcome or settlement of certain pending litigation or by the enactment of federal tobacco legislation. The Company and each of its subsidiaries named as a defendant believe, and each has been so advised by counsel handling the respective cases, that it has a number of valid defenses to all litigation pending against it. All such cases are, and will continue to be, vigorously defended. However, the Company and its subsidiaries periodically may enter into discussions in an attempt to settle various cases when they believe it is in the best interests of the Company's stockholders to do so. In that regard, PM Inc. and other companies in the United States tobacco industry have discussed with a number of state attorneys general an agreement that could settle the asserted and unasserted health care cost recovery claims of all of the states. Discussions have reached the stage where those attorneys general are reporting to the remaining states the terms of a proposed agreement. The proposed agreement is contingent upon a sufficient number of states accepting the agreement. No assurance can be given that the proposed agreement will be accepted by a sufficient number of states as to cause the industry to conclude an agreement. The proposed agreement would effect significant changes in the advertising and marketing of tobacco products. It would also require the industry to pay more than $206 billion through 2025, including (i) more than $12.7 billion in initial payments over the first five years (including $2.4 billion immediately); (ii) annual payments commencing in 2000 in the original amount of $4.5 billion and increasing periodically to $9 billion in 2018 and thereafter in perpetuity, and (iii) $1.7 billion over ten years, the great preponderance of which is due during the first five years. PM Inc.'s share of the $2.4 billion payment due immediately would be 68% (based on relative market capitalization). All other payments would be allocated among the original participating manufacturers based on their relative unit volume of domestic cigarette shipments and would be subject to adjustment for inflation and volume changes and for participation by less than all the states and for other adjustments and offsets described in the proposed agreement. The Company anticipates that its share of the $2.4 billion payment due immediately would be charged to expense in the fiscal quarter and year during which the agreement is concluded and would be paid from available cash or through commercial paper borrowings as the Company deems appropriate. The Company further anticipates that PM Inc.'s share of future annual industry payments related to cigarette sales would be charged to expense as the related sales occur and would be funded through price increases. Any such agreement would have a material adverse effect on the operating income and cash flows of the Company and PM Inc. in the fiscal quarter and year the agreement was concluded and would likely materially adversely affect the business, volume, cash flows and/or operating income and financial position of the Company and PM Inc. in future years. The degree of the adverse impact would depend, among other things, on the rates of decline in United States cigarette sales in the premium and discount segments, PM Inc.'s shares of the domestic premium and discount segments, and the effect of any resulting cost advantage of manufacturers not subject to the agreement. The proposed agreement is filed as an Exhibit to this Quarterly Report on Form 10-Q and the foregoing discussion is qualified by reference thereto. Operating Results
For the Nine Months Ended September 30, ----------------------------------------------------------------------- Operating Revenues Operating Income ------------------------- ------------------------ (in millions) 1998 1997 1998 1997 ------- ------- ------ ----- Domestic tobacco $11,130 $ 9,959 $2,324 $2,685 International tobacco 21,327 20,547 4,060 3,654 ------- ------- ------ ------ Total $32,457 $30,506 $6,384 $6,339 ------- ------- ------ ------ ------- ------- ------ ------
Domestic tobacco. During the first nine months of 1998, PM Inc.'s operating revenues increased 11.8% over the comparable 1997 period, due to pricing ($1,377 million) and improved product mix ($35 million), partially offset by lower volume ($241 million). During the first nine months of 1998, PM Inc. recorded pre-tax charges of $1,116 million related to Tobacco Settlements, as discussed in Note 3 to the Condensed 34 Consolidated Financial Statements. In addition, PM Inc. recorded pre-tax charges of $319 million primarily related to voluntary early retirement and separation programs for salaried and hourly employees. PM Inc.'s operating income for the first nine months of 1998 decreased 13.4% from the comparable 1997 period, due primarily to higher Tobacco Settlements ($304 million), charges for voluntary early retirement and separation programs and severance ($319 million), higher marketing, administration and research costs ($563 million), and lower volume ($160 million), partially offset by price increases, net of cost increases ($965 million) and improved product mix ($25 million). Excluding the impact of the Tobacco Settlements and the voluntary early retirement and separation programs, PM Inc.'s underlying operating income for the first nine months of 1998 increased 7.5% over the comparable 1997 period. Domestic tobacco industry shipment volume during the first nine months of 1998 declined 3.7% from the first nine months of 1997 primarily as a result of price increases. PM Inc. estimates year-to-date industry shipments were affected by a 1997 increase in wholesaler inventories in anticipation of price increases. While PM Inc. cannot predict future rates of change in industry shipments, it believes that industry shipments should continue to decline in line with historical trends of 1.0% to 2.0% per annum, subject to the effects of price increases related to tobacco litigation settlements or the possible enactment of increased excise taxes or other tobacco legislation discussed under "Tobacco--Business Environment" above. PM Inc.'s shipment volume for the first nine months of 1998 was 173.0 billion units, a decrease of 2.2% from the first nine months of 1997. However, PM Inc. estimates that, excluding the effect of the 1997 wholesaler inventory increase mentioned above, its volume would have decreased by less than 1.0%. For the first nine months of 1998, PM Inc.'s shipment market share was 49.6%, an increase of 0.7 share points over the comparable period of 1997. However, PM Inc. estimates that, excluding the factors mentioned above, its shipment share grew by 1.0 points to approximately 49.9%. This increase is consistent with consumer purchasing trends as measured by retail data from an independent market research company. Marlboro shipment volume for the first nine months of 1998 increased 0.4 billion units (0.3%) over the comparable 1997 period to 124.1 billion units for a 35.6% share of the total industry, an increase of 1.5 share points over the comparable period of 1997. Based on shipments, the premium segment accounted for approximately 73.3% of the domestic cigarette industry volume in the first nine months of 1998, an increase of 0.9 share points over the comparable period of 1997, reflecting a continued shift toward higher-margin premium cigarettes and away from the discount segment. In the premium segment, PM Inc.'s volume decreased 1.1% during the first nine months of 1998, compared with a 2.5% decrease for the industry, resulting in a premium segment share of 58.7%, an increase of 0.9 share points over the comparable period of 1997. In the discount segment, PM Inc.'s shipments decreased 9.2% to 23.1 billion units in the first nine months of 1998, compared with an industry decline of 6.7%, resulting in a discount segment share of 24.7%, a decrease of 0.7 share points from the comparable period of 1997. Basic shipment volume for the first nine months of 1998 was down 1.0% at 17.4 billion units, for an 18.7% share of the discount segment, an increase of 1.1 share points over the comparable 1997 period. PM Inc. cannot predict future change or rates of change in the relative sizes of the premium and discount segments or in PM Inc.'s shipments, shipment market 35 share or retail market share; however, it believes that PM Inc.'s shipments would be materially adversely affected by price increases related to tobacco litigation settlements or the possible enactment of increased excise taxes or other tobacco legislation discussed under "Tobacco--Business Environment" above. During July 1998, PM Inc. announced a price increase of $3.00 per thousand cigarettes on its premium and discount brands. This increase follows similar announcements of price increases of $2.50 per thousand cigarettes in May 1998, $2.50 per thousand cigarettes in April 1998, $1.25 per thousand cigarettes in January 1998, $3.50 per thousand cigarettes in September 1997 and $2.50 per thousand cigarettes in March 1997. Each $1.00 per thousand increase by PM Inc. equates to a $0.02 increase to the wholesale price of each pack of twenty cigarettes. International tobacco. During the first nine months of 1998, international tobacco operating revenues of PMI increased 3.8% over 1997, including excise taxes. Excluding excise taxes, operating revenues increased 3.9%, due primarily to price increases ($469 million), favorable volume/mix ($155 million) and the consolidation of previously unconsolidated subsidiaries ($425 million), partially offset by unfavorable currency movements ($803 million). Operating income for the first nine months of 1998 increased 11.1% over the comparable 1997 period, due primarily to price increases, net of cost increases ($430 million), favorable volume/mix ($42 million), the consolidation of previously unconsolidated subsidiaries ($99 million), and lower fixed manufacturing expenses and marketing, administration and research costs, partially offset by unfavorable currency movements ($290 million). PMI's volume in the first nine months of 1998 grew 12.1 billion units (2.2%) over the comparable 1997 period to 570.2 billion units. PMI's volume growth was impeded by continued weaker business conditions in a number of Asian and Eastern European markets and, PMI presently anticipates a continued slowdown of shipments to these markets in the fourth quarter. Excluding these markets, PMI's volume grew by 4.1%, primarily in higher-margin established markets. Volume advanced strongly in a number of important markets, including Italy, France, the Benelux countries, Spain, Greece, Austria, Poland, Hungary, Turkey, the Middle East, Japan and Mexico. PMI recorded market share gains in virtually all major markets.
For the Three Months Ended September 30, ----------------------------------------------------------------------- Operating Revenues Operating Income ------------------------- ------------------------ (in millions) 1998 1997 1998 1997 ------- ------- ------ ----- Domestic tobacco $ 4,119 $ 3,590 $1,275 $ 426 International tobacco 7,002 6,843 1,378 1,241 ------- ------- ------ ------ Total $11,121 $10,433 $2,653 $1,667 ------- ------- ------ ------ ------- ------- ------ ------
Domestic tobacco. During the third quarter of 1998, PM Inc.'s operating revenues increased 14.7% over the comparable 1997 period, due to pricing ($612 million) and improved product mix ($8 million), partially offset by lower volume ($91 million). 36 Operating income for the third quarter of 1998 increased by more than 100.0% from the comparable 1997 period, due primarily to lower charges for Tobacco Settlements ($701 million), higher prices, net of cost increases (aggregating to $450 million) and favorable mix ($8 million), partially offset by higher marketing, administration and research costs ($236 million), lower volume ($61 million) and a charge for severance ($10 million). Excluding the impact of Tobacco Settlements and severance, PM Inc.'s underlying operating income for the third quarter of 1998 increased 12.8% over the comparable 1997 period. Domestic tobacco industry shipment volume during the third quarter declined 4.7% from the comparable 1997 period primarily as a result of price increases. While PM Inc. cannot predict future rates of change in industry shipments, it believes that, over the long term, industry shipments should continue to decline in line with historical trends of 1.0% to 2.0% per annum, subject to the effects of price increases related to tobacco litigation settlements or the possible enactment of increased excise taxes or other tobacco legislation discussed under "Tobacco--Business Environment" above. PM Inc.'s shipment volume for the third quarter of 1998 was 61.3 billion units, a decrease of 2.5% from the third quarter of 1997, reflecting the price increases mentioned above. PM Inc.'s third quarter 1998 shipment market share was 50.0%, an increase of 1.1 share points from the comparable period of 1997. This increase is consistent with the trend of consumer purchases as measured by retail data from an independent market research company. Third-quarter Marlboro shipment volume increased 0.1 billion units (0.2%) to 44.5 billion units for a 36.3% share of the total industry, an increase of 1.8 share points over the third quarter of 1997. Based on shipments, the premium segment accounted for approximately 73.9% of domestic cigarette industry volume in the third quarter of 1998, an increase of 0.8 share points over the comparable 1997 period reflecting a continued shift toward higher-margin premium cigarettes and away from the discount segment. In the premium segment, PM Inc.'s third-quarter volume decreased 1.6%, compared with a 3.6% decrease for the industry, resulting in a premium segment share of 59.0%, an increase of 1.2 share points from the third quarter of 1997. In the discount segment, PM Inc.'s third quarter shipments decreased 8.3% to 7.8 billion units in 1998, compared with an industry decline of 7.6%, resulting in a discount segment share of 24.5%, a decrease of 0.2 share points from the comparable period of 1997. Basic's third-quarter shipment volume decreased 156.0 million units to 6.0 billion units, for an 18.7% share of the discount segment, an increase of 1.0 share points from the comparable 1997 period. PM Inc. cannot predict future change or rates of change in the relative sizes of the premium and discount segments or in PM Inc.'s shipments, shipment market share or retail market share; however, it believes that PM Inc.'s shipments would be materially adversely affected by price increases related to tobacco litigation settlements or the possible enactment of increased excise taxes or other tobacco legislation discussed under "Tobacco--Business Environment" above. International tobacco. During the third quarter of 1998, international tobacco operating revenues of PMI increased 2.3% over 1997, including excise taxes. Excluding excise taxes, operating revenues increased 0.3%, due primarily to price increases ($139 million) and the consolidation of previously unconsolidated subsidiaries ($152 million), partially offset by unfavorable volume/mix ($100 million) and unfavorable currency movements ($218 million). Operating income for the third quarter of 1998 increased 11.0% over the comparable 1997 period, due primarily to price increases ($139 million), the consolidation of previously 37 unconsolidated subsidiaries ($47 million) and lower fixed manufacturing expenses and marketing, administration and research costs, partially offset by unfavorable volume/mix ($75 million) and currency movements ($98 million). PMI's volume in the third quarter of 1998 declined 3.9 billion units (2.1%) from the comparable 1997 period to 186.1 billion units. PMI's volume decline was due primarily to continued weaker business conditions in a number of Asian and Eastern European markets, and PMI presently anticipates a continued slowdown of shipments to these markets in the fourth quarter. Excluding these markets, PMI's volume grew by 4.9%, primarily in higher-margin established markets. Volume advanced strongly in a number of important markets during the third quarter, including Italy, France, Spain, the Netherlands, Belgium, Austria, Hungary, Turkey, the Middle East, Japan and Mexico. PMI recorded market share gains in virtually all major markets. Food - ---- Business Environment Kraft Foods, Inc. ("Kraft"), the largest processor and marketer of retail packaged food in the United States, and its subsidiary, Kraft Foods International, Inc. ("KFI"), which markets coffee, confectionery and grocery products in Europe and the Asia/Pacific region, are subject to fluctuating commodity costs, currency movements and competitive challenges in various product categories and markets. Certain subsidiaries and affiliates of PMI that manufacture and sell food products in Latin America are also subject to competitive challenges in various product categories and markets. To confront these challenges, Kraft, KFI and PMI continue to take steps to build the value of premium brands with new product and marketing initiatives, to improve their food business portfolios and to reduce costs. Fluctuations in commodity costs can cause retail price volatility, price competition and can influence consumer and trade buying patterns. The North American and international food businesses are subject to fluctuating commodity costs, particularly coffee bean and cocoa prices. Coffee bean prices reached a twenty-year high in May 1997, leading to price increases by Kraft, KFI and their competitors. In 1998, coffee bean prices have declined from their 1997 levels. During the third quarter of 1998, the cost of United States cheese and butter commodities reached near record high levels. Such high costs had an adverse impact on Kraft's operating results in the third quarter and may continue to have an adverse impact on Kraft's results of operations during the fourth quarter. During the third quarter of 1998, KFI sold a small Italian pasta dinners business. During 1997, PMI sold its Brazilian ice cream businesses in the fourth quarter, Kraft sold its North American maple-flavored syrup businesses in the third quarter and KFI sold a Scandinavian sugar confectionery business in the first quarter. Kraft and KFI also sold several smaller non-strategic businesses in 1997. The operating results of businesses divested in 1997 and 1998 were not material to consolidated operating results in any of the periods presented. During the third quarter of 1998, Kraft announced a licensing agreement with the California Pizza Kitchen ("CPK") restaurant chain to manufacture, market and sell CPK frozen pizza to grocery customers. In addition, Kraft announced a licensing agreement with the Starbucks Coffee chain to market, sell and distribute Starbucks Coffee to grocery customers across the United States. Neither of these agreements is expected to have a material impact on Kraft's operating results for the fourth quarter of 1998. 38 Operating Results
For the Nine Months Ended September 30, ----------------------------------------------------------------------- Operating Revenues Operating Income ------------------------- ------------------------ (in millions) 1998 1997 1998 1997 ------- ------- ------ ----- North American food $12,921 $12,779 $2,408 $2,245 International food 7,115 7,840 769 820 ------- ------- ------ ------ Total $20,036 $20,619 $3,177 $3,065 ------- ------- ------ ------ ------- ------- ------ ------
North American food. During the first nine months of 1998, operating revenues increased 1.1% over the first nine months of 1997, due primarily to favorable volume ($294 million) and pricing ($76 million), partially offset by unfavorable product mix ($67 million), the impact of divestitures ($90 million) and unfavorable currency movements ($71 million). Operating income for the first nine months of 1998 increased 7.3% over the first nine months of 1997, due to volume increases in ongoing operations ($168 million), net pricing ($129 million, including the impact of lower manufacturing and overhead costs which more than offset the impact of higher cheese costs) and favorable marketing, administration and research costs ($6 million), partially offset by unfavorable product mix ($109 million), the impact of divestitures ($22 million) and unfavorable currency movements ($9 million). Excluding operating results of the divested North American food businesses discussed above, underlying operating revenues and underlying operating income increased 1.8% and 8.3%, respectively, in the first nine months of 1998 versus the comparable 1997 period. Volume gains were achieved by frozen pizza, resulting from the continued success of rising crust pizza; beverages, from the strength of ready-to-drink products and new product introductions, partially offset by declines in higher-margin powdered soft drinks; meals, due to the growth of Taco Bell grocery products as well as strength in macaroni and cheese dinners; cheese, across most product lines; cereals, from the success of new products; and processed meats, due to the strength of lunch combinations, which reflected the continued success of new product introductions, and to increases in bacon and hot dogs. Volume was lower in coffee, due largely to market contraction resulting from higher retail prices in the first quarter of 1998; desserts and snacks, reflecting declines in dry packaged desserts and frozen toppings, partially offset by an increase in shelf-stable puddings; and enhancers, due primarily to lower shipments of barbecue sauce, spoonable dressings and pourable dressings. In Canada, volume was down reflecting lower shipments of retail branded products and the planned reduction of low margin products. International food. Operating revenues for the first nine months of 1998 decreased 9.2% from the first nine months of 1997, due to unfavorable currency movements ($490 million), lower volume/mix ($62 million) and the impact of divestitures ($299 million), partially offset by pricing ($80 million) and the consolidation of a previously unconsolidated subsidiary ($46 million). Operating income for the first nine months of 1998 decreased 6.2% from the first nine months of 1997, due primarily to net pricing ($31 million, primarily related to 39 higher coffee costs earlier in 1998), the impact of divestitures ($35 million) and unfavorable currency movements ($34 million), partially offset by lower marketing, administration and research costs ($36 million) and higher volume/mix ($7 million, primarily favorable mix). Excluding the operating results of the divested international food businesses discussed above, underlying operating revenues decreased 5.7% and underlying operating income decreased 2.0% in the first nine months of 1998 from the first nine months of 1997. KFI's coffee volume for the first nine months of 1998 continued to lag the comparable period of 1997 as volume in the first half of the year was adversely affected by soft consumption and trade de-stocking in anticipation of price declines in certain markets, as well as a difficult comparison against the prior year, when shipments were heavy in advance of rising prices. Confectionery volume increased on continued growth and new product introductions in Central and Eastern Europe. These increases more than offset volume declines due to the contraction of several key European chocolate markets, as well as unfavorable volume related to higher retail prices in Germany and lower shipments into Russia. Volume also increased in KFI's cheese and grocery business as a result of higher shipments of cheese snacks and lunch combinations in the United Kingdom, snacks in Scandinavia, powdered soft drinks in the Middle East and China and processed cheese slices and peanut butter in Australia. Cheese and grocery volume in Germany was down due primarily to the impact of retail price increases. Cheese and grocery volume was also down in Southeast Asia, reflecting the current economic instability of the region. In Latin America, volume was essentially flat as softness and consumer down-trading to lower priced competitor brands in the confectionery markets of Brazil and Argentina, as well as lower powdered soft drink volume in Argentina were offset by higher shipments of powdered soft drinks in Brazil and Mexico and ready-to-drink beverages in Puerto Rico.
For the Three Months Ended September 30, ----------------------------------------------------------------------- Operating Revenues Operating Income ------------------------- ------------------------ (in millions) 1998 1997 1998 1997 ------- ------- ------ ----- North American food $4,016 $4,048 $ 722 $ 687 International food 2,310 2,407 262 260 ------ ------ ------ ------ Total $6,326 $6,455 $ 984 $ 947 ------ ------ ------ ------ ------ ------ ------ ------
North American food. During the third quarter of 1998, operating revenues decreased 0.8% from the third quarter of 1997, due primarily to pricing ($16 million, a result of commodity driven price decreases in coffee, partially offset by commodity driven price increases in cheese) and unfavorable currency movements ($27 million). Operating income for the third quarter of 1998 increased 5.1% over the third quarter of 1997, due primarily to cost decreases (aggregating to $38 million, driven by lower manufacturing and overhead costs which more than offset the impact of higher cheese costs) and lower marketing, administration and research costs ($32 million, the majority of which related to lower marketing expense), partially offset by unfavorable product mix ($33 million) and unfavorable currency movements ($3 million). 40 Volume for the third quarter increased slightly over the comparable 1997 period. Volume gains were achieved by frozen pizza, resulting from the continued success of rising crust pizza; beverages, from the strength of both ready-to-drink and powdered soft drink products and new product introductions; coffee, reflecting the favorable impact of reductions in retail prices as green coffee bean costs were lower in the third quarter of 1998 versus the comparable 1997 period; cheese, due to strength in natural and cottage cheese as well as sour cream and new product introductions, partially offset by lower shipments of processed cheese. Volume for cereals was essentially flat. Offsetting the aforementioned volume gains were volume declines in processed meats, with declines across most major product categories, partially offset by volume gains in lunch combinations; meals, primarily reflecting softness in macaroni and cheese and rice; desserts and snacks, due to declines in dry packaged desserts and frozen toppings; and enhancers, due to lower shipments of spoonables and barbecue sauce. In Canada, volume decreased due to lower shipments of retail branded products. International food. Operating revenues for the third quarter of 1998 decreased 4.0% from the third quarter of 1997, due to unfavorable currency movements ($83 million) and the impact of divestitures ($69 million) and unfavorable pricing ($37 million), partially offset by higher ongoing volume/mix ($80 million) and the consolidation of a previously unconsolidated subsidiary ($12 million). Operating income for the third quarter of 1998 increased 0.8% from the third quarter of 1997, due primarily to cost decreases, net of price decreases (aggregating to $26 million, primarily related to lower coffee costs) and higher volume/mix ($29 million), partially offset by higher marketing, administration and research costs ($40 million), and unfavorable currency movements ($8 million). Excluding the operating results of the divested international food businesses discussed above, underlying operating revenues decreased 1.2% and underlying operating income increased 3.2% in the third quarter of 1998 from the third quarter of 1997. KFI's coffee volume increased over the comparable period of 1997 due primarily to gains in Germany, France, Italy, Sweden and Denmark reflecting both a favorable comparison against soft results in 1997 when high commodity costs disrupted the marketplace and the beginning of a recovery spurred by recent price declines. Confectionery volume declined due to higher retail pricing in Germany and the impact of the economic crisis in Russia. Volume also grew in KFI's cheese and grocery business as a result of higher shipments of lunch combinations in the United Kingdom; snacks in Scandinavia; cheese and cream cheese in Italy; and powdered soft drinks in the Middle East, Africa, Romania, the Philippines and China. In Latin America, volume decreased due primarily to soft confectionery markets in Brazil and Argentina and lower powdered soft drink volume in Argentina, partially offset by higher shipments of powdered soft drinks in Brazil and Mexico, as well as higher shipments of ready-to-drink beverages in Puerto Rico. Beer - ---- Nine Months Ended September 30 Operating revenues of the Miller Brewing Company ("Miller") for the first nine months of 1998 decreased $71 million (2.1%) from the first nine months of 1997, due primarily to lower volume ($61 million) and unfavorable price/mix ($12 million), partially offset by income received in accordance with the terms of a contract manufacturing agreement with S&P Company. Operating income for the first nine months of 1998 decreased $6 million (1.5%) from the first nine months 41 of 1997, due primarily to lower volume ($25 million), unfavorable price/mix ($22 million) and the impact of a divested equity investment ($11 million), partially offset by lower fixed manufacturing expenses and marketing, administration and research costs ($52 million). Excluding the 1997 results of then 20%-owned Molson Breweries of Canada, underlying operating income increased 1.3%. Miller's domestic shipment volume of 32.9 million barrels for the first nine months of 1998 decreased 1.4% from the comparable 1997 period, reflecting decreases in premium, near-premium and budget brands. Domestic shipments of premium products were below 1997 as lower shipments of Miller beer, Miller Lite and Miller Genuine Draft more than offset double-digit gains in Icehouse and Foster's. Domestic shipments of near-premium products were essentially even with 1997 as increased shipments of Red Dog nearly offset declines in the Miller High Life family. Domestic shipments of budget brands were below 1997, despite volume growth in the Milwaukee's Best family of beers. Wholesalers' sales to retailers in the first nine months of 1998 also decreased from the comparable 1997 period, reflecting lower sales of Miller Lite, Miller Genuine Draft and Miller beer, partially offset by double-digit increases for Icehouse and Foster's. Export volume decreased 21.4%, as volume shifted to sales under international licensing agreements. Three Months Ended September 30 Miller's operating revenues for the third quarter of 1998 decreased $54 million (4.8%) from the third quarter of 1997, due primarily to lower volume ($46 million) and unfavorable price/mix ($10 million), partially offset by income received in accordance with the terms of the previously mentioned agreement with S&P Company. Operating income for the third quarter of 1998 decreased $7 million (5.6%) from the third quarter of 1997, due primarily to the impact of a divested equity investment ($9 million), lower volume ($17 million) and unfavorable price/mix ($16 million), partially offset by lower fixed manufacturing costs and marketing, administration and research costs ($33 million). Excluding the 1997 results of then 20%-owned Molson Breweries of Canada, underlying operating income increased 1.7%. Miller's domestic shipment volume of 11.0 million barrels for the third quarter of 1998 decreased 4.2% from the comparable 1997 period, reflecting decreases in premium, near-premium and budget brands. Domestic shipments of premium brands were below the comparable 1997 period, due primarily to lower domestic shipments of Miller Lite and Miller Genuine Draft, both of which continue to be adversely affected by intense competition in the key markets of California and Texas, and to lower shipments of Miller beer, partially offset by double-digit increases for Icehouse and Foster's. Domestic shipments of near-premium and budget brand products decreased slightly on lower shipments across all brands. Wholesalers' sales to retailers in the third quarter of 1998 decreased from the comparable 1997 period, reflecting lower sales of Miller Lite, Miller Genuine Draft and Miller beer, partially offset by double-digit increases for Icehouse and Foster's as well as higher sales of the Miller High Life family. Export volume declined 7.3%, as volume shifted to sales under international licensing agreements. Financial Services and Real Estate - ---------------------------------- Philip Morris Capital Corporation's ("PMCC") financial services and real estate operating revenues and operating income declined in the first nine months and the third quarter of 1998 from the comparable 1997 periods, reflecting the sale of its real estate subsidiary, Mission Viejo Company, in the third quarter of 1997 for a pre-tax gain of $103 million. Operating revenues and operating income from 42 PMCC's financial services business increased in the first nine months and third quarter of 1998 over the comparable 1997 periods due to increased leasing and structured finance investments and the continued profitability of PMCC's existing portfolio of finance assets. Financial Review - ---------------- Net Cash Provided by Operating Activities - ----------------------------------------- During the first nine months of 1998, net cash provided by operating activities was $6.4 billion compared with $5.1 billion in the comparable 1997 period. The increase primarily reflects higher underlying net earnings, partially offset by the payment of Tobacco Settlements. Included in net earnings for the first nine months of 1998 were previously discussed charges for voluntary early retirement programs, severance and the Tobacco Settlements (aggregating to $888 million on an after-tax basis), payments for the majority of which will be made in future periods. Net Cash Used in Investing Activities - ------------------------------------- During the first nine months of 1998, net cash used in investing activities was $1.6 billion compared with $1.2 billion in 1997. The increase primarily reflects the lower level of cash received from the sales of businesses during the first nine months of 1998. Net Cash Used in Financing Activities - ------------------------------------- During the first nine months of 1998, net cash of $1.6 billion was used in financing activities, as compared with $3.2 billion used in financing activities during the comparable 1997 period. This difference was primarily due to higher net issuances of debt in 1998 and to higher stock repurchases during the first nine months of 1997. Debt - ---- The Company's total debt (consumer products and financial services) was $15.6 billion and $14.1 billion at September 30, 1998 and December 31, 1997, respectively. Total consumer products debt was $14.7 billion and $13.3 billion at September 30, 1998 and December 31, 1997, respectively. At September 30, 1998 and December 31, 1997, the Company's ratio of consumer products debt to total equity was 0.85 and 0.89, respectively. The ratio of total debt to total equity was 0.90 and 0.95 at September 30, 1998 and December 31, 1997, respectively. The Company and its subsidiaries maintain credit facilities with a number of lending institutions, amounting to approximately $12.0 billion at September 30, 1998. These include revolving bank credit agreements totaling $10.0 billion, which may be used to support any commercial paper borrowings by the Company and which are available for acquisitions and other corporate purposes. During October 1998, the Company entered into a $2.0 billion revolving credit agreement expiring in October 1999 which replaced an existing facility that expired in October 1998. An agreement for $8.0 billion expires in 2002, enabling the Company to refinance short-term debt on a long-term basis. The Company expects to refinance long-term and short-term debt from time to time. The nature and amount of the Company's long-term and short-term debt and the proportionate amount of each can be expected to vary as a result of future business requirements, market conditions and other factors. 43 The Company operates internationally, with manufacturing and sales facilities in various locations around the world. The Company continually evaluates its foreign currency net asset exposure (primarily the Swiss franc, German mark, Netherlands guilder, Swedish krona and Canadian dollar) based on current market conditions and business strategies, and it acts to manage such exposure, when deemed prudent, through various hedging transactions. The Company has entered into currency and related interest rate swap agreements to manage a portion of its exposure to currency movements. The U.S. dollar value of aggregate notional principal amounts for these agreements outstanding was equivalent to $2.6 billion and $1.4 billion, respectively, at September 30, 1998 and December 31, 1997. Of these amounts, $2.0 billion and $736 million related to consumer products debt at September 30, 1998 and December 31, 1997, respectively. In addition, during 1998, the Company entered into a swap agreement that effectively converts $800 million of fixed rate debt to variable rate debt. The Company enters into forward exchange and option contracts, for purposes other than trading, to reduce the effects of fluctuating foreign currency on foreign currency denominated current assets, liabilities, commitments and short-term intercompany transactions. At September 30, 1998 and December 31, 1997, the Company had entered into contracts, with maturities of less than one year and U.S. dollar equivalents of $4.4 billion (including $2.8 billion in option contracts) and $2.5 billion (including $1.1 billion in option contracts), respectively. Use of the above-mentioned derivative financial instruments has not had a material impact on the Company's financial position at September 30, 1998 or results of operations for the three or nine months then ended. The Company's credit ratings by Moody's at September 30, 1998 and December 31, 1997 were "P-1" in the commercial paper market and "A2" for long-term debt obligations. The Company's credit ratings by Standard & Poor's ("S&P") at September 30, 1998 and December 31, 1997 were "A-1" in the commercial paper market and "A" for long-term debt obligations. The debt ratings of the Company remain on S&P's CreditWatch list, as S&P monitors tobacco litigation and legislation developments. As discussed above under "Tobacco--Business Environment," the present legislative and litigation environment is substantially uncertain and could result in material adverse consequences for the business, financial condition, cash flows or results of operations of the Company, PM Inc. and PMI. Equity and Dividends - -------------------- During the first quarter of 1997, the Board of Directors announced an $8.0 billion share repurchase program. The Company repurchased common stock at an aggregate cost of $51 million under this program prior to its suspension in April 1997. Dividends paid in the first nine months of 1998 were substantially unchanged from the comparable 1997 period. During the third quarter, the Company's Board of Directors approved a 10% increase in the current quarterly dividend rate to $0.44 per share. As a result, the present annualized dividend rate is $1.76 per share. Cash and Cash Equivalents - ------------------------- Cash and cash equivalents were $5.5 billion at September 30, 1998 and $2.3 billion at December 31, 1997, the increase being largely attributable to the 1997 44 suspension of the Company's share repurchase program and higher 1998 debt issuances. New Accounting Standards - ------------------------ During the second quarter of 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which must be adopted by the Company by January 1, 2000, with early adoption permitted. SFAS No. 133 requires that all derivative instruments be recorded on the consolidated balance sheet at their fair value. Changes in the fair value of derivatives will be recorded each period in earnings or other comprehensive earnings, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. Gains and losses on derivative instruments reported in other comprehensive earnings will be reclassified as earnings in the periods in which earnings are affected by the hedged item. The Company has not yet determined the timing of adoption or the impact that adoption or subsequent application of SFAS No. 133 will have on its financial position or results of operations. In 1998, the American Institute of Certified Public Accountants' Accounting Standards Executive Committee ("AcSEC") issued Statement of Position ("SOP") No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP No. 98-1 requires certain costs incurred in connection with developing or obtaining internal-use software to be capitalized and other costs to be expensed. The Company adopted SOP No. 98-1 effective January 1, 1998, and its application for the three and nine month periods ended September 30, 1998 had no material effect on the Company's financial position or results of operations. In 1998, AcSEC issued SOP No. 98-5, "Reporting on the Costs of Start-Up Activities." SOP No. 98-5 establishes standards on accounting for start-up and organization costs and in general, requires such costs to be expensed as incurred. This standard is required to be adopted on January 1, 1999. Adoption of SOP No. 98-5 will have no material effect on the Company's financial position or results of operations. Contingencies - ------------- See Note 3 to the Condensed Consolidated Financial Statements for a discussion of contingencies. Forward-Looking and Cautionary Statements - ----------------------------------------- The Company and its representatives may from time to time make written or oral forward-looking statements, including statements contained in the Company's filings with the Securities and Exchange Commission and in its reports to stockholders. In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company is hereby identifying important factors that could cause actual results to differ materially from those contained in any forward-looking statement made by or on behalf of the Company; any such statement is qualified by reference to the following cautionary statements. The tobacco industry continues to be subject to health concerns relating to the use of tobacco products and exposure to ETS, legislation, including tax increases, governmental regulation, privately imposed smoking restrictions, governmental and grand jury investigations, litigation, and the effects of price increases related to concluded Tobacco Settlements and, if implemented, federal tobacco legislation and the proposed settlement of the asserted and unasserted health care cost recovery claims of all states as discussed above. Each of the 45 Company's operating subsidiaries is subject to intense competition, changes in consumer preferences, the effects of changing prices for its raw materials, local economic conditions and the potential impact of the CDC issue or the conversion to the Euro. The performance of each of PMI and KFI is affected by foreign economies and currency movements. Developments in any of these areas, which are more fully described above and which descriptions are incorporated into this section by reference, could cause the Company's results to differ materially from results that have been or may be projected by or on behalf of the Company. The Company cautions that the foregoing list of important factors is not exclusive. The Company does not undertake to update any forward-looking statement that may be made from time to time by or on behalf of the Company. 46 Part II - OTHER INFORMATION Item 1. Legal Proceedings. Reference is made to Note 3, "Contingencies," of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report, and to "Tobacco--Business Environment," of the Management's Discussion and Analysis of Financial Condition and Results of Operations included in Part I, Item 2 of this report. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 10.1 Stipulation of Amendment to Settlement Agreement and For Entry of Consent Decree, dated September 11, 1998, regarding the settlement of the Florida health care cost recovery action. 10.2 Florida Fee Payment Agreement, dated September 11, 1998, regarding the payment of attorneys' fees. 12 Statement regarding computation of ratios of earnings to fixed charges. 27 Financial Data Schedule. 99.1 Certain Pending Litigation Matters and Recent Developments. 99.2 Trial Schedule. 99.3 Proposed Master Settlement Agreement relating to state health care cost recovery claims. (b) Reports on Form 8-K. The registrant has not filed a Current Report on Form 8-K since the beginning of the quarter for which this report is filed. 47 Signature Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PHILIP MORRIS COMPANIES INC. /s/ LOUIS C. CAMILLERI Louis C. Camilleri, Senior Vice President and Chief Financial Officer November 16, 1998 48 EX-10.1 2 EXHIBIT 10.1 Exhibit 10.1 IN THE CIRCUIT COURT OF THE FIFTEENTH JUDICIAL CIRCUIT PALM BEACH COUNTY, FLORIDA STATE OF FLORIDA, et al., Plaintiffs, v. Civil Action No. 95-1466 AH AMERICAN TOBACCO COMPANY, et al., Defendants. / - ------------------------------- STIPULATION OF AMENDMENT TO SETTLEMENT AGREEMENT ------------------------------------------------ AND FOR ENTRY OF CONSENT DECREE ------------------------------- THIS STIPULATION OF AMENDMENT TO SETTLEMENT AGREEMENT AND FOR ENTRY OF CONSENT DECREE (the "Stipulation of Amendment") is made as of the date hereof, by and among the parties hereto, as indicated by their signatures below, to amend the Settlement Agreement entered into by the parties hereto with respect to this Action on August 25, 1997 (the "Settlement Agreement"). WHEREAS, on August 25, 1997, the State of Florida and Settling Defendants entered into the Settlement Agreement to settle and resolve with finality all present and future civil claims against all parties to this litigation relating to the subject matter of this litigation which have been or could have been asserted by any of the parties hereto; WHEREAS, the Settlement Agreement was approved and adopted as an enforceable order of the Court pursuant to Court Order dated August 25, 1997; WHEREAS, the Settlement Agreement contains a "Most Favored Nation" clause which provides that, in the event that Settling Defendants enter into a future pre-verdict settlement agreement of other litigation brought by a non-federal governmental plaintiff on terms more favorable to such governmental plaintiff than the terms of the Settlement Agreement (after due consideration of relevant differences in population or other appropriate factors), the terms of the Settlement Agreement shall be revised so that the State of Florida will obtain treatment at least as relatively favorable as any such non-federal governmental entity; WHEREAS, on May 8, 1998, Settling Defendants Philip Morris Incorporated, R.J. Reynolds Tobacco Company, Brown & Williamson Tobacco Corporation and Lorillard Tobacco Company (the "MFN Settling Defendants") entered into a pre-verdict settlement agreement with the State of Minnesota (the "Minnesota Settlement") to resolve the lawsuit State of Minnesota v. Philip Morris Inc., No. C1-94-8565 (Dist. Ct. Ramsey County, filed Aug. 17, 1994); 2 WHEREAS, the State of Florida and Settling Defendants agree that, pursuant to the Most Favored Nation clause of the Settlement Agreement, the Settlement Agreement is to be revised in light of the Minnesota Settlement; WHEREAS, the State of Florida and Settling Defendants have agreed on the terms of revisions to the Settlement Agreement, including revisions in light of the Minnesota Settlement, as set forth in this Stipulation of Amendment and the attached Consent Decree; and WHEREAS, the State of Florida and MFN Settling Defendants have further agreed jointly to petition the Court for approval of the Consent Decree: NOW, THEREFORE, BE IT KNOWN THAT, pursuant to the Most Favored Nation clause of the Settlement Agreement and in consideration of their mutual agreement to the terms of this Stipulation of Amendment (including, inter alia, waiver of any further claim to revise the Settlement Agreement pursuant to the Most Favored Nation clause, except as expressly provided herein), and such other consideration as described herein, the sufficiency of which is hereby acknowledged, the parties hereto, acting by and through their authorized agents, memorialize and agree as follows: 1. Amendment of Settlement Agreement. The provisions of this ---------------------------------- Stipulation of Amendment supplement the terms of the Settlement Agreement, 3 which shall remain in full force and effect except insofar as they are expressly revised by the provisions of this Stipulation of Amendment. 2. Voluntary Agreement of the Parties. This Stipulation of Amendment ----------------------------------- is entered into voluntarily by the parties hereto. The State and Settling Defendants understand that Congress may enact legislation dealing with some of the issues addressed in the Settlement Agreement, this Stipulation of Amendment or the Consent Decree. The MFN Settling Defendants and their assigns, affiliates, agents and successors hereby voluntarily waive any right to challenge the Settlement Agreement, this Stipulation of Amendment or the Consent Decree, directly or through third parties, on the ground that any term thereof or hereof is unconstitutional, outside the power or jurisdiction of the Court or preempted by or in conflict with any current or future federal legislation (except insofar as the non-economic terms of the Settlement Agreement (as revised hereby) or the Consent Decree are irreconcilable with any such future federal legislation). The Court may, upon the State's application, enter a Consent Decree in the form attached hereto as Exhibit 1. 3. Definitions. For the purposes of the Settlement Agreement, this ------------ Stipulation of Amendment and the Consent Decree, the following terms shall have the meanings set forth below: 4 (a) "Consumer Price Index" means the Consumer Price Index for All Urban Consumers for the most recent twelve-month period for which such percentage information is available, as published by the Bureau of Labor Statistics of the U.S. Department of Labor; (b) "Market Share" means a Settling Defendant's respective share of sales of Cigarettes, by number of individual Cigarettes shipped in the United States for domestic consumption, as measured by such Settling Defendant's audited reports of shipments of Tobacco Products provided to the U.S. Securities and Exchange Commission ("SEC") (or, in the case of any Settling Defendant that does not provide such reports to the SEC, audited reports of shipments containing the same shipment information as contained in the reports provided to the SEC) ("Shipment Reports"), during (i) with respect to payments made pursuant to paragraph 7 of this Stipulation of Amendment, the calendar year ending on the date on which the payment at issue is due (or, in the case of the payment due on September 15, 1998, the calendar year ending December 31, 1998), regardless of when such payment is made, and (ii) with respect to all other payments made pursuant to this Stipulation of Amendment and the Settlement Agreement, the calendar year immediately preceding the year in 5 which the payment at issue is due, regardless of when such payment is made; (c) "Cigarettes" means any product which contains nicotine, is intended to be burned or heated under ordinary conditions of use, and consists of or contains (i) any roll of tobacco wrapped in paper or in any substance not containing tobacco; or (ii) tobacco, in any form, that is functional in the product, which, because of its appearance, the type of tobacco used in the filler, or its packaging and labeling, is likely to be offered to, or purchased by, consumers as a cigarette; or (iii) any roll of tobacco wrapped in any substance containing tobacco which, because of its appearance, the type of tobacco used in the filler, or its packaging and labeling, is likely to be offered to, or purchased by, consumers as a cigarette described in subparagraph (i) of this paragraph; (d) "Smokeless Tobacco" means any product that consists of cut, ground, powdered or leaf tobacco that contains nicotine and that is intended to be placed in the oral cavity; (e) "Tobacco Products" means Cigarettes and Smokeless Tobacco; and (f) "Children" means persons under the age of 18; 6 The above definitions supplement the definitions provided in the Settlement Agreement and, insofar as they differ, supersede them. 4. Settlement Receipts. The payments to be made by Settling Defendants -------------------- under the Settlement Agreement and this Stipulation of Amendment are in settlement of all of the State of Florida's claims for damages incurred by the State in the year of payment or earlier years related to the subject matter of this Action, and no part of any payment under the Settlement Agreement or this Stipulation of Amendment is made in settlement of an actual or potential liability for a fine, civil penalty, criminal penalty or enhanced damages or as the cost of a tangible or intangible asset or other future benefit. This paragraph 4 supplements and clarifies section II.B(4) of the Settlement Agreement and does not and is not intended to change the characterization of settlement payments described in section II.B(4) of the Settlement Agreement. 5. Supplemental Initial Payment. Each MFN Settling Defendant severally ----------------------------- shall cause to be paid, pro rata in proportion to its Market Share and in accordance with and subject to paragraphs 17 and 18 of this Stipulation of Amendment, to an account designated in writing by the State of Florida, its share of $123,470,000, to be paid on or before January 4, 1999; its share of $464,590,000, to be paid on or before January 3, 2000; its share of $464,590,000, to be paid on or before January 2, 2001; its share of $464,590,000, to be paid on or 7 before January 2, 2002; and its share of $232,760,000, to be paid on or before January 2, 2003. The payments made by MFN Settling Defendants pursuant to this paragraph shall be adjusted upward by the greater of 3% or the actual total percent change in the Consumer Price Index applied each year on the previous year, beginning with the payment due to be made on or before January 3, 2000. The payments due to be made by MFN Settling Defendants pursuant to this paragraph on or before January 3, 2000, on or before January 2, 2001, on or before January 2, 2002, and on or before January 2, 2003, will also be decreased or increased, as the case may be, in accordance with the formula for adjustment of payments set forth in Appendix A hereto. The payment due to be made by MFN Settling Defendants pursuant to this paragraph 5 on or before January 4, 1999, shall not be subject to adjustment for inflation or in accordance with the formula for adjustment of payments set forth in Appendix A hereto. 6. Acceleration of Supplemental Initial Payment. In the event that any --------------------------------------------- MFN Settling Defendant fails to make any payment required of it pursuant to paragraph 5 of this Stipulation of Amendment (a "Defaulting Defendant") by the applicable date set forth in such paragraph 5 (a "Missed Payment"), the State of Florida shall provide notice to each of the MFN Settling Defendants of such non-payment. The Defaulting Defendant shall have 15 days after receipt of such notice to pay the Missed Payment, together with interest accrued from the original 8 applicable due date at the prime rate as published in the Wall Street Journal on the latest publication date on or before the date of default plus 3%. If the Defaulting Defendant does not make such payment within such 15-day period, the State of Florida shall have the option of providing notice to each of the MFN Settling Defendants of such continued non-payment. In the event that the State of Florida elects to provide such notice, any or all of the MFN Settling Defendants (other than the Defaulting Defendant) shall have 15 days after receipt of such notice to elect (in such MFN Settling Defendant's or such MFN Settling Defendants' sole and absolute discretion) to pay the Missed Payment, together with interest accrued from the original applicable due date at the prime rate as published in the Wall Street Journal on the latest publication date on or before the date of default plus 3%. In the event that the State of Florida does not receive the Missed Payment, together with such accrued interest, within such additional 15-day period, all future payments required to be made by each of the respective MFN Settling Defendants pursuant to paragraph 5 of this Stipulation of Amendment shall at the end of such additional 15-day period be accelerated and immediately become due and owing to the State of Florida from each MFN Settling Defendant, pro rata in proportion to its Market Share and in accordance with and subject to paragraph 18 of this Stipulation of Amendment; provided, however, that such accelerated payments (a) shall all be adjusted upward by the greater of (i) the rate of 3% per annum or 9 (ii) the actual total percent change in the Consumer Price Index, in either instance for the period between January 1 of the year in which the acceleration of payments pursuant to this paragraph occurs and the date on which such accelerated payments are made pursuant to this paragraph 6, and (b) shall all immediately be adjusted in accordance with the formula for adjustment of payments set forth in Appendix A hereto. Nothing in this paragraph 6 shall be deemed under any circumstance to create any obligation on the part of any MFN Settling Defendant to pay any amount owed or payable to the State of Florida by any other MFN Settling Defendant. All obligations of the MFN Settling Defendants pursuant to this paragraph 6 are intended to be and shall remain several, and not joint. 7. Annual Payments. Each of the Settling Defendants agrees that on or ---------------- before September 15, 1998 it shall severally cause to be paid to an account designated in writing by the State of Florida, pro rata in proportion to its respective Market Share and in accordance with and subject to paragraph 18 of this Stipulation of Amendment, its share of $220 million (subject to adjustment for appropriate allocation among Settling Defendants by January 30, 1999). Each of the Settling Defendants further agrees that, on or before December 31, 1999 and annually thereafter on or before December 31st of each year after 1999 (subject to final adjustment within 30 days), it shall severally cause to be paid 10 into an account designated by the State of Florida, pro rata in proportion to its respective Market Share and in accordance with and subject to paragraph 18 of this Stipulation of Amendment, its share of 5.5% of the following amounts (in billions): Year 1999 2000 2001 2002 2003 thereafter - ---- Amount $4.5B $5B $6.5B $6.5B $8B $8B - ------
The payments made by Settling Defendants pursuant to this paragraph 7 shall be adjusted upward by the greater of 3% or the actual total percent change in the Consumer Price Index applied each year on the previous year, beginning with the annual payment due on December 31, 1999. Such payments will also be decreased or increased, as the case may be, beginning with the annual payment due on December 31, 1999, in accordance with the formula for adjustment of payments set forth in Appendix A hereto. Settling Defendants shall pay the payment due on September 15, 1998 without adjustment for inflation or in accordance with the formula for adjustments of payments set forth in Appendix A hereto. This paragraph 7 supersedes section II.B(3) of the Settlement Agreement, which is hereby rendered null, void and of no further effect. 8. Determination of Market Share. In the event of a disagreement ------------------------------ between or among any Settling Defendants as to their respective shares of any payment due to be paid on a Market Share basis pursuant to the Settlement 11 Agreement and this Stipulation of Amendment, each Settling Defendant shall pay its undisputed share of such payment promptly on or before the date on which such payment is due, and shall, within 21 days of such date, submit copies of its Shipment Reports for the year in question to a third party to be selected by agreement of Settling Defendants (the "Third Party"), who shall determine the Market Share of each Settling Defendant within three business days of receipt of such Shipment Reports. The decision of the Third Party shall be final and non-appealable, and shall be communicated by facsimile to each person designated to receive notice hereunder. Each Settling Defendant shall, within two business days of receipt of the Third Party's decision, pay the State or such other Settling Defendant, as appropriate, the difference, if any, between (1) the amount that such Settling Defendant has already paid with respect to the payment in question and (2) the amount of the payment in question that corresponds to such Settling Defendant's Market Share as determined by the Third Party, together with interest accrued from the original date on which the payment in question was due, at the prime rate as published in the Wall Street Journal on the latest publication date on or before the original date on which the payment in question was due plus 3%. In the event of any disagreement by or among Settling Defendants as to their respective shares of the payment due on September 15, 1998 pursuant to this Stipulation of Amendment, the procedures for resolving such disagreement shall be 12 as described in this paragraph, except that each Settling Defendant shall not be required to provide its Shipment Reports to the Third Party until January 21, 1999. 9. Adjustments in Event of Federal Legislation. In the event that -------------------------------------------- federal tobacco legislation is enacted before November 30, 2000 that provides for payments by tobacco companies (whether in the form of settlement payment, tax or otherwise) ("Tobacco Legislation"): (a) MFN Settling Defendants shall be entitled to receive a dollar for dollar offset against the annual payments required under paragraph 7 of this Stipulation of Amendment of any amounts that the State of Florida could elect to receive pursuant to such Tobacco Legislation ("Federal Settlement Funds"), up to the full amount of such annual payments, except to the extent that: (i) such Federal Settlement Funds are required to be used for purposes other than health care or tobacco-related purposes; (ii) such Tobacco Legislation provides the opportunity for other states to elect to receive Federal Settlement Funds but does not provide for the abrogation, settlement or relinquishment of tobacco-related claims of such states that have not previously been resolved; or (iii) state receipt of such Federal Settlement Funds is conditioned upon (A) the relinquishment of rights or benefits under the Settlement 13 Agreement (including this Stipulation of Amendment and the Consent Decree) (excepting any annual payment amounts subject to the offset); or (B) actions or expenditures by the state unrelated to health care or tobacco (including but not limited to tobacco education, cessation, control or enforcement). (b) Nothing in this paragraph 9 shall reduce (i) the payments made to the State of Florida pursuant to sections II.B(1) and (2) of the Settlement Agreement and paragraphs 5 and 6 of this Stipulation of Amendment (by offset, credit, recoupment, refund or otherwise); or (ii) the percentage figure (5.5%) used to determine the State of Florida's annual payments pursuant to paragraph 7 of this Stipulation of Amendment. Nothing in this paragraph 9 is intended to or shall reduce the total amounts payable by MFN Settling Defendants to the State of Florida under the Settlement Agreement (as revised hereby) by an amount greater than the amount of Federal Settlement Funds that the State of Florida could elect to receive. This paragraph 9 supersedes section II.B(5) of the Settlement Agreement, which is hereby rendered null, void and of no further effect. 10. Clarification of Scope of State's Release. The release of claims ------------------------------------------ provided in section II.C(2) of the Settlement Agreement shall, with respect to the Claims therein released as to the future, apply only to monetary Claims. The 14 foregoing sentence does not supersede but rather supplements and clarifies the scope of the release provided in section II.C(2) of the Settlement Agreement. In addition, the State of Florida hereby agrees to dismiss with prejudice those claims dismissed pursuant to the Court's Order Approving and Adopting Certain Stipulations of the Parties as Enforceable Orders of this Court, dated April 24, 1998 (the "April 24th Order") and the Stipulation of Voluntary Dismissal Without Prejudice of Count III of the Plaintiffs' Third Amended Complaint, dated April 24, 1998 (the "April 24th Stipulation"). The State of Florida further agrees that, notwithstanding anything to the contrary in the Settlement Agreement, the April 24th Order or the April 24th Stipulation, the claims dismissed pursuant to the April 24th Order and the April 24th Stipulation shall be treated as Released Claims for purposes of section II.C(2) of the Settlement Agreement. 11. Limited Most-Favored Nation Provision. In partial consideration -------------------------------------- for the monetary payments to be made by MFN Settling Defendants pursuant to this Stipulation of Amendment, the State of Florida agrees that, if MFN Settling Defendants enter into any future pre-verdict settlement agreement of other similar litigation brought by a non-federal governmental plaintiff, or any amendment to any such existing settlement agreement, on terms more favorable to such non-federal governmental plaintiff than the terms of the Settlement Agreement (including this Stipulation of Amendment and the Consent Decree) (after due 15 consideration of relevant differences in population or other appropriate factors), the terms of the Settlement Agreement (including this Stipulation of Amendment and the Consent Decree) shall not be revised except as follows: to the extent, if any, such other pre-verdict settlement agreement includes terms that provide: (a) for joint and several liability among MFN Settling Defendants with respect to monetary payments to be made pursuant to such agreement; (b) a guarantee by the parent company of any of MFN Settling Defendants or other assurances of payment or creditors' remedies with respect to monetary payments to be made pursuant to such agreement; (c) for the implementation of non-economic tobacco-related public health measures different from those contained in the Settlement Agreement (including this Stipulation of Amendment and the Consent Decree); (d) for no offset of Federal Settlement Funds against annual settlement payments pursuant to such settlement agreement; or (e) for an offset term more favorable to the plaintiff than the offset provisions of paragraph 9 of this Stipulation of Amendment, then the Settlement Agreement shall, at the option of the Office of the Attorney General of the State of Florida, be revised to include terms comparable to such terms. This paragraph 11 supersedes section IV of the Settlement Agreement, which is hereby rendered null, void and of no further effect as to any MFN Settling 16 Defendant. The State of Florida hereby acknowledges that, pursuant to the terms of this paragraph 11, it has irrevocably waived any future claim against MFN Settling Defendants to revise the terms of the Settlement Agreement or this Stipulation of Amendment pursuant to section IV of the Settlement Agreement (except as provided in paragraph 27 of this Stipulation of Amendment), and it hereby further covenants and agrees that, in consideration for MFN Settling Defendants' agreement to the terms of this Stipulation of Amendment, it shall not hereafter seek to revise the Settlement Agreement or this Stipulation of Amendment as to MFN Settling Defendants, except as expressly provided in this paragraph 11 (or pursuant to mutually agreeable amendment by the parties hereto as provided in section VI.D of the Settlement Agreement and paragraph 20 hereof). 12. MFN Settling Defendants' Assurances. MFN Settling Defendants ------------------------------------ agree: (a) to support the legislative initiatives to enact new laws and administrative initiatives to promulgate new rules described in section II.A(2) of the Settlement Agreement; and (b) not to support in Congress or any other forum legislation, rules or policies which would preempt, override, abrogate or diminish the State's rights or recoveries under the Settlement Agreement (as amended hereby). Except as specifically provided in the foregoing sentence, nothing in the 17 Settlement Agreement (including this Stipulation of Amendment and the Consent Decree) shall be deemed to restrain the parties from advocating terms of any national settlement or taking any other positions on issues relating to tobacco. 13. Disclosure of Payments. Each MFN Settling Defendant shall disclose ----------------------- to the Office of the Attorney General and the Office of the Governor, at the times and in the manner provided below, information about the following payments: (a) Any payment to a "lobbyist" or "principal" within the meaning of the Joint Rules of the Florida House and Senate, Section 1.1(2)(d) and (f), if the MFN Settling Defendant knows or has reason to know that the payment will be used, directly or indirectly, to influence legislative or administrative action or the official action of state or local government in Florida in any way relating to Tobacco Products or their use; (b) Any payment to a third party, if the MFN Settling Defendant knows the payment is partly in consideration for the third party attending, offering testimony at, or participating before a state or local government hearing in Florida in any way relating to Tobacco Products or their use; and (c) Any payment (other than a "political contribution" under 2 U.S.C. Section 431(8)(A)) to, or for the benefit of, a state or local official in Florida, whether made directly by the MFN Settling Defendant or indirectly through 18 an employee of the MFN Settling Defendant acting within the scope of his employment, or through an affiliate, lobbyist or other agent acting under the substantial control of the MFN Settling Defendant. Disclosures required under this paragraph 13 shall be filed with the Office of the Attorney General and the Office of the Governor on the first day of February, May, August and November of each year (beginning November 1, 1998) for any and all payments made through the first day of the previous month, and shall be transmitted in electronic format or such format as the Attorney General may require, with the following information: - The name, address, telephone number and e-mail address of the recipient; - The amount of each payment described in this paragraph 13; and - The aggregate amount of all payments described in this paragraph 13 to the recipient in the calendar year. Information disclosed pursuant to this paragraph is a "public record" within the meaning of the Florida Public Records Act, Ch. 119, Florida Statutes. 14. Prohibition of Certain Payments for Product Placement. MFN ------------------------------------------------------ Settling Defendants shall not make or cause to be made, in connection with any motion picture made in the United States, any payment, direct or indirect, to any person to use, display, make reference to or use as a prop any cigarette, cigarette package, advertisement for cigarettes, or any other item bearing the brand name, logo, symbol, motto, selling message, recognizable color or pattern of colors, or any 19 other indicia of product identification identical or similar to, or identifiable with, those used for any brand of domestic Tobacco Products. 15. Prohibition on Promotional Merchandise. On and after December 31, --------------------------------------- 1998, MFN Settling Defendants shall permanently cease marketing, licensing, distributing, selling or offering, directly or indirectly, including by catalogue or direct mail, in the State of Florida, any item (other than Tobacco Products or any item of which the sole function is to advertise Tobacco Products) which bears the brand name (alone or in conjunction with any other word), logo, symbol, motto, selling message, recognizable color or pattern of colors, or any other indicia of product identification identical or similar to, or identifiable with, those used for any brand of domestic Tobacco Products, except that nothing in this paragraph shall (i) require any MFN Settling Defendant to terminate, breach or violate any licensing agreement or contract in existence as of July 1, 1998 for the remaining term of such contract; (ii) prohibit the distribution to any employee (18 years of age or older) of an MFN Settling Defendant of any item described above that is intended for the personal use of such employee by such MFN Settling Defendant; or (iii) prohibit items necessarily incidental to or ordinarily distributed in connection with any sponsorship described in section I.D(7) of the Settlement Agreement. 20 16. Document Production. MFN Settling Defendants shall, upon request, -------------------- provide to the State of Florida a copy of any CD-ROMs of documents that MFN Settling Defendants have agreed to produce, pursuant to the Minnesota Settlement, to the document depository established in connection with the lawsuit State of Minnesota v. Philip Morris Inc., No. C1-94-8565 (Dist. Ct. Ramsey County, filed Aug. 17, 1994), with a copy of the accompanying transmittal letter provided to each person designated to receive notice hereunder. 17. Court Approval. The parties hereto agree to submit this --------------- Stipulation of Amendment to the Court for its review and approval, and further, to move that the Court enter the Consent Decree in the form attached hereto as Exhibit 1. If the Court refuses to approve this Stipulation of Amendment and the Consent Decree in any respect unacceptable to any of the parties hereto and such refusal is not reversed on appeal, or if such approval is modified in any respect unacceptable to any of the parties hereto or is set aside on appeal, then this Stipulation of Amendment shall be canceled and terminated and it and all orders issued pursuant hereto (including the Consent Decree) shall become null and void and of no further effect. Any such cancellation or termination of this Stipulation of Amendment shall not of itself result in the cancellation or termination of, or otherwise affect, the Settlement Agreement as approved by the Court on August 25, 1997. All payments described in paragraphs 5 and 6 of this Stipulation of Amendment shall 21 be paid into a special escrow account in a New York City bank, pursuant to the terms of a mutually acceptable escrow agreement in the form attached hereto as Exhibit 2 (the "MFN Escrow Agreement"), and if so paid shall remain in said escrow account, until such time as (1) the 30-day time period to seek review of the Court's order approving this Stipulation of Amendment has expired without the filing of any notice of appeal or petition for review; or (2) in the event of a timely appeal or petition, the appeal or the petition has been dismissed or the Court's order has been affirmed in all material respects by the court of last resort to which such appeal or petition has been taken and such dismissal or affirmance has become no longer subject to further appeal or review. Any payments made into escrow shall be disbursed from escrow only in strict accordance with the terms of the MFN Escrow Agreement, which shall not be modified without the express written consent of MFN Settling Defendants and the State of Florida. 18. Escrow Pending Resolution of Certain Claims. Certain of the -------------------------------------------- State's private counsel (the "Lienors") have filed attorneys' charging liens against any payments to be made to the State of Florida pursuant to the settlement of the Action (the "Liens"), and the State of Florida has contested the validity and enforceability of the Liens. Until such time as the question of the validity and enforceability of the Liens (including any attorneys' charging liens that may be filed by the State's private counsel after the date hereof) has been conclusively 22 resolved by the court of last resort to which such question may be presented, each payment to be made by Settling Defendants pursuant to this Stipulation of Amendment shall be paid in accordance with such directions as may be issued by the Court as necessary to preserve the claim of the Lienors to the portion of the payment in question that is claimed to be subject to the Liens. Notwithstanding any other provision of this Stipulation of Amendment (i) any payment by Settling Defendants that is made in accordance with such directions shall fully satisfy Settling Defendants' obligations with respect to the payment in question, and (ii) upon the conclusive resolution of the question of the validity and enforceability of the Liens by the court of last resort to which such question may be presented, the portion of each payment to be made by Settling Defendants pursuant to this Stipulation of Amendment that is claimed to be subject to the Liens shall be paid to the State of Florida or to the Lienors (or any of them) in accordance with such conclusive determination. 19. Payment Responsibility. All obligations of the Settling Defendants ----------------------- pursuant to the Settlement Agreement and this Stipulation of Amendment are intended to be and shall remain several, and not joint. Due to the particular corporate structures of Settling Defendants R.J. Reynolds Tobacco Company ("Reynolds") and Brown & Williamson Tobacco Corporation ("Brown & Williamson") with respect to their non-domestic tobacco operations, Settling 23 Defendants Reynolds and Brown & Williamson shall each be severally liable for its respective share of each payment due pursuant to the Settlement Agreement and this Stipulation of Amendment up to (and its liability hereunder shall not exceed) the full extent of its assets used in, and earnings derived from, the manufacture and sale in the United States of Tobacco Products intended for domestic consumption, and no recourse shall be had against any of its other assets or earnings to satisfy such obligations. 20. Applicable Provisions of Settlement Agreement. The provisions of ---------------------------------------------- sections VI.A (Headings), VI.B (No Admission), VI.C (Non-Admissibility), VI.D (Amendment), VI.E (Cooperation), VI.F (Governing Law), VI.G (Construction), VI.H (Intended Beneficiaries) and VI.I (Counterparts) of the Settlement Agreement shall be equally applicable to this Stipulation of Amendment as though fully set forth herein, and all references to the Settlement Agreement in the sections thereof specifically listed in this paragraph 20 shall be construed to include this Stipulation of Amendment. 21. Pilot Program. The provisions of section II.B(2) of the Settlement -------------- Agreement that restrict the manner in which the pilot program funds provided for therein may be expended are hereby rendered null, void and of no further effect. 22. Release of Right to Additional Compensation. In consideration for -------------------------------------------- the terms hereof, including, inter alia, the provisions of paragraph 5 hereof, the State 24 of Florida hereby irrevocably releases MFN Settling Defendants from any claim for additional compensation pursuant to section V of the Settlement Agreement, and the provisions of section V regarding the State's rights to costs and additional compensation are hereby rendered null, void and of no effect. 23. Notices. All notices or other communications to any party to the -------- Settlement Agreement shall be in writing (and shall include telex, telecopy or similar writing) and shall be given to the respective parties hereto at the following addresses. Any party hereto may change the name and address of the person designated to receive notice on behalf of such party by notice given as provided in this paragraph. State of Florida: ----------------- Hon. Robert A. Butterworth Attorney General's Office The Capitol Suite PL01 Tallahassee, FL 32399-1050 Fax: (850) 413-0632 With a copy to: --------------- Joseph F. Rice Ness, Motley, Loadholt, Richardson & Poole 151 Meeting Street, Suite 600 Charleston, SC 29402 Fax: (803) 720-9290 25 Philip Morris Incorporated: R.J. Reynolds Tobacco Company: --------------------------- ------------------------------ Martin J. Barrington Charles A. Blixt Philip Morris Incorporated R.J. Reynolds Tobacco Company 120 Park Avenue 401 North Main Street New York, NY 10017-5592 Winston-Salem, NC 27102 Fax: (212) 907-5399 Fax: (336) 741-2998 With a copy to: With a copy to: --------------- --------------- Meyer G. Koplow Arthur F. Golden Wachtell, Lipton, Rosen & Katz Davis Polk & Wardwell 51 West 52nd Street 450 Lexington Avenue New York, NY 10019 New York, NY 10017 Fax: (212) 403-2000 Fax: (212) 450-4800 Brown & Williamson Tobacco Corp.: Lorillard Tobacco Company: --------------------------------- -------------------------- F. Anthony Burke Arthur J. Stevens Brown & Williamson Tobacco Corp. Lorillard Tobacco Company 200 Brown & Williamson Tower 714 Green Valley Road 401 South Fourth Avenue Greensboro, NC 27408 Louisville, KY 40202 Fax: (336) 335-7707 Fax: (502) 568-7297 With a copy to: United States Tobacco Company: --------------- ------------------------------ Stephen R. Patton Richard H. Verheij Kirkland & Ellis UST Inc. 200 East Randolph Dr. 100 West Putnam Avenue Chicago, IL 60601 Greenwich, CT 06830 Fax: (312) 861-2200 Fax: (203) 863-7233 24. Representation of Parties. The parties hereto represent that the -------------------------- Settlement Agreement and this Stipulation of Amendment have been duly authorized and, upon execution, will (together with the Consent Decree) constitute 26 valid and binding contractual obligations, enforceable in accordance with their terms, of each of the parties hereto. 25. Severability. In the event that any non-material provision of the ------------- Settlement Agreement (as revised hereby) is modified or found to be invalid or unenforceable, the remainder thereof shall be fully enforceable. 26. Attorneys' Fees. Settling Defendants, the State of Florida and ---------------- certain private counsel for the State of Florida have entered into a separate agreement on September 11, 1998 (the "Florida Fee Payment Agreement") that sets forth the entire obligation of Settling Defendants with respect to payment of attorneys' fees pursuant to section V of the Settlement Agreement. The parties hereto agree that MFN Settling Defendants shall not be required to perform any obligation pursuant to paragraphs 5 and 6 of this Stipulation of Amendment until such time as (1) the Court issues the Consent Decree in the form attached as Exhibit 1 hereto; (2) the 30-day period to seek review of the Court's order entering the Consent Decree has expired without the filing of any notice of appeal or petition for review; and (3) in the event of a timely appeal or petition, such appeal or petition has been dismissed or the Court's order entering the Consent Decree has been affirmed in all material respects by the court of last resort to which such appeal or petition has been taken and such dismissal or affirmance has become no longer subject to further appeal or review. Under no circumstances shall Settling Defendants' entry into this 27 Stipulation of Amendment or the Florida Fee Payment Agreement be construed as, or deemed to be, evidence of or an admission or concession that the Settlement Agreement can be revised pursuant to the Most Favored Nation clause without incorporation of all terms of any settlement agreement that provides the occasion for any such revision, including all terms thereof with respect to attorneys' fees. 27. Conditioned on Minnesota Settlement. In the event that a court ------------------------------------ order or other judicial determination is issued on or before January 2, 2003 that overturns, voids or invalidates the Minnesota Settlement or otherwise declares it to be unenforceable (such that MFN Settling Defendants are relieved from making payments required under the Minnesota Settlement) (the "Minnesota Order"), MFN Settling Defendants shall have the option to elect not to make any payment pursuant to paragraphs 5 and 6 of this Stipulation of Amendment that becomes due on or after the date of such Minnesota Order. In the event that MFN Settling Defendants make such an election: (a) MFN Settling Defendants shall not be obligated to make any payment pursuant to paragraphs 5 and 6 of this Stipulation of Amendment that becomes due on or after the date of the Minnesota Order; provided, however, that if the Minnesota Order is reversed on appeal or otherwise set aside, MFN Settling Defendants shall be obligated to make any payments pursuant to paragraphs 5 and 6 of this Stipulation of 28 Amendment that were not made when initially due as result of the Minnesota Order; (b) the provisions of paragraph 11 of this Stipulation of Amendment shall not apply to preclude the application of section IV of the Settlement Agreement with respect to any pre-verdict settlement agreement described therein entered into after the date of the Minnesota Order; and (c) MFN Settling Defendants shall be entitled to a credit, in the amount of any payments made pursuant to paragraphs 5 and 6 of this Stipulation of Amendment, against any payments due to the State of Florida as a result of application of section IV of the Settlement Agreement in connection with any pre-verdict settlement agreement entered into after the date of the Minnesota Order, pursuant to subparagraph (b) of this paragraph 27. No other provision of the Settlement Agreement, this Stipulation of Amendment or the Consent Decree shall be affected by the Minnesota Order. MFN Settling Defendants will provide the State of Florida with notice of any filing seeking to obtain a Minnesota Order. 28. Entire Agreement of Parties. The Settlement Agreement (including ---------------------------- this Stipulation of Amendment, Florida Fee Payment Agreement and the Consent Decree) contains an entire, complete and integrated statement of each and every 29 term and provision agreed to by and among the parties hereto relating in any way to the settlement of the tobacco litigation brought by the State of Florida, and is not subject to any condition not provided for herein. IN WITNESS WHEREOF, the parties hereto, through their fully authorized representatives, have agreed to this Stipulation of Amendment as of this eleventh day of September, 1998. STATE OF FLORIDA, acting by and through Lawton M. Chiles, Jr., its duly elected and authorized Governor, and Robert A. Butterworth, its duly elected and authorized Attorney General By: /s/LAWTON M. CHILES, JR. ------------------------- Lawton M. Chiles, Jr. Governor By: /s/ROBERT A. BUTTERWORTH ------------------------- Robert A. Butterworth Attorney General PHILIP MORRIS INCORPORATED By: /s/MEYER G. KOPLOW ------------------------- Meyer G. Koplow Counsel By: /s/MARTIN J. BARRINGTON ------------------------- Martin J. Barrington General Counsel 30 R.J. REYNOLDS TOBACCO COMPANY By: /s/ARTHUR F. GOLDEN ------------------------- Arthur F. Golden Counsel By: /s/CHARLES A. BLIXT ------------------------- Charles A. Blixt Executive Vice President & General Counsel BROWN & WILLIAMSON TOBACCO CORPORATION By: /s/STEPHEN R. PATTON ------------------------- Stephen R. Patton Counsel By: /s/F. ANTHONY BURKE ------------------------- F. Anthony Burke Vice President & General Counsel 31 LORILLARD TOBACCO COMPANY By: /s/ARTHUR J. STEVENS ------------------------- Arthur J. Stevens Senior Vice President & General Counsel UNITED STATES TOBACCO COMPANY By: /s/RICHARD H. VERHEIJ ------------------------- Richard H. Verheij Executive Vice President & General Counsel 32 APPENDIX A ---------- FORMULA FOR CALCULATING VOLUME ADJUSTMENTS ------------------------------------------ Any payment that by the terms of the Stipulation of Amendment is to be adjusted pursuant to this Appendix (the "Applicable Base Payment") shall be adjusted pursuant to this Appendix in the following manner: (A) in the event the aggregate number of cigarettes shipped for domestic consumption by Settling Defendants in the Applicable Year (as defined hereinbelow) (the "Actual Volume") is greater than the aggregate number of cigarettes shipped for domestic consumption by Settling Defendants in 1997 (the "Base Volume"), the Applicable Base Payment shall be multiplied by the ratio of the Actual Volume to the Base Volume; (B) in the event the Actual Volume is less than the Base Volume, (i) the Applicable Base Payment shall be multiplied by the ratio of the Actual Volume to the Base Volume, and the resulting product shall be divided by 0.98; and (ii)if a reduction of the Applicable Base Payment results from the application of subparagraph (B)(i) of this Appendix, but the Settling Defendants' aggregate net operating profits from domestic sales of cigarettes for the Applicable Year (the "Actual Net Operating Profit") is greater than the Settling Defendants' aggregate net operating profits from domestic sales of cigarettes in 1997 (the "Base Net Operating Profit") (such Base Net Operating Profit being adjusted upward by the greater of the rate of 3% per annum or the actual total percent change in the Consumer Price Index, in either instance for the period between January 1, 1998 and the date on which the payment at issue is made), then the amount by which the Applicable Base Payment is reduced by the application of subparagraph (B)(i) shall be reduced (but not below zero) by 5.5% of 25% of such increase in such profits. For purposes of this Appendix, "net operating profits from domestic sales of cigarettes" shall mean net operating profits from domestic sales of cigarettes as reported to the United States Securities and Exchange Commission ("SEC") for the Applicable Year or, in the case of a Settling Defendant that does not report profits to the SEC, as reported in financial statements prepared in accordance with generally accepted accounting principles and audited by a nationally recognized accounting firm. The determination of Settling Defendants' aggregate net operating profits from domestic sales of cigarettes shall be derived using the same methodology as was employed in deriving such Settling Defendants' aggregate net operating profits from domestic sales of cigarettes in 1997. Any increase in an Applicable Base Payment pursuant to this subparagraph B(ii) shall be payable within 120 days after the date that the payment at issue was required to be made. (C) "Applicable Year" means (i) with respect to the payments made pursuant to paragraph 7 of the Stipulation of Amendment, the calendar year ending on the date on which the payment at issue is due, regardless of when such payment is made; and (ii) with respect to all other payments made pursuant to the Stipulation of Amendment, the calendar year immediately preceding the year in which the payment at issue is due, regardless of when such payment is made. 2 EXHIBIT 1 IN THE CIRCUIT COURT OF THE FIFTEENTH JUDICIAL CIRCUIT PALM BEACH COUNTY, FLORIDA STATE OF FLORIDA, et al., Plaintiffs, v. Civil Action No. 95-1466 AH AMERICAN TOBACCO COMPANY, et al., Defendants. - -------------------------------/ CONSENT DECREE -------------- WHEREAS, on August 25, 1997, the State of Florida and certain defendants entered into a Settlement Agreement (the "Settlement Agreement") to settle and resolve with finality all present and future claims against all parties to this litigation relating to the subject matter of this litigation which have been or could have been asserted by any of the parties hereto; WHEREAS, the Settlement Agreement was approved and adopted as an enforceable order of the Court pursuant to Court Order dated August 25, 1997, in which the Court expressly retained continuing jurisdiction to enforce and implement the terms of the Settlement Agreement, including the Most Favored Nation clause of the Settlement Agreement; EXHIBIT 1 WHEREAS, the Settlement Agreement contains a "Most Favored Nation" clause which provides that, in the event that Settling Defendants enter into a future pre-verdict settlement agreement of other litigation brought by a non-federal governmental plaintiff on terms more favorable to such governmental plaintiff than the terms of the Settlement Agreement (after due consideration of relevant differences in population or other appropriate factors), the terms of the Settlement Agreement shall be revised so that the State of Florida will obtain treatment at least as relatively favorable as any such non-federal governmental entity; WHEREAS, on May 8, 1998, Settling Defendants Philip Morris Incorporated, R.J. Reynolds Tobacco Company, Brown & Williamson Tobacco Corporation and Lorillard Tobacco Company (the "MFN Settling Defendants") entered into a pre-verdict settlement agreement with the State of Minnesota (the "Minnesota Settlement") to resolve the lawsuit State of Minnesota v. Philip Morris Inc., No. C1-94-8565 (Dist. Ct. Ramsey County, filed Aug. 17, 1994); WHEREAS, the State of Florida and MFN Settling Defendants agree that, pursuant to the Most Favored Nation clause of the Settlement Agreement, the Settlement Agreement is to be revised in light of the Minnesota Settlement; WHEREAS, the State of Florida and Settling Defendants have agreed on the terms of revisions to the Settlement Agreement as set forth in a Stipulation of 2 EXHIBIT 1 Amendment to Settlement Agreement and for Entry of Consent Decree executed on September 11, 1998 (the "Stipulation of Amendment"); WHEREAS, the Stipulation of Amendment provides for entry of this Consent Decree, which sets forth certain terms of injunctive relief, and further, provides that the MFN Settling Defendants have waived as specified therein their right to challenge the terms of this Consent Decree as being superseded or preempted by future congressional enactments; and WHEREAS, the Attorney General believes the entry of this Consent Decree is appropriate and in the public interest; NOW, THEREFORE, the State of Florida and MFN Settling Defendants having come before the Court on their joint motion for approval of a Stipulation of Amendment to the Settlement Agreement, and the Court having reviewed and considered the Stipulation of Amendment and otherwise being fully advised in the premises, it is hereby ORDERED, ADJUDGED and DECREED as follows: 1. Approval. The Court finds that the terms of the Stipulation of -------- Amendment are just and in the best interests of the State of Florida and Settling Defendants, and the same is hereby approved and adopted as an enforceable order of the Court, which shall supersede any prior court order insofar as inconsistent therewith. The Court further finds that the Stipulation of Amendment and the Florida Fee Payment Agreement set forth the State and Settling Defendants' 3 EXHIBIT 1 agreement as to certain matters addressed in this Court's April 16, 1998 Order Implementing Most Favored Nation Provision of Florida Settlement Agreement and Exhibit 1 thereto (the "April 16th Order") and accordingly hereby amends the April 16th Order (and all other orders of the Court relating thereto) so as to conform it to the terms of the Florida Fee Payment Agreement. In addition, the Court finds that amounts payable by Settling Defendants pursuant to the Florida Fee Payment Agreement are not funds of the State of Florida and are not subject to appropriation by the State of Florida pursuant to 1998 Fla. Sess. Law Serv. Ch. 98-63 (C.S.S.B. 1270) (West) and that Settling Defendants are under no obligation to pay such amounts to the State of Florida. In addition, pursuant to paragraph 10 of the Stipulation of Amendment, the claims of the State of Florida dismissed pursuant to the Court's Order Approving and Adopting Certain Stipulations of the Parties as Enforceable Orders of this Court, dated April 24, 1998 (the "April 24th Order") and the Stipulation of Voluntary Dismissal Without Prejudice of Count III of the Plaintiffs' Third Amended Complaint, dated April 24, 1998 (the "April 24th Stipulation") are hereby dismissed with prejudice and, notwithstanding anything to the contrary in the Settlement Agreement, the April 24th Order or the April 24th Stipulation, the claims dismissed pursuant to the April 24th Order and the April 24th Stipulation shall be treated as Released Claims for purposes of section II.C(2) of the Settlement Agreement. 4 EXHIBIT 1 2. Jurisdiction and Venue. In keeping with the Settlement Agreement and ---------------------- this Court's August 25, 1997 Order, the Court expressly retains jurisdiction for the purpose of enforcement of the Settlement Agreement (as amended by the Stipulation of Amendment) and this Consent Decree, as well as other issues relating to the settlement of this Action that are currently pending before the Court. Any party to this Consent Decree may apply to this Court at any time for such further orders and directions as may be necessary or appropriate for the construction and enforcement of the Settlement Agreement, the Stipulation of Amendment and this Consent Decree. 3. Definitions. The definitions set forth in the Settlement Agreement ------------ (as supplemented or superseded by the Stipulation of Amendment) are incorporated by reference herein. 4. Applicability. This Consent Decree applies only to MFN Settling -------------- Defendants in their corporate capacity acting through their respective successors and assigns, directors, officers, employees, agents, subsidiaries, divisions or other internal organizational units of any kind or any other entities acting in concert or participating with them, and only with respect to activities in connection with the manufacture and sale in the United States of Tobacco Products intended for domestic consumption. The remedies and penalties for a violation of this Consent Decree shall apply only to MFN Settling Defendants, and shall not be imposed or 5 EXHIBIT 1 assessed against any employee, officer or director of MFN Settling Defendants or other person or entity as a consequence of such a violation, and there shall be no jurisdiction under this Consent Decree to impose or assess a penalty against any employee, officer or director of MFN Settling Defendants or other person or entity as a consequence of a violation of this Consent Decree. 5. Effect on Third Parties. This Consent Decree is not intended to and ------------------------ does not vest standing in any third party with respect to the terms hereof, or create for any person other than the parties hereto a right to enforce the terms hereof. 6. Injunctive Relief. MFN Settling Defendants are permanently enjoined ------------------ from: (a) On and after December 31, 1998, marketing, licensing for distribution or sale, distributing, selling or offering, directly or indirectly, including by catalogue or direct mail, in the State of Florida, any item (other than Tobacco Products or any item the sole function of which is to advertise Tobacco Products) which bears the brand name (alone or in conjunction with any other word), logo, symbol, motto, selling message, recognizable color or pattern of colors, or any other indicia or product identification identical or similar to, or identifiable with, those used for any domestic brand of Tobacco Products, except that nothing in this paragraph shall (i) require any MFN Settling Defendant to terminate, 6 EXHIBIT 1 breach or violate any licensing agreement or contract in existence as of July 1, 1998 for the remaining term of such contract; (ii) prohibit the distribution to any employee (18 years of age or older) of an MFN Settling Defendant of any item described above that is intended for the personal use of such employee by such MFN Settling Defendant; or (iii) prohibit items necessarily incidental to or ordinarily distributed in connection with any sponsorship described in section I.D(7) of the Settlement Agreement. (b) Making any material misrepresentation of fact regarding the health consequence of using any Tobacco Product, including any tobacco additives, filters, paper or other ingredients; provided, however, that nothing in this paragraph shall limit the exercise of any First Amendment right or any defense or position which persons bound by this Consent Decree may assert in any judicial, legislative or regulatory forum. (c) Entering into any contract, combination or conspiracy between or among themselves which has the purpose or effect of: (1) limiting competition in the production or distribution of information about the health hazards or other consequences of the use of Tobacco Products; (2) limiting or suppressing research into smoking and health; or (3) limiting or suppressing research into, marketing, or development of new products. 7 EXHIBIT 1 (d) Taking any action, directly or indirectly, to target children in Florida in the advertising, promotion, or marketing of cigarettes, or taking any action the primary purpose of which is to initiate, maintain or increase the incidence of underage smoking in Florida. 7. No Determination or Admission. The Settlement Agreement having been ------------------------------ executed prior to the taking of any testimony, no final determination of any violation of any provision of law has been made in this Action. This Consent Decree is not intended to be and shall not in any event be construed as, or deemed to be, an admission or concession or evidence of any liability or any wrongdoing whatsoever on the part of any person covered by the releases provided in sections II(C)(1) and (2) of the Settlement Agreement; nor shall this Consent Decree be construed as, or deemed to be, an admission or concession or evidence of personal jurisdiction with respect to any person not a party to this Consent Decree. Defendants specifically disclaim any liability or wrongdoing whatsoever with respect to the claims and allegations asserted against them in this Action and MFN Settling Defendants have entered into the Settlement Agreement and the Stipulation of Amendment, and have stipulated to entry of this Consent Decree, solely to avoid the further expense, inconvenience, burden and risk of litigation. 8. Modification. This Consent Decree shall not be modified unless the ------------- party seeking modification demonstrates, by clear and convincing evidence, that it 8 EXHIBIT 1 will suffer irreparable harm from new and unforeseen conditions; provided, however, that the provisions of paragraph 4 of this Consent Decree shall in no event be subject to modification. Changes in the economic conditions of the parties shall not be grounds for modification. It is intended that MFN Settling Defendants will comply with this Consent Decree as originally entered, even if MFN Settling Defendants' obligations hereunder are greater than those imposed under current or future law. Therefore, a change in law that results, directly or indirectly, in more favorable or beneficial treatment of any one or more of the MFN Settling Defendants shall not support modification of this Consent Decree. The provisions of this paragraph shall not be construed to limit or affect any future modification of the Settlement Agreement (as amended by the Stipulation of Amendment) in the manner provided in paragraphs 11 and 27 of the Stipulation of Amendment. 9. Enforcement and Attorneys' Fees. In any proceeding which results in -------------------------------- a finding that a MFN Settling Defendant violated this Consent Decree, the responsible MFN Settling Defendant or MFN Settling Defendants shall pay the State's costs and attorneys' fees incurred in such proceeding. 10. Non-Exclusivity of Remedy. The remedies in this Consent Decree are -------------------------- cumulative and in addition to any other remedies the State may have at law or equity. Nothing herein shall be construed to prevent the State from bringing any 9 action simply because the conduct that is the basis for such action may also violate this Consent Decree. DONE AND ORDERED at Palm Beach County, Florida, this the __th day of September, 1998. -------------------------------------------- CIRCUIT JUDGE APPROVED: - ---------------------------------------- Robert A. Butterworth, Attorney General, Florida Bar No. 114422 For the State of Florida - ---------------------------------------- Stephen J. Krigbaum, Esq., Florida Bar No. 0978019 For MFN Settling Defendants 10 EXHIBIT 2 MFN ESCROW AGREEMENT This escrow agreement (the "MFN Escrow Agreement") is entered into as of _________, 1998 by and among Philip Morris Incorporated, R.J. Reynolds Tobacco Company, Brown & Williamson Tobacco Corporation and Lorillard Tobacco Company (collectively and severally, "MFN Settling Defendants" and each individually a "MFN Settling Defendant"), the State of Florida and _____ _____ [Bank], as escrow agent (the "MFN Escrow Agent"). WITNESSETH: WHEREAS, the State of Florida and Settling Defendants entered into a comprehensive settlement agreement and release as of August 27, 1997 (the "Settlement Agreement"), setting forth the terms and conditions of an agreement to settle and resolve with finality all present and future claims relating to the subject matter of the litigation entitled State of Florida v. American Tobacco Co., No. 95-1466 AH (Fifteenth Jud. Cir., Palm Beach County) (the "Action"), in the Circuit Court of Palm Beach County, Florida (the "Court"); WHEREAS, the State of Florida and Settling Defendants entered into a Stipulation of Amendment to Settlement Agreement and for Entry of Consent Decree (the "Stipulation of Amendment") on September 11, 1998, paragraph 17 of which provides for Court approval of the Stipulation of Amendment; WHEREAS, paragraph 5 of the Stipulation of Amendment provides that, on the dates specified therein, each MFN Settling Defendant shall severally pay to the State of Florida, pro rata in proportion to its Market Share, its respective share of the amounts indicated for each date; WHEREAS, paragraph 17 of the Stipulation of Amendment further provides that all payments described in paragraphs 5 and 6 of the Stipulation of Amendment shall be paid into a special escrow account in an appropriate New York City bank (and if so paid shall remain in said escrow account) until such time as (1) the 30 day period for appeal or to seek review of the Court's order approving the Stipulation of Amendment has expired without the filing of any notice of appeal or petition for review; or (2) in the event of any such appeal or petition, the appeal or the petition has been dismissed or the Court's order has been affirmed in all material respects by the court of last resort to which such 1 EXHIBIT 2 appeal or petition has been taken and such dismissal or affirmance has become no longer subject to further appeal or review (the "Availability Date"); and WHEREAS, the parties hereto believe that at least one of the payments described in the preceding paragraphs may become due prior to the Availability Date: NOW, THEREFORE, the parties hereto agree as follows: SECTION 1. Appointment of MFN Escrow Agent. MFN Settling Defendants and the State of Florida hereby appoint the MFN Escrow Agent to act as escrow agent on the terms and conditions set forth herein, and the MFN Escrow Agent hereby accepts such appointment on such terms and conditions. SECTION 2. Deposit. In the event that any payment pursuant to paragraph 5 or 6 of the Stipulation of Amendment becomes due on a date prior to the Availability Date, each MFN Settling Defendant shall severally deliver to the MFN Escrow Agent in immediately available funds such MFN Settling Defendant's respective share of the payment in question (the sum of such shares being the "Initial Deposit"). Upon receipt, the MFN Escrow Agent shall deposit the Initial Deposit into a separate escrow account established for such purpose and governed by the terms of this MFN Escrow Agreement (the "MFN Escrow Account"). Any subsequent payment pursuant to paragraph 5 or 6 of the Stipulation of Amendment that becomes due prior to the Availability Date shall be delivered to the MFN Escrow Agent and added to the Initial Deposit (the Initial Deposit and any subsequent payments deposited into the MFN Escrow Account, including any payments of interest or other income on investment of the MFN Escrow Amount or any portion thereof, being the "MFN Escrow Amount") and shall be governed by the terms of this MFN Escrow Agreement. All such deliveries of funds are subject to the right of MFN Settling Defendants to obtain, pursuant to section 4(a) of this MFN Escrow Agreement, prompt return of the entire MFN Escrow Amount (less appropriate deductions for administrative fees and expenses, including taxes and other related costs) in the event that the Stipulation of Amendment is cancelled or terminated pursuant to paragraph 17 of the Stipulation of Amendment. The MFN Escrow Amount shall be maintained, invested and disbursed by the MFN Escrow Agent strictly in accordance with this MFN Escrow Agreement. 2 EXHIBIT 2 SECTION 3. Investment of MFN Escrow Amount. The MFN Escrow Agent shall invest and reinvest the MFN Escrow Amount in either (i) direct obligations of, or obligations the principal and interest on which are unconditionally guaranteed by, the United States of America (including government-sponsored agencies) or the State of Florida; (ii) repurchase agreements fully collateralized by securities of the kind specified in clause (i) above; (iii) money market accounts maturing within 30 days of the acquisition thereof and issued by a bank or trust company organized under the laws of the United States of America or a State thereof (a "United States Bank") and having a combined capital surplus in excess of $250,000,000; or (iv) demand deposits with any United States Bank or any federal savings and loan institution having a combined capital surplus in excess of $250,000,000. Any loss on any such investment, including, without limitation, any penalty for any liquidation required to fund a disbursement, shall be borne pro rata by the parties in proportion to their ultimate entitlement to the MFN Escrow Amount. The MFN Escrow Agent's fees and all expenses, including taxes and other related costs, shall, to the extent possible, be paid out of income earned. Whenever the MFN Escrow Agent shall pay all or any part of the MFN Escrow Amount to any party as provided herein, the MFN Escrow Agent shall also pay to such party all interest and profits earned to the date of payment on such amount, less deductions for fees and all expenses, including taxes and other related fees. SECTION 4. Release of the MFN Escrow Amount. After receipt, the MFN Escrow Agent shall deliver the MFN Escrow Amount as set forth below: (a) Following receipt of written notice signed by counsel for the MFN Settling Defendants certifying that such notice has been delivered by counsel for the MFN Settling Defendants to all parties hereto and stating that the Court has not approved the Stipulation of Amendment as provided in paragraph 17 thereof or that the Court's approval has been modified in any respect unacceptable to any of the parties thereto or set aside on appeal, the MFN Escrow Agent shall upon the expiration of ten (10) business days following the MFN Escrow Agent's receipt of such notice disburse the entire MFN Escrow Amount (including any interest thereon, as provided in Section 3) to the MFN Settling Defendants on the same pro rata basis as such funds were contributed to the MFN Escrow Account. 3 EXHIBIT 2 (b) Upon receipt of (i) written notice signed by counsel for the MFN Settling Defendants and counsel for the State of Florida stating that the Availability Date has occurred and (ii) an order of the Court pursuant to applicable Florida law so directing, the MFN Escrow Agent shall proceed to distribute the MFN Escrow Amount in accordance with such Court order. (c) For its services, the MFN Escrow Agent shall receive fees in accordance with the MFN Escrow Agent's customary fees in similar matters. All such fees shall constitute a direct charge against the MFN Escrow Amount, but the MFN Escrow Agent shall not debit the MFN Escrow Amount for any such charge until it shall have presented its statement to and received approval by counsel for the MFN Settling Defendants and counsel for the State of Florida, which approval shall not be unreasonably withheld. Such approval shall be deemed given if the MFN Escrow Agent has not received written objections from either counsel for MFN Settling Defendants or counsel for the State of Florida within 30 days after presentment of its statement. Such fees and all expenses charged against the MFN Escrow Amount shall, to the extent possible, be paid out of interest earned. In the event that counsel for MFN Settling Defendants or counsel for the State of Florida objects in writing to such fees, the MFN Escrow Agent shall not debit the MFN Escrow Amount except upon a court order approving such fees. SECTION 5. Substitute Form W-9; Qualified Settlement Fund. Each of the signatories to this MFN Escrow Agreement shall provide the MFN Escrow Agent with a correct taxpayer identification number on a substitute Form W-9 within 90 days of the date hereof and indicate thereon that it is not subject to backup withholding. It is anticipated that the MFN Escrow Account established pursuant to this MFN Escrow Agreement shall be treated as a Qualified Settlement Fund for federal tax purposes pursuant to Treas. Reg. Section 1.468B-1. SECTION 6. Termination of MFN Escrow Account. This MFN Escrow Agreement (other than the MFN Escrow Agent's right to indemnification set forth in Section 7) shall terminate when the MFN Escrow Agent shall have released from the MFN Escrow Account all amounts pursuant to Section 4 hereof. 4 EXHIBIT 2 SECTION 7. MFN Escrow Agent. (a) The MFN Escrow Agent shall have no duty or obligation hereunder other than to take such specific actions as are required of it from time to time under the provisions hereof, and it shall incur no liability hereunder or in connection herewith for anything whatsoever other than as a result of its own negligence or willful misconduct. In the event the MFN Escrow Agent fails to receive the instructions contemplated by Section 4 hereof or receives conflicting instructions, the MFN Escrow Agent shall be fully protected in refraining from acting until such instructions are received or such conflict is resolved by written agreement or court order. (b) MFN Settling Defendants, on the same pro rata basis as the funds constituting the MFN Escrow Amount were contributed to the MFN Escrow Account, agree to indemnify, hold harmless and defend the MFN Escrow Agent from and against any and all losses, claims, liabilities and reasonable expenses, including the reasonable fees of its counsel, which it may suffer or incur hereunder or in connection herewith prior to the Availability Date, except such as shall result solely and directly from its own negligence or willful misconduct. The MFN Escrow Agent shall not be bound in any way by any agreement or contract between MFN Settling Defendants and the State of Florida (whether or not the MFN Escrow Agent has knowledge thereof) and the only duties and responsibilities of the MFN Escrow Agent shall be to hold and invest the MFN Escrow Amount received hereunder and to release such MFN Escrow Amount in accordance with the terms of this MFN Escrow Agreement. (c) The MFN Escrow Agent may resign at any time by giving written notice thereof to the other parties hereto, but such resignation shall not become effective until a successor MFN Escrow Agent, selected by the MFN Settling Defendants and agreeable to the State of Florida, shall have been appointed and shall have accepted such appointment in writing. If an instrument of acceptance by a successor MFN Escrow Agent shall not have been delivered to the MFN Escrow Agent within 30 days after the giving of such notice of resignation, the resigning MFN Escrow Agent may, at the expense of MFN Settling Defendants and the State of Florida (to be shared equally between the State of Florida and the MFN Settling Defendants), petition the Court for the appointment of a successor MFN Escrow Agent. 5 EXHIBIT 2 (d) Upon the Availability Date having occurred, provided that MFN Settling Defendants have performed all of their obligations required to be performed prior to the Availability Date, all duties and obligations of MFN Settling Defendants hereunder shall cease, with the exception of any indemnification obligation of MFN Settling Defendants incurred prior to the Availability Date. SECTION 8. Miscellaneous. (a) Notices. All notices or other communications to any party or other person hereunder shall be in writing (which shall include telex, telecopy or similar writing) and shall be given to the respective parties or persons at the following addresses. Any party or person may change the name and address of the person designated to receive notice on behalf of such party or person by notice given as provided in this paragraph. State of Florida: ----------------- Hon. Robert A. Butterworth Attorney General's Office The Capitol Suite PL01 Tallahassee, FL 32399-1050 Fax: (850) 413-0632 With a copy to: --------------- Joseph F. Rice, Esq. Ness, Motley, Loadholt, Richardson & Poole 151 Meeting Street, Suite 600 Charleston, SC 29402 Fax: (843) 720-9290 MFN Settling Defendants: ------------------------ For Philip Morris Incorporated: ------------------------------- Martin J. Barrington Philip Morris Incorporated 120 Park Avenue New York, NY 10017-5592 6 EXHIBIT 2 Fax: (212) 907-5399 With a copy to: --------------- Meyer G. Koplow Wachtell, Lipton, Rosen & Katz 51 West 52nd Street New York, NY 10019 Fax: (212) 403-2000 For R.J. Reynolds Tobacco Company --------------------------------- Charles A. Blixt R.J. Reynolds Tobacco Company 401 North Main Street Winston-Salem, NC 27102 Fax: (336) 741-2998 With a copy to: --------------- Arthur F. Golden Davis Polk & Wardwell 450 Lexington Avenue New York, NY 10017 Fax: (212) 450-4800 For Brown & Williamson Tobacco Corporation: ------------------------------------------- Michael Walter Brown & Williamson Tobacco Corporation 200 Brown & Williamson Tower 401 South Fourth Avenue Louisville, KY 40202 Fax: (502) 568-7187 With a copy to: --------------- F. Anthony Burke Brown & Williamson Tobacco Corporation 200 Brown & Williamson Tower 401 South Fourth Avenue Louisville, KY 40202 Fax: (502) 568-7297 7 EXHIBIT 2 For Lorillard Tobacco Company: ------------------------------ Arthur J. Stevens Lorillard Tobacco Company 714 Green Valley Road Greensboro, NC 27408 Fax: (336) 335-7707 MFN Escrow Agent: ----------------- [Bank] [Bank Address] Phone: Fax: Wire Transfer Instructions: ABA #: Account #: Account Name: (b) Successors and Assigns. The provisions of this MFN Escrow Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. (c) Governing Law. This MFN Escrow Agreement shall be construed in accordance with and governed by the laws of the State of Florida, without regard to the conflicts of law rules of such state. (d) Jurisdiction and Venue. The parties hereto irrevocably and unconditionally submit to the jurisdiction of the United States District Court for the Southern District of New York for purposes of any suit, action or proceeding seeking to enforce any provision of, or based on any right arising out of, this MFN Escrow Agreement, and the parties hereto agree not to commence any such suit, action or proceeding except in such court. The parties hereto hereby irrevocably and unconditionally waive any objection to the laying of venue of any such suit, action or proceeding in such court and hereby further irrevocably waive and agree not to plead or claim in such court that any such suit, action or proceeding has been brought in an inconvenient forum. 8 EXHIBIT 2 (e) Definitions. Terms used herein that are defined in the Settlement Agreement or the Stipulation of Amendment are, unless otherwise defined herein, used in this MFN Escrow Agreement as defined in the Settlement Agreement or the Stipulation of Amendment, as appropriate. (f) Amendments. This MFN Escrow Agreement may be amended only by written instrument executed by all parties hereto. The waiver of any rights conferred hereunder shall be effective only if made by written instrument executed by the waiving party. The waiver by any party of any breach of this MFN Escrow Agreement shall not be deemed to be or construed as a waiver of any other breach, whether prior, subsequent or contemporaneous, of this MFN Escrow Agreement. (g) Counterparts; Effectiveness. This MFN Escrow Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This MFN Escrow Agreement shall become effective when each party hereto shall have signed a counterpart hereof. Delivery by facsimile of a signed agreement shall be deemed delivery for purposes of acknowledging acceptance hereof; however, an original executed signature page must promptly thereafter be appended to this MFN Escrow Agreement, and an original executed agreement shall promptly thereafter be delivered to each party hereto. (h) Captions. The captions herein are included for convenience of reference only and shall be ignored in the construction and interpretation hereof. 9 EXHIBIT 2 IN WITNESS WHEREOF, the parties have executed this MFN Escrow Agreement as of the day and year first hereinabove written. STATE OF FLORIDA By: ----------------------------------------- Robert A. Butterworth Attorney General PHILIP MORRIS INCORPORATED By: ----------------------------------------- Meyer G. Koplow Counsel R.J. REYNOLDS TOBACCO COMPANY By: ----------------------------------------- Arthur F. Golden Counsel 10 EXHIBIT 2 BROWN & WILLIAMSON TOBACCO CORPORATION By: ----------------------------------------- Stephen R. Patton Counsel LORILLARD TOBACCO COMPANY By: ----------------------------------------- Arthur J. Stevens Senior Vice President & General Counsel _________________ [BANK], as MFN Escrow Agent By: ----------------------------------------- Name: Title: 11 EX-10.2 3 EXHIBIT 10.2 Exhibit 10.2 FLORIDA FEE PAYMENT AGREEMENT This Florida Fee Payment Agreement (the "Agreement") is entered into as of September 11, 1998, by and among Philip Morris Incorporated, R.J. Reynolds Tobacco Company, Brown & Williamson Tobacco Corporation, Lorillard Tobacco Company and United States Tobacco Company (collectively and severally "Settling Defendants" and each individually a "Settling Defendant"), the State of Florida and those Florida Counsel (as identified by the Governor pursuant to section 24 hereof) that with the written consent of the State of Florida are, or at any time prior to December 15, 1998 become, signatories hereto ("Participating Florida Counsel"). WITNESSETH: WHEREAS, on August 25, 1997, the State of Florida and Settling Defendants entered into a comprehensive settlement agreement to settle and resolve with finality all present and future civil claims relating to the subject matter of the lawsuit State of Florida v. American Tobacco Co., No. 95-1466 AH (15th Jud. Cir., Palm Beach County) (the "Action"), which settlement agreement (the "Settlement Agreement") was approved by the Circuit Court for Palm Beach County (the "Court") and adopted as an enforceable order of the Court pursuant to Court Order dated August 25, 1997; WHEREAS, section V of the Settlement Agreement provides that Settling Defendants shall pay reasonable attorneys' fees to private counsel for the State of Florida, in an amount set by arbitration, subject to an appropriate annual cap on all such payments of attorneys' fees by Settling Defendants, as well as other conditions; WHEREAS, section V of the Settlement Agreement did not and was not intended to reflect the entire agreement of Settling Defendants and the State of Florida as to the procedures and conditions that would govern Settling Defendants' payment of fees to private counsel retained by the State of Florida in connection with the Action ("Florida Counsel"), including an agreed specific annual aggregate national cap on all payments of attorneys' fees and certain other professional fees by Settling Defendants, as well as other essential terms; WHEREAS, section IV of the Settlement Agreement contains a "Most Favored Nation" clause which provides that, in the event that Settling Defendants enter into a future pre-verdict settlement agreement of other litigation brought by a non-federal governmental plaintiff on terms more favorable to such governmental plaintiff than the terms of the Settlement Agreement (after due consideration of relevant differences in population or other appropriate factors), the terms of the Settlement Agreement shall be revised so that the State of Florida will obtain treatment at least as relatively favorable as any such non-federal governmental entity; WHEREAS, on January 16, 1998, Settling Defendants entered into a pre-verdict settlement agreement with the State of Texas, which sets forth the terms of Settling Defendants' agreement to pay attorneys' fees to private counsel for the State of Texas and includes provisions for advances on such attorneys' fees by Settling Defendants and the State of Texas; WHEREAS, on May 8, 1998, certain Settling Defendants entered into a pre-verdict settlement agreement with the State of Minnesota (the "Minnesota Settlement"), which includes provisions for payment of attorneys' fees to private counsel for the State of Minnesota; WHEREAS, on September 11, 1998, Settling Defendants and the State of Florida entered into a Stipulation of Amendment to Settlement Agreement and for Entry of Consent Decree (the "Stipulation of Amendment") to resolve any disputes with respect to the Most Favored Nation clause of the Settlement Agreement, including any disputes regarding payment of attorneys' fees, in light of the Texas and Minnesota Settlements; and WHEREAS, Settling Defendants, the State of Florida and Participating Florida Counsel, in order to resolve any disputes with respect to sections IV and V of the Settlement Agreement, and to describe more fully the procedures that will govern Settling Defendants' payment of fees to Florida Counsel, have agreed to the terms of this Agreement: NOW, THEREFORE, BE IT KNOWN THAT, in consideration of their mutual agreement to the terms of this Agreement, the State of Florida's and Settling Defendants' mutual agreement to the terms of the Stipulation of Amendment, and such other consideration described herein, including the release of certain claims against Settling Defendants, the sufficiency of which is hereby acknowledged, the parties hereto, acting by and through their authorized agents, memorialize and agree as follows: 2 SECTION 1. Agreement to Pay Fees. Settling Defendants will pay reasonable attorneys' fees pursuant to this Agreement to those Florida Counsel (as identified by the Governor pursuant to section 24 hereof) that are Participating Florida Counsel for their representation of the State of Florida in connection with the Action. The amount of such fees will be set by a panel of three independent arbitrators (the "Panel") whose decisions as to the amount of fees to be paid in connection with this Agreement ("Fee Award(s)") shall be final and not appealable. The procedures governing Settling Defendants' obligation to pay any such Fee Awards, including the procedures for making, and the timing and amounts of payments in satisfaction of, such Fee Awards shall be as provided herein. SECTION 2. Aggregate National Caps on Payment of Certain Fees. Settling Defendants' payment of any Fee Award pursuant to this Agreement shall be subject to the payment schedule and the annual and quarterly aggregate national caps specified in sections 15, 16, 17, 18 and 19 hereof, which shall apply to: (a) all payments of attorneys' fees pursuant to an award arbitrated by the Panel ("Fee Award") in connection with the settlement of any tobacco and health cases (other than non-class action personal injury cases brought directly by or on behalf of a single natural person or the survivor of such person or for wrongful death, or any non-class action consolidation of two or more such cases) ("Tobacco Cases") on terms that provide for payment by Settling Defendants or other defendants acting in agreement with Settling Defendants (collectively, "Participating Defendants") of fees with respect to private counsel retained by the plaintiff in connection with any such case ("Private Counsel"), subject to an annual cap on payment of all such fees; (b) all payments of attorneys' fees (other than fees for attorneys of Participating Defendants) pursuant to a Fee Award for activities in connection with Tobacco Cases resolved by operation of federal legislation that either (i) implements the terms of the June 20, 1997 Proposed Resolution (or a substantially equivalent federal program) (the "Proposed Resolution") or (ii) imposes an enforceable obligation on Participating Defendants to pay attorneys' fees with respect to Private Counsel (any such legislation hereinafter referred to as "Federal Legislation"); and 3 (c) all payments of attorneys' fees and certain other professional fees (other than fees for attorneys or agents of Participating Defendants) pursuant to a Fee Award for contributions made toward enacted Federal Legislation. In the event that Federal Legislation is enacted, the terms "Private Counsel" and "Eligible Counsel" shall apply not only to persons otherwise falling within the definitions of such terms herein but also to all persons granted Fee Awards for such contributions (such persons being Eligible Counsel with respect to each month beginning with the month the Federal Legislation was enacted). Nothing in this Agreement shall be construed to require any Settling Defendant to pay Fee Awards in connection with any litigation other than the Action. SECTION 3. Exclusive Obligation of Settling Defendants; Releases; Effective Date. (a) The provisions set forth herein constitute the entire obligation of Settling Defendants with respect to payment of attorneys' fees in connection with the Action and the exclusive means by which Florida Counsel may seek payment of fees by Settling Defendants in connection with the Action. The parties hereto acknowledge that the provisions for payment set forth herein are the entirety of Settling Defendants' obligations with respect to payment of attorneys' fees pursuant to section V of the Settlement Agreement. The State of Florida agrees that Settling Defendants have no obligation to pay attorneys' fees pursuant to section V of the Settlement Agreement with respect to any counsel other than Participating Florida Counsel and that Settling Defendants have no other obligation to pay fees or otherwise compensate Florida Counsel, any other counsel or representative of the State of Florida or the State of Florida itself with respect to attorneys' fees in connection with the Action. (b) Each Participating Florida Counsel hereby irrevocably releases Settling Defendants and their respective present and former parents, subsidiaries, divisions, affiliates, officers, directors, employees, representatives, insurers, agents and attorneys (as well as the predecessors, heirs, executors, administrators, successors and assigns of each of the foregoing) from any and all claims that such counsel ever had, now has or hereafter can, shall or may have in any way related to the Action (including but not limited to any negotiations related to the settlement of the Action). The foregoing shall not be construed as a release of any person or entity as to any of the obligations undertaken in this Agreement in connection with a breach thereof. 4 (c) Each Participating Florida Counsel hereby irrevocably releases all of the State of Florida's present and former salaried employees, officials and officers, elected representatives, in-house attorneys and agents, special assistant attorneys general and each other Participating Florida Counsel (as well as the predecessors, heirs, executors, administrators, successors and assigns of each of the foregoing) from any and all claims for personal liability that such counsel ever had, now has or hereafter can, shall or may have in any way related to the Action (including but not limited to any negotiations related to the settlement of the Action). The foregoing shall not be construed as a release of any person or entity as to any of the obligations undertaken in this Agreement in connection with a breach thereof. (d) This Agreement shall become effective upon (i) its execution by (A) the authorized representatives of each Settling Defendant, (B) the Attorney General and the Governor on behalf of the State of Florida and (C) the authorized representatives of at least eight of those Florida Counsel identified as Contract Counsel by the Governor pursuant to section 24 hereof, or such lesser number of such counsel as Settling Defendants (in their sole discretion) deem sufficient and (ii) the expiration of three business days after its presentation for signature to each Contract Counsel (the first date upon which all such conditions shall have been satisfied being the "Effective Date"). SECTION 4. No Effect on Certain Florida Counsel's Contingent-Fee Contract. The State of Florida has entered into a contingent-fee contract (the "Contract") with certain Florida Counsel ("Contract Counsel"). The rights and obligations, if any, of Contract Counsel that are parties hereto ("Participating Contract Counsel") and the State of Florida under the Contract shall not be affected by this Agreement, except that any payments received by Participating Contract Counsel pursuant to this Agreement shall be credited against any amounts that may be due to such Contract Counsel from the State of Florida under the Contract. The State of Florida's execution of this Agreement shall not be deemed a waiver of any defense to any claim under the Contract, including without limitation any defense that the Contract is void ab initio, that payments under the Contract are subject to prior legislative appropriation, that claims under the Contract are subject to sovereign immunity, that any proposed application of the Contract is invalid, that the Contract is subject to a subsequent novation or that Contract Counsel must act collectively under the Contract. 5 SECTION 5. Composition of the Panel. (a) The first and the second members of the Panel shall both be permanent members of the Panel and, as such, will participate in the determination of all Fee Awards. The third Panel member shall not be a permanent Panel member, but instead shall be a state-specific member selected to determine Fee Awards on behalf of Private Counsel retained in connection with litigation within a single state. Accordingly, the third, state-specific member of the Panel for purposes of determining Fee Awards with respect to litigation in the State of Florida shall not participate in any determination as to any Fee Award with respect to litigation in any other state (unless selected to participate in such determinations by such persons as may be authorized to make such selections under other agreements). (b) The members of the Panel shall be selected as follows: (i) The first member shall be a natural person selected by Participating Defendants, who shall advise Participating Florida Counsel of the name of the person selected by October 8, 1998. (ii) The second member shall be a natural person selected by agreement of Participating Defendants and a majority of the members of a committee composed of the following members: Joseph F. Rice, Richard F. Scruggs, Steven W. Berman, Walter Umphrey, two representatives of the Castano Plaintiffs' Legal Committee and, at the option of Participating Defendants, one additional representative to serve on behalf of counsel for any one or more states that, subsequent to the date hereof, enter into settlement agreements with Participating Defendants that provide for payment of such states' Private Counsel pursuant to an arbitrated award of fees; such second member shall be selected by October 1, 1998. (iii) The third, state-specific member for purposes of determining Fee Awards with respect to litigation in the State of Florida shall be a natural person selected by Participating Contract Counsel, who shall notify Settling Defendants of the name of the person selected by October 15, 1998. SECTION 6. Commencement of Panel Proceedings. No application for a Fee Award shall be presented to the Panel or any Panel member until November 3, 1998. The Panel shall consider and render 6 decisions on applications for Fee Awards in the order in which they are submitted or pursuant to notice by counsel having priority that they have ceded their place to others. In the event that more than one application for a Fee Award is submitted on the same date, the Panel shall consider and render decisions on such applications in the order in which their respective cases were settled. Counsel may seek permission from the Panel to make combined presentations of aspects of their respective applications. Settling Defendants shall not oppose any request to combine presentations of applications for Fee Awards in connection with the Action, the lawsuit In re Mike Moore, Attorney General, ex rel. State of Mississippi Tobacco Litig., No. 94-1429 (Miss. Ch. Ct., Jackson County), or the lawsuit State of Texas v. American Tobacco Co., No. 5-96CV-91 (E.D. Tex. filed Mar. 28, 1996). SECTION 7. Costs of Arbitration. All costs and expenses of the arbitration proceedings held by the Panel, including compensation of Panel members (but not including any costs, expenses or compensation of counsel making applications to the Panel), shall be borne by Settling Defendants in proportion to their respective Market Shares. SECTION 8. Application on Behalf of Contract Counsel. Participating Contract Counsel shall make a collective written application to the Panel for a single Fee Award on behalf of all Contract Counsel (the "Contract Counsel Award") on November 3, 1998. All interested persons, including persons not parties hereto, may submit to the Panel any information that they wish; but interested persons not parties hereto may submit only written materials. The Panel shall consider all such submissions by any party hereto and may consider any such materials submitted by other interested persons. All written submissions relating to applications for a Fee Award in connection with the Action shall be served on all parties hereto by November 13, 1998. Presentations to the Panel shall, to the extent possible, be based on affidavit or video presentation rather than live testimony. The Panel shall preserve the confidentiality of any attorney work-product materials or other similar confidential information that may be submitted. Settling Defendants will not take any position adverse to the amount of the Fee Award requested by Participating Contract Counsel, nor will they or their representatives express any opinion (even upon request) as to the appropriateness or inappropriateness of the amount of any proposed Contract Counsel Award. The undersigned outside counsel for Settling Defendants Philip Morris Incorporated and R.J. Reynolds Tobacco Company will appear, if requested, to provide information as to the nature and efficacy of the 7 work of Contract Counsel and to advise the Panel that they support a Contract Counsel Award of full reasonable compensation under the circumstances. SECTION 9. Award of Fees to Contract Counsel. The members of the Panel will consider all relevant information submitted to them in reaching a decision as to a Fee Award that fairly provides for full reasonable compensation of Contract Counsel for their representation of the State of Florida in connection with the Action. The Panel shall determine and report the amount of the Contract Counsel Award for all Contract Counsel collectively no later than December 10, 1998. Given the significance and uniqueness of the Action, the Panel shall not be limited to an hourly-rate or lodestar analysis in determining the amount of the Contract Counsel Award, but shall take into account the totality of the circumstances. In considering the amount of the Contract Counsel Award, the Panel shall not consider Fee Awards that already have been or yet may be awarded in connection with any other Tobacco Cases. The Panel's decisions as to Fee Awards shall be in writing and shall report the amount of the fee awarded (with or without explanation or opinion, at the Panel's discretion). SECTION 10. Application of Other Participating Florida Counsel, If Any. Participating Florida Counsel other than Contract Counsel ("Other Participating Florida Counsel"), if any, may submit applications for Fee Awards separate from Participating Contract Counsel. The procedures, schedule and process with respect to any such application on behalf of any such Other Participating Florida Counsel shall be the same as the procedures, schedule and process set forth in sections 6, 7, 8 and 9 hereof with respect to the fee application on behalf of Contract Counsel, except that Settling Defendants shall be in no way constrained from contesting any Other Participating Florida Counsel's entitlement to receive a Fee Award or the amount of any Fee Award requested on behalf of any such counsel. Any Other Participating Florida Counsel that does not submit an application for a Fee Award on or before November 3, 1998 shall have thereby irrevocably waived any opportunity for payment of attorneys' fees pursuant to this Agreement. SECTION 11. Allocations Among Participating Contract Counsel. (a) All payments (including advances) made by Settling Defendants with respect to the Contract Counsel Award pursuant to this Agreement ("Contract Counsel Payments") shall be subject to reduction as provided in 8 section 12 hereof and shall be paid in the first instance to C. David Fonvielle, Esq. (or such other person designated in writing by Participating Contract Counsel), on behalf of Participating Contract Counsel. Any Contract Counsel that is a Participating Contract Counsel as of five business days prior to the date of any Contract Counsel Payment shall be entitled to receive a percentage share of such payment ("Payment Share") equal to the proportion of (i) the percentage of any fee recovery allocated to such Participating Contract Counsel under the terms of the fee-sharing agreement among Contract Counsel (or any written amendment thereto) (such percentage being such Contract Counsel's "Fee Percentage") to (ii) the sum of the Fee Percentages of all Participating Contract Counsel. Settling Defendants and the State of Florida shall have no obligation, responsibility or liability with respect to the allocation among Participating Contract Counsel, or with respect to any claim of misallocation, of any amounts of any Contract Counsel Payment. Any Contract Counsel not a party hereto as of five days prior to the date of any Contract Counsel Payment ("Non-Participating Contract Counsel") shall not be entitled to share in such payment. (b) P. Tim Howard and Howard & Associates (collectively, "Howard") have claimed entitlement to attorneys' fees on a contingent-fee basis under the Contract, which claim has been contested by certain Contract Counsel and the State of Florida. In order to protect Howard's interest (if any) in any Contract Counsel Payment, the parties hereto agree as follows: (i) Until such time as either (A) all of the conditions described in paragraph (ii) of this subsection have been satisfied or (B) any one or more of the conditions described in paragraph (iii) of this subsection have been satisfied, Howard shall be assigned a Payment Share of any Contract Counsel Payment(s), such share(s) to be held in escrow by C. David Fonvielle, Esq. (the "Howard Escrow Share"). The Fee Percentage used to determine any Payment Share(s) assigned to Howard for purposes of this paragraph shall be equal to 8.33%. (ii) In the event that (A) Howard is conclusively determined to entitled to attorneys' fees on a contingent-fee basis under the Contract by the court of last resort to which such question may be presented; and (B) prior to December 15, 1998, Howard has both consented to payment of attorneys' fees pursuant to the terms of this Agreement and granted releases identical to the releases granted by Participating Florida Counsel pursuant to section 3 hereof; and (C) prior to December 15, 1998, the State of Florida has consented in writing to payment of attorneys' fees to Howard pursuant to the terms of this Agreement, then: (1) Howard shall 9 be treated as Participating Contract Counsel for purposes of this Agreement; and (2) on the date upon which all of the conditions described above in this paragraph shall have been satisfied, Howard shall be entitled to receive from the Howard Escrow Share an amount equal to the Payment Share of any Contract Counsel Payment(s) made prior to such date that Howard would be entitled to receive pursuant to subsection (a) of this section in light of Howard's actual Fee Percentage determined by such court ("Howard's Actual Payment Share"). If Howard's Actual Payment Share is less than the Howard Escrow Share, each Participating Contract Counsel (other than Howard) shall be entitled to receive a percentage of the difference between the amount of Howard's Escrow Share and Howard's Actual Payment Share equal to its respective Fee Percentage, with the remainder, if any, to be returned to Settling Defendants in proportion to their respective contributions toward such amount. If Howard's Actual Payment Share is greater than the Howard Escrow Share, Participating Contract Counsel (other than Howard) shall be obligated to pay to Howard an amount sufficient to ensure that Howard receives Howard's Actual Payment Share. (iii) In the event that (A) Howard is conclusively determined not to be entitled to attorneys' fees on a contingent-fee basis under the Contract by the court of last resort to which such question may be presented; or (B) as of close of business on December 14, 1998, Howard has not both consented to payment of attorneys' fees pursuant to the terms of this Agreement and granted releases identical to the releases granted by Participating Florida Counsel pursuant to section 3 hereof; or (C) as of close of business on December 14, 1998, the State of Florida has not consented in writing to payment of attorneys' fees to Howard pursuant to the terms of this Agreement, then: (1) Howard shall not be treated as Participating Contract Counsel or Participating Florida Counsel for purposes of the payment provisions of this Agreement and shall not be entitled to receive any part of the Howard Escrow Share; and (2) on the date upon which any one or more of the conditions described above in this paragraph shall have been satisfied, each Participating Contract Counsel shall be entitled to receive a percentage of the amount of the Howard Escrow Share equal to its respective Fee Percentage, with the remainder, if any, to be returned to Settling Defendants in proportion to their respective contributions toward such amount. (c) Each Participating Contract Counsel hereby irrevocably agrees to indemnify and hold harmless Settling Defendants and the State of Florida, up to 10 any amounts allocable to such Participating Contract Counsel pursuant to this Agreement, for any and all losses (including costs and attorneys' fees) they may at any time incur as a result of any claim (i) by Howard relating to attorneys' fees (other than a claim for payment of attorneys' fees by Settling Defendants pursuant to the terms of this Agreement); (ii) by any private counsel party to the Contract for alleged damages or other losses as a result of the allocation of any Contract Counsel Payment in accordance with the certification described in section 12(a) hereof; or (iii) by any party to any referral agreement or other compensation arrangement entered with such Participating Contract Counsel in connection with, or otherwise relating to, the Action. SECTION 12. Participation by Fewer than All Contract Counsel. In the event that fewer than all Contract Counsel are Participating Contract Counsel as of five business days prior to the date of any Contract Counsel Payment: (a) The Fee Percentage of each Non-Participating Contract Counsel shall be certified to Settling Defendants in writing by Participating Contract Counsel, at least four business days prior to the date of the Contract Counsel Payment. Settling Defendants and the State of Florida shall have no obligation, responsibility or liability with respect to any such certification. (b) The amount of the Contract Counsel Payment shall be reduced by a percentage equal to the sum of the Fee Percentages of Non-Participating Contract Counsel provided to Settling Defendants pursuant to subsection (a) of this section. Settling Defendants and the State of Florida shall have no obligation, responsibility or liability with respect to the amount of any such reduction. The amount of any reduction in the amount of any Contract Counsel Payment made pursuant to this subsection shall be retained by Settling Defendants. (c) In the event that (i) the State of Florida pays attorneys' fees in connection with the Action to any Non-Participating Contract Counsel and (ii) Settling Defendants have been released by such Non-Participating Contract Counsel to the extent provided in section 3 hereof or the State's payment of attorneys' fees is pursuant to a non-consensual final judgment against the State (as to which all appeals have been exhausted) and such judgment has resolved and satisfied all asserted and potential claims of such Non-Participating Contract Counsel for compensation pursuant to the Contract or otherwise in connection with the Action (including any claims against Settling Defendants, without any liability on the part of Settling Defendants, or any of them), the State of Florida 11 shall be entitled to receive from Settling Defendants the amount of any reduction pursuant to subsection (b) of this section in the amount of any Contract Counsel Payment as a result of such counsel's being a Non-Participating Contract Counsel, up to the amount actually paid to such Non-Participating Contract Counsel by the State of Florida. SECTION 13. Advance on Payment of Fees. Within five business days of the Effective Date, each Settling Defendant shall severally pay to Contract Counsel, pro rata in proportion to its Market Share indicated on Schedule A hereto and subject to reduction pursuant to section 12 hereof, its respective share of $100 million, as an advance against later Contract Counsel Payments to be credited as provided in section 19 hereof. The Attorney General, on behalf of the State of Florida, hereby represents and warrants that the advance to be paid by Settling Defendants pursuant to this section and all other payments by Settling Defendants described in this Agreement are not funds of the State of Florida and are not subject to appropriation by the State of Florida pursuant to 1998 Fla. Sess. Law Serv. Ch. 98-63 (C.S.S.B. 1270) (West) and that Settling Defendants are under no obligation to pay such advance or payments to the State of Florida. Settling Defendants' obligations with respect to payment of such advance and all other payments described in this Agreement are expressly conditioned upon the continuing accuracy of the foregoing representation and warranty of the Attorney General. SECTION 14. Waiver of Fee Payments. Any Participating Contract Counsel that at any time waives, abandons or otherwise relinquishes its right to payment of attorneys' fees pursuant to this Agreement ("Waiving Counsel") shall not be entitled to payment of attorneys' fees pursuant to this Agreement under any circumstances. Each Waiving Counsel shall be treated for purposes of the payment provisions of this Agreement as Non-Participating Contract Counsel and not as Participating Contract Counsel (notwithstanding its being a signatory hereto). SECTION 15. Annual Amount for 1997; Allocation. (a) For 1997, Settling Defendants shall pay, subject to reduction pursuant to section 12 hereof and in the manner described in section 17 hereof, the unsatisfied amount of the Fee Award (without regard to the advance described in section 13 hereof) (the "Unpaid Fees") of Florida Counsel, and those Participating Defendants so obligated shall make payments with respect to the Unpaid Fees of 12 Private Counsel retained in connection with the lawsuits In re Mike Moore, Attorney General, ex rel. State of Mississippi Tobacco Litig., No. 94-1429 (Miss. Ch. Ct., Jackson County), and Mangini v. R.J. Reynolds Tobacco Co., No. 939359 (Cal. Super. Ct., San Francisco County), in an amount not to exceed $250 million for all payments described in this subsection. (b) In the event that the sum of the Unpaid Fees of those Private Counsel identified in subsection (a) of this section exceeds $250 million, such amount shall be allocated among the payments to be made with respect to such Private Counsel in proportion to the amount of their respective Unpaid Fees (the amount so allocated with respect to the Unpaid Fees of each such Private Counsel being such counsel's "Allocable Share" for 1997). SECTION 16. Annual Amount for 1998; Allocation. (a) For 1998, Settling Defendants shall pay, subject to reduction pursuant to section 12 hereof and in the manner described in section 17 hereof, the Unpaid Fees of Florida Counsel, and those Participating Defendants so obligated shall make payments with respect to the Unpaid Fees of all other Private Counsel, in an amount not to exceed $500 million for all such payments described in this subsection. (b) The amount payable by Settling Defendants with respect to each Fee Award for 1998 shall be determined as follows: The $500 million annual cap for 1998 shall be allocated equally among each month of the year. Except as provided in section 17(b) hereof, each monthly amount shall be allocated to those Private Counsel retained in connection with Tobacco Cases settled by Participating Defendants or resolved by Federal Legislation before or during such month, up to the amounts of their respective Unpaid Fees (such counsel being "Eligible Counsel" with respect to such monthly amount). In the event that the monthly amount is less than the sum of Eligible Counsel's Unpaid Fees, the monthly amount shall be allocated to Eligible Counsel in proportion to the amounts of their respective Unpaid Fees (the amount so allocated to each Eligible Counsel for a given month being such counsel's Allocable Share for such month, and the sum of each Private Counsel's Allocable Shares for each month being such counsel's Allocable Share for 1998). (c) Settling Defendants represent that, as of the date of this Agreement, the only Tobacco Cases (other than the Action) that have been settled by Participating Defendants on terms that allow for Private Counsel retained in connection with such cases to seek a Fee Award from the Panel are In re Mike 13 Moore, Attorney General, ex rel. State of Mississippi Tobacco Litig., No. 94-1429 (Miss. Ch. Ct., Jackson County), State of Texas v. American Tobacco Co., No. 5- 96CV-91 (E.D. Tex.), and Mangini v. R.J. Reynolds Tobacco Co., No. 939359 (Cal. Super. Ct., San Francisco County). In addition, Private Counsel retained in connection with Mangini v. Brown & Williamson Tobacco Corp., No. 993893 (Cal. Super. Ct., San Francisco County), may under the terms of the settlement in that action "apply to participate in any national, reasonable, 'public benefit' fee award or arbitration process created by a 'national settlement' or 'Congressional Resolution.'" SECTION 17. Payments with Respect to Annual Amounts for 1997 and 1998. (a) On or before December 21, 1998, each Settling Defendant shall severally pay, pro rata in proportion to its Market Share and subject to reduction pursuant to section 12 hereof, its share of an initial fee payment with respect to the Contract Counsel Award and the Fee Awards, if any, on behalf of Other Participating Florida Counsel (the "Initial Florida Fee Payment"), which shall include: (i) Florida Counsel's Allocable Share for 1997 as provided in section 15 hereof or, in the event that the Panel has not rendered Fee Awards with respect to all Private Counsel described in section 15(a) hereof as of December 10, 1998, Settling Defendants' reasonable estimation of Florida Counsel's Allocable Share for 1997; and (ii) Florida Counsel's Allocable Share for 1998 as provided in section 16 hereof for each month of 1998 except those with respect to which Florida Counsel's Allocable Share could not be determined as of December 10, 1998, as a result of there being other Eligible Counsel that, as of such date, had not yet been granted or denied a Fee Award by the Panel (either because such counsel's application for a Fee Award was still under consideration by the Panel or for any other reason). (b) On January 15, 1999, each Settling Defendant shall severally pay, pro rata in proportion to its Market Share and subject to reduction pursuant to section 12 hereof, its share of Florida Counsel's Allocable Share for those months of 1998 not included in the Initial Florida Fee Payment. Florida Counsel's Allocable Share for any such month shall be based on an allocation of the monthly amount among Eligible Counsel having Fee Awards as of December 31, 1998, without regard to whether there may be other Eligible Counsel that have not been granted or denied a Fee Award by the Panel as of such date. 14 (c) In the event that Settling Defendants pay an estimation of Florida Counsel's Allocable Share for 1997, as provided in subsection (a)(i) of this section, subsequent payments pursuant to this Agreement shall be adjusted to ensure that Florida Counsel receive their actual Allocable Share for 1997. (d) Notwithstanding any provision of this Agreement, individual Florida Counsel Scruggs, Millette, Bozeman & Dent, P.A. ("Scruggs, Millette") and Ness, Motley, Loadholt, Richardson & Poole ("Ness, Motley") agree to defer payment of the amounts of their respective Payments Shares of the Contract Counsel Payment due from Settling Defendant R.J. Reynolds Tobacco Company ("Reynolds") on December 21, 1998 insofar as necessary for the sum of all deferred amounts of any payments by Reynolds in 1998 with respect to Fee Awards to equal $62 million. Under no circumstances shall this subsection require any increase in any payment to be made by any other Settling Defendant. On January 5, 1999, Reynolds shall pay to Scruggs, Millette and Ness, Motley the amount, if any, of their respective Payment Shares of the Initial Florida Fee Payment deferred pursuant to this subsection. SECTION 18. Quarterly Amounts for 1999 and Subsequent Years; Allocation. Within 10 business days after the end of each calendar quarter beginning with the first calendar quarter of 1999, Settling Defendants shall pay, in the manner provided in subsection (d) of this section, the Unpaid Fees of Florida Counsel, and those Participating Defendants so obligated shall make payments with respect to the Unpaid Fees of all other Private Counsel, in an amount not to exceed $125 million for all such payments, as follows: (a) In the event that Federal Legislation has been enacted by the end of the calendar quarter with respect to which such quarterly payment is being made (the "Applicable Quarter"): (i) the quarterly amount shall be allocated among Private Counsel, up to the amount of their respective Unpaid Fees. Each Private Counsel shall be allocated an amount of each quarterly payment for the calendar year up to (or, in the eventthat the sum of such Private Counsel's Unpaid Fees exceeds the quarterly amount, in proportion to) the amount of such Private Counsel's Unpaid Fees. Each quarterly payment shall be allocated among Private Counsel having Unpaid Fees, without regard to whether there are other Private Counsel that have not yet been granted Fee Award by the Panel as of the end of the Applicable Quarter. 15 Subsequent quarterly payments shall be adjusted, if necessary, to account for Private Counsel that are granted Fee Awards in a subsequent quarter of the calendar year, as provided in paragraph (ii)(B) of this subsection. (ii) In the event that a quarterly payment for the calendar year is less than the sum of all Private Counsel's Unpaid Fees: (A) in the case of the first such quarterly payment, the quarterly amount shall be allocated among Private Counsel in proportion to the amounts of their respective Unpaid Fees. (B) in the case of a quarterly payment after the first quarterly payment that is less than the sum of all such Unpaid Fees, the quarterly amount shall be allocated only to those Private Counsel, if any, that were not paid a proportionate share of all prior quarterly payments for the calendar year (either because such Private Counsel's applications for Fee Awards were still under consideration as of the end of the calendar quarters with respect to which such quarterly payments were made or for any other reason), until each such Private Counsel has been allocated a proportionate share of all prior quarterly payments (each such share of each such Private Counsel being a "Payable Proportionate Share"). In the event that the sum of all Payable Proportionate Shares exceeds the amount of the quarterly payment, such payment shall be allocated among such Private Counsel in proportion to the amounts of their respective Unpaid Fees (without regard to whether there are other Private Counsel that have not yet been granted or denied a Fee Award by the Panel as of the end of the Applicable Quarter). In the event that the sum of all Payable Proportionate Shares is less than the amount of the quarterly payment, the amount by which the quarterly payment exceeds the sum of all such shares shall be allocated among Private Counsel up to (or, in the event that the sum of such Private Counsel's Unpaid Fees exceeds such amount, in proportion to) the amount of such Private Counsel's Unpaid Fees. (b) In the event that Federal Legislation has not been enacted by the end of the Applicable Quarter: (i) the quarterly amount shall be allocated equally among each of the three months of the calendar quarter. The amount for each such 16 month shall be allocated among those Private Counsel retained in connection with Tobacco Cases settled before or during such month (such Private Counsel being "Eligible Counsel" with respect to such monthly amount), each of whom shall be allocated a portion of each such monthly amount up to (or, in the event that the sum of Eligible Counsel's respective Unpaid Fees exceeds such monthly amount, in proportion to) the amount of such Eligible Counsel's Unpaid Fees. The monthly amount for each month of the calendar quarter shall be allocated among Eligible Counsel having Unpaid Fees, without regard to whether there may be Eligible Counsel that have not yet been granted or denied a Fee Award by the Panel as of the end of the Applicable Quarter. Subsequent quarterly payments shall be adjusted, as necessary, to account for Eligible Counsel that are granted Fee Awards in a subsequent quarter of the calendar year, as provided in paragraph (ii)(B) of this subsection. (ii) In the event that the amount for a given month is less than the sum of all Eligible Counsel's Unpaid Fees: (A) in the case of a first quarterly payment, such monthly amount shall be allocated among Eligible Counsel for such month in proportion to the amount of their respective Unpaid Fees. (B) in the case of a quarterly payment after the first quarterly payment, the quarterly amount shall be allocated among only those Private Counsel, if any, that were Eligible Counsel with respect to any monthly amount paid in a prior quarter of the calendar year but were not allocated a proportionate share of such monthly amount (either because such counsel's applications for Fee Awards were still under consideration as of the end of the calendar quarter containing the month in question or for any other reason), until each such Eligible Counsel has been allocated a proportionate share of all such prior monthly payments for the calendar year (each such share of each such Private Counsel being a "Payable Proportionate Share"). In the event that the sum of all Payable Proportionate Shares exceeds the amount of the quarterly payment, the quarterly payment shall be allocated among Eligible Counsel in proportion to the amounts of their respective Unpaid Fees (without regard to whether there may be other Eligible Counsel with respect to such prior monthly amounts that have not yet been granted or denied a Fee Award by the Panel as of the end of the Applicable Quarter). In the event that the sum of all Payable 17 Proportionate Shares is less than the amount of the quarterly payment, the amount by which the quarterly payment exceeds the sum of all such shares shall be allocated among each of the three months of the calendar quarter, and the amount for each month shall be allocated among each Eligible Counsel with respect to such monthly amount up to (or, in the event that the sum of Eligible Counsel's Unpaid Fees exceeds such monthly amount, in proportion to) the amount of such Eligible Counsel's Unpaid Fees. (c) Adjustments pursuant to paragraphs (a)(ii)(B) and (b)(ii)(B) of this section shall be made separately for each calendar year. No amounts paid in any calendar year shall be subject to refund, nor shall any payment in any given calendar year affect the allocation of payments to be made in any subsequent calendar year. (d) Each Settling Defendant shall severally pay, pro rata in proportion to its respective Market Share and subject to reduction pursuant to section 12 hereof, its share of the amounts, if any, allocated to Florida Counsel pursuant to this section. SECTION 19. Credits and Limitations. Notwithstanding any other provision of this Agreement: (a) The advance against future Contract Counsel Payments described in section 13 hereof shall be credited against and shall reduce subsequent Contract Counsel Payments, beginning with the first quarterly payment for 1999 pursuant to section 18 hereof, in an amount equal to 50% of the Contract Counsel Payment in question, until the advance paid by Settling Defendants is fully credited; provided, however, that the sum of all such credits applied in any calendar year with respect to the advance to Participating Contract Counsel described in section 13 hereof shall not exceed $50 million. The amount of any credit made against any such Contract Counsel Payment shall be counted in computing the annual and quarterly aggregate national caps on all payments made with respect to Private Counsel, in the amount of the credit applied to any such Contract Counsel Payment in any quarterly or annual period. All credits against Contract Counsel Payments pursuant to this subsection shall be allocated among Settling Defendants in proportion to their respective contributions toward the amounts of the advance described in section 13 hereof. 18 (b) Under no circumstances shall Settling Defendants be required to make payments that would result in aggregate national payments and credits by Participating Defendants with respect to Fee Awards: (i) for 1997, totaling more than $250 million; (ii) during 1998, totaling more than $500 million, except insofar as payments under the separate $250 million cap for 1997 are made in 1998 pursuant to section 17 hereof, and except insofar as advances are made in 1998 against payments due in years after 1998; (iii) during any year beginning with 1999, totaling more than $500 million, excluding payments with respect to any Private Counsel's Allocable Shares for 1998 that are paid in 1999; and (iv) during any calendar quarter beginning with the first calendar quarter of 1999, totaling more than $125 million, excluding payments with respect to any Private Counsel's Allocable Shares for 1998 that are paid in 1999 and except to the extent that payments and credits with respect to any prior quarter of the calendar year did not total $125 million. (c) Under no circumstances shall the sum of all Contract Counsel Payments (including the advance described in section 13 hereof) exceed the amount of the Contract Counsel Award. (d) Under no circumstances shall Settling Defendants be required to make any Contract Counsel Payment until the fourth business day following the receipt by Settling Defendants of the certification described in section 12(a) hereof. (e) Payments with respect to Fee Awards on behalf of Florida Counsel shall be made exclusively as provided by the terms of this Agreement, and notwithstanding any other provision of law, such Fee Awards shall not be entered as or reduced to a judgment against Settling Defendants or considered as a basis for requiring a bond or imposing a lien or any other encumbrance. SECTION 20. Contribution to National Legislation. If Federal Legislation is enacted that implements the Proposed Resolution, a three-member national panel including the two permanent members of the Panel shall consider any application for Fee Awards on behalf of Private Counsel for 19 contributions made toward the enactment of such Federal Legislation, along with all applications for Fee Awards for professional fees by any other persons who claim to have made similar contributions (other than attorneys or agents of Participating Defendants). No person shall make more than one application for a Fee Award in connection with any such contributions toward enactment of such Federal Legislation. All payments with respect to such Fee Awards, if any, shall be paid on the payment schedule and subject to, and counted in computing, the annual and quarterly national caps described in sections 16, 17, 18 and 19 hereof. SECTION 21. Payments on Market Share Basis. All payments due hereunder shall be paid by Settling Defendants pro rata in proportion to their respective Market Shares as provided herein, and each Settling Defendant shall be severally liable for its share of all such payments. Due to the particular corporate structures of Settling Defendants R.J. Reynolds Tobacco Company ("Reynolds") and Brown & Williamson Tobacco Corporation ("Brown & Williamson") with respect to their non-domestic tobacco operations, Settling Defendants Reynolds and Brown & Williamson shall be severally liable for their respective shares of each payment due pursuant to this Agreement up to (and their liability hereunder shall not exceed) the full extent of their assets used in, and earnings and revenues derived from, their manufacture and sale in the United States of Tobacco Products intended for domestic consumption, and no recourse shall be had against any of their other assets or earnings to satisfy such obligations. Under no circumstances shall any such payment or portion thereof become the joint obligation of Settling Defendants or the obligation of any party other than the Settling Defendant from which such payment is originally due, nor shall any Settling Defendant be required to pay a portion of any such payment greater than its respective Market Share. With respect to payment of the advance described in section 13 hereof and the amount for 1997 described in section 15 hereof, the Market Share of each Settling Defendant shall be as provided in Schedule A hereto. With respect to the amount for 1998 described in section 16 hereof, the Market Share of each Settling Defendant shall be its respective share pursuant to Appendix A hereto for 1998. With respect to all other payments pursuant to this Agreement, each Settling Defendant's Market Share shall be its respective share pursuant to Appendix A hereto for the 12 month period ending on the last day of the calendar quarter immediately preceding the calendar quarter with respect to which such payment is made. 20 SECTION 22. Determination of Market Share. In the event of a disagreement between or among any Settling Defendants as to their respective shares of any payment pursuant to this Agreement (except payments for which each Settling Defendant's Market Share is expressly provided herein), each Settling Defendant shall pay its undisputed share of such payment promptly, on or before the date on which such payment is due, and shall within 21 days submit copies of its audited reports of shipments of Tobacco Products provided to the U.S. Securities and Exchange Commission ("SEC") for the period in question (or, in the case of any Settling Defendant that does not provide such reports to the SEC, audited reports of shipments containing the same shipment information as contained in the reports provided to the SEC) ("Shipment Reports") to a third party to be selected by agreement of Settling Defendants (the "Third Party"), who shall within three business days determine the Market Share of each Settling Defendant. The decision of the Third Party shall be final and non-appealable, and shall be communicated by facsimile to each party hereto. Each Settling Defendant shall, within two business days of receipt of the Third Party's decision, pay Florida Counsel or such other Settling Defendant, as appropriate, the difference, if any, between (1) the amount that such Settling Defendant has already paid with respect to the payment in question and (2) the amount of the payment in question that corresponds to such Settling Defendant's Market Share as determined by the Third Party, together with interest accrued from the original date on which the payment in question was due, at the prime rate as published in the Wall Street Journal on the latest publication date on or before the original date on which the payment in question was due plus 3%. In the event of any disagreement by or among Settling Defendants as to their respective shares of the Initial Florida Fee Payment due on December 21, 1998 pursuant to section 17 hereof, the procedures for resolving such disagreement shall be as described in this section, except that each Settling Defendants shall not be required to provide its Shipment Reports to the Third Party until January 21, 1999. SECTION 23. Limited Waiver as to Other Terms. In consideration of Settling Defendants' agreement to the terms hereof, each Participating Florida Counsel hereby covenants and agrees that it will not argue in any forum (other than in proceedings before the Panel relating to their Fee Award application) that the arrangements made in connection with the Texas Settlement, the Mississippi Settlement or the Minnesota Settlement for payment of fees to private counsel for the States of Texas, Mississippi or Minnesota give rise to any claim or entitlement on the part of Florida Counsel (or any other person) in connection with this Action. 21 SECTION 24. State's Identification of Florida Counsel. The Governor, on behalf of the State of Florida, hereby represents and warrants that Schedule B hereto identifies all Florida Counsel, including all Contract Counsel. SECTION 25. Intended Beneficiaries. No part of this Agreement creates any rights on the part of, or is enforceable by, any person or entity that is not a party hereto or a person covered by the releases described in section 3 hereof. Nor shall any part of this Agreement bind any non-party or determine, limit or prejudice the rights of any such person or entity. SECTION 26. Definitions. Terms used herein that are defined in the Settlement Agreement or the Stipulation of Amendment are, unless otherwise defined herein, used in this Agreement as defined in the Settlement Agreement or the Stipulation of Amendment, as applicable. SECTION 27. Representations of Parties. The parties hereto hereby represent that this Agreement has been duly authorized and, upon execution, will constitute a valid and binding contractual obligation, enforceable in accordance with its terms, of each of the parties hereto. SECTION 28. No Admission. This Agreement is not intended to be and shall not in any event be construed as, or deemed to be, an admission or concession or evidence of any liability or wrongdoing whatsoever on the part of any party hereto or any person released pursuant to subsection (b) or (c) of section 3 hereof. Settling Defendants specifically disclaim and deny any liability or wrongdoing whatsoever with respect to the claims released under section 3 hereof and enter into this Agreement for the sole purposes of memorializing Settling Defendants' rights and obligations with respect to payment of attorneys' fees pursuant to the Settlement Agreement and avoiding the further expense, inconvenience, burden and uncertainty of litigation. 22 SECTION 29. Non-admissibility. This Agreement having been undertaken by the parties hereto in good faith and for settlement purposes only, neither this Agreement nor any evidence of negotiations relating hereto shall be offered or received in evidence in any action or proceeding other than the Action or an action or proceeding arising under this Agreement. SECTION 30. Amendment and Waiver. This Agreement may be amended only by a written instrument executed by the Attorney General on behalf of the State of Florida, Settling Defendants and a majority of Participating Florida Counsel. The waiver of any rights conferred hereunder shall be effective only if made by written instrument executed by the waiving party. The waiver by any party of any breach of this Agreement shall not be deemed to be or construed as a waiver of any other breach, whether prior, subsequent or contemporaneous, of this Agreement. SECTION 31. Notices. All notices or other communications to any party hereto shall be in writing (including but not limited to telex, telecopy or similar writing) and shall be given to the respective parties hereto listed on Schedule C hereto at the addresses therein indicated. Any party hereto may change the name and address of the person designated to receive notice on behalf of such party by notice given as provided in this section including an updated list conformed to Schedule C hereto. SECTION 32. Governing Law. This Agreement shall be governed by the laws of the State of Florida, without regard to the conflict of law rules of such State. SECTION 33. Construction. None of the parties hereto shall be considered to be the drafter of this Agreement or any provision hereof for the purpose of any statute, case law or rule of interpretation or construction that would or might cause any provision to be construed against the drafter hereof. 23 SECTION 34. Captions. The captions of the sections of this Agreement are included for convenience of reference only and shall be ignored in the construction and interpretation hereof. SECTION 35. Execution of Agreement. This Agreement may be executed in counterparts. Facsimile or photocopied signatures shall be considered valid signatures for purposes of execution of this Agreement as of the date of their receipt by all parties hereto, although the original signature pages shall thereafter be appended to this Settlement Agreement. Subject to the written consent of the State of Florida, any Florida Counsel (as identified by the Governor pursuant to section 24 hereof) that is not a signatory hereto as of the date hereof may at any time prior to December 15, 1998 become a party hereto by serving upon all parties hereto a signed letter of agreement to the terms hereof. Any such person shall thereafter promptly execute this Agreement. Any Florida Counsel that is not a signatory hereto prior to December 15, 1998 shall have forfeited any opportunity to become a signatory hereto; provided, however, that notwithstanding any other provision of this Agreement, after December 15, 1998 any Florida Counsel may, subject to the written consent of Settling Defendants and the State of Florida, become a signatory hereto, and any such Florida Counsel so permitted to become a signatory hereto after December 15, 1998 shall be a Participating Florida Counsel for purposes of this Agreement. SECTION 36. Court Orders. (a) In the event that the Court does not enter an order amending the Court's April 16, 1998 Order Implementing Most Favored Nation Provision of Florida Settlement Agreement and Exhibit 1 thereto (including all other orders of the Court relating thereto) (the "April 16th Order") so as to conform it to the terms of this Agreement, or that any Court order so amending the April 16th Order is itself modified or set aside on appeal in a manner unacceptable to Settling Defendants, the parties hereto agree that the procedures, schedule and process described herein shall govern any arbitration proceedings pursuant to the April 16th Order (the "Alternative Arbitration"). Participating Florida Counsel hereby waive any claim they may have to any advances (or any portion thereof) to be paid by Settling Defendants or the State of Florida under the April 16th Order. In the event that any of the procedures or the schedule or the process described 24 herein is not followed in connection with the Alternative Arbitration, Settling Defendants may elect (in their sole discretion) either: (i) to pay attorneys' fees to Participating Florida Counsel solely in accordance with this Agreement, in which case each Participating Florida Counsel shall be deemed to have waived any claim it may have to amounts payable under the Alternative Arbitration, shall take all actions reasonably likely to prevent the Alternative Arbitration in favor of the procedures, schedule and process described herein and shall be obligated to take all actions as may be necessary to ensure that Settling Defendants are not liable for any amounts that might be allocable to such Participating Florida Counsel under such Alternative Arbitration (including, without limitation, returning any such amounts to Settling Defendants) and are not subject to any judgment or lien that might be available under such Alternative Arbitration; or (ii) to pay attorneys' fees solely in accordance with the Alternative Arbitration, in which case (A) Settling Defendants shall no longer be obligated to perform any of their obligations under this Agreement not performed as of the date of Settling Defendants' election and (B) any payments made by Settling Defendants pursuant to this Agreement (including the advance paid pursuant to paragraph 13 hereof) shall be credited against any payments due to be paid by Settling Defendants to Participating Florida Counsel pursuant to the Alternative Arbitration. SECTION 37. Entire Agreement of Parties. This Agreement contains an entire, complete and integrated statement of each and every term, provision and condition with respect to payment of attorneys' fees by Settling Defendants in connection with the Action agreed to (1) by and between Settling Defendants and the State of Florida and (2) by and among Settling Defendants, the State of Florida and Participating Florida Counsel. 25 IN WITNESS WHEREOF, the parties hereto, through their fully authorized representatives, have agreed to this Florida Fee Payment Agreement as of this the eleventh day of September, 1998. STATE OF FLORIDA, acting by and through Lawton M. Chiles, Jr., its duly elected and authorized Governor, and Robert A. Butterworth, its duly elected and authorized Attorney General By: /s/LAWTON M. CHILES, JR. ---------------------------------- Lawton M. Chiles, Jr. Governor By: /s/ROBERT A. BUTTERWORTH ---------------------------------- Robert A. Butterworth Attorney General PHILIP MORRIS INCORPORATED By: /s/MEYER G. KOPLOW ---------------------------------- Meyer G. Koplow Counsel By: /s/MARTIN J. BARRINGTON ---------------------------------- Martin J. Barrington General Counsel 26 Florida Fee Payment Agreement, dated September 11, 1998 R.J. REYNOLDS TOBACCO COMPANY By: /s/ARTHUR F. GOLDEN ---------------------------------- Arthur F. Golden Counsel By: /s/CHARLES A. BLIXT ---------------------------------- Charles A. Blixt Executive Vice President & General Counsel BROWN & WILLIAMSON TOBACCO CORPORATION By: /s/STEPHEN R. PATTON ---------------------------------- Stephen R. Patton Counsel By: /s/F. ANTHONY BURKE ---------------------------------- F. Anthony Burke Vice President & General Counsel 27 Florida Fee Payment Agreement, dated September 11, 1998 LORILLARD TOBACCO COMPANY By: /s/ARTHUR J. STEVENS ---------------------------------- Arthur J. Stevens Senior Vice President & General Counsel UNITED STATES TOBACCO COMPANY By: /s/RICHARD H. VERHEIJ ---------------------------------- Richard H. Verheij Executive Vice President & General Counsel 28 Florida Fee Payment Agreement, dated September 11, 1998 PARTICIPATING CONTRACT COUNSEL ------------------------------ By:/s/C. DAVID FONVIELLE By:/s/WILLIAM C. GENTRY ----------------------------------- ----------------------------------- C. David Fonvielle William C. Gentry for Fonvielle, Hinkle & Lewis, P.A. for Gentry, Phillips & Hodak, P.A. By:/s/WAYNE HOGAN By: ----------------------------------- ----------------------------------- Wayne Hogan Robert G. Kerrigan for Brown, Terrell, Hogan, Ellis, for Kerrigan, Estess, Rankin & McLeod McClamma & Yegelwel, P.A. By:/s/MICHAEL MAHER By: ----------------------------------- ----------------------------------- Michael Maher Robert Montgomery for Maher, Gibson & Guiley, P.A. for Montgomery & Larmoyeux By:/s/JAMES H. NANCE By:/s/JOSEPH F. RICE ----------------------------------- ----------------------------------- James H. Nance Joseph F. Rice for Nance, Cacciatore, Sisserson, for Ness, Motley, Loadholt, Richardson & Duryea & Hamilton, P.A. Poole /s/RICHARD F. SCRUGGS BY By: By: W. STEVE BOZEMAN WITH PERMISSION ----------------------------------- ----------------------------------- Sheldon J. Schlesinger Richard F. Scruggs for Sheldon J. Schlesinger, P.A. for Scruggs, Millette, Bozeman & Dent, P.A. By:/s/C. STEVEN YERRID ----------------------------------- C. Steven Yerrid for Yerrid, Knopik & Krieger, P.A.
29 APPENDIX A MARKET SHARE CALCULATION The Market Share of each Settling Defendant for purposes of any payment required hereunder shall be equal to the proportion of (1) such Settling Defendant's Aggregate Sales Volume for the period in question to (2) the sum of all Settling Defendants' Aggregate Sales Volumes for the period in question. For purposes of the foregoing: (a) Each Settling Defendant's Aggregate Sales Volume shall be the sum of such Settling Defendant's Sales Volumes with respect to each type of Tobacco Product referenced in paragraph (c) of this Appendix. (b) Each Settling Defendant's Sales Volume with respect to each type of Tobacco Product referenced in paragraph (c) of this Appendix shall be the number of Units of such type of Tobacco Product sold within the United States by such Settling Defendant during the period in question, as measured by such Settling Defendant's applicable Shipment Reports. (c) A Unit of Tobacco Product means: (1) one Cigarette; (2) .12 ounces of Moist Snuff; (3) .3 ounces of Loose Leaf, Plug, Twist, Roll or other form of chewing tobacco; (4) .25 ounces of Dry Snuff; and (5) .16 ounces of Loose Leaf tobacco suitable for user preparation of cigarettes. SCHEDULE A MARKET SHARE PERCENTAGES
Settling Defendant Percentage - ------------------ ---------- Philip Morris Incorporated ........................................ 49.26 R.J. Reynolds Tobacco Company...................................... 24.49 Brown & Williamson Tobacco Corp.................................... 16.20 Lorillard Tobacco Company.......................................... 8.77 United States Tobacco Company...................................... 1.28 ---------- TOTAL 100.00
SCHEDULE B DESIGNATION of FLORIDA COUNSEL by the Governor 1. Pursuant to section 24 of the Florida Fee Payment Agreement, on behalf of the State of Florida, I hereby identify as Florida Counsel those private counsel that are appropriate, legal and authorized parties to the contingent-fee agreement titled "Standard Contract -- State of Florida, Agency for Health Care Administration" and executed in February 1995 (the "Contract," attached as Exhibit A hereto), and I hereby identify as Contract Counsel those same private counsel. 2. Laurence H. Tribe, G. Robert Blakey and persons working under their direction undertook activities on behalf of the State of Florida in connection with the Action but are not Contract Counsel or Florida Counsel for purposes of the Florida Fee Payment Agreement. 3. Fredric G. Levin of the firm Levin, Middlebrooks, Thomas, Mitchell, Green, Echsner, Proctor & Papantonio, P.A. (collectively, "Levin") undertook activities on behalf of the State of Florida in connection with the Action but is not Contract Counsel or Florida Counsel for purposes of the Florida Fee Payment Agreement, and it is the State's understanding that Levin will be compensated for his services by Contract Counsel from the fees paid to Contract Counsel pursuant to the Florida Fee Payment Agreement. 4. Richard A. Daynard has declared an intent to seek an award of attorneys' fees pursuant to the arbitration provisions described in the Court's April 16, 1998 Order Implementing Most Favored Nation Provision of Florida Settlement Agreement and Exhibit 1 thereto and the Court's Order of May 12, 1998 (collectively, the "Arbitration Orders"). It is the State's understanding that any activities of Mr. Daynard or others acting under his direction (collectively, "Daynard") in connection with the Action were undertaken on a strictly pro bono basis as to the State and without any obligation of compensation by the State, and Daynard is not Contract Counsel or Florida Counsel for purposes of the Florida Fee Payment Agreement. Notwithstanding the foregoing, in the event that Daynard is determined to be entitled, as a result of the Arbitration Orders, to participate in the fee arbitration process described in the Florida Fee Payment Agreement despite the provisions thereof and of the Stipulation of Amendment, Daynard shall be treated as Florida Counsel (but not as Contract Counsel) for purposes of the Florida Fee Payment Agreement. In the event that Daynard is treated as Participating Florida Counsel for purposes of the Florida Fee Payment Agreement and makes an application to the Panel as provided therein, the State of Florida will not support or oppose Daynard's application for an award of attorneys' fees by the Panel. 5. Except as expressly provided in paragraph 4 hereof, no person other than the persons identified in paragraph 1 hereof is entitled as Contract Counsel or Florida Counsel to seek payment of attorneys' fees by Settling Defendants. /s/LAWTON M. CHILES, JR. ----------------------------- Lawton M. Chiles, Jr. Governor Exhibit A STATE OF FLORIDA AGENCY FOR HEALTH CARE ADMINISTRATION STANDARD CONTRACT [Intentionally Omitted] SCHEDULE C NOTICES State of Florida ---------------- Hon. Robert A. Butterworth Attorney General's Office The Capitol Suite PL01 Tallahassee, FL 32399-1050 Fax: (850) 413-0632 With copies to: - --------------- Richard F. Scruggs Scruggs, Millette, Bozeman & Dent, P.A. 743 Delmas Avenue Pascagoula, MS 39568-1425 Fax: (228) 762-1207 and: - ---- Joseph F. Rice, Esq. Ness, Motley, Loadholt, Richardson & Poole 151 Meeting Street, Suite 600 Charleston, SC 29402 Fax: (843) 720-9290 (continued) Settling Defendants ------------------- Philip Morris Incorporated: R.J. Reynolds Tobacco Company: Martin J. Barrington, Esq. Charles A. Blixt, Esq. Philip Morris Incorporated R.J. Reynolds Tobacco Company 120 Park Avenue 401 North Main Street New York, NY 10017-5592 Winston-Salem, NC 27102 Fax: (212) 907-5399 Fax: (336) 741-2998 With a copy to: With a copy to: - --------------- --------------- Meyer G. Koplow, Esq. Arthur F. Golden, Esq. Wachtell, Lipton, Rosen & Katz Davis Polk & Wardwell 51 West 52nd Street 450 Lexington Avenue New York, NY 10019 New York, NY 10017 Fax: (212) 403-2000 Fax: (212) 450-4800 Brown & Williamson Tobacco Corp.: Lorillard Tobacco Company: - --------------------------------- -------------------------- F. Anthony Burke, Esq. Arthur J. Stevens, Esq. Brown & Williamson Tobacco Corp. Lorillard Tobacco Company 200 Brown & Williamson Tower 714 Green Valley Road 401 South Fourth Avenue Greensboro, NC 27408 Louisville, KY 40202 Fax: (336) 335-7707 Fax: (502) 568-7297 With a copy to: United States Tobacco Company: - --------------- ------------------------------ Stephen R. Patton, Esq. Richard H. Verheij Kirkland & Ellis UST Inc. 200 East Randolph Dr. 100 West Putnam Avenue Chicago, IL 60601 Greenwich, CT 06830 Fax: (312) 861-2200 Fax: (203) 863-7233
(continued) 2 Contract Counsel ---------------- Joseph F. Rice Richard F. Scruggs Ness, Motley, Loadholt, Scruggs, Millette, Bozeman & Richardson & Poole Dent, P.A. 151 Meeting Street, Suite 600 743 Delmas Avenue Charleston, SC 29402 Pascagoula, MS 39568-1425 Fax: (843) 720-9290 Fax: (228) 762-1207 Wayne Hogan William C. Gentry Brown, Terrell, Hogan, Ellis, Gentry, Phillips & Hodak, P.A. McClamma & Yegelwel, P.A. 6 East Bay Street, Suite 400 Blackston Building, Suite 804 Post Office Box 837 233 East Bay Street Jacksonville, Florida 32202 Jacksonville, Florida 32202 (904) 356-4100 (904) 632-2424 Fax: (904) 358-1895 Fax: (904) 353-4418 Michael Maher C. Steven Yerrid Maher, Gibson & Guiley, P.A. Yerrid, Knopik & Krieger, P.A. 90 East Livingston, Suite 200 101 East Kennedy Blvd., Suite 2160 Orlando, Florida 32801 Tampa, Florida 33602 (407) 83909866 (813) 222-8222 (407) 425-7958 Fax: (813) 222-8224 C. David Fonvielle James H. Nance Fonvielle, Hinkle & Lewis, P.A. Nance, Cacciatore, Sisserson, 3375 Capital Circle Northeast Duryea & Hamilton, P.A. Building A P.O. Drawer 361817 Tallahassee, Florida 32308 Melbourne, Florida 32936 (850) 422-7773 (407) 254-8416 Fax: (850) 422-3449 Fax: (407) 259-8243
(continued) 3 Robert G. Kerrigan Sheldon J. Schlesinger Kerrigan, Estess, Rankin & McLeod Sheldon J. Schlesinger, P.A. 400 East Government Street 1212 Southeast Third Avenue Pensacola, Florida 32501 Ft. Lauderdale, Florida 33316 (904) 444-4444 (954) 467-8800 Fax: (904) 444-4495 Fax: (954) 920-8000 Robert Montgomery Montgomery & Larmoyeux 1016 Clearwater Place P.O. Drawer 3086 West Palm Beach, Florida 33402 (561) 832-2880 Fax: (561) 832-0887
4 EX-12 4 EX-12 EXHIBIT 12 PHILIP MORRIS COMPANIES INC. AND SUBSIDIARIES Computation of Ratios of Earnings to Fixed Charges (in millions of dollars) -------------------
Nine Months Ended Three Months Ended September 30, 1998 September 30, 1998 ------------------ ------------------ Earnings before income taxes $ 8,523 $ 3,302 Add (Deduct): Equity in net earnings of less than 50% owned affiliates (143) (39) Dividends from less than 50% owned affiliates 102 31 Fixed charges 1,046 358 Interest capitalized, net of amortization (19) (17) ------- ------- Earnings available for fixed charges $ 9,509 $ 3,635 ------- ------- ------- ------- Fixed charges: Interest incurred: Consumer products $ 878 $ 301 Financial services 57 20 ------- ------- 935 321 Portion of rent expense deemed to represent interest factor 111 37 ------- ------- Fixed charges $ 1,046 $ 358 ------- ------- ------- ------- Ratio of earnings to fixed charges 9.1 10.2 ------- ------- ------- -------
EXHIBIT 12 PHILIP MORRIS COMPANIES INC. AND SUBSIDIARIES Computation of Ratios of Earnings to Fixed Charges (in millions of dollars) -------------------
Years Ended December 31, ------------------------------------------------------------------------ 1997 1996 1995 1994 1993 -------- -------- -------- -------- ------ Earnings before income taxes and cumulative effect of accounting changes $10,611 $10,683 $ 9,347 $ 8,216 $ 6,196 Add (Deduct): Equity in net earnings of less than 50% owned affiliates (207) (227) (246) (184) (164) Dividends from less than 50% owned affiliates 138 160 202 165 151 Fixed charges 1,438 1,421 1,495 1,537 1,716 Interest capitalized, net of amortization (16) 13 2 (1) (13) ------- ------- ------- ------- ------- Earnings available for fixed charges $11,964 $12,050 $10,800 $ 9,733 $ 7,886 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Fixed charges: Interest incurred: Consumer products $ 1,224 $ 1,197 $ 1,281 $ 1,317 $ 1,502 Financial services and real estate 67 81 84 78 87 ------- ------- ------- ------- ------- 1,291 1,278 1,365 1,395 1,589 Portion of rent expense deemed to represent interest factor 147 143 130 142 127 ------- ------- ------- ------- ------- Fixed charges $ 1,438 $ 1,421 $ 1,495 $ 1,537 $ 1,716 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Ratio of earnings to fixed charges 8.3 8.5 7.2 6.3 4.6 ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
EX-27 5 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM PAGES 3-5 OF THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 9-MOS DEC-31-1998 SEP-30-1998 5,524 0 5,296 174 9,246 21,738 21,158 9,045 60,875 16,092 13,292 0 0 935 16,299 60,875 55,948 55,948 20,119 32,754 13,989 0 682 8,523 3,425 5,098 0 0 0 5,098 2.10 2.09
EX-99.1 6 EXHIBIT 99-1 Exhibit 99.1 CERTAIN PENDING LITIGATION MATTERS AND RECENT DEVELOPMENTS As described in Note 3 ("Note 3") to the Condensed Consolidated Financial Statements included in Part I, Item 1, of this Quarterly Report on Form 10-Q, there are legal proceedings covering a wide range of matters pending in various U.S. and foreign jurisdictions against the Company, its subsidiaries and affiliates, including PM Inc. and PMI, and their respective indemnitees. Various types of claims are raised in these proceedings, including products liability, consumer protection, antitrust, securities law, tax, patent infringement, employment matters and claims for contribution. Pending claims related to tobacco products generally fall within three categories: (i) smoking and health cases alleging personal injury brought on behalf of individual plaintiffs, (ii) smoking and health cases alleging personal injury and purporting to be brought on behalf of a class of individual plaintiffs, and (iii) health care cost recovery cases brought by state and local governments seeking reimbursement for Medicaid and/or other health care expenditures allegedly caused by cigarette smoking, as well as other reimbursement cases, including class actions, brought by non-governmental plaintiffs such as unions, HMOs, native American tribes, federal and state taxpayers, and others. The following lists the pending claims included in the latter two of these categories. Certain developments in these cases since July 1, 1998 are also described. SMOKING AND HEALTH LITIGATION The following lists the smoking and health class actions pending against PM Inc. and, in some cases, the Company and/or its other subsidiaries and affiliates, including PMI, as of November 1, 1998, and describes certain developments since July 1, 1998. Engle, et al. v. R.J. Reynolds Tobacco Co., et al., Circuit Court, Dade County, Florida, filed May 5, 1994. The trial is currently underway. Granier, et al. v. The American Tobacco Company, et al., United States District Court, Eastern District, Louisiana, filed September 26, 1994. Caputo (formerly LeTourneau) v. Imperial Tobacco Limited, et al., Ontario Court of Justice, Toronto, Canada, filed January 13, 1995. The Smoker Health Defense Association, et al. v. Souza Cruz, S.A. and Philip Morris Marketing, S.A., 19th Lower Civil Court of the Central Courts of the Judiciary District of Sao Paulo, Brazil, filed July 25, 1995. Norton, et al. v. RJR Nabisco Holdings Corporation, et al., Superior Court, Madison County, Indiana, filed May 3, 1996. Richardson, et al. v. Philip Morris Incorporated, et al., Circuit Court, Baltimore City, Maryland, filed May 24, 1996. Trial is scheduled for September 1999. Scott, et al. v. The American Tobacco Company, et al., District Court, Orleans Parish, Louisiana, filed May 24, 1996. In November 1998, the appellate court affirmed the trial court's certification of the medical monitoring class. Frosina, et al. v. Philip Morris Incorporated, et al., Supreme Court, New York County, New York, filed June 19, 1996. In July 1998, a New York appeals court overturned the trial court's certification of the class, and dismissed the underlying claims, thus dismissing this case in its entirety. The New York Court of Appeals, the state's highest court, has agreed to review the decision. Exhibit 99.1 Reed, et al. v. Philip Morris Incorporated, et al., Superior Court, District of Columbia, filed June 21, 1996. Barnes (formerly Arch), et al. v. The American Tobacco Company, et al., United States District Court, Eastern District, Pennsylvania, filed August 8, 1996. In November 1998, the appellate court upheld the trial court's decertification of the class and dismissal of the case. Lyons, et al. v. The American Tobacco Company, et al., United States District Court, Southern District, Alabama, filed August 8, 1996. Blaylock (formerly Holmes and Crozier) v. The American Tobacco Company, et al., Circuit Court, Montgomery County, Alabama, filed August 8, 1996. Trial has been scheduled for August 1999. Chamberlain, et al. v. The American Tobacco Company, et al., United States District Court, Northern District, Ohio, filed August 14, 1996. Thompson, et al. v. American Tobacco Company, Inc., et al., United States District Court, Minnesota, filed September 4, 1996. Trial is scheduled for March 2000. Perry/Champion, et al. v. American Tobacco Co., Inc., et al., Circuit Court for Coffee County, Tennessee, at Manchester, filed September 6, 1996. Connor, et al. v. The American Tobacco Company, et al., Second Judicial District Court, Bernalillo County, New Mexico, filed October 10, 1996. Ruiz, et al. v. The American Tobacco Company, et al., United States District Court, Puerto Rico, filed October 23, 1996. Hansen, et al. v. The American Tobacco Company, et al., United States District Court, Eastern District, Arkansas, filed November 4, 1996. McCune, et al. v. American Tobacco Company, et al., Circuit Court of Kanawha County, West Virginia, filed January 31, 1997. Baker, et al. v. American Tobacco Company, et al., Circuit Court, Wayne County, Michigan, filed February 4, 1997. In August 1998, the court entered a stipulated order dismissing this case with prejudice, with leave for plaintiffs to include their claims in an amended complaint to be filed in the Taylor case also pending in Michigan. Muncy (formerly Ingle and formerly Woods), et al. v. Philip Morris Incorporated, et al., Circuit Court, McDowell County, West Virginia, filed February 4, 1997. Emig (formerly Green), et al. v. American Tobacco Company, et al., United States District Court, Kansas, filed February 6, 1997. Peterson, et al. v. American Tobacco Company, et al., United States District Court, Hawaii, filed February 6, 1997. Walls, et al. v. The American Tobacco Company, et al., United States District Court, Northern District, Oklahoma, filed February 6, 1997. In July 1998, the court ruled that plaintiffs' claims for breach of implied warranty are inappropriate for class 2 Exhibit 99.1 treatment. The court will certify questions to the Oklahoma Supreme Court to enable it to determine the remainder of plaintiffs' motion for class certification. Selcer, et al. v. R.J. Reynolds Tobacco Company, et al., United States District Court, Nevada, filed March 3, 1997. Insolia, et al. v. Philip Morris Incorporated, et al., United States District Court, Western District, Wisconsin, filed April 21, 1997. Trial is scheduled for May 1999. White, et al. v. Philip Morris, Inc., et al., Chancery Court, Jefferson County, Mississippi, filed April 18, 1997. In September 1998, plaintiffs voluntarily dismissed this case without prejudice. Geiger, et al. v. The American Tobacco Company, et al., Supreme Court, Queens County, New York, filed April 30, 1997. In July 1998, the appellate court decertified the class and remanded the case back to the trial court for further proceedings on whether plaintiffs meet the requirements for class certification. The appellate court also dismissed plaintiffs' claims of negligent misrepresentation and implied warranties of merchantability and fitness to the extent based on a failure to warn after 1969. Cole, et al. v. The Tobacco Institute, Inc., et al., United States District Court, Eastern District, Texas, Texarkana Division, filed May 5, 1997. Cosentino, et al. v. Philip Morris Incorporated, et al., Superior Court, Middlesex County, New Jersey, filed May 21, 1997. In October 1998, the trial court denied plaintiffs' motion for class certification. Clay, et al. v. The American Tobacco Company, Inc., et al., United States District Court, Southern District, Illinois, Benton Division, filed May 22, 1997. Trial is scheduled for August 1999. Anderson, et al. v. The American Tobacco Company, Inc., et al., United States District Court, Eastern District, Tennessee, filed May 23, 1997. Taylor, et al. v. The American Tobacco Company, Inc., et al., Circuit Court, Wayne County, Michigan, filed May 23, 1997. Lyons, et al. v. Brown & Williamson Tobacco Corporation, et al., United States District Court, Northern District, Georgia, filed May 27, 1997. Kirstein (formerly Enright), et al. v. American Tobacco Company, Inc., et al., Superior Court, Middlesex County, New Jersey, filed May 28, 1997. In October 1998, the court denied plaintiffs' motion for class certification. Tepper, et al. v. Philip Morris Incorporated, et al., Superior Court, Middlesex County, New Jersey, filed May 28, 1997. In October 1998, the court denied plaintiffs' motion for class certification. Brown, et al. v. The American Tobacco Company, Inc., et al., Superior Court, San Diego County, California, filed June 10, 1997. Lippincott, et al. v. American Tobacco Company, Inc., et al., Superior Court, Middlesex County, New Jersey, filed June 13, 1997. In October 1998, the court denied plaintiffs' motion for class certification. 3 Exhibit 99.1 Brammer, et al. v. R.J. Reynolds Tobacco Company, et al., United States District Court, Southern District, Iowa, filed June 20, 1997. Knowles, et al. v. The American Tobacco Company, et al., United States District Court, Eastern District, Louisiana, filed June 30, 1997. Daley, et al. v. American Brands, Inc., et al., United States District Court, Northern District, Illinois, filed July 7, 1997. Piscitello, et al. v. Philip Morris Incorporated, et al., Superior Court, Middlesex County, New Jersey, filed July 28, 1997. In October 1998, the court denied plaintiffs' motion for class certification. McCauley, et al. v. Brown & Williamson Tobacco Corporation, et al., United States District Court, Northern District, Georgia, filed August 20, 1997. In August 1998, plaintiffs voluntarily dismissed this case without prejudice. DaSilva, et al. v. Nigerian Tobacco Company, et al., High Court of Lagos State, Nigeria, filed September 8, 1997. Bush, et al. v. Philip Morris Incorporated, et al., United States District Court, Eastern District, Texas, filed September 10, 1997. Nwanze, et al. v. Philip Morris Companies Inc., et al., United States District Court, Southern District, New York, filed September 29, 1997. In August 1998, the court denied plaintiffs' motion for class certification in this prisoner pro se case, but granted plaintiffs leave to file an amended complaint. Badillo, et al. v. American Tobacco Company, et al., United States District Court, Nevada, filed October 8, 1997. Newborn, et al. v. Brown & Williamson Tobacco Corporation, et al., United States District Court, Western District, Tennessee, filed October 9, 1997. Young, et al. v. The American Tobacco Company, et al., Civil District Court, Orleans Parish, State of Louisiana, filed November 12, 1997. Aksamit, et al. v. Brown & Williamson Tobacco Corporation, et al., United States District Court, South Carolina, filed November 20, 1997. DiEnno, et al. v. Liggett Group, Inc., et al., United States District Court, Nevada, filed December 22, 1997. Herrera, et al. v. The American Tobacco Company, et al., United States District Court, Central District, Utah, filed January 28, 1998. In September 1998, plaintiffs voluntarily dismissed this case without prejudice. Jackson, et al. v. Philip Morris Incorporated, et al., United States District Court, Central District, Utah, filed February 13, 1998. Parsons, et al. v. A C & S, Inc., et al. Circuit Court, Kanawha County, West Virginia, filed February 27, 1998. 4 Exhibit 99.1 National Association for Assistance to Consumers and Workers v. Souza Cruz S.A. and Philip Morris Brasil S.A., The Fifth Court of Bankruptcies and Reorganizations of the Capital District of the State of Rio de Janeiro, Brazil, filed March 16, 1998. Basik (formerly Mendys), et al. v. Lorillard Tobacco Company, et al., Circuit Court of Cook County, Illinois, filed March 17, 1998. Daniels, et al. v. Philip Morris Companies, Inc., et al., Superior Court, San Diego County, California, filed April 2, 1998. Christensen, et al. v. Philip Morris Companies, Inc., et al., United States District Court, Nevada, filed April 3, 1998. Avallone, et al. v. The American Tobacco Company, Inc., et al., New Jersey Superior Court, Atlantic County Law Division, filed April 23, 1998. Collier, et al. v. Philip Morris Incorporated, United States District Court, Southern District of Mississippi, filed May 26, 1998. Cleary, et al. v. PM Inc., et al., Circuit Court, Cook County Illinois, County Law Department, Law Division, filed June 3, 1998. Hogue, et al. v. Philip Morris Companies, et al., United States District Court, Middle District, Florida, filed June 30, 1998. Cummis, et al. v. Philip Morris Incorporated, United States District Court, New Jersey, filed July 9, 1998. McNamara, et al. v. Philip Morris Companies, et al., United States District Court, Eastern District, Pennsylvania, filed July 16, 1998. Vaughan, et al. v. Philip Morris Inc., et al., United States District Court, Western District of Virginia, filed July 30, 1998. Jimenez, et al. v. Brown & Williamson Tobacco Corporation, et al., Second Judicial District Court, County of Bernalillo, New Mexico, filed August 20, 1998. Sweeney, et al. v. American Tobacco Company, et al., Court of Common Pleas, Allegheny County, Pennsylvania, filed October 15, 1998. Brown, et al. v. Philip Morris, Inc., et al., United States District Court, Eastern District of Pennsylvania, filed October 16, 1998. In this case plaintiffs allege that tobacco companies' "discriminatory targeting of menthol tobacco product sales to Black Americans" violates federal civil rights statutes. --------------------------------------------------------------------- 5 Exhibit 99.1 HEALTH CARE COST RECOVERY LITIGATION The following lists the health care cost recovery actions pending against PM Inc. and, in some cases, the Company and/or its other subsidiaries and affiliates as of November 1, 1998, and describes certain developments since July 1, 1998. Moore v. The American Tobacco Company, et al., Chancery Court, Jackson County, Mississippi, filed May 23, 1994. The parties entered into a settlement agreement in July 1997 (see the Company's 1997 Form 10-K). In July 1998, the parties amended the settlement agreement pursuant to its MFN provision (see the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998). State of Minnesota, et al. v. Philip Morris Incorporated, et al., District Court, Ramsey County, Minnesota, filed August 17, 1994. The parties entered into a settlement agreement in May 1998 (see the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998). McGraw v. The American Tobacco Company, et al., Circuit Court, Kanawha County, West Virginia, filed September 20, 1994. The State of Florida, et al. v. The American Tobacco Company, et al., Circuit Court, Palm Beach County, Florida, filed February 21, 1995. The parties entered into a settlement agreement in September 1997 (see the Company's 1997 Form 10-K). In September 1998, the parties amended the settlement agreement pursuant to its MFN provision (see Note 3. Contingencies hereto). Commonwealth of Massachusetts v. Philip Morris Inc., et al., Superior Court, Middlesex County, Massachusetts, filed December 19, 1995. Trial is scheduled for February 1999. Ieyoub v. The American Tobacco Company, et al., United States District Court, Western District, Louisiana, filed March 13, 1996. The State of Texas v. The American Tobacco Company, et al., United States District Court, Eastern District, Texas, filed March 28, 1996. The parties entered into a settlement agreement in January 1998 (see the Company's 1997 Form 10-K). In July 1998, the parties amended the settlement agreement pursuant to its MFN provision (see the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998). State of Maryland v. Philip Morris Incorporated, et al., Circuit Court, Baltimore City, Maryland, filed May 1, 1996. Trial is scheduled for April 1999. State of Washington v. The American Tobacco Company, et al., Superior Court, King County, Washington, filed June 5, 1996. Trial began in September 1998. In July 1998, the court dismissed plaintiff's claim for restitution. The court denied defendants' motions seeking dismissal of plaintiff's other claims, including plaintiff's conspiracy claim, but it invited defendants to address the scope of permissible relief under the conspiracy claim by further motion at trial. The court also ordered that defendants may seek a damages offset for plaintiff's tobacco-related tax revenues and that defendants are entitled to challenge the methodology used by plaintiff in estimating its damages and to present alternate methodologies. The court also granted plaintiff's motion for summary judgment as to defendants' defenses that subrogation is plaintiff's exclusive remedy, but denied the motion as to defendants' defenses based on the comparative fault of individual smokers, holding that defendants must be permitted to meet plaintiff's allegations of misrepresentation, deception, and fraud by showing that individual smokers were not misled. City and County of San Francisco, et al. v. Philip Morris Incorporated, et al., United States District Court, Northern District, California, filed June 6, 1996. 6 Exhibit 99.1 State of Connecticut v. Philip Morris Incorporated, et al., Superior Court, Litchfield District, Connecticut, filed July 18, 1996. In July 1998, plaintiff filed a motion that seeks prejudgment orders of attachment that attach assets in the amount of $2 billion of each tobacco company defendant, excluding Liggett, in order to secure the state's potential recovery. In October 1998, the court denied plaintiff's motion to bifurcate the case as to its claims under the Connecticut Unfair Trade Practices Act ("CUPTA"), and to set the case immediately for trial as to the injunctive relief claims under CUPTA, without prejudice to its reassertion at a later date if circumstances warrant. The court also denied plaintiff's application for a prejudgment attachment remedy without prejudice to plaintiff's right to resubmit that application with proper notice and documentation as required by law. In October 1998, the court set a trial date of September 1, 1999. County of Los Angeles v. R.J. Reynolds Tobacco Company, et al., Superior Court, San Diego County, California, filed August 5, 1996. In July 1998, the court ordered that this case be coordinated with certain other pending California cases in the coordinated proceeding known as In re Tobacco Cases I, Superior Court for the State of California, Judicial Council Coordination Proceeding No. 4041. Trial is scheduled for February 5, 1999. State of Arizona v. The American Tobacco Company, et al., Superior Court, Maricopa County, Arizona, filed August 20, 1996. Trial is scheduled for April 1999. State of Kansas v. R.J. Reynolds Tobacco Company, et al., District Court, Shawnee County, Kansas, filed August 20, 1996. Kelley v. Philip Morris Incorporated, et al., Circuit Court, Ingham County, Michigan, filed August 21, 1996, by the Attorney General of Michigan. In July 1998, the court granted defendants' motion to dismiss plaintiff's claim of breach of voluntary duty undertaken and plaintiff's exemplary damages claim, and denied the motion with respect to unjust enrichment as untimely. State of Oklahoma, et al. v. R.J. Reynolds Tobacco Company, et al., District Court, Cleveland County, Oklahoma, filed August 22, 1996. In July 1998, the court granted in part and denied in part defendants' motion for summary judgment on the state's public nuisance claim. The motion was granted to the extent the state's public nuisance claim was based on the lawful sale of cigarettes; it was denied to the extent the state's claim was based on defendants' alleged unlawful conduct. Also in July, the court denied defendants' motion for summary judgment on the state's claims for reimbursement of health care costs. The grounds for defendants' motion were (i) subrogation is the exclusive method of recovering the state's health care costs and (ii) the state is too remote a plaintiff. In August 1998, the court granted defendants' motions for partial summary judgment on the state's voluntary undertaking claim. In August 1998, the court also granted certain defendants' motion for partial summary judgment on the state's Consumer Protection Act ("CPA") claim, ruling that the state could not recover health care expenditures on that claim. In October 1998, the court granted defendants' motion for partial summary judgment on the state's strict liability claim. In November 1998, the court ruled that the state's claim for damages under its public nuisance claim is limited to "damages sufficient to complete the abatement remedy as to any proven wrongful acts." The court also ruled that civil penalties under the CPA could only be imposed for violations of the CPA that occurred after September 1, 1994 and that the state could not seek disgorgement of proceeds derived through illegal means as a remedy under the CPA until after September 1, 1994. The court reserved ruling, until after trial, whether disgorgement of illegal proceeds was an appropriate equitable remedy. Trial is scheduled for January 1999. 7 Exhibit 99.1 People of the State of California v. Philip Morris Incorporated, et al., Superior Court, San Francisco County, California, filed September 5, 1996. State of New Jersey v. R.J. Reynolds Tobacco Company, et al., Superior Court, Middlesex County, New Jersey, filed September 10, 1996. Coyne, et al. v. The American Tobacco Company, et al., United States District Court, Northern District, Ohio, filed September 17, 1996. The court has dismissed the case in its entirety. State of Utah v. R.J. Reynolds Tobacco Company, et al., United States District Court, Central Division, Utah, filed September 30, 1996. City of New York, et al. v. The Tobacco Institute, et al., Supreme Court, New York County, New York, filed October 17, 1996. People of the State of Illinois v. Philip Morris, Inc., et al., Circuit Court, Cook County, Illinois, filed November 12, 1996. State of Iowa v. R.J. Reynolds Tobacco Company, et al., District Court, Fifth Judicial District, Polk County, Iowa, filed November 27, 1996. In October 1998, the trial court dismissed the plaintiff's claims for prima facie tort, common law indemnity, and violation of the Iowa Ongoing Criminal Conduct Act and denied defendants' motion for judgment on the pleadings on plaintiff's counts for nuisance, conspiracy, and aiding and abetting. County of Erie v. The Tobacco Institute, Inc., et al., Supreme Court, Erie County, New York, filed January 14, 1997. State of New York v. Philip Morris Incorporated, et al., Supreme Court, New York County, New York, filed January 21, 1997. Trial is scheduled for June 1999. State of Hawaii v. Brown & Williamson Tobacco Corporation, et al., Circuit Court, First Circuit, Hawaii, filed January 31, 1997. Trial is scheduled for September 1999. State of Wisconsin v. Philip Morris Incorporated, et al., Circuit Court, Dane County, Wisconsin, filed February 5, 1997. Trial is scheduled for September 1999. State of Indiana v. Philip Morris Incorporated, et al., Superior Court, Marion County, Indiana, filed February 19, 1997. In July 1998, the trial court dismissed this case in its entirety. State of Alaska v. Philip Morris, Incorporated, et al., Superior Court, First Judicial District, Alaska, filed April 14, 1997. Trial is scheduled for February 2000. County of Cook v. Philip Morris, Incorporated, et al., Circuit Court, Cook County, Illinois, filed April 18, 1997. Commonwealth of Pennsylvania v. Philip Morris, Inc., et al., Court of Common Pleas, Philadelphia County, Pennsylvania, filed April 23, 1997. Stationary Engineers Local 39 Health and Welfare Trust Fund v. Philip Morris, Inc., et al., United States District Court, Northern District, California, filed April 25, 1997. 8 Exhibit 99.1 State of Arkansas v. The American Tobacco Company, et al., Chancery Court, Sixth Division, Pulaski County, Arkansas, filed May 5, 1997. State of Montana v. Philip Morris, Incorporated, et al., First Judicial Court, Lewis and Clark County, Montana, filed May 5, 1997. In September 1998, the court granted defendants' motion to dismiss plaintiff's unjust enrichment claim, but denied the motion with respect to plaintiff's remaining claims. State of Ohio v. Philip Morris, Incorporated, et al., Court of Common Pleas, Franklin County, Ohio, filed May 8, 1997. In August 1998, the court dismissed all claims other than a state RICO claim and a portion of plaintiff's conspiracy claim. Trial is scheduled for January 2000. State of Tennessee et al., ex. rel. Beckom, et al. v. The American Tobacco Company, et al., United States District Court, Eastern District, Tennessee, filed May 8, 1997. State of Missouri v. American Tobacco Company, Inc., et al., Circuit Court, City of St. Louis, Missouri, filed May 12, 1997. Trial is scheduled for January 2000. State of South Carolina v. Brown & Williamson Tobacco Corporation, et al., Court of Common Pleas, Richland County, South Carolina, filed May 12, 1997. Iron Workers Local Union No. 17 Insurance Fund, et al. v. Philip Morris, Inc., et al., United States District Court, Northern District, Ohio, Eastern Division, filed May 20, 1997. In September 1998, the court granted defendants' motion to dismiss plaintiffs' claims of breach of voluntarily undertaken duties, but denied the motion with respect to plaintiffs' five remaining claims (federal and state RICO, federal and state antitrust and civil conspiracy). The court also denied defendants' alternative motion to dismiss on the grounds that plaintiffs had failed to join necessary parties. In October 1998, the trial court granted plaintiffs' motion to certify a class consisting of all Ohio labor health and welfare funds. Trial is scheduled for February 1999. Northwest Laborers-Employers Health and Security Trust Fund, et al. v. Philip Morris, Inc., et al., United States District Court, Western District, Washington, filed May 21, 1997. Trial is scheduled for September 1999. State of Nevada v. Philip Morris, Incorporated, et al., Second Judicial District, Washoe County, Nevada, filed May 21, 1997. Trial is scheduled for June 2000. University of South Alabama v. The American Tobacco Company, et al., United States District Court, Southern District, Alabama, filed May 23, 1997. The court has dismissed the case in its entirety. State of New Mexico v. The American Tobacco Company, et al., First Judicial District Court, Santa Fe County, New Mexico, filed May 27, 1997. City of Birmingham, Alabama, and The Greene County Racing Commission v. The American Tobacco Company, et al., United States District Court, Northern District, Alabama, filed May 28, 1997. In September 1998, the court granted defendants' motion to strike plaintiffs' amended complaint and entered final judgment in favor of defendants. State of Vermont v. Philip Morris, Incorporated, et al., Superior Court, Chittenden County, Vermont, filed May 29, 1997. Trial is scheduled for November 1999. 9 Exhibit 99.1 Central Laborers Welfare Fund, et al. v. Philip Morris Inc., et al., United States District Court, Southern District, Illinois, filed May 30, 1997. Massachusetts Laborers Health and Welfare Fund v. Philip Morris Inc., et al., United States District Court, Massachusetts, filed June 2, 1997. State of New Hampshire v. R.J. Reynolds Tobacco Company, et al., Superior Court, Merrimack County, New Hampshire, filed June 4, 1997. The Lower Brule Sioux Tribe v. The American Tobacco Company, et al., Tribal Court, Lower Brule Sioux Tribe, filed June 4, 1997. State of Colorado v. R.J. Reynolds Tobacco Co., et al., District Court, City and County of Denver, Colorado, filed June 5, 1997. In October 1998, the court denied defendants' motion to dismiss the complaint. State of Oregon v. The American Tobacco Company, et al., Circuit Court, Multnomah County, Oregon, filed June 9, 1997. In July 1998, the court dismissed with prejudice plaintiff's unjust enrichment claim. The court denied defendants' motion to dismiss plaintiff's public nuisance claim but struck with prejudice that portion of the claim based on defendants' alleged interference with the "right to health care." Trial is scheduled for April 1999. State of Idaho v. Philip Morris, Inc., et al., District Court, Fourth Judicial District, Ada County, Idaho, filed June 11, 1997. In September 1998, the court granted defendants' motion to dismiss plaintiff's antitrust, public nuisance and conspiracy claims, but permitted plaintiff to replead a narrower consumer protection claim. In September 1998, the court granted defendants' motion to dismiss and entered final judgment in defendants' favor. People of the State of California v. Philip Morris, Inc., et al., Superior Court, Sacramento County, California, filed June 12, 1997. This case has been coordinated with certain other pending California cases in the coordinated proceeding known as In re Tobacco Cases I, Superior Court for the State of California, Judicial Council Coordination Proceeding No. 4041. Hawaii Health and Welfare Trust Fund for Operating Engineers v. Philip Morris, Inc., et al., United States District Court, Hawaii, filed June 13, 1997. State of Maine v. Philip Morris, Incorporated, et al., Superior Court, Kennebec County, Maine, filed June 17, 1997. Rossello, et al. v. Brown & Williamson Tobacco Corporation, et al., United States District Court, Puerto Rico, filed June 17, 1997. Trial is scheduled for June 2000. State of Rhode Island v. American Tobacco Company, Inc., et al., Superior Court, Providence, Rhode Island, filed June 17, 1997. Laborers Local 17 Health and Benefit Fund, et al. v. Philip Morris, Inc., et al., United States District Court, Southern District, New York, filed June 19, 1997. In September 1998, the court decided to reconsider an earlier order dismissing certain claims insofar as that order concluded that plaintiffs had not suffered antitrust injury. 10 Exhibit 99.1 The Muscogee Creek Nation, et al. v. The American Tobacco Company, et al., District Court, Muscogee Creek Nation, Okmulgee District, filed June 20, 1997. In July 1998, the appellate court dismissed defendants' appeal from the lower court's denial of a motion to dismiss based on lack of jurisdiction. Kentucky Laborers District Council Health and Welfare Trust Fund, et al. v. Hill & Knowlton, Inc., et al., United States District Court, Western District, Kentucky, Louisville Division, filed June 20, 1997. In September 1998, the court granted defendants' motion to dismiss antitrust, deceptive trade practices, special duty, strict liability, negligence, breach of warranty and unjust enrichment claims, but denied the motion with respect to certain portions of plaintiffs' RICO, fraud, misrepresentation and concealment claims. Oregon Laborers -- Employers Health and Welfare Trust Fund, et al. v. Philip Morris, Inc., et al., United States District Court, Oregon, filed June 20, 1997. In August 1998, the court dismissed this case in its entirety against PM Inc. and certain other defendants. United Federation of Teachers Welfare Fund, et al. v. Philip Morris, Inc., et al., United States District Court, Southern District, New York, filed June 25, 1997. In September 1998, the court decided to reconsider an earlier order dismissing certain claims insofar as that order concluded that plaintiffs had not suffered antitrust injury. Connecticut Pipe Trades Health Fund, et al. v. Philip Morris, Inc., et al., United States District Court, Connecticut, filed July 1, 1997. In September 1998, plaintiffs voluntarily dismissed this case without prejudice. Seafarers Welfare Plan and United Industrial Workers Welfare Plan v. Philip Morris, Inc., et al., United States District Court, Maryland, Southern Division, filed July 2, 1997. In July 1998, the court dismissed all claims with prejudice. Laborers and Operating Engineers Utility Agreement Health and Welfare Trust Fund for Arizona v. Philip Morris Incorporated, et al., United States District Court, Arizona, filed July 7, 1997. West Virginia Laborers' Pension Fund, et al. v. Philip Morris, Inc., et al., United States District Court, Southern District, West Virginia, Huntington Division, filed July 11, 1997. In August 1998, the court denied defendants' motion to dismiss. Trial is scheduled for June 2000. Rhode Island Laborers Health and Welfare Fund v. Philip Morris Incorporated, et al., United States District Court, Rhode Island, filed July 20, 1997. Eastern States Health and Welfare Fund, et al. v. Philip Morris, Inc., et al., Supreme Court, State of New York, County of New York, filed July 28, 1997. Asbestos Workers Local 53 Health and Welfare Fund, et al. v. Philip Morris, Inc., et al., United States District Court, Eastern District, Louisiana, filed August 15, 1997. Steamfitters Local Union No. 420 Welfare Fund, et al. v. Philip Morris, Inc., et al., United States District Court, Eastern District, Pennsylvania, filed August 21, 1997. 11 Exhibit 99.1 State of Georgia v. Philip Morris, Inc., et al., Superior Court, Fulton County, Georgia, filed August 29, 1997. Construction Laborers of Greater St. Louis Welfare Fund, et al. v. Philip Morris, Inc., et al., United States District Court, Eastern District, Missouri, filed September 2, 1997. The Arkansas Carpenters Health & Welfare Fund, et al. v. Philip Morris, Inc., et al., United States District Court, Eastern District, Arkansas, filed September 4, 1997. Southeast Florida Laborers District Council Health and Welfare Trust Fund v. Philip Morris, Inc., et al., United States District Court, Southern District, Florida, filed September 11, 1997. West Virginia--Ohio Valley Area International Brotherhood of Electrical Workers Welfare Fund v. The American Tobacco Company, et al., United States District Court, Southern District, West Virginia, filed September 11, 1997. In August 1998, the court denied defendants' motion to dismiss. Trial is scheduled for March 2000. Teamsters Union No. 142 Health and Welfare Trust Fund and Sheet Metal Workers Local Union No. 20 Welfare and Benefit Fund v. Philip Morris Incorporated, et al., Circuit Court of St. Joseph County, Indiana, filed September 12, 1997. Crow Creek Sioux Tribe v. The American Tobacco Company, et al., Tribal Court, Crow Creek Sioux Tribe, filed September 14, 1997. Operating Engineers Local 12 Health and Welfare Trust v. American Tobacco Company, et al., Superior Court of California, Los Angeles County, filed September 16, 1997. In July 1998, the court dismissed, without leave to amend, plaintiffs' claims for strict products liability, negligent breach of special duty, breach of express and implied warranties, restitution, unjust enrichment, violation of California antitrust law and intentional breach of special duty. The court dismissed, with leave to amend, plaintiffs' claims for fraud and misrepresentation, civil conspiracy and unfair business practices. In August 1998, this case was coordinated with eleven other cases, including ten other actions by labor or union trust funds, in In re TOBACCO CASES II, Superior Court for the State of California, Judicial Council Coordination Proceeding No. 4042. Puerto Rican ILGWU Health & Welfare Fund, et al. v. Philip Morris Inc., et al., Supreme Court, State of New York, County of New York, filed September 17, 1997. New Jersey Carpenters' Health Fund, et al. v. Philip Morris, Inc., et al., United States District Court, New Jersey, filed September 25, 1997. In August 1998, the court granted defendants' motion to dismiss antitrust, special duty and unjust enrichment claims. The court denied the motion as to plaintiffs' fraud and RICO claims, insofar as the alleged conduct was directed at, and relied upon by, plaintiffs. Those claims were dismissed to the extent that they alleged conduct directed at individual smokers. New Mexico and West Texas Multi-Craft Health and Welfare Trust Fund, et al. v. Philip Morris, Inc., et al., Second Judicial District Court, Bernalillo County, New Mexico, filed October 10, 1997. Republic of the Marshall Islands v. The American Tobacco Company, et al., High Court, Republic of the Marshall Islands, filed October 20, 1997. 12 Exhibit 99.1 Central States Joint Board v. Philip Morris, Inc., et al., United States District Court, Northern District, Illinois, filed October 20, 1997. International Brotherhood of Teamsters, Local 734 v. Philip Morris, Inc., et al., United States District Court, Northern District, Illinois, filed October 20, 1997. Texas Carpenters Health Benefit Fund, et al. v. Philip Morris, Inc., et al., United States District Court, Eastern District, Texas, Beaumont Division, filed October 31, 1997. In August 1998, the court dismissed this case in its entirety. United Food and Commercial Workers Union and Employers Health and Welfare Fund, et al. v. Philip Morris, Inc., et al., United States District Court, Northern District, Alabama, filed November 13, 1997. B.A.C. Local 32 Insurance Trust Fund, et al. v. Philip Morris, Incorporated, et al., United States District Court, Eastern District, Michigan, filed November 14, 1997. In September 1998, plaintiffs provided notice of their voluntary dismissal of this case without prejudice. Defendants have objected and the parties await the court's ruling. Screen Actors Guild-Producers Health Plan, et al. v. Philip Morris, Inc., et al., Superior Court, Los Angeles County, California, filed November 20, 1997. In July 1998, the court dismissed, without leave to amend, plaintiffs' antitrust claim. In August 1998, this case was coordinated with eleven other cases, including ten other actions by labor or union trust funds, in In re TOBACCO CASES II, Superior Court for the State of California, Judicial Council Coordination Proceeding No. 4042. IBEW Local 25 Health and Benefit Fund v. Philip Morris, Inc., et al., Supreme Court, State of New York, County of New York, filed November 25, 1997. IBEW Local 363 Welfare Fund v. Philip Morris, Inc., et al., Supreme Court, State of New York, County of New York, filed November 25, 1997. Local 138, 138A and 138B International Union of Operating Engineers Welfare Fund v. Philip Morris, Inc., et al., Supreme Court, State of New York, County of New York, filed November 25, 1997. Local 840, International Brotherhood of Teamsters Health and Insurance Fund v. Philip Morris, Inc., et al., Supreme Court, State of New York, County of New York, filed November 25, 1997. Long Island Regional Council of Carpenters Welfare Fund v. Philip Morris, Inc., Supreme Court, State of New York, County of New York, filed November 25, 1997. Day Care Council - Local 205 D.C. 1707 Welfare Fund v. Philip Morris, Inc., et al., Supreme Court, State of New York, County of New York, filed December 8, 1997. Local 1199 Home Care Industry Benefit Fund v. Philip Morris, Inc., et al., Supreme Court, State of New York, County of New York, filed December 8, 1997. Local 1199 National Benefit Fund for Health and Human Services Employees v. Philip Morris, Inc., et al., Supreme Court, New York County, New York, filed December 8, 1997. 13 Exhibit 99.1 Mason, et al. v. The American Tobacco Company, et al., United States District Court, Northern District, Texas, filed December 23, 1997. Operating Engineers Local 324 Health Care Fund, et al. v. Philip Morris, Inc., et al., Circuit Court, Wayne County, Michigan, filed December 30, 1997. Carpenters & Joiners Welfare Fund, et al. v. Philip Morris Incorporated, et al., United States District Court, Minnesota, filed December 31, 1997. Trial is scheduled for March 2000. Steamfitters Local Union No. 614 Health & Welfare Fund, et al. v. Philip Morris, Inc., et al., Circuit Court, Thirteenth Judicial District, Tennessee, filed January 7, 1998. Woods, et al. v. The American Tobacco Company, et al., United States District Court, Middle District, North Carolina, filed February 13, 1998. State of South Dakota, et al. v. Philip Morris, Inc., et al., Circuit Court, Hughes County, South Dakota, filed February 19, 1998. Belk, et al. v. Philip Morris, Inc., et al., United States District Court, Southern District, Alabama, filed February 20, 1998. In August 1998, this case was voluntarily dismissed. National Asbestos Workers Medical Fund, et al. v. Philip Morris Incorporated, et al., United States District Court for the Eastern District of New York, filed February 27, 1998. In October 1998, the court denied defendants' motion to dismiss. Trial is scheduled for May 1999. Milwaukee Carpenters, et al. v. Philip Morris Incorporated, et al., Circuit Court, Milwaukee County, Wisconsin, filed March 4, 1998. Group Health Plan, et al. v. Philip Morris, Inc., et al., United States District Court, Minnesota, filed March 11, 1998. Trial is scheduled for March 2000. Williams & Drake Company, et al. v. The American Tobacco Company, et al., United States District Court, Western District, Pennsylvania, filed March 23, 1998. Mangini, on Behalf of the General Public of the State of California v. Brown & Williamson Tobacco Corporation, et al., Superior Court, San Francisco County, California, filed March 26, 1998. This action sought injunctive and other relief regarding the advertising of tobacco products on outdoor billboards in California allegedly in violation of a recently-enacted statute that prohibits the placement of such billboards within 1000 feet of certain schools and "public playgrounds." In July 1998, this case was dismissed with prejudice in exchange for defendants' agreement to take certain actions with respect to its billboard advertising in California, including the removal of certain billboards. United Association of Plumbing and Pipefitting Industry Local 467 v. Philip Morris Incorporated, et al., Superior Court, San Mateo, California, filed March 31, 1998. In August 1998, this case was coordinated with eleven other cases, including ten other actions by labor or union trust funds, in In re TOBACCO CASES II, Superior Court for the State of California, Judicial Council Coordination Proceeding No. 4042. 14 Exhibit 99.1 United Association Local No. 467 Health and Welfare Trust Fund v. Philip Morris, Inc., et al., Superior Court, San Mateo County, California, filed March 31, 1998. Conwed Corporation and Leucadia, Inc. v. RJ Reynolds Tobacco Company, et al., United States District Court, Minnesota, filed April 10, 1998. Trial is scheduled for March 2000. Teamsters Benefit Trust v. Philip Morris, Inc., et al., Superior Court, Alameda County, California, filed April 15, 1998. In August 1998, this case was coordinated with eleven other cases, including ten other actions by labor or union trust funds, in In re TOBACCO CASES II, Superior Court for the State of California, Judicial Council Coordination Proceeding No. 4042. United Association Local No. 159 Health and Welfare Trust Fund v. Philip Morris, Inc., et al., Superior Court, Alameda County, California, filed April 15, 1998. In August 1998, this case was coordinated with eleven other cases, including ten other actions by labor or union trust funds, in In re TOBACCO CASES II, Superior Court for the State of California, Judicial Council Coordination Proceeding No. 4042. Newspaper Periodical Drivers Local 921 San Francisco Newspaper Agency Health & Welfare Fund v. Philip Morris, Inc., et al., Superior Court, San Mateo County, California, filed April 15, 1998. In August 1998, this case was coordinated with eleven other cases, including ten other actions by labor or union trust funds, in In re TOBACCO CASES II, Superior Court for the State of California, Judicial Council Coordination Proceeding No. 4042. United Association Local No. 343 Health and Welfare Trust Fund v. Philip Morris, Inc., et al., Superior Court, Alameda County, California, filed April 16, 1998. In August 1998, this case was coordinated with eleven other cases, including ten other actions by labor or union trust funds, in In re TOBACCO CASES II, Superior Court for the State of California, Judicial Council Coordination Proceeding No. 4042. Bay Area Automotive Group Welfare Fund v. Philip Morris, Inc., et al., Superior Court, San Francisco County, California, filed April 16, 1998. In August 1998, this case was coordinated with eleven other cases, including ten other actions by labor or union trust funds, in In re TOBACCO CASES II, Superior Court for the State of California, Judicial Council Coordination Proceeding No. 4042. Pipe Trades District Council No. 36 Health & Welfare Trust Fund v. Philip Morris, Inc., et al., Superior Court, Alameda County, California, filed April 16, 1998. In August 1998, this case was coordinated with eleven other cases, including ten other actions by labor or union trust funds, in In re TOBACCO CASES II, Superior Court for the State of California, Judicial Council Coordination Proceeding No. 4042. Sign, Pictorial and Display Industry Welfare Fund v. Philip Morris, Inc., et al., Superior Court, San Francisco County, California, filed April 16, 1998. In August 1998, this case was coordinated with eleven other cases, including ten other actions by labor or union trust funds, in In re TOBACCO CASES II, Superior Court for the State of California, Judicial Council Coordination Proceeding No. 4042. San Francisco Newspaper Publishers and Northern California Newspaper Guild Health & Welfare Trust v. Philip Morris, Inc., et al., Superior Court, San Francisco County, California, filed April 17, 1998. In August 1998, this case was coordinated with eleven other cases, including ten other actions by labor or union trust funds, in In re 15 Exhibit 99.1 TOBACCO CASES II, Superior Court for the State of California, Judicial Council Coordination Proceeding No. 4042. North Coast Trust Fund v. Philip Morris, Inc., et al., Superior Court, San Francisco County, California, filed April 24, 1998. Northern California Bakery Drivers Security Fund v. Philip Morris, Inc., et al., Superior Court, Alameda County, California, filed April 24, 1998. Arkansas Blue Cross and Blue Shield, et al. v. Philip Morris Incorporated, et al., United States District Court, Northern District, Illinois, filed April 29, 1998. Blue Cross and Blue Shield of New Jersey, Inc., et al. v. Philip Morris, Incorporated, et al., United States District Court, Eastern District, New York, filed April 29, 1998. Regence BlueShield, et al. v. Philip Morris, Inc., et al., United States District Court, Western District, Washington, filed April 29, 1998. Bay Area Delivery Drivers Security Fund v. Philip Morris, Inc., et al., Superior Court, Alameda County, California, filed April 30, 1998. Sisseton-Wahpeton Sioux Tribe v. Philip Morris Incorporated, et al., Tribal Court of the Sisseton-Wahpeton Sioux Tribe, filed May 8, 1998. Standing Rock Sioux Tribe v. Philip Morris Incorporated, et al., Tribal Court of the Standing Rock Sioux Indian Reservation, filed May 8, 1998. The Republic of Guatemala v. The Tobacco Institute, Inc., et al., United States District Court, District of Columbia, filed May 11, 1998. Landry, et al. v. Louisiana Health Service and Indemnity Co., Inc., et al., 19th Judicial Court, East Baton Rouge, Louisiana, filed May 18, 1998. In September 1998, plaintiffs voluntarily dismissed the tobacco company defendants from this case without prejudice. Northern California Plasterers Health & Welfare Trust Fund v. Philip Morris, Inc., et al., Superior Court, Alameda County, California, filed May 21, 1998. United Association Local No. 393 Health and Welfare Trust Fund v. Philip Morris, Inc., et al., Superior Court, Alameda County, California, filed May 21, 1998. Service Employees International Union Health & Welfare Fund, et al. v. Philip Morris, et al., United States District Court, District of Columbia, filed May 21, 1998. Northern California General Teamsters Security Fund v. Philip Morris, Inc., et al., Superior Court, Alameda County, California, filed May 22, 1998. Utah Laborers' Health and Welfare Fund, et al. v. Philip Morris Incorporated, et al., United States District Court, Utah, filed June 13, 1998. Joint Benefit Trust v. Philip Morris Incorporated, et al., Superior Court, Alameda County, California, filed June 15, 1998. 16 Exhibit 99.1 Northern California Pipe Trades v. Philip Morris Incorporated, et al., Superior Court, Alameda County, California, filed June 16, 1998. S.E.I.U. Local 74 Welfare Fund, et al. v. Philip Morris, et al., United States District Court, District of Columbia, filed June 22, 1998. Plastering Industry Welfare Trust Fund v. Philip Morris, Inc., et al., San Francisco County Superior Court, California, filed July 1, 1998. Central Valley Painting & Decorating Health & Welfare Trust Fund v. Philip Morris, Inc., et al., San Francisco County Superior Court, California, filed July 6, 1998. State of Vermont v. Philip Morris Incorporated, et al., Superior Court, Burlington, Vermont, filed July 7, 1998. Effective April 23, 1998, Vermont enacted a statute permitting the state to seek recovery from a "tobacco manufacturer" for the amount paid or likely to be paid in Medicaid benefits for tobacco-related health conditions, and for punitive damages, costs, reasonable attorneys' fees, and other relief. Among other things, the statute abrogated certain affirmative defenses, listed elements of the state's new direct cause of action, and authorized the use of statistical analysis to prove damages. PM Inc. and four other domestic cigarette manufacturers brought suit in federal court in Vermont against state officials for declaratory and injunctive relief on the grounds that enforcement of the statute would violate the United States Constitution and federal law. In July 1998, the State of Vermont brought a state court action under the new statute seeking damages in an amount sufficient to reimburse the state for expenditures made or to be made after the effective date of the statute for health conditions allegedly caused by the tobacco companies' tobacco products, for punitive damages, and certain other relief. Michael H. Holland, et al. v. Philip Morris, et al., United States District Court, District of Columbia, filed July 9, 1998. Northern California Tile Industry Health & Welfare Trust Fund v. Philip Morris, Inc., et al., San Francisco County Superior Court, California, filed July 29, 1998. San Francisco Culinary, Bartenders and Service Employees Welfare Fund v. Philip Morris, Inc., et al., San Francisco County Superior Court, California, filed July 30, 1998. IBEW Local 595 Health and Welfare Trust Fund v. Philip Morris, Inc., et al., Alameda County Superior Court, California, filed July 30, 1998. Shop Ironworkers Local 790 Welfare Plan v. Philip Morris, Inc., et al., Alameda County Superior Court, California, filed July 31, 1998. Contractors, Laborers, Teamsters & Engineers Health & Welfare Plan v. Philip Morris, Inc., et al., United States District Court, Nebraska, filed August 11, 1998. State of Nebraska v. R.J. Reynolds Tobacco Company, et al., District Court, Lancaster County, Nebraska, filed August 21, 1998. Smokers for Fairness, LLC et al. v. The State of California, et al., Los Angeles, Superior Court, California, filed September 25, 1998. This purported class action is brought on behalf of all California smokers. It purports to allege eight causes of action: two against the State of California and other California public entities, and six against PM Inc. and other tobacco company defendants. Against the state and the 17 Exhibit 99.1 other public entities, the first cause of action seeks to prohibit the public entities from concluding any settlements with the tobacco company defendants; the second cause of action seeks a refund of all tobacco taxes the purported class has paid. Against PM Inc. and the other tobacco company defendants, plaintiffs allege causes of action for fraud, violations of the California Consumers Legal Remedies Act, breach of express and implied warranties, strict liability, and violations of the California Unfair Competition Law and False Advertising Law. Plaintiffs seek from the tobacco companies unspecified general damages, special damages, restitution, a permanent and preliminary injunction restraining defendants from committing the acts and offenses alleged in the complaint, and attorney's fees and costs. Kupat Holim Clalit v. Philip Morris, Inc., et al., Jerusalem District Court, Israel, filed September 28, 1998. The Republic of Panama v. The American Tobacco Company, Inc., et al., United States District Court, Eastern District, Louisiana, filed October 16, 1998. Pechanga Band of Luiseno Mission Indians, et al. v. Philip Morris, Inc., et al., Superior Court, San Diego County, California, filed October 30, 1998. Plaintiffs have stated that they intend to petition for coordination of this action as an add-on to one of the coordination proceedings in California. In addition to the foregoing actions, other foreign, state and local government entities and others, including unions, have announced they are considering filing health care cost recovery actions. 18 EX-99.2 7 EX99-2 EXHIBIT 99.2 Trial Schedule Set forth below is a list of smoking and health class actions and health care cost recovery actions currently scheduled for trial through 2000 against PM Inc. and, in some cases, the Company. Trial dates, however, are subject to change.
Case Type of Action Trial Date ---- -------------- ---------- Engle, et al. v. R.J. Reynolds Tobacco Smoking and Health Class Action In Progress Co., et al. State of Washington v. The American Health Care Cost Recovery Action In Progress Tobacco Company, et al. State of Oklahoma, et al. v. R.J. Health Care Cost Recovery Action January 25, 1999 Reynolds Tobacco Company, et al. Commonwealth of Massachusetts v. Philip Health Care Cost Recovery Action February 1, 1999 Morris Inc., et al. County of Los Angeles v. R.J. Reynolds Health Care Cost Recovery Action February 5, 1999 Tobacco Company, et al. Iron Workers Local Union No. 17 Health Care Cost Recovery Action February 22, 1999 Insurance Fund, et al. v. Philip Morris, Inc., et al. State of Maryland v. Philip Morris Health Care Cost Recovery Action April 5, 1999 Incorporated, et al. State of Oregon v. The American Tobacco Health Care Cost Recovery Action April 5, 1999 Company, et al. State of Arizona v. The American Tobacco Health Care Cost Recovery Action April 14, 1999 Company, et al. Insolia, et al. v. Philip Morris Smoking and Health Class Action May 3, 1999 Incorporated, et al. National Asbestos Workers Medical Fund, Health Care Cost Recovery Action May 3, 1999 et al. v. Philip Morris Incorporated, et al. State of New York v. Philip Morris Health Care Cost Recovery Action June 17, 1999 Incorporated, et al. EXHIBIT 99.2 Case Type of Action Trial Date ---- -------------- ---------- Clay, et al. v. The American Tobacco Smoking and Health Class Action August 1999 Company, Inc., et al. Specific Date to be Set Blaylock (formerly Holmes and Crozier) Smoking and Health Class Action August 23, 1999 v. The American Tobacco Company, et al. State of Connecticut v. Philip Morris Health Care Cost Recovery Action September 1, 1999 Incorporated, et al. State of Hawaii v. Brown & Williamson Health Care Cost Recovery Action September 7, 1999 Tobacco Corporation, et al. Northwest Laborers-Employers Health and Health Care Cost Recovery Action September 7, 1999 Security Trust Fund, et al. v. Philip Morris, Inc., et al. State of Wisconsin v. Philip Morris Health Care Cost Recovery Action September 13, 1999 Incorporated, et al. Richardson, et al. v. Philip Morris Smoking and Health Class Action September 15, 1999 Incorporated, et al. State of Vermont v. Philip Morris, Health Care Cost Recovery Action November 13, 1999 Incorporated, et al. State of Missouri v. American Tobacco Health Care Cost Recovery Action January 24, 2000 Company, Inc., et al. State of Ohio v. Philip Morris, Health Care Cost Recovery Action January 31, 2000 Incorporated, et al. State of Alaska v. Philip Morris, Health Care Cost Recovery Action February 1, 2000 Incorporated, et al. Carpenters & Joiners Welfare Fund, et Health Care Cost Recovery Action March 1, 2000 al. v. Philip Morris Incorporated, et al. Conwed Corporation and Leucadia, Inc. v. Health Care Cost Recovery Action March 1, 2000 RJ Reynolds Tobacco Company, et al. 2 EXHIBIT 99.2 Case Type of Action Trial Date ---- -------------- ---------- Group Health Plan, et al. v. Philip Health Care Cost Recovery Action March 1, 2000 Morris, Inc., et al. Thompson, et al. v. American Tobacco Smoking and Health Class Action March 1, 2000 Company, Inc., et al. West Virginia--Ohio Valley Area Health Care Cost Recovery Action March 7, 2000 International Brotherhood of Electrical Workers Welfare Fund v. The American Tobacco Company, et al. Rossello, et al. v. Brown & Williamson Health Care Cost Recovery Action June 1, 2000 Tobacco Corporation, et al. West Virginia Laborers' Pension Fund, et Health Care Cost Recovery Action June 6, 2000 al. v. Philip Morris, Inc., et al. State of Nevada v. Philip Morris, Health Care Cost Recovery Action June 19, 2000 Incorporated, et al.
3 EX-99.3 8 MASTER SETTLEMENT AGREEMENT Exhibit 99.3 PROPOSED MASTER SETTLEMENT AGREEMENT MASTER SETTLEMENT AGREEMENT --------------------------- TABLE OF CONTENTS ----------------- Page ---- I. RECITALS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 II. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 (a) "Account" . . . . . . . . . . . . . . . . . . . . . . . . . . 3 (b) "Adult" . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 (c) "Adult-Only Facility" . . . . . . . . . . . . . . . . . . . . 3 (d) "Affiliate" . . . . . . . . . . . . . . . . . . . . . . . . . 3 (e) "Agreement" . . . . . . . . . . . . . . . . . . . . . . . . . 4 (f) "Allocable Share" . . . . . . . . . . . . . . . . . . . . . . 4 (g) "Allocated Payment" . . . . . . . . . . . . . . . . . . . . . 4 (h) "Bankruptcy". . . . . . . . . . . . . . . . . . . . . . . . . 4 (i) "Brand Name". . . . . . . . . . . . . . . . . . . . . . . . . 5 (j) "Brand Name Sponsorship". . . . . . . . . . . . . . . . . . . 5 (k) "Business Day". . . . . . . . . . . . . . . . . . . . . . . . 6 (l) "Cartoon" . . . . . . . . . . . . . . . . . . . . . . . . . . 6 (m) "Cigarette" . . . . . . . . . . . . . . . . . . . . . . . . . 6 (n) "Claims". . . . . . . . . . . . . . . . . . . . . . . . . . . 7 (o) "Consent Decree". . . . . . . . . . . . . . . . . . . . . . . 7 (p) "Court" . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 (q) "Escrow". . . . . . . . . . . . . . . . . . . . . . . . . . . 7 (r) "Escrow Agent". . . . . . . . . . . . . . . . . . . . . . . . 7 (s) "Escrow Agreement". . . . . . . . . . . . . . . . . . . . . . 8 (t) "Federal Tobacco Legislation Offset". . . . . . . . . . . . . 8 (u) "Final Approval". . . . . . . . . . . . . . . . . . . . . . . 8 (v) "Foundation". . . . . . . . . . . . . . . . . . . . . . . . . 8 (w) "Independent Auditor" . . . . . . . . . . . . . . . . . . . . 8 (x) "Inflation Adjustment". . . . . . . . . . . . . . . . . . . . 8 (y) "Litigating Releasing Parties Offset" . . . . . . . . . . . . 8 (z) "Market Share". . . . . . . . . . . . . . . . . . . . . . . . 9 (aa) "MSA Execution Date". . . . . . . . . . . . . . . . . . . . . 9 (bb) "NAAG". . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 (cc) "Non-Participating Manufacturer". . . . . . . . . . . . . . . 9 (dd) "Non-Settling States Reduction" . . . . . . . . . . . . . . . 9 (ee) "Notice Parties". . . . . . . . . . . . . . . . . . . . . . . 9 (ff) "NPM Adjustment". . . . . . . . . . . . . . . . . . . . . . .10 (gg) "NPM Adjustment Percentage" . . . . . . . . . . . . . . . . .10 (hh) "Original Participating Manufacturers". . . . . . . . . . . .10 (ii) "Outdoor Advertising" . . . . . . . . . . . . . . . . . . . .10 (jj) "Participating Manufacturer". . . . . . . . . . . . . . . . .11 -i- (kk) "Previously Settled States Reduction" . . . . . . . . . . . .12 (ll) "Prime Rate". . . . . . . . . . . . . . . . . . . . . . . . .12 (mm) "Relative Market Share" . . . . . . . . . . . . . . . . . . .12 (nn) "Released Claims" . . . . . . . . . . . . . . . . . . . . . .13 (oo) "Released Parties". . . . . . . . . . . . . . . . . . . . . .14 (pp) "Releasing Parties" . . . . . . . . . . . . . . . . . . . . .14 (qq) "Settling State". . . . . . . . . . . . . . . . . . . . . . .15 (rr) "State" . . . . . . . . . . . . . . . . . . . . . . . . . . .15 (ss) "State-Specific Finality" . . . . . . . . . . . . . . . . . .15 (tt) "Subsequent Participating Manufacturer" . . . . . . . . . . .16 (uu) "Tobacco Product Manufacturer". . . . . . . . . . . . . . . .16 (vv) "Tobacco Products". . . . . . . . . . . . . . . . . . . . . .17 (ww) "Tobacco-Related Organizations" . . . . . . . . . . . . . . .17 (xx) "Transit Advertisements". . . . . . . . . . . . . . . . . . .17 (yy) "Underage". . . . . . . . . . . . . . . . . . . . . . . . . .18 (zz) "Video Game Arcade" . . . . . . . . . . . . . . . . . . . . .18 (aaa) "Volume Adjustment" . . . . . . . . . . . . . . . . . . . . .18 (bbb) "Youth" . . . . . . . . . . . . . . . . . . . . . . . . . . .18 III. PERMANENT RELIEF. . . . . . . . . . . . . . . . . . . . . . . . . . .18 (a) Prohibition on Youth Targeting. . . . . . . . . . . . . . . .18 (b) Ban on Use of Cartoons. . . . . . . . . . . . . . . . . . . .19 (c) Limitation of Tobacco Brand Name Sponsorships . . . . . . . .19 (d) Elimination of Outdoor Advertising and Transit Advertisements. . . . . . . . . . . . . . . . . . . . . . . .22 (e) Prohibition on Payments Related to Tobacco Products and Media . . . . . . . . . . . . . . . . . . . . . . . . . . . .24 (f) Ban on Tobacco Brand Name Merchandise . . . . . . . . . . . .25 (g) Ban on Youth Access to Free Samples . . . . . . . . . . . . .26 (h) Ban on Gifts to Underage Persons Based on Proofs of Purchase. . . . . . . . . . . . . . . . . . . . . .26 (i) Limitation on Third-Party Use of Brand Names. . . . . . . . .27 (j) Ban on Non-Tobacco Brand Names. . . . . . . . . . . . . . . .27 (k) Minimum Pack Size of Twenty Cigarettes. . . . . . . . . . . .28 (l) Corporate Culture Commitments Related to Youth Access and Consumption . . . . . . . . . . . . . . . . . . . . . . . . .29 (m) Limitations on Lobbying . . . . . . . . . . . . . . . . . . .29 (n) Restriction on Advocacy Concerning Settlement Proceeds. . . .32 (o) Dissolution of The Tobacco Institute, Inc., the Council for Tobacco Research-U.S.A., Inc. and the Center for Indoor Air Research, Inc.. . . . . . . . . . . . . . . . . . . . . .32 (p) Regulation and Oversight of New Tobacco-Related Trade Associations. . . . . . . . . . . . . . . . . . . . . .33 (q) Prohibition on Agreements to Suppress Research. . . . . . . .35 (r) Prohibition on Material Misrepresentations. . . . . . . . . .36 -ii- IV. PUBLIC ACCESS TO DOCUMENTS. . . . . . . . . . . . . . . . . . . . . .36 V. TOBACCO CONTROL AND UNDERAGE USE LAWS . . . . . . . . . . . . . . . .41 VI. ESTABLISHMENT OF A NATIONAL FOUNDATION. . . . . . . . . . . . . . . .41 (a) Foundation Purposes . . . . . . . . . . . . . . . . . . . . .41 (b) Base Foundation Payments. . . . . . . . . . . . . . . . . . .42 (c) National Public Education Fund Payments . . . . . . . . . . .42 (d) Creation and Organization of the Foundation . . . . . . . . .43 (e) Foundation Affiliation. . . . . . . . . . . . . . . . . . . .44 (f) Foundation Functions. . . . . . . . . . . . . . . . . . . . .44 (g) Foundation Grant-Making . . . . . . . . . . . . . . . . . . .46 (h) Foundation Activities . . . . . . . . . . . . . . . . . . . .47 (i) Severance of this Section . . . . . . . . . . . . . . . . . .47 VII. ENFORCEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . .48 (a) Jurisdiction. . . . . . . . . . . . . . . . . . . . . . . . .48 (b) Enforcement of Consent Decree . . . . . . . . . . . . . . . .49 (c) Enforcement of this Agreement . . . . . . . . . . . . . . . .49 (d) Right of Review . . . . . . . . . . . . . . . . . . . . . . .51 (e) Applicability . . . . . . . . . . . . . . . . . . . . . . . .51 (f) Coordination of Enforcement . . . . . . . . . . . . . . . . .51 (g) Inspection and Discovery Rights . . . . . . . . . . . . . . .52 VIII. CERTAIN ONGOING RESPONSIBILITIES OF THE SETTLING STATES . . . . . . .53 IX. PAYMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .54 (a) All Payments Into Escrow. . . . . . . . . . . . . . . . . . .54 (b) Initial Payments. . . . . . . . . . . . . . . . . . . . . . .55 (c) Annual Payments and Strategic Contribution Payments . . . . .56 (d) Non-Participating Manufacturer Adjustment . . . . . . . . . .58 (e) Supplemental Payments . . . . . . . . . . . . . . . . . . . .76 (f) Payment Responsibility. . . . . . . . . . . . . . . . . . . .77 (g) Corporate Structures. . . . . . . . . . . . . . . . . . . . .77 (h) Accrual of Interest . . . . . . . . . . . . . . . . . . . . .77 (i) Payments by Subsequent Participating Manufacturers. . . . . .78 (j) Order of Application of Allocations, Offsets, Reductions and Adjustments . . . . . . . . . . . . . . . . . . . . . . . . .80 X. EFFECT OF FEDERAL TOBACCO-RELATED LEGISLATION . . . . . . . . . . . .83 -iii- XI. CALCULATION AND DISBURSEMENT OF PAYMENTS. . . . . . . . . . . . . . .86 (a) Independent Auditor to Make All Calculations. . . . . . . . .86 (b) Identity of Independent Auditor . . . . . . . . . . . . . . .87 (c) Resolution of Disputes. . . . . . . . . . . . . . . . . . . .88 (d) General Provisions as to Calculation of Payments. . . . . . .88 (e) General Treatment of Payments . . . . . . . . . . . . . . . .94 (f) Disbursement and Charges Not Contingent on Final Approval. . . . . . . . . . . . . . . . . . . . . . . .94 (g) Payments to be Made Only After Final Approval . . . . . . . 102 (h) Applicability to Section XVII Payments. . . . . . . . . . . 103 (i) Miscalculated or Disputed Payments. . . . . . . . . . . . . 103 (j) Payments After Applicable Condition . . . . . . . . . . . . 109 XII. SETTLING STATES' RELEASE, DISCHARGE AND COVENANT. . . . . . . . . . 109 (a) Release . . . . . . . . . . . . . . . . . . . . . . . . . . 109 (b) Released Claims Against Released Parties. . . . . . . . . . 116 XIII. CONSENT DECREES AND DISMISSAL OF CLAIMS . . . . . . . . . . . . . . 119 XIV. PARTICIPATING MANUFACTURERS' DISMISSAL OF RELATED LAWSUITS. . . . . 121 XV. VOLUNTARY ACT OF THE PARTIES. . . . . . . . . . . . . . . . . . . . 122 XVI. CONSTRUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . 122 XVII. RECOVERY OF COSTS AND ATTORNEYS' FEES . . . . . . . . . . . . . . . 123 XVIII. MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . . . 125 (a) Effect of Current or Future Law . . . . . . . . . . . . . . 125 (b) Limited Most-Favored Nation Provision . . . . . . . . . . . 125 (c) Transfer of Tobacco Brands. . . . . . . . . . . . . . . . . 129 (d) Payments in Settlement. . . . . . . . . . . . . . . . . . . 130 (e) No Determination or Admission . . . . . . . . . . . . . . . 130 (f) Non-Admissibility . . . . . . . . . . . . . . . . . . . . . 131 (g) Representations of Parties. . . . . . . . . . . . . . . . . 131 (h) Obligations Several, Not Joint. . . . . . . . . . . . . . . 132 (i) Headings. . . . . . . . . . . . . . . . . . . . . . . . . . 132 (j) Amendment and Waiver. . . . . . . . . . . . . . . . . . . . 132 (k) Notices . . . . . . . . . . . . . . . . . . . . . . . . . . 132 (l) Cooperation . . . . . . . . . . . . . . . . . . . . . . . . 133 (m) Designees to Discuss Disputes . . . . . . . . . . . . . . . 133 (n) Governing Law . . . . . . . . . . . . . . . . . . . . . . . 134 -iv- (o) Severability. . . . . . . . . . . . . . . . . . . . . . . . 134 (p) Intended Beneficiaries. . . . . . . . . . . . . . . . . . . 136 (q) Counterparts. . . . . . . . . . . . . . . . . . . . . . . . 136 (r) Applicability . . . . . . . . . . . . . . . . . . . . . . . 136 (s) Preservation of Privilege . . . . . . . . . . . . . . . . . 136 (t) Non-Release . . . . . . . . . . . . . . . . . . . . . . . . 136 (u) Termination . . . . . . . . . . . . . . . . . . . . . . . . 137 (v) Freedom of Information Requests . . . . . . . . . . . . . . 138 (w) Bankruptcy. . . . . . . . . . . . . . . . . . . . . . . . . 138 (x) Notice of Material Transfers. . . . . . . . . . . . . . . . 144 (y) Entire Agreement. . . . . . . . . . . . . . . . . . . . . . 144 (z) Business Days . . . . . . . . . . . . . . . . . . . . . . . 144 (aa) Subsequent Signatories. . . . . . . . . . . . . . . . . . . 144 (bb) Decimal Places. . . . . . . . . . . . . . . . . . . . . . . 145 (cc) Regulatory Authority. . . . . . . . . . . . . . . . . . . . 145 (dd) Successors. . . . . . . . . . . . . . . . . . . . . . . . . 145 (ee) Export Packaging. . . . . . . . . . . . . . . . . . . . . . 145 (ff) Actions Within Geographic Boundaries of Settling States . . . . . . . . . . . . . . . . . . . . . . 145 (gg) Notice to Affiliates. . . . . . . . . . . . . . . . . . . . 146 EXHIBIT A STATE ALLOCATION PERCENTAGES EXHIBIT B FORM OF ESCROW AGREEMENT EXHIBIT C FORMULA FOR CALCULATING INFLATION ADJUSTMENTS EXHIBIT D LIST OF LAWSUITS EXHIBIT E FORMULA FOR CALCULATING VOLUME ADJUSTMENTS EXHIBIT F POTENTIAL LEGISLATION NOT TO BE OPPOSED EXHIBIT G OBLIGATIONS OF THE TOBACCO INSTITUTE UNDER THE MASTER SETTLEMENT AGREEMENT EXHIBIT H DOCUMENT PRODUCTION EXHIBIT I INDEX AND SEARCH FEATURES FOR DOCUMENT WEBSITE EXHIBIT J TOBACCO ENFORCEMENT FUND PROTOCOL EXHIBIT K MARKET CAPITALIZATION PERCENTAGES EXHIBIT L MODEL CONSENT DECREE -v- EXHIBIT M LIST OF PARTICIPATING MANUFACTURERS' LAWSUITS AGAINST THE SETTLING STATES EXHIBIT N LITIGATING POLITICAL SUBDIVISIONS EXHIBIT O [MODEL] STATE FEE PAYMENT AGREEMENT EXHIBIT P NOTICES EXHIBIT Q 1997 DATA EXHIBIT R EXCLUSION OF CERTAIN BRAND NAMES EXHIBIT S DESIGNATION OF OUTSIDE COUNSEL EXHIBIT T MODEL STATUTE EXHIBIT U STRATEGIC CONTRIBUTION FUND PROTOCOL -vi- MASTER SETTLEMENT AGREEMENT This Master Settlement Agreement is made by the undersigned Settling State officials (on behalf of their respective Settling States) and the undersigned Participating Manufacturers to settle and resolve with finality all Released Claims against the Participating Manufacturers and related entities as set forth herein. This Agreement constitutes the documentation effecting this settlement with respect to each Settling State, and is intended to and shall be binding upon each Settling State and each Participating Manufacturer in accordance with the terms hereof. I. RECITALS WHEREAS, more than 40 States have commenced litigation asserting various claims for monetary, equitable and injunctive relief against certain tobacco product manufacturers and others as defendants, and the States that have not filed suit can potentially assert similar claims; WHEREAS, the Settling States that have commenced litigation have sought to obtain equitable relief and damages under state laws, including consumer protection and/or antitrust laws, in order to further the Settling States' policies regarding public health, including policies adopted to achieve a significant reduction in smoking by Youth; WHEREAS, defendants have denied each and every one of the Settling States' allegations of unlawful conduct or wrongdoing and have asserted a number of defenses to the Settling States' claims, which defenses have been contested by the Settling States; WHEREAS, the Settling States and the Participating Manufacturers are committed to reducing underage tobacco use by discouraging such use and by preventing Youth access to Tobacco Products; WHEREAS, the Participating Manufacturers recognize the concern of the tobacco grower community that it may be adversely affected by the potential reduction in tobacco consumption resulting from this settlement, reaffirm their commitment to work cooperatively to address concerns about the potential adverse economic impact on such community, and will, within 30 days after the MSA Execution Date, meet with the political leadership of States with grower communities to address these economic concerns; WHEREAS, the undersigned Settling State officials believe that entry into this Agreement and uniform consent decrees with the tobacco industry is necessary in order to further the Settling States' policies designed to reduce Youth smoking, to promote the public health and to secure monetary payments to the Settling States; and WHEREAS, the Settling States and the Participating Manufacturers wish to avoid the further expense, delay, inconvenience, burden and uncertainty of continued litigation (including appeals from any verdicts), and, therefore, have agreed to settle their respective lawsuits and potential claims pursuant to terms which will achieve for the Settling States and their citizens significant funding for the advancement of public health, the implementation of important tobacco-related public health measures, including the enforcement of the mandates and restrictions related to such measures, as well as funding for a national Foundation dedicated to significantly reducing the use of Tobacco Products by Youth; -2- NOW, THEREFORE, BE IT KNOWN THAT, in consideration of the implementation of tobacco-related health measures and the payments to be made by the Participating Manufacturers, the release and discharge of all claims by the Settling States, and such other consideration as described herein, the sufficiency of which is hereby acknowledged, the Settling States and the Participating Manufacturers, acting by and through their authorized agents, memorialize and agree as follows: II. DEFINITIONS (a) "Account" has the meaning given in the Escrow Agreement. (b) "Adult" means any person or persons who are not Underage. (c) "Adult-Only Facility" means a facility or restricted area (whether open-air or enclosed) where the operator ensures or has a reasonable basis to believe (such as by checking identification as required under state law, or by checking the identification of any person appearing to be under the age of 27) that no Underage person is present. A facility or restricted area need not be permanently restricted to Adults in order to constitute an Adult-Only Facility, provided that the operator ensures or has a reasonable basis to believe that no Underage person is present during the event or time period in question. (d) "Affiliate" means a person who directly or indirectly owns or controls, is owned or controlled by, or is under common ownership or control with, another person. Solely for purposes of this definition, the terms "owns," "is owned" and "ownership" mean ownership of an equity interest, or the equivalent thereof, of 10 percent or more, and the term "person" means an individual, partnership, committee, association, corporation or any other organization or group of persons. -3- (e) "Agreement" means this Master Settlement Agreement, together with the exhibits hereto, as it may be amended pursuant to subsection XVIII(j). (f) "Allocable Share" means the percentage set forth for the State in question as listed in Exhibit A hereto, without regard to any subsequent alteration or modification of such State's percentage share agreed to by or among any States; or, solely for the purpose of calculating payments under subsection IX(c)(2) (and corresponding payments under subsection IX(i)), the percentage disclosed for the State in question pursuant to subsection IX(c)(2)(A) prior to June 30, 1999, without regard to any subsequent alteration or modification of such State's percentage share agreed to by or among any States. (g) "Allocated Payment" means a particular Settling State's Allocable Share of the sum of all of the payments to be made by the Original Participating Manufacturers in the year in question pursuant to subsections IX(c)(1) and IX(c)(2), as such payments have been adjusted, reduced and allocated pursuant to clause "First" through the first sentence of clause "Fifth" of subsection IX(j), but before application of the other offsets and adjustments described in clauses "Sixth" through "Thirteenth" of subsection IX(j). (h) "Bankruptcy" means, with respect to any entity, the commencement of a case or other proceeding (whether voluntary or involuntary) seeking any of (1) liquidation, reorganization, rehabilitation, receivership, conservatorship, or other relief with respect to such entity or its debts under any bankruptcy, insolvency or similar law now or hereafter in effect; (2) the appointment of a trustee, receiver, liquidator, custodian or similar official of such entity or any substantial part of its business or property; (3) the consent of such entity to any of the relief described in (1) above or to the appointment of any official described in (2) above in any such case or other proceeding involuntarily commenced -4- against such entity; or (4) the entry of an order for relief as to such entity under the federal bankruptcy laws as now or hereafter in effect. Provided, however, that an involuntary case or proceeding otherwise within the foregoing definition shall not be a "Bankruptcy" if it is or was dismissed within 60 days of its commencement. (i) "Brand Name" means a brand name (alone or in conjunction with any other word), trademark, logo, symbol, motto, selling message, recognizable pattern of colors, or any other indicia of product identification identical or similar to, or identifiable with, those used for any domestic brand of Tobacco Products. Provided, however, that the term "Brand Name" shall not include the corporate name of any Tobacco Product Manufacturer that does not after the MSA Execution Date sell a brand of Tobacco Products in the States that includes such corporate name. (j) "Brand Name Sponsorship" means an athletic, musical, artistic, or other social or cultural event as to which payment is made (or other consideration is provided) in exchange for use of a Brand Name or Names (1) as part of the name of the event or (2) to identify, advertise, or promote such event or an entrant, participant or team in such event in any other way. Sponsorship of a single national or multi-state series or tour (for example, NASCAR (including any number of NASCAR races)), or of one or more events within a single national or multi-state series or tour, or of an entrant, participant, or team taking part in events sanctioned by a single approving organization (e.g., NASCAR or CART), constitutes one Brand Name Sponsorship. Sponsorship of an entrant, participant, or team by a Participating Manufacturer using a Brand Name or Names in an event that is part of a series or tour that is sponsored by such Participating Manufacturer or that is part of a series or tour in which any one or more events are sponsored by such Participating -5- Manufacturer does not constitute a separate Brand Name Sponsorship. Sponsorship of an entrant, participant, or team by a Participating Manufacturer using a Brand Name or Names in any event (or series of events) not sponsored by such Participating Manufacturer constitutes a Brand Name Sponsorship. The term "Brand Name Sponsorship" shall not include an event in an Adult-Only Facility. (k) "Business Day" means a day which is not a Saturday or Sunday or legal holiday on which banks are authorized or required to close in New York, New York. (l) "Cartoon" means any drawing or other depiction of an object, person, animal, creature or any similar caricature that satisfies any of the following criteria: (1) the use of comically exaggerated features; (2) the attribution of human characteristics to animals, plants or other objects, or the similar use of anthropomorphic technique; or (3) the attribution of unnatural or extrahuman abilities, such as imperviousness to pain or injury, X-ray vision, tunneling at very high speeds or transformation. The term "Cartoon" includes "Joe Camel," but does not include any drawing or other depiction that on July 1, 1998, was in use in any State in any Participating Manufacturer's corporate logo or in any Participating Manufacturer's Tobacco Product packaging. (m) "Cigarette" means any product that contains nicotine, is intended to be burned or heated under ordinary conditions of use, and consists of or contains (1) any roll of tobacco wrapped in paper or in any substance not containing tobacco; or (2) tobacco, in any form, that is functional in the product, which, because of its appearance, the type of tobacco used in the filler, or its packaging and labeling, is likely to be offered to, or -6- purchased by, consumers as a cigarette; or (3) any roll of tobacco wrapped in any substance containing tobacco which, because of its appearance, the type of tobacco used in the filler, or its packaging and labeling, is likely to be offered to, or purchased by, consumers as a cigarette described in clause (1) of this definition. The term "Cigarette" includes "roll-your-own" (i.e., any tobacco which, because of its appearance, type, packaging, or labeling is suitable for use and likely to be offered to, or purchased by, consumers as tobacco for making cigarettes). Except as provided in subsections II(z) and II(mm), 0.0325 ounces of "roll-your-own" tobacco shall constitute one individual "Cigarette." (n) "Claims" means any and all manner of civil (i.e., non-criminal): claims, demands, actions, suits, causes of action, damages (whenever incurred), liabilities of any nature including civil penalties and punitive damages, as well as costs, expenses and attorneys' fees (except as to the Original Participating Manufacturers' obligations under section XVII), known or unknown, suspected or unsuspected, accrued or unaccrued, whether legal, equitable, or statutory. (o) "Consent Decree" means a state-specific consent decree as described in subsection XIII(b)(1)(B) of this Agreement. (p) "Court" means the respective court in each Settling State to which this Agreement and the Consent Decree are presented for approval and/or entry as to that Settling State. (q) "Escrow" has the meaning given in the Escrow Agreement. (r) "Escrow Agent" means the escrow agent under the Escrow Agreement. -7- (s) "Escrow Agreement" means an escrow agreement substantially in the form of Exhibit B. (t) "Federal Tobacco Legislation Offset" means the offset described in section X. (u) "Final Approval" means the earlier of: (1) the date by which State-Specific Finality in a sufficient number of Settling States has occurred; or (2) June 30, 2000. For the purposes of this subsection (u), "State-Specific Finality in a sufficient number of Settling States" means that State-Specific Finality has occurred in both: (A) a number of Settling States equal to at least 80% of the total number of Settling States; and (B) Settling States having aggregate Allocable Shares equal to at least 80% of the total aggregate Allocable Shares assigned to all Settling States. Notwithstanding the foregoing, the Original Participating Manufacturers may, by unanimous written agreement, waive any requirement for Final Approval set forth in subsections (A) or (B) hereof. (v) "Foundation" means the foundation described in section VI. (w) "Independent Auditor" means the firm described in subsection XI(b). (x) "Inflation Adjustment" means an adjustment in accordance with the formulas for inflation adjustments set forth in Exhibit C. (y) "Litigating Releasing Parties Offset" means the offset described in subsection XII(b). -8- (z) "Market Share" means a Tobacco Product Manufacturer's respective share (expressed as a percentage) of the total number of individual Cigarettes sold in the fifty United States, the District of Columbia and Puerto Rico during the applicable calendar year, as measured by excise taxes collected by the federal government and, in the case of sales in Puerto Rico, arbitrios de cigarillos collected by the Puerto Rico taxing authority. For purposes of the definition and determination of "Market Share" with respect to calculations under subsection IX(i), 0.09 ounces of "roll your own" tobacco shall constitute one individual Cigarette; for purposes of the definition and determination of "Market Share" with respect to all other calculations, 0.0325 ounces of "roll your own" tobacco shall constitute one individual Cigarette. (aa) "MSA Execution Date" means November 23, 1998. (bb) "NAAG" means the National Association of Attorneys General, or its successor organization that is directed by the Attorneys General to perform certain functions under this Agreement. (cc) "Non-Participating Manufacturer" means any Tobacco Product Manufacturer that is not a Participating Manufacturer. (dd) "Non-Settling States Reduction" means a reduction determined by multiplying the amount to which such reduction applies by the aggregate Allocable Shares of those States that are not Settling States on the date 15 days before such payment is due. (ee) "Notice Parties" means each Participating Manufacturer, each Settling State, the Escrow Agent, the Independent Auditor and NAAG. -9- (ff) "NPM Adjustment" means the adjustment specified in subsection IX(d). (gg) "NPM Adjustment Percentage" means the percentage determined pursuant to subsection IX(d). (hh) "Original Participating Manufacturers" means the following: Brown & Williamson Tobacco Corporation, Lorillard Tobacco Company, Philip Morris Incorporated and R.J. Reynolds Tobacco Company, and the respective successors of each of the foregoing. Except as expressly provided in this Agreement, once an entity becomes an Original Participating Manufacturer, such entity shall permanently retain the status of Original Participating Manufacturer. (ii) "Outdoor Advertising" means (1) billboards, (2) signs and placards in arenas, stadiums, shopping malls and Video Game Arcades (whether any of the foregoing are open air or enclosed) (but not including any such sign or placard located in an Adult-Only Facility), and (3) any other advertisements placed (A) outdoors, or (B) on the inside surface of a window facing outward. Provided, however, that the term "Outdoor Advertising" does not mean (1) an advertisement on the outside of a Tobacco Product manufacturing facility; (2) an individual advertisement that does not occupy an area larger than 14 square feet (and that neither is placed in such proximity to any other such advertisement so as to create a single "mosaic"-type advertisement larger than 14 square feet, nor functions solely as a segment of a larger advertising unit or series), and that is placed (A) on the outside of any retail establishment that sells Tobacco Products (other than solely through a vending machine), (B) outside (but on the property of) any such establishment, or (C) on the inside surface of a window facing outward in any such establishment; (3) an advertisement inside a retail establishment that sells Tobacco -10- Products (other than solely through a vending machine) that is not placed on the inside surface of a window facing outward; or (4) an outdoor advertisement at the site of an event to be held at an Adult-Only Facility that is placed at such site during the period the facility or enclosed area constitutes an Adult-Only Facility, but in no event more than 14 days before the event, and that does not advertise any Tobacco Product (other than by using a Brand Name to identify the event). (jj) "Participating Manufacturer" means a Tobacco Product Manufacturer that is or becomes a signatory to this Agreement, provided that (1) in the case of a Tobacco Product Manufacturer that is not an Original Participating Manufacturer, such Tobacco Product Manufacturer is bound by this Agreement and the Consent Decree (or, in any Settling State that does not permit amendment of the Consent Decree, a consent decree containing terms identical to those set forth in the Consent Decree) in all Settling States in which this Agreement and the Consent Decree binds Original Participating Manufacturers (provided, however, that such Tobacco Product Manufacturer need only become bound by the Consent Decree in those Settling States in which the Settling State has filed a Released Claim against it), and (2) in the case of a Tobacco Product Manufacturer that signs this Agreement after the MSA Execution Date, such Tobacco Product Manufacturer, within a reasonable period of time after signing this Agreement, makes any payments (including interest thereon at the Prime Rate) that it would have been obligated to make in the intervening period had it been a signatory as of the MSA Execution Date. "Participating Manufacturer" shall also include the successor of a Participating Manufacturer. Except as expressly provided in this Agreement, once an entity becomes a Participating Manufacturer such entity shall permanently retain the -11- status of Participating Manufacturer. Each Participating Manufacturer shall regularly report its shipments of Cigarettes in or to the fifty United States, the District of Columbia and Puerto Rico to Management Science Associates, Inc. (or a successor entity as set forth in subsection (mm)). Solely for purposes of calculations pursuant to subsection IX(d), a Tobacco Product Manufacturer that is not a signatory to this Agreement shall be deemed to be a "Participating Manufacturer" if the Original Participating Manufacturers unanimously consent in writing. (kk) "Previously Settled States Reduction" means a reduction determined by multiplying the amount to which such reduction applies by 12.4500000%, in the case of payments due in or prior to 2007; 12.2373756%, in the case of payments due after 2007 but before 2018; and 11.0666667%, in the case of payments due in or after 2018. (ll) "Prime Rate" shall mean the prime rate as published from time to time by the Wall Street Journal or, in the event the Wall Street Journal is no longer published or no longer publishes such rate, an equivalent successor reference rate determined by the Independent Auditor. (mm) "Relative Market Share" means an Original Participating Manufacturer's respective share (expressed as a percentage) of the total number of individual Cigarettes shipped in or to the fifty United States, the District of Columbia and Puerto Rico by all the Original Participating Manufacturers during the calendar year immediately preceding the year in which the payment at issue is due (regardless of when such payment is made), as measured by the Original Participating Manufacturers' reports of shipments of Cigarettes to Management Science Associates, Inc. (or a successor entity acceptable to both the Original Participating Manufacturers and a majority of those Attorneys General -12- who are both the Attorney General of a Settling State and a member of the NAAG executive committee at the time in question). A Cigarette shipped by more than one Participating Manufacturer shall be deemed to have been shipped solely by the first Participating Manufacturer to do so. For purposes of the definition and determination of "Relative Market Share," 0.09 ounces of "roll your own" tobacco shall constitute one individual Cigarette. (nn) "Released Claims" means: (1) for past conduct, acts or omissions (including any damages incurred in the future arising from such past conduct, acts or omissions), those Claims directly or indirectly based on, arising out of or in any way related, in whole or in part, to (A) the use, sale, distribution, manufacture, development, advertising, marketing or health effects of, (B) the exposure to, or (C) research, statements, or warnings regarding, Tobacco Products (including, but not limited to, the Claims asserted in the actions identified in Exhibit D, or any comparable Claims that were, could be or could have been asserted now or in the future in those actions or in any comparable action in federal, state or local court brought by a Settling State or a Releasing Party (whether or not such Settling State or Releasing Party has brought such action)), except for claims not asserted in the actions identified in Exhibit D for outstanding liability under existing licensing (or similar) fee laws or existing tax laws (but not excepting claims for any tax liability of the Tobacco-Related Organizations or of any Released Party with respect to such Tobacco-Related Organizations, which claims are covered by the release and covenants set forth in this Agreement); -13- (2) for future conduct, acts or omissions, only those monetary Claims directly or indirectly based on, arising out of or in any way related to, in whole or in part, the use of or exposure to Tobacco Products manufactured in the ordinary course of business, including without limitation any future Claims for reimbursement of health care costs allegedly associated with the use of or exposure to Tobacco Products. (oo) "Released Parties" means all Participating Manufacturers and their past, present and future Affiliates, divisions, officers, directors, employees, representatives, insurers, lenders, underwriters, Tobacco-Related Organizations, trade associations, suppliers, agents, auditors, advertising agencies, public relations entities, attorneys, retailers and distributors (and the predecessors, heirs, executors, administrators, successors and assigns of each of the foregoing). Provided, however, that "Released Parties" does not include any person or entity (including, but not limited to, an Affiliate) that is itself a Non-Participating Manufacturer at any time after the MSA Execution Date, unless such person or entity becomes a Participating Manufacturer. (pp) "Releasing Parties" means each Settling State and any of its past, present and future agents, officials acting in their official capacities, legal representatives, agencies, departments, commissions and divisions; and also means, to the full extent of the power of the signatories hereto to release past, present and future claims, the following: (1) any Settling State's subdivisions (political or otherwise, including, but not limited to, municipalities, counties, parishes, villages, unincorporated districts and hospital districts), public entities, public instrumentalities and public educational institutions; and (2) persons or entities acting in a parens patriae, sovereign, -14- quasi-sovereign, private attorney general, qui tam, taxpayer, or any other capacity, whether or not any of them participate in this settlement, (A) to the extent that any such person or entity is seeking relief on behalf of or generally applicable to the general public in such Settling State or the people of the State, as opposed solely to private or individual relief for separate and distinct injuries, or (B) to the extent that any such entity (as opposed to an individual) is seeking recovery of health-care expenses (other than premium or capitation payments for the benefit of present or retired state employees) paid or reimbursed, directly or indirectly, by a Settling State. (qq) "Settling State" means any State that signs this Agreement on or before the MSA Execution Date. Provided, however, that the term "Settling State" shall not include (1) the States of Mississippi, Florida, Texas and Minnesota; and (2) any State as to which this Agreement has been terminated. (rr) "State" means any state of the United States, the District of Columbia, the Commonwealth of Puerto Rico, Guam, the Virgin Islands, American Samoa, and the Northern Marianas. (ss) "State-Specific Finality" means, with respect to the Settling State in question: (1) this Agreement and the Consent Decree have been approved and entered by the Court as to all Original Participating Manufacturers, or, in the event of an appeal from or review of a decision of the Court to withhold its approval and entry of this Agreement and the Consent Decree, by the court hearing such appeal or conducting such review; -15- (2) entry by the Court has been made of an order dismissing with prejudice all claims against Released Parties in the action as provided herein; and (3) the time for appeal or to seek review of or permission to appeal ("Appeal") from the approval and entry as described in subsection (1)(A) hereof and entry of such order described in subsection (1)(B) hereof has expired; or, in the event of an Appeal from such approval and entry, the Appeal has been dismissed, or the approval and entry described in (1)(A) hereof and the order described in subsection (1)(B) hereof have been affirmed in all material respects by the court of last resort to which such Appeal has been taken and such dismissal or affirmance has become no longer subject to further Appeal (including, without limitation, review by the United States Supreme Court). (tt) "Subsequent Participating Manufacturer" means a Tobacco Product Manufacturer (other than an Original Participating Manufacturer) that: (1) is a Participating Manufacturer, and (2) is a signatory to this Agreement, regardless of when such Tobacco Product Manufacturer became a signatory to this Agreement. "Subsequent Participating Manufacturer" shall also include the successors of a Subsequent Participating Manufacturer. Except as expressly provided in this Agreement, once an entity becomes a Subsequent Participating Manufacturer such entity shall permanently retain the status of Subsequent Participating Manufacturer, unless it agrees to assume the obligations of an Original Participating Manufacturer as provided in subsection XVIII(c). (uu) "Tobacco Product Manufacturer" means an entity that after the MSA Execution Date directly (and not exclusively through any Affiliate): -16- (1) manufactures Cigarettes anywhere that such manufacturer intends to be sold in the States, including Cigarettes intended to be sold in the States through an importer (except where such importer is an Original Participating Manufacturer that will be responsible for the payments under this Agreement with respect to such Cigarettes as a result of the provisions of subsections II(mm) and that pays the taxes specified in subsection II(z) on such Cigarettes, and provided that the manufacturer of such Cigarettes does not market or advertise such Cigarettes in the States); (2) is the first purchaser anywhere for resale in the States of Cigarettes manufactured anywhere that the manufacturer does not intend to be sold in the States; or (3) becomes a successor of an entity described in subsection (1) or (2) above. The term "Tobacco Product Manufacturer" shall not include an Affiliate of a Tobacco Product Manufacturer unless such Affiliate itself falls within any of subsections (1) - (3) above. (vv) "Tobacco Products" means Cigarettes and smokeless tobacco products. (ww) "Tobacco-Related Organizations" means the Council for Tobacco Research-U.S.A., Inc., The Tobacco Institute, Inc. ("TI"), and the Center for Indoor Air Research, Inc. ("CIAR") and the successors, if any, of TI or CIAR. (xx) "Transit Advertisements" means advertising on or within private or public vehicles and all advertisements placed at, on or within any bus stop, taxi stand, transportation waiting area, train station, airport or any similar location. Notwithstanding -17- the foregoing, the term "Transit Advertisements" does not include (1) any advertisement placed in, on or outside the premises of any retail establishment that sells Tobacco Products (other than solely through a vending machine) (except if such individual advertisement (A) occupies an area larger than 14 square feet; (B) is placed in such proximity to any other such advertisement so as to create a single "mosaic"-type advertisement larger than 14 square feet; or (C) functions solely as a segment of a larger advertising unit or series); or (2) advertising at the site of an event to be held at an Adult-Only Facility that is placed at such site during the period the facility or enclosed area constitutes an Adult-Only Facility, but in no event more than 14 days before the event, and that does not advertise any Tobacco Product (other than by using a Brand Name to identify the event). (yy) "Underage" means younger than the minimum age at which it is legal to purchase or possess (whichever minimum age is older) Cigarettes in the applicable Settling State. (zz) "Video Game Arcade" means an entertainment establishment primarily consisting of video games (other than video games intended primarily for use by persons 18 years of age or older) and/or pinball machines. (aaa) "Volume Adjustment" means an upward or downward adjustment in accordance with the formula for volume adjustments set forth in Exhibit E. (bbb) "Youth" means any person or persons under 18 years of age. III. PERMANENT RELIEF (a) PROHIBITION ON YOUTH TARGETING. No Participating Manufacturer may take any action, directly or indirectly, to target Youth within any Settling State in the advertising, -18- promotion or marketing of Tobacco Products, or take any action the primary purpose of which is to initiate, maintain or increase the incidence of Youth smoking within any Settling State. (b) BAN ON USE OF CARTOONS. Beginning 180 days after the MSA Execution Date, no Participating Manufacturer may use or cause to be used any Cartoon in the advertising, promoting, packaging or labeling of Tobacco Products. (c) LIMITATION OF TOBACCO BRAND NAME SPONSORSHIPS. (1) PROHIBITED SPONSORSHIPS. After the MSA Execution Date, no Participating Manufacturer may engage in any Brand Name Sponsorship in any State consisting of: (A) concerts; or (B) events in which the intended audience is comprised of a significant percentage of Youth; or (C) events in which any paid participants or contestants are Youth; or (D) any athletic event between opposing teams in any football, basketball, baseball, soccer or hockey league. (2) LIMITED SPONSORSHIPS. (A) No Participating Manufacturer may engage in more than one Brand Name Sponsorship in the States in any twelve-month period (such period measured from the date of the initial sponsored event). (B) Provided, however, that -19- (i) nothing contained in subsection (2)(A) above shall require a Participating Manufacturer to breach or terminate any sponsorship contract in existence as of August 1, 1998 (until the earlier of (x) the current term of any existing contract, without regard to any renewal or option that may be exercised by such Participating Manufacturer or (y) three years after the MSA Execution Date); and (ii) notwithstanding subsection (1)(A) above, Brown & Williamson Tobacco Corporation may sponsor either the GPC country music festival or the Kool jazz festival as its one annual Brand Name Sponsorship permitted pursuant to subsection (2)(A) as well as one Brand Name Sponsorship permitted pursuant to subsection (2)(B)(i). (3) RELATED SPONSORSHIP RESTRICTIONS. With respect to any Brand Name Sponsorship permitted under this subsection (c): (A) advertising of the Brand Name Sponsorship event shall not advertise any Tobacco Product (other than by using the Brand Name to identify such Brand Name Sponsorship event); (B) no Participating Manufacturer may refer to a Brand Name Sponsorship event or to a celebrity or other person in such an event in its advertising of a Tobacco Product; (C) nothing contained in the provisions of subsection III(e) of this Agreement shall apply to actions taken by any Participating Manufacturer -20- in connection with a Brand Name Sponsorship permitted pursuant to the provisions of subsections (2)(A) and (2)(B)(i); the Brand Name Sponsorship permitted by subsection (2)(B)(ii) shall be subject to the restrictions of subsection III(e) except that such restrictions shall not prohibit use of the Brand Name to identify the Brand Name Sponsorship; (D) nothing contained in the provisions of subsections III(f) and III(i) shall apply to apparel or other merchandise: (i) marketed, distributed, offered, sold, or licensed at the site of a Brand Name Sponsorship permitted pursuant to subsections (2)(A) or (2)(B)(i) by the person to which the relevant Participating Manufacturer has provided payment in exchange for the use of the relevant Brand Name in the Brand Name Sponsorship or a third-party that does not receive payment from the relevant Participating Manufacturer (or any Affiliate of such Participating Manufacturer) in connection with the marketing, distribution, offer, sale or license of such apparel or other merchandise; or (ii) used at the site of a Brand Name Sponsorship permitted pursuant to subsection (2)(A) or (2)(B)(i) (during such event) that are not distributed (by sale or otherwise) to any member of the general public; and (E) nothing contained in the provisions of subsection III(d) shall: (i) apply to the use of a Brand Name on a vehicle used in a Brand Name Sponsorship; or (ii) apply to Outdoor Advertising advertising the Brand Name Sponsorship, to the extent that such Outdoor Advertising is placed at the site of a Brand Name Sponsorship no more than 90 days before the -21- start of the initial sponsored event, is removed within 10 days after the end of the last sponsored event, and is not prohibited by subsection (3)(A) above. (4) CORPORATE NAME SPONSORSHIPS. Nothing in this subsection (c) shall prevent a Participating Manufacturer from sponsoring or causing to be sponsored any athletic, musical, artistic, or other social or cultural event, or any entrant, participant or team in such event (or series of events) in the name of the corporation which manufactures Tobacco Products, provided that the corporate name does not include any Brand Name of domestic Tobacco Products. (5) NAMING RIGHTS PROHIBITION. No Participating Manufacturer may enter into any agreement for the naming rights of any stadium or arena located within a Settling State using a Brand Name, and shall not otherwise cause a stadium or arena located within a Settling State to be named with a Brand Name. (6) PROHIBITION ON SPONSORING TEAMS AND LEAGUES. No Participating Manufacturer may enter into any agreement pursuant to which payment is made (or other consideration is provided) by such Participating Manufacturer to any football, basketball, baseball, soccer or hockey league (or any team involved in any such league) in exchange for use of a Brand Name. (d) ELIMINATION OF OUTDOOR ADVERTISING AND TRANSIT ADVERTISEMENTS. Each Participating Manufacturer shall discontinue Outdoor Advertising and Transit Advertisements advertising Tobacco Products within the Settling States as set forth herein. -22- (1) REMOVAL. Except as otherwise provided in this section, each Participating Manufacturer shall remove from within the Settling States within 150 days after the MSA Execution Date all of its (A) billboards (to the extent that such billboards constitute Outdoor Advertising) advertising Tobacco Products; (B) signs and placards (to the extent that such signs and placards constitute Outdoor Advertising) advertising Tobacco Products in arenas, stadiums, shopping malls and Video Game Arcades; and (C) Transit Advertisements advertising Tobacco Products. (2) PROHIBITION ON NEW OUTDOOR ADVERTISING AND TRANSIT ADVERTISEMENTS. No Participating Manufacturer may, after the MSA Execution Date, place or cause to be placed any new Outdoor Advertising advertising Tobacco Products or new Transit Advertisements advertising Tobacco Products within any Settling State. (3) ALTERNATIVE ADVERTISING. With respect to those billboards required to be removed under subsection (1) that are leased (as opposed to owned) by any Participating Manufacturer, the Participating Manufacturer will allow the Attorney General of the Settling State within which such billboards are located to substitute, at the Settling State's option, alternative advertising intended to discourage the use of Tobacco Products by Youth and their exposure to second-hand smoke for the remaining term of the applicable contract (without regard to any renewal or option term that may be exercised by such Participating Manufacturer). The Participating Manufacturer will bear the cost of the lease through the end of such remaining term. Any other costs associated with such alternative advertising will be borne by the Settling State. -23- (4) BAN ON AGREEMENTS INHIBITING ANTI-TOBACCO ADVERTISING. Each Participating Manufacturer agrees that it will not enter into any agreement that prohibits a third party from selling, purchasing or displaying advertising discouraging the use of Tobacco Products or exposure to second-hand smoke. In the event and to the extent that any Participating Manufacturer has entered into an agreement containing any such prohibition, such Participating Manufacturer agrees to waive such prohibition in such agreement. (5) DESIGNATION OF CONTACT PERSON. Each Participating Manufacturer that has Outdoor Advertising or Transit Advertisements advertising Tobacco Products within a Settling State shall, within 10 days after the MSA Execution Date, provide the Attorney General of such Settling State with the name of a contact person to whom the Settling State may direct inquiries during the time such Outdoor Advertising and Transit Advertisements are being eliminated, and from whom the Settling State may obtain periodic reports as to the progress of their elimination. (6) ADULT-ONLY FACILITIES. To the extent that any advertisement advertising Tobacco Products located within an Adult-Only Facility constitutes Outdoor Advertising or a Transit Advertisement, this subsection (d) shall not apply to such advertisement, provided such advertisement is not visible to persons outside such Adult-Only Facility. (e) PROHIBITION ON PAYMENTS RELATED TO TOBACCO PRODUCTS AND MEDIA. No Participating Manufacturer may, beginning 30 days after the MSA Execution Date, make, or cause to be made, any payment or other consideration to any other person or entity to -24- use, display, make reference to or use as a prop any Tobacco Product, Tobacco Product package, advertisement for a Tobacco Product, or any other item bearing a Brand Name in any motion picture, television show, theatrical production or other live performance, live or recorded performance of music, commercial film or video, or video game ("Media"); provided, however, that the foregoing prohibition shall not apply to (1) Media where the audience or viewers are within an Adult-Only Facility (provided such Media are not visible to persons outside such Adult-Only Facility); (2) Media not intended for distribution or display to the public; or (3) instructional Media concerning non-conventional cigarettes viewed only by or provided only to smokers who are Adults. (f) BAN ON TOBACCO BRAND NAME MERCHANDISE. Beginning July 1, 1999, no Participating Manufacturer may, within any Settling State, market, distribute, offer, sell, license or cause to be marketed, distributed, offered, sold or licensed (including, without limitation, by catalogue or direct mail), any apparel or other merchandise (other than Tobacco Products, items the sole function of which is to advertise Tobacco Products, or written or electronic publications) which bears a Brand Name. Provided, however, that nothing in this subsection shall (1) require any Participating Manufacturer to breach or terminate any licensing agreement or other contract in existence as of June 20, 1997 (this exception shall not apply beyond the current term of any existing contract, without regard to any renewal or option term that may be exercised by such Participating Manufacturer); (2) prohibit the distribution to any Participating Manufacturer's employee who is not Underage of any item described above that is intended for the personal use of such an employee; (3) require any Participating Manufacturer to retrieve, collect or otherwise recover any item that prior to the MSA Execution Date was marketed, distributed, -25- offered, sold, licensed, or caused to be marketed, distributed, offered, sold or licensed by such Participating Manufacturer; (4) apply to coupons or other items used by Adults solely in connection with the purchase of Tobacco Products; or (5) apply to apparel or other merchandise used within an Adult-Only Facility that is not distributed (by sale or otherwise) to any member of the general public. (g) BAN ON YOUTH ACCESS TO FREE SAMPLES. After the MSA Execution Date, no Participating Manufacturer may, within any Settling State, distribute or cause to be distributed any free samples of Tobacco Products except in an Adult-Only Facility. For purposes of this Agreement, a "free sample" does not include a Tobacco Product that is provided to an Adult in connection with (1) the purchase, exchange or redemption for proof of purchase of any Tobacco Products (including, but not limited to, a free offer in connection with the purchase of Tobacco Products, such as a "two-for-one" offer), or (2) the conducting of consumer testing or evaluation of Tobacco Products with persons who certify that they are Adults. (h) BAN ON GIFTS TO UNDERAGE PERSONS BASED ON PROOFS OF PURCHASE. Beginning one year after the MSA Execution Date, no Participating Manufacturer may provide or cause to be provided to any person without sufficient proof that such person is an Adult any item in exchange for the purchase of Tobacco Products, or the furnishing of credits, proofs-of-purchase, or coupons with respect to such a purchase. For purposes of the preceding sentence only, (1) a driver's license or other government-issued identification (or legible photocopy thereof), the validity of which is certified by the person to whom the item is provided, shall by itself be deemed to be a sufficient form of proof of age; and (2) in the case of items provided (or to be redeemed) at retail establishments, a -26- Participating Manufacturer shall be entitled to rely on verification of proof of age by the retailer, where such retailer is required to obtain verification under applicable federal, state or local law. (i) LIMITATION ON THIRD-PARTY USE OF BRAND NAMES. After the MSA Execution Date, no Participating Manufacturer may license or otherwise expressly authorize any third party to use or advertise within any Settling State any Brand Name in a manner prohibited by this Agreement if done by such Participating Manufacturer itself. Each Participating Manufacturer shall, within 10 days after the MSA Execution Date, designate a person (and provide written notice to NAAG of such designation) to whom the Attorney General of any Settling State may provide written notice of any such third-party activity that would be prohibited by this Agreement if done by such Participating Manufacturer itself. Following such written notice, the Participating Manufacturer will promptly take commercially reasonable steps against any such non-de minimis third-party activity. Provided, however, that nothing in this subsection shall require any Participating Manufacturer to (1) breach or terminate any licensing agreement or other contract in existence as of July 1, 1998 (this exception shall not apply beyond the current term of any existing contract, without regard to any renewal or option term that may be exercised by such Participating Manufacturer); or (2) retrieve, collect or otherwise recover any item that prior to the MSA Execution Date was marketed, distributed, offered, sold, licensed or caused to be marketed, distributed, offered, sold or licensed by such Participating Manufacturer. (j) BAN ON NON-TOBACCO BRAND NAMES. No Participating Manufacturer may, pursuant to any agreement requiring the payment of money or other valuable -27- consideration, use or cause to be used as a brand name of any Tobacco Product any nationally recognized or nationally established brand name or trade name of any non-tobacco item or service or any nationally recognized or nationally established sports team, entertainment group or individual celebrity. Provided, however, that the preceding sentence shall not apply to any Tobacco Product brand name in existence as of July 1, 1998. For the purposes of this subsection, the term "other valuable consideration" shall not include an agreement between two entities who enter into such agreement for the sole purpose of avoiding infringement claims. (k) MINIMUM PACK SIZE OF TWENTY CIGARETTES. No Participating Manufacturer may, beginning 60 days after the MSA Execution Date and through and including December 31, 2001, manufacture or cause to be manufactured for sale in any Settling State any pack or other container of Cigarettes containing fewer than 20 Cigarettes (or, in the case of roll-your-own tobacco, any package of roll-your-own tobacco containing less than 0.60 ounces of tobacco). No Participating Manufacturer may, beginning 150 days after the MSA Execution Date and through and including December 31, 2001, sell or distribute in any Settling State any pack or other container of Cigarettes containing fewer than 20 Cigarettes (or, in the case of roll-your-own tobacco, any package of roll-your-own tobacco containing less than 0.60 ounces of tobacco). Each Participating Manufacturer further agrees that following the MSA Execution Date it shall not oppose, or cause to be opposed (including through any third party or Affiliate), the passage by any Settling State of any legislative proposal or administrative rule applicable to all Tobacco Product Manufacturers and all retailers of Tobacco Products prohibiting the manufacture and sale of any pack or other container of Cigarettes containing fewer than 20 Cigarettes -28- (or, in the case of roll-your-own tobacco, any package of roll-your-own tobacco containing less than 0.60 ounces of tobacco). (l) CORPORATE CULTURE COMMITMENTS RELATED TO YOUTH ACCESS AND CONSUMPTION. Beginning 180 days after the MSA Execution Date each Participating Manufacturer shall: (1) promulgate or reaffirm corporate principles that express and explain its commitment to comply with the provisions of this Agreement and the reduction of use of Tobacco Products by Youth, and clearly and regularly communicate to its employees and customers its commitment to assist in the reduction of Youth use of Tobacco Products; (2) designate an executive level manager (and provide written notice to NAAG of such designation) to identify methods to reduce Youth access to, and the incidence of Youth consumption of, Tobacco Products; and (3) encourage its employees to identify additional methods to reduce Youth access to, and the incidence of Youth consumption of, Tobacco Products. (m) LIMITATIONS ON LOBBYING. Following State-Specific Finality in a Settling State: (1) No Participating Manufacturer may oppose, or cause to be opposed (including through any third party or Affiliate), the passage by such Settling State (or any political subdivision thereof) of those state or local legislative proposals or administrative rules described in Exhibit F hereto intended by their terms to reduce Youth access to, and the incidence of Youth consumption of, Tobacco Products. Provided, however, that the foregoing does not prohibit any Participating Manufacturer from (A) challenging enforcement of, or suing for -29- declaratory or injunctive relief with respect to, any such legislation or rule on any grounds; (B) continuing, after State-Specific Finality in such Settling State, to oppose or cause to be opposed, the passage during the legislative session in which State-Specific Finality in such Settling State occurs of any specific state or local legislative proposals or administrative rules introduced prior to the time of State-Specific Finality in such Settling State; (C) opposing, or causing to be opposed, any excise tax or income tax provision or user fee or other payments relating to Tobacco Products or Tobacco Product Manufacturers; or (D) opposing, or causing to be opposed, any state or local legislative proposal or administrative rule that also includes measures other than those described in Exhibit F. (2) Each Participating Manufacturer shall require all of its officers and employees engaged in lobbying activities in such Settling State after State-Specific Finality, contract lobbyists engaged in lobbying activities in such Settling State after State-Specific Finality, and any other third parties who engage in lobbying activities in such Settling State after State-Specific Finality on behalf of such Participating Manufacturer ("lobbyist" and "lobbying activities" having the meaning such terms have under the law of the Settling State in question) to certify in writing to the Participating Manufacturer that they: (A) will not support or oppose any state, local or federal legislation, or seek or oppose any governmental action, on behalf of the Participating Manufacturer without the Participating Manufacturer's express authorization (except where such advance express authorization is not reasonably practicable); -30- (B) are aware of and will fully comply with this Agreement and all laws and regulations applicable to their lobbying activities, including, without limitation, those related to disclosure of financial contributions. Provided, however, that if the Settling State in question has in existence no laws or regulations relating to disclosure of financial contributions regarding lobbying activities, then each Participating Manufacturer shall, upon request of the Attorney General of such Settling State, disclose to such Attorney General any payment to a lobbyist that the Participating Manufacturer knows or has reason to know will be used to influence legislative or administrative actions of the state or local government relating to Tobacco Products or their use. Disclosures made pursuant to the preceding sentence shall be filed in writing with the Office of the Attorney General on the first day of February and the first day of August of each year for any and all payments made during the six month period ending on the last day of the preceding December and June, respectively, with the following information: (1) the name, address, telephone number and e-mail address (if any) of the recipient; (2) the amount of each payment; and (3) the aggregate amount of all payments described in this subsection (2)(B) to the recipient in the calendar year; and (C) have reviewed and will fully abide by the Participating Manufacturer's corporate principles promulgated pursuant to this Agreement when acting on behalf of the Participating Manufacturer. -31- (3) No Participating Manufacturer may support or cause to be supported (including through any third party or Affiliate) in Congress or any other forum legislation or rules that would preempt, override, abrogate or diminish such Settling State's rights or recoveries under this Agreement. Except as specifically provided in this Agreement, nothing herein shall be deemed to restrain any Settling State or Participating Manufacturer from advocating terms of any national settlement or taking any other positions on issues relating to tobacco. (n) RESTRICTION ON ADVOCACY CONCERNING SETTLEMENT PROCEEDS. After the MSA Execution Date, no Participating Manufacturer may support or cause to be supported (including through any third party or Affiliate) the diversion of any proceeds of this settlement to any program or use that is neither tobacco-related nor health-related in connection with the approval of this Agreement or in any subsequent legislative appropriation of settlement proceeds. (o) DISSOLUTION OF THE TOBACCO INSTITUTE, INC., THE COUNCIL FOR TOBACCO RESEARCH-U.S.A., INC. AND THE CENTER FOR INDOOR AIR RESEARCH, INC. (1) The Council for Tobacco Research-U.S.A., Inc. ("CTR") (a not-for-profit corporation formed under the laws of the State of New York) shall, pursuant to the plan of dissolution previously negotiated and agreed to between the Attorney General of the State of New York and CTR, cease all operations and be dissolved in accordance with the laws of the State of New York (and with the preservation of all applicable privileges held by any member company of CTR). (2) The Tobacco Institute, Inc. ("TI") (a not-for-profit corporation formed under the laws of the State of New York) shall, pursuant to a plan of dissolution to -32- be negotiated by the Attorney General of the State of New York and the Original Participating Manufacturers in accordance with Exhibit G hereto, cease all operations and be dissolved in accordance with the laws of the State of New York and under the authority of the Attorney General of the State of New York (and with the preservation of all applicable privileges held by any member company of TI). (3) Within 45 days after Final Approval, the Center for Indoor Air Research, Inc. ("CIAR") shall cease all operations and be dissolved in a manner consistent with applicable law and with the preservation of all applicable privileges (including, without limitation, privileges held by any member company of CIAR). (4) The Participating Manufacturers shall direct the Tobacco-Related Organizations to preserve all records that relate in any way to issues raised in smoking-related health litigation. (5) The Participating Manufacturers may not reconstitute CTR or its function in any form. (6) The Participating Manufacturers represent that they have the authority to and will effectuate subsections (1) through (5) hereof. (p) REGULATION AND OVERSIGHT OF NEW TOBACCO-RELATED TRADE ASSOCIATIONS. (1) A Participating Manufacturer may form or participate in new tobacco-related trade associations (subject to all applicable laws), provided such associations agree in writing not to act in any manner contrary to any provision of this Agreement. Each Participating Manufacturer agrees that if any new tobacco- -33- related trade association fails to so agree, such Participating Manufacturer will not participate in or support such association. (2) Any tobacco-related trade association that is formed or controlled by one or more of the Participating Manufacturers after the MSA Execution Date shall adopt by-laws governing the association's procedures and the activities of its members, board, employees, agents and other representatives with respect to the tobacco-related trade association. Such by-laws shall include, among other things, provisions that: (A) each officer of the association shall be appointed by the board of the association, shall be an employee of such association, and during such officer's term shall not be a director of or employed by any member of the association or by an Affiliate of any member of the association; (B) legal counsel for the association shall be independent, and neither counsel nor any member or employee of counsel's law firm shall serve as legal counsel to any member of the association or to a manufacturer of Tobacco Products that is an Affiliate of any member of the association during the time that it is serving as legal counsel to the association; and (C) minutes describing the substance of the meetings of the board of directors of the association shall be prepared and shall be maintained by the association for a period of at least five years following their preparation. -34- (3) Without limitation on whatever other rights to access they may be permitted by law, for a period of seven years from the date any new tobacco-related trade association is formed by any of the Participating Manufacturers after the MSA Execution Date the antitrust authorities of any Settling State may, for the purpose of enforcing this Agreement, upon reasonable cause to believe that a violation of this Agreement has occurred, and upon reasonable prior written notice (but in no event less than 10 Business Days): (A) have access during regular office hours to inspect and copy all relevant non-privileged, non-work-product books, records, meeting agenda and minutes, and other documents (whether in hard copy form or stored electronically) of such association insofar as they pertain to such believed violation; and (B) interview the association's directors, officers and employees (who shall be entitled to have counsel present) with respect to relevant, non-privileged, non-work-product matters pertaining to such believed violation. Documents and information provided to Settling State antitrust authorities shall be kept confidential by and among such authorities, and shall be utilized only by the Settling States and only for the purpose of enforcing this Agreement or the criminal law. The inspection and discovery rights provided to the Settling States pursuant to this subsection shall be coordinated so as to avoid repetitive and excessive inspection and discovery. (q) PROHIBITION ON AGREEMENTS TO SUPPRESS RESEARCH. No Participating Manufacturer may enter into any contract, combination or conspiracy with any other -35- Tobacco Product Manufacturer that has the purpose or effect of: (1) limiting competition in the production or distribution of information about health hazards or other consequences of the use of their products; (2) limiting or suppressing research into smoking and health; or (3) limiting or suppressing research into the marketing or development of new products. Provided, however, that nothing in this subsection shall be deemed to (1) require any Participating Manufacturer to produce, distribute or otherwise disclose any information that is subject to any privilege or protection; (2) preclude any Participating Manufacturer from entering into any joint defense or joint legal interest agreement or arrangement (whether or not in writing), or from asserting any privilege pursuant thereto; or (3) impose any affirmative obligation on any Participating Manufacturer to conduct any research. (r) PROHIBITION ON MATERIAL MISREPRESENTATIONS. No Participating Manufacturer may make any material misrepresentation of fact regarding the health consequences of using any Tobacco Product, including any tobacco additives, filters, paper or other ingredients. Nothing in this subsection shall limit the exercise of any First Amendment right or the assertion of any defense or position in any judicial, legislative or regulatory forum. IV. PUBLIC ACCESS TO DOCUMENTS (a) After the MSA Execution Date, the Original Participating Manufacturers and the Tobacco-Related Organizations will support an application for the dissolution of any protective orders entered in each Settling State's lawsuit identified in Exhibit D with respect only to those documents, indices and privilege logs that have been produced as of the MSA Execution Date to such Settling State and (1) as to which defendants have made -36- no claim, or have withdrawn any claim, of attorney-client privilege, attorney work-product protection, common interest/joint defense privilege (collectively, "privilege"), trade-secret protection, or confidential or proprietary business information; and (2) that are not inappropriate for public disclosure because of personal privacy interests or contractual rights of third parties that may not be abrogated by the Original Participating Manufacturers or the Tobacco-Related Organizations. (b) Notwithstanding State-Specific Finality, if any order, ruling or recommendation was issued prior to September 17, 1998 rejecting a claim of privilege or trade-secret protection with respect to any document or documents in a lawsuit identified in Exhibit D, the Settling State in which such order, ruling or recommendation was made may, no later than 45 days after the occurrence of State-Specific Finality in such Settling State, seek public disclosure of such document or documents by application to the court that issued such order, ruling or recommendation and the court shall retain jurisdiction for such purposes. The Original Participating Manufacturers and Tobacco-Related Organizations do not consent to, and may object to, appeal from or otherwise oppose any such application for disclosure. The Original Participating Manufacturers and Tobacco-Related Organizations will not assert that the settlement of such lawsuit has divested the court of jurisdiction or that such Settling State lacks standing to seek public disclosure on any applicable ground. (c) The Original Participating Manufacturers will maintain at their expense their Internet document websites accessible through "TobaccoResolution.com" or a similar website until June 30, 2010. The Original Participating Manufacturers will maintain the -37- documents that currently appear on their respective websites and will add additional documents to their websites as provided in this section IV. (d) Within 180 days after the MSA Execution Date, each Original Participating Manufacturer and Tobacco-Related Organization will place on its website copies of the following documents, except as provided in subsections IV(e) and IV(f) below: (1) all documents produced by such Original Participating Manufacturer or Tobacco-Related Organization as of the MSA Execution Date in any action identified in Exhibit D or any action identified in section 2 of Exhibit H that was filed by an Attorney General. Among these documents, each Original Participating Manufacturer and Tobacco-Related Organization will give the highest priority to (A) the documents that were listed by the State of Washington as trial exhibits in the STATE OF WASHINGTON v. AMERICAN TOBACCO CO., ET AL., No. 96-2-15056-8 SEA (Wash. Super. Ct., County of King); and (B) the documents as to which such Original Participating Manufacturer or Tobacco-Related Organization withdrew any claim of privilege as a result of the re-examination of privilege claims pursuant to court order in STATE OF OKLAHOMA v. R.J. REYNOLDS TOBACCO COMPANY, ET AL., CJ-96-2499-L (Dist. Ct., Cleveland County); (2) all documents that can be identified as having been produced by, and copies of transcripts of depositions given by, such Original Participating Manufacturer or Tobacco-Related Organization as of the MSA Execution Date in the litigation matters specified in section 1 of Exhibit H; and (3) all documents produced by such Original Participating Manufacturer or Tobacco-Related Organization as of the MSA Execution Date and listed by the -38- plaintiffs as trial exhibits in the litigation matters specified in section 2 of Exhibit H. (e) Unless copies of such documents are already on its website, each Original Participating Manufacturer and Tobacco-Related Organization will place on its website copies of documents produced in any production of documents that takes place on or after the date 30 days before the MSA Execution Date in any federal or state court civil action concerning smoking and health. Copies of any documents required to be placed on a website pursuant to this subsection will be placed on such website within the later of 45 days after the MSA Execution Date or within 45 days after the production of such documents in any federal or state court action concerning smoking and health. This obligation will continue until June 30, 2010. In placing such newly produced documents on its website, each Original Participating Manufacturer or Tobacco-Related Organization will identify, as part of its index to be created pursuant to subsection IV(h), the action in which it produced such documents and the date on which such documents were added to its website. (f) Nothing in this section IV shall require any Original Participating Manufacturer or Tobacco-Related Organization to place on its website or otherwise disclose documents that: (1) it continues to claim to be privileged, a trade secret, confidential or proprietary business information, or that contain other information not appropriate for public disclosure because of personal privacy interests or contractual rights of third parties; or (2) continue to be subject to any protective order, sealing order or other order or ruling that prevents or limits a litigant from disclosing such documents. -39- (g) Oversized or multimedia records will not be required to be placed on the Website, but each Original Participating Manufacturers and Tobacco-Related Organizations will make any such records available to the public by placing copies of them in the document depository established in THE STATE OF MINNESOTA, ET AL. v. PHILIP MORRIS INCORPORATED, ET AL., C1-94-8565 (County of Ramsey, District Court, 2d Judicial Cir.). (h) Each Original Participating Manufacturer will establish an index and other features to improve searchable access to the document images on its website, as set forth in Exhibit I. (i) Within 90 days after the MSA Execution Date, the Original Participating Manufacturers will furnish NAAG with a project plan for completing the Original Participating Manufacturers' obligations under subsection IV(h) with respect to documents currently on their websites and documents being placed on their websites pursuant to subsection IV(d). NAAG may engage a computer consultant at the Original Participating Manufacturers' expense for a period not to exceed two years and at a cost not to exceed $100,000. NAAG's computer consultant may review such plan and make recommendations consistent with this Agreement. In addition, within 120 days after the completion of the Original Participating Manufacturers' obligations under subsection IV(d), NAAG's computer consultant may make final recommendations with respect to the websites consistent with this Agreement. In preparing these recommendations, NAAG's computer consultant may seek input from Settling State officials, public health organizations and other users of the websites. -40- (j) The expenses incurred pursuant to subsection IV(i), and the expenses related to documents of the Tobacco-Related Organizations, will be severally shared among the Original Participating Manufacturers (allocated among them according to their Relative Market Shares). All other expenses incurred under this section will be borne by the Original Participating Manufacturer that incurs such expense. V. TOBACCO CONTROL AND UNDERAGE USE LAWS Each Participating Manufacturer agrees that following State-Specific Finality in a Settling State it will not initiate, or cause to be initiated, a facial challenge against the enforceability or constitutionality of such Settling State's (or such Settling State's political subdivisions') statutes, ordinances and administrative rules relating to tobacco control enacted prior to June 1, 1998 (other than a statute, ordinance or rule challenged in any lawsuit listed in Exhibit M). VI. ESTABLISHMENT OF A NATIONAL FOUNDATION (a) FOUNDATION PURPOSES. The Settling States believe that a comprehensive, coordinated program of public education and study is important to further the remedial goals of this Agreement. Accordingly, as part of the settlement of claims described herein, the payments specified in subsections VI(b), VI(c), and IX(e) shall be made to a charitable foundation, trust or similar organization (the "Foundation") and/or to a program to be operated within the Foundation (the "National Public Education Fund"). The purposes of the Foundation will be to support (1) the study of and programs to reduce Youth Tobacco Product usage and Youth substance abuse in the States, and (2) the study of and educational programs to prevent diseases associated with the use of Tobacco Products in the States. -41- (b) BASE FOUNDATION PAYMENTS. On March 31, 1999, and on March 31 of each subsequent year for a period of nine years thereafter, each Original Participating Manufacturer shall severally pay its Relative Market Share of $25,000,000 to fund the Foundation. The payments to be made by each of the Original Participating Manufacturers pursuant to this subsection (b) shall be subject to no adjustments, reductions, or offsets, and shall be paid to the Escrow Agent (to be credited to the Subsection VI(b) Account), who shall disburse such payments to the Foundation only upon the occurrence of State-Specific Finality in at least one Settling State. (c) NATIONAL PUBLIC EDUCATION FUND PAYMENTS. (1) Each Original Participating Manufacturer shall severally pay its Relative Market Share of the following base amounts on the following dates to the Escrow Agent for the benefit of the Foundation's National Public Education Fund to be used for the purposes and as described in subsections VI(f)(1), VI(g) and VI(h) below: $250,000,000 on March 31, 1999; $300,000,000 on March 31, 2000; $300,000,000 on March 31, 2001; $300,000,000 on March 31, 2002; and $300,000,000 on March 31, 2003, as such amounts are modified in accordance with this subsection (c). The payment due on March 31, 1999 pursuant to this subsection (c)(1) is to be credited to the Subsection (c) Account (First). The payments due on or after March 31, 2000 pursuant to this subsection VI(c)(1) are to be credited to the Subsection VI(c) Account (Subsequent). (2) The payments to be made by the Original Participating Manufacturers pursuant to this subsection (c), other than the payment due on March 31, 1999, shall -42- be subject to the Inflation Adjustment, the Volume Adjustment and the offset for miscalculated or disputed payments described in subsection XI(i). (3) The payment made pursuant to this subsection (c) on March 31, 1999 shall be disbursed by the Escrow Agent to the Foundation only upon the occurrence of State-Specific Finality in at least one Settling State. Each remaining payment pursuant to this subsection (c) shall be disbursed by the Escrow Agent to the Foundation only when State-Specific Finality has occurred in Settling States having aggregate Allocable Shares equal to at least 80% of the total aggregate Allocable Shares assigned to all States that were Settling States as of the MSA Execution Date. (4) In addition to the payments made pursuant to this subsection (c), the National Public Education Fund will be funded (A) in accordance with subsection IX(e), and (B) through monies contributed by other entities directly to the Foundation and designated for the National Public Education Fund ("National Public Education Fund Contributions"). (5) The payments made by the Original Participating Manufacturers pursuant to this subsection (c) and/or subsection IX(e) and monies received from all National Public Education Fund Contributions will be deposited and invested in accordance with the laws of the state of incorporation of the Foundation. (d) CREATION AND ORGANIZATION OF THE FOUNDATION. NAAG, through its executive committee, will provide for the creation of the Foundation. The Foundation shall be organized exclusively for charitable, scientific, and educational purposes within the meaning of Internal Revenue Code section 501(c)(3). The organizational documents of -43- the Foundation shall specifically incorporate the provisions of this Agreement relating to the Foundation, and will provide for payment of the Foundation's administrative expenses from the funds paid pursuant to subsection VI(b) or VI(c). The Foundation shall be governed by a board of directors. The board of directors shall be comprised of eleven directors. NAAG, the National Governors' Association ("NGA"), and the National Conference of State Legislatures ("NCSL") shall each select from its membership two directors. These six directors shall select the five additional directors. One of these five additional directors shall have expertise in public health issues. Four of these five additional directors shall have expertise in medical, child psychology, or public health disciplines. The board of directors shall be nationally geographically diverse. (e) FOUNDATION AFFILIATION. The Foundation shall be formally affiliated with an educational or medical institution selected by the board of directors. (f) FOUNDATION FUNCTIONS. The functions of the Foundation shall be: (1) carrying out a nationwide sustained advertising and education program to (A) counter the use by Youth of Tobacco Products, and (B) educate consumers about the cause and prevention of diseases associated with the use of Tobacco Products; (2) developing and disseminating model advertising and education programs to counter the use by Youth of substances that are unlawful for use or purchase by Youth, with an emphasis on reducing Youth smoking; monitoring and testing the effectiveness of such model programs; and, based on the information received from such monitoring and testing, continuing to develop and disseminate revised versions of such model programs, as appropriate; -44- (3) developing and disseminating model classroom education programs and curriculum ideas about smoking and substance abuse in the K-12 school system, including specific target programs for special at-risk populations; monitoring and testing the effectiveness of such model programs and ideas; and, based on the information received from such monitoring and testing, continuing to develop and disseminate revised versions of such model programs or ideas, as appropriate; (4) developing and disseminating criteria for effective cessation programs; monitoring and testing the effectiveness of such criteria; and continuing to develop and disseminate revised versions of such criteria, as appropriate; (5) commissioning studies, funding research, and publishing reports on factors that influence Youth smoking and substance abuse and developing strategies to address the conclusions of such studies and research; (6) developing other innovative Youth smoking and substance abuse prevention programs; (7) providing targeted training and information for parents; (8) maintaining a library open to the public of Foundation-funded studies, reports and other publications related to the cause and prevention of Youth smoking and substance abuse; (9) tracking and monitoring Youth smoking and substance abuse, with a focus on the reasons for any increases or failures to decrease Youth smoking and -45- substance abuse and what actions can be taken to reduce Youth smoking and substance abuse; (10) receiving, controlling, and managing contributions from other entities to further the purposes described in this Agreement; and (11) receiving, controlling, and managing such funds paid by the Participating Manufacturers pursuant to subsections VI(b) and VI(c) above. (g) FOUNDATION GRANT-MAKING. The Foundation is authorized to make grants from the National Public Education Fund to Settling States and their political subdivisions to carry out sustained advertising and education programs to (1) counter the use by Youth of Tobacco Products, and (2) educate consumers about the cause and prevention of diseases associated with the use of Tobacco Products. In making such grants, the Foundation shall consider whether the Settling State or political subdivision applying for such grant: (1) demonstrates the extent of the problem regarding Youth smoking in such Settling State or political subdivision; (2) either seeks the grant to implement a model program developed by the Foundation or provides the Foundation with a specific plan for such applicant's intended use of the grant monies, including demonstrating such applicant's ability to develop an effective advertising/education campaign and to assess the effectiveness of such advertising/education campaign; (3) has other funds readily available to carry out a sustained advertising and education program to (A) counter the use by Youth of Tobacco Products, and (B) educate consumers about the cause and prevention of diseases associated with the use of Tobacco Products; and -46- (4) is a Settling State that has not severed this section VI from its settlement with the Participating Manufacturers pursuant to subsection VI(i) below, or is a political subdivision in such a Settling State. (h) FOUNDATION ACTIVITIES. The Foundation shall not engage in, nor shall any of the Foundation's money be used to engage in, any political activities or lobbying, including, but not limited to, support of or opposition to candidates, ballot initiatives, referenda or other similar activities. The National Public Education Fund shall be used only for public education and advertising regarding the addictiveness, health effects, and social costs related to the use of tobacco products and shall not be used for any personal attack on, or vilification of, any person (whether by name or business affiliation), company, or governmental agency, whether individually or collectively. The Foundation shall work to ensure that its activities are carried out in a culturally and linguistically appropriate manner. The Foundation's activities (including the National Public Education Fund) shall be carried out solely within the States. The payments described in subsections VI(b) and VI(c) above are made at the direction and on behalf of Settling States. By making such payments in such manner, the Participating Manufacturers do not undertake and expressly disclaim any responsibility with respect to the creation, operation, liabilities, or tax status of the Foundation or the National Public Education Fund. (i) SEVERANCE OF THIS SECTION. If the Attorney General of a Settling State determines that such Settling State may not lawfully enter into this section VI as a matter of applicable state law, such Attorney General may sever this section VI from its settlement with the Participating Manufacturers by giving written notice of such -47- severance to each Participating Manufacturer and NAAG pursuant to subsection XVIII(k) hereof. If any Settling State exercises its right to sever this section VI, this section VI shall not be considered a part of the specific settlement between such Settling State and the Participating Manufacturers, and this section VI shall not be enforceable by or in such Settling State. The payment obligation of subsections VI(b) and VI(c) hereof shall apply regardless of a determination by one or more Settling States to sever section VI hereof; provided, however, that if all Settling States sever section VI hereof, the payment obligations of subsections (b) and (c) hereof shall be null and void. If the Attorney General of a Settling State that severed this section VI subsequently determines that such Settling State may lawfully enter into this section VI as a matter of applicable state law, such Attorney General may rescind such Settling State's previous severance of this section VI by giving written notice of such rescission to each Participating Manufacturer and NAAG pursuant to subsection XVIII(k). If any Settling State rescinds such severance, this section VI shall be considered a part of the specific settlement between such Settling State and the Participating Manufacturers (including for purposes of subsection (g)(4)), and this section VI shall be enforceable by and in such Settling State. VII. ENFORCEMENT (a) JURISDICTION. Each Participating Manufacturer and each Settling State acknowledge that the Court: (1) has jurisdiction over the subject matter of the action identified in Exhibit D in such Settling State and over each Participating Manufacturer; (2) shall retain exclusive jurisdiction for the purposes of implementing and enforcing this Agreement and the Consent Decree as to such Settling State; and (3) except as provided in subsections IX(d), XI(c) and XVII(d) and Exhibit O, shall be the only court to which -48- disputes under this Agreement or the Consent Decree are presented as to such Settling State. Provided, however, that notwithstanding the foregoing, the Escrow Court (as defined in the Escrow Agreement) shall have exclusive jurisdiction, as provided in section 15 of the Escrow Agreement, over any suit, action or proceeding seeking to interpret or enforce any provision of, or based on any right arising out of, the Escrow Agreement. (b) ENFORCEMENT OF CONSENT DECREE. Except as expressly provided in the Consent Decree, any Settling State or Released Party may apply to the Court to enforce the terms of the Consent Decree (or for a declaration construing any such term) with respect to alleged violations within such Settling State. A Settling State may not seek to enforce the Consent Decree of another Settling State; provided, however, that nothing contained herein shall affect the ability of any Settling State to (1) coordinate state enforcement actions or proceedings, or (2) file or join any amicus brief. In the event that the Court determines that any Participating Manufacturer or Settling State has violated the Consent Decree within such Settling State, the party that initiated the proceedings may request any and all relief available within such Settling State pursuant to the Consent Decree. (c) ENFORCEMENT OF THIS AGREEMENT. (1) Except as provided in subsections IX(d), XI(c), XVII(d) and Exhibit O, any Settling State or Participating Manufacturer may bring an action in the Court to enforce the terms of this Agreement (or for a declaration construing any such term ("Declaratory Order")) with respect to disputes, alleged violations or alleged breaches within such Settling State. -49- (2) Before initiating such proceedings, a party shall provide 30 days' written notice to the Attorney General of each Settling State, to NAAG, and to each Participating Manufacturer of its intent to initiate proceedings pursuant to this subsection. The 30-day notice period may be shortened in the event that the relevant Attorney General reasonably determines that a compelling time-sensitive public health and safety concern requires more immediate action. (3) In the event that the Court determines that any Participating Manufacturer or Settling State has violated or breached this Agreement, the party that initiated the proceedings may request an order restraining such violation or breach, and/or ordering compliance within such Settling State (an "Enforcement Order"). (4) If an issue arises as to whether a Participating Manufacturer has failed to comply with an Enforcement Order, the Attorney General for the Settling State in question may seek an order for interpretation or for monetary, civil contempt or criminal sanctions to enforce compliance with such Enforcement Order. (5) If the Court finds that a good-faith dispute exists as to the meaning of the terms of this Agreement or a Declaratory Order, the Court may in its discretion determine to enter a Declaratory Order rather than an Enforcement Order. (6) Whenever possible, the parties shall seek to resolve an alleged violation of this Agreement by discussion pursuant to subsection XVIII(m) of this Agreement. In addition, in determining whether to seek an Enforcement Order, or in determining whether to seek an order for monetary, civil contempt or criminal -50- sanctions for any claimed violation of an Enforcement Order, the Attorney General shall give good-faith consideration to whether the Participating Manufacturer that is claimed to have violated this Agreement has taken appropriate and reasonable steps to cause the claimed violation to be cured, unless such party has been guilty of a pattern of violations of like nature. (d) RIGHT OF REVIEW. All orders and other judicial determinations made by any court in connection with this Agreement or any Consent Decree shall be subject to all available appellate review, and nothing in this Agreement or any Consent Decree shall be deemed to constitute a waiver of any right to any such review. (e) APPLICABILITY. This Agreement and the Consent Decree apply only to the Participating Manufacturers in their corporate capacity acting through their respective successors and assigns, directors, officers, employees, agents, subsidiaries, divisions, or other internal organizational units of any kind or any other entities acting in concert or participation with them. The remedies, penalties and sanctions that may be imposed or assessed in connection with a breach or violation of this Agreement or the Consent Decree (or any Declaratory Order or Enforcement Order issued in connection with this Agreement or the Consent Decree ) shall only apply to the Participating Manufacturers, and shall not be imposed or assessed against any employee, officer or director of any Participating Manufacturer, or against any other person or entity as a consequence of such breach or violation, and the Court shall have no jurisdiction to do so. (f) COORDINATION OF ENFORCEMENT. The Attorneys General of the Settling States (through NAAG) shall monitor potential conflicting interpretations by courts of different States of this Agreement and the Consent Decrees. The Settling States shall use their best -51- efforts, in cooperation with the Participating Manufacturers, to coordinate and resolve the effects of such conflicting interpretations as to matters that are not exclusively local in nature. (g) INSPECTION AND DISCOVERY RIGHTS. Without limitation on whatever other rights to access they may be permitted by law, following State-Specific Finality in a Settling State and for seven years thereafter, representatives of the Attorney General of such Settling State may, for the purpose of enforcing this Agreement and the Consent Decree, upon reasonable cause to believe that a violation of this Agreement or the Consent Decree has occurred, and upon reasonable prior written notice (but in no event less than 10 Business Days): (1) have access during regular office hours to inspect and copy all relevant non-privileged, non-work-product books, records, meeting agenda and minutes, and other documents (whether in hard copy form or stored electronically) of each Participating Manufacturer insofar as they pertain to such believed violation; and (2) interview each Participating Manufacturer's directors, officers and employees (who shall be entitled to have counsel present) with respect to relevant, non-privileged, non-work-product matters pertaining to such believed violation. Documents and information provided to representatives of the Attorney General of such Settling State pursuant to this section VII shall be kept confidential by the Settling States, and shall be utilized only by the Settling States and only for purposes of enforcing this Agreement, the Consent Decree and the criminal law. The inspection and discovery rights provided to such Settling State pursuant to this subsection shall be coordinated through NAAG so as to avoid repetitive and excessive inspection and discovery. -52- VIII. CERTAIN ONGOING RESPONSIBILITIES OF THE SETTLING STATES (a) Upon approval of the NAAG executive committee, NAAG will provide coordination and facilitation for the implementation and enforcement of this Agreement on behalf of the Attorneys General of the Settling States, including the following: (1) NAAG will assist in coordinating the inspection and discovery activities referred to in subsections III(p)(3) and VII(g) regarding compliance with this Agreement by the Participating Manufacturers and any new tobacco-related trade associations. (2) NAAG will convene at least two meetings per year and one major national conference every three years for the Attorneys General of the Settling States, the directors of the Foundation and three persons designated by each Participating Manufacturer. The purpose of the meetings and conference is to evaluate the success of this Agreement and coordinate efforts by the Attorneys General and the Participating Manufacturers to continue to reduce Youth smoking. (3) NAAG will periodically inform NGA, NCSL, the National Association of Counties and the National League of Cities of the results of the meetings and conferences referred to in subsection (a)(2) above. (4) NAAG will support and coordinate the efforts of the Attorneys General of the Settling States in carrying out their responsibilities under this Agreement. (5) NAAG will perform the other functions specified for it in this Agreement, including the functions specified in section IV. -53- (b) Upon approval by the NAAG executive committee to assume the responsibilities outlined in subsection VIII(a) hereof, each Original Participating Manufacturer shall cause to be paid, beginning on December 31, 1998, and on December 31 of each year thereafter through and including December 31, 2007, its Relative Market Share of $150,000 per year to the Escrow Agent (to be credited to the Subsection VIII(b) Account), who shall disburse such monies to NAAG within 10 Business Days, to fund the activities described in subsection VIII(a). (c) The Attorneys General of the Settling States, acting through NAAG, shall establish a fund ("The States' Antitrust/Consumer Protection Tobacco Enforcement Fund") in the form attached as Exhibit J, which will be maintained by such Attorneys General to supplement the Settling States' (1) enforcement and implementation of the terms of this Agreement and the Consent Decrees, and (2) investigation and litigation of potential violations of laws with respect to Tobacco Products, as set forth in Exhibit J. Each Original Participating Manufacturer shall on March 31, 1999, severally pay its Relative Market Share of $50,000,000 to the Escrow Agent (to be credited to the Subsection VIII(c) Account), who shall disburse such monies to NAAG upon the occurrence of State-Specific Finality in at least one Settling State. Such funds will be used in accordance with the provisions of Exhibit J. IX. PAYMENTS (a) ALL PAYMENTS INTO ESCROW. All payments made pursuant to this Agreement (except those payments made pursuant to section XVII) shall be made into escrow pursuant to the Escrow Agreement, and shall be credited to the appropriate Account established pursuant to the Escrow Agreement. Such payments shall be disbursed to the -54- beneficiaries or returned to the Participating Manufacturers only as provided in section XI and the Escrow Agreement. No payment obligation under this Agreement shall arise (1) unless and until the Escrow Court has approved and retained jurisdiction over the Escrow Agreement or (2) if such approval is reversed (unless and until such reversal is itself reversed). The parties agree to proceed as expeditiously as possible to resolve any issues that prevent approval of the Escrow Agreement. If any payment (other than the first initial payment under subsection IX(b)) is delayed because the Escrow Agreement has not been approved, such payment shall be due and payable (together with interest at the Prime Rate) within 10 Business Days after approval of the Escrow Agreement by the Escrow Court. (b) INITIAL PAYMENTS. On the second Business Day after the Escrow Court approves and retains jurisdiction over the Escrow Agreement, each Original Participating Manufacturer shall severally pay to the Escrow Agent (to be credited to the Subsection IX(b) Account (First)) its Market Capitalization Percentage (as set forth in Exhibit K) of the base amount of $2,400,000,000. On January 10, 2000, each Original Participating Manufacturer shall severally pay to the Escrow Agent its Relative Market Share of the base amount of $2,472,000,000. On January 10, 2001, each Original Participating Manufacturer shall severally pay to the Escrow Agent its Relative Market Share of the base amount of $2,546,160,000. On January 10, 2002, each Original Participating Manufacturer shall severally pay to the Escrow Agent its Relative Market Share of the base amount of $2,622,544,800. On January 10, 2003, each Original Participating Manufacturer shall severally pay to the Escrow Agent its Relative Market Share of the base amount of $2,701,221,144. The payments pursuant to this subsection (b) due on or -55- after January 10, 2000 shall be credited to the Subsection IX(b) Account (Subsequent). The foregoing payments shall be modified in accordance with this subsection (b). The payments made by the Original Participating Manufacturers pursuant to this subsection (b) (other than the first such payment) shall be subject to the Volume Adjustment, the Non-Settling States Reduction and the offset for miscalculated or disputed payments described in subsection XI(i). The first payment due under this subsection (b) shall be subject to the Non-Settling States Reduction, but such reduction shall be determined as of the date one day before such payment is due (rather than the date 15 days before). (c) ANNUAL PAYMENTS AND STRATEGIC CONTRIBUTION PAYMENTS. (1) On April 15, 2000 and on April 15 of each year thereafter in perpetuity, each Original Participating Manufacturer shall severally pay to the Escrow Agent (to be credited to the Subsection IX(c)(1) Account) its Relative Market Share of the base amounts specified below, as such payments are modified in accordance with this subsection (c)(1): -56- YEAR BASE AMOUNT 2000 $4,500,000,000 2001 $5,000,000,000 2002 $6,500,000,000 2003 $6,500,000,000 2004 $8,000,000,000 2005 $8,000,000,000 2006 $8,000,000,000 2007 $8,000,000,000 2008 $8,139,000,000 2009 $8,139,000,000 2010 $8,139,000,000 2011 $8,139,000,000 2012 $8,139,000,000 2013 $8,139,000,000 2014 $8,139,000,000 2015 $8,139,000,000 2016 $8,139,000,000 2017 $8,139,000,000 2018 and each year thereafter $9,000,000,000 The payments made by the Original Participating Manufacturers pursuant to this subsection (c)(1) shall be subject to the Inflation Adjustment, the Volume Adjustment, the Previously Settled States Reduction, the Non-Settling States Reduction, the NPM Adjustment, the offset for miscalculated or disputed payments described in subsection XI(i), the Federal Tobacco Legislation Offset, the Litigating Releasing Parties Offset, and the offsets for claims over described in subsections XII(a)(4)(B) and XII(a)(8). (2) On April 15, 2008 and on April 15 of each year thereafter through 2017, each Original Participating Manufacturer shall severally pay to the Escrow Agent (to be credited to the Subsection IX(c)(2) Account) its Relative Market Share of the base amount of $861,000,000, as such payments are modified in accordance with this subsection (c)(2). The payments made by the Original -57- Participating Manufacturers pursuant to this subsection (c)(2) shall be subject to the Inflation Adjustment, the Volume Adjustment, the NPM Adjustment, the offset for miscalculated or disputed payments described in subsection XI(i), the Federal Tobacco Legislation Offset, the Litigating Releasing Parties Offset, and the offsets for claims over described in subsections XII(a)(4)(B) and XII(a)(8). Such payments shall also be subject to the Non-Settling States Reduction; provided, however, that for purposes of payments due pursuant to this subsection (c)(2) (and corresponding payments by Subsequent Participating Manufacturers under subsection IX(i)), the Non-Settling States Reduction shall be derived as follows: (A) the payments made by the Original Participating Manufacturers pursuant to this subsection (c)(2) shall be allocated among the Settling States on a percentage basis to be determined by the Settling States pursuant to the procedures set forth in Exhibit U, and the resulting allocation percentages disclosed to the Escrow Agent, the Independent Auditor and the Original Participating Manufacturers not later than June 30, 1999; and (B) the Non-Settling States Reduction shall be based on the sum of the Allocable Shares so established pursuant to subsection (c)(2)(A) for those States that were Settling States as of the MSA Execution Date and as to which this Agreement has terminated as of the date 15 days before the payment in question is due. (d) NON-PARTICIPATING MANUFACTURER ADJUSTMENT. (1) CALCULATION OF NPM ADJUSTMENT FOR ORIGINAL PARTICIPATING MANUFACTURERS. To protect the public health gains achieved by this Agreement, certain payments made pursuant to this Agreement shall be subject to an NPM -58- Adjustment. Payments by the Original Participating Manufacturers to which the NPM Adjustment applies shall be adjusted as provided below: (A) Subject to the provisions of subsections (d)(1)(C), (d)(1)(D) and (d)(2) below, each Allocated Payment shall be adjusted by subtracting from such Allocated Payment the product of such Allocated Payment amount multiplied by the NPM Adjustment Percentage. The "NPM Adjustment Percentage" shall be calculated as follows: (i) If the Market Share Loss for the year immediately preceding the year in which the payment in question is due is less than or equal to 0 (zero), then the NPM Adjustment Percentage shall equal zero. (ii) If the Market Share Loss for the year immediately preceding the year in which the payment in question is due is greater than 0 (zero) and less than or equal to 16 2/3 percentage points, then the NPM Adjustment Percentage shall be equal to the product of (x) such Market Share Loss and (y) 3 (three). (iii) If the Market Share Loss for the year immediately preceding the year in which the payment in question is due is greater than 16 2/3 percentage points, then the NPM Adjustment Percentage shall be equal to the sum of (x) 50 percentage points and (y) the product of (1) the Variable Multiplier and (2) the result of such Market Share Loss minus 16 2/3 percentage points. -59- (B) Definitions: (i) "Base Aggregate Participating Manufacturer Market Share" means the result of (x) the sum of the applicable Market Shares (the applicable Market Share to be that for 1997) of all present and former Tobacco Product Manufacturers that were Participating Manufacturers during the entire calendar year immediately preceding the year in which the payment in question is due minus (y) 2 (two) percentage points. (ii) "Actual Aggregate Participating Manufacturer Market Share" means the sum of the applicable Market Shares of all present and former Tobacco Product Manufacturers that were Participating Manufacturers during the entire calendar year immediately preceding the year in which the payment in question is due (the applicable Market Share to be that for the calendar year immediately preceding the year in which the payment in question is due). (iii) "Market Share Loss" means the result of (x) the Base Aggregate Participating Manufacturer Market Share minus (y) the Actual Aggregate Participating Manufacturer Market Share. (iv) "Variable Multiplier" equals 50 divided by the result of (x) the Base Aggregate Participating Manufacturer Market Share minus (y) 16 2/3 percentage points. -60- (C) On or before February 2 of each year following a year in which there was a Market Share Loss greater than zero, a nationally recognized firm of economic consultants (the "Firm") shall determine whether the disadvantages experienced as a result of the provisions of this Agreement were a significant factor contributing to the Market Share Loss for the year in question. If the Firm determines that the disadvantages experienced as a result of the provisions of this Agreement were a significant factor contributing to the Market Share Loss for the year in question, the NPM Adjustment described in subsection IX(d)(1) shall apply. If the Firm determines that the disadvantages experienced as a result of the provisions of this Agreement were not a significant factor contributing to the Market Share Loss for the year in question, the NPM Adjustment described in subsection IX(d)(1) shall not apply. The Original Participating Manufacturers, the Settling States, and the Attorneys General for the Settling States shall cooperate to ensure that the determination described in this subsection (1)(C) is timely made. The Firm shall be acceptable to (and the principals responsible for this assignment shall be acceptable to) both the Original Participating Manufacturers and a majority of those Attorneys General who are both the Attorney General of a Settling State and a member of the NAAG executive committee at the time in question (or in the event no such firm or no such principals shall be acceptable to such parties, National Economic Research Associates, Inc., or its successors by merger, acquisition or otherwise ("NERA"), acting -61- through a principal or principals acceptable to such parties, if such a person can be identified and, if not, acting through a principal or principals identified by NERA, or a successor firm selected by the CPR Institute for Dispute Resolution). As soon as practicable after the MSA Execution Date, the Firm shall be jointly retained by the Settling States and the Original Participating Manufacturers for the purpose of making the foregoing determination, and the Firm shall provide written notice to each Settling State, to NAAG, to the Independent Auditor and to each Participating Manufacturer of such determination. The determination of the Firm with respect to this issue shall be conclusive and binding upon all parties, and shall be final and non-appealable. The reasonable fees and expenses of the Firm shall be paid by the Original Participating Manufacturers according to their Relative Market Shares. Only the Participating Manufacturers and the Settling States, and their respective counsel, shall be entitled to communicate with the Firm with respect to the Firm's activities pursuant to this subsection (1)(C). (D) No NPM Adjustment shall be made with respect to a payment if the aggregate number of Cigarettes shipped in or to the fifty United States, the District of Columbia and Puerto Rico in the year immediately preceding the year in which the payment in question is due by those Participating Manufacturers that had become Participating Manufacturers prior to 14 days after the MSA Execution Date is greater than the aggregate number of Cigarettes shipped in or to the fifty United States, the -62- District of Columbia, and Puerto Rico in 1997 by such Participating Manufacturers (and any of their Affiliates that made such shipments in 1997, as demonstrated by certified audited statements of such Affiliates' shipments, and that do not continue to make such shipments after the MSA Execution Date because the responsibility for such shipments has been transferred to one of such Participating Manufacturers). Measurements of shipments for purposes of this subsection (D) shall be made in the manner prescribed in subsection II(mm); in the event that such shipment data is unavailable for any Participating Manufacturer for 1997, such Participating Manufacturer's shipment volume for such year shall be measured in the manner prescribed in subsection II(z). (2) ALLOCATION AMONG SETTLING STATES OF NPM ADJUSTMENT FOR ORIGINAL PARTICIPATING MANUFACTURERS. (A) The NPM Adjustment set forth in subsection (d)(1) shall apply to the Allocated Payments of all Settling States, except as set forth below. (B) A Settling State's Allocated Payment shall not be subject to an NPM Adjustment: (i) if such Settling State continuously had a Qualifying Statute (as defined in subsection (2)(E) below) in full force and effect during the entire calendar year immediately preceding the year in which the payment in question is due, and diligently enforced the provisions of such statute during such entire calendar year; or (ii) if such Settling State enacted the Model Statute (as defined in subsection (2)(E) below) for the first time during the calendar year immediately preceding the year in -63- which the payment in question is due, continuously had the Model Statute in full force and effect during the last six months of such calendar year, and diligently enforced the provisions of such statute during the period in which it was in full force and effect. (C) The aggregate amount of the NPM Adjustments that would have applied to the Allocated Payments of those Settling States that are not subject to an NPM Adjustment pursuant to subsection (2)(B) shall be reallocated among all other Settling States pro rata in proportion to their respective Allocable Shares (the applicable Allocable Shares being those listed in Exhibit A), and such other Settling States' Allocated Payments shall be further reduced accordingly. (D) This subsection (2)(D) shall apply if the amount of the NPM Adjustment applied pursuant to subsection (2)(A) to any Settling State plus the amount of the NPM Adjustments reallocated to such Settling State pursuant to subsection (2)(C) in any individual year would either (i) exceed such Settling State's Allocated Payment in that year, or (ii) if subsection (2)(F) applies to the Settling State in question, exceed 65% of such Settling State's Allocated Payment in that year. For each Settling State that has an excess as described in the preceding sentence, the excess amount of NPM Adjustment shall be further reallocated among all other Settling States whose Allocated Payments are subject to an NPM Adjustment and that do not have such an excess, pro rata in proportion to their respective Allocable Shares, and such other Settling States' Allocated -64- Payments shall be further reduced accordingly. The provisions of this subsection (2)(D) shall be repeatedly applied in any individual year until either (i) the aggregate amount of NPM Adjustments has been fully reallocated or (ii) the full amount of the NPM Adjustments subject to reallocation under subsection (2)(C) or (2)(D) cannot be fully reallocated in any individual year as described in those subsections because (x) the Allocated Payment in that year of each Settling State that is subject to an NPM Adjustment and to which subsection (2)(F) does not apply has been reduced to zero, and (y) the Allocated Payment in that year of each Settling State to which subsection (2)(F) applies has been reduced to 35% of such Allocated Payment. (E) A "Qualifying Statute" means a Settling State's statute, regulation, law and/or rule (applicable everywhere the Settling State has authority to legislate) that effectively and fully neutralizes the cost disadvantages that the Participating Manufacturers experience vis- -vis Non-Participating Manufacturers within such Settling State as a result of the provisions of this Agreement. Each Participating Manufacturer and each Settling State agree that the model statute in the form set forth in Exhibit T (the "Model Statute"), if enacted without modification or addition (except for particularized state procedural or technical requirements) and not in conjunction with any other legislative or regulatory proposal, shall constitute a Qualifying Statute. Each Participating Manufacturer agrees to support the enactment of such Model -65- Statute if such Model Statute is introduced or proposed (i) without modification or addition (except for particularized procedural or technical requirements), and (ii) not in conjunction with any other legislative proposal. (F) If a Settling State (i) enacts the Model Statute without any modification or addition (except for particularized state procedural or technical requirements) and not in conjunction with any other legislative or regulatory proposal, (ii) uses its best efforts to keep the Model Statute in full force and effect by, among other things, defending the Model Statute fully in any litigation brought in state or federal court within such Settling State (including litigating all available appeals that may affect the effectiveness of the Model Statute), and (iii) otherwise complies with subsection (2)(B), but a court of competent jurisdiction nevertheless invalidates or renders unenforceable the Model Statute with respect to such Settling State, and but for such ruling the Settling State would have been exempt from an NPM Adjustment under subsection (2)(B), then the NPM Adjustment (including reallocations pursuant to subsections (2)(C) and (2)(D)) shall still apply to such Settling State's Allocated Payments but in any individual year shall not exceed 65% of the amount of such Allocated Payments. (G) In the event a Settling State proposes and/or enacts a statute, regulation, law and/or rule (applicable everywhere the Settling State has authority to legislate) that is not the Model Statute and asserts that such -66- statute, regulation, law and/or rule is a Qualifying Statute, the Firm shall be jointly retained by the Settling States and the Original Participating Manufacturers for the purpose of determining whether or not such statute, regulation, law and/or rule constitutes a Qualifying Statute. The Firm shall make the foregoing determination within 90 days of a written request to it from the relevant Settling State (copies of which request the Settling State shall also provide to all Participating Manufacturers and the Independent Auditor), and the Firm shall promptly thereafter provide written notice of such determination to the relevant Settling State, NAAG, all Participating Manufacturers and the Independent Auditor. The determination of the Firm with respect to this issue shall be conclusive and binding upon all parties, and shall be final and non-appealable; provided, however, (i) that such determination shall be of no force and effect with respect to a proposed statute, regulation, law and/or rule that is thereafter enacted with any modification or addition; and (ii) that the Settling State in which the Qualifying Statute was enacted and any Participating Manufacturer may at any time request that the Firm reconsider its determination as to this issue in light of subsequent events (including, without limitation, subsequent judicial review, interpretation, modification and/or disapproval of a Settling State's Qualifying Statute, and the manner and/or the effect of enforcement of such Qualifying Statute). The Original Participating Manufacturers shall severally pay their Relative Market Shares of the reasonable fees and expenses of the Firm. Only the -67- Participating Manufacturers and Settling States, and their respective counsel, shall be entitled to communicate with the Firm with respect to the Firm's activities pursuant to this subsection (2)(G). (H) Except as provided in subsection (2)(F), in the event a Qualifying Statute is enacted within a Settling State and is thereafter invalidated or declared unenforceable by a court of competent jurisdiction, otherwise rendered not in full force and effect, or, upon reconsideration by the Firm pursuant to subsection (2)(G) determined not to constitute a Qualifying Statute, then such Settling State's Allocated Payments shall be fully subject to an NPM Adjustment unless and until the requirements of subsection (2)(B) have been once again satisfied. (3) ALLOCATION OF NPM ADJUSTMENT AMONG ORIGINAL PARTICIPATING MANUFACTURERS. The portion of the total amount of the NPM Adjustment to which the Original Participating Manufacturers are entitled in any year that can be applied in such year consistent with subsection IX(d)(2) (the "Available NPM Adjustment") shall be allocated among them as provided in this subsection IX(d)(3). (A) The "Base NPM Adjustment" shall be determined for each Original Participating Manufacturer in such year as follows: (i) For those Original Participating Manufacturers whose Relative Market Shares in the year immediately preceding the year in which the NPM Adjustment in question is applied exceed or are -68- equal to their respective 1997 Relative Market Shares, the Base NPM Adjustment shall equal 0 (zero). (ii) For those Original Participating Manufacturers whose Relative Market Shares in the year immediately preceding the year in which the NPM Adjustment in question is applied are less than their respective 1997 Relative Market Shares, the Base NPM Adjustment shall equal the result of (x) the difference between such Original Participating Manufacturer's Relative Market Share in such preceding year and its 1997 Relative Market Share multiplied by both (y) the number of individual Cigarettes (expressed in thousands of units) shipped in or to the United States, the District of Columbia and Puerto Rico by all the Original Participating Manufacturers in such preceding year (determined in accordance with subsection II(mm)) and (z) $20 per each thousand units of Cigarettes (as this number is adjusted pursuant to subsection IX(d)(3)(C) below). (iii) For those Original Participating Manufacturers whose Base NPM Adjustment, if calculated pursuant to subsection (ii) above, would exceed $300 million (as this number is adjusted pursuant to subsection IX(d)(3)(C) below), the Base NPM Adjustment shall equal $300 million (or such adjusted number, as provided in subsection IX(d)(3)(C) below). -69- (B) The share of the Available NPM Adjustment each Original Participating Manufacturer is entitled to shall be calculated as follows: (i) If the Available NPM Adjustment the Original Participating Manufacturers are entitled to in any year is less than or equal to the sum of the Base NPM Adjustments of all Original Participating Manufacturers in such year, then such Available NPM Adjustment shall be allocated among those Original Participating Manufacturers whose Base NPM Adjustment is not equal to 0 (zero) pro rata in proportion to their respective Base NPM Adjustments. (ii) If the Available NPM Adjustment the Original Participating Manufacturers are entitled to in any year exceeds the sum of the Base NPM Adjustments of all Original Participating Manufacturers in such year, then (x) the difference between such Available NPM Adjustment and such sum of the Base NPM Adjustments shall be allocated among the Original Participating Manufacturers pro rata in proportion to their Relative Market Shares (the applicable Relative Market Shares to be those in the year immediately preceding such year), and (y) each Original Participating Manufacturer's share of such Available NPM Adjustment shall equal the sum of (1) its Base NPM Adjustment for such year, and (2) the amount allocated to such Original Participating Manufacturer pursuant to clause (x). -70- (iii) If an Original Participating Manufacturer's share of the Available NPM Adjustment calculated pursuant to subsection IX(d)(3)(B)(i) or IX(d)(3)(B)(ii) exceeds such Original Participating Manufacturer's payment amount to which such NPM Adjustment applies (as such payment amount has been determined pursuant to step B of clause "Seventh" of subsection IX(j)), then (1) such Original Participating Manufacturer's share of the Available NPM Adjustment shall equal such payment amount, and (2) such excess shall be reallocated among the other Original Participating Manufacturers pro rata in proportion to their Relative Market Shares. (C) Adjustments: (i) For calculations made pursuant to this subsection IX(d)(3) (if any) with respect to payments due in the year 2000, the number used in subsection IX(d)(3)(A)(ii)(z) shall be $20 and the number used in subsection IX(d)(3)(A)(iii) shall be $300 million. Each year thereafter, both these numbers shall be adjusted upward or downward by multiplying each of them by the quotient produced by dividing (x) the average revenue per Cigarette of all the Original Participating Manufacturers in the year immediately preceding such year, by (y) the average revenue per Cigarette of all the Original Participating Manufacturers in the year immediately preceding such immediately preceding year. -71- (ii) For purposes of this subsection, the average revenue per Cigarette of all the Original Participating Manufacturers in any year shall equal (x) the aggregate revenues of all the Original Participating Manufacturers from sales of Cigarettes in the fifty United States, the District of Columbia and Puerto Rico after Federal excise taxes and after payments pursuant to this Agreement and the tobacco litigation Settlement Agreements with the States of Florida, Mississippi, Minnesota and Texas (as such revenues are reported to the United States Securities and Exchange Commission ("SEC") for such year (either independently by the Original Participating Manufacturer or as part of consolidated financial statements reported to the SEC by an Affiliate of the Original Participating Manufacturers) or, in the case of an Original Participating Manufacturer that does not report income to the SEC, as reported in financial statements prepared in accordance with United States generally accepted accounting principles and audited by a nationally recognized accounting firm), divided by (y) the aggregate number of the individual Cigarettes shipped in or to the United States, the District of Columbia and Puerto Rico by all the Original Participating Manufacturers in such year (determined in accordance with subsection II(mm)). (D) In the event that in the year immediately preceding the year in which the NPM Adjustment in question is applied both (x) the Relative -72- Market Share of Lorillard Tobacco Company (or of its successor) ("Lorillard") was less than or equal to 20.0000000%, and (y) the number of individual Cigarettes shipped in or to the United States, the District of Columbia and Puerto Rico by Lorillard (determined in accordance with subsection II(mm)) (for purposes of this subsection (D), "Volume") was less than or equal to 70 billion, Lorillard's and Philip Morris Incorporated's (or its successor's) ("Philip Morris") shares of the Available NPM Adjustment calculated pursuant to subsections (3)(A)-(C) above shall be further reallocated between Lorillard and Philip Morris as follows (this subsection (3)(D) shall not apply in the year in which either of the two conditions specified in this sentence is not satisfied): (i) Notwithstanding subsections (A)-(C) of this subsection (d)(3), but subject to further adjustment pursuant to subsections (D)(ii) and (D)(iii) below, Lorillard's share of the Available NPM Adjustment shall equal its Relative Market Share of such Available NPM Adjustment (the applicable Relative Market Share to be that in the year immediately preceding the year in which such NPM Adjustment is applied). The dollar amount of the difference between the share of the Available NPM Adjustment Lorillard is entitled to pursuant to the preceding sentence and the share of the Available NPM Adjustment it would be entitled to in the same year pursuant to subsections (d)(3)(A)-(C) shall be reallocated to Philip Morris and used to decrease or increase, as the case may be, -73- Philip Morris's share of the Available NPM Adjustment in such year calculated pursuant to subsections (d)(3)(A)-(C). (ii) In the event that in the year immediately preceding the year in which the NPM Adjustment in question is applied either (x) Lorillard's Relative Market Share was greater than 15.0000000% (but did not exceed 20.0000000%), or (y) Lorillard's Volume was greater than 50 billion (but did not exceed 70 billion), or both, Lorillard's share of the Available NPM Adjustment calculated pursuant to subsection (d)(3)(D)(i) shall be reduced by a percentage equal to the greater of (1) 10.0000000% for each percentage point (or fraction thereof) of excess of such Relative Market Share over 15.0000000% (if any), or (2) 2.5000000% for each billion (or fraction thereof) of excess of such Volume over 50 billion (if any). The dollar amount by which Lorillard's share of the Available NPM Adjustment is reduced in any year pursuant to this subsection (D)(ii) shall be reallocated to Philip Morris and used to increase Philip Morris's share of the Available NPM Adjustment in such year. (iii) In the event that in any year a reallocation of the shares of the Available NPM Adjustment between Lorillard and Philip Morris pursuant to this subsection (d)(3)(D) results in Philip Morris's share of the Available NPM Adjustment in such year exceeding the greater of (x) Philip Morris's Relative Market Share -74- of such Available NPM Adjustment (the applicable Relative Market Share to be that in the year immediately preceding such year), or (y) Philip Morris's share of the Available NPM Adjustment in such year calculated pursuant to subsections (d)(3)(A)-(C), Philip Morris's share of the Available NPM Adjustment in such year shall be reduced to equal the greater of (x) or (y) above. In such instance, the dollar amount by which Philip Morris's share of the Available NPM Adjustment is reduced pursuant to the preceding sentence shall be reallocated to Lorillard and used to increase Lorillard's share of the Available NPM Adjustment in such year. (iv) In the event that either Philip Morris or Lorillard is treated as a Non-Participating Manufacturer for purposes of this subsection IX(d)(3) pursuant to subsection XVIII(w)(2)(A), this subsection (3)(D) shall not be applied, and the Original Participating Manufacturers' shares of the Available NPM Adjustment shall be determined solely as described in subsections (3)(A)-(C). (4) NPM ADJUSTMENT FOR SUBSEQUENT PARTICIPATING MANUFACTURERS. Subject to the provisions of subsection IX(i)(3), a Subsequent Participating Manufacturer shall be entitled to an NPM Adjustment with respect to payments due from such Subsequent Participating Manufacturer in any year during which an NPM Adjustment is applicable under subsection (d)(1) above to payments due -75- from the Original Participating Manufacturers. The amount of such NPM Adjustment shall equal the product of (A) the NPM Adjustment Percentage for such year multiplied by (B) the sum of the payments due in the year in question from such Subsequent Participating Manufacturer that correspond to payments due from Original Participating Manufacturers pursuant to subsection IX(c) (as such payment amounts due from such Subsequent Participating Manufacturer have been adjusted and allocated pursuant to clauses "First" through "Fifth" of subsection IX(j)). The NPM Adjustment to payments by each Subsequent Participating Manufacturer shall be allocated and reallocated among the Settling States in a manner consistent with subsection (d)(2) above. (e) SUPPLEMENTAL PAYMENTS. Beginning on April 15, 2004, and on April 15 of each year thereafter in perpetuity, in the event that the sum of the Market Shares of the Participating Manufacturers that were Participating Manufacturers during the entire calendar year immediately preceding the year in which the payment in question would be due (the applicable Market Share to be that for the calendar year immediately preceding the year in which the payment in question would be due) equals or exceeds 99.0500000%, each Original Participating Manufacturer shall severally pay to the Escrow Agent (to be credited to the Subsection IX(e) Account) for the benefit of the Foundation its Relative Market Share of the base amount of $300,000,000, as such payments are modified in accordance with this subsection (e). Such payments shall be utilized by the Foundation to fund the national public education functions of the Foundation described in subsection VI(f)(1), in the manner described in and subject to the provisions of subsections VI(g) and VI(h). The payments made by the Original Participating -76- Manufacturers pursuant to this subsection shall be subject to the Inflation Adjustment, the Volume Adjustment, the Non-Settling States Reduction, and the offset for miscalculated or disputed payments described in subsection XI(i). (f) PAYMENT RESPONSIBILITY. The payment obligations of each Participating Manufacturer pursuant to this Agreement shall be the several responsibility only of that Participating Manufacturer. The payment obligations of a Participating Manufacturer shall not be the obligation or responsibility of any Affiliate of such Participating Manufacturer. The payment obligations of a Participating Manufacturer shall not be the obligation or responsibility of any other Participating Manufacturer. Provided, however, that no provision of this Agreement shall waive or excuse liability under any state or federal fraudulent conveyance or fraudulent transfer law. Any Participating Manufacturer whose Market Share (or Relative Market Share) in any given year equals zero shall have no payment obligations under this Agreement in the succeeding year. (g) CORPORATE STRUCTURES. Due to the particular corporate structures of R.J. Reynolds Tobacco Company ("Reynolds") and Brown & Williamson Tobacco Corporation ("B&W") with respect to their non-domestic tobacco operations, Reynolds and B&W shall be severally liable for their respective shares of each payment due pursuant to this Agreement up to (and their liability hereunder shall not exceed) the full extent of their assets used in and earnings derived from, the manufacture and/or sale in the States of Tobacco Products intended for domestic consumption, and no recourse shall be had against any of their other assets or earnings to satisfy such obligations. (h) ACCRUAL OF INTEREST. Except as expressly provided otherwise in this Agreement, any payment due hereunder and not paid when due (or payments requiring -77- the accrual of interest under subsection XI(d)) shall accrue interest from and including the date such payment is due until (but not including) the date paid at the Prime Rate plus three percentage points. (i) PAYMENTS BY SUBSEQUENT PARTICIPATING MANUFACTURERS. (1) A Subsequent Participating Manufacturer shall have payment obligations under this Agreement only in the event that its Market Share in any calendar year exceeds 125 percent of its 1997 Market Share (subject to the provisions of subsection (i)(4)). In the year following any such calendar year, such Subsequent Participating Manufacturer shall make payments corresponding to those due in that same following year from the Original Participating Manufacturers pursuant to subsections VI(c) (except for the payment due on March 31, 1999), IX(c)(1), IX(c)(2) and IX(e). The amounts of such corresponding payments by a Subsequent Participating Manufacturer are in addition to the corresponding payments that are due from the Original Participating Manufacturers and shall be determined as described in subsections (2) and (3) below. Such payments by a Subsequent Participating Manufacturer shall (A) be due on the same dates as the corresponding payments are due from Original Participating Manufacturers; (B) be for the same purpose as such corresponding payments; and (C) be paid, allocated and distributed in the same manner as such corresponding payments. (2) The base amount due from a Subsequent Participating Manufacturer on any given date shall be determined by multiplying (A) the corresponding base amount due on the same date from all of the Original Participating Manufacturers -78- (as such base amount is specified in the corresponding subsection of this Agreement and is adjusted by the Volume Adjustment (except for the provisions of subsection (B)(ii) of Exhibit E), but before such base amount is modified by any other adjustments, reductions or offsets) by (B) the quotient produced by dividing (i) the result of (x) such Subsequent Participating Manufacturer's applicable Market Share (the applicable Market Share being that for the calendar year immediately preceding the year in which the payment in question is due) minus (y) 125 percent of its 1997 Market Share, by (ii) the aggregate Market Shares of the Original Participating Manufacturers (the applicable Market Shares being those for the calendar year immediately preceding the year in which the payment in question is due). (3) Any payment due from a Subsequent Participating Manufacturer under subsections (1) and (2) above shall be subject (up to the full amount of such payment) to the Inflation Adjustment, the Non-Settling States Reduction, the NPM Adjustment, the offset for miscalculated or disputed payments described in subsection XI(i), the Federal Tobacco Legislation Offset, the Litigating Releasing Parties Offset and the offsets for claims over described in subsections XII(a)(4)(B) and XII(a)(8), to the extent that such adjustments, reductions or offsets would apply to the corresponding payment due from the Original Participating Manufacturers. Provided, however, that all adjustments and offsets to which a Subsequent Participating Manufacturer is entitled may only be applied against payments by such Subsequent Participating Manufacturer, if any, that are due within 12 months after the date on which the Subsequent Participating -79- Manufacturer becomes entitled to such adjustment or makes the payment that entitles it to such offset, and shall not be carried forward beyond that time even if not fully used. (4) For purposes of this subsection (i), the 1997 Market Share (and 125 percent thereof) of those Subsequent Participating Manufacturers that either (A) became a signatory to this Agreement more than 60 days after the MSA Execution Date or (B) had no Market Share in 1997, shall equal zero. (j) ORDER OF APPLICATION OF ALLOCATIONS, OFFSETS, REDUCTIONS AND ADJUSTMENTS. The payments due under this Agreement shall be calculated as set forth below. The "base amount" referred to in clause "First" below shall mean (1) in the case of payments due from Original Participating Manufacturers, the base amount referred to in the subsection establishing the payment obligation in question; and (2) in the case of payments due from a Subsequent Participating Manufacturer, the base amount referred to in subsection (i)(2) for such Subsequent Participating Manufacturer. In the event that a particular adjustment, reduction or offset referred to in a clause below does not apply to the payment being calculated, the result of the clause in question shall be deemed to be equal to the result of the immediately preceding clause. (If clause "First" is inapplicable, the result of clause "First" will be the base amount of the payment in question prior to any offsets, reductions or adjustments.) FIRST: the Inflation Adjustment shall be applied to the base amount of the payment being calculated; SECOND: the Volume Adjustment (other than the provisions of subsection (B)(iii) of Exhibit E) shall be applied to the result of clause "First"; -80- THIRD: the result of clause "Second" shall be reduced by the Previously Settled States Reduction; FOURTH: the result of clause "Third" shall be reduced by the Non-Settling States Reduction; FIFTH: in the case of payments due under subsections IX(c)(1) and IX(c)(2), the results of clause "Fourth" for each such payment due in the calendar year in question shall be apportioned among the Settling States pro rata in proportion to their respective Allocable Shares, and the resulting amounts for each particular Settling State shall then be added together to form such Settling State's Allocated Payment. In the case of payments due under subsection IX(i) that correspond to payments due under subsections IX(c)(1) or IX(c)(2), the results of clause "Fourth" for all such payments due from a particular Subsequent Participating Manufacturer in the calendar year in question shall be apportioned among the Settling States pro rata in proportion to their respective Allocable Shares, and the resulting amounts for each particular Settling State shall then be added together. (In the case of all other payments made pursuant to this Agreement, this clause "Fifth" is inapplicable.); SIXTH: the NPM Adjustment shall be applied to the results of clause "Fifth" pursuant to subsections IX(d)(1) and (d)(2) (or, in the case of payments due from the Subsequent Participating Manufacturers, pursuant to subsection IX(d)(4)); SEVENTH: in the case of payments due from the Original Participating Manufacturers to which clause "Fifth" (and therefore clause "Sixth") does not apply, the result of clause "Fourth" shall be allocated among the Original Participating Manufacturers according to their Relative Market Shares. In the case of payments due -81- from the Original Participating Manufacturers to which clause "Fifth" applies: (A) the Allocated Payments of all Settling States determined pursuant to clause "Fifth" (prior to reduction pursuant to clause "Sixth") shall be added together; (B) the resulting sum shall be allocated among the Original Participating Manufacturers according to their Relative Market Shares and subsection (B)(iii) of Exhibit E hereto (if such subsection is applicable); (C) the Available NPM Adjustment (as determined pursuant to clause "Sixth") shall be allocated among the Original Participating Manufacturers pursuant to subsection IX(d)(3); (D) the respective result of step (C) above for each Original Participating Manufacturer shall be subtracted from the respective result of step (B) above for such Original Participating Manufacturer; and (E) the resulting payment amount due from each Original Participating Manufacturer shall then be allocated among the Settling States in proportion to the respective results of clause "Sixth" for each Settling State. The offsets described in clauses "Eighth" through "Twelfth" shall then be applied separately against each Original Participating Manufacturer's resulting payment shares (on a Settling State by Settling State basis) according to each Original Participating Manufacturer's separate entitlement to such offsets, if any, in the calendar year in question. (In the case of payments due from Subsequent Participating Manufacturers, this clause "Seventh" is inapplicable.) EIGHTH: the offset for miscalculated or disputed payments described in subsection XI(i) (and any carry-forwards arising from such offset) shall be applied to the results of clause "Seventh" (in the case of payments due from the Original Participating Manufacturers) or to the results of clause "Sixth" (in the case of payments due from Subsequent Participating Manufacturers); -82- NINTH: the Federal Tobacco Legislation Offset (including any carry-forwards arising from such offset) shall be applied to the results of clause "Eighth"; TENTH: the Litigating Releasing Parties Offset (including any carry-forwards arising from such offset) shall be applied to the results of clause "Ninth"; ELEVENTH: the offset for claims over pursuant to subsection XII(a)(4)(B) (including any carry-forwards arising from such offset) shall be applied to the results of clause "Tenth"; TWELFTH: the offset for claims over pursuant to subsection XII(a)(8) (including any carry-forwards arising from such offset) shall be applied to the results of clause "Eleventh"; and THIRTEENTH: in the case of payments to which clause "Fifth" applies, the Settling States' allocated shares of the payments due from each Participating Manufacturer (as such shares have been determined in step (E) of clause "Seventh" in the case of payments from the Original Participating Manufacturers or in clause "Sixth" in the case of payments from the Subsequent Participating Manufacturers, and have been reduced by clauses "Eighth" through "Twelfth") shall be added together to state the aggregate payment obligation of each Participating Manufacturer with respect to the payments in question. (In the case of a payment to which clause "Fifth" does not apply, the aggregate payment obligation of each Participating Manufacturer with respect to the payment in question shall be stated by the results of clause "Eighth.") X. EFFECT OF FEDERAL TOBACCO-RELATED LEGISLATION (a) If federal tobacco-related legislation is enacted on or before November 30, 2002, and if such legislation provides for payment(s) by any Original Participating -83- Manufacturer (whether by settlement payment, tax or any other means), all or part of which are actually made available to a Settling State ("Federal Funds"), each Original Participating Manufacturer shall receive a continuing dollar-for-dollar offset for any and all amounts that are paid by such Original Participating Manufacturer pursuant to such legislation and actually made available to such Settling State (except as described in subsections (b) and (c) below). Such offset shall be applied against the applicable Original Participating Manufacturer's share (determined as described in step E of clause "Seventh" of subsection IX(j)) of such Settling State's Allocated Payment, up to the full amount of such Original Participating Manufacturer's share of such Allocated Payment (as such share had been reduced by adjustment, if any, pursuant to the NPM Adjustment and has been reduced by offset, if any, pursuant to the offset for miscalculated or disputed payments). Such offset shall be made against such Original Participating Manufacturer's share of the first Allocated Payment due after such Federal Funds are first available for receipt by such Settling State. In the event that such offset would in any given year exceed such Original Participating Manufacturer's share of such Allocated Payment: (1) the offset to which such Original Participating Manufacturer is entitled under this section in such year shall be the full amount of such Original Participating Manufacturer's share of such Allocated Payment, and (2) all amounts not offset by reason of subsection (1) shall carry forward and be offset in the following year(s) until all such amounts have been offset. (b) The offset described in subsection (a) shall apply only to that portion of Federal Funds, if any, that are either unrestricted as to their use, or restricted to any form of health care or to any use related to tobacco (including, but not limited to, tobacco -84- education, cessation, control or enforcement) (other than that portion of Federal Funds, if any, that is specifically applicable to tobacco growers or communities dependent on the production of tobacco or Tobacco Products). Provided, however, that the offset described in subsection (a) shall not apply to that portion of Federal Funds, if any, whose receipt by such Settling State is conditioned upon or appropriately allocable to: (1) the relinquishment of rights or benefits under this Agreement (including the Consent Decree); or (2) actions or expenditures by such Settling State, unless: (A) such Settling State chooses to undertake such action or expenditure; (B) such actions or expenditures do not impose significant constraints on public policy choices; or (C) such actions or expenditures are both: (i) related to health care or tobacco (including, but not limited to, tobacco education, cessation, control or enforcement) and (ii) do not require such Settling State to expend state matching funds in an amount that is significant in relation to the amount of the Federal Funds made available to such Settling State. (c) Subject to the provisions of subsection IX(i)(3), Subsequent Participating Manufacturers shall be entitled to the offset described in this section X to the extent that they are required to pay Federal Funds that would give rise to an offset under subsections (a) and (b) if paid by an Original Participating Manufacturer. (d) Nothing in this section X shall (1) reduce the payments to be made to the Settling States under this Agreement other than those described in subsection IX(c) (or -85- corresponding payments under subsection IX(i)) of this Agreement; or (2) alter the Allocable Share used to determine each Settling State's share of the payments described in subsection IX(c) (or corresponding payments under subsection IX(i)) of this Agreement. Nothing in this section X is intended to or shall reduce the total amounts payable by the Participating Manufacturers to the Settling States under this Agreement by an amount greater than the amount of Federal Funds that the Settling States could elect to receive. XI. CALCULATION AND DISBURSEMENT OF PAYMENTS (a) INDEPENDENT AUDITOR TO MAKE ALL CALCULATIONS. (1) Beginning with payments due in the year 2000, an Independent Auditor shall calculate and determine the amount of all payments owed pursuant to this Agreement, the adjustments, reductions and offsets thereto (and all resulting carry-forwards, if any), the allocation of such payments, adjustments, reductions, offsets and carry-forwards among the Participating Manufacturers and among the Settling States, and shall perform all other calculations in connection with the foregoing (including, but not limited to, determining Market Share, Relative Market Share, Base Aggregate Participating Manufacturer Market Share and Actual Aggregate Participating Manufacturer Market Share). The Independent Auditor shall promptly collect all information necessary to make such calculations and determinations. Each Participating Manufacturer and each Settling State shall provide the Independent Auditor, as promptly as practicable, with information in its possession or readily available to it necessary for the Independent Auditor to perform such calculations. The Independent Auditor shall -86- agree to maintain the confidentiality of all such information, except that the Independent Auditor may provide such information to Participating Manufacturers and the Settling States as set forth in this Agreement. The Participating Manufacturers and the Settling States agree to maintain the confidentiality of such information. (2) Payments due from the Original Participating Manufacturers prior to January 1, 2000 (other than the first payment due pursuant to subsection IX(b)) shall be based on the 1998 Relative Market Shares of the Original Participating Manufacturers or, if the Original Participating Manufacturers are unable to agree on such Relative Market Shares, on their 1997 Relative Market Shares specified in Exhibit Q. (b) IDENTITY OF INDEPENDENT AUDITOR. The Independent Auditor shall be a major, nationally recognized, certified public accounting firm jointly selected by agreement of the Original Participating Manufacturers and those Attorneys General of the Settling States who are members of the NAAG executive committee, who shall jointly retain the power to replace the Independent Auditor and appoint its successor. Fifty percent of the costs and fees of the Independent Auditor (but in no event more than $500,000 per annum), shall be paid by the Fund described in Exhibit J hereto, and the balance of such costs and fees shall be paid by the Original Participating Manufacturers, allocated among them according to their Relative Market Shares. The agreement retaining the Independent Auditor shall provide that the Independent Auditor shall perform the functions specified for it in this Agreement, and that it shall do so in the manner specified in this Agreement. -87- (c) RESOLUTION OF DISPUTES. Any dispute, controversy or claim arising out of or relating to calculations performed by, or any determinations made by, the Independent Auditor (including, without limitation, any dispute concerning the operation or application of any of the adjustments, reductions, offsets, carry-forwards and allocations described in subsection IX(j) or subsection XI(i)) shall be submitted to binding arbitration before a panel of three neutral arbitrators, each of whom shall be a former Article III federal judge. Each of the two sides to the dispute shall select one arbitrator. The two arbitrators so selected shall select the third arbitrator. The arbitration shall be governed by the United States Federal Arbitration Act. (d) GENERAL PROVISIONS AS TO CALCULATION OF PAYMENTS. (1) Not less than 90 days prior to the scheduled due date of any payment due pursuant to this Agreement ("Payment Due Date"), the Independent Auditor shall deliver to each other Notice Party a detailed itemization of all information required by the Independent Auditor to complete its calculation of (A) the amount due from each Participating Manufacturer with respect to such payment, and (B) the portion of such amount allocable to each entity for whose benefit such payment is to be made. To the extent practicable, the Independent Auditor shall specify in such itemization which Notice Party is requested to produce which information. Each Participating Manufacturer and each Settling State shall use its best efforts to promptly supply all of the required information that is within its possession or is readily available to it to the Independent Auditor, and in any event not less than 50 days prior to such Payment Due Date. Such best efforts obligation shall be continuing in the case of information that comes within the -88- possession of, or becomes readily available to, any Settling State or Participating Manufacturer after the date 50 days prior to such Payment Due Date. (2) Not less than 40 days prior to the Payment Due Date, the Independent Auditor shall deliver to each other Notice Party (A) detailed preliminary calculations ("Preliminary Calculations") of the amount due from each Participating Manufacturer and of the amount allocable to each entity for whose benefit such payment is to be made, showing all applicable offsets, adjustments, reductions and carry-forwards and setting forth all the information on which the Independent Auditor relied in preparing such Preliminary Calculations, and (B) a statement of any information still required by the Independent Auditor to complete its calculations. (3) Not less than 30 days prior to the Payment Due Date, any Participating Manufacturer or any Settling State that disputes any aspect of the Preliminary Calculations (including, but not limited to, disputing the methodology that the Independent Auditor employed, or the information on which the Independent Auditor relied, in preparing such calculations) shall notify each other Notice Party of such dispute, including the reasons and basis therefor. (4) Not less than 15 days prior to the Payment Due Date, the Independent Auditor shall deliver to each other Notice Party a detailed recalculation (a "Final Calculation") of the amount due from each Participating Manufacturer, the amount allocable to each entity for whose benefit such payment is to be made, and the Account to which such payment is to be credited, explaining any changes from -89- the Preliminary Calculation. The Final Calculation may include estimates of amounts in the circumstances described in subsection (d)(5). (5) The following provisions shall govern in the event that the information required by the Independent Auditor to complete its calculations is not in its possession by the date as of which the Independent Auditor is required to provide either a Preliminary Calculation or a Final Calculation. (A) If the information in question is not readily available to any Settling State, any Original Participating Manufacturer or any Subsequent Participating Manufacturer, the Independent Auditor shall employ an assumption as to the missing information producing the minimum amount that is likely to be due with respect to the payment in question, and shall set forth its assumption as to the missing information in its Preliminary Calculation or Final Calculation, whichever is at issue. Any Original Participating Manufacturer, Subsequent Participating Manufacturer or Settling State may dispute any such assumption employed by the Independent Auditor in its Preliminary Calculation in the manner prescribed in subsection (d)(3) or any such assumption employed by the Independent Auditor in its Final Calculation in the manner prescribed in subsection (d)(6). If the missing information becomes available to the Independent Auditor prior to the Payment Due Date, the Independent Auditor shall promptly revise its Preliminary Calculation or Final Calculation (whichever is applicable) and shall promptly provide the revised calculation to each Notice Party, showing the newly available -90- information. If the missing information does not become available to the Independent Auditor prior to the Payment Due Date, the minimum amount calculated by the Independent Auditor pursuant to this subsection (A) shall be paid on the Payment Due Date, subject to disputes pursuant to subsections (d)(6) and (d)(8) and without prejudice to a later final determination of the correct amount. If the missing information becomes available to the Independent Auditor after the Payment Due Date, the Independent Auditor shall calculate the correct amount of the payment in question and shall apply any overpayment or underpayment as an offset or additional payment in the manner described in subsection (i). (B) If the information in question is readily available to a Settling State, Original Participating Manufacturer or Subsequent Participating Manufacturer, but such Settling State, Original Participating Manufacturer or Subsequent Participating Manufacturer does not supply such information to the Independent Auditor, the Independent Auditor shall base the calculation in question on its best estimate of such information, and shall show such estimate in its Preliminary Calculation or Final Calculation, whichever is applicable. Any Original Participating Manufacturer, Subsequent Participating Manufacturer or Settling State (except the entity that withheld the information) may dispute such estimate employed by the Independent Auditor in its Preliminary Calculation in the manner prescribed in subsection (d)(3) or such estimate employed by the Independent Auditor in its Final Calculation in the manner prescribed in -91- subsection (d)(6). If the withheld information is not made available to the Independent Auditor more than 30 days prior to the Payment Due Date, the estimate employed by the Independent Auditor (as revised by the Independent Auditor in light of any dispute filed pursuant to the preceding sentence) shall govern the amounts to be paid on the Payment Due Date, subject to disputes pursuant to subsection (d)(6) and without prejudice to a later final determination of the correct amount. In the event that the withheld information subsequently becomes available, the Independent Auditor shall calculate the correct amount and shall apply any overpayment or underpayment as an offset or additional payment in the manner described in subsection (i). (6) Not less than five days prior to the Payment Due Date, each Participating Manufacturer and each Settling State shall deliver to each Notice Party a statement indicating whether it disputes the Independent Auditor's Final Calculation and, if so, the disputed and undisputed amounts and the basis for the dispute. Except to the extent a Participating Manufacturer or a Settling State delivers a statement indicating the existence of a dispute by such date, the amounts set forth in the Independent Auditor's Final Calculation shall be paid on the Payment Due Date. Provided, however, that (A) in the event that the Independent Auditor revises its Final Calculation within five days of the Payment Due Date as provided in subsection (5)(A) due to receipt of previously missing information, a Participating Manufacturer or Settling State may dispute such revision pursuant to the procedure set forth in this subsection (6) at any time prior -92- to the Payment Due Date; and (B) prior to the date four years after the Payment Due Date, neither failure to dispute a calculation made by the Independent Auditor nor actual agreement with any calculation or payment to the Escrow Agent or to another payee shall waive any Participating Manufacturer's or Settling State's rights to dispute any payment (or the Independent Auditor's calculations with respect to any payment) after the Payment Due Date. No Participating Manufacturer and no Settling State shall have a right to raise any dispute with respect to any payment or calculation after the date four years after such payment's Payment Due Date. (7) Each Participating Manufacturer shall be obligated to pay by the Payment Due Date the undisputed portion of the total amount calculated as due from it by the Independent Auditor's Final Calculation. Failure to pay such portion shall render the Participating Manufacturer liable for interest thereon as provided in subsection IX(h) of this Agreement, in addition to any other remedy available under this Agreement. (8) As to any disputed portion of the total amount calculated to be due pursuant to the Final Calculation, any Participating Manufacturer that by the Payment Due Date pays such disputed portion into the Disputed Payments Account (as defined in the Escrow Agreement) shall not be liable for interest thereon even if the amount disputed was in fact properly due and owing. Any Participating Manufacturer that by the Payment Due Date does not pay such disputed portion into the Disputed Payments Account shall be liable for interest as -93- provided in subsection IX(h) if the amount disputed was in fact properly due and owing. (9) On the same date that it makes any payment pursuant to this Agreement, each Participating Manufacturer shall deliver a notice to each other Notice Party showing the amount of such payment and the Account to which such payment is to be credited. (10) On the first Business Day after the Payment Due Date, the Escrow Agent shall deliver to each other Notice Party a statement showing the amounts received by it from each Participating Manufacturer and the Accounts credited with such amounts. (e) GENERAL TREATMENT OF PAYMENTS. The Escrow Agent may disburse amounts from an Account only if permitted, and only at such time as permitted, by this Agreement and the Escrow Agreement. No amounts may be disbursed to a Settling State other than funds credited to such Settling State's State-Specific Account (as defined in the Escrow Agreement). The Independent Auditor, in delivering payment instructions to the Escrow Agent, shall specify: the amount to be paid; the Account or Accounts from which such payment is to be disbursed; the payee of such payment (which may be an Account); and the Business Day on which such payment is to be made by the Escrow Agent. Except as expressly provided in subsection (f) below, in no event may any amount be disbursed from any Account prior to Final Approval. (f) DISBURSEMENTS AND CHARGES NOT CONTINGENT ON FINAL APPROVAL. Funds may be disbursed from Accounts without regard to the occurrence of Final Approval in the following circumstances and in the following manner: -94- (1) PAYMENTS OF FEDERAL AND STATE TAXES. Federal, state, local or other taxes imposed with respect to the amounts credited to the Accounts shall be paid from such amounts. The Independent Auditor shall prepare and file any tax returns required to be filed with respect to the escrow. All taxes required to be paid shall be allocated to and charged against the Accounts on a reasonable basis to be determined by the Independent Auditor. Upon receipt of written instructions from the Independent Auditor, the Escrow Agent shall pay such taxes and charge such payments against the Account or Accounts specified in those instructions. (2) PAYMENTS TO AND FROM DISPUTED PAYMENTS ACCOUNT. The Independent Auditor shall instruct the Escrow Agent to credit funds from an Account to the Disputed Payments Account when a dispute arises as to such funds, and shall instruct the Escrow Agent to credit funds from the Disputed Payments Account to the appropriate payee when such dispute is resolved with finality. The Independent Auditor shall provide the Notice Parties not less than 10 Business Days prior notice before instructing the Escrow Agent to disburse funds from the Disputed Payments Account. (3) PAYMENTS TO A STATE-SPECIFIC ACCOUNT. Promptly following the occurrence of State-Specific Finality in any Settling State, such Settling State and the Original Participating Manufacturers shall notify the Independent Auditor of such occurrence. The Independent Auditor shall promptly thereafter notify each Notice Party of such State-Specific Finality and of the portions of the amounts in the Subsection IX(b) Account (First), Subsection IX(b) Account (Subsequent), Subsection IX(c)(1) Account and Subsection IX(c)(2) Account, respectively (as -95- such Accounts are defined in the Escrow Agreement), that are at such time held in such Accounts for the benefit of such Settling State, and which are to be transferred to the appropriate State-Specific Account for such Settling State. If neither the Settling State in question nor any Participating Manufacturer disputes such amounts or the occurrence of such State-Specific Finality by notice delivered to each other Notice Party not later than 10 Business Days after delivery by the Independent Auditor of the notice described in the preceding sentence, the Independent Auditor shall promptly instruct the Escrow Agent to make such transfer. If the Settling State in question or any Participating Manufacturer disputes such amounts or the occurrence of such State-Specific Finality by notice delivered to each other Notice Party not later than 10 Business Days after delivery by the Independent Auditor of the notice described in the second sentence of this subsection (f)(3), the Independent Auditor shall promptly instruct the Escrow Agent to credit the amount disputed to the Disputed Payments Account and the undisputed portion to the appropriate State-Specific Account. No amounts may be transferred or credited to a State-Specific Account for the benefit of any State as to which State-Specific Finality has not occurred or as to which this Agreement has terminated. (4) PAYMENTS TO PARTIES OTHER THAN PARTICULAR SETTLING STATES. (A) Promptly following the occurrence of State-Specific Finality in one Settling State, such Settling State and the Original Participating Manufacturers shall notify the Independent Auditor of such occurrence. The Independent Auditor shall promptly thereafter notify each Notice -96- Party of the occurrence of State-Specific Finality in at least one Settling State and of the amounts held in the Subsection VI(b) Account, Subsection VI(c) Account (First), and Subsection VIII(c) Account (as such Accounts are defined in the Escrow Agreement), if any. If neither any of the Settling States nor any of the Participating Manufacturers disputes such amounts or disputes the occurrence of State-Specific Finality in one Settling State, by notice delivered to each Notice Party not later than ten Business Days after delivery by the Independent Auditor of the notice described in the preceding sentence, the Independent Auditor shall promptly instruct the Escrow Agent to disburse the funds held in such Accounts to the Foundation or to the Fund specified in subsection VIII(c), as appropriate. If any Settling State or Participating Manufacturer disputes such amounts or the occurrence of such State-Specific Finality by notice delivered to each other Notice Party not later than 10 Business Days after delivery by the Independent Auditor of the notice described in the second sentence of this subsection (4)(A), the Independent Auditor shall promptly instruct the Escrow Agent to credit the amounts disputed to the Disputed Payments Account and to disburse the undisputed portion to the Foundation or to the Fund specified in subsection VIII(c), as appropriate. (B) The Independent Auditor shall instruct the Escrow Agent to disburse funds on deposit in the Subsection VIII(b) Account and Subsection IX(e) Account (as such Accounts are defined in the Escrow Agreement) to NAAG or to the Foundation, as appropriate, within 10 -97- Business Days after the date on which such amounts were credited to such Accounts. (C) Promptly following the occurrence of State-Specific Finality in Settling States having aggregate Allocable Shares equal to at least 80% of the total aggregate Allocable Shares assigned to all States that were Settling States as of the MSA Execution Date, the Settling States and the Original Participating Manufacturers shall notify the Independent Auditor of such occurrence. The Independent Auditor shall promptly thereafter notify each Notice Party of the occurrence of such State-Specific Finality and of the amounts held in the Subsection VI(c) Account (Subsequent) (as such Account is defined in the Escrow Agreement), if any. If neither any of the Settling States nor any of the Participating Manufacturers disputes such amounts or disputes the occurrence of such State-Specific Finality, by notice delivered to each Notice Party not later than 10 Business Days after delivery by the Independent Auditor of the notice described in the preceding sentence, the Independent Auditor shall promptly instruct the Escrow Agent to disburse the funds held in such Account to the Foundation. If any Settling State or Participating Manufacturer disputes such amounts or the occurrence of such State-Specific Finality by notice delivered to each other Notice Party not later than 10 Business Days after delivery by the Independent Auditor of the notice described in the second sentence of this subsection (4)(C), the Independent Auditor shall promptly instruct the Escrow Agent to credit the amounts disputed to the Disputed -98- Payments Account and to disburse the undisputed portion to the Foundation. (5) TREATMENT OF PAYMENTS FOLLOWING TERMINATION. (A) AS TO AMOUNTS HELD FOR SETTLING STATES. Promptly upon the termination of this Agreement with respect to any Settling State (whether or not as part of the termination of this Agreement as to all Settling States) such State or any Participating Manufacturer shall notify the Independent Auditor of such occurrence. The Independent Auditor shall promptly thereafter notify each Notice Party of such termination and of the amounts held in the Subsection IX(b) Account (First), the Subsection IX(b) Account (Subsequent), the Subsection IX(c)(1) Account, the Subsection IX(c)(2) Account, and the State-Specific Account for the benefit of such Settling State. If neither the State in question nor any Participating Manufacturer disputes such amounts or the occurrence of such termination by notice delivered to each other Notice Party not later than 10 Business Days after delivery by the Independent Auditor of the notice described in the preceding sentence, the Independent Auditor shall promptly instruct the Escrow Agent to transfer such amounts to the Participating Manufacturers (on the basis of their respective contributions of such funds). If the State in question or any Participating Manufacturer disputes the amounts held in the Accounts or the occurrence of such termination by notice delivered to each other Notice Party not later than 10 Business Days after delivery by the Independent Auditor of the notice described in the -99- second sentence of this subsection (5)(A), the Independent Auditor shall promptly instruct the Escrow Agent to transfer the amount disputed to the Disputed Payments Account and the undisputed portion to the Participating Manufacturers (on the basis of their respective contributions of such funds). (B) AS TO AMOUNTS HELD FOR OTHERS. If this Agreement is terminated with respect to all of the Settling States, the Original Participating Manufacturers shall promptly notify the Independent Auditor of such occurrence. The Independent Auditor shall promptly thereafter notify each Notice Party of such termination and of the amounts held in the Subsection VI(b) Account, the Subsection VI(c) Account (First), the Subsection VIII(b) Account, the Subsection VIII(c) Account and the Subsection IX(e) Account. If neither any such State nor any Participating Manufacturer disputes such amounts or the occurrence of such termination by notice delivered to each other Notice Party not later than 10 Business Days after delivery by the Independent Auditor of the notice described in the preceding sentence, the Independent Auditor shall promptly instruct the Escrow Agent to transfer such amounts to the Participating Manufacturers (on the basis of their respective contributions of such funds). If any such State or any Participating Manufacturer disputes the amounts held in the Accounts or the occurrence of such termination by notice delivered to each other Notice Party not later than 10 Business Days after delivery by the Independent Auditor of the notice described in the -100- second sentence of this subsection (5)(B), the Independent Auditor shall promptly instruct the Escrow Agent to credit the amount disputed to the Disputed Payments Account and transfer the undisputed portion to the Participating Manufacturers (on the basis of their respective contribution of such funds). (C) AS TO AMOUNTS HELD IN THE SUBSECTION VI(C) ACCOUNT (SUBSEQUENT). If this Agreement is terminated with respect to Settling States having aggregate Allocable Shares equal to more than 20% of the total aggregate Allocable Shares assigned to those States that were Settling States as of the MSA Execution Date, the Original Participating Manufacturers shall promptly notify the Independent Auditor of such occurrence. The Independent Auditor shall promptly thereafter notify each Notice Party of such termination and of the amounts held in the Subsection VI(c) Account (Subsequent) (as defined in the Escrow Agreement). If neither any such State with respect to which this Agreement has terminated nor any Participating Manufacturer disputes such amounts or the occurrence of such termination by notice delivered to each other Notice Party not later than 10 Business Days after delivery by the Independent Auditor of the notice described in the preceding sentence, the Independent Auditor shall promptly instruct the Escrow Agent to transfer such amounts to the Participating Manufacturers (on the basis of their respective contributions of such funds). If any such State or any Participating Manufacturer disputes the amounts held in the Account or -101- the occurrence of such termination by notice delivered to each other Notice Party not later than 10 Business Days after delivery by the Independent Auditor of the notice described in the second sentence of this subsection (5)(C), the Independent Auditor shall promptly instruct the Escrow Agent to credit the amount disputed to the Disputed Payments Account and transfer the undisputed portion to the Participating Manufacturers (on the basis of their respective contribution of such funds). (g) PAYMENTS TO BE MADE ONLY AFTER FINAL APPROVAL. Promptly following the occurrence of Final Approval, the Settling States and the Original Participating Manufacturers shall notify the Independent Auditor of such occurrence. The Independent Auditor shall promptly thereafter notify each Notice Party of the occurrence of Final Approval and of the amounts held in the State-Specific Accounts. If neither any of the Settling States nor any of the Participating Manufacturers disputes such amounts, disputes the occurrence of Final Approval or claims that this Agreement has terminated as to any Settling State for whose benefit the funds are held in a State-Specific Account, by notice delivered to each Notice Party not later than 10 Business Days after delivery by the Independent Auditor of such notice of Final Approval, the Independent Auditor shall promptly instruct the Escrow Agent to disburse the funds held in the State-Specific Accounts to the respective Settling States. If any Notice Party disputes such amounts or the occurrence of Final Approval, or claims that this Agreement has terminated as to any Settling State for whose benefit the funds are held in a State-Specific Account, by notice delivered to each other Notice Party not later than 10 Business Days after delivery by the Independent Auditor of such notice of Final Approval, the Independent Auditor shall -102- promptly instruct the Escrow Agent to credit the amounts disputed to the Disputed Payments Account and to disburse the undisputed portion to the respective Settling States. (h) APPLICABILITY TO SECTION XVII PAYMENTS. This section XI shall not be applicable to payments made pursuant to section XVII; provided, however, that the Independent Auditor shall be responsible for calculating Relative Market Shares in connection with such payments, and the Independent Auditor shall promptly provide the results of such calculation to any Original Participating Manufacturer or Settling State that requests it do so. (i) MISCALCULATED OR DISPUTED PAYMENTS. (1) UNDERPAYMENTS. (A) If information becomes available to the Independent Auditor not later than four years after a Payment Due Date, and such information shows that any Participating Manufacturer was instructed to make an insufficient payment on such date ("original payment"), the Independent Auditor shall promptly determine the additional payment owed by such Participating Manufacturer and the allocation of such additional payment among the applicable payees. The Independent Auditor shall then reduce such additional payment (up to the full amount of such additional payment) by any adjustments or offsets that were available to the Participating Manufacturer in question against the original payment at the time it was made (and have not since been used) but which such Participating Manufacturer was unable to use against such original -103- payment because such adjustments or offsets were in excess of such original payment (provided that any adjustments or offsets used against such additional payment shall reduce on a dollar-for-dollar basis any remaining carry-forward held by such Participating Manufacturer with respect to such adjustment or offset). The Independent Auditor shall then add interest at the Prime Rate (calculated from the Payment Due Date in question) to the additional payment (as reduced pursuant to the preceding sentence), except that where the additional payment owed by a Participating Manufacturer is the result of an underpayment by such Participating Manufacturer caused by such Participating Manufacturer's withholding of information as described in subsection (d)(5)(B), the applicable interest rate shall be that described in subsection IX(h). The Independent Auditor shall promptly give notice of the additional payment owed by the Participating Manufacturer in question (as reduced and/or increased as described above) to all Notice Parties, showing the new information and all calculations. Upon receipt of such notice, any Participating Manufacturer or Settling State may dispute the Independent Auditor's calculations in the manner described in subsection (d)(3), and the Independent Auditor shall promptly notify each Notice Party of any subsequent revisions to its calculations. Not more than 15 days after receipt of such notice (or, if the Independent Auditor revises its calculations, not more than 15 days after receipt of the revisions), any Participating Manufacturer and any Settling State may dispute the -104- Independent Auditor's calculations in the manner prescribed in subsection (d)(6). Failure to dispute the Independent Auditor's calculations in this manner shall constitute agreement with the Independent Auditor's calculations, subject to the limitations set forth in subsection (d)(6). Payment of the undisputed portion of an additional payment shall be made to the Escrow Agent not more than 20 days after receipt of the notice described in this subsection (A) (or, if the Independent Auditor revises its calculations, not more than 20 days after receipt of the revisions). Failure to pay such portion shall render the Participating Manufacturer liable for interest thereon as provided in subsection IX(h). Payment of the disputed portion shall be governed by subsection (d)(8). (B) To the extent a dispute as to a prior payment is resolved with finality against a Participating Manufacturer: (i) in the case where the disputed amount has been paid into the Disputed Payments Account pursuant to subsection (d)(8), the Independent Auditor shall instruct the Escrow Agent to transfer such amount to the applicable payee Account(s); (ii) in the case where the disputed amount has not been paid into the Disputed Payments Account and the dispute was identified prior to the Payment Due Date in question by delivery of a statement pursuant to subsection (d)(6) identifying such dispute, the Independent Auditor shall calculate interest on the disputed amount from the Payment Due Date in question (the applicable interest rate to be that provided in subsection IX(h)) and the allocation of such amount and interest among the applicable -105- payees, and shall provide notice of the amount owed (and the identity of the payor and payees) to all Notice Parties; and (iii) in all other cases, the procedure described in subsection (ii) shall apply, except that the applicable interest rate shall be the Prime Rate. (2) OVERPAYMENTS. (A) If a dispute as to a prior payment is resolved with finality in favor of a Participating Manufacturer where the disputed amount has been paid into the Disputed Payments Account pursuant to subsection (d)(8), the Independent Auditor shall instruct the Escrow Agent to transfer such amount to such Participating Manufacturer. (B) If information becomes available to the Independent Auditor not later than four years after a Payment Due Date showing that a Participating Manufacturer made an overpayment on such date, or if a dispute as to a prior payment is resolved with finality in favor of a Participating Manufacturer where the disputed amount has been paid but not into the Disputed Payments Account, such Participating Manufacturer shall be entitled to a continuing dollar-for-dollar offset as follows: (i) offsets under this subsection (B) shall be applied only against eligible payments to be made by such Participating Manufacturer after the entitlement to the offset arises. The eligible payments shall be: in the case of offsets arising from payments under subsection IX(b) or IX(c)(1), subsequent payments under any of such subsections; in the case of offsets arising from -106- payments under subsection IX(c)(2), subsequent payments under such subsection or, if no subsequent payments are to be made under such subsection, subsequent payments under subsection IX(c)(1); in the case of offsets arising from payments under subsection IX(e), subsequent payments under such subsection or subsection IX(c); in the case of offsets arising from payments under subsection VI(c), subsequent payments under such subsection or, if no subsequent payments are to be made under such subsection, subsequent payments under any of subsection IX(c)(1), IX(c)(2) or IX(e); in the case of offsets arising from payments under subsection VIII(b), subsequent payments under such subsection or, if no subsequent payments are to be made under such subsection, subsequent payments under either subsection IX(c)(1) or IX(c)(2); in the case of offsets arising from payments under subsection VIII(c), subsequent payments under either subsection IX(c)(1) or IX(c)(2); and, in the case of offsets arising from payments under subsection IX(i), subsequent payments under such subsection. (ii) in the case of offsets to be applied against payments under subsection IX(c), the offset to be applied shall be apportioned among the Settling States pro rata in proportion to their respective shares of such payments. -107- (iii) the total amount of the offset to which a Participating Manufacturer shall be entitled shall be the full amount of the overpayment it made, together with interest calculated from the time of the overpayment to the Payment Due Date of the first eligible payment against which the offset may be applied. The applicable interest rate shall be the Prime Rate (except that, where the overpayment is the result of a Settling State's withholding of information as described in subsection (d)(5)(B), the applicable interest rate shall be that described in subsection IX(h)). (iv) an offset under this subsection (B) shall be applied up to the full amount of the Participating Manufacturer's share (in the case of payments due from Original Participating Manufacturers, determined as described in the first sentence of clause "Seventh" of subsection IX(j) (or, in the case of payments pursuant to subsection IX(c), step D of such clause)) of the eligible payment in question, as such payment has been adjusted and reduced pursuant to clauses "First" through "Sixth" of subsection IX(j), to the extent each such clause is applicable to the payment in question. In the event that the offset to which a Participating Manufacturer is entitled under this subsection (B) would exceed such Participating Manufacturer's share of the eligible payment against which it is being applied, the offset shall be the full amount of such Participating Manufacturer's share of such eligible payment and all -108- amounts not offset shall carry forward and be offset against subsequent eligible payments until all such amounts have been offset. (j) PAYMENTS AFTER APPLICABLE CONDITION. To the extent that a payment is made after the occurrence of all applicable conditions for the disbursement of such payment to the payee(s) in question, the Independent Auditor shall instruct the Escrow Agent to disburse such payment promptly following its deposit. XII. SETTLING STATES' RELEASE, DISCHARGE AND COVENANT (a) RELEASE. (1) Upon the occurrence of State-Specific Finality in a Settling State, such Settling State shall absolutely and unconditionally release and forever discharge all Released Parties from all Released Claims that the Releasing Parties directly, indirectly, derivatively or in any other capacity ever had, now have, or hereafter can, shall or may have. (2) Notwithstanding the foregoing, this release and discharge shall not apply to any defendant in a lawsuit settled pursuant to this Agreement (other than a Participating Manufacturer) unless and until such defendant releases the Releasing Parties (and delivers to the Attorney General of the applicable Settling State a copy of such release) from any and all Claims of such defendant relating to the prosecution of such lawsuit. (3) Each Settling State (for itself and for the Releasing Parties) further covenants and agrees that it (and the Releasing Parties) shall not after the occurrence of State-Specific Finality sue or seek to establish civil liability against -109- any Released Party based, in whole or in part, upon any of the Released Claims, and further agrees that such covenant and agreement shall be a complete defense to any such civil action or proceeding. (4) (A) Each Settling State (for itself and for the Releasing Parties) further agrees that, if a Released Claim by a Releasing Party against any person or entity that is not a Released Party (a "non-Released Party") results in or in any way gives rise to a claim-over (on any theory whatever other than a claim based on an express written indemnity agreement) by such non-Released Party against any Released Party (and such Released Party gives notice to the applicable Settling State within 30 days of the service of such claim-over (or within 30 days after the MSA Execution Date, whichever is later) and prior to entry into any settlement of such claim-over), the Releasing Party: (i) shall reduce or credit against any judgment or settlement such Releasing Party may obtain against such non-Released Party the full amount of any judgment or settlement such non-Released Party may obtain against the Released Party on such claim-over; and (ii) shall, as part of any settlement with such non-Released Party, obtain from such non-Released Party for the benefit of such Released Party a satisfaction in full of such non-Released Party's judgment or settlement against the Released Party. (B) Each Settling State further agrees that in the event that the provisions of subsection (4)(A) do not fully eliminate any and all liability of any Original Participating Manufacturer (or of any person or entity that is a Released Party by virtue of its relation to any Original Participating Manufacturer) with respect to -110- claims-over (on any theory whatever other than a claim based on an express written indemnity agreement) by any non-Released Party to recover in whole or in part any liability (whether direct or indirect, or whether by way of settlement (to the extent that such Released Party has given notice to the applicable Settling State within 30 days of the service of such claim-over (or within 30 days after the MSA Execution Date, whichever is later) and prior to entry into any settlement of such claim-over), judgment or otherwise) of such non-Released Party to any Releasing Party arising out of any Released Claim, such Original Participating Manufacturer shall receive a continuing dollar-for-dollar offset for any amounts paid by such Original Participating Manufacturer (or by any person or entity that is a Released Party by virtue of its relation to such Original Participating Manufacturer) on any such liability against such Original Participating Manufacturer's share (determined as described in step E of clause "Seventh" of subsection IX(j)) of the applicable Settling State's Allocated Payment, up to the full amount of such Original Participating Manufacturer's share of such Allocated Payment each year, until all such amounts paid on such liability have been offset. In the event that the offset under this subsection (4) with respect to a particular Settling State would in any given year exceed such Original Participating Manufacturer's share of such Settling State's Allocated Payment (as such share had been reduced by adjustment, if any, pursuant to the NPM Adjustment, and has been reduced by offsets, if any, pursuant to the offset for miscalculated or disputed payments, the Federal Tobacco Legislation Offset and the Litigating Releasing Parties Offset): (i) the offset to which such Original Participating -111- Manufacturer is entitled under this subsection in such year shall be the full amount of such Original Participating Manufacturer's share of such Allocated Payment; and (ii) all amounts not offset by reason of subsection (i) shall carry forward and be offset in the following year(s) until all such amounts have been offset. (C) Each Settling State further agrees that, subject to the provisions of section IX(i)(3), each Subsequent Participating Manufacturer shall be entitled to the offset described in subsection (B) above to the extent that it (or any person or entity that is a Released Party by virtue of its relationship with such Subsequent Participating Manufacturer) has paid on liability that would give rise to an offset under such subsection if paid by an Original Participating Manufacturer. (5) This release and covenant shall not operate to interfere with a Settling State's ability to enforce as against any Participating Manufacturer the provisions of this Agreement, or with the Court's ability to enter the Consent Decree or to maintain continuing jurisdiction to enforce such Consent Decree pursuant to the terms thereof. Provided, however, that neither subsection III(a) or III(r) of this Agreement nor subsection V(A) or V(I) of the Consent Decree shall create a right to challenge the continuation, after the MSA Execution Date, of any advertising content, claim or slogan (other than use of a Cartoon) that was not unlawful prior to the MSA Execution Date. (6) The Settling States do not purport to waive or release any claims on behalf of Indian tribes. -112- (7) The Settling States do not waive or release any criminal liability based on federal, state or local law. (8) Notwithstanding the foregoing (and the definition of Released Parties), this release and covenant shall not apply to retailers, suppliers or distributors to the extent of any liability arising from the sale or distribution of Tobacco Products of, or the supply of component parts of Tobacco Products to, any non-Released Party. (A) Each Settling State (for itself and for the Releasing Parties) agrees that, if a claim by a Releasing Party against a retailer, supplier or distributor that would be a Released Claim but for the operation of the preceding sentence results in or in any way gives rise to a claim-over (on any theory whatever) by such retailer, supplier or distributor against any Released Party (and such Released Party gives notice to the applicable Settling State within 30 days of the service of such claim-over (or within 30 days after the MSA Execution Date, whichever is later) and prior to entry into any settlement of such claim-over), the Releasing Party: (i) shall reduce or credit against any judgment or settlement such Releasing Party may obtain against such retailer, supplier or distributor the full amount of any judgment or settlement such retailer, supplier or distributor may obtain against the Released Party on such claim-over; and (ii) shall, as part of any settlement with such retailer, supplier or distributor, obtain from such retailer, supplier or distributor for the benefit of such Released -113- Party a satisfaction in full of such retailer's, supplier's or distributor's judgment or settlement against the Released Party. (B) Each Settling State further agrees that in the event that the provisions of subsection (8)(A) above do not fully eliminate any and all liability of any Original Participating Manufacturer (or any person or entity that is a Released Party by virtue of its relationship to an Original Participating Manufacturer) with respect to claims-over (on any theory whatever) by any such retailer, supplier or distributor to recover in whole or in part any liability (whether direct or indirect, or whether by way of settlement (to the extent that such Released Party has given notice to the applicable Settling State within 30 days of the service of such claim-over (or within 30 days after the MSA Execution Date, whichever is later) and prior to entry into any settlement of such claim-over), judgment or otherwise) of such retailer, supplier or distributor to any Releasing Party arising out of any claim that would be a Released Claim but for the operation of the first sentence of this subsection (8), such Original Participating Manufacturer shall receive a continuing dollar-for-dollar offset for any amounts paid by such Original Participating Manufacturer (or by any person or entity that is a Released Party by virtue of its relation to such Original Participating Manufacturer) on any such liability against such Original Participating Manufacturer's share (determined as described in step E of clause "Seventh" of subsection IX(j)) of the applicable Settling State's Allocated Payment, up to the full amount of such Original -114- Participating Manufacturer's share of such Allocated Payment each year, until all such amounts paid on such liability have been offset. In the event that the offset under this subsection (8) with respect to a particular Settling State would in any given year exceed such Original Participating Manufacturer's share of such Settling State's Allocated Payment (as such share had been reduced by adjustment, if any, pursuant to the NPM Adjustment, and has been reduced by offsets, if any, pursuant to the offset for miscalculated or disputed payments, the Federal Tobacco Legislation Offset, the Litigating Releasing Parties Offset and the offset for claims-over under subsection XII(a)(4)(B)): (i) the offset to which such Original Participating Manufacturer is entitled under this subsection in such year shall be the full amount of such Original Participating Manufacturer's share of such Allocated Payment; and (ii) all amounts not offset by reason of clause (i) shall carry forward and be offset in the following year(s) until all such amounts have been offset. (C) Each Settling State further agrees that, subject to the provisions of subsection IX(i)(3), each Subsequent Participating Manufacturer shall be entitled to the offset described in subsection (B) above to the extent that it (or any person or entity that is a Released Party by virtue of its relationship with such Subsequent Participating Manufacturer) has paid on liability that would give rise to an offset under such subsection if paid by an Original Participating Manufacturer. -115- (9) Notwithstanding any provision of law, statutory or otherwise, which provides that a general release does not extend to claims which the creditor does not know or suspect to exist in its favor at the time of executing the release, which if known by it must have materially affected its settlement with the debtor, the releases set forth in this section XII release all Released Claims against the Released Parties, whether known or unknown, foreseen or unforeseen, suspected or unsuspected, that the Releasing Parties may have against the Released Parties, and the Releasing Parties understand and acknowledge the significance and consequences of waiver of any such provision and hereby assume full responsibility for any injuries, damages or losses that the Releasing Parties may incur. (b) RELEASED CLAIMS AGAINST RELEASED PARTIES. If a Releasing Party (or any person or entity enumerated in subsection II(pp), without regard to the power of the Attorney General to release claims of such person or entity) nonetheless attempts to maintain a Released Claim against a Released Party, such Released Party shall give written notice of such potential claim to the Attorney General of the applicable Settling State within 30 days of receiving notice of such potential claim (or within 30 days after the MSA Execution Date, whichever is later) (unless such potential claim is being maintained by such Settling State). The Released Party may offer the release and covenant as a complete defense. If it is determined at any point in such action that the release of such claim is unenforceable or invalid for any reason (including, but not limited to, lack of authority to release such claim), the following provisions shall apply: -116- (1) The Released Party shall take all ordinary and reasonable measures to defend the action fully. The Released Party may settle or enter into a stipulated judgment with respect to the action at any time in its sole discretion, but in such event the offset described in subsection (b)(2) or (b)(3) below shall apply only if the Released Party obtains the relevant Attorney General's consent to such settlement or stipulated judgment, which consent shall not be unreasonably withheld. The Released Party shall not be entitled to the offset described in subsection (b)(2) or (b)(3) below if such Released Party failed to take ordinary and reasonable measures to defend the action fully. (2) The following provisions shall apply where the Released Party is an Original Participating Manufacturer (or any person or entity that is a Released Party by virtue of its relationship with an Original Participating Manufacturer): (A) In the event of a settlement or stipulated judgment, the settlement or stipulated amount shall give rise to a continuing offset as such amount is actually paid against the full amount of such Original Participating Manufacturer's share (determined as described in step E of clause "Seventh" of subsection IX(j)) of the applicable Settling State's Allocated Payment until such time as the settlement or stipulated amount is fully credited on a dollar-for-dollar basis. (B) Judgments (other than a default judgment) against a Released Party in such an action shall, upon payment of such judgment, give rise to an immediate and continuing offset against the full amount of such Original Participating Manufacturer's share (determined as described in -117- subsection (A)) of the applicable Settling State's Allocated Payment, until such time as the judgment is fully credited on a dollar-for-dollar basis. (C) Each Settling State reserves the right to intervene in such an action (unless such action was brought by the Settling State) to the extent authorized by applicable law in order to protect the Settling State's interest under this Agreement. Each Participating Manufacturer agrees not to oppose any such intervention. (D) In the event that the offset under this subsection (b)(2) with respect to a particular Settling State would in any given year exceed such Original Participating Manufacturer's share of such Settling State's Allocated Payment (as such share had been reduced by adjustment, if any, pursuant to the NPM Adjustment, and has been reduced by offsets, if any, pursuant to the Federal Tobacco Legislation Offset and the offset for miscalculated or disputed payments): (i) the offset to which such Original Participating Manufacturer is entitled under this subsection (2) in such year shall be the full amount of such Original Participating Manufacturer's share of such Allocated Payment; and (ii) all amounts not offset by reason of clause (i) shall carry forward and be offset in the following year(s) until all such amounts have been offset. (3) The following provisions shall apply where the Released Party is a Subsequent Participating Manufacturer (or any person or entity that is a Released Party by virtue of its relationship with a Subsequent Participating Manufacturer): Subject to the provisions of subsection IX(i)(3), each Subsequent Participating -118- Manufacturer shall be entitled to the offset as described in subsections (2)(A)-(C) above against payments it otherwise would owe under section IX(i) to the extent that it (or any person or entity that is a Released Party by virtue of its relationship with such Subsequent Participating Manufacturer) has paid on a settlement, stipulated judgment or judgment that would give rise to an offset under such subsections if paid by an Original Participating Manufacturer. XIII. CONSENT DECREES AND DISMISSAL OF CLAIMS (a) Within 10 days after the MSA Execution Date (or, as to any Settling State identified in the Additional States provision of Exhibit D, concurrently with the filing of its lawsuit), each Settling State and each Participating Manufacturer that is a party in any of the lawsuits identified in Exhibit D shall jointly move for a stay of all proceedings in such Settling State's lawsuit with respect to the Participating Manufacturers and all other Released Parties (except any proceeding seeking public disclosure of documents pursuant to subsection IV(b)). Such stay of a Settling State's lawsuit shall be dissolved upon the earlier of the occurrence of State-Specific Finality or termination of this Agreement with respect to such Settling State pursuant to subsection XVIII(u)(1). (b) Not later than December 11, 1998 (or, as to any Settling State identified in the Additional States provision of Exhibit D, concurrently with the filing of its lawsuit): (1) each Settling State that is a party to a lawsuit identified in Exhibit D and each Participating Manufacturer will: (A) tender this Agreement to the Court in such Settling State for its approval; and -119- (B) tender to the Court in such Settling State for entry a consent decree conforming to the model consent decree attached hereto as Exhibit L (revisions or changes to such model consent decree shall be limited to the extent required by state procedural requirements to reflect accurately the factual setting of the case in question, but shall not include any substantive revision to the duties or obligations of any Settling State or Participating Manufacturer, except by agreement of all Original Participating Manufacturers); and (2) each Settling State shall seek entry of an order of dismissal of claims dismissing with prejudice all claims against the Participating Manufacturers and any other Released Party in such Settling State's action identified in Exhibit D. Provided, however, that the Settling State is not required to seek entry of such an order in such Settling State's action against such a Released Party (other than a Participating Manufacturer) unless and until such Released Party has released the Releasing Parties (and delivered to the Attorney General of such Settling State a copy of such release) (which release shall be effective upon the occurrence of State-Specific Finality in such Settling State, and shall recite that in the event this Agreement is terminated with respect to such Settling State pursuant to subsection XVIII(u)(1) the Released Party agrees that the order of dismissal shall be null and void and of no effect) from any and all Claims of such Released Party relating to the prosecution of such action as provided in subsection XII(a)(2). -120- XIV. PARTICIPATING MANUFACTURERS' DISMISSAL OF RELATED LAWSUITS (a) Upon State-Specific Finality in a Settling State, each Participating Manufacturer will dismiss without prejudice (and without costs and fees) the lawsuit(s) listed in Exhibit M pending in such Settling State in which the Participating Manufacturer is a plaintiff. Within 10 days after the MSA Execution Date, each Participating Manufacturer and each Settling State that is a party in any of the lawsuits listed in Exhibit M shall jointly move for a stay of all proceedings in such lawsuit. Such stay of a lawsuit against a Settling State shall be dissolved upon the earlier of the occurrence of State-Specific Finality in such Settling State or termination of this Agreement with respect to such Settling State pursuant to subsection XVIII(u)(1). (b) Upon State-Specific Finality in a Settling State, each Participating Manufacturer will release and discharge any and all monetary Claims against such Settling State and any of such Settling State's officers, employees, agents, administrators, representatives, officials acting in their official capacity, agencies, departments, commissions, divisions and counsel relating to or in connection with the lawsuit(s) commenced by the Attorney General of such Settling State identified in Exhibit D. (c) Upon State-Specific Finality in a Settling State, each Participating Manufacturer will release and discharge any and all monetary Claims against all subdivisions (political or otherwise, including, but not limited to, municipalities, counties, parishes, villages, unincorporated districts and hospital districts) of such Settling State, and any of their officers, employees, agents, administrators, representatives, officials acting in their official capacity, agencies, departments, -121- commissions, divisions and counsel arising out of Claims that have been waived and released with continuing full force and effect pursuant to section XII of this Agreement. XV. VOLUNTARY ACT OF THE PARTIES The Settling States and the Participating Manufacturers acknowledge and agree that this Agreement is voluntarily entered into by each Settling State and each Participating Manufacturer as the result of arm's-length negotiations, and each Settling State and each Participating Manufacturer was represented by counsel in deciding to enter into this Agreement. Each Participating Manufacturer further acknowledges that it understands that certain provisions of this Agreement may require it to act or refrain from acting in a manner that could otherwise give rise to state or federal constitutional challenges and that, by voluntarily consenting to this Agreement, it (and the Tobacco-Related Organizations (or any trade associations formed or controlled by any Participating Manufacturer)) waives for purposes of performance of this Agreement any and all claims that the provisions of this Agreement violate the state or federal constitutions. Provided, however, that nothing in the foregoing shall constitute a waiver as to the entry of any court order (or any interpretation thereof) that would operate to limit the exercise of any constitutional right except to the extent of the restrictions, limitations or obligations expressly agreed to in this Agreement or the Consent Decree. XVI. CONSTRUCTION (a) No Settling State or Participating Manufacturer shall be considered the drafter of this Agreement or any Consent Decree, or any provision of either, for the purpose of any statute, case law or rule of interpretation or construction that would or might cause any provision to be construed against the drafter. -122- (b) Nothing in this Agreement shall be construed as approval by the Settling States of any Participating Manufacturer's business organizations, operations, acts or practices, and no Participating Manufacturer may make any representation to the contrary. XVII. RECOVERY OF COSTS AND ATTORNEYS' FEES (a) The Original Participating Manufacturers agree that, with respect to any Settling State in which the Court has approved this Agreement and the Consent Decree, they shall severally reimburse the following "Governmental Entities": (1) the office of the Attorney General of such Settling State; (2) the office of the governmental prosecuting authority for any political subdivision of such Settling State with a lawsuit pending against any Participating Manufacturer as of July 1, 1998 (as identified in Exhibit N) that has released such Settling State and such Participating Manufacturer(s) from any and all Released Claims (a "Litigating Political Subdivision"); and (3) other appropriate agencies of such Settling State and such Litigating Political Subdivision, for reasonable costs and expenses incurred in connection with the litigation or resolution of claims asserted against the Participating Manufacturers in the actions set forth in Exhibits D, M and N; provided that such costs and expenses are of the same nature as costs and expenses for which the Original Participating Manufacturers would reimburse their own counsel or agents (but not including costs and expenses relating to lobbying activities). (b) The Original Participating Manufacturers further agree severally to pay the Governmental Entities in any Settling State in which State-Specific Finality has occurred an amount sufficient to compensate such Governmental Entities for time reasonably expended by attorneys and paralegals employed in such offices in connection with the -123- litigation or resolution of claims asserted against or by the Participating Manufacturers in the actions identified in Exhibits D, M and N (but not including time relating to lobbying activities), such amount to be calculated based upon hourly rates equal to the market rate in such Settling State for private attorneys and paralegals of equivalent experience and seniority. (c) Such Governmental Entities seeking payment pursuant to subsection (a) and/or (b) shall provide the Original Participating Manufacturers with an appropriately documented statement of all costs, expenses and attorney and paralegal time for which payment is sought, and, solely with respect to payments sought pursuant to subsection (b), shall do so no earlier than the date on which State-Specific Finality occurs in such Settling State. All amounts to be paid pursuant to subsections (a) and (b) shall be subject to reasonable verification if requested by any Original Participating Manufacturer; provided, however, that nothing contained in this subsection (c) shall constitute, cause, or require the performance of any act that would constitute any waiver (in whole or in part) of any attorney-client privilege, work product protection or common interest/joint prosecution privilege. All such amounts to be paid pursuant to subsections (a) and (b) shall be subject to an aggregate cap of $150 million for all Settling States, shall be paid promptly following submission of the appropriate documentation (and the completion of any verification process), shall be paid separately and apart from any other amounts due pursuant to this Agreement, and shall be paid severally by each Original Participating Manufacturer according to its Relative Market Share. All amounts to be paid pursuant to subsection (b) shall be paid to such Governmental Entities in the order in which State- -124- Specific Finality has occurred in such Settling States (subject to the $150 million aggregate cap). (d) The Original Participating Manufacturers agree that, upon the occurrence of State-Specific Finality in a Settling State, they will severally pay reasonable attorneys' fees to the private outside counsel, if any, retained by such Settling State (and each Litigating Political Subdivision, if any, within such Settling State) in connection with the respective actions identified in Exhibits D, M and N and who are designated in Exhibit S for each Settling State by the relevant Attorney General (and for each Litigating Political Subdivision, as later certified in writing to the Original Participating Manufacturers by the relevant governmental prosecuting authority of each Litigating Political Subdivision) as having been retained by and having represented such Settling State (or such Litigating Political Subdivision), in accordance with the terms described in the Model Fee Payment Agreement attached as Exhibit O. XVIII. MISCELLANEOUS (a) EFFECT OF CURRENT OR FUTURE LAW. If any current or future law includes obligations or prohibitions applying to Tobacco Product Manufacturers related to any of the provisions of this Agreement, each Participating Manufacturer shall comply with this Agreement unless compliance with this Agreement would violate such law. (b) LIMITED MOST-FAVORED NATION PROVISION. (1) If any Participating Manufacturer enters into any future settlement agreement of other litigation comparable to any of the actions identified in Exhibit D brought by a non-foreign governmental plaintiff other than the federal government ("Future Settlement Agreement"): -125- (A) before October 1, 2000, on overall terms more favorable to such governmental plaintiff than the overall terms of this Agreement (after due consideration of relevant differences in population or other appropriate factors), then, unless a majority of the Settling States determines that the overall terms of the Future Settlement Agreement are not more favorable than the overall terms of this Agreement, the overall terms of this Agreement will be revised so that the Settling States will obtain treatment with respect to such Participating Manufacturer at least as relatively favorable as the overall terms provided to any such governmental plaintiff; provided, however, that as to economic terms this Agreement shall not be revised based on any such Future Settlement Agreement if such Future Settlement Agreement is entered into after: (i) the impaneling of the jury (or, in the event of a non-jury trial, the commencement of trial) in such litigation or any severed or bifurcated portion thereof; or (ii) any court order or judicial determination relating to such litigation that (x) grants judgment (in whole or in part) against such Participating Manufacturer; or (y) grants injunctive or other relief that affects the assets or on-going business activities of such Participating Manufacturer in a manner other than as expressly provided for in this Agreement; or (B) on or after October 1, 2000, on terms more favorable to such governmental plaintiff than the terms of this Agreement (after due consideration of relevant differences in population or other appropriate -126- factors), and such Future Settlement Agreement includes terms that provide for the implementation of non-economic tobacco-related public health measures different from those contained in this Agreement, then this Agreement shall be revised to include terms comparable to such non-economic terms, unless a majority of the Settling States elects against such revision. (2) If any Settling State resolves Claims against any Non-Participating Manufacturer after the MSA Execution Date comparable to any Released Claim, and such resolution includes overall terms that are more favorable to such Non-Participating Manufacturer than the terms of this Agreement (including, without limitation, any terms that relate to the marketing or distribution of Tobacco Products and any term that provides for a lower settlement cost on a per pack sold basis), then the overall terms of this Agreement will be revised so that the Original Participating Manufacturers will obtain, with respect to that Settling State, overall terms at least as relatively favorable (taking into account, among other things, all payments previously made by the Original Participating Manufacturers and the timing of any payments) as those obtained by such Non-Participating Manufacturer pursuant to such resolution of Claims. The foregoing shall include but not be limited: (a) to the treatment by any Settling State of a Future Affiliate, as that term is defined in agreements between any of the Settling States and Brooke Group Ltd., Liggett & Myers Inc. and/or Liggett Group, Inc. ("Liggett"), whether or not such Future Affiliate is merged with, or its operations combined with, Liggett or any Affiliate thereof; and (b) to any application of the -127- terms of any such agreement (including any terms subsequently negotiated pursuant to any such agreement) to a brand of Cigarettes (or tobacco-related assets) as a result of the purchase by or sale to Liggett of such brand or assets or as a result of any combination of ownership among Liggett and any entity that manufactures Tobacco Products. Provided, however, that revision of this Agreement pursuant to this subsection (2) shall not be required by virtue of the subsequent entry into this Agreement by a Tobacco Product Manufacturer that has not become a Participating Manufacturer as of the MSA Execution Date. Notwithstanding the provisions of subsection XVIII(j), the provisions of this subsection XVIII(b)(2) may be waived by (and only by) unanimous agreement of the Original Participating Manufacturers. (3) The parties agree that if any term of this Agreement is revised pursuant to subsection (b)(l) or (b)(2) above and the substance of such term before it was revised was also a term of the Consent Decree, each affected Settling State and each affected Participating Manufacturer shall jointly move the Court to amend the Consent Decree to conform the terms of the Consent Decree to the revised terms of the Agreement. (4) If at any time any Settling State agrees to relieve, in any respect, any Participating Manufacturer's obligation to make the payments as provided in this Agreement, then, with respect to that Settling State, the terms of this Agreement shall be revised so that the other Participating Manufacturers receive terms as relatively favorable. -128- (c) TRANSFER OF TOBACCO BRANDS. No Original Participating Manufacturer may sell or otherwise transfer or permit the sale or transfer of any of its Cigarette brands, Brand Names, Cigarette product formulas or Cigarette businesses (other than a sale or transfer of Cigarette brands or Brand Names to be sold, product formulas to be used, or Cigarette businesses to be conducted, by the acquiror or transferee exclusively outside of the States) to any person or entity unless such person or entity is an Original Participating Manufacturer or prior to the sale or acquisition agrees to assume the obligations of an Original Participating Manufacturer with respect to such Cigarette brands, Brand Names, Cigarette product formulas or businesses. No Participating Manufacturer may sell or otherwise transfer any of its Cigarette brands, Brand Names, Cigarette product formulas or Cigarette businesses (other than a sale or transfer of Cigarette brands or Brand Names to be sold, Cigarette product formulas to be used, or businesses to be conducted, by the acquiror or transferee exclusively outside of the States) to any person or entity unless such person or entity is or becomes prior to the sale or acquisition a Participating Manufacturer. In the event of any such sale or transfer of a Cigarette brand, Brand Name, Cigarette product formula or Cigarette business by a Participating Manufacturer to a person or entity that within 180 days prior to such sale or transfer was a Non-Participating Manufacturer, the Participating Manufacturer shall certify to the Settling States that it has determined that such person or entity has the capability to perform the obligations under this Agreement. Such certification shall not survive beyond one year following the date of any such transfer. Each Original Participating Manufacturer certifies and represents that, except as provided in Exhibit R, it (or a wholly owned Affiliate) exclusively owns and controls in the States the Brand Names of those -129- Cigarettes that it currently manufactures for sale (or sells) in the States and that it has the capacity to enter into an effective agreement concerning the sale or transfer of such Brand Names pursuant to this subsection XVIII(c). Nothing in this Agreement is intended to create any right for a State to obtain any Cigarette product formula that it would not otherwise have under applicable law. (d) PAYMENTS IN SETTLEMENT. All payments to be made by the Participating Manufacturers pursuant to this Agreement are in settlement of all of the Settling States' antitrust, consumer protection, common law negligence, statutory, common law and equitable claims for monetary, restitutionary, equitable and injunctive relief alleged by the Settling States with respect to the year of payment or earlier years, except that no part of any payment under this Agreement is made in settlement of an actual or potential liability for a fine, penalty (civil or criminal) or enhanced damages or is the cost of a tangible or intangible asset or other future benefit. (e) NO DETERMINATION OR ADMISSION. This Agreement is not intended to be and shall not in any event be construed or deemed to be, or represented or caused to be represented as, an admission or concession or evidence of (1) any liability or any wrongdoing whatsoever on the part of any Released Party or that any Released Party has engaged in any of the activities barred by this Agreement; or (2) personal jurisdiction over any person or entity other than the Participating Manufacturers. Each Participating Manufacturer specifically disclaims and denies any liability or wrongdoing whatsoever with respect to the claims and allegations asserted against it by the Attorneys General of the Settling States and the Litigating Political Subdivisions. Each Participating -130- Manufacturer has entered into this Agreement solely to avoid the further expense, inconvenience, burden and risk of litigation. (f) NON-ADMISSIBILITY. The settlement negotiations resulting in this Agreement have been undertaken by the Settling States and the Participating Manufacturers in good faith and for settlement purposes only, and no evidence of negotiations or discussions underlying this Agreement shall be offered or received in evidence in any action or proceeding for any purpose. Neither this Agreement nor any public discussions, public statements or public comments with respect to this Agreement by any Settling State or Participating Manufacturer or its agents shall be offered or received in evidence in any action or proceeding for any purpose other than in an action or proceeding arising under or relating to this Agreement. (g) REPRESENTATIONS OF PARTIES. Each Settling State and each Participating Manufacturer hereby represents that this Agreement has been duly authorized and, upon execution, will constitute a valid and binding contractual obligation, enforceable in accordance with its terms, of each of them. The signatories hereto on behalf of their respective Settling States expressly represent and warrant that they have the authority to settle and release all Released Claims of their respective Settling States and any of their respective Settling States' past, present and future agents, officials acting in their official capacities, legal representatives, agencies, departments, commissions and divisions, and that such signatories are aware of no authority to the contrary. It is recognized that the Original Participating Manufacturers are relying on the foregoing representation and warranty in making the payments required by and in otherwise performing under this Agreement. The Original Participating Manufacturers shall have the right to terminate -131- this Agreement pursuant to subsection XVIII(u) as to any Settling State as to which the foregoing representation and warranty is breached or not effectively given. (h) OBLIGATIONS SEVERAL, NOT JOINT. All obligations of the Participating Manufacturers pursuant to this Agreement (including, but not limited to, all payment obligations) are intended to be, and shall remain, several and not joint. (i) HEADINGS. The headings of the sections and subsections of this Agreement are not binding and are for reference only and do not limit, expand or otherwise affect the contents or meaning of this Agreement. (j) AMENDMENT AND WAIVER. This Agreement may be amended by a written instrument executed by all Participating Manufacturers affected by the amendment and by all Settling States affected by the amendment. The terms of any such amendment shall not be enforceable in any Settling State that is not a signatory to such amendment. The waiver of any rights conferred hereunder shall be effective only if made by written instrument executed by the waiving party or parties. The waiver by any party of any breach of this Agreement shall not be deemed to be or construed as a waiver of any other breach, whether prior, subsequent or contemporaneous, nor shall such waiver be deemed to be or construed as a waiver by any other party. (k) NOTICES. All notices or other communications to any party to this Agreement shall be in writing (including, but not limited to, facsimile, telex, telecopy or similar writing) and shall be given at the addresses specified in Exhibit P (as it may be amended to reflect any additional Participating Manufacturer that becomes a party to this Agreement after the MSA Execution Date). Any Settling State or Participating Manufacturer may change or add the name and address of the persons designated to -132- receive notice on its behalf by notice given (effective upon the giving of such notice) as provided in this subsection. (l) COOPERATION. Each Settling State and each Participating Manufacturer agrees to use its best efforts and to cooperate with each other to cause this Agreement and the Consent Decrees to become effective, to obtain all necessary approvals, consents and authorizations, if any, and to execute all documents and to take such other action as may be appropriate in connection herewith. Consistent with the foregoing, each Settling State and each Participating Manufacturer agrees that it will not directly or indirectly assist or encourage any challenge to this Agreement or any Consent Decree by any other person, and will support the integrity and enforcement of the terms of this Agreement and the Consent Decrees. Each Settling State shall use its best efforts to cause State-Specific Finality to occur as to such Settling State. (m) DESIGNEES TO DISCUSS DISPUTES. Within 14 days after the MSA Execution Date, each Settling State's Attorney General and each Participating Manufacturer shall provide written notice of its designation of a senior representative to discuss with the other signatories to this Agreement any disputes and/or other issues that may arise with respect to this Agreement. Each Settling State's Attorney General shall provide such notice of the name, address and telephone number of the person it has so designated to each Participating Manufacturer and to NAAG. Each Participating Manufacturer shall provide such notice of the name, address and telephone number of the person it has so designated to each Settling State's Attorney General, to NAAG and to each other Participating Manufacturer. -133- (n) GOVERNING LAW. This Agreement (other than the Escrow Agreement) shall be governed by the laws of the relevant Settling State, without regard to the conflict of law rules of such Settling State. The Escrow Agreement shall be governed by the laws of the State in which the Escrow Court is located, without regard to the conflict of law rules of such State. (o) SEVERABILITY. (1) Sections VI, VII, IX, X, XI, XII, XIII, XIV, XVI, XVIII(b), (c), (d), (e), (f), (g), (h), (o), (p), (r), (s), (u), (w), (z), (bb), (dd), and Exhibits A, B, and E hereof ("Nonseverable Provisions") are not severable, except to the extent that severance of section VI is permitted by Settling States pursuant to subsection VI(i) hereof. The remaining terms of this Agreement are severable, as set forth herein. (2) If a court materially modifies, renders unenforceable, or finds to be unlawful any of the Nonseverable Provisions, the NAAG executive committee shall select a team of Attorneys General (the "Negotiating Team") to attempt to negotiate an equivalent or comparable substitute term or other appropriate credit or adjustment (a "Substitute Term") with the Original Participating Manufacturers. In the event that the court referred to in the preceding sentence is located in a Settling State, the Negotiating Team shall include the Attorney General of such Settling State. The Original Participating Manufacturers shall have no obligation to agree to any Substitute Term. If any Original Participating Manufacturer does not agree to a Substitute Term, this Agreement shall be terminated in all Settling States affected by the court's ruling. The Negotiating -134- Team shall submit any proposed Substitute Term negotiated by the Negotiating Team and agreed to by all of the Original Participating Manufacturers to the Attorneys General of all of the affected Settling States for their approval. If any affected Settling State does not approve the proposed Substitute Term, this Agreement in such Settling State shall be terminated. (3) If a court materially modifies, renders unenforceable, or finds to be unlawful any term of this Agreement other than a Nonseverable Provision: (A) The remaining terms of this Agreement shall remain in full force and effect. (B) Each Settling State whose rights or obligations under this Agreement are affected by the court's decision in question (the "Affected Settling State") and the Participating Manufacturers agree to negotiate in good faith a Substitute Term. Any agreement on a Substitute Term reached between the Participating Manufacturers and the Affected Settling State shall not modify or amend the terms of this Agreement with regard to any other Settling State. (C) If the Affected Settling State and the Participating Manufacturers are unable to agree on a Substitute Term, then they will submit the issue to non-binding mediation. If mediation fails to produce agreement to a Substitute Term, then that term shall be severed and the remainder of this Agreement shall remain in full force and effect. (4) If a court materially modifies, renders unenforceable, or finds to be unlawful any portion of any provision of this Agreement, the remaining portions -135- of such provision shall be unenforceable with respect to the affected Settling State unless a Substitute Term is arrived at pursuant to subsection (o)(2) or (o)(3) hereof, whichever is applicable. (p) INTENDED BENEFICIARIES. No portion of this Agreement shall provide any rights to, or be enforceable by, any person or entity that is not a Settling State or a Released Party. No Settling State may assign or otherwise convey any right to enforce any provision of this Agreement. (q) COUNTERPARTS. This Agreement may be executed in counterparts. Facsimile or photocopied signatures shall be considered as valid signatures as of the date affixed, although the original signature pages shall thereafter be appended. (r) APPLICABILITY. The obligations and duties of each Participating Manufacturer set forth herein are applicable only to actions taken (or omitted to be taken) within the States. This subsection (r) shall not be construed as extending the territorial scope of any obligation or duty set forth herein whose scope is otherwise limited by the terms hereof. (s) PRESERVATION OF PRIVILEGE. Nothing contained in this Agreement or any Consent Decree, and no act required to be performed pursuant to this Agreement or any Consent Decree, is intended to constitute, cause or effect any waiver (in whole or in part) of any attorney-client privilege, work product protection or common interest/joint defense privilege, and each Settling State and each Participating Manufacturer agrees that it shall not make or cause to be made in any forum any assertion to the contrary. (t) NON-RELEASE. Except as otherwise specifically provided in this Agreement, nothing in this Agreement shall limit, prejudice or otherwise interfere with the rights of any Settling State or any Participating Manufacturer to pursue any and all rights and -136- remedies it may have against any Non-Participating Manufacturer or other non-Released Party. (u) TERMINATION. (1) Unless otherwise agreed to by each of the Original Participating Manufacturers and the Settling State in question, in the event that (A) State-Specific Finality in a Settling State does not occur in such Settling State on or before December 31, 2001; or (B) this Agreement or the Consent Decree has been disapproved by the Court (or, in the event of an appeal from or review of a decision of the Court to approve this Agreement and the Consent Decree, by the court hearing such appeal or conducting such review), and the time to Appeal from such disapproval has expired, or, in the event of an Appeal from such disapproval, the Appeal has been dismissed or the disapproval has been affirmed by the court of last resort to which such Appeal has been taken and such dismissal or disapproval has become no longer subject to further Appeal (including, without limitation, review by the United States Supreme Court); or (C) this Agreement is terminated in a Settling State for whatever reason (including, but not limited to, pursuant to subsection XVIII(o) of this Agreement), then this Agreement and all of its terms (except for the non-admissibility provisions hereof, which shall continue in full force and effect) shall be canceled and terminated with respect to such Settling State, and it and all orders issued by the courts in such Settling State pursuant hereto shall become null and void and of no effect. (2) If this Agreement is terminated with respect to a Settling State for whatever reason, then (A) the applicable statute of limitation or any similar time -137- requirement shall be tolled from the date such Settling State signed this Agreement until the later of the time permitted by applicable law or for one year from the date of such termination, with the effect that the parties shall be in the same position with respect to the statute of limitation as they were at the time such Settling State filed its action, and (B) the parties shall jointly move the Court for an order reinstating the actions and claims dismissed pursuant to sections XIII and XIV hereof, with the effect that the parties shall be in the same position with respect to those actions and claims as they were at the time the action or claim was stayed or dismissed. (v) FREEDOM OF INFORMATION REQUESTS. Upon the occurrence of State-Specific Finality in a Settling State, each Participating Manufacturer will withdraw in writing any and all requests for information, administrative applications, and proceedings brought or caused to be brought by such Participating Manufacturer pursuant to such Settling State's freedom of information law relating to the subject matter of the lawsuits identified in Exhibit D. (w) BANKRUPTCY. The following provisions shall apply if a Participating Manufacturer both enters Bankruptcy and at any time thereafter is not timely performing its financial obligations as required under this Agreement: (1) In the event that both a number of Settling States equal to at least 75% of the total number of Settling States and Settling States having aggregate Allocable Shares equal to at least 75% of the total aggregate Allocable Shares assigned to all Settling States deem (by written notice to the Participating Manufacturers other than the bankrupt Participating Manufacturer) that the -138- financial obligations of this Agreement have been terminated and rendered null and void as to such bankrupt Participating Manufacturer (except as provided in subsection (A) below) due to a material breach by such Participating Manufacturer, whereupon, with respect to all Settling States: (A) all agreements, all concessions, all reductions of Releasing Parties' Claims, and all releases and covenants not to sue, contained in this Agreement shall be null and void as to such Participating Manufacturer. Provided, however, that (i) all reductions of Releasing Parties' Claims, and all releases and covenants not to sue, contained in this Agreement shall remain in full force and effect as to all persons or entities (other than the bankrupt Participating Manufacturer itself or any person or entity that, as a result of the Bankruptcy, obtains domestic tobacco assets of such Participating Manufacturer (unless such person or entity is itself a Participating Manufacturer)) who (but for the first sentence of this subsection (A)) would otherwise be Released Parties by virtue of their relationship with the bankrupt Participating Manufacturer; and (ii) in the event a Settling State asserts any Released Claim against a bankrupt Participating Manufacturer after the termination of this Agreement with respect to such Participating Manufacturer as described in this subsection (1) and receives a judgment, settlement or distribution arising from such Released Claim, then the amount of any payments such Settling State has previously received from such Participating Manufacturer under this Agreement shall be applied against the amount of any such judgment, -139- settlement or distribution (provided that in no event shall such Settling State be required to refund any payments previously received from such Participating Manufacturer pursuant to this Agreement); (B) the Settling States shall have the right to assert any and all claims against such Participating Manufacturer in the Bankruptcy or otherwise without regard to any limits otherwise provided in this Agreement (subject to any and all defenses against such claims); (C) the Settling States may exercise all rights provided under the federal Bankruptcy Code (or other applicable bankruptcy law) with respect to their Claims against such Participating Manufacturer, including the right to initiate and complete police and regulatory actions against such Participating Manufacturer pursuant to the exceptions to the automatic stay set forth in section 362(b) of the Bankruptcy Code (provided, however, that such Participating Manufacturer may contest whether the Settling State's action constitutes a police and regulatory action); and (D) to the extent that any Settling State is pursuing a police and regulatory action against such Participating Manufacturer as described in subsection (1)(C), such Participating Manufacturer shall not request or support a request that the Bankruptcy court utilize the authority provided under section 105 of the Bankruptcy Code to impose a discretionary stay on the Settling State's action. The Participating Manufacturers further agree that they will not request, seek or support relief from the terms of this Agreement in any proceeding before any court of law (including the -140- federal bankruptcy courts) or an administrative agency or through legislative action, including (without limitation) by way of joinder in or consent to or acquiescence in any such pleading or instrument filed by another. (2) Whether or not the Settling States exercise the option set forth in subsection (1) (and whether or not such option, if exercised, is valid and enforceable): (A) In the event that the bankrupt Participating Manufacturer is an Original Participating Manufacturer, such Participating Manufacturer shall continue to be treated as an Original Participating Manufacturer for all purposes under this Agreement except (i) such Participating Manufacturer shall be treated as a Non-Participating Manufacturer (and not as an Original Participating Manufacturer or Participating Manufacturer) for all purposes with respect to subsections IX(d)(1), IX(d)(2) and IX(d)(3) (including, but not limited to, that the Market Share of such Participating Manufacturer shall not be included in Base Aggregate Participating Manufacturer Market Share or Actual Aggregate Participating Manufacturer Market Share, and that such Participating Manufacturer's volume shall not be included for any purpose under subsection IX(d)(1)(D)); (ii) such Participating Manufacturer's Market Share shall not be included as that of a Participating Manufacturer for the purpose of determining whether the trigger percentage specified in subsection IX(e) has been achieved (provided that such Participating Manufacturer shall be -141- treated as an Original Participating Manufacturer for all other purposes with respect to such subsection); (iii) for purposes of subsection (B)(iii) of Exhibit E, such Participating Manufacturer shall continue to be treated as an Original Participating Manufacturer, but its operating income shall be recalculated by the Independent Auditor to reflect what such income would have been had such Participating Manufacturer made the payments that would have been due under this Agreement but for the Bankruptcy; (iv) for purposes of subsection XVIII(c), such Participating Manufacturer shall not be treated as an Original Participating Manufacturer or as a Participating Manufacturer to the extent that after entry into Bankruptcy it becomes the acquiror or transferee of Cigarette brands, Brand Names, Cigarette product formulas or Cigarette businesses of any Participating Manufacturer (provided that such Participating Manufacturer shall continue to be treated as an Original Participating Manufacturer and Participating Manufacturer for all other purposes under such subsection); and (v) as to any action that by the express terms of this Agreement requires the unanimous agreement of all Original Participating Manufacturers. (B) In the event that the bankrupt Participating Manufacturer is a Subsequent Participating Manufacturer, such Participating Manufacturer shall continue to be treated as a Subsequent Participating Manufacturer for all purposes under this Agreement except (i) such Participating Manufacturer shall be treated as a Non-Participating Manufacturer (and -142- not as a Subsequent Participating Manufacturer or Participating Manufacturer) for all purposes with respect to subsections IX(d)(1), (d)(2) and (d)(4) (including, but not limited to, that the Market Share of such Participating Manufacturer shall not be included in Base Aggregate Participating Manufacturer Market Share or Actual Aggregate Participating Manufacturer Market Share, and that such Participating Manufacturer's volume shall not be included for any purpose under subsection IX(d)(1)(D)); (ii) such Participating Manufacturer's Market Share shall not be included as that of a Participating Manufacturer for the purpose of determining whether the trigger percentage specified in subsection IX(e) has been achieved (provided that such Participating Manufacturer shall be treated as a Subsequent Participating Manufacturer for all other purposes with respect to such subsection); and (iii) for purposes of subsection XVIII(c), such Participating Manufacturer shall not be treated as a Subsequent Participating Manufacturer or as a Participating Manufacturer to the extent that after entry into Bankruptcy it becomes the acquiror or transferee of Cigarette brands, Brand Names, Cigarette product formulas or Cigarette businesses of any Participating Manufacturer (provided that such Participating Manufacturer shall continue to be treated as a Subsequent Participating Manufacturer and Participating Manufacturer for all other purposes under such subsection). (C) Revision of this Agreement pursuant to subsection XVIII(b)(2) shall not be required by virtue of any resolution on an -143- involuntary basis in the Bankruptcy of Claims against the bankrupt Participating Manufacturer. (x) NOTICE OF MATERIAL TRANSFERS. Each Participating Manufacturer shall provide notice to each Settling State at least 20 days before consummating a sale, transfer of title or other disposition, in one transaction or series of related transactions, of assets having a fair market value equal to five percent or more (determined in accordance with United States generally accepted accounting principles) of the consolidated assets of such Participating Manufacturer. (y) ENTIRE AGREEMENT. This Agreement (together with any agreements expressly contemplated hereby and any other contemporaneous written agreements) embodies the entire agreement and understanding between and among the Settling States and the Participating Manufacturers relating to the subject matter hereof and supersedes (l) all prior agreements and understandings relating to such subject matter, whether written or oral, and (2) all purportedly contemporaneous oral agreements and understandings relating to such subject matter. (z) BUSINESS DAYS. Any obligation hereunder that, under the terms of this Agreement, is to be performed on a day that is not a Business Day shall be performed on the first Business Day thereafter. (aa) SUBSEQUENT SIGNATORIES. With respect to a Tobacco Product Manufacturer that signs this Agreement after the MSA Execution Date, the timing of obligations under this Agreement (other than payment obligations, which shall be governed by subsection II(jj)) shall be negotiated to provide for the institution of such obligations on a schedule -144- not more favorable to such subsequent signatory than that applicable to the Original Participating Manufacturers. (bb) DECIMAL PLACES. Any figure or percentage referred to in this Agreement shall be carried to seven decimal places. (cc) REGULATORY AUTHORITY. Nothing in section III of this Agreement is intended to affect the legislative or regulatory authority of any local or State government. (dd) SUCCESSORS. In the event that a Participating Manufacturer ceases selling a brand of Tobacco Products in the States that such Participating Manufacturer owned in the States prior to July 1, 1998, and an Affiliate of such Participating Manufacturer thereafter and after the MSA Execution Date intentionally sells such brand in the States, such Affiliate shall be considered to be the successor of such Participating Manufacturer with respect to such brand. Performance by any such successor of the obligations under this Agreement with respect to the sales of such brand shall be subject to court-ordered specific performance. (ee) EXPORT PACKAGING. Each Participating Manufacturer shall place a visible indication on each pack of Cigarettes it manufactures for sale outside of the fifty United States and the District of Columbia that distinguishes such pack from packs of Cigarettes it manufactures for sale in the fifty United States and the District of Columbia. (ff) ACTIONS WITHIN GEOGRAPHIC BOUNDARIES OF SETTLING STATES. To the extent that any provision of this Agreement expressly prohibits, restricts, or requires any action to be taken "within" any Settling State or the Settling States, the relevant prohibition, restriction, or requirement applies within the geographic boundaries of the applicable -145- Settling State or Settling States, including, but not limited to, Indian country or Indian trust land within such geographic boundaries. (gg) NOTICE TO AFFILIATES. Each Participating Manufacturer shall give notice of this Agreement to each of its Affiliates. IN WITNESS WHEREOF, each Settling State and each Participating Manufacturer, through their fully authorized representatives, have agreed to this Agreement. -146- STATE OF ALABAMA By: ------------------------------ Fob James, Jr. Governor Date: ---------------------------- By: ------------------------------ Bill Pryor Attorney General Date: ---------------------------- STATE OF ALASKA By: ------------------------------ Bruce M. Botelho Attorney General Date: ---------------------------- AMERICAN SAMOA By: ------------------------------ Tauese P. Sunia Governor Date: --------------------------- By: ------------------------------ Toetagata Albert Mailo Attorney General Date: --------------------------- STATE OF ARIZONA By: ------------------------------ Grant Woods Attorney General Date: --------------------------- By: ------------------------------ John H. Kelley Director Arizona Health Care Cost Containment System Date: --------------------------- STATE OF ARKANSAS By: ------------------------------ Winston Bryant Attorney General Date: ---------------------------- STATE OF CALIFORNIA By: ------------------------------ Daniel E. Lungren Attorney General Date: ---------------------------- By: ------------------------------ Kimberly Belshe Director California Department of Health Services Date: ---------------------------- STATE OF COLORADO By: ------------------------------ Gale A. Norton Attorney General Date: ---------------------------- STATE OF CONNECTICUT By: ------------------------------ Richard Blumenthal Attorney General Date: ---------------------------- STATE OF DELAWARE By: ------------------------------ M. Jane Brady Attorney General Date: ---------------------------- DISTRICT OF COLUMBIA By: ------------------------------ John M. Ferren Corporation Counsel Date: ---------------------------- By: ------------------------------ Marion Barry, Jr. Mayor Date: ---------------------------- STATE OF GEORGIA By: ------------------------------ Zell Miller Governor Date: ---------------------------- By: ------------------------------ Thurbert E. Baker Attorney General Date: ---------------------------- GUAM By: ------------------------------ Carl T.C. Gutierrez Governor Date: ---------------------------- By: ------------------------------ Gus Diaz Acting Attorney General Date: ---------------------------- STATE OF HAWAII By: ------------------------------ Margery S. Bronster Attorney General Date: ---------------------------- STATE OF IDAHO By: ------------------------------ Alan G. Lance Attorney General Date: ---------------------------- STATE OF ILLINOIS By: ------------------------------ Jim Ryan Attorney General Date: ---------------------------- STATE OF INDIANA By: ------------------------------ Frank L. O'Bannon Governor Date: ---------------------------- By: ------------------------------ Jeffrey A. Modisett Attorney General Date: ---------------------------- STATE OF IOWA By: ------------------------------ Tom Miller Attorney General Date: ---------------------------- STATE OF KANSAS By: ------------------------------ Carla J. Stovall Attorney General Date: ---------------------------- COMMONWEALTH OF KENTUCKY By: ------------------------------ Albert Benjamin "Ben" Chandler III Attorney General Date: ---------------------------- STATE OF LOUISIANA By: ------------------------------ Richard P. Ieyoub Attorney General Date: ---------------------------- STATE OF MAINE By: ------------------------------ Andrew Ketterer Attorney General Date: ---------------------------- STATE OF MARYLAND By: ------------------------------ J. Joseph Curran, Jr. Attorney General Date: ---------------------------- COMMONWEALTH OF MASSACHUSETTS By: ------------------------------ Scott Harshbarger Attorney General Date: ---------------------------- STATE OF MICHIGAN By: ------------------------------ Frank J. Kelley Attorney General Date: ---------------------------- STATE OF MISSOURI By: ------------------------------ Jeremiah W. (Jay) Nixon Attorney General Date: ---------------------------- STATE OF MONTANA By: ------------------------------ Joseph P. Mazurek Attorney General Date: ---------------------------- STATE OF NEBRASKA By: ------------------------------ Don Stenberg Attorney General Date: ---------------------------- STATE OF NEVADA By: ------------------------------ Frankie Sue Del Papa Attorney General Date: ---------------------------- STATE OF NEW HAMPSHIRE By: ------------------------------ Philip T. McLaughlin Attorney General Date: ---------------------------- STATE OF NEW JERSEY By: ------------------------------ Peter Verniero Attorney General Date: ---------------------------- STATE OF NEW MEXICO By: ------------------------------ Tom Udall Attorney General Date: ---------------------------- STATE OF NEW YORK By: ------------------------------ Dennis C. Vacco Attorney General Date: ---------------------------- STATE OF NORTH CAROLINA By: ------------------------------ James B. Hunt Governor Date: ---------------------------- By: ------------------------------ Michael F. Easley Attorney General Date: ---------------------------- STATE OF NORTH DAKOTA By: ------------------------------ Heidi Heitkamp Attorney General Date: ---------------------------- NORTHERN MARIANA ISLANDS By: ------------------------------ Sally Pfund (Acting) Attorney General Date: ---------------------------- STATE OF OHIO By: ------------------------------ Betty D. Montgomery Attorney General Date: ---------------------------- STATE OF OKLAHOMA By: ------------------------------ W.A. Drew Edmondson Attorney General Date: ---------------------------- STATE OF OREGON By: ------------------------------ Hardy Myers Attorney General Date: __________________ COMMONWEALTH OF PENNSYLVANIA By: ------------------------------ Mike Fisher Attorney General Date: ---------------------------- COMMONWEALTH OF PUERTO RICO By: ------------------------------ Jose A. Fuentes-Agostini Attorney General Date: ---------------------------- STATE OF RHODE ISLAND By: ------------------------------ Jeffrey B. Pine Attorney General Date: ---------------------------- STATE OF SOUTH CAROLINA By: ------------------------------ Charlie Condon Attorney General Date: ---------------------------- STATE OF SOUTH DAKOTA By: ------------------------------ William J. Janklow Governor Date: ---------------------------- By: ------------------------------ Mark Barnett Attorney General Date: ---------------------------- STATE OF TENNESSEE By: ------------------------------ John Knox Walkup Attorney General Date: ---------------------------- STATE OF UTAH By: ------------------------------ Jan Graham Attorney General Date: ---------------------------- STATE OF VERMONT By: ------------------------------ William H. Sorrell Attorney General Date: ---------------------------- COMMONWEALTH OF VIRGINIA By: ------------------------------ Mark L. Earley Attorney General Date: ---------------------------- THE VIRGIN ISLANDS OF THE UNITED STATES By: ------------------------------ Julio A. Brady Attorney General Date: ---------------------------- STATE OF WASHINGTON By: ------------------------------ Christine O. Gregoire Attorney General Date: ---------------------------- STATE OF WEST VIRGINIA By: ------------------------------ Darrell V. McGraw Jr. Attorney General Date: ---------------------------- STATE OF WISCONSIN By: ------------------------------ Tommy G. Thompson Governor Date: ---------------------------- By: ------------------------------ James E. Doyle Attorney General Date: ---------------------------- STATE OF WYOMING By: ------------------------------ Jim Geringer Governor Date: ---------------------------- By: ------------------------------ William U. Hill Attorney General Date: ---------------------------- PHILIP MORRIS INCORPORATED By: ------------------------------ Martin J. Barrington General Counsel Date: ---------------------------- By: ------------------------------ Meyer G. Koplow Counsel Date: ---------------------------- R.J. REYNOLDS TOBACCO COMPANY By: ------------------------------ Charles A. Blixt Executive Vice President and General Counsel Date: ---------------------------- By: ------------------------------ Arthur F. Golden Counsel Date: ---------------------------- BROWN & WILLIAMSON TOBACCO CORPORATION By: ------------------------------ F. Anthony Burke Vice President and General Counsel Date: ---------------------------- By: ------------------------------ Stephen R. Patton Counsel Date: ---------------------------- LORILLARD TOBACCO COMPANY By: ------------------------------ Ronald S. Milstein General Counsel Date: ---------------------------- By: ------------------------------ Herbert M. Wachtell Counsel Date: ---------------------------- EXHIBIT A STATE ALLOCATION PERCENTAGES ---------------------------- State Percentage ----- ---------- Alabama 1.6161308% Alaska 0.3414187% Arizona 1.4738845% Arkansas 0.8280661% California 12.7639554% Colorado 1.3708614% Connecticut 1.8565373% Delaware 0.3954695% D.C. 0.6071183% Florida 0.0000000% Georgia 2.4544575% Hawaii 0.6018650% Idaho 0.3632632% Illinois 4.6542472% Indiana 2.0398033% Iowa 0.8696670% Kansas 0.8336712% Kentucky 1.7611586% Louisiana 2.2553531% Maine 0.7693505% Maryland 2.2604570% Massachusetts 4.0389790% Michigan 4.3519476% Minnesota 0.0000000% Mississippi 0.0000000% Missouri 2.2746011% Montana 0.4247591% Nebraska 0.5949833% Nevada 0.6099351% New Hampshire 0.6659340% New Jersey 3.8669963% New Mexico 0.5963897% New York 12.7620310% North Carolina 2.3322850% North Dakota 0.3660138% Ohio 5.0375098% Oklahoma 1.0361370% Oregon 1.1476582% Pennsylvania 5.7468588% Rhode Island 0.7189054% South Carolina 1.1763519% South Dakota 0.3489458% Tennessee 2.4408945% Texas 0.0000000% Utah 0.4448869% Vermont 0.4111851% Virginia 2.0447451% Washington 2.0532582% West Virginia 0.8864604% Wisconsin 2.0720390% Wyoming 0.2483449% American Samoa 0.0152170% N. Mariana Isld. 0.0084376% Guam 0.0219371% U.S. Virgin Isld. 0.0173593% Puerto Rico 1.1212774% Total 100.0000000% A-1 EXHIBIT B FORM OF ESCROW AGREEMENT ------------------------ This Escrow Agreement is entered into as of _______________, 1998 by the undersigned State officials (on behalf of their respective Settling States), the undersigned Participating Manufacturers and ____________________ as escrow agent (the "Escrow Agent"). WITNESSETH: WHEREAS, the Settling States and the Participating Manufacturers have entered into a settlement agreement entitled the "Master Settlement Agreement" (the "Agreement"); and WHEREAS, the Agreement requires the Settling States and the Participating Manufacturers to enter into this Escrow Agreement. NOW, THEREFORE, the parties hereto agree as follows: SECTION 1. APPOINTMENT OF ESCROW AGENT. The Settling States and the Participating Manufacturers hereby appoint ______________________ to serve as Escrow Agent under this Agreement on the terms and conditions set forth herein, and the Escrow Agent, by its execution hereof, hereby accepts such appointment and agrees to perform the duties and obligations of the Escrow Agent set forth herein. The Settling States and the Participating Manufacturers agree that the Escrow Agent appointed under the terms of this Escrow Agreement shall be the Escrow Agent as defined in, and for all purposes of, the Agreement. SECTION 2. DEFINITIONS. (a) Capitalized terms used in this Escrow Agreement and not otherwise defined herein shall have the meaning given to such terms in the Agreement. (b) "Escrow Court" means the court of the State of New York to which the Agreement is presented for approval, or such other court as agreed to by the Original Participating Manufacturers and a majority of those Attorneys General who are both the Attorney General of a Settling State and a member of the NAAG executive committee at the time in question. SECTION 3. ESCROW AND ACCOUNTS. (a) All funds received by the Escrow Agent pursuant to the terms of the Agreement shall be held and disbursed in accordance with the terms of this Escrow Agreement. Such funds and any earnings thereon shall constitute the "Escrow" and shall B-1 be held by the Escrow Agent separate and apart from all other funds and accounts of the Escrow Agent, the Settling States and the Participating Manufacturers. (b) The Escrow Agent shall allocate the Escrow among the following separate accounts (each an "Account" and collectively the "Accounts"): Subsection VI(b) Account Subsection VI(c) Account (First) Subsection VI(c) Account (Subsequent) Subsection VIII(b) Account Subsection VIII(c) Account Subsection IX(b) Account (First) Subsection IX(b) Account (Subsequent) Subsection IX(c)(1) Account Subsection IX(c)(2) Account Subsection IX(e) Account Disputed Payments Account State-Specific Accounts with respect to each Settling State in which State-Specific Finality occurs. (c) All amounts credited to an Account shall be retained in such Account until disbursed therefrom in accordance with the provisions of this Escrow Agreement pursuant to (i) written instructions from the Independent Auditor; or (ii) written instructions from all of the following: all of the Original Participating Manufacturers; all of the Subsequent Participating Manufacturers that contributed to such amounts in such Account; and all of the Settling States (collectively, the "Escrow Parties"). In the event of a conflict, instructions pursuant to clause (ii) shall govern over instructions pursuant to clause (i). (d) On the first Business Day after the date any payment is due under the Agreement, the Escrow Agent shall deliver to each other Notice Party a written statement showing the amount of such payment (or indicating that no payment was made, if such is the case), the source of such payment, the Account or Accounts to which such payment has been credited, and the payment instructions received by the Escrow Agent from the Independent Auditor with respect to such payment. (e) The Escrow Agent shall comply with all payment instructions received from the Independent Auditor unless before 11:00 a.m. (New York City time) on the scheduled date of payment it receives written instructions to the contrary from all of the Escrow Parties, in which event it shall comply with such instructions. (f) On the first Business Day after disbursing any funds from an Account, the Escrow Agent shall deliver to each other Notice Party a written statement showing the amount disbursed, the date of such disbursement and the payee of the disbursed funds. B-2 SECTION 4. FAILURE OF ESCROW AGENT TO RECEIVE INSTRUCTIONS. In the event that the Escrow Agent fails to receive any written instructions contemplated by this Escrow Agreement, the Escrow Agent shall be fully protected in refraining from taking any action required under any section of this Escrow Agreement other than Section 5 until such written instructions are received by the Escrow Agent. SECTION 5. INVESTMENT OF FUNDS BY ESCROW AGENT. The Escrow Agent shall invest and reinvest all amounts from time to time credited to the Accounts in either (i) direct obligations of, or obligations the principal and interest on which are unconditionally guaranteed by, the United States of America; (ii) repurchase agreements fully collateralized by securities described in clause (i) above; (iii) money market accounts maturing within 30 days of the acquisition thereof and issued by a bank or trust company organized under the laws of the United States of America or of any of the 50 States thereof (a "United States Bank") and having combined capital, surplus and undistributed profits in excess of $500,000,000; or (iv) demand deposits with any United States Bank having combined capital, surplus and undistributed profits in excess of $500,000,000. To the extent practicable, monies credited to any Account shall be invested in such a manner so as to be available for use at the times when monies are expected to be disbursed by the Escrow Agent and charged to such Account. Obligations purchased as an investment of monies credited to any Account shall be deemed at all times to be a part of such Account and the income or interest earned, profits realized or losses suffered with respect to such investments (including, without limitation, any penalty for any liquidation of an investment required to fund a disbursement to be charged to such Account), shall be credited or charged, as the case may be, to, such Account and shall be for the benefit of, or be borne by, the person or entity entitled to payment from such Account. In choosing among the investment options described in clauses (i) through (iv) above, the Escrow Agent shall comply with any instructions received from time to time from all of the Escrow Parties. In the absence of such instructions, the Escrow Agent shall invest such sums in accordance with clause (i) above. With respect to any amounts credited to a State-Specific Account, the Escrow Agent shall invest and reinvest all amounts credited to such Account in accordance with the law of the applicable Settling State to the extent such law is inconsistent with this Section 5. SECTION 6. SUBSTITUTE FORM W-9; QUALIFIED SETTLEMENT FUND. Each signatory to this Escrow Agreement shall provide the Escrow Agent with a correct taxpayer identification number on a substitute Form W-9 or if it does not have such a number, a statement evidencing its status as an entity exempt from back-up withholding, within 30 days of the date hereof (and, if it supplies a Form W-9, indicate thereon that it is not subject to backup withholding). The escrow established pursuant to this Escrow Agreement is intended to be treated as a Qualified Settlement Fund for federal tax purposes pursuant to Treas. Reg. Section 1.468B-l. The Escrow Agent shall comply B-3 with all applicable tax filing, payment and reporting requirements, including, without limitation, those imposed under Treas. Reg. Section 1.468B, and if requested to do so shall join in the making of the relation-back election under such regulation. SECTION 7. DUTIES AND LIABILITIES OF ESCROW AGENT. The Escrow Agent shall have no duty or obligation hereunder other than to take such specific actions as are required of it from time to time under the provisions of this Escrow Agreement, and it shall incur no liability hereunder or in connection herewith for anything whatsoever other than any liability resulting from its own gross negligence or willful misconduct. The Escrow Agent shall not be bound in any way by any agreement or contract between the Participating Manufacturers and the Settling States (whether or not the Escrow Agent has knowledge thereof) other than this Escrow Agreement, and the only duties and responsibilities of the Escrow Agent shall be the duties and obligations specifically set forth in this Escrow Agreement. SECTION 8. INDEMNIFICATION OF ESCROW AGENT. The Participating Manufacturers shall indemnify, hold harmless and defend the Escrow Agent from and against any and all losses, claims, liabilities and reasonable expenses, including the reasonable fees of its counsel, which it may suffer or incur in connection with the performance of its duties and obligations under this Escrow Agreement, except for those losses, claims, liabilities and expenses resulting solely and directly from its own gross negligence or willful misconduct. SECTION 9. RESIGNATION OF ESCROW AGENT. The Escrow Agent may resign at any time by giving written notice thereof to the other parties hereto, but such resignation shall not become effective until a successor Escrow Agent, selected by the Original Participating Manufacturers and the Settling States, shall have been appointed and shall have accepted such appointment in writing. If an instrument of acceptance by a successor Escrow Agent shall not have been delivered to the resigning Escrow Agent within 90 days after the giving of such notice of resignation, the resigning Escrow Agent may, at the expense of the Participating Manufacturers (to be shared according to their pro rata Market Shares), petition the Escrow Court for the appointment of a successor Escrow Agent. SECTION 10. ESCROW AGENT FEES AND EXPENSES. The Participating Manufacturers shall pay to the Escrow Agent its fees as set forth in Appendix A hereto as amended from time to time by agreement of the Original Participating Manufacturers and the Escrow Agent. The Participating Manufacturers shall pay to the Escrow Agent its reasonable fees and expenses, including all reasonable expenses, charges, counsel fees, and other disbursements incurred by it or by its attorneys, agents and employees in the performance of its duties and obligations under B-4 this Escrow Agreement. Such fees and expenses shall be shared by the Participating Manufacturers according to their pro rata Market Shares. SECTION 11. NOTICES. All notices, written instructions or other communications to any party or other person hereunder shall be given in the same manner as, shall be given to the same person as, and shall be effective at the same time as provided in subsection XVIII(k) of the Agreement. SECTION 12. SETOFF; REIMBURSEMENT. The Escrow Agent acknowledges that it shall not be entitled to set off against any funds in, or payable from, any Account to satisfy any liability of any Participating Manufacturer. Each Participating Manufacturer that pays more than its pro rata Market Share of any payment that is made by the Participating Manufacturers to the Escrow Agent pursuant to Section 8, 9 or 10 hereof shall be entitled to reimbursement of such excess from the other Participating Manufacturers according to their pro rata Market Shares of such excess. SECTION 13. INTENDED BENEFICIARIES; SUCCESSORS. No persons or entities other than the Settling States, the Participating Manufacturers and the Escrow Agent are intended beneficiaries of this Escrow Agreement, and only the Settling States, the Participating Manufacturers and the Escrow Agent shall be entitled to enforce the terms of this Escrow Agreement. Pursuant to the Agreement, the Settling States have designated NAAG and the Foundation as recipients of certain payments; for all purposes of this Escrow Agreement, the Settling States shall be the beneficiaries of such payments entitled to enforce payment thereof. The provisions of this Escrow Agreement shall be binding upon and inure to the benefit of the parties hereto and, in the case of the Escrow Agent and Participating Manufacturers, their respective successors. Each reference herein to the Escrow Agent or to a Participating Manufacturer shall be construed as a reference to its successor, where applicable. SECTION 14. GOVERNING LAW. This Escrow Agreement shall be construed in accordance with and governed by the laws of the State in which the Escrow Court is located, without regard to the conflicts of law rules of such state. SECTION 15. JURISDICTION AND VENUE. The parties hereto irrevocably and unconditionally submit to the continuing exclusive jurisdiction of the Escrow Court for purposes of any suit, action or proceeding seeking to interpret or enforce any provision of, or based on any right arising out of, this Escrow Agreement, and the parties hereto agree not to commence any such suit, action or B-5 proceeding except in the Escrow Court. The parties hereto hereby irrevocably and unconditionally waive any objection to the laying of venue of any such suit, action or proceeding in the Escrow Court and hereby further irrevocably waive and agree not to plead or claim in the Escrow Court that any such suit, action or proceeding has been brought in an inconvenient forum. SECTION 16. AMENDMENTS. This Escrow Agreement may be amended only by written instrument executed by all of the parties hereto that would be affected by the amendment. The waiver of any rights conferred hereunder shall be effective only if made in a written instrument executed by the waiving party. The waiver by any party of any breach of this Agreement shall not be deemed to be or construed as a waiver of any other breach, whether prior, subsequent or contemporaneous, of this Escrow Agreement, nor shall such waiver be deemed to be or construed as a waiver by any other party. SECTION 17. COUNTERPARTS. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. Delivery by facsimile of a signed counterpart shall be deemed delivery for purposes of acknowledging acceptance hereof; however, an original executed Escrow Agreement must promptly thereafter be delivered to each party. SECTION 18. CAPTIONS. The captions herein are included for convenience of reference only and shall be ignored in the construction and interpretation hereof. SECTION 19. CONDITIONS TO EFFECTIVENESS. This Escrow Agreement shall become effective when each party hereto shall have signed a counterpart hereof. The parties hereto agree to use their best efforts to seek an order of the Escrow Court approving, and retaining continuing jurisdiction over, the Escrow Agreement as soon as possible, and agree that such order shall relate back to, and be deemed effective as of, the date this Escrow Agreement became effective. SECTION 20. ADDRESS FOR PAYMENTS. Whenever funds are under the terms of this Escrow Agreement required to be disbursed to a Settling State, a Participating Manufacturer, NAAG or the Foundation, the Escrow Agent shall disburse such funds by wire transfer to the account specified by such payee by written notice delivered to all Notice Parties in accordance with Section 11 hereof at least five Business Days prior to the date of payment. Whenever funds are under the terms of this Escrow Agreement required to be disbursed to any other person or entity, the Escrow Agent shall disburse such funds to such account as shall have been B-6 specified in writing by the Independent Auditor for such payment at least five Business Days prior to the date of payment. SECTION 21. REPORTING. The Escrow Agent shall provide such information and reporting with respect to the escrow as the Independent Auditor may from time to time request. IN WITNESS WHEREOF, the parties have executed this Escrow Agreement as of the day and year first hereinabove written. [signature blocks] B-7 APPENDIX A SCHEDULE OF FEES AND EXPENSES B-8 EXHIBIT C FORMULA FOR CALCULATING INFLATION ADJUSTMENTS --------------------- (1) Any amount that, in any given year, is to be adjusted for inflation pursuant to this Exhibit (the "Base Amount") shall be adjusted upward by adding to such Base Amount the Inflation Adjustment. (2) The Inflation Adjustment shall be calculated by multiplying the Base Amount by the Inflation Adjustment Percentage applicable in that year. (3) The Inflation Adjustment Percentage applicable to payments due in the year 2000 shall be equal to the greater of 3% or the CPI%. For example, if the Consumer Price Index for December 1999 (as released in January 2000) is 2% higher than the Consumer Price Index for December 1998 (as released in January 1999), then the CPI% with respect to a payment due in 2000 would be 2%. The Inflation Adjustment Percentage applicable in the year 2000 would thus be 3%. (4) The Inflation Adjustment Percentage applicable to payments due in any year after 2000 shall be calculated by applying each year the greater of 3% or the CPI% on the Inflation Adjustment Percentage applicable to payments due in the prior year. Continuing the example in subsection (3) above, if the CPI% with respect to a payment due in 2001 is 6%, then the Inflation Adjustment Percentage applicable in 2001 would be 9.1800000% (an additional 6% applied on the 3% Inflation Adjustment Percentage applicable in 2000), and if the CPI% with respect to a payment due in 2002 is 4%, then the Inflation Adjustment Percentage applicable in 2002 would be 13.5472000% (an additional 4% applied on the 9.1800000% Inflation Adjustment Percentage applicable in 2001). (5) "Consumer Price Index" means the Consumer Price Index for All Urban Consumers as published by the Bureau of Labor Statistics of the U.S. Department of Labor (or other similar measures agreed to by the Settling States and the Participating Manufacturers). (6) The "CPI%" means the actual total percent change in the Consumer Price Index during the calendar year immediately preceding the year in which the payment in question is due. C-1 (7) ADDITIONAL EXAMPLES. (A) Calculating the Inflation Adjustment Percentages: Percentage to be applied on the Inflation Adjustment Percentage for the prior year (i.e., Inflation Payment Hypothetical the greater of 3% or the Adjustment Year CPI% CPI%) Percentage ---------------------------------------------------------------- 2000 2.4% 3.0% 3.0000000% 2001 2.1% 3.0% 6.0900000% 2002 3.5% 3.5% 9.8031500% 2003 3.5% 3.5% 13.6462603% 2004 4.0% 4.0% 18.1921107% 2005 2.2% 3.0% 21.7378740% 2006 1.6% 3.0% 25.3900102% (B) Applying the Inflation Adjustment: Using the hypothetical Inflation Adjustment Percentages set forth in section (7)(A): -- the subsection IX(c)(1) base payment amount for 2002 of $6,500,000,000 as adjusted for inflation would equal $7,137,204,750; -- the subsection IX(c)(1) base payment amount for 2004 of $8,000,000,000 as adjusted for inflation would equal $9,455,368,856; -- the subsection IX(c)(1) base payment amount for 2006 of $8,000,000,000 as adjusted for inflation would equal $10,031,200,816. C-2 EXHIBIT D LIST OF LAWSUITS ---------------- 1. ALABAMA BLAYLOCK ET AL. V. AMERICAN TOBACCO CO. ET AL., Circuit Court, Montgomery County, No. CV-96-1508-PR 2. ALASKA STATE OF ALASKA V. PHILIP MORRIS, INC., ET AL., Superior Court, First Judicial District of Juneau, No. IJU-97915 CI (Alaska) 3. ARIZONA STATE OF ARIZONA V. AMERICAN TOBACCO CO., INC., ET AL., Superior Court, Maricopa County, No. CV-96-14769 (Ariz.) 4. ARKANSAS STATE OF ARKANSAS V. THE AMERICAN TOBACCO CO., INC., ET AL., Chancery Court, 6th Division, Pulaski County, No. IJ 97-2982 (Ark.) 5. CALIFORNIA PEOPLE OF THE STATE OF CALIFORNIA ET AL. V. PHILIP MORRIS, INC., ET AL., Superior Court, Sacramento County, No. 97-AS-30301 6. COLORADO STATE OF COLORADO ET AL., V. R.J. REYNOLDS TOBACCO CO., ET AL., District Court, City and County of Denver, No. 97CV3432 (Colo.) 7. CONNECTICUT STATE OF CONNECTICUT V. PHILIP MORRIS, ET AL., Superior Court, Judicial District of Waterbury No. X02 CV96-0148414S (Conn.) 8. GEORGIA STATE OF GEORGIA ET AL. V. PHILIP MORRIS, INC., ET AL., Superior Court, Fulton County, No. CA E-61692 (Ga.) 9. HAWAII STATE OF HAWAII V. BROWN & WILLIAMSON TOBACCO CORP., ET AL., Circuit Court, First Circuit, No. 97-0441-01 (Haw.) 10. IDAHO STATE OF IDAHO V. PHILIP MORRIS, INC., ET AL., Fourth Judicial District, Ada County, No. CVOC 9703239D (Idaho) 11. ILLINOIS PEOPLE OF THE STATE OF ILLINOIS V. PHILIP MORRIS ET AL., Circuit Court of Cook County, No. 96-L13146 (Ill.) D-1 12. INDIANA STATE OF INDIANA V. PHILIP MORRIS, INC., ET AL., Marion County Superior Court, No. 49D 07-9702-CT-000236 (Ind.) 13. IOWA STATE OF IOWA V. R.J. REYNOLDS TOBACCO COMPANY ET AL., Iowa District Court, Fifth Judicial District, Polk County, No. CL71048 (Iowa) 14. KANSAS STATE OF KANSAS V. R.J. REYNOLDS TOBACCO COMPANY, ET AL., District Court of Shawnee County, Division 2, No. 96-CV-919 (Kan.) 15. LOUISIANA IEYOUB V. THE AMERICAN TOBACCO COMPANY, ET AL., 14th Judicial District Court, Calcasieu Parish, No. 96-1209 (La.) 16. MAINE STATE OF MAINE V. PHILIP MORRIS, INC., ET AL., Superior Court, Kennebec County, No. CV 97-134 (Me.) 17. MARYLAND MARYLAND V. PHILIP MORRIS INCORPORATED, ET AL., Baltimore City Circuit Court, No. 96-122017-CL211487 (Md.) 18. MASSACHUSETTS COMMONWEALTH OF MASSACHUSETTS V. PHILIP MORRIS INC., ET AL., Middlesex Superior Court, No. 95-7378 (Mass.) 19. MICHIGAN KELLEY V. PHILIP MORRIS INCORPORATED, ET AL., Ingham County Circuit Court, 30th Judicial Circuit, No. 96-84281-CZ (Mich.) 20. MISSOURI STATE OF MISSOURI V. AMERICAN TOBACCO CO., INC. ET AL., Circuit Court, City of St. Louis, No. 972-1465 (Mo.) 21. MONTANA STATE OF MONTANA V. PHILIP MORRIS, INC., ET AL., First Judicial Court, Lewis and Clark County, No. CDV 9700306-14 (Mont.) 22. NEBRASKA STATE OF NEBRASKA V. R.J. REYNOLDS TOBACCO CO., ET AL., District Court, Lancaster County, No. 573277 (Neb.) D-2 23. NEVADA NEVADA V. PHILIP MORRIS, INCORPORATED, ET AL., Second Judicial Court, Washoe County, No. CV97-03279 (Nev.) 24. NEW HAMPSHIRE NEW HAMPSHIRE V. R.J. REYNOLDS, TOBACCO CO., ET AL., New Hampshire Superior Court, Merrimack County, No. 97-E-165 (N.H.) 25. NEW JERSEY STATE OF NEW JERSEY V. R.J. REYNOLDS TOBACCO COMPANY, ET AL., Superior Court, Chancery Division, Middlesex County, No. C-254-96 (N.J.) 26. NEW MEXICO STATE OF NEW MEXICO, V. THE AMERICAN TOBACCO CO., ET AL., First Judicial District Court, County of Santa Fe, No. SF-1235 c (N.M.) 27. NEW YORK STATE STATE OF NEW YORK ET AL. V. PHILIP MORRIS, INC., ET AL., Supreme Court of the State of New York, County of New York, No. 400361/97 (N.Y.) 28. OHIO STATE OF OHIO V. PHILIP MORRIS, INC., ET AL., Court of Common Pleas, Franklin County, No. 97CVH055114 (Ohio) 29. OKLAHOMA STATE OF OKLAHOMA, ET AL. V. R.J. REYNOLDS TOBACCO COMPANY, ET AL., District Court, Cleveland County, No. CJ-96-1499-L (Okla.) 30. OREGON STATE OF OREGON V. THE AMERICAN TOBACCO CO., ET AL., Circuit Court, Multnomah County, No. 9706-04457 (Or.) 31. PENNSYLVANIA COMMONWEALTH OF PENNSYLVANIA V. PHILIP MORRIS, INC., ET AL., Court of Common Pleas, Philadelphia County, April Term 1997, No. 2443 32. PUERTO RICO ROSSELLO, ET AL. V. BROWN & WILLIAMSON TOBACCO CORPORATION, ET AL., U.S. District Court, Puerto Rico, No. 97-1910JAF 33. RHODE ISLAND STATE OF RHODE ISLAND V. AMERICAN TOBACCO CO., ET AL., Rhode Island Superior Court, Providence, No. 97-3058 (R.I.) 34. SOUTH CAROLINA STATE OF SOUTH CAROLINA V. BROWN & WILLIAMSON TOBACCO CORPORATION, ET AL., D-3 Court of Common Pleas, Fifth Judicial Circuit, Richland County, No. 97-CP-40-1686 (S.C.) 35. SOUTH DAKOTA STATE OF SOUTH DAKOTA, ET AL. V. PHILIP MORRIS, INC., ET AL., Circuit Court, Hughes County, Sixth Judicial Circuit, No. 98-65 (S.D.) 36. UTAH STATE OF UTAH V. R.J. REYNOLDS TOBACCO COMPANY, ET AL., U.S. District Court, Central Division, No. 96 CV 0829W (Utah) 37. VERMONT STATE OF VERMONT V. PHILIP MORRIS, INC., ET AL., Chittenden Superior Court, Chittenden County, No. 744-97 (Vt.) and 5816-98 (Vt.) 38. WASHINGTON STATE OF WASHINGTON V. AMERICAN TOBACCO CO. INC., ET AL., Superior Court of Washington, King County, No. 96-2-1505608SEA (Wash.) 39. WEST VIRGINIA MCGRAW, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., Kanawha County Circuit Court, No. 94-1707 (W. Va.) 40. WISCONSIN STATE OF WISCONSIN V. PHILIP MORRIS INC., ET AL., Circuit Court, Branch 11, Dane County, No. 97-CV-328 (Wis.) ADDITIONAL STATES - ----------------- For each Settling State not listed above, the lawsuit or other legal action filed by the Attorney General or Governor of such Settling State against Participating Manufacturers in the Court in such Settling State prior to 30 days after the MSA Execution Date asserting Released Claims. D-4 EXHIBIT E FORMULA FOR CALCULATING VOLUME ADJUSTMENTS ------------------ Any amount that by the terms of the Master Settlement Agreement is to be adjusted pursuant to this Exhibit E (the "Applicable Base Payment") shall be adjusted in the following manner: (A) In the event the aggregate number of Cigarettes shipped in or to the fifty United States, the District of Columbia, and Puerto Rico by the Original Participating Manufacturers in the Applicable Year (as defined hereinbelow) (the "Actual Volume") is greater than__________ Cigarettes [figure being determined; to represent the aggregate number of Cigarettes shipped in or to the fifty United States, the District of Columbia, and Puerto Rico in 1997 by those entities that were the Original Participating Manufacturers as of the MSA Execution Date (and any of their Affiliates that made such shipments in 1997 (as demonstrated by a certified statement of such Affiliates' shipments), and that do not continue to make such shipments after the MSA Execution Date because the responsibility for such shipments has been transferred to one of such Participating Manufacturers)] (the "Base Volume"), the Applicable Base Payment shall be multiplied by the ratio of the Actual Volume to the Base Volume. (B) In the event the Actual Volume is less than the Base Volume, i. The Applicable Base Payment shall be reduced by subtracting from it the amount equal to such Applicable Base Payment multiplied both by 0.98 and by the result of (i) 1(one) minus (ii) the ratio of the Actual Volume to the Base Volume. ii. Solely for purposes of calculating volume adjustments to the payments required under subsection IX(c)(1), if a reduction of the Base Payment due under such subsection results from the application of subparagraph (B)(i) of this Exhibit E, but the Original Participating Manufacturers' aggregate operating income from sales of Cigarettes for the Applicable Year in the fifty United States, the District of Columbia, and Puerto Rico (the "Actual Operating Income") is greater than $_____________ [figure being determined; to represent the Original Participating Manufacturers' aggregate operating income from such sales of Cigarettes (including operating income from such sales of any of their Affiliates that do not continue to have such sales after the MSA Execution Date) in 1996] (the "Base Operating Income") (such E-1 Base Operating Income being adjusted upward in accordance with the formula for inflation adjustments set forth in Exhibit C hereto beginning December 31, 1996 to be applied for each year after 1996) then the amount by which such Base Payment is reduced by the application of subsection (B)(i) shall be reduced (but not below zero) by the amount calculated by multiplying (i) a percentage equal to the aggregate Allocable Shares of the Settling States in which State-Specific Finality has occurred by (ii) 25% of such increase in such operating income. For purposes of this Exhibit E, "operating income from sales of Cigarettes" shall mean operating income from sales of Cigarettes in the fifty United States, the District of Columbia, and Puerto Rico: (a) before goodwill amortization, trademark amortization, restructuring charges and restructuring related charges, minority interest, net interest expense, non-operating income and expense, general corporate expenses and income taxes; and (b) excluding extraordinary items, cumulative effect of changes in method of accounting and discontinued operations -- all as such income is reported to the United States Securities and Exchange Commission ("SEC") for the Applicable Year (either independently by the Participating Manufacturer or as part of consolidated financial statements reported to the SEC by an Affiliate of such Participating Manufacturer) or, in the case of an Original Participating Manufacturer that does not report income to the SEC, as reported in financial statements prepared in accordance with U.S. generally accepted accounting principles and audited by a nationally recognized accounting firm. For years subsequent to 1998, the determination of the Original Participating Manufacturers' aggregate operating income from sales of Cigarettes shall not exclude any charges or expenses incurred or accrued in connection with this Agreement or any prior settlement of a tobacco and health case and shall otherwise be derived using the same principles as were employed in deriving such Original Participating Manufacturers' aggregate operating income from sales of Cigarettes in 1996. iii. Any increase in a Base Payment pursuant to subsection (B)(ii) above shall be allocated among the Original Participating Manufacturers in the following manner: (1) only to those Original Participating Manufacturers whose operating income from sales of Cigarettes in the fifty United States, the District of Columbia and Puerto Rico for the year for which the Base Payment is being adjusted is greater than their respective operating income from such sales of Cigarettes E-2 (including operating income from such sales of any of their Affiliates that do not continue to have such sales after the MSA Execution Date) in 1997 (as increased for inflation as provided in Exhibit C hereto); and (2) among the Original Participating Manufacturers described in paragraph (1) above in proportion to the ratio of (x) the increase in the operating income from sales of Cigarettes (as described in paragraph (1)) of the Original Participating Manufacturer in question, to (y) the aggregate increase in the operating income from sales of Cigarettes (as described in paragraph (1)) of those Original Participating Manufacturers described in paragraph (1) above. (C) "Applicable Year" means the calendar year immediately preceding the year in which the payment at issue is due, regardless of when such payment is made. (D) For purposes of this Exhibit, shipments shall be measured as provided in subsection II(mm). E-3 EXHIBIT F POTENTIAL LEGISLATION NOT TO BE OPPOSED --------------------------------------- 1. Limitations on Youth access to vending machines. 2. Inclusion of cigars within the definition of tobacco products. 3. Enhancement of enforcement efforts to identify and prosecute violations of laws prohibiting retail sales to Youth. 4. Encouraging or supporting use of technology to increase effectiveness of age-of-purchase laws, such as, without limitation, the use of programmable scanners, scanners to read drivers' licenses, or use of other age/ID data banks. 5. Limitations on promotional programs for non-tobacco goods using tobacco products as prizes or give-aways. 6. Enforcement of access restrictions through penalties on Youth for possession or use. 7. Limitations on tobacco product advertising in or on school facilities, or wearing of tobacco logo merchandise in or on school property. 8. Limitations on non-tobacco products which are designed to look like tobacco products, such as bubble gum cigars, candy cigarettes, etc. F-1 EXHIBIT G OBLIGATIONS OF THE TOBACCO INSTITUTE UNDER THE MASTER SETTLEMENT AGREEMENT ------------------------------------- (a) Upon court approval of a plan of dissolution The Tobacco Institute ("TI") will: (1) EMPLOYEES. Promptly notify and arrange for the termination of the employment of all employees; provided, however, that TI may continue to engage any employee who is (A) essential to the wind-down function as set forth in section (g) herein; (B) reasonably needed for the sole purpose of directing and supporting TI's defense of ongoing litigation; or (C) reasonably needed for the sole purpose of performing the Tobacco Institute Testing Laboratory's (the "TITL") industry-wide cigarette testing pursuant to the Federal Trade Commission (the "FTC") method or any other testing prescribed by state or federal law as set forth in section (h) herein. (2) EMPLOYEE BENEFITS. Fund all employee benefit and pension programs; provided, however, that unless ERISA or other federal or state law prohibits it, such funding will be accomplished through periodic contributions by the Original Participating Manufacturers, according to their Relative Market Shares, into a trust or a like mechanism, which trust or like mechanism will be established within 90 days of court approval of the plan of dissolution. An opinion letter will be appended to the dissolution plan to certify that the trust plan is not inconsistent with ERISA or employee benefit pension contracts. G-1 (3) LEASES. Terminate all leaseholds at the earliest possible date pursuant to the leases; provided, however, that TI may retain or lease anew such space (or lease other space) as needed for its wind-down activities, for TITL testing as described herein, and for subsequent litigation defense activities. Immediately upon execution of this Agreement, TI will provide notice to each of its landlords of its desire to terminate its lease with such landlord, and will request that the landlord take all steps to re-lease the premises at the earliest possible date consistent with TI's performance of its obligations hereunder. TI will vacate such leasehold premises as soon as they are re-leased or on the last day of wind-down, whichever occurs first. (b) ASSETS/DEBTS. Within 60 days after court approval of a plan of dissolution, TI will provide to the Attorney General of New York and append to the dissolution plan a description of all of its assets, its debts, tax claims against it, claims of state and federal governments against it, creditor claims against it, pending litigation in which it is a party and notices of claims against it. (c) DOCUMENTS. Subject to the privacy protections provided by New York Public Officers Law Sections 91-99, TI will provide a copy of or otherwise make available to the State of New York all documents in its possession, excluding those that TI continues to claim to be subject to any attorney-client privilege, attorney work product protection, common interest/joint defense privilege or any other applicable privilege (collectively, "privilege") after the re-examination of privilege claims pursuant to court order in STATE OF OKLAHOMA v. R.J. REYNOLDS TOBACCO COMPANY, ET AL., CJ-96-2499-L (Dist. Ct., Cleveland County) (the "Oklahoma action"): G-2 (1) TI will deliver to the Attorney General of the State of New York a copy of the privilege log served by it in the Oklahoma action. Upon a written request by the Attorney General, TI will deliver an updated version of its privilege log, if any such updated version exists. (2) The disclosure of any document or documents claimed to be privileged will be governed by section IV of this Agreement. (3) At the conclusion of the document production and privilege logging process, TI will provide a sworn affidavit that all documents in its possession have been made available to the Attorney General of New York except for documents claimed to be privileged, and that any privilege logs that already exist have been made available to the Attorney General. (d) REMAINING ASSETS. On mutual agreement between TI and the Attorney General of New York, a not-for-profit health or child welfare organization will be named as the beneficiary of any TI assets that remain after lawful transfers of assets and satisfaction of TI's employee benefit obligations and any other debts, liabilities or claims. (e) DEFENSE OF LITIGATION. Pursuant to Section 1006 of the New York Not-for-Profit Corporations Law, TI will have the right to continue to defend its litigation interests with respect to any claims against it that are pending or threatened now or that are brought or threatened in the future. TI will retain sole discretion over all litigation decisions, including, without limitation, decisions with respect to asserting any privileges or defenses, having privileged communications and creating privileged documents, filing pleadings, responding to discovery requests, making motions, filing affidavits and briefs, conducting party and non-party discovery, retaining expert witnesses and consultants, G-3 preparing for and defending itself at trial, settling any claims asserted against it, intervening or otherwise participating in litigation to protect interests that it deems significant to its defense, and otherwise directing or conducting its defense. Pursuant to existing joint defense agreements, TI may continue to assist its current or former members in defense of any litigation brought or threatened against them. TI also may enter into any new joint defense agreement or agreements that it deems significant to its defense of pending or threatened claims. TI may continue to engage such employees as reasonably needed for the sole purpose of directing and supporting its defense of ongoing litigation. As soon as TI has no litigation pending against it, it will dissolve completely and will cease all functions consistent with the requirements of law. (f) NO PUBLIC STATEMENT. Except as necessary in the course of litigation defense as set forth in section (e) above, upon court approval of a plan of dissolution, neither TI nor any of its employees or agents acting in their official capacity on behalf of TI will issue any statements, press releases, or other public statement concerning tobacco. (g) WIND-DOWN. After court approval of a plan of dissolution, TI will effectuate wind-down of all activities (other than its defense of litigation as described in section (e) above) expeditiously, and in no event later than 180 days after the date of court approval of the plan of dissolution. TI will provide monthly status reports to the Attorney General of New York regarding the progress of wind-down efforts and work remaining to be done with respect to such efforts. (h) TITL. Notwithstanding any other provision of this Exhibit G or the dissolution plan, TI may perform TITL industry-wide cigarette testing pursuant to the FTC method or any other testing prescribed by state or federal law until such function is G-4 transferred to another entity, which transfer will be accomplished as soon as practicable but in no event more than 180 days after court approval of the dissolution plan. (i) JURISDICTION. After the filing of a Certificate of Dissolution, pursuant to Section 1004 of the New York Not-for-Profit Corporation Law, the Supreme Court for the State of New York will have continuing jurisdiction over the dissolution of TI and the winding-down of TI's activities, including any litigation-related activities described in subsection (e) herein. (j) NO DETERMINATION OR ADMISSION. The dissolution of TI and any proceedings taken hereunder are not intended to be and shall not in any event be construed as, deemed to be, or represented or caused to be represented by any Settling State as, an admission or concession or evidence of any liability or any wrongdoing whatsoever on the part of TI, any of its current or former members or anyone acting on their behalf. TI specifically disclaims and denies any liability or wrongdoing whatsoever with respect to the claims and allegations asserted against it by the Attorneys General of the Settling States. (k) COURT APPROVAL. The Attorney General of the State of New York and the Original Participating Manufacturers will prepare a joint plan of dissolution for submission to the Supreme Court of the State of New York, all of the terms of which will be agreed on and consented to by the Attorney General and the Original Participating Manufacturers consistent with this schedule. The Original Participating Manufacturers and their employees, as officers and directors of TI, will take whatever steps are necessary to execute all documents needed to develop such a plan of dissolution and to submit it to the court for approval. If any court makes any material change to any term or G-5 provision of the plan of dissolution agreed upon and consented to by the Attorney General and the Original Participating Manufacturers, then: (1) the Original Participating Manufacturers may, at their election, nevertheless proceed with the dissolution plan as modified by the court; or (2) if the Original Participating Manufacturers elect not to proceed with the court-modified dissolution plan, the Original Participating Manufacturers will be released from any obligations or undertakings under this Agreement or this schedule with respect to TI; provided, however, that the Original Participating Manufacturers will engage in good faith negotiations with the New York Attorney General to agree upon the term or terms of the dissolution plan that the court may have modified in an effort to agree upon a dissolution plan that may be resubmitted for the court's consideration. G-6 EXHIBIT H DOCUMENT PRODUCTION ------------------- Section 1. (a) PHILIP MORRIS COMPANIES, INC., ET AL., v. AMERICAN BROADCASTING COMPANIES, INC., ET AL., At Law No. 760CL94X00816-00 (Cir. Ct., City of Richmond) (b) HARLEY-DAVIDSON v. LORILLARD TOBACCO CO., No. 93-947 (S.D.N.Y.) (c) LORILLARD TOBACCO CO. v. HARLEY-DAVIDSON, No. 93-6098 (E.D. Wis.) (d) BROWN & WILLIAMSON v. JACOBSON AND CBS, INC., No. 82-648 (N.D. Ill.) (e) The FTC investigations of tobacco industry advertising and promotion as embodied in the following cites: 1. 46 FTC 706 2. 48 FTC 82 3. 46 FTC 735 4. 47 FTC 1393 5. 108 F. Supp. 573 6. 55 FTC 354 7. 56 FTC 96 8. 79 FTC 255 9. 80 FTC 455 10. Investigation #8023069 11. Investigation #8323222 Each Original Participating Manufacturer and Tobacco-Related Organization will conduct its own reasonable inquiry to determine what documents or deposition testimony, if any, it produced or provided in the above-listed matters. H-1 Section 2. (a) STATE OF WASHINGTON v. AMERICAN TOBACCO CO., ET AL., No. 96-2-15056-8 SEA (Wash. Super. Ct., County of King) (b) IN RE MIKE MOORE, ATTORNEY GENERAL, EX REL, STATE OF MISSISSIPPI TOBACCO LITIGATION, No. 94-1429 (Chancery Ct., Jackson, Miss.) (c) STATE OF FLORIDA v. AMERICAN TOBACCO CO., ET AL., No. CL 95-1466 AH (Fla. Cir. Ct., 15th Judicial Cir., Palm Beach Co.) (d) STATE OF TEXAS v. AMERICAN TOBACCO CO., ET AL., No. 5-96CV-91 (E.D. Tex.) (e) MINNESOTA v. PHILIP MORRIS ET AL., No. C-94-8565 (Minn. Dist. Ct., County of Ramsey) (f) BROIN v. R.J. REYNOLDS, No. 91-49738 CA (22) (11th Judicial Ct., Dade County, Florida) H-2 EXHIBIT I INDEX AND SEARCH FEATURES FOR DOCUMENT WEBSITE ---------------------------------------------- (a) Each Original Participating Manufacturer and Tobacco-Related Organization will create and maintain on its website, at its expense, an enhanced, searchable index, as described below, using Alta-Vista or functionally comparable software, for all of the documents currently on its website and all documents being placed on its website pursuant to section IV of this Agreement. (b) The searchable indices of documents on these websites will include: (1) all of the information contained in the 4(b) indices produced to the State Attorneys General (excluding fields specific only to the Minnesota action other than "request number"); (2) the following additional fields of information (or their substantial equivalent) to the extent such information already exists in an electronic format that can be incorporated into such an index: Document ID Master ID Other Number Document Date Primary Type Other Type Person Attending Person Noted Person Author Person Recipient Person Copied Person Mentioned Organization Author Organization Recipient Organization Copied Organization Mentioned Organization Attending Organization Noted Physical Attachment 1 Physical Attachment 2 Characteristics File Name Site Area Verbatim Title Old Brand Primary Brand Mentioned Brand Page Count I-1 (c) Each Original Participating Manufacturer and Tobacco-Related Organization will add, if not already available, a user-friendly document retrieval feature on the Website consisting of a "view all pages" function with enhanced image viewer capability that will enable users to choose to view and/or print either "all pages" for a specific document or "page-by-page". (d) Each Original Participating Manufacturer and Tobacco-Related Organizations will provide at its own expense to NAAG a copy set in electronic form of its website document images and its accompanying subsection IV(h) index in ASCII-delimited form for all of the documents currently on its website and all of the documents described in subsection IV(d) of this Agreement. The Original Participating Manufacturers and Tobacco-Related Organizations will not object to any subsequent distribution and/or reproduction of these copy sets. I-2 EXHIBIT J TOBACCO ENFORCEMENT FUND PROTOCOL --------------------------------- The States' Antitrust/Consumer Protection Tobacco Enforcement Fund ("Fund") is established by the Attorneys General of the Settling States, acting through NAAG, pursuant to section VIII(c) of the Agreement. The following shall be the primary and mandatory protocol for the administration of the Fund. SECTION A FUND PURPOSE SECTION 1 The monies to be paid pursuant to section VIII(c) of the Agreement shall be placed by NAAG in a new and separate interest bearing account, denominated the States' Antitrust/ Consumer Protection Tobacco Enforcement Fund, which shall not then or thereafter be commingled with any other funds or accounts. However, nothing herein shall prevent deposits into the account so long as monies so deposited are then lawfully committed for the purpose of the Fund as set forth herein. SECTION 2 A committee of three Attorneys General ("Special Committee") shall be established to determine disbursements from the account, using the process described herein. The three shall be the Attorney General of the State of Washington, the Chair of NAAG's antitrust committee, and the Chair of NAAG's consumer protection committee. In the event that an Attorney General shall hold either two or three of the above stated positions, that Attorney General may serve only in a single capacity, and shall be replaced in the remaining positions by first, the President of NAAG, next by the President-Elect of NAAG and if necessary the Vice-President of NAAG. SECTION 3 The purpose of the Fund is: (1) to enforce and implement the terms of the Agreement, in particular, by partial payment of the monetary costs of the Independent Auditor as contemplated by the Agreement; and (2) to provide monetary assistance to the various states' attorneys general: (A) to investigate and/or litigate suspected violations of the Agreement and/or Consent Decree; (B) to investigate and/or litigate suspected violations of state and/or federal antitrust or consumer protection laws with respect to the manufacture, use, marketing and sales of tobacco products; and (C) to enforce the Qualifying Statute ("Qualifying Actions"). The Special Committee shall entertain requests only from Settling States for disbursement from the fund associated with a Qualifying Action ("Grant Application"). J-1 SECTION B ADMINISTRATION STANDARDS RELATIVE TO GRANT APPLICATIONS SECTION 1 The Special Committee shall not entertain any Grant Application to pay salaries or ordinary expenses of regular employees of any Attorney General's office. SECTION 2 The affirmative vote of two or more of the members of the Special Committee shall be required to approve any Grant Application. SECTION 3 The decision of the Special Committee shall be final and non-appealable. SECTION 4 The Attorney General of the State of Washington shall be chair of the Special Committee and shall annually report to the Attorneys General on the requests for funds from the Fund and the actions of the Special Committee upon the requests. SECTION 5 When a Grant Application to the Fund is made by an Attorney General who is then a member of the Special Committee, such member will be temporarily replaced on the Committee, but only for the determination of such Grant Application. The remaining members of the Special Committee shall designate an Attorney General to replace the Attorney General so disqualified, in order to consider the application. SECTION 6 The Fund shall be maintained in a federally insured depository institution located in Washington, D.C. Funds may be invested in federal government-backed vehicles. The Fund shall be regularly reported on NAAG financial statements and subject to annual audit. SECTION 7 Withdrawals from and checks drawn on the Fund will require at least two of three authorized signatures. The three persons so authorized shall be the executive director, the deputy director, and controller of NAAG. SECTION 8 The Special Committee shall meet in person or telephonically as necessary to determine whether a grant is sought for assistance with a Qualifying Action and whether and to what extent J-2 the Grant Application is accepted. The chair of the Special Committee shall designate the times for such meetings, so that a response is made to the Grant Application as expeditiously as practicable. SECTION 9 The Special Committee may issue a grant from the Fund only when an Attorney General certifies that the monies will be used in connection with a Qualifying Action, to wit: (A) to investigate and/or litigate suspected violations of the Agreement and/or Consent Decree; (B) to investigate and/or litigate suspected violations of state and/or federal antitrust or consumer protection laws with respect to the manufacture, use, marketing and sales of tobacco products; and (C) to enforce the Qualifying Statute. The Attorney General submitting such application shall further certify that the entire grant of monies from the Fund will be used to pay for such investigation and/or litigation. The Grant Application shall describe the nature and scope of the intended action and use of the funds which may be granted. SECTION 10 To the extent permitted by law, each Attorney General whose Grant Application is favorably acted upon shall promise to pay back to the Fund all of the amounts received from the Fund in the event the state is successful in litigation or settlement of a Qualifying Action. In the event that the monetary recovery, if any, obtained is not sufficient to pay back the entire amount of the grant, the Attorney General shall pay back as much as is permitted by the recovery. In all instances where monies are granted, the Attorney General(s) receiving monies shall provide an accounting to NAAG of all disbursements received from the Fund no later than the 30th of June next following such disbursement. SECTION 11 In addition to the repayments to the Fund contemplated in the preceding section, the Special Committee may deposit in the Fund any other monies lawfully committed for the precise purpose of the Fund as set forth in section A(3) above. For example, the Special Committee may at its discretion accept for deposit in the Fund a foundation grant or court-ordered award for state antitrust and/or consumer protection enforcement as long as the monies so deposited become part of and subject to the same rules, purposes and limitations of the Fund. SECTION 12 The Special Committee shall be the sole and final arbiter of all Grant Applications and of the amount awarded for each such application, if any. SECTION 13 The Special Committee shall endeavor to maintain the Fund for as long a term as is consistent with the purpose of the Fund. The Special Committee will limit the total amount of grants made to a single state to no more than $500,000.00. The Special Committee will not J-3 award a single grant in excess of $200,000.00, unless the grant involves more than one state, in which case, a single grant so made may not total more than $300,000.00. The Special Committee may, in its discretion and by unanimous vote, decide to waive these limitations if it determines that special circumstances exist. Such decision, however, shall not be effective unless ratified by a two-thirds majority vote of the NAAG executive committee. SECTION C GRANT APPLICATION PROCEDURES SECTION 1 This Protocol shall be transmitted to the Attorneys General within 90 days after the MSA Execution Date. It may not be amended unless by recommendation of the NAAG executive committee and majority vote of the Settling States. NAAG will notify the Settling States of any amendments promptly and will transmit yearly to the attorneys general a statement of the Fund balance and a summary of deposits to and withdrawals from the Fund in the previous calendar or fiscal year. SECTION 2 Grant Applications must be in writing and must be signed by the Attorney General submitting the application. SECTION 3 Grant Applications must include the following: (A) A description of the contemplated/pending action, including the scope of the alleged violation and the area (state/regional/multi-state) likely to be affected by the suspected offending conduct. (B) A statement whether the action is actively and currently pursued by any other Attorney General or other prosecuting authority. (C) A description of the purposes for which the monies sought will be used. (D) The amount requested. (E) A directive as to how disbursements from the Fund should be made, e.g., either directly to a supplier of services (consultants, experts, witnesses, and the like), to the Attorney General's office directly, or in the case of multi-state action, to one or more Attorneys General's offices designated as a recipient of the monies. (F) A statement that the applicant Attorney(s) General will, to the extent permitted by law, pay back to the Fund all, or as much as is possible, of the monies received, upon receipt of any monetary recovery obtained in the contemplated/pending litigation or settlement of the action. J-4 (G) A certification that no part of the grant monies will be used to pay the salaries or ordinary expenses of any regular employee of the office of the applicant(s) and that the grant will be used solely to pay for the stated purpose. (H) A certification that an accounting will be provided to NAAG of all monies received by the applicant(s) by no later than the 30th of June next following any receipt of such monies. SECTION 4 All Grant Applications shall be submitted to the NAAG office at the following address: National Association of Attorneys General, 750 1st Street, NE, Suite 1100, Washington D.C. 20002. SECTION 5 The Special Committee will endeavor to act upon all complete and properly submitted Grant Applications within 30 days of receipt of said applications. SECTION D OTHER DISBURSEMENTS FROM THE FUND SECTION 1 To enforce and implement the terms of the Agreement, the Special Committee shall direct disbursements from the Fund to comply with the partial payment obligations set forth in section XI of the Agreement relative to costs of the Independent Auditor. A report of such disbursements shall be included in the accounting given pursuant to section C(1) above. SECTION E ADMINISTRATIVE COSTS SECTION 1 NAAG shall receive from the Fund on July 1, 1999 and on July 1 of each year thereafter an administrative fee of $100,000 for its administrative costs in performing its duties under the Protocol and this Agreement. The NAAG executive committee may adjust the amount of the administrative fee in extraordinary circumstances. J-5 EXHIBIT K MARKET CAPITALIZATION PERCENTAGES --------------------------------- Philip Morris Incorporated 68.0000000% Brown & Williamson Tobacco Corporation 17.9000000% Lorillard Tobacco Company 7.3000000% R.J. Reynolds Tobacco Company 6.8000000% ----------- Total 100.0000000% =========== K-1 EXHIBIT L MODEL CONSENT DECREE -------------------- IN THE [XXXXXX] COURT OF THE STATE OF [XXXXXX] IN AND FOR THE COUNTY OF [XXXXX] - - - - - - - - - - - - - - - - - - - - - x CAUSE NO. XXXXXX : STATE OF [XXXXXXXXXXX], : Plaintiff, : v. : CONSENT DECREE AND FINAL [XXXXXX XXXXX XXXX], et al., : JUDGMENT : Defendants. : : - - - - - - - - - - - - - - - - - - - - - x WHEREAS, Plaintiff, the State of [name of Settling State], commenced this action on [date], [by and through its Attorney General [name]], pursuant to [her/his/its] common law powers and the provisions of [state and/or federal law]; WHEREAS, the State of [name of Settling State] asserted various claims for monetary, equitable and injunctive relief on behalf of the State of [name of Settling State] against certain tobacco product manufacturers and other defendants; WHEREAS, Defendants have contested the claims in the State's complaint [and amended complaints, if any] and denied the State's allegations [and asserted affirmative defenses]; WHEREAS, the parties desire to resolve this action in a manner which appropriately addresses the State's public health concerns, while conserving the parties' resources, as well as those of the Court, which would otherwise be expended in litigating a matter of this magnitude; and WHEREAS, the Court has made no determination of any violation of law, this Consent Decree and Final Judgment being entered prior to the taking of any testimony and without trial or final adjudication of any issue of fact or law; NOW, THEREFORE, IT IS HEREBY ORDERED, ADJUDGED AND DECREED, AS FOLLOWS: I. JURISDICTION AND VENUE This Court has jurisdiction over the subject matter of this action and over each of the Participating Manufacturers. Venue is proper in this [county/district]. II. DEFINITIONS The definitions set forth in the Agreement (a copy of which is attached hereto) are incorporated herein by reference. III. APPLICABILITY A. This Consent Decree and Final Judgment applies only to the Participating Manufacturers in their corporate capacity acting through their respective successors and assigns, directors, officers, employees, agents, subsidiaries, divisions, or other internal organizational units of any kind or any other entities acting in concert or participation with them. The remedies, penalties and sanctions that may be imposed or assessed in connection with a violation of this Consent Decree and Final Judgment (or any order issued in connection herewith) shall only apply to the Participating Manufacturers, and shall not be imposed or assessed against any employee, officer or director of any Participating Manufacturer, or against any other person or entity as a consequence of such violation, and there shall be no jurisdiction under this Consent Decree and Final Judgment to do so. B. This Consent Decree and Final Judgment is not intended to and does not vest standing in any third party with respect to the terms hereof. No portion of this Consent Decree and Final Judgment shall provide any rights to, or be enforceable by, any person or entity other than the State of [name of Settling State] or a Released Party. The State of [name of Settling State] may not assign or otherwise convey any right to enforce any provision of this Consent Decree and Final Judgment. IV. VOLUNTARY ACT OF THE PARTIES The parties hereto expressly acknowledge and agree that this Consent Decree and Final Judgment is voluntarily entered into as the result of arm's-length negotiation, and all parties hereto were represented by counsel in deciding to enter into this Consent Decree and Final Judgment. V. INJUNCTIVE AND OTHER EQUITABLE RELIEF Each Participating Manufacturer is permanently enjoined from: A. Taking any action, directly or indirectly, to target Youth within the State of [name of Settling State] in the advertising, promotion or marketing of Tobacco Products, or taking any action the primary purpose of which is to initiate, maintain or increase the incidence of Youth smoking within the State of [name of Settling State]. L-2 B. After 180 days after the MSA Execution Date, using or causing to be used within the State of [name of Settling State] any Cartoon in the advertising, promoting, packaging or labeling of Tobacco Products. C. After 30 days after the MSA Execution Date, making or causing to be made any payment or other consideration to any other person or entity to use, display, make reference to or use as a prop within the State of [name of Settling State] any Tobacco Product, Tobacco Product package, advertisement for a Tobacco Product, or any other item bearing a Brand Name in any Media; provided, however, that the foregoing prohibition shall not apply to (1) Media where the audience or viewers are within an Adult-Only Facility (provided such Media are not visible to persons outside such Adult-Only Facility); (2) Media not intended for distribution or display to the public; (3) instructional Media concerning non-conventional cigarettes viewed only by or provided only to smokers who are Adults; and (4) actions taken by any Participating Manufacturer in connection with a Brand Name Sponsorship permitted pursuant to subsections III(c)(2)(A) and III(c)(2)(B)(i) of the Agreement, and use of a Brand Name to identify a Brand Name Sponsorship permitted by subsection III(c)(2)(B)(ii). D. Beginning July 1, 1999, marketing, distributing, offering, selling, licensing or causing to be marketed, distributed, offered, sold, or licensed (including, without limitation, by catalogue or direct mail), within the State of [name of Settling State], any apparel or other merchandise (other than Tobacco Products, items the sole function of which is to advertise Tobacco Products, or written or electronic publications) which bears a Brand Name. Provided, however, that nothing in this section shall (1) require any Participating Manufacturer to breach or terminate any licensing agreement or other contract in existence as of June 20, 1997 (this exception shall not apply beyond the current term of any existing contract, without regard to any renewal or option term that may be exercised by such Participating Manufacturer); (2) prohibit the distribution to any Participating Manufacturer's employee who is not Underage of any item described above that is intended for the personal use of such an employee; (3) require any Participating Manufacturer to retrieve, collect or otherwise recover any item that prior to the MSA Execution Date was marketed, distributed, offered, sold, licensed or caused to be marketed, distributed, offered, sold or licensed by such Participating Manufacturer; (4) apply to coupons or other items used by Adults solely in connection with the purchase of Tobacco Products; (5) apply to apparel or other merchandise used within an Adult-Only Facility that is not distributed (by sale or otherwise) to any member of the general public; or (6) apply to apparel or other merchandise (a) marketed, distributed, offered, sold, or licensed at the site of a Brand Name Sponsorship permitted pursuant to subsection III(c)(2)(A) or III(c)(2)(B)(i) of the Agreement by the person to which the relevant Participating Manufacturer has provided payment in exchange for the use of the relevant Brand Name in the Brand Name Sponsorship or a third-party that does not receive payment from the relevant Participating Manufacturer (or any Affiliate of such Participating Manufacturer) in connection with the marketing, distribution, offer, sale or license of such apparel or other merchandise, or (b) used at the site of a Brand Name Sponsorship permitted pursuant to subsections III(c)(2)(A) or III(c)(2)(B)(i) of the Agreement (during such event) that are not distributed (by sale or otherwise) to any member of the general public. L-3 E. After the MSA Execution Date, distributing or causing to be distributed within the State of [name of Settling State] any free samples of Tobacco Products except in an Adult-Only Facility. For purposes of this Consent Decree and Final Judgment, a "free sample" does not include a Tobacco Product that is provided to an Adult in connection with (1) the purchase, exchange or redemption for proof of purchase of any Tobacco Products (including, but not limited to, a free offer in connection with the purchase of Tobacco Products, such as a "two-for-one" offer), or (2) the conducting of consumer testing or evaluation of Tobacco Products with persons who certify that they are Adults. F. Using or causing to be used as a brand name of any Tobacco Product pursuant to any agreement requiring the payment of money or other valuable consideration, any nationally recognized or nationally established brand name or trade name of any non-tobacco item or service or any nationally recognized or nationally established sports team, entertainment group or individual celebrity. Provided, however, that the preceding sentence shall not apply to any Tobacco Product brand name in existence as of July 1, 1998. For the purposes of this provision, the term "other valuable consideration" shall not include an agreement between two entities who enter into such agreement for the sole purpose of avoiding infringement claims. G. After 60 days after the MSA Execution Date and through and including December 31, 2001, manufacturing or causing to be manufactured for sale within the State of [name of Settling State] any pack or other container of Cigarettes containing fewer than 20 Cigarettes (or, in the case of roll-your-own tobacco, any package of roll-your-own tobacco containing less than 0.60 ounces of tobacco); and, after 150 days after the MSA Execution Date and through and including December 31, 2001, selling or distributing within the State of [name of Settling State] any pack or other container of Cigarettes containing fewer than 20 Cigarettes (or, in the case of roll-your-own tobacco, any package of roll-your-own tobacco containing less than 0.60 ounces of tobacco). H. Entering into any contract, combination or conspiracy with any other Tobacco Product Manufacturer that has the purpose or effect of: (1) limiting competition in the production or distribution of information about health hazards or other consequences of the use of their products; (2) limiting or suppressing research into smoking and health; or (3) limiting or suppressing research into the marketing or development of new products. Provided, however, that nothing in the preceding sentence shall be deemed to (1) require any Participating Manufacturer to produce, distribute or otherwise disclose any information that is subject to any privilege or protection; (2) preclude any Participating Manufacturer from entering into any joint defense or joint legal interest agreement or arrangement (whether or not in writing), or from asserting any privilege pursuant thereto; or (3) impose any affirmative obligation on any Participating Manufacturer to conduct any research. I. Making any material misrepresentation of fact regarding the health consequences of using any Tobacco Product, including any tobacco additives, filters, paper or other ingredients. Provided, however, that nothing in the preceding sentence shall limit the exercise of any First Amendment right or the assertion of any defense or position in any judicial, legislative or regulatory forum. L-4 VI. MISCELLANEOUS PROVISIONS A. Jurisdiction of this case is retained by the Court for the purposes of implementing and enforcing the Agreement and this Consent Decree and Final Judgment and enabling the continuing proceedings contemplated herein. Whenever possible, the State of [name of Settling State] and the Participating Manufacturers shall seek to resolve any issue that may exist as to compliance with this Consent Decree and Final Judgment by discussion among the appropriate designees named pursuant to subsection XVIII(m) of the Agreement. The State of [name of Settling State] and/or any Participating Manufacturer may apply to the Court at any time for further orders and directions as may be necessary or appropriate for the implementation and enforcement of this Consent Decree and Final Judgment. Provided, however, that with regard to subsections V(A) and V(I) of this Consent Decree and Final Judgment, the Attorney General shall issue a cease and desist demand to the Participating Manufacturer that the Attorney General believes is in violation of either of such sections at least ten Business Days before the Attorney General applies to the Court for an order to enforce such subsections, unless the Attorney General reasonably determines that either a compelling time-sensitive public health and safety concern requires more immediate action or the Court has previously issued an Enforcement Order to the Participating Manufacturer in question for the same or a substantially similar action or activity. For any claimed violation of this Consent Decree and Final Judgment, in determining whether to seek an order for monetary, civil contempt or criminal sanctions for any claimed violation, the Attorney General shall give good-faith consideration to whether: (1) the Participating Manufacturer that is claimed to have committed the violation has taken appropriate and reasonable steps to cause the claimed violation to be cured, unless that party has been guilty of a pattern of violations of like nature; and (2) a legitimate, good-faith dispute exists as to the meaning of the terms in question of this Consent Decree and Final Judgment. The Court in any case in its discretion may determine not to enter an order for monetary, civil contempt or criminal sanctions. B. This Consent Decree and Final Judgment is not intended to be, and shall not in any event be construed as, or deemed to be, an admission or concession or evidence of (1) any liability or any wrongdoing whatsoever on the part of any Released Party or that any Released Party has engaged in any of the activities barred by this Consent Decree and Final Judgment; or (2) personal jurisdiction over any person or entity other than the Participating Manufacturers. Each Participating Manufacturer specifically disclaims and denies any liability or wrongdoing whatsoever with respect to the claims and allegations asserted against it in this action, and has stipulated to the entry of this Consent Decree and Final Judgment solely to avoid the further expense, inconvenience, burden and risk of litigation. C. Except as expressly provided otherwise in the Agreement, this Consent Decree and Final Judgment shall not be modified (by this Court, by any other court or by any other means) unless the party seeking modification demonstrates, by clear and convincing evidence, that it will suffer irreparable harm from new and unforeseen conditions. Provided, however, that the provisions of sections III, V, VI and VII of this Consent Decree and Final Judgment shall in no event be subject to modification without the consent of the State of [name of Settling State] and all affected Participating Manufacturers. In the event that any of the sections of this Consent L-5 Decree and Final Judgment enumerated in the preceding sentence are modified by this Court, by any other court or by any other means without the consent of the State of [name of Settling State] and all affected Participating Manufacturers, then this Consent Decree and Final Judgment shall be void and of no further effect. Changes in the economic conditions of the parties shall not be grounds for modification. It is intended that the Participating Manufacturers will comply with this Consent Decree and Final Judgment as originally entered, even if the Participating Manufacturers' obligations hereunder are greater than those imposed under current or future law (unless compliance with this Consent Decree and Final Judgment would violate such law). A change in law that results, directly or indirectly, in more favorable or beneficial treatment of any one or more of the Participating Manufacturers shall not support modification of this Consent Decree and Final Judgment. D. In any proceeding which results in a finding that a Participating Manufacturer violated this Consent Decree and Final Judgment, the Participating Manufacturer or Participating Manufacturers found to be in violation shall pay the State's costs and attorneys' fees incurred by the State of [name of Settling State] in such proceeding. E. The remedies in this Consent Decree and Final Judgment are cumulative and in addition to any other remedies the State of [name of Settling State] may have at law or equity, including but not limited to its rights under the Agreement. Nothing herein shall be construed to prevent the State from bringing an action with respect to conduct not released pursuant to the Agreement, even though that conduct may also violate this Consent Decree and Final Judgment. Nothing in this Consent Decree and Final Judgment is intended to create any right for [name of Settling State] to obtain any Cigarette product formula that it would not otherwise have under applicable law. F. No party shall be considered the drafter of this Consent Decree and Final Judgment for the purpose of any statute, case law or rule of interpretation or construction that would or might cause any provision to be construed against the drafter. Nothing in this Consent Decree and Final Judgment shall be construed as approval by the State of [name of Settling State] of the Participating Manufacturers' business organizations, operations, acts or practices, and the Participating Manufacturers shall make no representation to the contrary. G. The settlement negotiations resulting in this Consent Decree and Final Judgment have been undertaken in good faith and for settlement purposes only, and no evidence of negotiations or discussions underlying this Consent Decree and Final Judgment shall be offered or received in evidence in any action or proceeding for any purpose. Neither this Consent Decree and Final Judgment nor any public discussions, public statements or public comments with respect to this Consent Decree and Final Judgment by the State of [name of Settling State] or any Participating Manufacturer or its agents shall be offered or received in evidence in any action or proceeding for any purpose other than in an action or proceeding arising under or relating to this Consent Decree and Final Judgment. L-6 H. All obligations of the Participating Manufacturers pursuant to this Consent Decree and Final Judgment (including, but not limited to, all payment obligations) are, and shall remain, several and not joint. I. The provisions of this Consent Decree and Final Judgment are applicable only to actions taken (or omitted to be taken) within the States. Provided, however, that the preceding sentence shall not be construed as extending the territorial scope of any provision of this Consent Decree and Final Judgment whose scope is otherwise limited by the terms thereof. J. Nothing in subsection V(A) or V(I) of this Consent Decree shall create a right to challenge the continuation, after the MSA Execution Date, of any advertising content, claim or slogan (other than use of a Cartoon) that was not unlawful prior to the MSA Execution Date. K. If the Agreement terminates in this State for any reason, then this Consent Decree and Final Judgment shall be void and of no further effect. VII. FINAL DISPOSITION A. The Agreement, the settlement set forth therein, and the establishment of the escrow provided for therein are hereby approved in all respects, and all claims are hereby dismissed with prejudice as provided therein. B. The Court finds that the person[s] signing the Agreement have full and complete authority to enter into the binding and fully effective settlement of this action as set forth in the Agreement. The Court further finds that entering into this settlement is in the best interests of the State of [name of Settling State]. LET JUDGMENT BE ENTERED ACCORDINGLY DATED this _____ day of ______________, 1998. L-7 EXHIBIT M LIST OF PARTICIPATING MANUFACTURERS' LAWSUITS AGAINST THE SETTLING STATES --------------------------- 1. PHILIP MORRIS, INC., ET AL. V. MARGERY BRONSTER, ATTORNEY GENERAL OF THE STATE OF HAWAII, IN HER OFFICIAL CAPACITY, Civ. No. 96-00722HG, United States District Court for the District of Hawaii 2. PHILIP MORRIS, INC., ET AL. V. BRUCE BOTELHO, ATTORNEY GENERAL OF THE STATE OF ALASKA, IN HIS OFFICIAL CAPACITY, Civ. No. A97-0003CV, United States District Court for the District of Alaska 3. PHILIP MORRIS, INC., ET AL. V. SCOTT HARSHBARGER, ATTORNEY GENERAL OF THE COMMONWEALTH OF MASSACHUSETTS, IN HIS OFFICIAL CAPACITY, Civ. No. 95-12574-GAO, United States District Court for the District of Massachusetts 4. PHILIP MORRIS, INC., ET AL. V. RICHARD BLUMENTHAL, ATTORNEY GENERAL OF THE STATE OF CONNECTICUT, IN HIS OFFICIAL CAPACITY, Civ. No. 396CV01221 (PCD), United States District Court for the District of Connecticut 5. PHILIP MORRIS, ET AL. V. WILLIAM H. SORRELL, ET AL., No. 1:98-ev-132, United States District Court for the District of Vermont M-1 EXHIBIT N LITIGATING POLITICAL SUBDIVISIONS --------------------------------- 1. CITY OF NEW YORK, ET AL. V. THE TOBACCO INSTITUTE, INC. ET AL., Supreme Court of the State of New York, County of New York, Index No. 406225/96 2. COUNTY OF ERIE V. THE TOBACCO INSTITUTE, INC. ET AL., Supreme Court of the State of New York, County of Erie, Index No. I 1997/359 3. COUNTY OF LOS ANGELES V. R.J. REYNOLDS TOBACCO CO. ET al., San Diego Superior Court, No. 707651 4. THE PEOPLE V. PHILIP MORRIS, INC. ET AL., San Francisco Superior Court, No. 980864 5. COUNTY OF COOK V. PHILIP MORRIS, INC. ET AL., Circuit Court of Cook County, Ill., No. 97-L-4550 N-1 EXHIBIT O [MODEL] STATE FEE PAYMENT AGREEMENT ----------------------------------- This STATE Fee Payment Agreement (the "STATE Fee Payment Agreement") is entered into as of _________, _____ between and among the Original Participating Manufacturers and STATE Outside Counsel (as defined herein), to provide for payment of attorneys' fees pursuant to Section XVII of the Master Settlement Agreement (the "Agreement"). WITNESSETH: WHEREAS, the State of STATE and the Original Participating Manufacturers have entered into the Agreement to settle and resolve with finality all Released Claims against the Released Parties, including the Original Participating Manufacturers, as set forth in the Agreement; and WHEREAS, Section XVII of the Agreement provides that the Original Participating Manufacturers shall pay reasonable attorneys' fees to those private outside counsel identified in Exhibit S to the Agreement, pursuant to the terms hereof; NOW, THEREFORE, BE IT KNOWN THAT, in consideration of the mutual agreement of the State of STATE and the Original Participating Manufacturers to the terms of the Agreement and of the mutual agreement of STATE Outside Counsel and the Original Participating Manufacturers to the terms of this STATE Fee Payment Agreement, and such other consideration described herein, the Original Participating Manufacturers and STATE Outside Counsel agree as follows: SECTION 1. DEFINITIONS. All definitions contained in the Agreement are incorporated by reference herein, except as to terms specifically defined herein. (a) "ACTION" means the lawsuit identified in Exhibit D, M or N to the Agreement that has been brought by or against the State of STATE [or Litigating Political Subdivision]. (b) "ALLOCATED AMOUNT" means the amount of any Applicable Quarterly Payment allocated to any Private Counsel (including STATE Outside Counsel) pursuant to section 17 hereof. (c) "ALLOCABLE LIQUIDATED SHARE" means, in the event that the sum of all Payable Liquidated Fees of Private Counsel as of any date specified in section 8 hereof exceeds the Applicable Liquidation Amount for any payment described therein, a percentage share of the Applicable Liquidation Amount equal to the proportion of (i) the amount of O-1 the Payable Liquidated Fee of STATE Outside Counsel to (ii) the sum of Payable Liquidated Fees of all Private Counsel. (d) "APPLICABLE LIQUIDATION AMOUNT" means, for purposes of the payments described in section 8 hereof - (i) for the payment described in subsection (a) thereof, $125 million; (ii) for the payment described in subsection (b) thereof, the difference between (A) $250 million and (B) the sum of all amounts paid in satisfaction of all Payable Liquidated Fees of Outside Counsel pursuant to subsection (a) thereof; (iii) for the payment described in subsection (c) thereof, the difference between (A) $250 million and (B) the sum of all amounts paid in satisfaction of all Payable Liquidated Fees of Outside Counsel pursuant to subsections (a) and (b) thereof; (iv) for the payment described in subsection (d) thereof, the difference between (A) $250 million and (B) the sum of all amounts paid in satisfaction of all Payable Liquidated Fees of Outside Counsel pursuant to subsections (a), (b) and (c) thereof; (v) for the payment described in subsection (e) thereof, the difference between (A) $250 million and (B) the sum of all amounts paid in satisfaction of all Payable Liquidated Fees of Outside Counsel pursuant to subsections (a), (b), (c) and (d) thereof; (vi) for each of the first, second and third quarterly payments for any calendar year described in subsection (f) thereof, $62.5 million; and (vii) for each of the fourth calendar quarterly payments for any calendar year described in subsection (f) thereof, the difference between (A) $250 million and (B) the sum of all amounts paid in satisfaction of all Payable Liquidated Fees of Outside Counsel with respect to the preceding calendar quarters of the calendar year. (e) "APPLICATION" means a written application for a Fee Award submitted to the Panel, as well as all supporting materials (which may include video recordings of interviews). (f) "APPROVED COST STATEMENT" means both (i) a Cost Statement that has been accepted by the Original Participating Manufacturers; and (ii) in the event that a Cost Statement submitted by STATE Outside Counsel is disputed, the determination by arbitration pursuant to subsection (b) of section 19 hereof as to the amount of the reasonable costs and expenses of STATE Outside Counsel. O-2 (g) "COST STATEMENT" means a signed and attested statement of reasonable costs and expenses of Outside Counsel for any action identified on Exhibit D, M or N to the Agreement that has been brought by or against a Settling State or Litigating Political Subdivision. (h) "DESIGNATED REPRESENTATIVE" means the person designated in writing, by each person or entity identified in Exhibit S to the Agreement [by the Attorney General of the State of STATE or as later certified in writing by the governmental prosecuting authority of the Litigating Political Subdivision], to act as their agent in receiving payments from the Original Participating Manufacturers for the benefit of STATE Outside Counsel pursuant to sections 8, 16 and 19 hereof, as applicable. (i) "DIRECTOR" means the Director of the Private Adjudication Center of the Duke University School of Law or such other person or entity as may be chosen by agreement of the Original Participating Manufacturers and the Committee described in the second sentence of paragraph (b)(ii) of section 11 hereof. (j) "ELIGIBLE COUNSEL" means Private Counsel eligible to be allocated a part of a Quarterly Fee Amount pursuant to section 17 hereof. (k) "FEDERAL LEGISLATION" means federal legislation that imposes an enforceable obligation on Participating Defendants to pay attorneys' fees with respect to Private Counsel. (l) "FEE AWARD" means any award of attorneys' fees by the Panel in connection with a Tobacco Case. (m) "LIQUIDATED FEE" means an attorneys' fee for Outside Counsel for any action identified on Exhibit D, M or N to the Agreement that has been brought by or against a Settling State or Litigating Political Subdivision, in an amount agreed upon by the Original Participating Manufacturers and such Outside Counsel. (n) "OUTSIDE COUNSEL" means all those Private Counsel identified in Exhibit S to the Agreement. (o) "PANEL" means the three-member arbitration panel described in section 11 hereof. (p) "PARTY" means (i) STATE Outside Counsel and (ii) an Original Participating Manufacturer. (q) "PAYABLE COST STATEMENT" means the unpaid amount of a Cost Statement as to which all conditions precedent to payment have been satisfied. (r) "PAYABLE LIQUIDATED FEE" means the unpaid amount of a Liquidated Fee as to which all conditions precedent to payment have been satisfied. O-3 (s) "PREVIOUSLY SETTLED STATES" means the States of Mississippi, Florida and Texas. (t) "PRIVATE COUNSEL" means all private counsel for all plaintiffs in a Tobacco Case (including STATE Outside Counsel). (u) "QUARTERLY FEE AMOUNT" means, for purposes of the quarterly payments described in sections 16, 17 and 18 hereof - (i) for each of the first, second and third calendar quarters of any calendar year beginning with the first calendar quarter of 1999 and ending with the third calendar quarter of 2008, $125 million; (ii) for each fourth calendar quarter of any calendar year beginning with the fourth calendar quarter of 1999 and ending with the fourth calendar quarter of 2003, the sum of (A) $125 million and (B) the difference, if any, between (1) $375 million and (2) the sum of all amounts paid in satisfaction of all Fee Awards of Private Counsel during such calendar year, if any; (iii) for each fourth calendar quarter of any calendar year beginning with the fourth calendar quarter of 2004 and ending with the fourth calendar quarter of 2008, the sum of (A) $125 million; (B) the difference between (1) $375 million; and (2) the sum of all amounts paid in satisfaction of all Fee Awards of Private Counsel during such calendar year, if any; and (C) the difference, if any, between (1) $250 million and (2) the product of (A) .2 (two tenths) and (B) the sum of all amounts paid in satisfaction of all Liquidated Fees of Outside Counsel pursuant to section 8 hereof, if any; (iv) for each of the first, second and third calendar quarters of any calendar year beginning with the first calendar quarter of 2009, $125 million; and (v) for each fourth calendar quarter of any calendar year beginning with the fourth calendar quarter of 2009, the sum of (A) $125 million and (B) the difference, if any, between (1) $375 million and (2) the sum of all amounts paid in satisfaction of all Fee Awards of Private Counsel during such calendar year, if any. (v) "RELATED PERSONS" means each Original Participating Manufacturer's past, present and future Affiliates, divisions, officers, directors, employees, representatives, insurers, lenders, underwriters, Tobacco-Related Organizations, trade associations, suppliers, agents, auditors, advertising agencies, public relations entities, attorneys, retailers and distributors (and the predecessors, heirs, executors, administrators, successors and assigns of each of the foregoing). (w) "STATE OF STATE" means the [applicable Settling State or the Litigating Political Subdivision], any of its past, present and future agents, officials acting in their O-4 official capacities, legal representatives, agencies, departments, commissions and subdivisions. (x) "STATE OUTSIDE COUNSEL" means all persons or entities identified in Exhibit S to the Agreement by the Attorney General of State of STATE [or as later certified by the office of the governmental prosecuting authority for the Litigating Political Subdivision] as having been retained by and having represented the STATE in connection with the Action, acting collectively by unanimous decision of all such persons or entities. (y) "TOBACCO CASE" means any tobacco and health case (other than a non-class action personal injury case brought directly by or on behalf of a single natural person or the survivor of such person or for wrongful death, or any non-class action consolidation of two or more such cases). (z) "UNPAID FEE" means the unpaid portion of a Fee Award. SECTION 2. AGREEMENT TO PAY FEES. The Original Participating Manufacturers will pay reasonable attorneys' fees to STATE Outside Counsel for their representation of the State of STATE in connection with the Action, as provided herein and subject to the CODE OF PROFESSIONAL RESPONSIBILITY of the American Bar Association. Nothing herein shall be construed to require the Original Participating Manufacturers to pay any attorneys' fees other than (i) a Liquidated Fee or a Fee Award and (ii) a Cost Statement, as provided herein, nor shall anything herein require the Original Participating Manufacturers to pay any Liquidated Fee, Fee Award or Cost Statement in connection with any litigation other than the Action. SECTION 3. EXCLUSIVE OBLIGATION OF THE ORIGINAL PARTICIPATING MANUFACTURERS. The provisions set forth herein constitute the entire obligation of the Original Participating Manufacturers with respect to payment of attorneys' fees of STATE Outside Counsel (including costs and expenses) in connection with the Action and the exclusive means by which STATE Outside Counsel or any other person or entity may seek payment of fees by the Original Participating Manufacturers or Related Persons in connection with the Action. The Original Participating Manufacturers shall have no obligation pursuant to Section XVII of the Agreement to pay attorneys' fees in connection with the Action to any counsel other than STATE Outside Counsel, and they shall have no other obligation to pay attorneys' fees to or otherwise to compensate STATE Outside Counsel, any other counsel or representative of the State of STATE or the State of STATE itself with respect to attorneys' fees in connection with the Action. SECTION 4. RELEASE. (a) Each person or entity identified in Exhibit S to the Agreement by the Attorney General of the State of STATE [or as certified by the office of the governmental prosecuting authority for the Litigating Political Subdivision] hereby irrevocably releases O-5 the Original Participating Manufacturers and all Related Persons from any and all claims that such person or entity ever had, now has or hereafter can, shall or may have in any way related to the Action (including but not limited to any negotiations related to the settlement of the Action). Such release shall not be construed as a release of any person or entity as to any of the obligations undertaken herein in connection with a breach thereof. (b) In the event that STATE Outside Counsel and the Original Participating Manufacturers agree upon a Liquidated Fee pursuant to section 7 hereof, it shall be a precondition to any payment by the Original Participating Manufacturers to the Designated Representative pursuant to section 8 hereof that each person or entity identified in Exhibit S to the Agreement by the Attorney General of the State of STATE [or as certified by the office of the governmental prosecuting authority for the Litigating Political Subdivision] shall have irrevocably released all entities represented by STATE Outside Counsel in the Action, as well as all persons acting by or on behalf of such entities (including the Attorney General [or the office of the governmental prosecuting authority] and each other person or entity identified on Exhibit S to the Agreement by the Attorney General [or the office of the governmental prosecuting authority]) from any and all claims that such person or entity ever had, now has or hereafter can, shall or may have in any way related to the Action (including but not limited to any negotiations related to the settlement of the Action). Such release shall not be construed as a release of any person or entity as to any of the obligations undertaken herein in connection with a breach thereof. SECTION 5. NO EFFECT ON STATE OUTSIDE COUNSEL'S FEE CONTRACT. The rights and obligations, if any, of the respective parties to any contract between the State of STATE and STATE Outside Counsel shall be unaffected by this STATE Fee Payment Agreement except (a) insofar as STATE Outside Counsel grant the release described in subsection (b) of section 4 hereof; and (b) to the extent that STATE Outside Counsel receive any payments in satisfaction of a Fee Award pursuant to section 16 hereof, any amounts so received shall be credited, on a dollar-for-dollar basis, against any amount payable to STATE Outside Counsel by the State of STATE [or the Litigating Political Subdivision] under any such contract. SECTION 6. LIQUIDATED FEES. (a) In the event that the Original Participating Manufacturers and STATE Outside Counsel agree upon the amount of a Liquidated Fee, the Original Participating Manufacturers shall pay such Liquidated Fee, pursuant to the terms hereof. (b) The Original Participating Manufacturers' payment of any Liquidated Fee pursuant to this STATE Fee Payment Agreement shall be subject to (i) satisfaction of the conditions precedent stated in section 4 and paragraph (c)(ii) of section 7 hereof; and (ii) the payment schedule and the annual and quarterly aggregate national caps specified in O-6 sections 8 and 9 hereof, which shall apply to all payments made with respect to Liquidated Fees of all Outside Counsel. SECTION 7. NEGOTIATION OF LIQUIDATED FEES. (a) If STATE Outside Counsel seek to be paid a Liquidated Fee, the Designated Representative shall so notify the Original Participating Manufacturers. The Original Participating Manufacturers may at any time make an offer of a Liquidated Fee to the Designated Representative in an amount set by the unanimous agreement, and at the sole discretion, of the Original Participating Manufacturers and, in any event, shall collectively make such an offer to the Designated Representative no more than 60 Business Days after receipt of notice by the Designated Representative that STATE Outside Counsel seek to be paid a Liquidated Fee. The Original Participating Manufacturers shall not be obligated to make an offer of a Liquidated Fee in any particular amount. Within ten Business Days after receiving such an offer, STATE Outside Counsel shall either accept the offer, reject the offer or make a counteroffer. (b) The national aggregate of all Liquidated Fees to be agreed to by the Original Participating Manufacturers in connection with the settlement of those actions indicated on Exhibits D, M and N to the Agreement shall not exceed one billion two hundred fifty million dollars ($1,250,000,000). (c) If the Original Participating Manufacturers and STATE Outside Counsel agree in writing upon a Liquidated Fee - (i) STATE Outside Counsel shall not be eligible for a Fee Award; (ii) such Liquidated Fee shall not become a Payable Liquidated Fee until such time as (A) State-Specific Finality has occurred in the State of STATE; (B) each person or entity identified in Exhibit S to the Agreement by the Attorney General of the State of STATE [or as certified by the office of the governmental prosecuting authority of the Litigating Political Subdivision] has granted the release described in subsection (b) of section 4 hereof; and (C) notice of the events described in subparagraphs (A) and (B) of this paragraph has been provided to the Original Participating Manufacturers. (iii) payment of such Liquidated Fee pursuant to sections 8 and 9 hereof (together with payment of costs and expenses pursuant to section 19 hereof), shall be STATE Outside Counsel's total and sole compensation by the Original Participating Manufacturers in connection with the Action. (d) If the Original Participating Manufacturers and STATE Outside Counsel do not agree in writing upon a Liquidated Fee, STATE Outside Counsel may submit an Application to the Panel for a Fee Award to be paid as provided in sections 16, 17 and 18 hereof. O-7 SECTION 8. PAYMENT OF LIQUIDATED FEE. In the event that the Original Participating Manufacturers and STATE Outside Counsel agree in writing upon a Liquidated Fee, and until such time as the Designated Representative has received payments in full satisfaction of such Liquidated Fee - (a) On February 1, 1999, if the Liquidated Fee of STATE Outside Counsel became a Payable Liquidated Fee before January 15, 1999, each Original Participating Manufacturer shall severally pay to the Designated Representative its Relative Market Share of the lesser of (i) the Payable Liquidated Fee of STATE Outside Counsel, (ii) $5 million or (iii) in the event that the sum of all Payable Liquidated Fees of all Outside Counsel as of January 15, 1999 exceeds the Applicable Liquidation Amount, the Allocable Liquidated Share of STATE Outside Counsel. (b) On August 1, 1999, if the Liquidated Fee of STATE Outside Counsel became a Payable Liquidated Fee on or after January 15, 1999 and before July 15, 1999, each Original Participating Manufacturer shall severally pay to the Designated Representative its Relative Market Share of the lesser of (i) the Payable Liquidated Fee of STATE Outside Counsel, (ii) $5 million or (iii) in the event that the sum of all Payable Liquidated Fees of all Outside Counsel that became Payable Liquidated Fees on or after January 15, 1999 and before July 15, 1999 exceeds the Applicable Liquidation Amount, the Allocable Liquidated Share of STATE Outside Counsel. (c) On December 15, 1999, if the Liquidated Fee of STATE Outside Counsel became a Payable Liquidated Fee on or after July 15, 1999 and before December 1, 1999, each Original Participating Manufacturer shall severally pay to the Designated Representative its Relative Market Share of the lesser of (i) the Payable Liquidated Fee of STATE Outside Counsel, (ii) $5 million or (iii) in the event that the sum of all Payable Liquidated Fees of all Outside Counsel that became Payable Liquidated Fees on or after July 15, 1999 and before December 1, 1999 exceeds the Applicable Liquidation Amount, the Allocable Liquidated Share of STATE Outside Counsel. (d) On December 15, 1999, if the Liquidated Fee of STATE Outside Counsel became a Payable Liquidated Fee before December 1, 1999, each Original Participating Manufacturer shall severally pay to the Designated Representative its Relative Market Share of the lesser of (i) the Payable Liquidated Fee of STATE Outside Counsel, or (ii) $5 million or (iii) in the event that the sum of all Payable Liquidated Fees of all Outside Counsel that become Payable Liquidated Fees before December 1, 1999 exceeds the Applicable Liquidation Amount, the Allocable Liquidated Share of STATE Outside Counsel. (e) On December 15, 1999, if the Liquidated Fee of STATE Outside Counsel became a Payable Liquidated Fee before December 1, 1999, each Original Participating Manufacturer shall severally pay to the Designated Representative its Relative Market Share of the lesser of (i) the Payable Liquidated Fee of STATE Outside Counsel or (ii) in the event that the sum of all Payable Liquidated Fees of all Outside Counsel that became O-8 Payable Liquidated Fees before December 1, 1999 exceeds the Applicable Liquidation Amount, the Allocable Liquidated Share of STATE Outside Counsel. (f) On the last day of each calendar quarter, beginning with the first calendar quarter of 2000 and ending with the fourth calendar quarter of 2003, if the Liquidated Fee of STATE Outside Counsel became a Payable Liquidated Fee at least 15 Business Days prior to the last day of each such calendar quarter, each Original Participating Manufacturer shall severally pay to the Designated Representative its Relative Market Share of the lesser of (i) the Payable Liquidated Fee of STATE Outside Counsel or (ii) in the event that the sum of all Payable Liquidated Fees of all Outside Counsel as of the date 15 Business Days prior to the date of the payment in question exceeds the Applicable Liquidation Amount, the Allocable Liquidated Share of STATE Outside Counsel. SECTION 9. LIMITATIONS ON PAYMENTS OF LIQUIDATED FEES. Notwithstanding any other provision hereof, all payments by the Original Participating Manufacturers with respect to Liquidated Fees shall be subject to the following: (a) Under no circumstances shall the Original Participating Manufacturers be required to make any payment that would result in aggregate national payments of Liquidated Fees: (i) during 1999, totaling more than $250 million; (ii) with respect to any calendar quarter beginning with the first calendar quarter of 2000 and ending with the fourth calendar quarter of 2003, totaling more than $62.5 million, except to the extent that a payment with respect to any prior calendar quarter of any calendar year did not total $62.5 million; or (iii) with respect to any calendar quarter after the fourth calendar quarter of 2003, totaling more than zero. (b) The Original Participating Manufacturers' obligations with respect to the Liquidated Fee of STATE Outside Counsel, if any, shall be exclusively as provided in this STATE Fee Payment Agreement, and notwithstanding any other provision of law, such Liquidated Fee shall not be entered as or reduced to a judgment against the Original Participating Manufacturers or considered as a basis for requiring a bond or imposing a lien or any other encumbrance. SECTION 10. FEE AWARDS. (a) In the event that the Original Participating Manufacturers and STATE Outside Counsel do not agree in writing upon a Liquidated Fee as described in section 7 hereof, the Original Participating Manufacturers shall pay, pursuant to the terms hereof, the Fee Award awarded by the Panel to STATE Outside Counsel. O-9 (b) The Original Participating Manufacturers' payment of any Fee Award pursuant to this STATE Fee Payment Agreement shall be subject to the payment schedule and the annual and quarterly aggregate national caps specified in sections 17 and 18 hereof, which shall apply to: (i) all payments of Fee Awards in connection with an agreement to pay fees as part of the settlement of any Tobacco Case on terms that provide for payment by the Original Participating Manufacturers or other defendants acting in agreement with the Original Participating Manufacturers (collectively, "Participating Defendants") of fees with respect to any Private Counsel, subject to an annual cap on payment of all such fees; and (ii) all payments of attorneys' fees (other than fees for attorneys of Participating Defendants) pursuant to Fee Awards for activities in connection with any Tobacco Case resolved by operation of Federal Legislation. SECTION 11. COMPOSITION OF THE PANEL. (a) The first and the second members of the Panel shall both be permanent members of the Panel and, as such, will participate in the determination of all Fee Awards. The third Panel member shall not be a permanent Panel member, but instead shall be a state-specific member selected to determine Fee Awards on behalf of Private Counsel retained in connection with litigation within a single state. Accordingly, the third, state-specific member of the Panel for purposes of determining Fee Awards with respect to litigation in the State of STATE shall not participate in any determination as to any Fee Award with respect to litigation in any other state (unless selected to participate in such determinations by such persons as may be authorized to make such selections under other agreements). (b) The members of the Panel shall be selected as follows: (i) The first member shall be the natural person selected by Participating Defendants. (ii) The second member shall be the person jointly selected by the agreement of Participating Defendants and a majority of the committee described in the fee payment agreements entered in connection with the settlements of the Tobacco Cases brought by the Previously Settled States. In the event that the person so selected is unable or unwilling to continue to serve, a replacement for such member shall be selected by agreement of the Original Participating Manufacturers and a majority of the members of a committee composed of the following members: Joseph F. Rice, Richard F. Scruggs, Steven W. Berman, Walter Umphrey, one additional representative, to be selected in the sole discretion of NAAG, and two representatives of Private Counsel in Tobacco Cases, to be selected at the sole discretion of the Original Participating Manufacturers. O-10 (iii) The third, state-specific member for purposes of determining Fee Awards with respect to litigation in the State of STATE shall be a natural person selected by STATE Outside Counsel, who shall notify the Director and the Original Participating Manufacturers of the name of the person selected. SECTION 12. APPLICATION OF STATE OUTSIDE COUNSEL. (a) STATE Outside Counsel shall make a collective Application for a single Fee Award, which shall be submitted to the Director. Within five Business Days after receipt of the Application by STATE Outside Counsel, the Director shall serve the Application upon the Original Participating Manufacturers and the STATE. The Original Participating Manufacturers shall submit all materials in response to the Application to the Director by the later of (i) 60 Business Days after service of the Application upon the Original Participating Manufacturers by the Director, (ii) five Business Days after the date of State-Specific Finality in the State of STATE or (iii) five Business Days after the date on which notice of the name of the third, state-specific panel member described in paragraph (b)(iii) of section 11 hereof has been provided to the Director and the Original Participating Manufacturers. (b) The Original Participating Manufacturers may submit to the Director any materials that they wish and, notwithstanding any restrictions or representations made in any other agreements, the Original Participating Manufacturers shall be in no way constrained from contesting the amount of the Fee Award requested by STATE Outside Counsel. The Director, the Panel, the State of STATE, the Original Participating Manufacturers and STATE Outside Counsel shall preserve the confidentiality of any attorney work-product materials or other similar confidential information that may be submitted. (c) The Director shall forward the Application of STATE Outside Counsel, as well as all written materials relating to such Application that have been submitted by the Original Participating Manufacturers pursuant to subsection (b) of this section, to the Panel within five Business Days after the later of (i) the expiration of the period for the Original Participating Manufacturers to submit such materials or (ii) the earlier of (A) the date on which the Panel issues a Fee Award with respect to any Application of other Private Counsel previously forwarded to the Panel by the Director or (B) 30 Business Days after the forwarding to the Panel of the Application of other Private Counsel most recently forwarded to the Panel by the Director. The Director shall notify the Parties upon forwarding the Application (and all written materials relating thereto) to the Panel. (d) In the event that either Party seeks a hearing before the Panel, such Party may submit a request to the Director in writing within five Business Days after the forwarding of the Application of STATE Outside Counsel to the Panel by the Director, and the Director shall promptly forward the request to the Panel. If the Panel grants the request, it shall promptly set a date for hearing, such date to fall within 30 Business Days after the date of the Panel's receipt of the Application. O-11 SECTION 13. PANEL PROCEEDINGS. The proceedings of the Panel shall be conducted subject to the terms of this Agreement and of the Protocol of Panel Procedures attached as an Appendix hereto. SECTION 14. AWARD OF FEES TO STATE OUTSIDE COUNSEL. The members of the Panel will consider all relevant information submitted to them in reaching a decision as to a Fee Award that fairly provides for full reasonable compensation of STATE Outside Counsel. In considering the amount of the Fee Award, the Panel shall not consider any Liquidated Fee agreed to by any other Outside Counsel, any offer of or negotiations relating to any proposed liquidated fee for STATE Outside Counsel or any Fee Award that already has been or yet may be awarded in connection with any other Tobacco Case. The Panel's decisions as to the Fee Award of STATE Outside Counsel shall be in writing and shall report the amount of the fee awarded (with or without explanation or opinion, at the Panel's discretion). The Panel shall determine the amount of the Fee Award to be paid to STATE Outside Counsel within the later of 30 calendar days after receiving the Application (and all related materials) from the Director or 15 Business Days after the last date of any hearing held pursuant to subsection (d) of section 12 hereof. The Panel's decision as to the Fee Award of STATE Outside Counsel shall be final, binding and non-appealable. SECTION 15. COSTS OF ARBITRATION. All costs and expenses of the arbitration proceedings held by the Panel, including costs, expenses and compensation of the Director and of the Panel members (but not including any costs, expenses or compensation of counsel making applications to the Panel), shall be borne by the Original Participating Manufacturers in proportion to their Relative Market Shares. SECTION 16. PAYMENT OF FEE AWARD OF STATE OUTSIDE COUNSEL. On or before the tenth Business Day after the last day of each calendar quarter beginning with the first calendar quarter of 1999, each Original Participating Manufacturer shall severally pay to the Designated Representative its Relative Market Share of the Allocated Amount for STATE Outside Counsel for the calendar quarter with respect to which such quarterly payment is being made (the "Applicable Quarter"). SECTION 17. ALLOCATED AMOUNTS OF FEE AWARDS. The Allocated Amount for each Private Counsel with respect to any payment to be made for any particular Applicable Quarter shall be determined as follows: (a) The Quarterly Fee Amount shall be allocated equally among each of the three months of the Applicable Quarter. The amount for each such month shall be allocated among those Private Counsel retained in connection with Tobacco Cases settled before or O-12 during such month (each such Private Counsel being an "Eligible Counsel" with respect to such monthly amount), each of which shall be allocated a portion of each such monthly amount up to (or, in the event that the sum of all Eligible Counsel's respective Unpaid Fees exceeds such monthly amount, in proportion to) the amount of such Eligible Counsel's Unpaid Fees. The monthly amount for each month of the calendar quarter shall be allocated among those Eligible Counsel having Unpaid Fees, without regard to whether there may be Eligible Counsel that have not yet been granted or denied a Fee Award as of the last day of the Applicable Quarter. The allocation of subsequent Quarterly Fee Amounts for the calendar year, if any, shall be adjusted, as necessary, to account for any Eligible Counsel that are granted Fee Awards in a subsequent quarter of such calendar year, as provided in paragraph (b)(ii) of this section. (b) In the event that the amount for a given month is less than the sum of the Unpaid Fees of all Eligible Counsel: (i) in the case of the first quarterly allocation for any calendar year, such monthly amount shall be allocated among all Eligible Counsel for such month in proportion to the amounts of their respective Unpaid Fees. (ii) in the case of a quarterly allocation after the first quarterly allocation, the Quarterly Fee Amount shall be allocated among only those Private Counsel, if any, that were Eligible Counsel with respect to any monthly amount for any prior quarter of the calendar year but were not allocated a proportionate share of such monthly amount (either because such Private Counsel's applications for Fee Awards were still under consideration as of the last day of the calendar quarter containing the month in question or for any other reason), until each such Eligible Counsel has been allocated a proportionate share of all such prior monthly payments for the calendar year (each such share of each such Eligible Counsel being a "Payable Proportionate Share"). In the event that the sum of all Payable Proportionate Shares exceeds the Quarterly Fee Amount, the Quarterly Fee Amount shall be allocated among such Eligible Counsel on a monthly basis in proportion to the amounts of their respective Unpaid Fees (without regard to whether there may be other Eligible Counsel with respect to such prior monthly amounts that have not yet been granted or denied a Fee Award as of the last day of the Applicable Quarter). In the event that the sum of all Payable Proportionate Shares is less than the Quarterly Fee Amount, the amount by which the Quarterly Fee Amount exceeds the sum of all such Payable Proportionate Shares shall be allocated among each month of the calendar quarter, each such monthly amount to be allocated among those Eligible Counsel having Unpaid Fees in proportion to the amounts of their respective Unpaid Fees (without regard to whether there may be Eligible Counsel that have not yet been granted or denied a Fee Award as of the last day of the Applicable Quarter). (c) Adjustments pursuant to subsection (b)(ii) of this section 17 shall be made separately for each calendar year. No amounts paid in any calendar year shall be subject O-13 to refund, nor shall any payment in any given calendar year affect the allocation of payments to be made in any subsequent calendar year. SECTION 18. CREDITS TO AND LIMITATIONS ON PAYMENT OF FEE AWARDS. Notwithstanding any other provision hereof, all payments by the Original Participating Manufacturers with respect to Fee Awards shall be subject to the following: (a) Under no circumstances shall the Original Participating Manufacturers be required to make payments that would result in aggregate national payments and credits by Participating Defendants with respect to all Fee Awards of Private Counsel: (i) during any year beginning with 1999, totaling more than the sum of the Quarterly Fee Amounts for each calendar quarter of the calendar year, excluding certain payments with respect to any Private Counsel for 1998 that are paid in 1999; and (ii) during any calendar quarter beginning with the first calendar quarter of 1999, totaling more than the Quarterly Fee Amount for such quarter, excluding certain payments with respect to any Private Counsel for 1998 that are paid in 1999. (b) The Original Participating Manufacturers' obligations with respect to the Fee Award of STATE Outside Counsel, if any, shall be exclusively as provided in this STATE Fee Payment Agreement, and notwithstanding any other provision of law, such Fee Award shall not be entered as or reduced to a judgment against the Original Participating Manufacturers or considered as a basis for requiring a bond or imposing a lien or any other encumbrance. SECTION 19. REIMBURSEMENT OF OUTSIDE COUNSEL'S COSTS. (a) The Original Participating Manufacturers shall reimburse STATE Outside Counsel for reasonable costs and expenses incurred in connection with the Action, provided that such costs and expenses are of the same nature as costs and expenses for which the Original Participating Manufacturers ordinarily reimburse their own counsel or agents. Payment of any Approved Cost Statement pursuant to this STATE Fee Payment Agreement shall be subject to (i) the condition precedent of approval of the Agreement by the Court for the State of STATE and (ii) the payment schedule and the aggregate national caps specified in subsection (c) of this section, which shall apply to all payments made with respect to Cost Statements of all Outside Counsel. (b) In the event that STATE Outside Counsel seek to be reimbursed for reasonable costs and expenses incurred in connection with the Action, the Designated Representative shall submit a Cost Statement to the Original Participating Manufacturers. Within 30 Business Days after receipt of any such Cost Statement, the Original Participating Manufacturers shall either accept the Cost Statement or dispute the Cost O-14 Statement, in which event the Cost Statement shall be subject to a full audit by examiners to be appointed by the Original Participating Manufacturers (in their sole discretion). Any such audit will be completed within 120 Business Days after the date the Cost Statement is received by the Original Participating Manufacturers. Upon completion of such audit, if the Original Participating Manufacturers and STATE Outside Counsel cannot agree as to the appropriate amount of STATE Outside Counsel's reasonable costs and expenses, the Cost Statement and the examiner's audit report shall be submitted to the Director for arbitration before the Panel or, in the event that STATE Outside Counsel and the Original Participating Manufacturers have agreed upon a Liquidated Fee pursuant to section 7 hereof, before a separate three-member panel of independent arbitrators, to be selected in a manner to be agreed to by STATE Outside Counsel and the Original Participating Manufacturers, which shall determine the amount of STATE Outside Counsel's reasonable costs and expenses for the Action. In determining such reasonable costs and expenses, the members of the arbitration panel shall be governed by the Protocol of Panel Procedures attached as an Appendix hereto. The amount of STATE Outside Counsel's reasonable costs and expenses determined pursuant to arbitration as provided in the preceding sentence shall be final, binding and non-appealable. (c) Any Approved Cost Statement of STATE Outside Counsel shall not become a Payable Cost Statement until approval of the Agreement by the Court for the State of STATE. Within five Business Days after receipt of notification thereof by the Designated Representative, each Original Participating Manufacturer shall severally pay to the Designated Representative its Relative Market Share of the Payable Cost Statement of STATE Outside Counsel, subject to the following - (i) All Payable Cost Statements of Outside Counsel shall be paid in the order in which such Payable Cost Statements became Payable Cost Statements. (ii) Under no circumstances shall the Original Participating Manufacturers be required to make payments that would result in aggregate national payments by Participating Defendants of all Payable Cost Statements of Private Counsel in connection with all of the actions identified in Exhibits D, M and N to the Agreement, totaling more than $75 million for any given year. (iii) Any Payable Cost Statement of Outside Counsel not paid during the year in which it became a Payable Cost Statement as a result of paragraph (ii) of this subsection shall become payable in subsequent years, subject to paragraphs (i) and (ii), until paid in full. (d) The Original Participating Manufacturers' obligations with respect to reasonable costs and expenses incurred by STATE Outside Counsel in connection with the Action shall be exclusively as provided in this STATE Fee Payment Agreement, and notwithstanding any other provision of law, any Approved Cost Statement determined pursuant to subsection (b) of this section (including any Approved Cost Statement O-15 determined pursuant to arbitration before the Panel or the separate three-member panel of independent arbitrators described therein) shall not be entered as or reduced to a judgment against the Original Participating Manufacturers or considered as a basis for requiring a bond or imposing a lien or any other incumbrance. SECTION 20. RECOVERY OF PAYMENTS BY STATE OF STATE. (a) In the event that the State of STATE pays attorneys' fees in connection with the Action to STATE Outside Counsel and STATE Outside Counsel have not agreed with the Original Participating Manufacturers on the amount of a Liquidated Fee, have not submitted an Application for a Fee Award to the Director, and have not submitted a Cost Statement to the Original Participating Manufacturers, the State of STATE may seek to be paid either a Liquidated Fee or a Fee Award, as well as a Cost Statement, in the place of STATE Outside Counsel, in the same manner as and subject to the same conditions applicable to the payment of a Liquidated Fee, Fee Award or Cost Statement of STATE Outside Counsel. [METHODOLOGY TO BE DETERMINED] SECTION 21. DISTRIBUTION OF PAYMENTS AMONG STATE OUTSIDE COUNSEL. (a) All payments made to the Designated Representative pursuant to this STATE Fee Payment Agreement shall be for the benefit of each person or entity identified in Exhibit S to the Agreement by the Attorney General of the State of STATE [or as certified by the governmental prosecuting authority of the Litigating Political Subdivision], each of which shall receive from the Designated Representative a percentage of each such payment in accordance with the fee sharing agreement, if any, among STATE Outside Counsel (or any written amendment thereto). (b) The Original Participating Manufacturers shall have no obligation, responsibility or liability with respect to the allocation among those persons or entities identified in Exhibit S to the Agreement by the Attorney General of the State of STATE [or as certified by the governmental prosecuting authority of the Litigating Political Subdivision], or with respect to any claim of misallocation, of any amounts paid to the Designated Representative pursuant to this STATE Fee Payment Agreement. SECTION 22. CALCULATIONS OF AMOUNTS. All calculations that may be required hereunder shall be performed by the Original Participating Manufacturers, with notice of the results thereof to be given promptly to the Designated Representative. Any disputes as to the correctness of calculations made by the Original Participating Manufacturers shall be resolved pursuant to the procedures described in Section XI(c) of the Agreement for resolving disputes as to calculations by the Independent Auditor. O-16 SECTION 23. PAYMENT RESPONSIBILITY. (a) Each Original Participating Manufacturer shall be severally liable for its share of all payments pursuant to this STATE Fee Payment Agreement. Under no circumstances shall any payment due hereunder or any portion thereof become the joint obligation of the Original Participating Manufacturers or the obligation of any person other than the Original Participating Manufacturer from which such payment is originally due, nor shall any Original Participating Manufacturer be required to pay a portion of any such payment greater than its Relative Market Share. (b) Due to the particular corporate structures of R. J. Reynolds Tobacco Company ("Reynolds") and Brown & Williamson Tobacco Corporation ("Brown & Williamson") with respect to their non-domestic tobacco operations, Reynolds and Brown & Williamson shall each be severally liable for its respective share of each payment due pursuant to this STATE Fee Payment Agreement up to (and its liability hereunder shall not exceed) the full extent of its assets used in, and earnings and revenues derived from, its manufacture and sale in the United States of Tobacco Products intended for domestic consumption, and no recourse shall be had against any of its other assets or earnings to satisfy such obligations. SECTION 24. TERMINATION. In the event that the Agreement is terminated with respect to the State of STATE pursuant to Section XVIII(u) of the Agreement (or for any other reason) the Designated Representative and each person or entity identified in Exhibit S to the Agreement by the Attorney General of the State of STATE [or as certified by the governmental prosecuting authority of the Litigating Political Subdivision] shall immediately refund to the Original Participating Manufacturers all amounts received under this STATE Fee Payment Agreement. SECTION 25. INTENDED BENEFICIARIES. No provision hereof creates any rights on the part of, or is enforceable by, any person or entity that is not a Party or a person covered by either of the releases described in section 4 hereof, except that sections 5 and 20 hereof create rights on the part of, and shall be enforceable by, the State of STATE. Nor shall any provision hereof bind any non-signatory or determine, limit or prejudice the rights of any such person or entity. SECTION 26. REPRESENTATIONS OF PARTIES. The Parties hereto hereby represent that this STATE Fee Payment Agreement has been duly authorized and, upon execution, will constitute a valid and binding contractual obligation, enforceable in accordance with its terms, of each of the Parties hereto. O-17 SECTION 27. NO ADMISSION. This STATE Fee Payment Agreement is not intended to be and shall not in any event be construed as, or deemed to be, an admission or concession or evidence of any liability or wrongdoing whatsoever on the part of any signatory hereto or any person covered by either of the releases provided under section 4 hereof. The Original Participating Manufacturers specifically disclaim and deny any liability or wrongdoing whatsoever with respect to the claims released under section 4 hereof and enter into this STATE Fee Payment Agreement for the sole purposes of memorializing the Original Participating Manufacturers' rights and obligations with respect to payment of attorneys' fees pursuant to the Agreement and avoiding the further expense, inconvenience, burden and uncertainty of potential litigation. SECTION 28. NON-ADMISSIBILITY. This STATE Fee Payment Agreement having been undertaken by the Parties hereto in good faith and for settlement purposes only, neither this STATE Fee Payment Agreement nor any evidence of negotiations relating hereto shall be offered or received in evidence in any action or proceeding other than an action or proceeding arising under this STATE Fee Payment Agreement. SECTION 29. AMENDMENT AND WAIVER. This STATE Fee Payment Agreement may be amended only by a written instrument executed by the Parties. The waiver of any rights conferred hereunder shall be effective only if made by written instrument executed by the waiving Party. The waiver by any Party of any breach hereof shall not be deemed to be or construed as a waiver of any other breach, whether prior, subsequent or contemporaneous, of this STATE Fee Payment Agreement. SECTION 30. NOTICES. All notices or other communications to any party hereto shall be in writing (including but not limited to telex, facsimile or similar writing) and shall be given to the notice parties listed on Schedule A hereto at the addresses therein indicated. Any Party hereto may change the name and address of the person designated to receive notice on behalf of such Party by notice given as provided in this section including an updated list conformed to Schedule A hereto. SECTION 31. GOVERNING LAW. This STATE Fee Payment Agreement shall be governed by the laws of the State of STATE without regard to the conflict of law rules of such State. O-18 SECTION 32. CONSTRUCTION. None of the Parties hereto shall be considered to be the drafter hereof or of any provision hereof for the purpose of any statute, case law or rule of interpretation or construction that would or might cause any provision to be construed against the drafter hereof. SECTION 33. CAPTIONS. The captions of the sections hereof are included for convenience of reference only and shall be ignored in the construction and interpretation hereof. SECTION 34. EXECUTION OF STATE FEE PAYMENT AGREEMENT. This STATE Fee Payment Agreement may be executed in counterparts. Facsimile or photocopied signatures shall be considered valid signatures as of the date hereof, although the original signature pages shall thereafter be appended to this STATE Fee Payment Agreement. SECTION 35. ENTIRE AGREEMENT OF PARTIES. This STATE Fee Payment Agreement contains an entire, complete and integrated statement of each and every term and provision agreed to by and among the Parties with respect to payment of attorneys' fees by the Original Participating Manufacturers in connection with the Action and is not subject to any condition or covenant, express or implied, not provided for herein. IN WITNESS WHEREOF, the Parties hereto, through their fully authorized representatives, have agreed to this STATE Fee Payment Agreement as of this __th day of ________, 1998. [SIGNATURE BLOCK] O-19 APPENDIX to MODEL FEE PAYMENT AGREEMENT PROTOCOL OF PANEL PROCEEDINGS ----------------------------- This Protocol of procedures has been agreed to between the respective parties to the STATE Fee Payment Agreement, and shall govern the arbitration proceedings provided for therein. SECTION 1. DEFINITIONS. All definitions contained in the STATE Fee Payment Agreement are incorporated by reference herein. SECTION 2. CHAIRMAN. The person selected to serve as the permanent, neutral member of the Panel as described in paragraph (b)(ii) of section 11 of the STATE Fee Payment Agreement shall serve as the Chairman of the Panel. SECTION 3. ARBITRATION PURSUANT TO AGREEMENT. The members of the Panel shall determine those matters committed to the decision of the Panel under the STATE Fee Payment Agreement, which shall govern as to all matters discussed therein. SECTION 4. ABA CODE OF ETHICS. Each of the members of the Panel shall be governed by the CODE OF ETHICS FOR ARBITRATORS IN COMMERCIAL DISPUTES prepared by the American Arbitration Association and the American Bar Association (the "CODE OF ETHICS") in conducting the arbitration proceedings pursuant to the STATE Fee Payment Agreement, subject to the terms of the STATE Fee Payment Agreement and this Protocol. Each of the party-appointed members of the Panel shall be governed by Canon VII of the CODE OF ETHICS. No person may engage in any EX PARTE communications with the permanent, neutral member of the Panel selected pursuant to paragraph (b)(ii) of section 11, in keeping with Canons I, II and III of the CODE OF ETHICS. SECTION 5. ADDITIONAL RULES AND PROCEDURES. The Panel may adopt such rules and procedures as it deems necessary and appropriate for the discharge of its duties under the STATE Fee Payment Agreement and this Protocol, subject to the terms of the STATE Fee Payment Agreement and this Protocol. O-20 SECTION 6. MAJORITY RULE. In the event that the members of the Panel are not unanimous in their views as to any matter to be determined by them pursuant to the STATE Fee Payment Agreement or this Protocol, the determination shall be decided by a vote of a majority of the three members of the Panel. SECTION 7. APPLICATION FOR FEE AWARD AND OTHER MATERIALS. (a) The Application of STATE Outside Counsel and any materials submitted to the Director relating thereto (collectively, "submissions") shall be forwarded by the Director to each of the members of the Panel in the manner and on the dates specified in the STATE Fee Payment Agreement. (b) All materials submitted to the Director by either Party (or any other person) shall be served upon all Parties. All submissions required to be served on any Party shall be deemed to have been served as of the date on which such materials have been sent by either (i) hand delivery or (ii) facsimile and overnight courier for priority next-day delivery. (c) To the extent that the Panel believes that information not submitted to the Panel may be relevant for purposes of determining those matters committed to the decision of the Panel under the terms of the STATE Fee Payment Agreement, the Panel shall request such information from the Parties. SECTION 8. HEARING. Any hearing held pursuant to section 12 of the STATE Fee Payment Agreement shall not take place other than in the presence of all three members of the Panel upon notice and an opportunity for the respective representatives of the Parties to attend. SECTION 9. MISCELLANEOUS. (a) Each member of the Panel shall be compensated for his services by the Original Participating Manufacturers on a basis to be agreed to between such member and the Original Participating Manufacturers. (b) The members of the Panel shall refer all media inquiries regarding the arbitration proceeding to the respective Parties to the STATE Fee Payment Agreement and shall refrain from any comment as to the arbitration proceedings to be conducted pursuant to the STATE Fee Payment Agreement during the pendency of such arbitration proceedings, in keeping with Canon IV(B) of the CODE OF ETHICS. O-21 EXHIBIT P NOTICES ------- NAAG Executive Director PHO: (202) 326-6053 750 First Street, N.E. FAX: (202) 408-6999 Suite 1100 Washington, DC 20002 ESCROW AGENT [to come] ALABAMA Honorable Bill Pryor PHO: (334) 242-7300 Attorney General of Alabama FAX: (334) 242-4891 Office of the Attorney General State House 11 South Union Street Montgomery, AL 36130 ALASKA Honorable Bruce M. Botelho PHO: (907) 465-3600 Attorney General of Alaska FAX: (907) 465-2075 Office of the Attorney General Post Office Box 110300 Diamond Courthouse Juneau, AK 99811-0300 AMERICAN SAMOA Honorable Toetagata Albert Mailo PHO: (684) 633-4163 Attorney General of American Samoa FAX: (684) 633-1838 Office of the Attorney General Post Office Box 7 Pago Pago, AS 96799 ARIZONA Honorable Grant Woods PHO: (602) 542-4266 Attorney General of Arizona FAX: (602) 542-4085 Office of the Attorney General 1275 West Washington Street Phoenix, AZ 85007 ARKANSAS Honorable Winston Bryant PHO: (501) 682-2007 Attorney General of Arkansas FAX: (501) 682-8084 Office of the Attorney General 200 Tower Building, 323 Center Street Little Rock, AR 72201-2610 P-1 CALIFORNIA Honorable Daniel E. Lungren PHO: (916) 324-5437 Attorney General of California FAX: (916) 324-6734 Office of the Attorney General 1300 I Street, Suite 1740 Sacramento, CA 95814 COLORADO Honorable Gale A. Norton PHO: (303) 866-3052 Attorney General of Colorado FAX: (303) 866-3955 Office of the Attorney General Department of Law 1525 Sherman Street Denver, CO 80203 CONNECTICUT Honorable Richard Blumenthal PHO: (860) 808-5318 Attorney General of Connecticut FAX: (860) 808-5387 Office of the Attorney General 55 Elm Street Hartford, CT 06141-0120 DELAWARE Honorable M. Jane Brady PHO: (302) 577-8400 Attorney General of Delaware FAX: (302) 577-2610 Office of the Attorney General Carvel State Office Building 820 North French Street Wilmington, DE 19801 DISTRICT OF COLUMBIA Honorable John M. Ferren PHO: (202) 727-6248 District of Columbia FAX: (202) 347-9822 Corporation Counsel Office of the Corporation Counsel 441 4th Street NW Washington, DC 20001 GEORGIA Honorable Thurbert E. Baker PHO: (404) 656-4585 Attorney General of Georgia FAX: (404) 657-8733 Office of the Attorney General 40 Capitol Square, S.W. Atlanta, GA 30334-1300 GUAM Honorable Gus Diaz PHO: (671) 475-3324 Acting Attorney General of Guam FAX: (671) 472-2493 Office of the Attorney General Judicial Center Building 120 West O'Brien Drive Agana, GU 96910 P-2 HAWAII Honorable Margery S. Bronster PHO: (808) 586-1282 Attorney General of Hawaii FAX: (808) 586-1239 Office of the Attorney General 425 Queen Street Honolulu, HI 96813 IDAHO Honorable Alan G. Lance PHO: (208) 334-2400 Attorney General of Idaho FAX: (208) 334-2530 Office of the Attorney General Statehouse P.O. Box 83720 Boise, ID 83720-0010 ILLINOIS Honorable Jim Ryan PHO: (312) 814-2503 Attorney General of Illinois FAX: (217)785-2551 Office of the Attorney General James R. Thompson Center 100 West Randolph Street Chicago, IL 60601 INDIANA Honorable Jeffrey A. Modisett PHO: (317) 233-4386 Attorney General of Indiana FAX: (317) 232-7979 Office of the Attorney General Indiana Government Center South Fifth Floor 402 West Washington Street Indianapolis, IN 46204 IOWA Honorable Tom Miller PHO: (515) 281-3053 Attorney General of Iowa FAX: (515) 281-4209 Office of the Attorney General Hoover State Office Building Des Moines, IA 50319 KANSAS Honorable Carla J. Stovall PHO: (913) 296-2215 Attorney General of Kansas FAX: (913) 296-6296 Office of the Attorney General Judicial Building 301 West Tenth Street Topeka, KS 66612-1597 KENTUCKY Honorable Albert Benjamin PHO: (502) 564-7600 "Ben" Chandler III FAX: (502) 564-8310 Attorney General of Kentucky Office of the Attorney General State Capitol, Room 116 Frankfort, KY 40601 P-3 LOUISIANA Honorable Richard P. Ieyoub PHO: (504) 342-7013 Attorney General of Louisiana FAX: (504) 342-8703 Office of the Attorney General Department of Justice Post Office Box 94095 Baton Rouge, LA 70804-4095 MAINE Honorable Andrew Ketterer PHO: (207) 626-8800 Attorney General of Maine FAX: (207) 287-3145 Office of the Attorney General State House Station Six Augusta, ME 04333 MARYLAND Honorable J. Joseph Curran Jr. PHO: (410) 576-6300 Attorney General of Maryland FAX: (410) 333-8298 Office of the Attorney General 200 Saint Paul Place Baltimore, MD 21202-2202 MASSACHUSETTS Honorable Scott Harshbarger PHO: (617) 727-2200 Attorney General of Massachusetts FAX: (617) 727-3251 Office of the Attorney General One Ashburton Place Boston, MA 02108-1698 MICHIGAN Honorable Frank J. Kelley PHO: (517) 373-1110 Attorney General of Michigan FAX: (517) 373-3042 Office of the Attorney General Post Office Box 30212 525 West Ottawa Street Lansing, MI 48909-0212 MISSOURI Honorable Jeremiah W. (Jay) Nixon PHO: (573) 751-3321 Attorney General of Missouri FAX: (573) 751-0774 Office of the Attorney General Supreme Court Building 207 West High Street Jefferson City, MO 65101 MONTANA Honorable Joseph P. Mazurek PHO: (406) 444-2026 Attorney General of Montana FAX: (406) 444-3549 Office of the Attorney General Justice Building, 215 North Sanders Helena, MT 59620-1401 P-4 NEBRASKA Honorable Don Stenberg PHO: (402) 471-2682 Attorney General of Nebraska FAX: (402) 471-3820 Office of the Attorney General State Capitol Post Office Box 98920 Lincoln, NE 68509-8920 NEVADA Honorable Frankie Sue Del Papa PHO: (702) 687-4170 Attorney General of Nevada FAX: (702) 687-5798 Office of the Attorney General Old Supreme Court Building 100 North Carson Street Carson City, NV 89701 NEW HAMPSHIRE Honorable Philip T. McLaughlin PHO: (603) 271-3658 Attorney General of New Hampshire FAX: (603) 271-2110 Office of the Attorney General State House Annex, 25 Capitol Street Concord, NH 03301-6397 NEW JERSEY Honorable Peter Verniero PHO: (609) 292-4925 Attorney General of New Jersey FAX: (609) 292-3508 Office of the Attorney General Richard J. Hughes Justice Complex 25 Market Street, CN 080 Trenton, NJ 08625 NEW MEXICO Honorable Tom Udall PHO: (505) 827-6000 Attorney General of New Mexico FAX: (505) 827-5826 Office of the Attorney General Post Office Drawer 1508 Santa Fe, NM 87504-1508 NEW YORK Honorable Dennis C. Vacco PHO: (518) 474-7330 Attorney General of New York FAX: (518) 473-9909 Office of the Attorney General Department of Law - The Capitol 2nd Floor Albany, NY 12224 P=5 NORTH CAROLINA Honorable Michael F. Easley PHO: (919) 716-6400 Attorney General of North Carolina FAX: (919) 716-6750 Office of the Attorney General Department of Justice Post Office Box 629 Raleigh, NC 27602-0629 NORTH DAKOTA Honorable Heidi Heitkamp PHO: (701) 328-2210 Attorney General of North Dakota FAX: (701) 328-2226 Office of the Attorney General State Capitol 600 East Boulevard Avenue Bismarck, ND 58505-0040 N. MARIANA ISLANDS Honorable Sally Pfund (Acting) PHO: (670) 664-2341 Attorney General of the FAX: (670) 664-2349 Northern Mariana Islands Office of the Attorney General Administration Building Saipan, MP 96950 OHIO Honorable Betty D. Montgomery PHO: (614) 466-3376 Attorney General of Ohio FAX: (614) 466-5087 Office of the Attorney General State Office Tower 30 East Broad Street Columbus, OH 43266-0410 OKLAHOMA Honorable W.A. Drew Edmondson PHO: (405) 521-3921 Attorney General of Oklahoma FAX: (405) 521-6246 Office of the Attorney General State Capitol, Room 112 2300 North Lincoln Boulevard Oklahoma City, OK 73105 OREGON Honorable Hardy Myers PHO: (503) 378-6002 Attorney General of Oregon FAX: (503) 378-4017 Office of the Attorney General Justice Building 1162 Court Street NE Salem, OR 97310 P-6 PENNSYLVANIA Honorable Mike Fisher PHO: (717) 787-3391 Attorney General of Pennsylvania FAX: (717) 783-1107 Office of the Attorney General Strawberry Square Harrisburg, PA 17120 PUERTO RICO Honorable Jose A. Fuentes-Agostini PHO: (787) 721-7700 Attorney General of Puerto Rico FAX: (787) 724-4770 Office of the Attorney General Post Office Box 192 San Juan, PR 00902-0192 RHODE ISLAND Honorable Jeffrey B. Pine PHO: (401) 274-4400 Attorney General of Rhode Island FAX: (401) 222-1302 Office of the Attorney General 150 South Main Street Providence, RI 02903 SOUTH CAROLINA Honorable Charlie Condon PHO: (803) 734-3970 Attorney General of South Carolina FAX: (803) 253-6283 Office of the Attorney General Rembert C. Dennis Office Building Post Office Box 11549 Columbia, SC 29211-1549 SOUTH DAKOTA Honorable Mark Barnett PHO: (605) 773-3215 Attorney General of South Dakota FAX: (605) 773-4106 Office of the Attorney General 500 East Capitol Pierre, SD 57501-5070 TENNESSEE Honorable John Knox Walkup PHO: (615) 741-6474 Attorney General of Tennessee FAX: (615) 741-2009 Office of the Attorney General 500 Charlotte Avenue Nashville, TN 37243 UTAH Honorable Jan Graham PHO: (801) 538-1326 Attorney General of Utah FAX: (801) 538-1121 Office of the Attorney General State Capitol, Room 236 Salt Lake City, UT 84114-0810 P-7 VERMONT Honorable William H. Sorrell PHO: (802) 828-3171 Attorney General of Vermont FAX: (802) 828-3187 Office of the Attorney General 109 State Street Montpelier, VT 05609-1001 VIRGINIA Honorable Mark L. Earley PHO: (804) 786-2071 Attorney General of Virginia FAX: (804) 371-0200 Office of the Attorney General 900 East Main Street Richmond, VA 23219 VIRGIN ISLANDS Honorable Julio A. Brady PHO: (340) 774-5666 Attorney General of FAX: (340) 774-9710 the Virgin Islands Office of the Attorney General Department of Justice G.E.R.S. Complex 48B-50C Kronprinsdens Gade St. Thomas, VI 00802 WASHINGTON Honorable Christine O. Gregoire PHO: (360) 753-6200 Attorney General of Washington FAX: (360) 664-0228 Office of the Attorney General P.O. Box 40100 1125 Washington Street, SE Olympia, WA 98504-0100 WITH A COPY TO: Joseph F. Rice John J. McConnell, Jr. Ness, Motley, Loadholt, Richardson & Poole 151 Meeting Street, Suite 200 Post Office Box 1137 Charleston, SC 29402 Phone: 843-720-9000 Fax: 843-720-9290 WEST VIRGINIA Honorable Darrell V. McGraw Jr. PHO: (304) 558-2021 Attorney General of West Virginia FAX: (304) 558-0140 Office of the Attorney General State Capitol 1900 Kanawha Boulevard East Charleston, WV 25305 P-8 WISCONSIN Honorable James E. Doyle PHO: (608) 266-1221 Attorney General of Wisconsin FAX: (608) 267-2779 Office of the Attorney General State Capitol Post Office Box 7857 Suite 114 East Madison, WI 53707-7857 WYOMING Honorable William U. Hill PHO: (307) 777-7841 Attorney General of Wyoming FAX: (307) 777-6869 Office of the Attorney General State Capitol Building Cheyenne, WY 82002 FOR PHILIP MORRIS INCORPORATED: Martin J. Barrington Philip Morris Incorporated 120 Park Avenue New York, NY 10017-5592 Phone: 917-663-5000 Fax: 917-663-5399 WITH A COPY TO: Meyer G. Koplow Wachtell, Lipton, Rosen & Katz 51 West 52nd Street New York, NY 10019 Phone: 212-403-1000 Fax: 212-403-2000 FOR R.J. REYNOLDS TOBACCO COMPANY: Charles A. Blixt General Counsel R.J. Reynolds Tobacco Company 401 North Main Street Winston-Salem, NC 27102 Phone: 336-741-0673 Fax: 336-741-2998 WITH A COPY TO: P-9 Arthur F. Golden Davis Polk & Wardwell 450 Lexington Avenue New York, NY 10017 Phone: 212-450-4000 Fax: 212-450-4800 FOR BROWN & WILLIAMSON TOBACCO CORPORATION: F. Anthony Burke Brown & Williamson Tobacco Corporation 200 Brown & Williamson Tower 401 South Fourth Avenue Louisville, KY 40202 Phone: 502-568-7787 Fax: 502-568-7297 WITH A COPY TO: Stephen R. Patton Kirkland & Ellis 200 East Randolph Dr. Chicago, IL 60601 Phone: 312-861-2000 Fax: 312-861-2200 FOR LORILLARD TOBACCO COMPANY: Ronald Milstein Lorillard Tobacco Company 714 Green Valley Road Greensboro, NC 27408 Phone: 336-335-7000 Fax: 336-335-7707 P-10 EXHIBIT Q 1997 DATA --------- [INFORMATION TO BE SUPPLIED AND VERIFIED] Q-1 EXHIBIT R EXCLUSION OF CERTAIN BRAND NAMES -------------------------------- [INFORMATION TO BE SUPPLIED AND VERIFIED] R-1 EXHIBIT S DESIGNATION OF OUTSIDE COUNSEL ------------------------------ The following sets forth those private counsel that were retained by and represented each of the Settling States and Litigating Political Subdivisions in the actions indicated on Exhibits D, M and N brought by or against each such Settling State or Litigating Political Subdivision. S-1 EXHIBIT T MODEL STATUTE ------------- SECTION __. FINDINGS AND PURPOSE.(1) (a) Cigarette smoking presents serious public health concerns to the State and to the citizens of the State. The Surgeon General has determined that smoking causes lung cancer, heart disease and other serious diseases, and that there are hundreds of thousands of tobacco-related deaths in the United States each year. These diseases most often do not appear until many years after the person in question begins smoking. (b) Cigarette smoking also presents serious financial concerns for the State. Under certain health-care programs, the State may have a legal obligation to provide medical assistance to eligible persons for health conditions associated with cigarette smoking, and those persons may have a legal entitlement to receive such medical assistance. (c) Under these programs, the State pays millions of dollars each year to provide medical assistance for these persons for health conditions associated with cigarette smoking. (d) It is the policy of the State that financial burdens imposed on the State by cigarette smoking be borne by tobacco product manufacturers rather than by the State to the extent that such manufacturers either determine to enter into a settlement with the State or are found culpable by the courts. (e) On _______, 1998, leading United States tobacco product manufacturers entered into a settlement agreement, entitled the "Master Settlement Agreement," with the State. The Master Settlement Agreement obligates these manufacturers, in return for a release of past, present and certain future claims against them as described therein, to pay substantial sums to the State (tied in part to their volume of sales); to fund a national foundation devoted to the interests of public health; and to make substantial changes in their advertising and marketing practices and corporate culture, with the intention of reducing underage smoking. (f) It would be contrary to the policy of the State if tobacco product manufacturers who determine not to enter into such a settlement could use a resulting cost advantage to derive large, short-term profits in the years before liability may arise without ensuring that the State will have an eventual source of recovery from them if they are proven to have acted culpably. It is thus in the interest of the State to require that such - ---------------------- (1) [A State may elect to deletem the "Findings and purposes" sections in its entirety. Other changes or substitutions with respect to the "findings and purposes" section (except for particularized state procedural or technical requirements) will mean that the statute will no longer conform to this model.] T-1 manufacturers establish a reserve fund to guarantee a source of compensation and to prevent such manufacturers from deriving large, short-term profits and then becoming judgment-proof before liability may arise. SECTION __. DEFINITIONS. (a) "Adjusted for inflation" means increased in accordance with the formula for inflation adjustment set forth in Exhibit C to the Master Settlement Agreement. (b) "Affiliate" means a person who directly or indirectly owns or controls, is owned or controlled by, or is under common ownership or control with, another person. Solely for purposes of this definition, the terms "owns," "is owned" and "ownership" mean ownership of an equity interest, or the equivalent thereof, of ten percent or more, and the term "person" means an individual, partnership, committee, association, corporation or any other organization or group of persons. (c) "Allocable share" means Allocable Share as that term is defined in the Master Settlement Agreement. (d) "Cigarette" means any product that contains nicotine, is intended to be burned or heated under ordinary conditions of use, and consists of or contains (1) any roll of tobacco wrapped in paper or in any substance not containing tobacco; or (2) tobacco, in any form, that is functional in the product, which, because of its appearance, the type of tobacco used in the filler, or its packaging and labeling, is likely to be offered to, or purchased by, consumers as a cigarette; or (3) any roll of tobacco wrapped in any substance containing tobacco which, because of its appearance, the type of tobacco used in the filler, or its packaging and labeling, is likely to be offered to, or purchased by, consumers as a cigarette described in clause (1) of this definition. The term "cigarette" includes "roll-your-own" (i.e., any tobacco which, because of its appearance, type, packaging, or labeling is suitable for use and likely to be offered to, or purchased by, consumers as tobacco for making cigarettes). For purposes of this definition of "cigarette," 0.09 ounces of "roll-your-own" tobacco shall constitute one individual "cigarette." (e) "Master Settlement Agreement" means the settlement agreement (and related documents) entered into on _______, 1998 by the State and leading United States tobacco product manufacturers. (f) "Qualified escrow fund" means an escrow arrangement with a federally or State chartered financial institution having no affiliation with any tobacco product manufacturer and having assets of at least $1,000,000,000 where such arrangement requires that such financial institution hold the escrowed funds' principal for the benefit of releasing parties and prohibits the tobacco product manufacturer placing the funds into escrow from using, accessing or directing the use of the funds' principal except as consistent with section ___(b)-(c) of this Act. T-2 (g) "Released claims" means Released Claims as that term is defined in the Master Settlement Agreement. (h) "Releasing parties" means Releasing Parties as that term is defined in the Master Settlement Agreement. (i) "Tobacco Product Manufacturer" means an entity that after the date of enactment of this Act directly (and not exclusively through any affiliate): (1) manufactures cigarettes anywhere that such manufacturer intends to be sold in the United States, including cigarettes intended to be sold in the United States through an importer (except where such importer is an original participating manufacturer (as that term is defined in the Master Settlement Agreement) that will be responsible for the payments under the Master Settlement Agreement with respect to such cigarettes as a result of the provisions of subsections II(mm) of the Master Settlement Agreement and that pays the taxes specified in subsection II(z) of the Master Settlement Agreement, and provided that the manufacturer of such cigarettes does not market or advertise such cigarettes in the United States); (2) is the first purchaser anywhere for resale in the United States of cigarettes manufactured anywhere that the manufacturer does not intend to be sold in the United States; or (3) becomes a successor of an entity described in paragraph (1) or (2). The term "Tobacco Product Manufacturer" shall not include an affiliate of a tobacco product manufacturer unless such affiliate itself falls within any of (1) - (3) above. (j) "Units sold" means the number of individual cigarettes sold in the State by the applicable tobacco product manufacturer (whether directly or through a distributor, retailer or similar intermediary or intermediaries) during the year in question, as measured by excise taxes collected by the State on packs (or "roll-your-own" tobacco containers) bearing the excise tax stamp of the State. The [fill in name of responsible state agency] shall promulgate such regulations as are necessary to ascertain the amount of State excise tax paid on the cigarettes of such tobacco product manufacturer for each year. SECTION __. REQUIREMENTS. Any tobacco product manufacturer selling cigarettes to consumers within the State (whether directly or through a distributor, retailer or similar intermediary or intermediaries) after the date of enactment of this Act shall do one of the following: T-3 (a) become a participating manufacturer (as that term is defined in section II(jj) of the Master Settlement Agreement) and generally perform its financial obligations under the Master Settlement Agreement; or (b) (1) place into a qualified escrow fund by April 15 of the year following the year in question the following amounts (as such amounts are adjusted for inflation) -- 1999: $.0094241 per unit sold after the date of enactment of this Act;(2) 2000: $.0104712 per unit sold after the date of enactment of this Act;(3) for each of 2001 and 2002: $.0136125 per unit sold after the date of enactment of this Act; for each of 2003 through 2006: $.0167539 per unit sold after the date of enactment of this Act; for each of 2007 and each year thereafter: $.0188482 per unit sold after the date of enactment of this Act. (2) A tobacco product manufacturer that places funds into escrow pursuant to paragraph (1) shall receive the interest or other appreciation on such funds as earned. Such funds themselves shall be released from escrow only under the following circumstances -- (A) to pay a judgment or settlement on any released claim brought against such tobacco product manufacturer by the State or any releasing party located or residing in the State. Funds shall be released from escrow under this subparagraph (i) in the order in which they were placed into escrow and (ii) only to the extent and at the time necessary to make payments required under such judgment or settlement; (B) to the extent that a tobacco product manufacturer establishes that the amount it was required to place into escrow in a particular year was greater than the State's allocable share of the total payments that such manufacturer would have been required to make in that year under the Master Settlement Agreement (as determined pursuant to section IX(i)(2) of the Master Settlement Agreement, and before any of the adjustments or offsets described in section IX(i)(3) of that Agreement other than the Inflation Adjustment) had it been a participating - -------------- (2) [All per unit numbers are subject to verification] (3) [The phrase "after the date of enactment of this Act" would need to be included only in the calendar year in which the Act is enacted.] T-4 manufacturer, the excess shall be released from escrow and revert back to such tobacco product manufacturer; or (C) to the extent not released from escrow under subparagraphs (A) or (B), funds shall be released from escrow and revert back to such tobacco product manufacturer twenty-five years after the date on which they were placed into escrow. (3) Each tobacco product manufacturer that elects to place funds into escrow pursuant to this subsection shall annually certify to the Attorney General [or other State official] that it is in compliance with this subsection. The Attorney General [or other State official] may bring a civil action on behalf of the State against any tobacco product manufacturer that fails to place into escrow the funds required under this section. Any tobacco product manufacturer that fails in any year to place into escrow the funds required under this section shall -- (A) be required within 15 days to place such funds into escrow as shall bring it into compliance with this section. The court, upon a finding of a violation of this subsection, may impose a civil penalty [to be paid to the general fund of the state] in an amount not to exceed 5 percent of the amount improperly withheld from escrow per day of the violation and in a total amount not to exceed 100 percent of the original amount improperly withheld from escrow; (B) in the case of a knowing violation, be required within 15 days to place such funds into escrow as shall bring it into compliance with this section. The court, upon a finding of a knowing violation of this subsection, may impose a civil penalty [to be paid to the general fund of the state] in an amount not to exceed 15 percent of the amount improperly withheld from escrow per day of the violation and in a total amount not to exceed 300 percent of the original amount improperly withheld from escrow; and (C) in the case of a second knowing violation, be prohibited from selling cigarettes to consumers within the State (whether directly or through a distributor, retailer or similar intermediary) for a period not to exceed 2 years. Each failure to make an annual deposit required under this section shall constitute a separate violation.(4) - ------------------- (4) [A State may elect to include a requirement that the violater also pay the State's costs and attorney's fees incurred during a successful prosecution under this paragraph (3).] T-5 EXHIBIT U STRATEGIC CONTRIBUTION FUND PROTOCOL ------------------------------------ The payments made by the Participating Manufacturers pursuant to section IX(c)(2) of the Agreement ("Strategic Contribution Fund") shall be allocated among the Settling States pursuant to the process set forth in this Exhibit U. SECTION 1 A panel committee of three former Attorneys General or former Article III judges ("Allocation Committee") shall be established to determine allocations of the Strategic Contribution Fund, using the process described herein. Two of the three members of the Allocation Committee shall be selected by the NAAG executive committee. Those two members shall choose the third Allocation Committee member. The Allocation Committee shall be geographically and politically diverse. SECTION 2 Within 60 days after the MSA Execution Date, each Settling State will submit an itemized request for funds from the Strategic Contribution Fund, based on the criteria set forth in Section 4 of this Exhibit U. SECTION 3 The Allocation Committee will determine the appropriate allocation for each Settling State based on the criteria set forth in Section 4 below. The Allocation Committee shall make its determination based upon written documentation. SECTION 4 The criteria to be considered by the Allocation Committee in its allocation decision include each Settling State's contribution to the litigation or resolution of state tobacco litigation, including, but not limited to, litigation and/or settlement with tobacco product manufacturers, including Liggett and Myers and its affiliated entities. SECTION 5 Within 45 days after receiving the itemized requests for funds from the Settling States, the Allocation Committee will prepare a preliminary decision allocating the Strategic Contribution Fund payments among the Settling States who submitted itemized requests for funds. All Allocation Committee decisions must be by majority vote. Each Settling State will have 30 days to submit comments on or objections to the draft decision. The Allocation Committee will issue a final decision allocating the Strategic Contribution Fund payments within 45 days. U-1 SECTION 6 The decision of the Allocation Committee shall be final and non-appealable. SECTION 7 The expenses of the Allocation Committee, in an amount not to exceed $100,000, will be paid from disbursements from the Subsection VIII(c) Account. U-2 -----END PRIVACY-ENHANCED MESSAGE-----