===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[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 1-6541
------
LOEWS CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-2646102
- - ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
667 MADISON AVENUE, NEW YORK, N.Y. 10021-8087
----------------------------------------------------
(Address of principal executive offices) (Zip Code)
(212) 521-2000
----------------------------------------------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
----------------------------------------------------
(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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--------- ---------
Class Outstanding at November 6, 1998
- - -------------------------- -------------------------------
Common stock, $1 par value 113,690,800 shares
===============================================================================
Page 1
INDEX
Part I. Financial Information Page No.
--------
Item 1. Financial Statements
Consolidated Condensed Balance Sheets--
September 30, 1998 and December 31, 1997 ...................... 3
Consolidated Condensed Statements of Income--
Three and nine months ended September 30, 1998 and 1997 ....... 4
Consolidated Condensed Statements of Cash Flows--
Nine months ended September 30, 1998 and 1997 ................. 5
Notes to Consolidated Condensed Financial Statements ............ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ........................................ 39
Item 3. Quantitative and Qualitative Disclosures about Market Risk 57
Part II. Other Information
Item 1. Legal Proceedings ......................................... 60
Item 6. Exhibits and Reports on Form 8-K .......................... 61
Page 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
--------------------
<TABLE>
<CAPTION>
Loews Corporation and Subsidiaries
Consolidated Condensed Balance Sheets
- - -------------------------------------------------------------------------------
(Amounts in millions) September 30, December 31,
1998 1997
-----------------------------
<S> <C> <C>
Assets:
Investments:
Fixed maturities, amortized cost of $28,734.7
and $30,201.6 ................................ $29,612.2 $30,723.2
Equity securities, cost of $1,716.8 and
$1,102.6 ..................................... 2,239.8 1,163.3
Other investments ............................. 1,099.3 978.4
Short-term investments ........................ 9,204.2 8,754.2
----------------------------
Total investments .......................... 42,155.5 41,619.1
Cash ............................................ 181.0 497.8
Receivables-net ................................. 14,960.3 13,616.9
Property, plant and equipment-net ............... 2,669.8 2,590.2
Deferred income taxes ........................... 661.9 944.3
Goodwill and other intangible assets-net ........ 720.2 751.4
Other assets .................................... 1,910.3 1,935.1
Deferred policy acquisition costs of insurance
subsidiaries ................................... 2,358.9 2,141.7
Separate Account business ....................... 5,381.5 5,811.6
----------------------------
Total assets ............................... $70,999.4 $69,908.1
============================
Liabilities and Shareholders' Equity:
Insurance reserves and claims ................... $40,482.5 $39,828.4
Payable to brokers .............................. 1,821.6 1,559.2
Securities sold under repurchase agreements ..... 57.9 152.7
Long-term debt, less unamortized discount ....... 5,701.3 5,752.6
Other liabilities ............................... 4,540.6 4,749.1
Separate Account business ....................... 5,381.5 5,811.6
----------------------------
Total liabilities .......................... 57,985.4 57,853.6
Minority interest ............................... 2,502.9 2,389.4
Shareholders' equity ............................ 10,511.1 9,665.1
----------------------------
Total liabilities and shareholders' equity . $70,999.4 $69,908.1
============================
See accompanying Notes to Consolidated Condensed Financial Statements.
</TABLE>
Page 3
<TABLE>
<CAPTION>
Loews Corporation and Subsidiaries
Consolidated Condensed Statements of Income
- - -------------------------------------------------------------------------------------------------
(Amounts in millions, except per share data) Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Insurance premiums:
Property and casualty ................. $ 2,513.8 $2,488.8 $ 7,706.7 $ 7,488.7
Life .................................. 784.1 846.3 2,424.2 2,538.8
Investment income, net of expenses ...... 585.4 583.7 1,837.9 1,803.5
Investment gains (losses) ............... 663.0 1.5 338.0 (265.1)
Manufactured products (including excise
taxes of $134.8, $131.8, $371.5 and
$366.2) ................................ 805.2 674.8 2,126.2 1,841.4
Other ................................... 600.4 516.3 1,718.8 1,392.3
--------------------------------------------------
Total ................................ 5,951.9 5,111.4 16,151.8 14,799.6
--------------------------------------------------
Expenses:
Insurance claims and policyholders'
benefits ............................... 2,773.4 2,854.5 8,560.6 8,607.0
Amortization of deferred policy
acquisition costs ...................... 544.9 621.3 1,803.7 1,737.5
Cost of manufactured products sold ...... 272.6 272.0 769.2 770.1
Selling, operating, advertising and
administrative expenses ................ 1,207.0 859.3 3,180.8 2,401.4
Interest ................................ 89.3 88.3 282.3 239.4
--------------------------------------------------
Total ................................ 4,887.2 4,695.4 14,596.6 13,755.4
--------------------------------------------------
1,064.7 416.0 1,555.2 1,044.2
--------------------------------------------------
Income tax expense ...................... 384.9 134.3 532.0 330.4
Minority interest ....................... 62.7 84.1 242.6 213.1
--------------------------------------------------
Total ................................ 447.6 218.4 774.6 543.5
--------------------------------------------------
Net income ................................ $ 617.1 $ 197.6 $ 780.6 $ 500.7
==================================================
Net income per share ...................... $ 5.38 $ 1.72 $ 6.79 $ 4.35
==================================================
Cash dividends per share .................. $ .25 $ .25 $ .75 $ .75
==================================================
Weighted average number of shares
outstanding .............................. 114.7 115.0 114.9 115.0
==================================================
See accompanying Notes to Consolidated Condensed Financial Statements.
</TABLE>
Page 4
<TABLE>
<CAPTION>
Loews Corporation and Subsidiaries
Consolidated Condensed Statements of Cash Flows
- - -------------------------------------------------------------------------------
(Amounts in millions) Nine Months Ended September 30,
1998 1997
-------------------------------
<S> <C> <C>
Operating Activities:
Net income .................................. $ 780.6 $ 500.7
Adjustments to reconcile net income to net
cash used by operating activities-net ...... 182.6 784.2
Changes in assets and liabilities-net:
Reinsurance receivable .................... (178.3) 127.6
Other receivables ......................... (693.1) (486.5)
Deferred policy acquisition costs ......... (217.3) (369.3)
Insurance reserves and claims ............. 665.5 993.2
Other liabilities ......................... 135.1 (1,029.3)
Trading securities ........................ (673.4) (598.6)
Other-net ................................. (156.4) (172.6)
--------------------------
(154.7) (250.6)
--------------------------
Investing Activities:
Purchases of fixed maturities ............... (50,541.0) (30,956.4)
Proceeds from sales of fixed maturities ..... 49,698.1 30,131.3
Proceeds from maturities of fixed maturities 2,655.3 1,667.8
Change in securities sold under repurchase
agreements ................................. (94.8) 627.7
Purchases of equity securities .............. (793.0) (854.2)
Proceeds from sales of equity securities .... 511.7 937.5
Change in short-term investments ............ (560.7) (1,963.4)
Purchases of property, plant and equipment .. (345.2) (533.1)
Change in other investments ................. (246.2) 40.1
--------------------------
284.2 (902.7)
--------------------------
Financing Activities:
Dividends paid to shareholders .............. (86.2) (86.3)
Dividends paid to minority interests ........ (30.7)
Issuance of long-term debt .................. 1,011.7 1,634.1
Principal payments on long-term debt ........ (1,065.9) (206.4)
Purchase of treasury shares ................. (110.1)
Purchase of treasury shares by subsidiaries . (153.6)
Net change in revolving line of credit ...... (63.0)
Net change in short-term debt ............... (9.9)
Receipts credited to policyholders .......... 18.8 6.7
Withdrawals of policyholder account balances (30.3) (18.4)
---------------------------
(446.3) 1,256.8
---------------------------
Net change in cash ............................ (316.8) 103.5
Cash, beginning of period ..................... 497.8 305.7
---------------------------
Cash, end of period ........................... $ 181.0 $ 409.2
===========================
See accompanying Notes to Consolidated Condensed Financial Statements.
</TABLE>
Page 5
Loews Corporation and Subsidiaries
Notes to Consolidated Condensed Financial Statements
- - -------------------------------------------------------------------------------
(Dollars in millions, except per share data)
1. General:
Reference is made to Notes to Consolidated Financial Statements in the 1997
Annual Report to Shareholders which should be read in conjunction with these
consolidated condensed financial statements.
Comprehensive income
Comprehensive income includes all changes to shareholders' equity, including
net income, except those resulting from investments by, and distributions
to, owners. For the three and nine months ended September 30, 1998 and 1997,
comprehensive income totaled $846.9, $462.4, $1,042.3 and $656.5,
respectively. Comprehensive income includes net income, unrealized
appreciation (depreciation) and foreign currency translation gains or
losses.
Net income per share
The Company adopted SFAS No. 128, "Earnings Per Share," which requires
presentation of basic and diluted earnings per share for entities with
complex capital structures. Basic earnings per share excludes dilution and
is computed by dividing net income by the weighted average number of common
shares outstanding for the period. Diluted earnings per share reflects the
potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock. The
Company does not have any dilutive instruments related to its common shares.
Accordingly, basic and diluted earnings per share are the same.
Reclassifications
Certain amounts applicable to prior periods have been reclassified to
conform to the classifications followed in 1998.
2. Reinsurance:
CNA assumes and cedes insurance with other insurers and reinsurers and
members of various reinsurance pools and associations. CNA utilizes
reinsurance arrangements to limit its maximum loss, to provide greater
diversification of risk and to minimize exposures on larger risks. The
reinsurance coverages are tailored to the specific risk characteristics of
each product line with CNA's retained amount varying by type of coverage.
Generally, reinsurance coverage for property risks is on an excess of loss,
per risk basis. Liability coverages are generally reinsured on a quota share
basis in excess of CNA's retained risk.
The ceding of insurance does not discharge the primary liability of the
original insurer. CNA places reinsurance with other carriers only after
careful review of the nature of the contract and a thorough assessment of
the reinsurers' credit quality and claim settlement performance. Further,
for carriers that are not authorized reinsurers in CNA's states of domicile,
CNA receives collateral, primarily in the form of bank letters of credit,
securing a large portion of the recoverables.
Page 6
The effects of reinsurance on earned premiums are as follows:
<TABLE>
<CAPTION>
% %
Direct Assumed Ceded Net Assumed Direct Assumed Ceded Net Assumed
--------------------------------------------------------------------------------------
Nine Months Ended September 30,
--------------------------------------------------------------------------------------
---------------- 1998 -------------------- ---------------- 1997 -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Property and
casualty .. $6,261.0 $1,114.0 $481.0 $ 6,894.0 16.2% $6,087.0 $1,078.0 $549.0 $ 6,616.0 16.3%
Accident and
health .... 2,620.0 153.0 202.0 2,571.0 5.9 2,803.0 73.0 115.0 2,761.0 2.6
Life ....... 742.0 112.0 188.0 666.0 16.8 649.0 92.0 90.0 651.0 14.1
--------------------------------------------------------------------------------------
Total .... $9,623.0 $1,379.0 $871.0 $10,131.0 13.6% $9,539.0 $1,243.0 $754.0 $10,028.0 12.4%
======================================================================================
</TABLE>
In the above table, life premium revenue is principally from long duration
contracts and the property and casualty earned premium is from short
duration contracts. Approximately three quarters of accident and health
earned premiums are from short duration contracts.
Insurance claims and policyholders' benefits are net of reinsurance
recoveries of $721.0 and $618.0 for the nine months ended September 30, 1998
and 1997, respectively.
3. The Company's receivables are comprised of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---------------------------
<S> <C> <C>
Reinsurance .................................. $ 6,235.3 $ 6,057.0
Other insurance .............................. 6,956.1 6,293.9
Security sales ............................... 1,300.7 755.8
Accrued investment income .................... 428.3 422.8
Other ....................... ................ 363.2 405.4
---------------------------
Total ................................. 15,283.6 13,934.9
Less allowance for doubtful accounts and
cash discounts .............................. 323.3 318.0
---------------------------
Receivables-net ....................... $14,960.3 $13,616.9
===========================
</TABLE>
Page 7
4. Shareholders' equity:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---------------------------
<S> <C> <C>
Preferred stock, $.10 par value:
Authorized--100,000,000 shares
Common stock, $1 par value:
Authorized--400,000,000 shares
Issued--115,000,000 shares ................. $ 115.0 $ 115.0
Additional paid-in capital ................... 165.8 165.8
Earnings retained in the business ............ 9,589.8 8,895.4
Accumulated other comprehensive income ....... 750.6 488.9
--------------------------
Total ................................. 10,621.2 9,665.1
Less common stock (1,309,200 shares) held in
treasury at cost ............................ 110.1
--------------------------
Total ................................. $10,511.1 $9,665.1
==========================
</TABLE>
5. Restructuring and Other Related Charges-
In the third quarter of 1998, CNA finalized and approved a plan to
restructure its operations. In connection with this plan, CNA recorded pre-
tax restructuring and other related charges totaling approximately $220.0.
The restructuring plan focused primarily on a net reduction in current
workforce, the consolidation of certain processing centers, the closing of
various facilities, and the exiting of certain businesses. CNA's plan calls
for a reduction in the current workforce of approximately 4,500 employees
resulting in a net reduction of approximately 2,400 employees upon
completion of the plans activities. The charges recorded in the third
quarter of 1998 relate to employee termination benefits ($72.0), the
writedown of certain assets to their fair values ($74.0), lease abandonment
costs ($42.0) and losses related to the exiting of businesses ($32.0).
6. Legal Proceedings and Contingent Liabilities-
INSURANCE RELATED
Fibreboard Litigation
---------------------
CNA's primary property and casualty subsidiary, Continental Casualty Company
("Casualty"), has been party to litigation with Fibreboard Corporation
("Fibreboard") involving coverage for certain asbestos-related claims and
defense costs (San Francisco Superior Court, Judicial Council Coordination
Proceeding 1072). As described below, Casualty, Fibreboard, another insurer
(Pacific Indemnity, a subsidiary of the Chubb Corporation), and a
negotiating committee of asbestos claimant attorneys (collectively referred
to as "Settling Parties") have reached a Global Settlement (the "Global
Settlement") to resolve all future asbestos-related bodily injury claims
involving Fibreboard, which is subject to court approval.
Casualty, Fibreboard and Pacific Indemnity have also reached an agreement
(the "Trilateral Agreement") on a settlement to resolve the coverage
litigation in the event the Global Settlement does not obtain final court
Page 8
approval.
On July 27, 1995, the United States District Court for the Eastern District
of Texas entered judgment approving the Global Settlement Agreement and the
Trilateral Agreement. As expected, appeals were filed as respects to both of
these decisions. On July 25, 1996, a panel of the United States Fifth
Circuit Court of Appeals in New Orleans affirmed the judgment approving the
Global Settlement Agreement by a 2 to 1 vote and affirmed the judgment
approving the Trilateral Agreement by a 3 to 0 vote. Petitions for rehearing
by the panel and Suggestions for Rehearing by the entire Fifth Circuit Court
of Appeals as respects to the decision on the Global Settlement Agreement
were denied. Two petitions for certiorari were filed in the Supreme Court as
respects the Global Settlement Agreement. On June 27, 1997, the Supreme
Court granted these petitions, vacated the Fifth Circuit's judgment as
respects to the Global Settlement Agreement, and remanded the matter to the
Fifth Circuit for reconsideration in light of the Supreme Court's decision
in Amchem Products Co. v. Windsor.
On January 27, 1998, a panel of the United States Fifth Circuit Court of
Appeals again approved the Global Settlement Agreement by a 2 to 1 vote. Two
sets of objectors filed petitions for certiorari which were docketed on
April 16 and 17, 1998, by the United States Supreme Court. On June 22, 1998,
the Supreme Court granted the petition for certiorari filed by one of the
sets of objectors. The Supreme Court has set oral argument for December 8,
1998.
No further appeal was filed with respect to the Trilateral Agreement;
therefore, court approval of the Trilateral Agreement has become final.
Settlement Agreements - On April 9, 1993, Casualty and Fibreboard entered
into an agreement pursuant to which, among other things, the parties agreed
to use their best efforts to negotiate and finalize a global class action
settlement with asbestos-related bodily injury and death claimants.
On August 27, 1993, the Settling Parties reached an agreement in principle
for an omnibus settlement to resolve all future asbestos-related bodily
injury claims involving Fibreboard. The Global Settlement Agreement was
executed on December 23, 1993. The agreement calls for contribution by
Casualty and Pacific Indemnity of an aggregate of $1,525.0 to a trust fund
for a class of all future asbestos claimants, defined generally as those
persons whose claims against Fibreboard were neither filed nor settled
before August 27, 1993. An additional $10.0 is to be contributed to the fund
by Fibreboard. As indicated above, the Global Settlement Agreement has been
approved by the Fifth Circuit a second time, but the Supreme Court has
granted a petition for certiorari filed by one of the sets of objectors to
the settlement.
On October 12, 1993, Casualty, Pacific Indemnity and Fibreboard entered into
the Trilateral Agreement to settle the coverage litigation to operate in the
event that the Global Settlement Agreement is disapproved. The Trilateral
Agreement calls for payment by Casualty and Pacific Indemnity of an
aggregate $2,000.0, of which Casualty's portion is approximately $1,460.0,
to Fibreboard to resolve all claims by Fibreboard and all future and
unsettled present asbestos claimants arising under the policy issued to
Fibreboard by Casualty.
Under either the Global Settlement Agreement or the Trilateral Agreement,
Casualty is also obligated to pay under prior settlements of present
asbestos claims. As a result of the final approval of the Trilateral
Agreement, such obligation has become final. Through September 30, 1998,
Casualty, Fibreboard and plaintiff attorneys had reached settlements with
Page 9
respect to approximately 135,200 present claims, for an estimated settlement
amount of approximately $1,630.0 plus any applicable interest. Final court
approval of the Trilateral Agreement obligates Casualty to pay under these
settlements. Approximately $1,670.0 (including interest of $184.0) was paid
through September 30, 1998. Such payments have been partially recovered from
Pacific Indemnity. Casualty may negotiate other agreements for unsettled
claims.
Final court approval of the Trilateral Agreement and its implementation
resolved Casualty's exposure with respect to the Fibreboard asbestos claims.
Casualty's management does not anticipate further material exposure with
respect to the Fibreboard matter, and subsequent adverse reserve
adjustments, if any, are not expected to materially affect the results of
operations or equity of the Company.
Tobacco Litigation
------------------
Several of CNA's property/casualty subsidiaries have been named as
defendants as part of a "direct action" lawsuit, Richard P. Ieyoub v. The
American Tobacco Company, et al., filed by the Attorney General for the
State of Louisiana, in state court, Calcasieu Parish, Louisiana. In that
suit, filed against certain tobacco manufacturers and distributors (the
"Tobacco Defendants") and over 100 insurance companies, the State of
Louisiana seeks to recover medical expenses allegedly incurred by the State
as a result of tobacco-related illnesses.
The original suit was filed on March 13, 1996, against the Tobacco
Defendants only. The insurance companies were added to the suit in March
1997 under a "direct action" procedure in Louisiana. Under the direct action
statute, the Louisiana Attorney General is pursuing liability claims against
the Tobacco Defendants and their insurers in the same suit, even though none
of the Tobacco Defendants has made a claim for insurance coverage.
In June of 1997, the United States District Court for the Western District
of Louisiana, Lake Charles Division, granted a petition to remove this
litigation to the federal district court. The district court's decision is
currently on appeal to the United States Fifth Circuit Court of Appeals.
During the pending appeal, all proceedings in state court and in the federal
district court are stayed. Because of the uncertainties inherent in
assessing the risk of liability at this very early stage of the litigation,
management is unable to make a meaningful estimate of the amount or range of
any loss that could result from an unfavorable outcome of the pending
litigation. However, management believes that the ultimate outcome of the
pending litigation should not materially affect the results of operations or
equity of CNA.
Environmental Pollution and Asbestos
------------------------------------
The CNA property and casualty insurance companies have potential exposures
related to environmental pollution and asbestos claims.
Environmental pollution clean-up is the subject of both federal and state
regulation. By some estimates, there are thousands of potential waste sites
subject to clean-up. The insurance industry is involved in extensive
litigation regarding coverage issues. Judicial interpretations in many cases
have expanded the scope of coverage and liability beyond the original intent
of the policies.
The Comprehensive Environmental Response Compensation and Liability Act of
Page 10
1980 ("Superfund") and comparable state statutes ("mini-Superfund") govern
the clean-up and restoration of abandoned toxic waste sites and formalize
the concept of legal liability for clean-up and restoration by potentially
responsible parties ("PRP's"). Superfund and the mini-Superfunds
(Environmental Clean-up Laws or "ECLs") establish mechanisms to pay for
clean-up of waste sites if PRPs fail to do so, and to assign liability to
PRPs. The extent of liability to be allocated to a PRP is dependent on a
variety of factors. Further, the number of waste sites subject to clean-up
is unknown. To date, approximately 1,300 clean-up sites have been identified
by the Environmental Protection Agency on its National Priorities List
("NPL"). The addition of new clean-up sites to the NPL has slowed in recent
years. Many clean-up sites have been designated by state authorities as
well.
Many policyholders have made claims against various CNA insurance
subsidiaries for defense costs and indemnification in connection with
environmental pollution matters. CNA and the insurance industry are
disputing coverage for many such claims. Key coverage issues include whether
clean-up costs are considered damages under the policies, trigger of
coverage, applicability of pollution exclusions and owned property
exclusions, the potential for joint and several liability and definition of
an occurrence. To date, courts have been inconsistent in their rulings on
these issues.
A number of proposals to reform Superfund have been made by various parties.
However, no reforms were enacted by Congress in 1998 and it is unclear as to
what positions the Congress or the Clinton Administration will take and what
legislation, if any, will result. If there is legislation, and in some
circumstances even if there is no legislation, the federal role in
environmental clean-up may be significantly reduced in favor of state
action. Substantial changes in the federal statute or the activity of the
EPA may cause states to reconsider their environmental clean-up statutes and
regulations. There can be no meaningful prediction of the pattern of
regulation that would result.
Due to the inherent uncertainties described above, including the
inconsistency of court decisions, the number of waste sites subject to
clean-up, and the standards for clean-up and liability, CNA's ultimate
liability for environmental pollution claims may vary substantially from the
amount currently recorded.
As of September 30, 1998 and December 31, 1997, CNA carried $646.0 and
$773.0, respectively, of claim and claim expense reserves, net of
reinsurance recoverables, for reported and unreported environmental
pollution claims. The reserves relate to claims for accident years 1988 and
prior, after which CNA adopted the Simplified Commercial General Liability
coverage form which includes an absolute pollution exclusion. Unfavorable
environmental pollution reserve development for the nine months ended
September 30, 1998 was $58.0. There was no environmental pollution reserve
development for the nine months ended September 30, 1997.
CNA's property and casualty insurance subsidiaries have exposure to asbestos
claims, including those attributable to CNA's litigation with Fibreboard
Corporation (see above). Estimation of asbestos claim reserves involves many
of the same limitations discussed above for environmental pollution claims
such as inconsistency of court decisions, specific policy provisions,
allocation of liability among insurers, missing policies and proof of
coverage. As of September 30, 1998 and December 31, 1997, CNA carried
$1,455.0 and $1,400.0, respectively, of claim and claim expense reserves,
net of reinsurance recoverables, for reported and unreported
asbestos-related claims. Unfavorable asbestos claim reserve development for
Page 11
the nine months ended September 30, 1998 and 1997 totaled $205.0 and $40.0,
respectively.
The unfavorable reserve development on environmental and asbestos reserves
in 1998 was more than offset by favorable reserve development in other
lines, primarily commercial and specialty coverages. Excluding environmental
and asbestos reserves, favorable loss and allocated loss adjustment expense
reserve development approximated $380.0 and $340.0 for the nine months ended
September 30, 1998 and 1997, respectively. Premium development for these
same periods approximated $30.0 favorable and $165.0 unfavorable,
respectively. The large unfavorable premium development in 1997 is primarily
attributable to reductions in residual market premiums.
The following table provides additional data related to CNA's environmental
pollution and asbestos-related claims activity.
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
----------------------------------------------------
Environmental Environmental
Pollution Asbestos Pollution Asbestos
----------------------------------------------------
<S> <C> <C> <C> <C>
Reported Claims:
Gross reserves .................... $279.0 $1,308.0 $279.0 $1,198.0
Less reinsurance recoverable ...... (52.0) (101.0) (36.0) (117.0)
------------------------------------------------
Net reported claims ............... 227.0 1,207.0 243.0 1,081.0
Net unreported claims ............... 419.0 248.0 530.0 319.0
------------------------------------------------
Net reserves ........................ $646.0 $1,455.0 $773.0 $1,400.0
================================================
</TABLE>
The results of operations in future years may continue to be adversely
affected by environmental pollution and asbestos claims and claim expenses.
Management will continue to monitor these liabilities and make further
adjustments as warranted.
NON-INSURANCE
Tobacco Litigation -- Lawsuits continue to be filed with increasing
frequency against Lorillard and other manufacturers of tobacco products
seeking damages for cancer and other health effects claimed to have resulted
from an individual's use of cigarettes, addiction to smoking, or exposure to
environmental tobacco smoke. Tobacco litigation includes claims brought by
individual plaintiffs ("Conventional Product Liability Cases"); claims
brought as class actions on behalf of a large number of individuals for
damages allegedly caused by smoking ("Class Actions"); claims brought on
behalf of governmental entities and others, including private citizens suing
on behalf of taxpayers, labor unions, Indian Tribes and private companies,
seeking, among other alleged damages, reimbursement of health care costs
allegedly incurred as a result of smoking ("Reimbursement Cases"); and
claims for contribution and/or indemnity of asbestos claims by asbestos
manufacturers ("Claims for Contribution"). In addition, claims have been
brought against Lorillard seeking damages resulting from exposure to
asbestos fibers which had been incorporated, for a limited period of time,
ending more than forty years ago, into filter material used in one brand of
cigarettes manufactured by Lorillard ("Filter Cases").
In these actions, plaintiffs claim substantial compensatory, statutory and
punitive damages in amounts ranging into the billions of dollars. These
Page 12
claims are based on a number of legal theories including, among other
things, theories of negligence, fraud, misrepresentation, strict liability,
breach of warranty, enterprise liability, civil conspiracy, intentional
infliction of harm, violation of anti-trust laws and state consumer
protection statutes, and failure to warn of the allegedly harmful and/or
addictive nature of tobacco products.
On June 20, 1997, together with other companies in the United States tobacco
industry, Lorillard entered into a Memorandum of Understanding to support
the adoption of federal legislation and any necessary ancillary undertakings
incorporating the features described in the proposed resolution attached to
the Memorandum of Understanding (together, the "Proposed Resolution"). The
Proposed Resolution can be implemented only by federal legislation. If
enacted into law, the legislation implementing the Proposed Resolution would
resolve many of the regulatory and litigation issues affecting the United
States tobacco industry thereby reducing uncertainties facing the industry.
Certain legislation had been introduced in Congress that would significantly
modify the Proposed Resolution including provisions more stringent than
those included in the Proposed Resolution. On April 18, 1998, Lorillard and
other companies announced a withdrawal from the legislative process to enact
a comprehensive tobacco settlement. (See Item 1 - Lorillard, Inc. -
"Proposed Resolution of Certain Regulatory and Litigation Issues" in the
Company's annual report on Form 10-K for the year ended December 31, 1997.)
CONVENTIONAL PRODUCT LIABILITY CASES - There are approximately 660 cases
filed by individual plaintiffs against manufacturers of tobacco products
pending in the United States federal and state courts in which individuals
allege they or their decedents have been injured due to smoking cigarettes,
due to exposure to environmental tobacco smoke, or due to nicotine
dependence. Lorillard is a defendant in approximately 300 of these cases.
The Company is a defendant in 73 of the cases, although two have not been
served. Sixty-five of the 73 cases have been filed in West Virginia.
Plaintiffs in these cases seek unspecified amounts in compensatory and
punitive damages in many cases, and in other cases damages are stated to
amount to as much as $100.0 in compensatory damages and $600.0 in punitive
damages.
On March 19, 1998, the jury in Dunn v. RJR Nabisco Holdings Corporation, et
al. (Superior Court, Delaware County, Indiana, filed May 28, 1993) returned
a unanimous verdict in favor of the defendant cigarette manufacturers and
their parent entities, including the Company, in the trial of a suit brought
by the family of a woman who died of cancer, allegedly caused by exposure to
environmental tobacco smoke. The court denied plaintiffs' motion for new
trial. Plaintiffs did not notice an appeal.
On September 26, 1997, a jury in the case of Gordon v. R.J. Reynolds Tobacco
Company, et al. (Superior Court, Middlesex County, Massachusetts), returned
a special verdict favorable to the defendants, which included Lorillard. The
court entered judgment in favor of the defendants. Trial was held on the
limited issue of the cigarettes smoked by the decedent and the time period
in which she smoked them. Plaintiff has filed a motion for new trial, which
is pending.
During 1998, a jury in the Circuit Court of Duval County, Florida, returned
a verdict in favor of plaintiffs in a smoking and health case in which
Lorillard was not a party, Widdick v. Brown & Williamson Tobacco Corporation
(verdict returned June 10, 1998). The jury awarded plaintiffs $1.0 in actual
damages and punitive damages. The First District of the Florida Court of
Appeal reversed the trial court's order denying Brown & Williamson Tobacco
Corporation's motion to transfer venue. The Circuit Court of Duval County,
Page 13
Florida, transferred the case to the Circuit Court of Palm Beach County,
Florida. Brown & Williamson's motion for new trial is pending.
During 1997, juries returned verdicts in favor of the defendants in trials
in two smoking and health cases in which Lorillard was not a party, Connor
v. R.J. Reynolds Tobacco Company (verdict returned May 5, 1997) and
Karbiwnyk v. R.J. Reynolds Tobacco Company (verdict returned October 31,
1997) (both cases were tried in the Circuit Court of Duval County, Florida).
Appeals are not pending in either case.
The Florida Court of Appeals issued a ruling in the case of Carter v. Brown
& Williamson Tobacco Corporation, filed in the Circuit Court of Duval
County, Florida, that reversed a 1996 verdict entered in favor of plaintiffs
in which they were awarded a total of seven hundred fifty thousand dollars
in actual damages. The Court of Appeals directed that judgment be entered in
favor of Brown & Williamson Tobacco Corporation by the trial court.
Plaintiffs have asked the Court of Appeals to reconsider its decision.
Lorillard was not a party to Carter v. Brown & Williamson Tobacco
Corporation.
CLASS ACTIONS - There are approximately 70 purported class actions pending
against cigarette manufacturers and other defendants, including the Company.
Three cases have not been served. Most of the suits seek class certification
on behalf of residents of the states in which the cases have been filed,
although some suits seek class certification on behalf of residents of
multiple states. All but one of the purported class actions seek class
certification on behalf of individuals who smoked cigarettes or were exposed
to environmental tobacco smoke. One of the cases seek class certification on
behalf of individuals who have paid insurance premiums to Blue Cross and
Blue Shield organizations. Plaintiffs in a number of Reimbursement cases
also seek certification as class actions (see Reimbursement Cases, below).
Theories of liability asserted in the purported class actions include a
broad range of product liability theories, including those based on consumer
protection statutes and fraud and misrepresentation. Plaintiffs seek damages
in each case that range from unspecified amounts to the billions of dollars.
Most plaintiffs seek punitive damages and some seek treble damages.
Plaintiffs in many of the cases seek medical monitoring. Plaintiffs in
several of the purported class actions are represented by a well-funded and
coordinated consortium of over 60 law firms from throughout the United
States. Lorillard is a defendant in 59 of the approximately 70 cases seeking
class certification. The Company is a defendant in 24 of the purported class
actions, two of which have not been served. Many of the purported class
actions are in the pre-trial, discovery stage.
Broin v. Philip Morris Companies, Inc., et al. (Circuit Court, Dade County,
Florida, October 31, 1991). On October 10, 1997, the parties to this class
action brought on behalf of flight attendants claiming injury as a result of
exposure to environmental tobacco smoke executed a settlement agreement
which was approved by the trial court on February 3, 1998. The settlement
agreement requires Lorillard and three other cigarette manufacturers jointly
to pay $300.0 in three annual installments to create and endow a research
institute to study diseases associated with cigarette smoke. None of these
payments are to be made until all appeals have been exhausted and judgment
becomes final. The amount to be paid by Lorillard is based upon each of the
four settling defendants' then share of the United States market for the
sale of cigarettes. Lorillard had approximately 8.8% of the cigarette market
in the United States. Based on this calculation, Lorillard is expected to
pay approximately $26.0 of the proposed settlement amount. The plaintiff
class members are permitted to file individual suits, but these individuals
may not seek punitive damages for injuries that arose prior to January 15,
Page 14
1997 which enabled them to be members of the class. The defendants that
executed the settlement agreement will pay a total of $49.0 as fees and
expenses of the attorneys who represented plaintiffs. Certain of the absent
class members objected to the settlement agreement and have noticed an
appeal from the February 3, 1998 order.
Castano, et al. v. The American Tobacco Company, Inc. et al. (U.S. District
Court, Eastern District, Louisiana, March 29, 1994). This case was initiated
as a class action on behalf of nicotine dependent smokers in the United
States. During 1998, Lorillard Tobacco Company and certain other cigarette
manufacturer defendants agreed with the plaintiffs to dismiss this action
without prejudice and to toll the statute of limitations as to the named
plaintiffs' claims. Lorillard Tobacco Company paid $1.0 to reimburse the
costs and expenses of plaintiffs' counsel. This amount will be credited
against any award of costs and expenses incurred in connection with this
suit that plaintiffs' counsel may obtain in the future as a result of the
federal legislation implementing the Proposed Resolution, or against any
judgment or settlements that such counsel may obtain in the future in
similar actions.
Granier v. The American Tobacco Company, et al. (U.S. District Court,
Eastern District, Louisiana, filed September 26, 1994).
Engle v. R.J. Reynolds Tobacco Co., et al. (Circuit Court, Dade County,
Florida, filed May 5, 1994). Class certification has been granted as to
Florida citizens who allege they, or their survivors, have, have had or have
died from diseases and medical conditions caused by smoking cigarettes. The
Florida Supreme Court has denied defendants' appeal. Trial is underway.
Norton v. RJR Nabisco Holdings Corporation, et al. (Superior Court, Madison
County, Indiana, filed May 3, 1996). The Company is a defendant in the case.
Richardson v. Philip Morris Incorporated, et al. (Circuit Court, Baltimore
City, Maryland, filed May 24, 1996). During January of 1998, the court
granted plaintiffs' motion for class certification on behalf of Maryland
residents who had, presently have, or died from diseases, medical conditions
or injuries caused by smoking cigarettes or using smokeless tobacco
products; nicotine dependent persons in Maryland who have purchased and used
cigarettes and smokeless tobacco products manufactured by the defendants;
and Maryland residents who require medical monitoring. Defendants have filed
a petition for writ of mandamus or prohibition from the class certification
order with the Maryland Court of Special Appeals.
Scott v. The American Tobacco Company, et al. (U.S. District Court, Eastern
District, Louisiana, filed May 24, 1996). The Company is a defendant in the
case. Class certification has been granted on behalf of Louisiana citizens
who require medical monitoring. The class certification order was affirmed
on appeal by the Louisiana Court of Appeals.
Small v. Lorillard Tobacco Company, Inc., et al., Hoskins v. R.J. Reynolds
Tobacco Company, et al., Frosina v. Philip Morris Incorporated, et al.,
Hoberman v. Brown & Williamson Tobacco Corporation, et al., and Zito v.
American Tobacco Company, et al. (Supreme Court, New York County, New York,
filed June 19, 1996). Small is the only one of these cases to name Lorillard
as a defendant. Small formerly was known as Mroczowski. Plaintiffs' motions
for class certification on behalf of New York residents who are nicotine
dependent was granted. On appeal, the Appellate Division of the New York
Supreme Court reversed the trial court's class certification order and
directed the trial court to enter judgment in favor of the defendants. The
New York Court of Appeals has agreed to review the Appellate Division's
ruling.
Page 15
Reed v. Philip Morris Incorporated, et al. (Superior Court, District of
Columbia, filed June 21, 1996). The court has denied plaintiff's motion for
class certification.
Barnes v. The American Tobacco Company, et al. (U.S. District Court, Eastern
District, Pennsylvania, filed August 8, 1996). The District Court has
vacated its prior order that granted class certification on behalf of
Pennsylvania smokers who require medical monitoring. The court also granted
defendants' motion for summary judgment. The Third Circuit Court of Appeals
has affirmed the trial court's class certification ruling and the order
granting the summary judgment motion.
Blaylock v. The American Tobacco Company, et al. (Circuit Court, Montgomery
County, Alabama, filed August 8, 1996). The Company is a defendant in the
case. This matter formerly was known as Holmes.
Lyons v. The American Tobacco Company, et al. (U.S. District Court, Southern
District, Alabama, filed August 8, 1996).
Chamberlain v. The American Tobacco Company, et al. (U.S. District Court,
Northern District, Ohio, filed August 14, 1996). The Company is a defendant
in the case.
Thompson v. American Tobacco Company, Inc., et al. (U.S. District Court,
Minnesota, filed September 4, 1996). The Company is a defendant in the case.
Perry v. The American Tobacco Company, et al. (Circuit Court, Coffee County,
Tennessee, filed September 30, 1996). Plaintiffs seek class certification on
behalf of individuals who have paid medical insurance premiums to a Blue
Cross and Blue Shield organization.
Connor v. The American Tobacco Company, et al. (Second Judicial District
Court, Bernalillo County, New Mexico, filed October 10, 1996).
Ruiz v. The American Tobacco Company, et al. (U.S. District Court, Puerto
Rico, filed October 23, 1996). The court denied plaintiffs' motion for class
certification.
Hansen v. The American Tobacco Company, et al. (U.S. District Court, Eastern
District, Arkansas, filed November 4, 1996). The Company is a defendant in
the case.
McCune v. American Tobacco Company, et al. (Circuit Court, Kanawha County,
West Virginia, filed January 31, 1997). The Company is a defendant in the
case.
Muncy v. Philip Morris Incorporated, et al. (Circuit Court, McDowell County,
West Virginia, filed February 4, 1997). This matter formerly was known as
Woods.
Emig v. American Tobacco Company, et al. (U.S. District Court, Kansas, filed
February 6, 1997). The Company is a defendant in the case. The court has
heard argument on plaintiffs' motion for class certification.
Peterson v. American Tobacco Company, et al. (U.S. District Court, Hawaii,
filed February 6, 1997). The Company is a defendant in the case.
Walls v. The American Tobacco Company, et al. (U.S. District Court, Northern
District, Oklahoma, filed February 6, 1997). The court has heard argument on
plaintiffs' motion for class certification. The court has indicated that it
will certify certain question of Oklahoma law to the Oklahoma Supreme Court.
Page 16
Selcer v. R.J. Reynolds Tobacco Company, et al. (U.S. District Court,
Nevada, filed March 3, 1997). The Company is a defendant in the case.
Insolia v. Philip Morris Incorporated, et al. (U.S. District Court, Western
District, Wisconsin, filed April 21, 1997). Briefing of plaintiffs' motion
for class certification has been completed. The court has not scheduled the
case for oral argument and has indicated that it may decide the motion based
on the briefs that have been submitted.
Geiger v. The American Tobacco Company, et al. (Supreme Court, Queens
County, New York, filed April 30, 1997). The trial court granted on an
interim basis plaintiffs' motion for class certification on behalf of New
York residents who allege lung cancer or throat cancer as a result of
smoking cigarettes. The Appellate Division of the New York Supreme Court
reversed the class certification order and directed the trial court to allow
the parties to conduct additional proceedings on the class certification
motion.
Cole v. The Tobacco Institute, Inc., et al. (U.S. District Court, Eastern
District, Texas, Texarkana Division, filed May 5, 1997).
Clay v. The American Tobacco Company, Inc., et al. (U.S. District Court,
Southern District, Illinois, Benton Division, filed May 22, 1997).
Anderson v. The American Tobacco Company, Inc., et al. (U.S. District Court,
Eastern District, Tennessee, filed May 23, 1997). The Company is a defendant
in the case.
Taylor v. The American Tobacco Company, Inc., et al. (Circuit Court, Wayne
County, Michigan, filed May 23, 1997).
Lyons v. Brown & Williamson Tobacco Corporation, et al. (U.S. District
Court, Northern District, Georgia, filed May 27, 1997). The Company is a
defendant in the case.
Cosentino v. Philip Morris Incorporated, et al. (Superior Court, Middlesex
County, New Jersey, filed May 28, 1997). The court has denied plaintiffs'
motion for class certification.
Kirstein v. American Tobacco Company, Inc., et al. (Superior Court, Camden
County, New Jersey, filed May 28, 1997). The court has denied plaintiffs'
motion for class certification.
Tepper v. Philip Morris Incorporated, et al. (Superior Court, Bergen County,
New Jersey, filed May 28, 1997). The court has denied plaintiffs' motion for
class certification.
Brown v. The American Tobacco Company, Inc., et al. (Superior Court, San
Diego County, California, filed June 10, 1997).
Lippincott v. American Tobacco Company, Inc., et al. (Superior Court, Camden
County, New Jersey, filed June 13, 1997). The court has denied plaintiffs'
motion for class certification.
Brammer v. R.J. Reynolds Tobacco Company, et al. (U.S. District Court,
Southern District, Iowa, filed June 20, 1997). The Company is a defendant in
the case.
Knowles v. The American Tobacco Company, et al. (U.S. District Court,
Eastern District, Louisiana, filed June 30, 1997). The Company is a
defendant in the case.
Page 17
Daley v. American Brands, Inc., et al. (U.S. District Court, Northern
District, Illinois, filed July 7, 1997).
Piscitello v. Philip Morris, Incorporated, et al. (Superior Court, Middlesex
County, New Jersey, filed July 28, 1997). The Company is a defendant in the
case. The court has denied plaintiffs' motion for class certification.
Azorsky v. R.J. Reynolds Tobacco Company, et al. (U.S. District Court,
Western District, Pennsylvania, filed August 15, 1997). The court granted
defendants' motion to dismiss. Plaintiffs have attempted to notice appeals
to the United States Court of Appeals for the Third Circuit.
Bush v. Philip Morris Incorporated, et al. (U.S. District Court, Eastern
District, Texas, filed September 10, 1997).
Nwanze v. Philip Morris Companies Inc., et al. (U.S. District Court,
Southern District, New York, filed September 29, 1997). The Company is a
defendant in the case. The court denied plaintiffs' motion for class
certification.
Badillo v. American Tobacco Company, et al. (U.S. District Court, Nevada,
filed October 8, 1997). The Company is a defendant in the case.
Newborn v. Brown & Williamson Tobacco Corporation, et al. (U.S. District
Court, Western District, Tennessee, filed October 9, 1997).
Young v. The American Tobacco Company, et al. (Civil District Court, Orleans
Parish, Louisiana, filed November 12, 1997). The Company is a defendant in
the case.
Aksamit v. Brown & Williamson Tobacco Corporation, et al. (U.S. District
Court, South Carolina, filed November 20, 1997). The Company is a defendant
in the case.
DiEnno v. Liggett Group, Inc., et al. (U.S. District Court, Nevada, filed
December 22, 1997).
Jackson v. Philip Morris Incorporated, et al. (U.S. District Court, Central
District, Utah, filed on or about February 13, 1998). The Company is a
defendant in the case.
Parsons v. AC&S, et al. (Circuit Court, Kanawha County, West Virginia, filed
February 27, 1998). The Company is a defendant in the case.
Basik v. Lorillard Tobacco Company, et al. (Circuit Court, Cook County,
Illinois, filed March 17, 1998).
Daniels v. Philip Morris Companies, Inc., et al. (Superior Court, San Diego
County, California, filed April 2, 1998). The Company is a defendant in the
case.
Christensen v. Philip Morris Companies, Inc., et al. (U.S. District Court,
Nevada, filed April 3, 1998). The Company is a defendant in the case. To
date, none of the defendants have received service of process.
Avallone v. The American Tobacco Company, Inc., et al. (Superior Court,
Middlesex County, New Jersey, filed April 23, 1998). The Company is a
defendant in the case. The court has heard argument on plaintiffs' motion
for class certification.
Collier v. Philip Morris Incorporated, et al. (U.S. District Court, Southern
Page 18
District, Mississippi, filed May 27, 1998).
Cleary v. Philip Morris Incorporated, et al. (Circuit Court, Cook County,
Illinois, filed June 5, 1998).
Vaughan v. Philip Morris Incorporated, et al. (U.S. District Court, Western
District, Virginia, filed June 30, 1998). To date, none of the defendants
have received service of process.
Creekmore v. Brown & Williamson Tobacco Corporation, et al. (Superior Court,
Buncombe County, North Carolina, filed July 31, 1998). To date, none of the
defendants have received service of process.
Jiminez v. Brown & Williamson Tobacco Corporation, et al. (Second Judicial
District Court, Bernalillo County, New Mexico, filed August 20, 1998).
Smokers for Fairness v. British American Tobacco Company, et al. (Superior
Court, Los Angeles County, California, filed September 25, 1998). To date,
none of the defendants have received service of process.
Brown v. Philip Morris, Inc., et al. (U.S. District Court, Eastern District,
Pennsylvania, filed October 16, 1998).
REIMBURSEMENT CASES - Approximately 140 actions are pending in which
governmental entities, private citizens, or other organizations, including
labor unions, insurers and Indian Tribes, seek recovery of funds expended by
them to provide health care to individuals with injuries or other health
effects allegedly caused by use of tobacco products or exposure to cigarette
smoke. These cases are based on, among other things, equitable claims,
including indemnity, restitution, unjust enrichment and public nuisance, and
claims based on antitrust laws and state consumer protection acts.
Plaintiffs in a number of these actions seek certification as class actions.
Plaintiffs seek damages in each case that range from unspecified amounts to
the billions of dollars. Most plaintiffs seek punitive damages and some seek
treble damages. Plaintiffs in many of the cases seek medical monitoring.
Lorillard is named as a defendant in all such actions except for one filed
in a U.S. court by a nation in which Lorillard does not conduct business
(The Republic of Guatemala). The Company is named as a defendant in 17 of
them.
State or Local Governmental Reimbursement Cases - To date, suits filed by 42
states, the Commonwealth of Puerto Rico, and the Republic of The Marshall
Islands are pending. In addition, cities, counties or other local
governmental entities have filed eight such suits. The Company is a
defendant in 13 cases filed by state or local governmental entities. Since
January 1, 1997, cases brought by Florida, Minnesota, Mississippi, Texas and
Blue Cross and Blue Shield of Minnesota have been settled (see "Settlements
of Reimbursement Cases"). Many of the pending Reimbursement Cases are in the
pre-trial, discovery stage.
Moore v. The American Tobacco Company, et al. (Chancery Court, Jackson
County, Mississippi, filed May 23, 1994). On July 2, 1997, Lorillard and
other defendants entered into a Memorandum of Understanding with the State
of Mississippi which settled the State's claims for monetary damages. See
"Settlements of Reimbursement Cases" below.
State of Minnesota, et al. v. Philip Morris Incorporated, et al., (District
Court, Ramsey County, Minnesota, filed August 17, 1994). Blue Cross and Blue
Shield of Minnesota ("Blue Cross") also is plaintiff in the case. On May 8,
1998, the parties reached an agreement to settle the matter. See
"Settlements of Reimbursement Cases" below.
Page 19
McGraw v. The American Tobacco Company, et al. (Circuit Court, Kanawha
County, West Virginia, filed September 20, 1994 by the West Virginia
Attorney General and state agencies). The Company is a defendant in the
case.
The State of Florida, et al. v. The American Tobacco Company, et al.
(Circuit Court, Palm Beach County, Florida, filed February 21, 1995). The
trial court granted the Company's motion to dismiss. The Florida Court of
Appeal affirmed the order dismissing the Company. On August 25, 1997,
Lorillard Tobacco Company and other defendants entered into a Memorandum of
Understanding with the State of Florida which settled the State's claims for
monetary damages. See "Settlements of Reimbursement Cases" below. The
remaining claims have now been dismissed.
Commonwealth of Massachusetts v. Philip Morris Inc., et al. (Superior Court,
Middlesex County, Massachusetts, filed December 19, 1995). The court has
scheduled trial in this matter to begin on February 1, 1999.
Ieyoub v. The American Tobacco Company, et al. (U.S. District Court, Western
District, Louisiana, filed March 13, 1996 by the Louisiana Attorney
General). The Company is a defendant in the case.
The State of Texas v. The American Tobacco Company, et al. (U.S. District
Court, Eastern District, Texas, filed March 28, 1996). On January 16, 1998,
Lorillard Tobacco Company and other defendants entered into a Memorandum of
Understanding with the State of Texas which settled the State's claims for
monetary damages. See "Settlements of Reimbursement Cases" below.
State of Maryland v. Philip Morris Incorporated, et al. (Circuit Court,
Baltimore City, Maryland, filed May 1, 1996).
State of Washington v. The American Tobacco Company, et al. (Superior Court,
King County, Washington, filed June 5, 1996). Trial is underway.
City and County of San Francisco, et al. v. Philip Morris Incorporated, et
al. (U.S. District Court, Northern District, California, filed June 6, 1996
by various California cities and counties).
State of Connecticut v. Philip Morris Incorporated, et al. (Superior Court,
Litchfield District, Connecticut, filed July 18, 1996).
County of Los Angeles v. R.J. Reynolds Tobacco Company, et al. (Superior
Court, San Diego County, filed August 5, 1996). The court has scheduled a
bench trial to begin on February 5, 1999 in this matter and in two other
cases that assert allegations that defendants violated certain provisions of
the California Business and Professions Code. Immediately after the
completion of the bench trial, the court will convene a jury as to the
remainder of the plaintiff's claims in County of Los Angeles.
State of Arizona v. The American Tobacco Company, et al. (Superior Court,
Maricopa County, Arizona, filed August 20, 1996). The court has scheduled
the case for trial on April 14, 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).
State of Oklahoma, et al. v. R.J. Reynolds Tobacco Company, et al. (District
Court, Cleveland County, Oklahoma, filed August 22, 1996). The Company is a
Page 20
defendant in the case. The court has scheduled the case for trial on January
25, 1999.
People of the State of California v. Philip Morris Incorporated, et al.
(Superior Court, San Francisco County, California, filed September 5, 1996
by various California counties and cities and local chapters of various
medical societies and associations). The court has scheduled the case for
trial on March 1, 1999.
State of New Jersey v. R.J. Reynolds Tobacco Company, et al. (Superior
Court, Middlesex County, New Jersey, filed September 10, 1996).
State of Utah v. R.J. Reynolds Tobacco Company, et al. (U.S. District Court,
Central Division, Utah, filed September 30, 1996). The Company is a
defendant in the case.
City of New York, et al. v. The Tobacco Institute, et al. (Supreme Court,
New York County, 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). The
Company is a defendant in the case. The Supreme Court of Iowa has affirmed
the trial court's order dismissing plaintiff's claims of deception,
voluntary assumption of a special duty and indemnity. Plaintiff did not
attempt to appeal the dismissal of its claim of unjust
enrichment/restitution.
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. The American Tobacco Company, et al. (Supreme Court,
New York County, New York, filed January 21, 1997). The Company is a
defendant in the case.
State of Hawaii v. Brown & Williamson Tobacco Corporation, et al. (Circuit
Court, First Circuit, Hawaii, filed January 31, 1997).
State of Wisconsin v. Philip Morris Incorporated, et al. (Circuit Court,
Dane County, Wisconsin, filed February 5, 1997).
State of Indiana v. Philip Morris Incorporated, et al. (Superior Court,
Marion County, Indiana, filed February 19, 1997). The court has granted
defendants' motion to dismiss all counts of the complaint. Plaintiff has
noticed an appeal to the Indiana Court of Appeals.
State of Alaska v. Philip Morris, Incorporated, et al. (Superior Court,
First Judicial District, Alaska, filed April 14, 1997).
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).
State of Arkansas v. The American Tobacco Company, et al. (Sixth Division,
Chancery Court, Pulaski County, Arkansas, filed May 5, 1997).
State of Montana v. Philip Morris, Incorporated, et al. (First Judicial
Page 21
Court, Lewis and Clark County, Montana, filed May 5, 1997).
State of Ohio v. Philip Morris, Incorporated, et al. (Court of Common Pleas,
Franklin County, Ohio, filed on May 8, 1997).
State of Missouri v. American Tobacco Company, Inc., et al. (Circuit Court,
City of St. Louis, Missouri, filed May 12, 1997). The Company is a defendant
in the case. Several hospitals or owners of hospitals have filed a motion to
intervene in the suit.
State of South Carolina v. Brown & Williamson Tobacco Corporation, et al.
(Court of Common Pleas, Richland County, South Carolina, filed May 12,
1997). The Company is a defendant in the case.
State of Nevada v. Philip Morris, Incorporated, et al. (Second Judicial
District, Washoe County, Nevada, filed May 21, 1997).
University of South Alabama v. The American Tobacco Company, et al. (U.S.
District Court, Southern District, Alabama, filed May 23, 1997). The Company
is a defendant in the case. Plaintiff noticed an appeal to the U.S. Court of
Appeals for the Fifth Circuit from the trial court's order that dismissed
the action.
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. (U.S. District Court, Northern District,
Alabama, filed May 28, 1997). The Company is a defendant in the case. The
court granted defendants' motion to strike the complaint. Plaintiffs have
noticed an appeal to the United States Court of Appeals for the Eleventh
Circuit.
State of Vermont v. Philip Morris, Incorporated, et al. (Superior Court,
Chittenden County, Vermont, filed May 29, 1997).
State of New Hampshire v. R.J. Reynolds Tobacco Company, et al. (Superior
Court, Merrimack County, New Hampshire, 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).
State of Idaho v. Philip Morris, Inc., et al. (District Court, Fourth
Judicial District, Ada County, Idaho, filed June 9, 1997). The court has
granted defendants' motion to dismiss and has entered final judgment in
their favor. Plaintiff has noticed an appeal to the Idaho Court of Appeals.
State of Oregon v. The American Tobacco Company, et al. (Circuit Court,
Multnomah County, Oregon, filed June 9, 1997).
People of the State of California v. Philip Morris, Inc., et al. (Superior
Court, Sacramento County, California, filed June 12, 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. (U.S.
District Court, Puerto Rico, filed June 17, 1997). The Company is a
defendant in the case.
State of Rhode Island v. American Tobacco Company, Inc., et al. (Superior
Page 22
Court, Providence, Rhode Island, filed June 17, 1997). The Company is a
defendant in the case.
State of Georgia v. Philip Morris, Inc., et al. (Superior Court, Fulton
County, Georgia, filed August 29, 1997).
Republic of the Marshall Islands v. The American Tobacco Company, et al.
(High Court, Republic of the Marshall Islands, filed October 20, 1997). The
court granted motions to dismiss filed by Lorillard Tobacco Company,
Lorillard, Inc., and Loews Corporation.
State of South Dakota and South Dakota Department of Social Services v.
Philip Morris, Inc., et al. (Circuit Court, Sixth Judicial Circuit, Hughes
County, South Dakota filed February 23, 1998).
The Republic of Guatemala v. The Tobacco Institute, Inc., et al. (U.S.
District Court, District of Columbia, filed May 11, 1998). Neither Lorillard
nor the Company are named as defendants in the matter.
State of Vermont v. Philip Morris, Incorporated, et al. (Superior Court,
Chittenden County, Vermont, filed July 7, 1998). Plaintiff asserts different
claims in this suit than in the one filed on May 29, 1997, that is listed
above.
State of Nebraska v. R.J. Reynolds Tobacco Company, et al. (District Court,
Lancaster County, Nebraska, filed August 21, 1998).
Republic of Panama v. The American Tobacco Company, et al. (District Court,
Orleans Parish, Louisiana, filed October 16, 1998). The Company is a
defendant in the case.
Private Citizens' Reimbursement Cases - There are five suits pending in
which plaintiffs are private citizens. Four of the suits have been filed by
private citizens on behalf of taxpayers of their respective states, although
governmental entities have filed a reimbursement suit in one of the four
states. The Company is a defendant in two of the five pending private
citizen Reimbursement Cases. Lorillard is a defendant in each of the cases.
Each of these cases is in the pre-trial discovery stage.
Coyne v. The American Tobacco Company, et al. (U.S. District Court, Northern
District, Ohio, filed September 17, 1996). The Company is a defendant in the
case. The suit is on behalf of taxpayers of Ohio. The court has granted
defendants' motion to dismiss. The plaintiffs have noticed an appeal from
the court's order granting a motion to dismiss.
Beckom v. The American Tobacco Company, et al. (U.S. District Court, Eastern
District, Tennessee, filed May 8, 1997). The Company is a defendant in the
case. The suit is on behalf of taxpayers of Tennessee. The court has granted
defendants' motion to dismiss. The time for plaintiffs to notice an appeal
from the ruling has not expired.
Mason v. The American Tobacco Company, et al. (U.S. District Court, Northern
District, Texas, filed December 23, 1997). The suit is on behalf of
taxpayers of the U.S. as to funds expended by the Medicaid program.
The State of North Carolina, et al. v. The American Tobacco Company, et al.
(U.S. District Court, Middle District, North Carolina, filed February 13,
1998).
Wynn v. Philip Morris, Inc., et al. (U.S. District Court, Northern District,
Alabama, filed May 27, 1998). The suit is on behalf of taxpayers of Alabama.
Page 23
Reimbursement Cases By Indian Tribes - Indian Tribes have filed eight
reimbursement suits in their tribal courts, two of which have been
dismissed. Lorillard is a defendant in each of the cases. The Company is not
named as a defendant in any of the seven tribal suits filed to date. Each of
the pending cases is in the pre-trial, discovery stage.
The Lower Brule Sioux Tribe v. The American Tobacco Company, et al. (Tribal
Court, Lower Brule Sioux Tribe, filed on an unknown date, first amended
complaint filed May 28, 1997).
Muscogee Creek Nation v. The American Tobacco Company, et al. (District
Court, Muscogee Creek Nation, Okmulgee District, filed June 20, 1997).
Crow Creek Sioux Tribe v. The American Tobacco Company, et al. (Tribal
Court, Crow Creek Sioux Tribe, filed September 14, 1997).
The Standing Rock Sioux Tribe v. The American Tobacco Company, et al.
(Tribal Court, Standing Rock Sioux Tribe, filed May 8, 1998).
The Sisseton-Wahpeton Sioux Tribe v. The American Tobacco Company, et al.
(Tribal Court, Sisseton-Wahpeton Sioux Tribe, filed May 12, 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).
Reimbursement Cases By Labor Unions - Labor unions have filed approximately
70 reimbursement suits in various states in federal or state courts. In 23
of these cases, plaintiffs seek class certification. Lorillard is named as a
defendant in each of the suits filed to date by unions. The Company is a
defendant in two of the pending suits. Each of these cases is in the pre-
trial, discovery stage.
Stationary Engineers Local 39 Health and Welfare Trust Fund v. Philip
Morris, Inc., et al. (U.S. District Court, Northern District, California,
filed April 25, 1997).
Iron Workers Local Union No. 17 Insurance Fund, et al. v. Philip Morris,
Inc., et al. (U.S. District Court, Northern District, Ohio, Eastern
Division, filed May 20, 1997). The court has granted plaintiffs' motion for
class certification on behalf of funds in Ohio established under the Taft-
Hartley Act. The court has scheduled trial in this matter to begin on
February 22, 1999.
Northwest Laborers-Employers Health and Security Trust Fund, et al. v.
Philip Morris, Inc., et al. (U.S. District Court, Western District,
Washington, filed May 21, 1997). The court has granted plaintiffs' motion
for class certification on behalf of "all existing jointly-administered and
collectively bargained-for health and welfare trusts in [the State of]
Washington, and/or the trustees of such entities, that have provided or paid
for health care and/or addiction treatment costs or services for employees
or other beneficiaries." The United States Court of Appeals for the Ninth
Circuit has declined to review the ruling at this time.
Massachusetts Laborers Health and Welfare Fund v. Philip Morris Inc., et al.
(U.S. District Court, Massachusetts, filed June 2, 1997).
Central Laborers Welfare Fund, et al. v. Philip Morris, Inc., et al. (U.S.
District Court, Southern District, Illinois, filed on or about June 9,
1997).
Hawaii Health and Welfare Trust Fund for Operating Engineers v. Philip
Page 24
Morris, Inc., et al. (U.S. District Court, Hawaii, filed June 13, 1997).
Laborers Local 17 Health and Benefit Fund and The Transport Workers Union
New York City Private Bus Lines Health Benefit Trust v. Philip Morris, Inc.,
et al. (U.S. District Court, Southern District, New York, filed June 19,
1997).
Ark-La-Miss Laborers Welfare Fund v. Philip Morris, Inc., et al. (U.S.
District Court, Eastern District, Louisiana, filed June 20, 1997).
Kentucky Laborers District Council Health and Welfare Trust Fund v. Hill &
Knowlton, Inc., et al. (U.S. District Court, Western District, Kentucky,
Louisville Division, filed June 20, 1997).
Oregon Laborers -- Employers Health and Welfare Trust Fund, et al. v. Philip
Morris, Inc., et al. (U.S. District Court, Oregon, filed June 20, 1997). The
court granted defendants' motion for judgment on the pleadings, which
dismissed the case. Plaintiffs have noticed an appeal to the United States
Court of Appeals for the Ninth Circuit.
United Federation of Teachers Welfare Fund, et al. v. Philip Morris, Inc.,
et al. (U.S. District Court, Southern District, New York, filed June 25,
1997).
Laborers and Operating Engineers Utility Agreement Health and Welfare Trust
Fund for Arizona v. Philip Morris Incorporated, et al. (U.S. District Court,
Arizona, filed July 7, 1997).
West Virginia Laborers Pension Fund v. Philip Morris, Inc., et al. (U.S.
District Court, Southern District, West Virginia, Huntington Division, filed
July 11, 1997).
Rhode Island Laborers Health and Welfare Fund v. Philip Morris Incorporated,
et al. (U.S. District Court, Rhode Island, filed July 20, 1997).
Eastern States Health and Welfare Fund, et al. v. Philip Morris, Inc., et
al. (Supreme Court, New York County, New York, filed July 28, 1997).
Asbestos Workers Local 53 Health and Welfare Fund, et al. v. Philip Morris,
Inc., et al. (U.S. District Court, Eastern District, Louisiana, filed August
15, 1997). This action has been consolidated with the case of Ark-La-Miss
Laborers Welfare Fund.
Steamfitters Local Union No. 420 Welfare Fund, et al. v. Philip Morris,
Inc., et al. (U.S. District Court, Eastern District, Pennsylvania, filed
August 21, 1997). The court granted defendants' motion to dismiss the case.
Plaintiffs have noticed an appeal to the United States Court of Appeals for
the Third Circuit.
Construction Laborers of Greater St. Louis Welfare Fund, et al. v. Philip
Morris, Inc., et al. (U.S. District Court, Eastern District, Missouri, filed
September 2, 1997).
Arkansas Carpenters Health & Welfare Fund v. Philip Morris, Inc., et al.
(U.S. District Court, Eastern District, Arkansas, filed September 4, 1997).
West Virginia--Ohio Valley Area International Brotherhood of Electrical
Workers Welfare Fund v. The American Tobacco Company, et al. (U.S. District
Court, West Virginia, filed September 11, 1997).
Teamsters Union No. 142, Health and Welfare Trust Fund and Sheet Metal
Page 25
Workers Local Union No. 20 Welfare and Benefit Fund v. Philip Morris
Incorporated, et al. (Circuit Court, St. Joseph County, Indiana, filed
September 12, 1997).
Operating Engineers Local 12 Health and Welfare Trust v. American Tobacco
Company, et al. (Superior Court, Los Angeles County, California, filed
September 16, 1997).
Puerto Rican ILGWU Health & Welfare Fund v. Philip Morris Inc., et al.
(Supreme Court, New York County, New York, filed September 17, 1997).
New Jersey Carpenters Health Fund, et al. v. Philip Morris, Inc., et al.
(U.S. District Court, New Jersey, filed September 25, 1997).
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).
Central States Joint Board v. Philip Morris, Inc., et al. (U.S. District
Court, Northern District, Illinois, filed October 20, 1997).
International Brotherhood of Teamsters Local 734 v. Philip Morris, Inc., et
al. (U.S. District Court, Northern District, Illinois, filed October 20,
1997).
Texas Carpenters Health Benefit Fund, et al. v. Philip Morris, Inc., et al.
(U.S. District Court, Eastern District, Texas, Beaumont Division, filed
October 31, 1997). The court granted defendants' motion to dismiss.
Plaintiff has noticed an appeal to the United States Court of Appeals for
the Fifth Circuit.
United Food and Commercial Workers Unions and Employers Health and Welfare
Fund, et al. v. Philip Morris, Inc., et al. (U.S. 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. (U.S. District Court, Eastern District, Michigan, filed November 14,
1997). Plaintiffs have filed a motion to voluntarily dismiss the case
without prejudice. Defendants have filed a motion to strike plaintiffs'
voluntary dismissal and have asked the court to enter a dismissal with
prejudice. The court has not ruled on the motion to date.
Screen Actors Guild-Producers Health Plan, et al. v. Philip Morris, Inc., et
al. (Superior Court, Los Angeles County, California, filed November 20,
1997).
IBEW Local 25 Health and Benefit Fund v. Philip Morris, Inc. et al. (Supreme
Court, New York County, New York, filed November 25, 1997).
IBEW Local 363 Welfare Fund v. Philip Morris, Inc., et al. (Supreme Court,
New York County, 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, New York County, New
York, filed November 25, 1997).
Local 840, International Brotherhood of Teamsters Health and Insurance Fund
v. Philip Morris, Inc., et al. (Supreme Court, New York County, New York,
filed November 25, 1997).
Long Island Council of Regional Carpenters Welfare Fund v. Philip Morris,
Page 26
Inc., et al. (Supreme Court, New York County, New York, filed November 25,
1997).
Day Care Council - Local 205 D.C. 1707 Welfare Fund v. Philip Morris, Inc.,
et al. (Supreme Court, New York County, New York, filed December 8, 1997).
Local 1199 Home Care Industry Benefit Fund v. Philip Morris, Inc., et al.
(Supreme Court, New York County, 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).
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. (U.S. District Court, Minnesota, filed December 31, 1997).
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).
National Asbestos Workers, et al. v. Philip Morris Incorporated, et al.
(U.S. District Court, Eastern District, New York, filed February 27, 1998).
The Company is a defendant in the case.
Milwaukee Carpenters, et al. v. Philip Morris, Incorporated, et al. (Circuit
Court, Milwaukee County, Wisconsin, filed March 4, 1998). To date, none of
the defendants have received service of process.
Service Employees International Union Health & Welfare Fund, et al. v.
Philip Morris, Inc., et al. (U.S. District Court, District of Columbia,
filed March 19, 1998).
Milwaukee Carpenters, et al. v. Philip Morris, Incorporated, et al. (Circuit
Court, Milwaukee County, Wisconsin, filed March 30, 1998).
United Association of Plumbing and Pipefitters Industry Local 467, et al. v.
Philip Morris Incorporated, et al. (Superior Court, San Mateo County,
California, filed March 31, 1998).
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).
Teamsters Benefit Trust v. Philip Morris, Inc., et al. (Superior Court,
Alameda County, California, filed April 15, 1998).
United Association Local 159 Health and Welfare Trust Fund v. Philip Morris,
Inc., et al. (Superior Court, Alameda County, California, filed April 15,
1998).
Bay Area Automotive Group Welfare Fund v. Philip Morris, Inc., et al.
(Superior Court, San Francisco County, California, filed April 16, 1998).
Bay Area Delivery Drivers Security Fund v. Philip Morris, Inc., et al.
(Superior Court, Alameda County, California, filed April 16, 1998).
Pipe Trades District Council No. 36 Health & Welfare Trust Fund v. Philip
Page 27
Morris, Inc., et al. (Superior Court, Alameda County, California, filed
April 16, 1998).
Sign, Pictorial and Display Industry Welfare Fund v. Philip Morris, Inc., et
al. (Superior Court, San Francisco County, California, filed April 16,
1998).
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).
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).
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).
Northern California Plasterers Health & Welfare Trust Fund v. Philip Morris,
Inc., et al. (Superior Court, San Francisco County, California, filed May
21, 1998).
U.A. Local No. 393 Health and Welfare Trust Fund v. Philip Morris, Inc., et
al. (Superior Court, Alameda County, California, 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 & Welfare Trust Fund, et al. v. Philip Morris
Incorporated, et al. (U.S. District Court, Utah, Central Division, filed
June 4, 1998). The Company is a defendant in the case.
Joint Benefit Trust v. Philip Morris, Inc., et al. (Superior Court, Alameda
County, California, filed June 15, 1998).
Northern California Pipe Trades Health and Welfare Trust v. Philip Morris,
Inc., et al. (Superior Court, Alameda County, California, filed June 18,
1998).
S.E.I.U. v. Philip Morris, Inc., et al. (U.S. District Court, District of
Columbia, filed June 22, 1998). To date, none of the defendants have
received service of process.
Plastering Industry Welfare Trust Fund v. Philip Morris, Inc. et al.
(Superior Court, San Francisco County, California, filed July 1, 1998).
Central Valley Painting & Decorating Health & Welfare Trust Fund v. Philip
Morris, Inc., et al. (Superior Court, San Francisco County, California,
filed July 6, 1998).
Holland, et al., Trustees of United Mine Workers v. Philip Morris
Incorporated, et al. (U.S. District Court, District of Columbia, filed July
9, 1998).
Northern California Tile Industry Health & Welfare Trust Fund v. Philip
Morris, Inc., et al. (Superior Court, San Francisco County, California,
filed July 29, 1998).
Page 28
San Francisco Culinary, Bartenders and Service Employees Welfare Fund v.
Philip Morris, Inc., et al. (Superior Court, San Francisco County,
California, filed July 30, 1998).
IBEW Local 595 Health and Welfare Trust Fund v. Philip Morris, Inc., et al.
(Superior Court, Alameda County, California, filed July 30, 1998).
Shop Ironworkers Local 790 Welfare Plan v. Philip Morris, Inc., et al.
(Superior Court, Alameda County, California, filed July 31, 1998).
Contractors, Laborers, Teamsters & Engineers Health & Welfare Plan v. Philip
Morris, Inc., et al. (U.S. District Court, Nebraska, filed August 11, 1998).
Reimbursement Cases By Private Companies - Private companies have filed six
Reimbursement Cases to date. Lorillard is named as a defendant in each of
the cases filed by private companies. The Company is not a defendant in the
cases filed by private companies.
Group Health Plan, Inc., et al. v. Philip Morris Incorporated, et al. (U.S.
District Court, Minnesota, filed March 11, 1998).
Williams and Drake Company v. The American Tobacco Company, et al. (U.S.
District Court, Western District, Pennsylvania, filed March 23, 1998).
Conwed Corporation, et al. v. R.J. Reynolds Tobacco Company, et al. (U.S.
District Court, Minnesota, filed April 10, 1998).
Arkansas Blue Cross and Blue Shield, et al. v. Philip Morris, Incorporated,
et al. (U.S. 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. (U.S. District Court, Eastern District, New York, filed
April 29, 1998).
Regence Blueshield, et al. v. Philip Morris, Incorporated, et al. (U.S.
District Court, Western District, Washington, filed April 29, 1998).
CONTRIBUTION CLAIMS - In addition to the foregoing cases, nine cases are
pending in which private companies seek recovery of funds expended by them
to individuals whose asbestos disease or illness was alleged to have been
caused in whole or in part by smoking-related illnesses. One of the cases
has not been served. Lorillard is named as a defendant in each action. The
Company is named as a defendant in four of the cases but has not received
service of process in one of them. Each of these cases is in the pre-trial,
discovery stage.
Raymark Industries v. R.J. Reynolds Tobacco Company, et al. (Circuit Court,
Duval County, Florida, filed September 15, 1997). The Company is a defendant
in the case but has not received service of process to date.
Raymark Industries v. Brown & Williamson Tobacco Corporation, et al. (U.S.
District Court, Northern District, Georgia, filed September 15, 1997). The
Company is a defendant in the case.
Fibreboard Corporation and Owens-Corning v. The American Tobacco Company, et
al. (Superior Court, Alameda County, California, filed December 11, 1997).
Keene Creditors Trust v. Brown & Williamson Tobacco Corporation, et al.
(Supreme Court, New York County, New York, filed December 19, 1997). The
Company is a defendant in the case.
Page 29
Falise, et al., as Trustees of the Manville Personal Injury Settlement Trust
v. The American Tobacco Company, et al. (U.S. District Court, Eastern
District, New York, filed December 31, 1997).
H.K. Porter Company v. B.A.T. Industries, PLC, et al. (U.S. District Court,
Southern District, New York, filed December 31, 1997).
Raymark Industries v. R.J. Reynolds Tobacco Co., et al. (Circuit Court,
Duval County, Florida, filed December 31, 1997). To date, none of the
defendants have received service of process.
Raymark Industries v. The American Tobacco Company, et al. (U.S. District
Court, Eastern District, New York, filed January 30, 1998).
Thomas v. R.J. Reynolds Tobacco Company, et al., (Circuit Court of Jefferson
County, Mississippi, filed August 21, 1998). The complaint asserts
contribution claims on behalf of Owens Corning as well as conventional
product liability claims on behalf of an individual. The Company is a
defendant in the case.
FILTER CASES - A number of cases have been filed against Lorillard seeking
damages for cancer and other health effects claimed to have resulted from
exposure to asbestos fibers which were incorporated, for a limited period of
time, ending more than forty years ago, into the filter material used in one
of the brands of cigarettes manufactured by Lorillard. Nineteen such cases,
including one that also includes allegations that plaintiff also was injured
as a result of smoking cigarettes, are pending in federal and state courts.
Allegations of liability include negligence, strict liability, fraud,
misrepresentation and breach of warranty. Plaintiffs seek unspecified
amounts in compensatory and punitive damages in many cases, and in other
cases damages are stated to amount to as much as $15.0 in compensatory
damages and $100.0 in punitive damages. No such cases have been tried during
1998. In the one case of this type that has been tried during 1997, the jury
returned a verdict in favor of Lorillard. Trials were held in three cases of
this type during 1996. In two of the cases, the juries returned verdicts in
favor of Lorillard. In the third case, the jury returned a verdict in favor
of plaintiffs. The verdict required Lorillard to pay the amount of one
hundred forty thousand dollars, although the award subsequently was reduced
to seventy thousand dollars. Lorillard's appeals from the verdict have been
rejected.
Trials were held in three cases of this type during 1995. In two of the
cases, the juries returned verdicts in favor of Lorillard. In the third
case, the jury returned a verdict in favor of plaintiffs, which was upheld
on appeal. The Company has paid the compensatory judgment award, trial costs
and interest thereon in the amount of $1.6 on December 30, 1997. The United
States Supreme Court denied the Company's petition for writ of certiorari as
to the punitive damages award. The Company has paid the punitive damages
award.
In addition to the foregoing litigation, one pending case, Cordova v.
Liggett Group, Inc., et al. (Superior Court, San Diego County, California,
filed May 12, 1992), alleges that Lorillard and other named defendants,
including other manufacturers of tobacco products, engaged in unfair and
fraudulent business practices in connection with activities relating to the
Council for Tobacco Research-USA, Inc., of which Lorillard is a sponsor, in
violation of a California state consumer protection law by misrepresenting
to or concealing from the public information concerning the health aspects
of smoking. The court has scheduled trial to begin no earlier than February
5, 1999 in this matter and in four other cases that assert allegations that
defendants violated certain provisions of the California Business and
Page 30
Professions Code.
In addition, two California cities, Los Angeles and San Jose, suing on
behalf of The People of the State of California, have filed suits alleging
cigarette manufacturers, including Lorillard, have violated a California
statute, commonly known as "Proposition 65," that requires California
residents to be informed if they are exposed to substances that are alleged
to cause cancer or birth defects. Plaintiffs in both suits allege that non-
smokers have not been warned by cigarette manufacturers that exposure to
environmental tobacco smoke may cause illness. Plaintiffs in both suits
further allege defendants violated certain provisions of the California
Business and Professions Code (The People of the State of California, and
American Environmental Safety Institute v. Philip Morris Incorporated, et
al. (Superior Court, Los Angeles County, California, filed July 14, 1998)
and The People of the State of California, the City of San Jose and Paul
Dowhall v. Brown & Williamson Tobacco Corporation, et al. (Superior Court,
San Francisco County, California, filed July 28, 1998)).
DOCUMENT DISCOVERY ISSUES - Plaintiffs in a number of the cases pending
against the tobacco industry, including cases against Lorillard and the
Company, have challenged the claims made by Lorillard and other companies in
the tobacco industry that certain documents sought by plaintiffs are
protected from disclosure by the attorney-client privilege, joint defense
privilege and work product doctrine. These challenges include, among other
things, allegations that such documents do not contain legal advice or were
not prepared for litigation purposes and, thus, are not privileged or
protected as attorney work product. Certain plaintiffs in these cases have
also alleged that defendants' privileged documents should be discoverable
pursuant to the so-called crime/fraud exception which negates the privilege
as to documents found to have been related to and prepared in furtherance of
an alleged crime or fraud. In addition, several plaintiffs have argued, and
certain courts have found, that defendants have "waived" their privilege as
to a number of documents. Such arguments by plaintiffs generally pertain to
certain industry documents which were subpoenaed by the House Commerce
Committee (see discussion below).
Various courts have addressed these issues and have arrived at differing
conclusions as to whether the privilege for some of defendants' documents
should be maintained. Some of these rulings are final and, as a result,
certain documents as to which defendants have claimed a privilege have been
released to plaintiffs.
On December 5, 1997, certain documents as to which defendants had claimed
privilege were provided to the Chairman of the House Commerce Committee in
response to a subpoena. These documents were subsequently made available on
the Internet.
On February 19, 1998, the Committee subpoenaed approximately 37,000
additional documents which Lorillard and other companies in the tobacco
industry have asserted to be privileged. These documents were the subject of
a March 7, 1998 ruling in the Reimbursement Case brought by the State of
Minnesota, in which the judge ordered that the documents should be released
on the basis of the crime/fraud exception. Defendants exhausted their
remedies through the state's judicial system as well as the U.S. Supreme
Court. On April 6, 1998, the U.S. Supreme Court denied defendants'
application for a Stay and, in accordance with the March 7, 1998 ruling of
the district court, such documents were released to plaintiffs in Minnesota.
Also on April 6, 1998 and pursuant to the February 19, 1998 subpoena,
documents were submitted to the Committee. The Committee subsequently made
available on the Internet the vast majority of those documents.
Page 31
Under the Proposed Resolution, Lorillard and the other companies in the
tobacco industry agreed to establish an industry-funded document depository
to allow public viewing of certain industry documents. In recent
Congressional testimony, representatives of the tobacco companies offered to
make tens of millions of pages of documents public prior to the enactment of
any comprehensive legislation to demonstrate their commitment to the
principles set forth in the Proposed Resolution. On February 27, 1998,
Lorillard and other companies in the tobacco industry posted on the Internet
the first installment of these documents for public access. In addition, the
court in the Reimbursement Case brought by the State of Minnesota has
granted defendants' request to allow public access to the document
depository established in that case. The publicly available materials will
not include documents containing trade secret information, certain personnel
and third party information, or documents for which attorney-client
privilege or work product doctrine claims have been asserted.
Tobacco industry documents have generated extensive media coverage recently
and have become a focal point in the litigation. The Company cannot predict
the effect disclosure of these documents may have on pending litigation or
Congressional consideration of the Proposed Resolution.
SETTLEMENTS OF REIMBURSEMENT CASES - During 1997 and 1998, Lorillard and
other companies in the United States tobacco industry (the "settling
defendants") settled health care cost recovery actions brought by the States
of Mississippi, Florida, Texas and Minnesota. Claims of Blue Cross and Blue
Shield of Minnesota asserted against the settling defendants together with
Minnesota's claims were separately settled as well. These settlements are
described in Note 5 of the Notes to Consolidated Condensed Financial
Statements of the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1998. Recently, as detailed below, the Mississippi, Texas
and Florida settlement agreements have been amended pursuant to their "most
favored nation" clauses to reflect terms of the Minnesota settlement. The
Florida, Texas and Minnesota health care cost recovery settlements and
certain ancillary agreements are filed as Exhibits to various reports of the
Company filed with the Securities and Exchange Commission, and the
amendments to the Mississippi and Texas settlements and certain ancillary
agreements are filed as Exhibits to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1998. The amendments to the Florida
settlement and certain ancillary agreements are filed as Exhibits to this
Form 10-Q. The discussion herein is qualified by reference thereto.
Following the settlement with Minnesota, Lorillard was contacted by counsel
for the States of Texas, Florida and Mississippi seeking to discuss the
issue of what effect, if any, the settlement of the Minnesota action has
upon the terms of the prior settlements with those states pursuant to the
"most favored nation" ("MFN") provision of those prior state settlements.
That provision provides that, in the event the settling defendants enter
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 will be revised to provide treatment at least as relatively
favorable. As discussed below, the Mississippi, Texas and Florida settlement
agreements were recently amended pursuant to this provision.
On July 6, July 24 and September 11, 1998 respectively, Lorillard and the
other settling defendants reached agreements with the States of Mississippi,
Texas and Florida to amend those States' settlements pursuant to the MFN
provision. The MFN amendments call for the settling defendants to make
additional settlement payments to Mississippi, Texas and Florida aggregating
$550.0, $2,275.0 and $1,750.0, respectively. These amounts are payable in
Page 32
January of the year indicated:
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 Total
---------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Mississippi $ 41.7 $ 145.2 $ 145.2 $ 145.2 $ 72.7 $ 550.0
Texas 156.5 605.1 605.1 605.1 303.2 2,275.0
Florida 123.5 464.6 464.6 464.6 232.7 1,750.0
---------------------------------------------------------
$321.7 $1,214.9 $1,214.9 $1,214.9 $608.6 $4,575.0
=========================================================
</TABLE>
These payments, which in the case of payments after 1999 will be adjusted
for inflation, changes in domestic sales volume, and, under specified
circumstances, increases in net operating profits from domestic sales, will
be allocated among the settling defendants in accordance with their relative
unit volume of domestic cigarette sales.
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
agreements are several and not joint; the amended settlement agreements do
not obligate any settling defendant to pay the share of another settling
defendant.
The nominal amounts of the ongoing annual payments, (the "Ongoing Annual
Payments") contemplated by the original Mississippi, Texas and Florida
settlement agreements are unchanged by the MFN amendments.
The MFN amendments modify the provisions of the original settlement
agreements that address the impact enactment of federal tobacco legislation
before November 30, 2000 would have on such settlements. Under the MFN
amendments, the settling defendants will be entitled to receive a dollar-for-
dollar offset against their Ongoing Annual Payments for amounts that
Mississippi, Texas and Florida, as the case may be, could elect to receive
pursuant to 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 amendments also supersede the MFN provisions contained in the
original settlement agreements. Under the revised MFN provision 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 Mississippi, Texas and Florida
settlements will not otherwise be revised except to the extent such future
Page 33
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
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 amendments to disclose
specified future payments for lobbying or related purposes in Mississippi,
Texas and Florida, to support enumerated legislative and regulatory
proposals and to not support legislation, rules or policies that would
diminish Mississippi's, Texas' and Florida's rights under the amended
settlement agreements.
The settling defendants also submitted to a Consent Judgment enjoining the
settling defendants from (i) offering or selling non-tobacco services or
merchandise (e.g., caps, jackets or bags) in Mississippi, Texas and 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 Mississippi,
Texas and Florida in the advertising, promotion or marketing of cigarettes.
In connection with the MFN amendments, the parties executed new agreements
governing settling defendants' payment of attorneys fees to counsel for
Mississippi, Texas and Florida. (Copies of the Mississippi and Texas
agreements are filed as Exhibits to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1998 and copies of the Florida
agreements are filed as Exhibits to this Form 10-Q, and the discussion
herein is qualified by reference thereto.) The agreements provide 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. Under the agreements, there is
an annual cap of $500.0 on aggregate attorneys' fees to be paid pursuant to
arbitration awards, including those to be paid for counsel for Mississippi,
Texas and Florida. A one-time $250.0 payment may be paid for cases that were
settled in 1997. This 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 federal tobacco legislation.
The settling defendants have made payments to counsel for Mississippi, Texas
and Florida totaling $283.5 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.
These settlements resulted in pre-tax charges to earnings of $79.0 and $84.4
in the third and fourth quarter of 1997, respectively, and $30.6 and $215.8
in the quarter and nine months ended September 30, 1998.
Together with other companies in the United States tobacco industry,
Lorillard has discussed with a number of state attorneys general an
agreement that could settle the asserted and unasserted health care cost
Page 34
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 number of states
sufficient 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
$206,000 through 2025, including (i) more than $12,700 in initial payments
over the first five years (including $2,400 immediately); (ii) annual
payments commencing in 2000 in the original amount of $4,500 and increasing
periodically to $9,000 in 2018 and thereafter in perpetuity, and (iii)
$1,700 over ten years, the great preponderance of which is due during the
first five years. Lorillard's share of the $2,400 payment due immediately
would be 7.3% (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 Lorillard's share of
the $2,400 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 Lorillard's available cash. The Company further anticipates that
Lorillard's share of future annual industry payments related to cigarette
sales would be charged to expense as the related sales occur and may be
funded through price increases. The Company believes that any such agreement
would materially adversely affect its consolidated results of operations and
financial position. 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, Lorillard's share 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 Form 10-Q and the foregoing discussion is qualified by
reference thereto.
LIGGETT SETTLEMENT - Liggett Group, Inc. and its parent company, Brooke
Group, Ltd., Inc. ("Liggett"), and the Attorneys General for a total of 40
states, have announced that they have reached agreements (the "Liggett
Settlements") to settle the reimbursement claims made by those states. The
proposed settlements reportedly will require Liggett: to make one-time
payments to each of the settling states in an amount of as much as $1.0; to
pay to the settling states an aggregate percentage of as much as 30% of its
pre-tax profits annually for the next 25 years; to acknowledge that
cigarette smoking is addictive (Liggett has supplemented the warning notices
it places on its cigarette packages to reflect that acknowledgment); to
acknowledge that cigarette smoking causes disease; to acknowledge that
cigarette companies have targeted marketing programs towards minors; and to
cooperate in suits against the other cigarette manufacturers by releasing
Liggett documents to the Attorneys General and to allow its employees to
testify in these matters. The Liggett Settlements also purport to be on
behalf of "all persons who, prior to or during the term of [the Liggett
Settlements], have smoked cigarettes or have used other tobacco products and
have suffered or claim to have suffered injury as a consequence thereof."
Pursuant to the Liggett Settlements described above, Liggett has submitted
numerous documents from its files to courts and defendants in several of the
Reimbursement Cases and in other cases as well. Liggett has also served
descriptive logs of such documents on counsel for plaintiffs and defendants
in those cases. Defendants have reviewed the Liggett logs and the Liggett
documents to determine which Liggett documents are subject to a joint-
defense privilege claim by other defendants.
Page 35
DEFENSES - One of the defenses raised by Lorillard in certain cases is
preemption by the Federal Cigarette Labeling and Advertising Act (the
"Labeling Act"). In the case of Cipollone v. Liggett Group, Inc., et al.,
the United States Supreme Court, in a plurality opinion issued on June 24,
1992, 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, does
preempt claims against tobacco companies arising after July 1, 1969, which
assert that the tobacco companies failed to adequately warn of the alleged
health risks of cigarettes, sought to undermine or neutralize the Labeling
Act's mandatory health warnings, or concealed material facts concerning the
health effects of smoking in their advertising and promotion of cigarettes.
The Supreme Court held that claims against tobacco companies based on
fraudulent misrepresentation, breach of express warranty, or conspiracy to
misrepresent material facts concerning the alleged health effects of smoking
are not preempted by the Labeling Act. The Supreme Court in so holding did
not consider whether such common law damage actions were valid under state
law. The effect of the Supreme Court's decision on pending and future cases
against Lorillard and other tobacco companies will likely be the subject of
further legal proceedings. Additional litigation involving claims such as
those held to be preempted by the Supreme Court in Cipollone could be
encouraged if legislative proposals to eliminate the federal preemption
defense, pending in Congress since 1991, are enacted. It is not possible to
predict whether any such legislation will be enacted.
Lorillard believes that it has a number of defenses to pending cases, in
addition to defenses based on preemption described above, and Lorillard will
continue to maintain a vigorous defense in all such litigation. These
defenses, where applicable, include, among others, statutes of limitations
or repose, assumption of the risk, comparative fault, the lack of proximate
causation, and the lack of any defect in the product alleged by a plaintiff.
Lorillard believes that some or all of these defenses may, in many of the
pending or anticipated cases, be found by a jury or court to bar recovery by
a plaintiff. Application of various defenses, including those based on
preemption, are likely to be the subject of further legal proceedings in the
Class Action cases and in the Reimbursement Cases.
Other Legal Proceedings: In September 1997, a purported class action was
commenced by private plaintiffs in Alabama state court alleging that the
U.S. tobacco companies and others conspired to fix cigarette prices in
Alabama, that agreements leading to price increases were reached during the
negotiations leading to the Proposed Resolution, and that prices were
increased pursuant to the alleged conspiracy in 1997 (Mosley, et al. v.
Philip Morris Companies Inc., et al.). The parties have settled this action
for a payment by defendants in an aggregate amount approximating sixty
thousand dollars to cover costs incurred by plaintiff's counsel.
Department of Justice Investigations - Early in 1994, the Energy and
Commerce Subcommittee on Health and the Environment of the U.S. House of
Representatives (the "Subcommittee") launched an oversight investigation
into tobacco products, including possible regulation of nicotine-containing
cigarettes as drugs. During the course of such investigation, the
Subcommittee held hearings at which executives of each of the major tobacco
manufacturers testified. Following the November 1994 elections, the incoming
Chairman of the Energy and Commerce Committee indicated that this
investigation by the Subcommittee would not continue, and on December 20,
1994, the outgoing majority staff of the Subcommittee issued two final
reports. One of these reports questioned the scientific practices of what it
characterized as the tobacco industry's "long-running campaign" related to
ETS, but reached no final conclusions. The second report asserted that
documents obtained from American Tobacco Company, a competitor of Lorillard,
"reflect an intense research and commercial interest in nicotine."
Page 36
The U.S. Department of Justice is investigating allegations of perjury in
connection with the testimony provided by tobacco industry executives,
including Lorillard executives, to the Subcommittee in April 1994. Lorillard
has not received any request for documents or testimony. It is impossible at
this time to predict the outcome of this investigation.
In 1996 Lorillard responded to a grand jury subpoena for documents in
connection with a grand jury investigation commenced in 1992 by the United
States Attorney's Office for the Eastern District of New York regarding
possible fraud by Lorillard and other tobacco companies relating to smoking
and health research undertaken or administered by the Council for Tobacco
Research - USA, Inc. There have been no requests for any testimony by any
Lorillard personnel. At the present time, Lorillard is unable to predict
whether the United States Attorney's Office will ultimately determine to
bring any proceeding against Lorillard. An adverse outcome of this
investigation could result in criminal, administrative or other proceedings
against Lorillard.
In March 1996, the Company and Lorillard each received a grand jury subpoena
duces tecum from the United States Attorney's Office for the Southern
District of New York seeking documents, advertisements or related materials
distributed by the Company and Lorillard to members of the general public
relating to, among other things, the health effects of cigarettes, nicotine
or tobacco products, the addictiveness of such products, and Congressional
hearings relating to cigarettes or the tobacco industry. The Company and
Lorillard responded to the subpoena. The Company and Lorillard were informed
in the latter part of 1996 that responsibility for this investigation has
been transferred from the United States Attorney's Office for the Southern
District of New York to the United States Department of Justice in
Washington, D.C. It is impossible at this time to predict the ultimate
outcome of this investigation.
On September 18, 1998, Lorillard was served with a grand jury subpoena for
documents in connection with an investigation being conducted by the Middle
Atlantic Office of the Antitrust Division of the United States Department of
Justice. Similar subpoenas have been served on other tobacco companies and
tobacco leaf purchasers. The investigation concerns possible violations of
the antitrust laws in connection with the purchase of tobacco leaf in the
United States. At the present time, Lorillard is unable to predict whether
the Department of Justice will ultimately determine to bring any proceedings
against Lorillard arising out of this investigation. An adverse outcome of
this investigation could result in criminal, civil or other proceedings
against Lorillard.
While Lorillard intends to defend vigorously all smoking and health related
litigation which may be brought against it, it is not possible to predict
the outcome of any of this litigation. Litigation is subject to many
uncertainties, and it is possible that some of these actions could be
decided unfavorably.
Many of the recent developments in relation to smoking and health discussed
above have received wide-spread media attention including the release of
documents by the industry. These developments may reflect adversely on the
tobacco industry and could have adverse effects on the ability of Lorillard
and other cigarette manufacturers to prevail in smoking and health
litigation.
Except for the effect of the Proposed Resolution if implemented as described
above, 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. It is possible that the Company's results of operations or cash
Page 37
flows in a particular quarterly or annual period or its financial position
could be materially affected by an unfavorable outcome of certain pending
litigation.
Other Litigation -- The Company and its subsidiaries are also parties to
other litigation arising in the ordinary course of business. The outcome of
this other litigation will not, in the opinion of management, materially
affect the Company's results of operations or equity.
7.In the opinion of Management, the accompanying consolidated condensed
financial statements reflect all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the financial position as of
September 30, 1998 and December 31, 1997 and the results of operations for
the three and nine months and changes in cash flows for the nine months
ended September 30, 1998 and 1997, respectively.
Results of operations for the third quarter and the first nine months of
each of the years is not necessarily indicative of results of operations for
that entire year.
Page 38
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
----------------------------------------------------------------------
Liquidity and Capital Resources:
- - -------------------------------
Insurance
- - ---------
CNA Financial Corporation and subsidiaries ("CNA"). CNA is an 85% owned
subsidiary of the Company.
Statutory surplus of the property and casualty insurance subsidiaries was
approximately $7.0 billion at September 30, 1998 and December 31, 1997.
Statutory surplus increased by statutory net income of $291.0 million and a
change in net unrealized investment gains of $25.0 million. These increases
were more than offset by a $367.0 million reduction in surplus, primarily
dividends. The statutory surplus of the life insurance subsidiaries was
approximately $1.2 billion at September 30, 1998 and December 31, 1997.
The principal cash flow sources of CNA's property and casualty and life
insurance subsidiaries are premiums, investment income, and sales and
maturities of investments. The primary operating cash flow uses are payments
for claims, policy benefits and operating expenses.
For the first nine months of 1998, CNA's operating cash flows were a negative
$730.0 million, compared to a negative $359.2 million for the nine months ended
September 30, 1997. Negative cash flows for 1998 are primarily the result of
reduced income from operations while negative cash flows for 1997 are
substantially the result of the settlement of asbestos and environmental
claims, including those attributable to the Fibreboard litigation.
Net cash flows from operations are invested in marketable securities.
Investment strategies employed by CNA's insurance subsidiaries consider the
cash flow requirements of the insurance products sold and the tax attributes of
the various types of marketable investments.
On January 8, 1998, CNA issued $150.0 million principal amount of 6.45%
senior notes due January 15, 2008 and $150.0 million principal amount of 6.95%
senior notes due January 15, 2018. The net proceeds were used to pay down bank
loans drawn under a revolving credit facility. Concurrent with the reduction in
bank debt, CNA terminated $300.0 million notional amount of interest rate
swaps.
On April 15, 1998, CNA issued $500.0 million principal amount of 6.50% senior
notes due April 15, 2005. The net proceeds were used to pay down existing bank
debt, provide refinancing of certain senior notes and provide funds for
acquisitions.
In the past five years, several rating agencies have lowered CNA's ratings
with regard to its debt and claims paying ability. Some of the factors causing
these downgrades include Casualty's obligations under the Fibreboard settlement
and the merger with The Continental Corporation in 1995. More recently, rating
agencies in their evaluations of Casualty have expressed concern with regard to
the intensely competitive environment in the U.S. commercial insurance markets,
among other factors.
CNA intends to take a number of steps to address the issue of lowered ratings
and, among other things, intends to enhance its capital structure by
Page 39
approximately $500.0 million. It is anticipated that this will be accomplished
in the fourth quarter of 1998 and the first quarter of 1999 through several
transactions, including the issuance of preferred equity and debt securities by
CNA. The Company has advised CNA that it would be willing to purchase
approximately half of such securities.
As of November 2, 1998 CNA purchased 2,734,800 shares of its outstanding
Common Stock at an aggregate cost of approximately $102.4 million. Depending on
market conditions, CNA from time to time may purchase additional shares in the
open market or otherwise.
Cigarettes
- - ----------
Lorillard, Inc. and subsidiaries ("Lorillard"). Lorillard, Inc. is a wholly
owned subsidiary of the Company.
Lorillard and other cigarette manufacturers continue to be confronted with an
increasing level of litigation and regulatory issues.
The volume of lawsuits against Lorillard and other manufacturers of tobacco
products seeking damages for cancer and other health effects claimed to have
resulted from an individual's use of cigarettes, addiction to smoking, or
exposure to environmental tobacco smoke has increased substantially through
1997 and in 1998. See Note 6 of the Notes to Consolidated Condensed Financial
Statements. In a number of cases, the Company is named as a defendant. Tobacco
litigation includes claims brought by individual plaintiffs and claims brought
as class actions on behalf of a large number of individuals for damages
allegedly caused by smoking; and claims brought on behalf of governmental
entities, private citizens, or other organizations seeking reimbursement of
health care costs allegedly incurred as a result of smoking. In addition,
claims have been brought against Lorillard seeking damages resulting from
exposure to asbestos fibers which had been incorporated, for a limited period
of time, ending more than forty years ago, into filter material used in one
brand of cigarettes manufactured by Lorillard. In the foregoing actions,
plaintiffs claim substantial compensatory and punitive damages in amounts
ranging into the billions of dollars.
It has also been reported that the Executive branch of the government has
urged the U.S. Justice Department to commence an action against the tobacco
industry seeking reimbursement of Medicare expenditures resulting from injuries
or other health effects allegedly caused by use of tobacco products.
In 1997 and 1998, Lorillard, together with other companies in the United
States tobacco industry, reached agreements to settle certain tobacco related
litigation. See "Settlements of Reimbursement Cases" and "Broin v. Philip
Morris Companies, Inc. et al." in Note 6 of the Notes to Consolidated Condensed
Financial Statements.
Together with other companies in the United States tobacco industry,
Lorillard has 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 number of states sufficient 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
Page 40
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.
Lorillard's share of the $2.4 billion payment due immediately would be 7.3%
(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 Lorillard's 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 Lorillard's
available cash. The Company further anticipates that Lorillard's share of
future annual industry payments related to cigarette sales would be charged to
expense as the related sales occur and may be funded through price increases.
The Company believes that any such agreement would materially adversely affect
its consolidated results of operations and financial position. 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, Lorillard's
share 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 Form 10-Q and the foregoing
discussion is qualified by reference thereto.
FDA Regulations
The Food and Drug Administration ("FDA") has published regulations (the "FDA
Regulations") severely restricting cigarette advertising and promotion and
limiting the manner in which tobacco products can be sold. The FDA premised its
regulations on the need to reduce smoking by underage youth and young adults.
The FDA Regulations include:
(i) Regulations making unlawful the sale by retail merchants of cigarettes
to anyone under age 18. These regulations also require retail merchants
to request proof of age for any person under age 27 who attempts to
purchase cigarettes.
(ii) Regulations limiting all cigarette advertising to a black and white,
text only format in most publications and outdoor advertising such as
billboards, prohibiting billboards advertising cigarettes within 1,000
feet of a school or playground, banning the use of cigarette brand
names, logos and trademarks on premium items and prohibiting the
furnishing of any premium item in consideration for the purchase of
cigarettes or the redemption of proofs-of-purchase coupons.
(iii) Regulations prohibiting the use of cigarette brand names to sponsor
sporting and cultural events.
Lorillard and other cigarette manufacturers have filed a lawsuit, Coyne
Beahm, Inc., et al. v. United States Food & Drug Administration, et al., in the
United States District Court for the Middle District of North Carolina
challenging the FDA's assertion of jurisdiction over cigarettes. The Court
granted, in part, and denied, in part, plaintiffs' motion for summary judgment.
The Court held that if an adequate factual foundation is established, the FDA
has the authority to regulate tobacco products as medical devices under the
Federal Food, Drug & Cosmetic Act, may impose restrictions regarding access to
tobacco products by persons under the age of 18, and may impose labeling
requirements on tobacco products' packaging. The Court, however, also held that
the FDA is not authorized to regulate the promotion or advertisement of tobacco
products. The Court also stayed the effective date for the FDA Regulations
Page 41
relating to advertising and promotion of tobacco products, but allowed the
access restrictions to take effect as of February 27, 1997. Both the plaintiffs
and the defendants filed an appeal of the District Court's ruling to the Fourth
Circuit Court of Appeals and on August 14, 1998, that Court overturned the
District Court's decision, invalidating the FDA's assertion of authority over
cigarettes and the FDA Regulations promulgated pursuant to that asserted
authority. The plaintiffs petitioned the Appeals Court for rehearing with
suggestions for en banc reconsideration, and on November 10, 1998 the Appeals
Court denied such petition.
Proposed Resolution of Certain Regulatory and Litigation Issues
On June 20, 1997, Lorillard, together with other companies in the United
States tobacco industry, entered into a Memorandum of Understanding to support
the adoption of federal legislation and any necessary ancillary undertakings,
incorporating the features described in the proposed resolution attached to the
Memorandum of Understanding (together, the "Proposed Resolution"). The Proposed
Resolution would permit extensive regulation of the industry by the FDA and
would impose large monetary obligations on the industry to be paid to the
federal government and to the states. The Proposed Resolution would require the
manufacturers to sign private contracts, or Protocols, which embody significant
restrictions on the industry's commercial free speech advertising. In return,
the Proposed Resolution would resolve much of the industry's litigation and
establish a rational litigation system for future lawsuits. The Proposed
Resolution, by the nature of its terms, could be implemented only by federal
legislation. Incorporated by reference into this filing is the discussion of
the Proposed Resolution in the Company's annual report on Form 10-K for the
year ended December 31, 1997.
Since the Proposed Resolution was announced, it has been the subject of
intense review and criticism by the White House, the public health community,
and other interested parties. Certain members of Congress have offered, or
indicated that they intend to offer, alternative legislation. No bill
introduced would adopt the Proposed Resolution as agreed to. Over 50 bills have
been introduced in Congress regarding the issues raised in the Proposed
Resolution, including bills seeking more stringent regulation of tobacco
products by the Food and Drug Administration and more punitive monetary
payments by the companies. One particular bill initially introduced by Senator
John McCain from Arizona, was approved by the Senate Commerce Committee. The
McCain bill included, among other things, provisions more stringent than those
in the Proposed Resolution regarding FDA regulation, licensing of tobacco
manufacturers and retailers, surcharges against the industry for failure to
achieve underage smoking reduction goals, advertising restrictions and labeling
requirements, industry payments, smoking restrictions, civil liability
limitations, a method for determining the amount and payment of attorneys'
fees, and public disclosure of industry documents. On June 17, 1998, the United
States Senate voted to return the McCain bill to the Senate Commerce Committee
after several weeks of debate. No further action was taken on the McCain Bill,
and no similar bill was acted upon by the 105th Congress before it adjourned in
October.
On April 18, 1998, Lorillard, along with the other signatory companies to the
Proposed Resolution, announced a withdrawal from the legislative process to
enact a comprehensive tobacco settlement. Lorillard remains committed to the
Proposed Resolution, but does not believe that the current political process in
Washington can produce legislation that is fair to the industry.
For information with respect to these matters, as well as with respect to
discussions regarding an attempt to achieve a comprehensive legislative
resolution to litigation and regulatory issues affecting the United States
tobacco industry, see Note 6 of the Notes to Consolidated Condensed Financial
Page 42
Statements.
Cigarette Excise Taxes
The United States federal excise tax on cigarettes is presently $12.00 per
1,000 cigarettes ($0.24 per pack of 20 cigarettes). In August 1997, the United
States Congress approved, and the President signed into law, an increase in the
federal excise tax on cigarettes of $7.50 per 1,000 cigarettes ($0.15 per pack
of 20 cigarettes). This increase is phased in at a rate of $5.00 per 1,000
cigarettes in the year 2000 and an additional $2.50 per 1,000 cigarettes in the
year 2002. Various states have proposed, and certain states have recently
passed, increases in their state tobacco excise taxes. Such actions may
adversely affect Lorillard's volume, operating revenues and operating income.
Hotels
- - ------
Loews Hotels Holding Corporation and subsidiaries ("Loews Hotels"). Loews
Hotels Holding Corporation is a wholly owned subsidiary of the Company.
Funds from operations continue to exceed operating requirements. Loews Hotels
has entered into an agreement with the owners of the Universal Florida resort
to develop hotels at the resort. In addition, Loews Hotels is developing a
convention center hotel in Philadelphia. Capital expenditures in relation to
these hotel projects will be funded by a combination of equity and mortgages.
Loews Hotels will obtain its equity contributions for the development of these
hotels under arrangements with the Company.
Offshore Drilling
- - -----------------
Diamond Offshore Drilling, Inc. and subsidiaries ("Diamond Offshore").
Diamond Offshore Drilling, Inc. is a 52% owned subsidiary of the Company.
For the first nine months of 1998, Diamond Offshore's cash provided by
operating activities amounted to $389.1 million, compared to $243.7 million in
the 1997 period. This increase in operating cash flow was primarily
attributable to a $101.8 million increase in net income for the first nine
months of 1998, a $16.5 million increase in depreciation and amortization
expense, and various changes in operating assets and liabilities.
Diamond Offshore continues to enhance its fleet to meet customer demand for
diverse drilling capabilities, including those required for deep water and
harsh environment operations. Diamond Offshore has a revised budget of $125.2
million for capital expenditures on rig upgrades during 1998. Diamond Offshore
expended $66.5 million, including capitalized interest expenses, for
significant rig upgrades during the nine months ended September 30, 1998. Such
rig upgrade projects include the conversion of an accommodation vessel to a
semisubmersible drilling unit capable of operating in harsh environments and
ultra-deep water. Diamond Offshore has estimated the cost of conversion to be
approximately $210.0 million. Upon completion of the conversion, the rig will
begin a five year drilling program in the Gulf of Mexico, which is anticipated
to commence in late 1999. Other upgrade projects include the installation of
new engines and other equipment on the Ocean King which is expected to be
completed in November 1998, the cantilever conversion project on the Ocean
Warwick completed in March 1998, and leg strengthening and other modifications
on the Ocean Tower completed in May 1998. Diamond Offshore has also budgeted
$126.7 million for 1998 capital expenditures associated with its continuing rig
enhancement program, spare equipment and other corporate requirements. These
expenditures include purchases of anchor chain, drill pipe, riser, and other
drilling equipment. During the first nine months of 1998, $66.1 million was
Page 43
expended on this program.
Diamond Offshore believes it has the financial resources needed to meet its
business requirements in the foreseeable future, including capital expenditures
for major upgrades, continuing rig enhancements and working capital
requirements.
During the nine months ended September 30, 1998, Diamond Offshore purchased
3,518,100 shares of its outstanding Common Stock at an aggregate cost of
approximately $88.7 million. Depending on market conditions, Diamond Offshore
from time to time may purchase additional shares in the open market or
otherwise.
Watches and Clocks
- - ------------------
Bulova Corporation and subsidiaries ("Bulova"). Bulova Corporation is a 97%
owned subsidiary of the Company.
Funds from operations continue to exceed operating requirements. Bulova's
cash and cash equivalents, and investments amounted to $31.8 million at
September 30, 1998, as compared to $29.1 million at December 31, 1997. Funds
for other capital expenditures and working capital requirements are expected to
be provided from operations.
Parent Company
- - --------------
During the nine months ended September 30, 1998, the Company purchased
1,309,200 shares of its outstanding Common Stock at an aggregate cost of
approximately $110.1 million. Depending on market conditions, the Company from
time to time may purchase additional shares in the open market or otherwise.
Investments:
- - -----------
Investment activities of non-insurance companies include investments in fixed
income securities, equity securities including short sales, derivative
instruments and short-term investments. Equity securities, which are considered
part of the Company's trading portfolio, short sales and derivative instruments
are marked to market and reported as investment gains or losses in the income
statement. The remaining securities are carried at fair value with a net
unrealized gain (loss) of $.1 and $(3.2) million at September 30, 1998 and
December 31, 1997, respectively.
The Company enters into short sales and invests in certain derivative
instruments for a number of purposes, including: (i) for its asset and
liability management activities, (ii) for income enhancements for its portfolio
management strategy, and (iii) to benefit from anticipated future movements in
the underlying markets that Company management expects to occur. If such
movements do not occur or if the market moves in the opposite direction from
what management expects, significant losses may occur.
Monitoring procedures include senior management review of daily detailed
reports of existing positions and valuation fluctuations to ensure that open
positions are consistent with the Company's portfolio strategy.
The credit exposure associated with these instruments is generally limited to
the positive market value of the instruments and will vary based on changes in
market prices. The Company enters into these transactions with large financial
institutions and considers the risk of nonperformance to be remote.
Page 44
The Company does not believe that any of the derivative instruments utilized
by it are unusually complex or volatile, nor do these instruments contain
imbedded leverage features which would expose the Company to a higher degree of
risk. See "Results of Operations" and "Quantitative and Qualitative Disclosures
about Market Risk" for additional information with respect to derivative
instruments, including recognized gains and losses on these instruments. See
also Note 4 of the Notes to Consolidated Financial Statements in the 1997
Annual Report on Form 10-K.
Page 45
Insurance
- - ---------
A summary of CNA's general account fixed maturity securities portfolio and
short-term investments, at carrying value, are as follows:
<TABLE>
<CAPTION>
Change in
Unrealized
September 30, December 31, Gains
1998 1997 (Losses)
-------------------------------------
(In millions)
<S> <C> <C> <C>
Fixed maturity securities:
U.S. Treasury securities and
obligations of government agencies . $10,075.0 $12,980.0 $ 236.0
Asset-backed securities ............. 6,766.0 4,804.0 137.0
Tax exempt securities ............... 6,144.0 4,724.0 98.0
Taxable ............................. 6,337.0 7,040.0 (124.0)
----------------------------------
Total fixed maturity securities. 29,322.0 29,548.0 347.0
Stocks ................................ 1,362.0 814.0 272.0
Short-term and other investments....... 5,613.0 5,829.0 (107.0)
Derivative security investments ....... 8.0 12.0
----------------------------------
Total .......................... $36,305.0 $36,203.0 $ 512.0
==================================
Short-term investments:
Commercial paper .................... $ 1,981.0 $ 1,850.0
Security repurchase collateral ...... 58.0 154.0
Escrow .............................. 1,049.0 1,065.0
U.S. Treasuries ..................... 525.0 558.0
Money markets ....................... 312.0 624.0
Others .............................. 624.0 633.0
Other investments ..................... 1,064.0 945.0
-----------------------
Total short-term and other
investments ................... $ 5,613.0 $ 5,829.0
=======================
</TABLE>
CNA's general account investment portfolio is managed to maximize after tax
investment return, while minimizing credit risks with investments concentrated
in high quality securities to support its insurance underwriting operations.
CNA has the capacity to hold its fixed maturity portfolio to maturity.
However, securities may be sold as part of CNA's asset/liability strategies or
to take advantage of investment opportunities generated by changing interest
rates, tax and credit considerations, or other similar factors. Accordingly,
fixed maturity securities are classified as available for sale.
CNA invests from time to time in certain derivative financial instruments
primarily to reduce its exposure to market risk (principally interest rate,
equity price and foreign currency risk). CNA also uses derivatives to mitigate
the risk associated with its indexed group annuity contract by purchasing S&P
500 futures contracts in a notional amount equal to the original customer
deposit.
Page 46
CNA considers its derivatives as being held for purposes other than trading.
Derivative securities, except for interest rate swaps associated with certain
corporate borrowings, are recorded at fair value at the reporting date with
changes in market value reflected in investment gains and losses. The interest
rate swaps on corporate borrowings are accounted for on the accrual basis with
the related income or expense recorded as an adjustment to interest expense;
the changes in fair value are not recorded.
The general account portfolio consists primarily of high quality (BBB or
higher) marketable fixed maturity securities, approximately 93.7% of which are
rated as investment grade. At September 30, 1998, tax exempt securities and
short-term investments excluding collateral for securities sold under
repurchase agreements, comprised approximately 16.9% and 12.4%, respectively,
of the general account's total investment portfolio compared to 13.1% and
13.1%, respectively, at December 31, 1997. Historically, CNA has maintained
short-term assets at a level that provided for liquidity to meet its short-term
obligations, as well as reasonable contingencies and anticipated claim payout
patterns. Short-term investments at both September 30, 1998 and December 31,
1997 are substantially higher than historical levels in anticipation of
Fibreboard-related claim payments. At September 30, 1998, the major components
of the short-term investment portfolio consist primarily of high grade
commercial paper and U.S. Treasury bills.
As of September 30, 1998, the market value of CNA's general account
investments in fixed maturities was $29.3 billion and was greater than
amortized cost by approximately $876.0 million. This compares to a market value
of $29.5 billion and approximately $528.0 million of net unrealized investment
gains at December 31, 1997. The gross unrealized investment gains and losses
for the fixed maturity securities portfolio at September 30, 1998 were $1,138.0
and $262.0 million, respectively, compared to $644.0 and $116.0 million,
respectively, at December 31, 1997.
Net unrealized investment gains on general account fixed maturities at
September 30, 1998 include net unrealized investment losses on high yield
securities of $137.0 million, compared to net unrealized investment losses of
$2.0 million at December 31, 1997. High yield securities are bonds rated as
below investment grade by bond rating agencies, plus private placements and
other unrated securities which, in the opinion of management, are below
investment grade (below BBB). CNA's investment in high yield securities in the
general account decreased $377.0 million to approximately $1.9 billion at
September 30, 1998 when compared to December 31, 1997.
At September 30, 1998, total Separate Account cash and investments amounted
to approximately $5.3 billion with taxable fixed maturity securities
representing approximately 83.9% of the Separate Accounts' portfolios.
Approximately 68.0% of Separate Account investments are used to fund guaranteed
investments for which CNA's life insurance affiliate guarantees principal and a
specified return to the contract holders. The duration of fixed maturity
securities included in the guaranteed investment portfolio is generally matched
with the corresponding payout pattern of the liabilities of the guaranteed
investment contracts. The fair value of all fixed maturity securities in the
guaranteed investment portfolio was $3.4 billion at September 30, 1998 compared
to $3.8 billion at December 31, 1997. At September 30, 1998, fair value
exceeded amortized cost by approximately $101.0 million, as compared to an
unrealized gain of approximately $71.0 million at December 31, 1997. The gross
unrealized investment gains and losses for the guaranteed investment fixed
maturity securities portfolio at September 30, 1998 were $118.0 and $17.0
million, respectively, as compared to unrealized gains of $87.0 million and
unrealized losses of $16.0 million at December 31, 1997.
Carrying values of high yield securities in the guaranteed investment
Page 47
portfolio were $278.0 and $310.0 million at September 30, 1998 and December 31,
1997, respectively. Net unrealized investment losses on high yield securities
held in such Separate Accounts were $19.0 million at September 30 1998,
compared to $1.0 million at December 31, 1997.
High yield securities generally involve a greater degree of risk than that of
investment grade securities. Expected returns should, however, compensate for
the added risk. The risk is also considered in the interest rate assumptions in
the underlying insurance products. At September 30, 1998, CNA's investment in
high yield bonds, including Separate Accounts, was approximately 3.7% of its
total assets as compared to 3.2% at December 31, 1997. In addition, CNA's
investments in mortgage loans and real estate are substantially below the
industry average, representing less than one quarter of one percent of its
total assets.
Included in CNA's fixed maturity securities at September 30, 1998 (general
and guaranteed investment portfolios) are $9.0 billion of asset-backed
securities, consisting of approximately 54.5% in collateralized mortgage
obligations ("CMO's"), 15.2% in corporate asset-backed obligations, 16.6% in
corporate mortgage backed security pass-through obligations and 13.7% in U.S.
government agency issued pass-through certificates. The majority of CMO's held
are corporate mortgage-backed securities, which are actively traded in liquid
markets and are priced monthly by broker-dealers. At September 30, 1998, the
fair value of asset-backed securities exceeded the amortized cost by
approximately $299.0 million compared to net unrealized investment gains of
$114.0 million at December 31, 1997. CNA limits the risks associated with
interest rate fluctuations and prepayment by concentrating its CMO investments
in early planned amortization classes with relatively short principal repayment
windows.
At September 30, 1998, 36.2% of the general account's fixed maturity
securities portfolio was invested in U.S. government securities, 36.4% in other
AAA rated securities and 15.1% in AA and A rated securities. CNA's guaranteed
investment fixed maturity securities portfolio is comprised of 5.7% U.S.
government securities, 61.9% in other AAA rated securities and 13.9% in AA and
A rated securities. These ratings are primarily from Standard and Poor's.
Results of Operations:
- - ----------------------
Revenues increased by $840.5 and $1,352.2 million, or 16.4% and 9.1%,
respectively, and net income increased by $419.5 and $279.9 million,
respectively, for the quarter and nine months ended September 30, 1998 as
compared to the corresponding periods of the prior year. The following table
sets forth the major sources of the Company's consolidated revenues and net
income.
Page 48
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-----------------------------------------------------
1998 1997 1998 1997
-----------------------------------------------------
(In millions)
<S> <C> <C> <C> <C>
Revenues (a):
Property and casualty insurance ....... $3,196.4 $3,286.7 $ 9,950.4 $ 9,618.7
Life insurance ........................ 936.7 1,029.8 2,945.1 3,059.4
Cigarettes ............................ 788.8 648.9 2,074.1 1,769.7
Hotels ................................ 57.8 57.3 171.2 164.3
Offshore drilling ..................... 326.6 256.4 950.5 698.0
Watches and clocks .................... 35.4 34.4 96.2 92.3
Investment income (loss)-net (non-
insurance companies) ................. 605.1 (198.4) (38.1) (592.6)
Other and eliminations-net ............ 5.1 (3.7) 2.4 (10.2)
----------------------------------------------------
$5,951.9 $5,111.4 $16,151.8 $14,799.6
====================================================
Net income (a):
Property and casualty insurance ....... $ 14.6 $ 199.9 $ 336.4 $ 484.3
Life insurance ........................ (14.8) 45.8 64.2 122.9
Cigarettes ............................ 195.5 72.4 356.2 275.4
Hotels ................................ 6.5 6.6 18.0 15.7
Offshore drilling ..................... 54.0 36.4 144.0 93.8
Watches and clocks .................... 3.2 3.0 7.3 5.7
Investment income (loss)-net (non-
insurance companies) ................. 391.9 (129.8) (29.5) (390.4)
Corporate interest expense ............ (20.7) (17.2) (64.7) (49.6)
Unallocated corporate expense and
other-net ............................ (13.1) (19.5) (51.3) (57.1)
----------------------------------------------------
$ 617.1 $ 197.6 $ 780.6 $ 500.7
====================================================
(a) Includes investment gains (losses) as follows:
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------------------------
1998 1997 1998 1997
---------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Property and casualty insurance ....... $ 88.4 $ 192.6 $ 414.3 $ 338.6
Life insurance ........................ 9.3 48.1 99.8 120.6
Investment income-net ................. 565.3 (239.2) (176.1) (724.3)
---------------------------------------------------
$ 663.0 $ 1.5 $ 338.0 $(265.1)
===================================================
Net income:
Property and casualty insurance ....... $ 46.3 $ 106.7 $ 221.7 $ 186.2
Life insurance ........................ 1.7 24.6 48.0 61.5
Investment income-net ................. 367.5 (155.1) (114.2) (472.4)
---------------------------------------------------
$ 415.5 $ (23.8) $ 155.5 $(224.7)
===================================================
</TABLE>
Page 49
Insurance
- - ---------
Property and casualty revenues, excluding investment gains, increased by
$13.9 and $256.0 million, or .4% and 2.8%, for the quarter and nine months
ended September 30, 1998, as compared to the same periods a year ago.
Property and casualty premium revenues increased by $25.0 and $218.0 million,
or 1.0% and 2.9%, for the quarter and nine months ended September 30, 1998,
from the prior year's comparable periods. The increase is attributable to
higher involuntary risk earned premium of approximately $207.0 million, an
increase in personal lines premium of approximately $92.0 million, $80.0
million of premium from CNA Surety Corporation, which was formed in September
1997, and $48.0 million of premium from Omega Aseguradora de Reisgo de Trabajo,
an Argentinean workers' compensation carrier that was acquired in June 1997.
These increases were partially offset by a decrease in commercial lines
premiums of approximately $150.0 million and group lines of approximately $92.0
million.
Involuntary premium for 1997 reflected reductions in estimates of premium for
1996 and prior periods, primarily in the workers' compensation line of
business, and a greater willingness on the part of the voluntary market,
including CNA, to write these types of risks. The 1998 estimated premiums
reflect a return to historical levels. The increase in personal lines premium
is attributable to increases in California Earthquake Authority premium of
$34.0 million as well as an increase of $45.0 million across various lines. The
decrease in commercial lines is primarily due to competitive pricing pressures
throughout the industry. The decrease in group lines is mainly due to the
decision to exit the Employer Health and Affinity Health lines of business. Net
investment income decreased by $20.0 and $30.0 million, or 4.6% and 2.2%, for
the quarter and nine months ended September 30, 1998, compared with the same
period in the prior year, due to lower yielding investments. The bond segment
of the investment portfolio yielded 6.1% in the first nine months of 1998
compared with 6.3% for the same period a year ago.
Life insurance revenues, excluding investment gains, decreased by $54.3 and
$93.5 million, or 5.5% and 3.2%, for the quarter and nine months ended
September 30, 1998 as compared to the same periods a year ago. Life premium
revenues decreased by $62.2 and $114.6 million, or 7.3% and 4.5%, for the
quarter and nine months ended September 30, 1998. The decrease is primarily due
to lower premiums for the Federal Employees Health Benefit Plan ("FEHBP"). The
decrease in FEHBP premiums is due to improved claim experience upon which
premiums are based and continues the trend from the first half of this year.
Life net investment income increased by $9.0 and $29.0 million, or 8.8% and
9.5%, for the quarter and nine months ended September 30, 1998, compared to the
same periods a year ago. The bond segment of the life investment portfolio
yielded approximately 6.4% in the first nine months of 1998, as compared to
6.3% for the comparable period in 1997.
On August 5, 1998, CNA announced a reassessment of its businesses which would
involve reorganization of a number of its businesses and corporate support
areas. In the third quarter of 1998, CNA finalized and approved a plan to
restructure its operations. In connection with this plan, CNA recorded a pre-
tax restructuring and other related charges amounting to approximately $220.0
million. The restructuring plan focused on a net reduction in the current
workforce of approximately 4,500 employees resulting in net reduction of
approximately 2,400 employees, the consolidation of certain processing
centers, the closing of various facilities, and the exiting of certain
businesses. The charges recorded in the third quarter of 1998 relate to
employee termination benefits ($72.0 million), the writedown of certain assets
to their fair values ($74.0 million), lease abandonment costs ($42.0 million)
Page 50
and losses related to the exiting of businesses ($32.0 million). These
activities and changes are more fully discussed below.
Within its risk management business, pre-tax restructuring and other related
charges totaled approximately $79.0 million for the third quarter. The charges
relate to costs associated with the consolidation of claim offices in
approximately 36 market territories totaling approximately $8.0 million (lease
abandonment costs), employee termination benefits related to the net reduction
in workforce of approximately 200 employees at a cost of approximately $7.0
million and the writedown of fixed and intangible assets of approximately $64.0
million.
Within its commercial insurance business, pre-tax restructuring and other
related charges for the third quarter totaled approximately $57.0 million. The
charges relate primarily to the consolidation of four regional offices into two
zone offices and a reduction of claim processing offices from 24 to 8 at a cost
of approximately $21.0 million (lease abandonment costs). The charges also
consist of approximately $31.0 million of employee termination benefits related
to the net reduction in workforce of approximately 1,200 employees and an
additional $5.0 million relating to fixed asset writedowns.
Within its group insurance business, pre-tax restructuring and other related
charges for the third quarter totaled approximately $38.0 million. The charges
relate primarily to the Employer Health and Affinity lines of business that CNA
decided to exit and include the employee termination benefit costs related to
the net reduction in its current workforce of approximately 400 employees.
For various other departments within CNA, pre-tax restructuring and other
related charges totaled approximately $25.0 million and relate primarily to the
closing of leased facilities and employee termination benefits related to the
reductions in the current workforce. Additionally, CNA recorded approximately
$21.0 million in incremental benefit plan expenses associated with the
reductions in its workforce.
CNA expects to record an additional $125.0 to $175.0 million in charges over
the next 12 to 15 months, primarily related to employee related expenses,
computer systems, consulting fees and other related costs. While such costs
relate to CNA's overall plans of reorganization, generally accepted accounting
principles do not allow for accrual of these in the period the plan is adopted.
Rather such costs will be recorded in the period which they are incurred.
While CNA has not yet completed its analysis of anticipated cost savings, it
estimates that its reorganization, which includes the restructuring plan as
well as revenue enhancements and operating efficiencies, will result in
anticipated reductions of approximately 200 basis points in CNA's expense ratio
and savings of approximately $300.0 to $350.0 million on an annualized basis.
CNA expects a portion of the anticipated savings will be realized beginning in
the latter part of 1998 and to achieve the full expense ratio reduction within
15 months.
Property and casualty underwriting losses for the quarter and nine months
ended September 30, 1998 were $465.0 million and $1.1 billion, compared to
$273.4 and $843.8 million for the same periods in 1997. The increase in
underwriting losses is primarily due to restructuring and other related charges
recorded during the third quarter (as discussed above), as well as an increase
in pre-tax catastrophe losses for the first nine months of 1998. Pre-tax
catastrophe losses were approximately $66.0 and $217.0 million for the quarter
and nine months ended September 30, 1998 as compared to $2.5 and $78.5 million
in 1997. The increase in catastrophe losses is mainly due to spring storms
throughout the United States and hurricane damage sustained during the third
quarter of 1998.
Page 51
The components of CNA's investment gains are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------------------------
1998 1997 1998 1997
-------------------------------------------------
(In millions)
<S> <C> <C> <C> <C>
Bonds:
U.S. Government ....................... $ 69.0 $ 54.0 $165.0 $103.0
Tax exempt ............................ 26.0 24.0 58.0 26.0
Asset-backed .......................... 3.0 9.0 30.0 18.0
Taxable ............................... 14.0 18.0 83.0 102.0
-------------------------------------------------
Total bonds ........................ 112.0 105.0 336.0 249.0
Stocks .................................. (1.0) 18.0 12.0 57.0
Derivative instruments .................. (6.0) 2.0 28.0 2.0
Separate Accounts and other (1) ......... (8.0) 112.0 136.0 167.0
-------------------------------------------------
Total investment gains ............. $ 97.0 $237.0 $512.0 $475.0
=================================================
(1) Includes $88.8 for the three and nine months ended September 30, 1997 from issuance of
subsidiary's stock.
</TABLE>
CNA's primary property and casualty subsidiary, Continental Casualty Company,
is party to litigation with Fibreboard Corporation involving coverage for
certain asbestos-related claims and defense costs (see Note 6 of the Notes to
Consolidated Condensed Financial Statements).
Cigarettes
- - ----------
Revenues increased by $139.9 and $304.4 million, or 21.6% and 17.2%,
respectively, and net income increased by $123.1 and $80.8 million,
respectively, for the quarter and nine months ended September 30, 1998 as
compared to the corresponding periods of the prior year.
The increase in revenues is composed primarily of higher average unit prices
amounting to approximately $113.3 and $248.6 million, or 17.7% and 14.2%,
respectively, and an increase of approximately $16.1 and $32.7 million, or 2.5%
and 1.9%, reflecting higher unit sales volume for the quarter and nine months
ended September 30, 1998, as compared to the corresponding periods of the prior
year. Revenues also benefited from increased investment income.
Net income for the quarter and nine months ended September 30, 1998 and 1997
includes a pre-tax charge of $30.8, $109.3, $218.3 and $109.3 million ($18.4,
$65.3, $130.5 and $65.3 million after taxes), respectively, to reflect the
settlement of tobacco litigation (see Note 6 of the Notes to Consolidated
Condensed Financial Statements). Excluding these charges, net income would have
increased by $76.2 and $146.0 million for the quarter and nine months ended
September 30, 1998, respectively, as a result of the improved revenues, and for
the three months ended September 30, 1998, lower legal expenses. These
increases were partially offset by higher sales promotion expenses and, for the
nine months ended September 30, 1998, increased legal expenses.
Lorillard's unit sales volume increased by 1.6% and 1.2%, while Newport's
sales volume increased by 1.4% and 4.0% for the quarter and nine months ended
September 30, 1998, as compared to the corresponding periods of the prior year.
Page 52
Newport, a full price brand, accounted for 78.0% of Lorillard's unit sales.
Discount brand sales have decreased from an average of 31.4% of industry sales
during 1994 to an average of 27.0% during 1997. At September 30, 1998, they
represented 26.4% of industry sales.
Hotels
- - ------
Revenues increased by $.5 and $6.9 million, or .9% and 4.2%, respectively,
and net income decreased by $.1 million, or 1.5%, and increased by $2.3
million, or 14.6%, respectively, for the quarter and nine months ended
September 30, 1998, as compared to the prior year, due primarily to higher
overall average room rates, partially offset by lower occupancy rates.
Net income decreased for the quarter due primarily to higher costs. Net
income improved for the nine month period, as compared to the prior year, due
to higher average room rates, partially offset by lower overall occupancy rates
and increased administrative expenses.
Offshore drilling
- - -----------------
Revenues increased by $70.2 and $252.5 million, or 27.4% and 36.2%, and net
income increased by $17.6 and $50.2 million, or 48.4% and 53.5%, respectively,
for the quarter and nine months ended September 30, 1998, as compared to the
prior year.
Revenues from semisubmersible rigs increased by $62.6 and $206.6 million, or
24.4% and 29.6%, for the quarter and nine months ended September 30, 1998. The
revenue increase is due to higher dayrates ($51.5 and $176.9 million),
recognized by semisubmersible rigs located in the North Sea and the Gulf of
Mexico. These increases were partially offset by revenues foregone ($5.3 and
$37.4 million) during mandatory inspections. Revenues from jackup rigs
increased by $5.9 and $38.8 million, or 2.3% and 5.6%, due to improvements in
dayrates, primarily in the Gulf of Mexico ($10.8 and $48.3 million).
Depressed product prices in the oil and gas industry have resulted in
declining dayrates and decreased utilization, primarily in the shallow waters
of the Gulf of Mexico. As a result, Diamond Offshore has cold stacked and
suspended marketing efforts on two of its low-end specification
semisburmersible rigs located in the Gulf of Mexico. In addition, due to the
excess supply in the current jack-up market, several of Diamond Offshore's
jack-up rigs are idle in the Gulf of Mexico. To date, Diamond Offshore has been
able to mitigate the effect of these conditions on its results of operations
primarily with existing term contract commitments and the diversity of Diamond
Offshore's fleet. However, the offshore contract drilling industry historically
has been and is expected to continue to be highly competitive and cyclical. The
current trends in market conditions could have a material adverse effect on
Diamond Offshore's future results of operations, although the extent of such
effect cannot be accurately predicted.
Diamond Offshore's results of operations have also been impacted by the loss
of revenues and associated costs incurred during required regulatory
inspections of its drilling rigs. As of September 30, 1998, eight of these
inspections had been completed with four anticipated to occur in the fourth
quarter of 1998. Diamond Offshore intends to focus on returning these rigs to
operations as soon as reasonably possible, in order to minimize the downtime
and associated loss of revenues.
Net income for the quarter and nine months ended September 30, 1998 increased
Page 53
due primarily to the higher revenues discussed above, partially offset by an
overall increase in contract drilling costs, including labor and drilling
supplies and increased depreciation and administrative expenses.
Watches and Clocks
- - ------------------
Revenues increased by $1.0 and $3.9 million, or 2.9% and 4.2%, respectively,
and net income increased by $.2 and $1.6 million, or 6.7% and 28.1%,
respectively, for the quarter and nine months ended September 30, 1998 as
compared to the corresponding periods of the prior year.
Revenues increased for the quarter and nine months ended September 30, 1998
due primarily to increased watch unit sales volume and higher interest income,
partially offset by lower clock unit sales.
Net income increased for the quarter and nine months ended September 30, 1998
due primarily to the increased revenue discussed above and lower cost of sales.
In addition, net income benefited from a $.8 million pre-tax credit recorded in
the third quarter of 1998 related to an actuarial adjustment to postretirement
benefit costs.
Other
- - -----
Revenues increased by $812.3 and $567.1 million, respectively, and net income
increased by $524.6 and $351.6 million, respectively, for the quarter and nine
months ended September 30, 1998 as compared to the corresponding periods of the
prior year.
The components of investment gains (losses) included in Investment income
(loss)-net are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
-------------------------------------
(In millions)
<S> <C> <C> <C> <C>
Revenues:
Derivative instruments (1) ............ $484.7 $(187.7) $ (15.5) $(568.4)
Equity securities, including short
positions (1) ........................ 54.5 (46.1) (174.8) (195.4)
Fixed maturities ...................... 25.3 (.1) 13.3 14.8
Short-term investments, primarily U.S.
government securities ................ (.9) .8 (.3) .4
Gain on issuance of subsidiary's stock 29.1
Other ................................. 1.7 (6.1) 1.2 (4.8)
-----------------------------------
565.3 (239.2) (176.1) (724.3)
Income tax benefit ...................... (198.0) 83.8 61.6 253.5
Minority interest ....................... .2 .3 .3 (1.6)
-----------------------------------
Net income (loss) .................. $367.5 $(155.1) $(114.2) $(472.4)
===================================
</TABLE>
Page 54
(1) Includes gains (losses) on short sales, equity index futures and options
aggregating $491.8, $(278.3), $(221.6) and $(800.4) for the quarter and
nine months ended September 30, 1998 and 1997, respectively. The Company
continues to maintain these positions but has reduced its exposure in
these instruments.
Exclusive of securities transactions, revenues increased $7.8 and $18.9
million, or 21.0% and 15.6%, for the quarter and nine months ended September
30, 1998 due primarily to increased revenues from a shipping joint venture and,
for the nine month period, higher investment income. Net income increased by
$2.0 million, or 17.5%, and decreased by $6.6 million, or 26.7%, for the
quarter and nine months ended September 30, 1998, respectively. Net income
increased for the quarter due to the increased revenues discussed above,
partially offset by higher corporate interest expenses. Net income decreased
for nine months ended September 30, 1998 due to higher corporate interest
expenses, partially offset by increased interest income.
Year 2000 Issue
- - ---------------
The widespread use of computer programs, both in the United States and
internationally, that rely on two digit date fields to perform computations and
decision making functions may cause computer systems to malfunction when
processing information involving dates beginning in 1999. Such malfunctions
could lead to business delays and disruptions. The Company is in the process of
renovating or replacing many of its legacy systems to accommodate business for
the Year 2000 and beyond. In addition, the Company is checking embedded systems
in computer hardware and other infrastructure such as elevators, heating and
ventilating systems, and security systems. To date, approximately 89% of all
planned hours have been expended, and a similar percentage of milestones have
been completed.
Approximately 81% of the Company's internal systems have been internally
tested and are expected to be running in a production environment by December
1, 1998. This deadline allows a full year for re-validation of already tested
and implemented Year 2000 remediated systems, as well as for shake-out of any
previously unidentified problems and for interacting with business partners and
vendors that are still working on making their programs Year 2000 ready.
Based upon its current assessment, the Company estimates that the total cost
to replace and upgrade its systems to accommodate Year 2000 processing will be
approximately $70.0 to $80.0 million. As of September 30, 1998, approximately
$53.0 million has been spent. While some hardware charges are included in the
budget figures, the Company's hardware costs are typically included as part of
ongoing technology updates and not specifically as part of the Year 2000
project. All funds spent and to be spent will be financed from current
operating funds.
The Company believes that it will be able to resolve the Year 2000 issue in a
timely manner. However, due to the interdependent nature of computer systems,
the Company may be adversely impacted depending upon whether it or other
entities not affiliated with the Company (vendors and business partners)
address this issue successfully. To mitigate this impact, the Company is
communicating with its vendors and business partners to coordinate the Year
2000 conversion. CNA has already sent Year 2000 information packages to more
than 12,000 independent agents to encourage them to become Year 2000 ready on a
timely basis. CNA has also sent Year 2000 information to almost 300,000
business policyholders to increase their awareness of the Year 2000 issue.
Similar information packages have been sent to health care providers, lawyers
and others with whom CNA has business relationships. Because of the
Page 55
interdependent nature of the issue, the Company cannot be sure that there will
not be a disruption to its business.
The Company has also developed business resumption plans to ensure that the
Company is able to continue critical processes through other means in the event
that it becomes necessary to do so. Formal strategies have been developed
within each business unit and support organization to include appropriate
recovery processes and use of alternative vendors. More than 200 strategies
have been developed to address recovery plans for approximately 400 processes.
These plans are being updated quarterly.
In addition, property and casualty insurance subsidiaries may have an
underwriting exposure related to the Year 2000 issue. Although CNA has not
received any claims for coverage from its policyholders based on losses
resulting from Year 2000 issues, there can be no assurances that policyholders
will not suffer losses of this type and seek compensation under insurance
policies underwritten by CNA. If any claims are made, coverage, if any, will
depend on the facts and circumstances of the claim and the provisions of the
policy. The range of potential insurance exposure created by the Year 2000
problem is sufficiently broad that it is impossible to estimate with any degree
of accuracy the extent to which various types of policies issued by CNA may
afford coverage for loss or claims. At this time, in the absence of any claims
experience, CNA is unable to forecast the nature and range of the losses, the
availability of coverage for the losses, or the likelihood of significant
claims. As a result, CNA is unable to determine whether the adverse impact, if
any, in connection with the foregoing circumstances would be material to it.
Accounting Standards
- - --------------------
In December 1997, the AICPA's Accounting Standards Executive Committee issued
SOP 97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments," which provides guidance on accounting for insurance-related
assessments. It requires that entities recognize liabilities for insurance-
related assessments when all of the following criteria have been met: an
assessment has been imposed or it is probable that an assessment will be
imposed; the event obligating an entity to pay an imposed or probable
assessment has occurred on or before the date of the financial statements; and
the amount of the assessment can be reasonably estimated. This SOP is effective
for fiscal years beginning after December 15, 1998. The Company is currently
evaluating the effects of this SOP on its accounting for insurance-related
assessments. Certain insurance industry information required for compliance is
not currently available and therefore the Company is studying alternatives for
estimating the accrual. While it is possible that the cumulative effect of
adoption could be material, the ongoing impact of this standard is not expected
to be material to the results of operations, liquidity or financial position of
the Company.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits." This Statement standardizes
disclosure requirements for pension and other postretirement benefits to the
extent practicable, and requires additional information on changes in benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures that are no longer useful to users
of financial statements. It also suggests combined formats for presentation of
pension and other postretirement benefit disclosures. The Statement supersedes
the disclosure requirements of a number of earlier opinions of the FASB and
does not address measurement or recognition. It is effective for fiscal years
beginning after December 15, 1997. The Company is currently evaluating the
effects of this Statement on its benefit plan disclosures.
Page 56
In March 1998, the AICPA's Accounting Standards Executive Committee issued
SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use," which provides guidance on accounting for costs of computer
software developed or obtained for internal use and for determining whether
computer software is for internal use. For purposes of this SOP, internal-use
software is software acquired, internally developed or modified solely to meet
the entity's internal needs for which no substantive plan exists or is being
developed to market the software externally during the software's development
or modification. Accounting treatment for costs associated with software
developed or obtained for internal use, as defined by this SOP, is based upon a
number of factors, including the point in time during the project that costs
are incurred as well as the types of costs incurred. This SOP is effective for
financial statements for fiscal years beginning after December 15, 1998. The
Company is currently evaluating the effects of this SOP.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes standards for the
accounting and reporting for derivative instruments and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. If certain conditions are met, a derivative may be
specifically designated as (a) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment,
(b) a hedge of the exposure to variable cash flows of a forecasted transaction,
or (c) a hedge of the foreign currency exposure of a net investment in a
foreign operation, an unrecognized firm commitment, an available-for-sale
security, or a foreign-currency-denominated forecasted transaction. The
accounting for changes in the fair value of a derivative depends on the
intended use of the derivative and the resulting designation. This Statement is
effective for all fiscal quarters of fiscal years beginning after June 15,
1999. The Company is currently evaluating the effects of this Statement on its
accounting and reporting for derivatives and hedges.
Forward-Looking Statements
- - --------------------------
When included in this Report, the words "believes," "expects," "intends,"
"anticipates," "estimates," and analogous expressions are intended to identify
forward-looking statements. Such statements inherently are subject to a variety
of risks and uncertainties that could cause actual results to differ materially
from those projected. Such risks and uncertainties include, among others,
general economic and business conditions, competition, changes in financial
markets (interest rate, currency, commodities and stocks), changes in foreign,
political, social and economic conditions, regulatory initiatives and
compliance with governmental regulations, judicial decisions and rulings in
smoking and health litigation, the impact of bills introduced in Congress in
relation to tobacco operations, implementation of the Proposed Resolution,
changes in foreign and domestic oil and gas exploration and production
activity, customer preferences and various other matters, many of which are
beyond the Company's control. These forward-looking statements speak only as of
the date of this Report. The Company expressly disclaims any obligation or
undertaking to release publicly any updates or revisions to any forward-looking
statement contained herein to reflect any change in the Company's expectations
with regard thereto or any change in events, conditions or circumstances on
which any statement is based.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
-----------------------------------------------------------
The Company is a large diversified financial services company. As such, it
has significant amounts of financial instruments that involve market risk. The
Page 57
Company's measure of market risk exposure represents an estimate of the change
in fair value of its financial instruments. Changes in the trading portfolio
would be recognized as investment gains (losses) in the income statement.
Market risk exposure is presented for each class of financial instrument held
by the Company at September 30, 1998, assuming immediate adverse market
movements of the magnitude described below. The Company believes that the
various rates of adverse market movements represent a measure of exposure to
loss under hypothetically assumed adverse conditions. The estimated market risk
exposure represents the hypothetical loss to future earnings and does not
represent the maximum possible loss nor any expected actual loss, even under
adverse conditions, because actual adverse fluctuations would likely differ. In
addition, since the Company's investment portfolio is subject to change based
on its portfolio management strategy as well as in response to changes in the
market, these estimates are not necessarily indicative of the actual results
which may occur.
The following tables present the Company's market risk by category (equity
markets, interest rates, foreign currency exchange rates and commodity prices)
on the basis of those entered into for trading purposes and other than trading
purposes.
Trading portfolio:
<TABLE>
<CAPTION>
September 30, 1998
- - -------------------------------------------------------------------------------
Fair Value Market
Category of risk exposure: Asset (Liability) Risk
- - -------------------------------------------------------------------------------
(In millions)
<S> <C> <C>
Equity markets (1):
Equity securities $ 228.7 $ 57.2
Options purchased 649.1 (584.9)
Options written (56.6) 47.1
Futures 86.5
Short sales (643.9) (161.0)
Commodities:
Oil (2):
Swaps .2 (1.6)
Energy purchase obligations (14.2) (5.9)
Gold (3):
Options purchased 18.7 (18.7)
Options written (3.9) 3.9
- - -------------------------------------------------------------------------------
</TABLE>
Note: The calculation of estimated market risk exposure is based on assumed
adverse changes in the underlying reference price or index of (1) an
increase in equity prices of 25%, (2) a decline in oil prices of 20% and
(3) an increase in gold prices of 20%. Adverse changes on options which
differ from those presented above would not necessarily result in a
proportionate change to the estimated market risk exposure.
The most significant areas of market risk in the Company's trading portfolio
result from positions held in S&P futures contracts, short sales of certain
equity securities and put options purchased on the S&P 500 index. The Company
enters into these positions primarily to benefit from anticipated future
Page 58
movements in the underlying markets that Company management expects to occur.
If such movements do not occur or if the market moves in the opposite direction
from what management expects, significant losses may occur. The Company
continues to maintain these positions but has reduced its exposure in these
instruments.
Exposure to market risk is managed and monitored by senior management. Senior
management approves the overall investment strategy employed by the Company and
has responsibility to ensure that the investment positions are consistent with
that strategy and the level of risk acceptable to it. The Company may manage
risk by buying or selling instruments or entering into offsetting positions.
Other than trading portfolio:
<TABLE>
<CAPTION>
September 30, 1998
- - -------------------------------------------------------------------------------
Fair Value Market
Category of risk exposure: Asset (Liability) Risk
- - -------------------------------------------------------------------------------
(In millions)
<S> <C> <C>
Equity market (1):
Equity securities:
CNA Financial general accounts (a) $ 1,362.0 $ (341.0)
CNA Financial separate accounts 186.0 (46.0)
Equity index futures, separate accounts (b) (205.0)
Interest rate (2):
Fixed maturities (a) 29,612.2 (1,456.2)
Short-term investments (a) 9,204.2 (6.0)
Interest rate swaps (15.0) 11.0
Separate Accounts:
Fixed maturities (a) 4,405.0 (157.0)
Short-term investments (a) 457.0 (1.0)
Long-term debt (5,739.7)
- - -------------------------------------------------------------------------------
</TABLE>
Note: The calculation of estimated market risk exposure is based on assumed
adverse changes in the underlying reference price or index of (1) a
decrease in equity prices of 25% and (2) an increase in interest rates
of 100 basis points.
(a) Certain securities are denominated in foreign currencies. Assuming a 20%
decline in the underlying exchange rates would result in an aggregate
foreign currency exchange rate risk of $(391.0).
(b) This market risk would be offset by decreases in liabilities to
customers under variable insurance contracts.
Equity Price Risk - The Company has exposure to equity price risk as a result
of its investment in equity securities and equity derivatives. Equity price
risk results from changes in the level or volatility of equity prices that
affect the value of equity securities or instruments which derive their value
from such securities or indexes. Equity price risk was measured assuming an
instantaneous 25% change in the underlying reference price or index from its
level at September 30, 1998, with all other variables held constant.
Interest Rate Risk - The Company has exposure to interest rate risk arising
Page 59
from changes in the level or volatility of interest rates. The Company attempts
to mitigate its exposure to interest rate risk by utilizing instruments such as
interest rate swaps, interest rate caps, commitments to purchase securities,
options, futures and forwards. The Company monitors its sensitivity to interest
rate risk by evaluating the change in its financial assets and liabilities
relative to fluctuations in interest rates. The evaluation is made using an
instantaneous parallel change in interest rates by varying magnitudes on a
static balance sheet to determine the effect such a change in rates would have
on the Company's market value at risk and the resulting effect on shareholders'
equity. The analysis presents the sensitivity of the market value of the
Company's financial instruments to selected changes in market rates and prices
which the Company believes are reasonably possible over a one-year period.
The analysis assumes that the composition of the Company's interest sensitive
assets and liabilities existing at the beginning of the period remains constant
over the period being measured and also assumes that a particular change in
interest rates is reflected uniformly across the yield curve regardless of the
time to maturity. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market rates.
Accordingly the analysis may not be indicative of, is not intended to provide,
and does not provide a precise forecast of the effect of changes of market
interest rates on the Company's earnings or shareholders' equity. Further, the
computations do not contemplate any actions the Company would undertake in
response to changes in interest rates.
The Company's long-term debt, including interest rate swap agreements, as of
September 30, 1998 is denominated in U.S. Dollars. The Company's debt has been
primarily issued at fixed rates, and as such, interest expense would not be
impacted by interest rate shifts.
The sensitivity analysis assumes an instantaneous shift in market interest
rates increasing 100 basis points from their levels at September 30, 1998, with
all other variables held constant.
Foreign Exchange Risk - Foreign exchange rate risk arises from the
possibility that changes in foreign currency exchange rates will impact the
value of financial instruments. The Company has foreign exchange exposure when
it buys or sells foreign currencies or financial instruments denominated in a
foreign currency. This exposure is mitigated by the Company's asset/liability
matching strategy and through the use of futures for those instruments which
are not matched. The Company's foreign transactions are primarily denominated
in Canadian Dollars, British Pounds, German Deutschmarks and Japanese Yen. The
sensitivity analysis also assumes an instantaneous 20% change in the foreign
currency exchange rates versus the U.S. Dollar from their levels at September
30, 1998, with all other variables held constant.
Commodity Price Risk - The Company has exposure to commodity price risk as a
result of its investments in energy purchase obligations, gold options and
other investments. Commodity price risk results from changes in the level or
volatility of commodity prices that impact instruments which derive their value
from such commodities. Commodity price risk was measured assuming an
instantaneous change of 20% in the value of the underlying commodities.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
-----------------
1. CNA is involved in various lawsuits involving environmental pollution
claims and litigation with Fibreboard Corporation. Information involving such
Page 60
lawsuits is incorporated by reference to Note 6 of the Notes to Consolidated
Condensed Financial Statements in Part I.
2. Lorillard is involved in various lawsuits involving tobacco products
seeking damages for cancer and other health effects claimed to have resulted
from the use of cigarettes or from exposure to tobacco smoke. Information
involving such lawsuits is incorporated by reference to Note 6 of the Notes to
Consolidated Condensed Financial Statements in Part I.
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits--
(3.1) By-Laws.
(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 attorney's fees.
(27.1) Financial Data Schedule for the nine months ended September 30,
1998.
(99.1) Proposed Master Settlement Agreement relating to state health
care cost recovery claims.
(b) Current reports on Form 8-K--There were no reports on Form 8-K filed for
three months ended September 30, 1998.
Page 61
SIGNATURES
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.
LOEWS CORPORATION
-----------------
(Registrant)
Dated: November 16, 1998 By /s/ Peter W. Keegan
-------------------------
PETER W. KEEGAN
Senior Vice President and
Chief Financial Officer
(Duly authorized officer
and principal financial
officer)
Page 62
Exhibit 3.01
AS AMENDED THROUGH
November 3, 1998
=====================================
================================================================================
LOEWS CORPORATION
=======
By-Laws
=======
================================================================================
BY-LAWS
OF
LOEWS CORPORATION
(A Delaware Corporation)
------------------------
------------------------------------
ARTICLE 1
Definitions
As used in these By-laws, unless the context otherwise requires, the term:
1.1 "Assistant Secretary" means an Assistant Secretary of the Corporation.
1.2 "Assistant Treasurer" means an Assistant Treasurer of the Corporation.
1.3 "Board" means the Board of Directors of the Corporation.
1.4 "By-laws" means the initial by-laws of the Corporation, as amended from
time to time.
1.5 "Certificate of Incorporation" means the initial certificate of
incorporation of the Corporation, as amended, supplemented or restated from time
to time.
1.6 "Corporation" means Loews Corporation.
1.7 "Directors" means directors of the Corporation.
1.8 "General Corporation Law" means the General Corporation Law of the
State of Delaware, as amended from time to time.
1.9 "Office of the Corporation" means the executive office of the
Corporation, anything in Section 131 of the General Corporation Law to the
contrary notwithstanding.
1.10 "Chairman of the Board" means the Chairman of the Board of Directors
of the Corporation.
1.11 "President" means the President of the Corporation.
2
1.12 "Secretary" means the Secretary of the Corporation.
1.13 "Stockholders" means stockholders of the Corporation.
1.14 "Treasurer" means the Treasurer of the Corporation.
1.15 "Vice President" means a Vice President of the Corporation.
ARTICLE 2
STOCKHOLDERS
2.1 Place of Meetings. Every meeting of the stockholders shall be held at
-----------------
the office of the Corporation or at such other place within or without the State
of Delaware as shall be specified or fixed in the notice of such meeting or in
the waiver of notice thereof.
2.2 Annual Meeting. A meeting of stockholders shall be held annually for
--------------
the election of directors and the transaction of other business at such hour as
may be designated in the notice of meeting, on the second Tuesday in May in each
year (or, if such date falls on a legal holiday, on the first business day
thereafter which is not a Saturday, Sunday or legal holiday), or on such other
date not later than six months after the end of the fiscal year of the
Corporation, as may be fixed by the Board.
2.3 Special Meetings. A special meeting of stockholders, unless otherwise
----------------
prescribed by statute, may be called at any time by the Board or by the Chairman
of the Board and Chief Executive Officer, the President or by the Secretary and
shall be called by the Chairman of the Board and Chief Executive Officer, the
President or by the Secretary on the written request of holders of a majority or
more of the shares of capital stock of the Corporation entitled to vote in an
election of directors, which written request shall state the purpose or purposes
of such meeting. At any special meeting of stockholders only such business may
be transacted which is related to the purpose or purposes of such meeting set
forth in the notice thereof given pursuant to Section 2.5 of the By-laws or in
any waiver of notice thereof given pursuant to Section 2.4 of the By-laws.
2.4 Fixing Record Date. For the purpose of determining the stockholders
------------------
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, or to express consent to corporate action in writing
without a meeting, or for the purpose of determining stockholders entitled to
receive payment of any dividend or the allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock,
or for the purpose of any other lawful
3
action, the Board may fix, in advance, a date as the record date for any such
determination of stockholders. Such date shall not be more than sixty nor less
than ten days before the date of such meeting, nor more than sixty days prior to
any other action. If no such record date is fixed:
2.4.1 The record date for determining stockholders entitled to notice of or
to vote at a meeting of stockholders shall be at the close of business on the
day next preceding the day on which notice is given, or, if notice is waived, at
the close of business on the day next preceding the day on which the meeting is
held;
2.4.2 The record date for determining stockholders entitled to express
consent to corporate action in writing without a meeting, when no prior action
by the Board is necessary, shall be the day on which the first written consent
is expressed;
2.4.3 The record date for determining stockholders for any purpose other
than specified in Sections 2.4.1 and 2.4.2 shall be at the close of business on
the day on which the Board adopts the resolution relating thereto.
When a determination of stockholders entitled to notice of or to vote at any
meeting of stockholders has been made as provided in this Section 2.4 such
determination shall apply to any adjournment thereof, unless the Board fixes a
new record date for the adjourned meeting.
2.5 Notice of Meetings of Stockholders. Except as otherwise provided in
----------------------------------
Sections 2.3 and 2.4 of the By-laws, whenever under the General Corporation Law
or the Certificate of Incorporation or the By-laws, stockholders are required or
permitted to take any action at a meeting, written notice shall be given stating
the place, date and hour of the meeting and, in the case of a special meeting,
the purpose or purposes for which the meeting is called. A copy of the notice of
any meeting shall be given, personally or by mail not less than ten nor more
than fifty days before the date of the meeting, to each stockholder entitled to
notice of or to vote at such meeting. If mailed, such notice shall be deemed to
be given when deposited in the United States mail, with postage prepaid,
directed to the stockholder at his address as it appears on the records of the
Corporation. An affidavit of the Secretary or an Assistant Secretary or of the
transfer agent of the Corporation that the notice required by this section has
been given shall, in the absence of fraud, be prima facie evidence of the facts
stated therein. When a meeting is adjourned to another time or place, notice
need not be given of the adjourned meeting if the time and place thereof are
announced at the meeting at which the adjournment is taken, and at the adjourned
meeting any business may be transacted that might have been transacted at the
meeting as originally called. If, however, the adjournment is for more than
thirty days, or if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting.
4
2.6 List of Stockholders. The Secretary shall prepare and make, or cause to
--------------------
be prepared and made, at least ten days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
2.7 Quorum of Stockholders; Adjournment. The holders of a majority of the
-----------------------------------
shares of stock entitled to vote at any meeting of stockholders, present in
person or represented by proxy, shall constitute a quorum for the transaction of
any business at such meeting. When a quorum is once present to organize a
meeting of stockholders, it is not broken by the subsequent withdrawal of any
stockholders. The holders of a majority of the shares of stock present in person
or represented by proxy at any meeting of stockholders, including an adjourned
meeting, whether or not a quorum is present, may adjourn such meeting to another
time and place.
2.8 Voting; Proxies. Unless otherwise provided in the Certificate of
---------------
Incorporation every stockholder of record shall be entitled at every meeting of
stockholders to one vote for each share of capital stock standing in his name on
the record of stockholders determined in accordance with Section 2.4 of the By-
laws. If the Certificate of Incorporation provides for more or less than one
vote for any share, on any matter, every, reference in the By-laws or the
General Corporation Law to a majority or other proportion of stock shall refer
to such majority or other proportion of the votes of such stock. The provisions
of Sections 212 and 217 of the General Corporation Law shall apply in
determining whether any shares of capital stock may be voted and the persons, if
any, entitled to vote such shares; but the Corporation shall be protected in
treating the persons in whose names shares of capital stock stand on the record
of stockholders as owners thereof for all purposes. At any meeting of
stockholders, a quorum being present, all matters, except as otherwise provided
by law or by the Certificate of Incorporation or by the By-laws, shall be
decided by a majority of the votes cast at such meeting by the holders of shares
present in person or represented by proxy and entitled to vote thereon. All
elections of directors shall be by written ballot unless otherwise provided in
the Certificate of Incorporation. In voting on any other question on which a
vote by ballot is required by law or is demanded by any stockholder entitled to
vote, the voting shall be by ballot. Each ballot shall be signed by the
stockholder voting or by his proxy, and shall state the number of shares voted.
On all other questions, the voting may be viva voce. Every stockholder entitled
to vote at a meeting of stockholders or to express consent or dissent without a
meeting may authorize another person or persons to act for him by proxy. The
validity and enforceability of any proxy shall be determined in accordance with
Section 212 of the General Corporation Law.
5
2.9 Selection and Duties of Inspectors at Meetings of Stockholders. The
--------------------------------------------------------------
Board, in advance of any meeting of stockholders, may appoint one or more
inspectors to act at the meeting or any adjournment thereof. If inspectors are
not so appointed, the person presiding at such meeting may, and on the request
of any stockholder entitled to vote thereat shall, appoint one or more
inspectors. In case any person appointed fails to appear or act, the vacancy may
be filled by appointment made by the Board in advance of the meeting or at the
meeting by the person presiding thereat. Each inspector, before entering upon
the discharge of his duties, shall take and sign an oath faithfully to execute
the duties of inspector at such meeting with strict impartiality and according
to the best of his ability. The inspector or inspectors shall determine the
number of shares outstanding and the voting power of each, the shares
represented at the meeting, the existence of a quorum, the validity and effect
of proxies, and shall receive votes, ballots or consents, hear and determine all
challenges and questions arising in connection with the right to vote, count and
tabulate all votes, ballots or consents, determine the result, and do such acts
as are proper to conduct the election or vote with fairness to all stockholders.
On request of the person presiding at the meeting or any stockholder entitled to
vote thereat, the inspector or inspectors shall make a report in writing of any
challenge, question or matter determined by him or them and execute a
certificate of any fact found by him or them. Any report or certificate made by
the inspector or inspectors shall be prima facie evidence of the facts stated
and of the vote as certified by him or them.
2.10 Organization. At every meeting of stockholders, the Chairman of the
------------
Board and Chief Executive Officer, or in his absence the President, or in the
absence of both of them the Senior Vice President, or in the absence of all of
them the Executive Vice President or in the absence of all of them the most
senior Vice President (based on term of service as Vice President) present,
shall act as chairman of the meeting. The Secretary, or in his absence one of
the Assistant Secretaries, shall act as secretary of the meeting. In case none
of the officers above designated to act as chairman or secretary of the meeting,
respectively, shall be present a chairman or a secretary of the meeting, as the
case may be, shall be chosen by a majority of the votes cast at such meeting by
the holders of shares of capital stock present in person or represented by proxy
and entitled to vote at the meeting.
2.11 Order of Business. The order of business at all meetings of
-----------------
stockholders shall be as determined by the chairman of the meeting, but the
order of business to be followed at any meeting at which a quorum is present may
be changed by a majority of the votes cast at such meeting by the holders of
shares of capital stock present in person or represented by proxy and entitled
to vote at the meeting.
6
ARTICLE 3
Directors
3.1 General Powers. Except as otherwise provided in the Certificate of
--------------
Incorporation, the business and affairs of the Corporation shall be managed by
the Board. The Board may adopt such rules and regulations, not inconsistent with
the Certificate of Incorporation or the By-laws or applicable laws, as it may
deem proper for the conduct of its meetings and the management of the
Corporation. In addition to the powers expressly conferred by the By-laws, the
Board may exercise all powers and perform all acts which are not required, by
the By-laws or the Certificate of Incorporation or by law, to be exercised and
performed by the stockholders.
3.2 Number; Qualification; Term of Office. The Board shall consist of one
-------------------------------------
or more members. The number of directors shall be fixed initially by the Board
and may thereafter be changed from time to time by action of the stockholders or
of the Board. Directors need not be stockholders. Each director shall hold
office until his successor is elected and qualified or until his earlier death,
resignation or removal.
3.3 Election. Directors shall except as otherwise required by law or by the
--------
Certificate of Incorporation, be elected by a plurality of the votes cast at a
meeting of stockholders by the holders of shares entitled to vote in the
election.
3.4 Newly Created Directorships and Vacancies. Unless otherwise provided in
-----------------------------------------
the Certificate of Incorporation, newly created directorships resulting from an
increase in the number of directors and vacancies occurring in the Board for any
reason, including the removal of directors without cause, may be filled by vote
of a majority of the directors then in office, although less than a quorum, at
any meeting of the Board or may be elected by a plurality of the votes cast by
the holders of shares of capital stock entitled to vote in the election at a
special meeting of stockholders called for that purpose. A director elected to
fill a vacancy shall be elected to hold office until his successor is elected
and qualified, or until his earlier death, resignation or removal.
3.5 Resignations. Any director may resign at any time by written notice to
------------
the Corporation. Such resignation shall take effect at the time therein
specified, and, unless otherwise specified, the acceptance of such resignation
shall not be necessary to make it effective.
3.6 Removal of Directors. Any or all of the directors may be removed (i)
--------------------
for cause, by vote of the stockholders or by action of the Board, and (ii)
without cause, by vote of the stockholders.
7
3.7 Remuneration. Unless otherwise expressly provided by resolution adopted
------------
by the Board, none of the directors or of the members of any committee of the
Corporation contemplated by these By-laws or otherwise provided for by
resolution of the Board shall as such receive any stated remuneration for his
services; but the Board may at any time or from time to time by resolution
provide that remuneration shall be paid to, or on behalf of, any director of the
Corporation or to any member of any such committee who shall not be in the
employ of the Corporation or of any of its subsidiary companies, either as his
annual remuneration as such director or member or as remuneration for his
attendance at each meeting of the Board or of such committee. The Board may also
likewise provide that the Corporation shall reimburse each such director or
member of such committee for any expenses paid by him on account of his
attendance at any such meeting. Nothing in this Section contained shall be
construed to preclude any director from serving the Corporation in any other
capacity and receiving remuneration therefor.
3.8 Place and Time of Meetings of the Board. Meetings of the Board, regular
---------------------------------------
or special, may be held at any place within or without the State of Delaware.
The times and places for holding meetings of the Board may be fixed from time to
time by resolution of the Board or (unless contrary to resolution of the Board)
in the notice of the meeting.
3.9 Annual Meetings. On the day when and at the place where the annual
---------------
meeting of stockholders for the election of directors is held, and as soon as
practicable thereafter, the Board may hold its annual meeting, without notice of
such meeting, for the purposes of organization the election of officers and the
transaction of other business. The annual meeting of the Board may be held at
any other time and place specified in a notice given as provided in Section 3.11
of the By-laws for special meetings of the Board or in a waiver of notice
thereof.
3.10 Regular Meetings. Regular meetings of the Board may be held at such
----------------
times and places as may be fixed from time to time by the Board. Unless
otherwise required by the Board, regular meetings of the Board may be held
without notice. If any day fixed for a regular meeting of the Board shall be a
Saturday or Sunday or a legal holiday at the place where such meeting is to be
held, then such meeting shall be held at the same hour at the same place on the
first business day thereafter which is not a Saturday, Sunday or legal holiday.
3.11 Special Meetings. Special meetings of the Board shall be held whenever
----------------
called by the Chairman of the Board, the President, or the Secretary or by any
two or more directors. Notice of each special meeting of the Board shall, if
mailed, be addressed to each director at the address designated by him for that
purpose or, if none is designated, at his last known address at least two days
before the date on which the meeting is to be held; or such notice shall be sent
to each director at such address by telegraph, cable or wireless, or be
delivered to him personally, not later than the day before the date on which
such meeting is to be held. Every such notice shall state the time and place of
the meeting but need not state the purposes of the meeting, except to the extent
required by law.
8
If mailed, each notice shall be deemed given when deposited, with postage
thereon prepaid, in a post office or official depository under the exclusive
care and custody of the United States Post Office Department. Such mailing shall
be by first-class mail.
3.12 Adjourned Meetings. A majority of the directors present at any meeting
------------------
of the Board, including an adjourned meeting, whether or not a quorum is present
may adjourn such meeting to another time and place. Notice of any adjourned
meeting of the Board need not be given to any director whether or not present at
the time of the adjournment. Any business may be transacted at any adjourned
meeting that might have been transacted at the meeting as originally called.
3.13 Waiver of Notice. Whenever notice is required to be given to any
----------------
director or member of a committee of directors under any provision of the
General Corporation Law or of the Certificate of Incorporation or By-laws, a
written waiver thereof, signed by the person entitled to notice, whether before
or after the time stated therein, shall be deemed equivalent to notice.
Attendance of a person at a meeting shall constitute a waiver of notice of such
meeting, except when the person attends a meeting for the express purpose of
objecting, at the beginning of the meeting, to the transaction of any business
because the meeting is not lawfully called or convened. Neither the business to
be transacted at, nor the purpose of, any regular or special meeting of the
directors, or members of a committee of directors, need be specified in any
written waiver of notice.
3.14 Organization. At each meeting of the Board, the Chairman of the Board,
------------
or in the absence of the Chairman of the Board, the President of the
Corporation, or in the absence of all of them a chairman chosen by the majority
of the directors present, shall preside. The Secretary shall act as secretary at
each meeting of the Board. In case the Secretary shall be absent from any
meeting of the Board, an Assistant Secretary shall perform the duties of secre-
tary at such meeting; and in the absence from any such meeting of the Secretary
and Assistant Secretaries, the person presiding at the meeting may appoint any
person to act as secretary of the meeting.
3.15 Quorum of Directors. A majority of the directors then in office shall
-------------------
constitute a quorum for the transaction of business or of any specified item of
business at any meeting of the Board.
3.16 Action by the Board. All corporate action taken by the Board or any
-------------------
committee thereof shall be taken at a meeting of the Board, or of such
committee, as the case may be, except that any action required or permitted to
be taken at any meeting of the Board, or of any committee thereof, may be taken
without a meeting if all members of the Board or committee, as the case may be,
consent thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the Board or committee. Members of the Board, or any
committee designated by the Board, may participate in a meeting of the Board, or
of such committee, as the case may be, by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each others and participation in a meeting pursuant to this
9
Section 3.16 shall constitute presence in person at such meeting. Except as
otherwise provided by the Certificate of Incorporation or by law, the vote of a
majority of the directors present (including those who participate by means of
conference telephone or similar communications equipment) at the time of the
vote, if a quorum is present at such time, shall be the act of the Board.
ARTICLE 4
COMMITTEES OF THE BOARD
4.1 Executive Committee; Number, Appointment, Term of Office, etc. (a) The
-------------------------------------------------------------
Board, by resolution adopted by a majority of the whole Board, may designate an
Executive Committee consisting of the Chairman of the Board and Chief Executive
Officer and such other directors as it may designate. Each member of the
Executive Committee shall continue to be a member thereof only so long as he
remains a director and at the pleasure of a majority of the whole Board. Any
vacancies on the Executive Committee may be filled by the majority of the whole
Board.
(b) The Executive Committee, between meetings of the Board, shall have and
may exercise the powers of the Board in the management of the property, business
and affairs of the Corporation and may authorize the seal of the Corporation to
be affixed to all papers which may require it. Without limiting the foregoing,
the Executive Committee shall have the express power and authority to declare a
dividend, to authorize the issuance of stock, and to adopt a certificate of
ownership and merger pursuant to Section 253 of the General Corporation Law of
the State of Delaware.
The Secretary, or if he shall be absent from such meeting, the person (who shall
be an Assistant Secretary, if an Assistant Secretary shall be present thereat)
whom the chairman of such meeting shall appoint, shall act as secretary of such
meeting and keep the minutes thereof.
(c) Regular meetings of the Executive Committee, of which no notice shall
be necessary, shall be held on such days and at such places, within or without
the State of Delaware, as shall be fixed by resolution adopted by a majority of
the Executive Committee. Special meetings of the Executive Committee shall be
held whenever called by the Chairman of the Board, if Chief Executive Officer,
the President, the Chairman of the Executive Committee and shall be called by
the Secretary of the Corporation on the request of a majority of the Executive
Committee. Notice of each special meeting of the Executive Committee shall be
given to each member thereof by depositing such notice in the United States
mail, in a postage prepaid envelope, directed to him at his residence or usual
place of business at least two days before the day on which such meeting is to
be held or shall be sent addressed to him at such place by telegraph, cable,
wireless or other form of recorded communication or be delivered personally or
by telephone a reasonable time in advance of the time at which such meeting is
to be held. Notice of any such meeting need not, however, be given to any member
of the Executive Committee if he shall be present at such meeting. Any
10
meeting of the Executive Committee shall be a legal meeting without any Notice
thereof having been given if all the members of the Executive Committee shall be
present thereat. Such notice shall specify the time and place of the meeting,
but except as otherwise expressly provided by law, the purposes thereof need not
be stated in such notice. Subject to the provisions of these By-laws, the
Executive Committee may fix its own rules of procedure, and it shall keep a
record of its proceedings and report them to the Board at the next regular or
special meeting thereof after such proceedings shall have been taken. All such
proceedings shall be subject to revision or alteration by the Board; provided,
however, that third parties shall not be prejudiced by any such revision or
alteration.
(d) Except as otherwise provided by law, a majority of the Executive
Committee then in office shall constitute a quorum for the transaction of
business, and the act of a majority of those present at a meeting thereof shall
be the act of the Executive Committee. In the absence of a quorum, a majority of
the members of the Executive Committee present thereat may adjourn such meeting
from time to time until a quorum shall be present thereat. Notice of any
adjourned meeting need not be given. The Executive Committee shall act only as a
committee, and the individual members shall have no power as such.
(e) Any member of the Executive Committee may resign therefrom at any time
by giving written notice of his resignation to the Chairman of the Board, the
President or the Secretary. Any such resignation shall take effect at the time
specified therein or, if the time when it shall become effective shall not be
specified therein, it shall take effect immediately upon its receipt; and,
except as specified therein, the acceptance of such resignation shall not be
necessary to make it effective.
(f) In addition to the foregoing, in the absence or disqualification of a
member of the Executive Committee, the members present at any meeting and not
disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member.
4.2 Other Committees of the Board. The Board, by resolution adopted by a
-----------------------------
majority of the whole Board, may designate one or more other committees, which
shall in each case consist of such number of directors, but not less than two,
and shall have and may exercise such powers for such periods, as the Board may
determine in the resolution designating such committee. A majority of the
members of any such committee may fix its rules of procedure, determine its
action, fix the time and place, whether within or without the State of Delaware,
of its meetings and specify what notice thereof, if any, shall be given, unless
the Board shall by resolution adopted by a majority of the whole Board otherwise
provide. Each member of any such committee shall continue to be a member thereof
only so long as he remains a director and at the pleasure of a majority of the
whole Board. Any vacancies on any such committee may be filled by a majority of
the whole Board.
11
4.3 Other Committees. Nothing hereinbefore contained in this Article 4
----------------
shall be deemed to preclude the designation by the Chairman of the Board, if
Chief Executive Officer, or the President, of committees, other than committees
of the Board, which may include officers and employees who are not directors.
ARTICLE 5
OFFICERS
5.1 Officers. The Board shall elect a Chairman of the Board, a President
--------
and Chief Executive Officer, a Chairman of the Executive Committee, a Secretary
and a Treasurer, and as many Assistant Secretaries and Assistant Treasurers as
the Board may deem necessary, and may elect or appoint one or more Vice
Presidents and such other officers as it may determine. The Board may designate
one or more Vice Presidents as Senior Vice President or Executive Vice
President, and may use descriptive words or phrases to designate the standing,
seniority or area of special competence of the Vice Presidents elected or
appointed by it. Each officer shall hold his office until his successor is
elected and qualified or until his earlier death, resignation or removal in the
manner provided in Section 5.2 of the By-laws. Any two or more offices may be
held by the same person. The Board may require any officer to give a bond or
other security for the faithful performance of his duties, in such amount and
with such sureties as the Board may determine. All officers as between
themselves and the Corporation shall have such authority and perform such duties
in the management of the Corporation as may be provided in the By-laws or as the
Board may from time to time determine.
5.2 Removal of Officers. Any officer elected or appointed by the Board may
-------------------
be removed by the Board with or without cause. The removal of an officer without
cause shall be without prejudice to his contract rights, if any. The election or
appointment of an officer shall not of itself create contract rights.
5.3 Resignations. Any officer may resign at any time in writing by
------------
notifying the Board, the Chairman of the Board, the President or the Secretary.
Such resignation shall take effect at the date of receipt of such notice or at
such later time as is therein specified, and, unless otherwise specified, the
acceptance of such resignation shall not be necessary to make it effective. The
resignation of an officer shall be without prejudice to the contract rights of
the Corporation, if any.
5.4 Vacancies. A vacancy in any office because of death, resignation,
---------
removal, disqualification or any other cause shall be filled for the unexpired
portion of the term in the manner prescribed in the By-laws for the regular
election or appointment to such office.
12
5.5 Compensation. Salaries or other compensation of the officers may be
------------
fixed from time to time by the Board. No officer shall be prevented from
receiving a salary or other compensation by reason of the fact that he is also a
director.
5.6 Chairman of the Board. The Chairman of the Board of the Corporation
---------------------
shall have general supervision over the business of the Corporation, subject,
however, to the control of the Board and of any duly authorized committee of
directors. The Chairman of the Board shall, if present, preside at all meetings
of the stockholders and at all meetings of the Board. He may, with the Secretary
or the Treasurer or an Assistant Secretary or an Assistant Treasurer, sign
certificates for shares of capital stock of the Corporation. He may sign and
execute in the name of the Corporation deeds, mortgages, bonds, contracts and
other instruments, except in cases where the signing and execution thereof shall
be expressly delegated by the Board or by the By-laws to some other officer or
agent of the Corporation, or shall be required by law otherwise to be signed or
executed and, in general, he shall perform all duties incident to the office of
Chairman of the Board and such other duties as from time to time may be assigned
to him by the Board. The Board may designate two persons to serve as Co-Chairman
of the Board of the Corporation in which case each reference in these By-Laws to
the "Chairman of the Board" shall mean the "Co-Chairman of the Board". Where
both individuals holding such office are present, the individual with greater
seniority shall exercise the powers of the office, unless otherwise directed by
the Board.
5.7 President and Chief Executive Officer. The President shall be the
-------------------------------------
Chief Executive officer, of the Corporation and as such shall have the general
powers and duties of supervision and management usually vested in the office of
President and Chief Executive Officer. The President may also, with the
Secretary or the Treasurer or an Assistant Secretary or an Assistant Treasurer,
sign certificates for shares of capital stock of the Corporation; may sign and
execute in the name of the Corporation deeds, mortgages, bonds, contracts or
other instruments authorized by the Board, except in cases where the signing and
execution thereof shall be expressly delegated by the Board or by the By-laws to
some other officer or agent of the Corporation, or shall be required by law
otherwise to be signed or executed; and shall perform such other duties as from
time to time may be assigned to him by the Board.
5.8 Chairman of the Executive Committee. The Chairman of the Executive
-----------------------------------
Committee shall have the powers and duties incident to that office and shall
have other powers and duties as may be prescribed from time to time by the Board
of Directors. He shall be a member of the Executive Committee and shall preside
at all meetings of the Executive Committee. In the event of the absence or
disability of the President, he shall perform the duties of the President,
unless the Board of Directors shall have designated another person to perform
such duties.
13
5.9 Vice Presidents. Each Vice President shall have such powers and shall
---------------
perform such duties as shall be assigned to such person by the President or the
Board of Directors. Any Vice President may also, with the Secretary or the
Treasurer or an Assistant Secretary or an Assistant Treasurer, sign certificates
for shares of capital stock of the Corporation; may sign and execute in the name
of the Corporation deeds, mortgages, bonds, contracts or other instruments
authorized by the Board, except in cases where the signing and execution thereof
than be expressly delegated by the Board or by the By-laws to some other officer
or agent of the Corporation, or shall be required by law otherwise to be signed
or executed.
5.10 Secretary. The Secretary, if present, shall act as secretary of all
---------
meetings of the stockholders and of the Board, and shall keep the minutes
thereof in the proper book or books to be provided for that purpose; he shall
see that all notices required to be given by the Corporation are duly given and
served; he may, with the Chairman of the Board, the President or a Vice
President, sign certificates for shares of capital stock of the Corporation; he
shall be custodian of the seal of the Corporation and may seal with the seal of
the Corporation, or a facsimile thereof, all certificates for shares of capital
stock, of the Corporation and all documents the execution of which on behalf of
the Corporation under its corporate seal is authorized in accordance with the
provisions of the By-laws; he shall have charge of the stock ledger and also of
the other books, records and papers of the Corporation relating to its
organization and management as a Corporation, and shall see that the reports,
statements and other documents required by law are properly kept and filed; and
shall, in general, perform all the duties incident to the office of Secretary
and such other duties as from time to time may be assigned to him by the Board
or by the President.
14
5.11 Treasurer. The Treasurer shall have charge and custody of, and be
---------
responsible for, all funds, securities and notes of the Corporation; receive and
give receipts for moneys due and payable to the Corporation from any sources
whatsoever; deposit all such monies in the name of the Corporation in such
banks, trust companies or other depositories as shall be selected in accordance
with these By-laws; against proper vouchers, cause such funds to be disbursed by
checks or drafts on the authorized depositaries of the Corporation signed in
such manner as shall be determined in accordance with any provisions of the By-
laws, and be responsible for the accuracy of the amounts of all monies so
disbursed; regularly enter or cause to be entered in books to be kept by him or
under his direction full and adequate amount of all monies received or paid by
him for the amount of the Corporation; have the right to require, from time to
time reports or statements giving such information as he may desire with respect
to any and all financial transactions of the Corporation from the officers or
agents transacting the same; render to the President or the Board, whenever the
President or the Board, respectively, require him so to do, an account of the
financial condition of the Corporation and of all his transactions as Treasurer;
exhibit at all reasonable times his books of account and other records to any of
the directors upon application at the office of the Corporation where such books
and records are kept; and in general, perform all the duties incident to the
office of Treasurer and such other duties as from time to time may be assigned
to him by the Board, or by the President; and he may sign, with the Chairman of
the Board, the President or a Vice President, certificates for shares of capital
stock of the Corporation.
5.12 Assistant Secretaries and Assistant Treasurers. Assistant Secretaries
----------------------------------------------
and Assistant Treasurers shall perform such duties as shall be assigned to them
by the Secretary or by the Treasurer, respectively, or by the Board, or the
President. Assistant Secretaries and Assistant Treasurers may, with the Chairman
of the Board, the President or a Vice President, sign certificates for shares of
capital stock of the Corporation.
ARTICLE 6
CONTRACTS, CHECKS, DRAFTS, BANK ACCOUNTS, ETC.
6.1 Execution of Contracts. The Board may authorize any officer, employee
----------------------
or agent, in the name and on behalf of the Corporation, to enter into any
contracts or execute and satisfy any instrument, and any such authority may be
general or confined to specific instances, or otherwise limited.
15
6.2 Loans. The Chairman of the Board and Chief Executive Officer, the
-----
President or any other officer, employee or agent authorized by the By-laws or
by the Board may effect loans and advances at any time for the Corporation from
any bank, trust company or other institutions or from any firm, corporation or
individual and for such loan and advances may make, execute and deliver
promissory notes, bonds or other certificates or evidences of indebtedness of
the Corporation, and when authorized so to do may pledge and hypothecate or
transfer any securities or other property of the Corporation as security for any
such loans or advances. Such authority conferred by the Board may be general or
confined to specific instances or otherwise limited.
6.3 Checks, Drafts, Etc. All checks, drafts and other orders for the
-------------------
payment of money out of the funds of the Corporation and all notes or other
evidences of indebtedness of the Corporation shall be signed on behalf of the
Corporation in such manner as shall from time to time be determined by
resolution of the Board.
6.4 Deposits. The funds of the Corporation not otherwise employed shall be
--------
deposited from time to time to the order of the Corporation in such banks, trust
companies or other depositories as the Board may select or as may be selected by
an officer, employee or agent of the Corporation to whom such power may from
time to time be delegated by the Board.
ARTICLE 7
STOCKS AND DIVIDENDS
7.1 Certificates Representing Shares. The shares of capital stock of the
--------------------------------
Corporation shall be represented by certificates in such form (consistent with
the provisions of Section 158 of the General Corporation Law) as shall be
approved by the Board. Such certificates shall be signed by the Chairman of the
Board and Chief Executive Officer, the President or a Vice President and by the
Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer,
and may be sealed with the seal of the Corporation or a facsimile thereof. The
signatures of the officers upon a certificate may be facsimiles, if the cer-
tificate is countersigned by a transfer agent or registrar other than the
Corporation itself or its employee. In case any officer, transfer agent or
registrar who has signed or whose facsimile signature has been placed upon any
certificate shall have ceased to be such officer, transfer agent or registrar
before such certificate is issued, such certificate may, unless otherwise
ordered by the Board, be issued by the Corporation with the same effect as if
such person were such officer, transfer agent or registrar at the date of issue.
7.2 Transfer of Shares. Transfers of shares of capital stock of the
------------------
Corporation shall be made only on the books of the Corporation by the holder
thereof or by his duly authorized attorney appointed by a power of attorney duly
executed and filed with the Secretary or a transfer agent of the Corporation,
and on surrender of the certificate or certificates representing such shares of
capital
16
stock properly endorsed for transfer and upon payment of all necessary transfer
taxes. Every certificate exchanged, returned or surrendered to the Corporation
shall be marked "Canceled," with the date of cancellation, by the Secretary or
an Assistant Secretary or the transfer agent of the Corporation. A person in
whose name shares of capital stock shall stand on the books of the Corporation
shall be deemed the owner thereof to receive dividends, to vote as such owner
and for all other purposes as respects the Corporation. No transfer of shares of
capital stock shall be valid as against the Corporation, its stockholders and
creditors for any purpose, except to render the transferee liable for the debts
of the Corporation to the extent provided by law, until such transfer shall have
been entered on the books of the Corporation by an entry showing from and to
whom transferred.
7.3 Transfer and Registry Agents. The Corporation may from time to time
----------------------------
maintain one or more transfer offices or agents and registry offices or agents
at such place or places as may be determined from time to time by the Board.
7.4 Lost, Destroyed, Stolen and Mutilated Certificates. The holder of any
--------------------------------------------------
shares of capital stock of the Corporation shall immediately notify the
Corporation of any loss, destruction, theft or mutilation of the certificate
representing such shares, and the Corporation may issue a new certificate to
replace the certificate alleged to have been lost, destroyed, stolen or
mutilated. The Board may, in its discretion, as, a condition to the issue of any
such new certificate, require the owner of the lost, destroyed, stolen or
mutilated certificate, or his legal representatives, to make proof satisfactory
to the Board of such loss, destruction, theft or mutilation and to advertise
such fact in such manner as the Board may require, and to give the Corporation
and its transfer agents and registrars, or such of them as the Board may
require, a bond in such form, in such sum and with such surety or sureties as
the Board may direct, to indemnify the Corporation and its transfer agents and
registrars against any claim that may be made against any of them on account of
the continued existence of any such certificate so alleged to have been lost,
destroyed, stolen or mutilated and against any expense in connection with such
claim.
7.5 Regulations. The Board may make such rules and regulations as it may
-----------
deem expedient, not inconsistent with the By-laws or with the Certificate of
Incorporation, concerning the issue, transfer and registration of certificates
representing shares of its capital stock.
7.6 Restriction on Transfer of Stock. A written restriction on the transfer
--------------------------------
or registration of transfer of capital stock of the Corporation, if permitted by
Section 202 of the General Corporation Law and noted conspicuously on the
certificate representing such capital stock, may be enforced against the holder
of the restricted capital stock or any successor or transferee of the holder
including an executor, administrator, trustee, guardian or other fiduciary
entrusted with like responsibility for the person or estate of the holder.
Unless noted conspicuously on the certificate representing such capital stock, a
restriction, even though permitted by Section 202 of the General Corporation
Law, shall be ineffective except against a person with actual knowledge of the
restriction. A restriction
17
on the transfer or registration of transfer of capital stock of the Corporation
may be imposed either by the Certificate of Incorporation or by an agreement
among any number of stockholders or among such stockholders and the Corporation.
No restriction so imposed shall be binding with respect to capital stock issued
prior to the adoption of the restriction unless the holders of such capital
stock are parties to an agreement or voted in favor of the restriction.
7.7 Dividends, Surplus, Etc. Subject to the provisions of the Certificate
-----------------------
of Incorporation and of law, the Board:
7.7.1 May declare and pay dividends or make other distributions on the
outstanding shares of capital stock in such amounts and at such time or
times as, in its discretion, the condition of the affairs of the
Corporation shall render advisable;
7.7.2 May use and apply, in its discretion, any of the surplus of the
Corporation in purchasing or acquiring any shares of capital stock of the
Corporation, or purchase warrants therefor, in accordance with law, or any
of its bonds, debentures, notes, scrip or other securities or evidences of
indebtedness;
7.7.3 May set aside from time to time out of such surplus or net profits
such sum or sums as, in its discretion, it may think proper, as a reserve
fund to meet contingencies, or for equalizing dividends or for the purpose
of maintaining or increasing the property or business of the Corporation,
or for any purpose it may think conducive to the best interest of the
Corporation.
ARTICLE 8
INDEMNIFICATION
8.1 Indemnification of Officers and Directors. The Corporation shall
-----------------------------------------
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative, by reason of the fact that he
is or was a director or an officer of the Corporation against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit or
proceeding to the fullest extent and in the manner set forth in and permitted by
the General Corporation Law, and any other applicable law, as from time to time
in effect. Such right of indemnification shall not be deemed exclusive of any
other rights to which such director or officer may be entitled apart from the
foregoing provisions. The foregoing provisions of this Section 8.1 shall be
deemed to be a contract between the Corporation and each director and officer
who serves in such capacity at any time while this Article 8 and the relevant
provisions, of the General Corporation law and other applicable law, if any, are
in effect, and any
18
repeal or modification thereof shall not affect any rights or obligations then
existing, with respect to any state of facts then or theretofore existing, or
any action, suit or proceeding theretofore, or thereafter brought or threatened
based in whole or in part upon any such state of facts.
8.2 Indemnification of Other Persons. The Corporation may indemnify any
--------------------------------
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative by reason of the fact that he is or
was an employee or agent of the Corporation, or is or was, serving at the
request of the Corporation, as a director, officer, employee or agent of another
Corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding to the extent and in the manner set forth in and
permitted by the General Corporation Law, and any other applicable law, as from
time to time in effect. Such right of indemnification shall not be deemed
exclusive of any other rights to which any such person may be entitled apart
from the foregoing provisions.
ARTICLE 9
BOOKS AND RECORDS
9.1 Books and Records. The Corporation shall keep correct and complete
-----------------
books and records of account and shall keep minutes of the proceedings of the
stockholders, the Board and any committee of the Board. The Corporation shall
keep at the office designated in the Certificate of Incorporation or at the
office of the transfer agent or registrar of the Corporation in Delaware, a
record containing the names and addresses of all stockholders, the number and
class of shares held by each and the dates when they respectively became the
owners of record thereof.
9.2 Form of Records. Any records maintained by the Corporation in the
---------------
regular course of its business, including its stock ledger, books of account,
and minute books, may be kept on, or be in the form of, punch cards, magnetic
tape, photographs, microphotographs or any other information storage device
provided that the records so kept can be converted into clearly legible written
form within a reasonable time. The Corporation shall so convert any records so
kept upon the request of any person entitled to inspect the same.
9.3 Inspection of Books and Records. Except as otherwise provided by law,
-------------------------------
the Board shall determine from time to time whether, and, if allowed, when and
under what conditions and regulations, the accounts, books, minutes and other
records of the Corporation, or any of them, shall be open to the inspection of
the stockholders.
19
ARTICLE 10
SEAL
The Board may adopt a corporate seal which shall be in the form of a circle
and shall bear the full name of the Corporation, the year of its incorporation
and the word "Delaware".
ARTICLE 11
FISCAL YEAR
The fiscal year of the Corporation shall begin on the 1st day of January
and shall terminate on the 31st day of December in each year, or such other
period as may be fixed by resolution of the Board.
ARTICLE 12
VOTING OF SHARES HELD
Unless otherwise provided by resolution of the Board, the Chairman of the
Board and Chief Executive Officer, or the President, or any Vice President, may,
from time to time, appoint one or more attorneys or agents of the Corporation,
in the name and on behalf of the Corporation, to cast the votes which the
Corporation may be entitled to cast as a stockholder or otherwise in any other
corporation, any of whose shares or securities may be held by the Corporation,
at meetings of the holders of stock or other securities of such other
corporation, or to consent, in writing to any action by any such other
corporation, and may instruct the person or persons so appointed as to the
manner of casting such votes or giving such consent, and may execute or cause to
be executed on behalf of the Corporation and under its corporate or seal, or
otherwise, such written proxies, consents, waivers or other instruments as he
may deem necessary or proper in the premises; or the Chairman of the Board and
Chief Executive Officer, or the President, or any Vice President may himself
attend any meeting of the holders of the stock or other securities of any such
other corporation and thereat vote or exercise any or all other powers of the
Corporation as the holder of such stock or other securities of such other
corporation.
20
ARTICLE 13
BUSINESS COMBINATIONS WITH INTERESTED STOCKHOLDERS
Pursuant to the provisions of Section 203 (a) (2) of the General
Corporation Law, the Corporation, by action of the Board, expressly elects not
to be governed by Section 203 of the General Corporation Law, dealing with
business combinations with interested stockholders. Notwithstanding anything to
the contrary in these By-laws, the provisions of this Article 13 may not be
further amended by the Board, except as may be specifically authorized by the
General Corporation Law.
ARTICLE 14
AMENDMENTS
The By-laws may be altered, amended, supplemented or repealed, or new By-
laws may be adopted, by vote of the holders of the shares entitled to vote in
the election of directors. The By-laws may be altered, amended, supplemented or
repealed, or new By-laws may be adopted, by the Board, provided that the vote of
a majority of the entire Board shall be required to change the number of
authorized directors. Any By-laws adopted, altered, amended, or supplemented by
the Board may be altered, amended, supplemented or repealed by the stockholders
entitled to vote thereon.
ARTICLE 15
OFFICES
The Corporation may have an office or offices at such place or places,
within or without the State of Delaware, as the Board of Directors may from time
to time designate or the business of the Corporation require.
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. ss.
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
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 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; 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 event that 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 or denied a 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 & odak, P.A.
By:/s/WAYNE HOGAN By:
----------------------------------- -----------------------------------
Wayne Hogan Robert G. Kerrigan
for Brown, Terrell, Hogan, Ellis, for Kerrigan, Estess, Rankin &
McClamma & Yegelwel, P.A. McLeod
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,
Duryea & Hamilton, P.A. Richardson & 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]
ATTACHMENT 1
[Intentionally Omitted]
STATE OF FLORIDA
AGENCY FOR HEALTH CARE ADMINISTRATION
CERTIFICATION
[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
<PAGE>
Exhibit 99.1
PROPOSED MASTER SETTLEMENT AGREEMENT
<PAGE>
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-
<PAGE>
(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
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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
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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
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(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
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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
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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;
<PAGE>
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;
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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.
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(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
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<PAGE>
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
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<PAGE>
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
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<PAGE>
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.
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(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).
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<PAGE>
(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.
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(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
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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
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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
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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);
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(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,
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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;
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(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):
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(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
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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,
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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
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(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
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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
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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.
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(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.
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(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
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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,
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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
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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
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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
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(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
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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);
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(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.
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(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
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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-
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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.
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(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
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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
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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
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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
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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.
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(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.
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(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.
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(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
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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
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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;
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(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
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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
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(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
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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
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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.
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(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
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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
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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.
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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.
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(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
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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
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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):
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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
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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
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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.
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(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.
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(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
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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
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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
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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
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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
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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
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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
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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
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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).
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(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).
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(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.
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(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
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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,
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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
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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
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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
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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
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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
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(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
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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";
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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
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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);
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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
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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
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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
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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
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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.
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(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
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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
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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
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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
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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
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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
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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:
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(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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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.
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(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
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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
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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
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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
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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.
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(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
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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
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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.
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(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:
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(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
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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
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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
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(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).
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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,
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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.
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(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
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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-
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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"):
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(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
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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
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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.
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(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
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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
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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
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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
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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.
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(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
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<PAGE>
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
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<PAGE>
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
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<PAGE>
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
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<PAGE>
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
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<PAGE>
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,
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<PAGE>
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
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<PAGE>
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
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<PAGE>
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
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<PAGE>
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
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<PAGE>
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
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<PAGE>
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
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<PAGE>
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.
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STATE OF ALABAMA
By:
------------------------------
Fob James, Jr.
Governor
Date:
----------------------------
By:
------------------------------
Bill Pryor
Attorney General
Date:
----------------------------
<PAGE>
STATE OF ALASKA
By:
------------------------------
Bruce M. Botelho
Attorney General
Date:
----------------------------
<PAGE>
AMERICAN SAMOA
By:
------------------------------
Tauese P. Sunia
Governor
Date:
---------------------------
By:
------------------------------
Toetagata Albert Mailo
Attorney General
Date:
---------------------------
<PAGE>
STATE OF ARIZONA
By:
------------------------------
Grant Woods
Attorney General
Date:
---------------------------
By:
------------------------------
John H. Kelley
Director
Arizona Health Care Cost
Containment System
Date:
---------------------------
<PAGE>
STATE OF ARKANSAS
By:
------------------------------
Winston Bryant
Attorney General
Date:
----------------------------
<PAGE>
STATE OF CALIFORNIA
By:
------------------------------
Daniel E. Lungren
Attorney General
Date:
----------------------------
By:
------------------------------
Kimberly Belshe
Director
California Department of Health Services
Date:
----------------------------
<PAGE>
STATE OF COLORADO
By:
------------------------------
Gale A. Norton
Attorney General
Date:
----------------------------
<PAGE>
STATE OF CONNECTICUT
By:
------------------------------
Richard Blumenthal
Attorney General
Date:
----------------------------
<PAGE>
STATE OF DELAWARE
By:
------------------------------
M. Jane Brady
Attorney General
Date:
----------------------------
<PAGE>
DISTRICT OF COLUMBIA
By:
------------------------------
John M. Ferren
Corporation Counsel
Date:
----------------------------
By:
------------------------------
Marion Barry, Jr.
Mayor
Date:
----------------------------
<PAGE>
STATE OF GEORGIA
By:
------------------------------
Zell Miller
Governor
Date:
----------------------------
By:
------------------------------
Thurbert E. Baker
Attorney General
Date:
----------------------------
<PAGE>
GUAM
By:
------------------------------
Carl T.C. Gutierrez
Governor
Date:
----------------------------
By:
------------------------------
Gus Diaz
Acting Attorney General
Date:
----------------------------
<PAGE>
STATE OF HAWAII
By:
------------------------------
Margery S. Bronster
Attorney General
Date:
----------------------------
<PAGE>
STATE OF IDAHO
By:
------------------------------
Alan G. Lance
Attorney General
Date:
----------------------------
<PAGE>
STATE OF ILLINOIS
By:
------------------------------
Jim Ryan
Attorney General
Date:
----------------------------
<PAGE>
STATE OF INDIANA
By:
------------------------------
Frank L. O'Bannon
Governor
Date:
----------------------------
By:
------------------------------
Jeffrey A. Modisett
Attorney General
Date:
----------------------------
<PAGE>
STATE OF IOWA
By:
------------------------------
Tom Miller
Attorney General
Date:
----------------------------
<PAGE>
STATE OF KANSAS
By:
------------------------------
Carla J. Stovall
Attorney General
Date:
----------------------------
<PAGE>
COMMONWEALTH OF KENTUCKY
By:
------------------------------
Albert Benjamin "Ben" Chandler III
Attorney General
Date:
----------------------------
<PAGE>
STATE OF LOUISIANA
By:
------------------------------
Richard P. Ieyoub
Attorney General
Date:
----------------------------
<PAGE>
STATE OF MAINE
By:
------------------------------
Andrew Ketterer
Attorney General
Date:
----------------------------
<PAGE>
STATE OF MARYLAND
By:
------------------------------
J. Joseph Curran, Jr.
Attorney General
Date:
----------------------------
<PAGE>
COMMONWEALTH OF MASSACHUSETTS
By:
------------------------------
Scott Harshbarger
Attorney General
Date:
----------------------------
<PAGE>
STATE OF MICHIGAN
By:
------------------------------
Frank J. Kelley
Attorney General
Date:
----------------------------
<PAGE>
STATE OF MISSOURI
By:
------------------------------
Jeremiah W. (Jay) Nixon
Attorney General
Date:
----------------------------
<PAGE>
STATE OF MONTANA
By:
------------------------------
Joseph P. Mazurek
Attorney General
Date:
----------------------------
<PAGE>
STATE OF NEBRASKA
By:
------------------------------
Don Stenberg
Attorney General
Date:
----------------------------
<PAGE>
STATE OF NEVADA
By:
------------------------------
Frankie Sue Del Papa
Attorney General
Date:
----------------------------
<PAGE>
STATE OF NEW HAMPSHIRE
By:
------------------------------
Philip T. McLaughlin
Attorney General
Date:
----------------------------
<PAGE>
STATE OF NEW JERSEY
By:
------------------------------
Peter Verniero
Attorney General
Date:
----------------------------
<PAGE>
STATE OF NEW MEXICO
By:
------------------------------
Tom Udall
Attorney General
Date:
----------------------------
<PAGE>
STATE OF NEW YORK
By:
------------------------------
Dennis C. Vacco
Attorney General
Date:
----------------------------
<PAGE>
STATE OF NORTH CAROLINA
By:
------------------------------
James B. Hunt
Governor
Date:
----------------------------
By:
------------------------------
Michael F. Easley
Attorney General
Date:
----------------------------
<PAGE>
STATE OF NORTH DAKOTA
By:
------------------------------
Heidi Heitkamp
Attorney General
Date:
----------------------------
<PAGE>
NORTHERN MARIANA ISLANDS
By:
------------------------------
Sally Pfund
(Acting) Attorney General
Date:
----------------------------
<PAGE>
STATE OF OHIO
By:
------------------------------
Betty D. Montgomery
Attorney General
Date:
----------------------------
<PAGE>
STATE OF OKLAHOMA
By:
------------------------------
W.A. Drew Edmondson
Attorney General
Date:
----------------------------
<PAGE>
STATE OF OREGON
By:
------------------------------
Hardy Myers
Attorney General
Date: __________________
<PAGE>
COMMONWEALTH OF PENNSYLVANIA
By:
------------------------------
Mike Fisher
Attorney General
Date:
----------------------------
<PAGE>
COMMONWEALTH OF PUERTO RICO
By:
------------------------------
Jose A. Fuentes-Agostini
Attorney General
Date:
----------------------------
<PAGE>
STATE OF RHODE ISLAND
By:
------------------------------
Jeffrey B. Pine
Attorney General
Date:
----------------------------
<PAGE>
STATE OF SOUTH CAROLINA
By:
------------------------------
Charlie Condon
Attorney General
Date:
----------------------------
<PAGE>
STATE OF SOUTH DAKOTA
By:
------------------------------
William J. Janklow
Governor
Date:
----------------------------
By:
------------------------------
Mark Barnett
Attorney General
Date:
----------------------------
<PAGE>
STATE OF TENNESSEE
By:
------------------------------
John Knox Walkup
Attorney General
Date:
----------------------------
<PAGE>
STATE OF UTAH
By:
------------------------------
Jan Graham
Attorney General
Date:
----------------------------
<PAGE>
STATE OF VERMONT
By:
------------------------------
William H. Sorrell
Attorney General
Date:
----------------------------
<PAGE>
COMMONWEALTH OF VIRGINIA
By:
------------------------------
Mark L. Earley
Attorney General
Date:
----------------------------
<PAGE>
THE VIRGIN ISLANDS OF THE UNITED
STATES
By:
------------------------------
Julio A. Brady
Attorney General
Date:
----------------------------
<PAGE>
STATE OF WASHINGTON
By:
------------------------------
Christine O. Gregoire
Attorney General
Date:
----------------------------
<PAGE>
STATE OF WEST VIRGINIA
By:
------------------------------
Darrell V. McGraw Jr.
Attorney General
Date:
----------------------------
<PAGE>
STATE OF WISCONSIN
By:
------------------------------
Tommy G. Thompson
Governor
Date:
----------------------------
By:
------------------------------
James E. Doyle
Attorney General
Date:
----------------------------
<PAGE>
STATE OF WYOMING
By:
------------------------------
Jim Geringer
Governor
Date:
----------------------------
By:
------------------------------
William U. Hill
Attorney General
Date:
----------------------------
<PAGE>
PHILIP MORRIS INCORPORATED
By:
------------------------------
Martin J. Barrington
General Counsel
Date:
----------------------------
By:
------------------------------
Meyer G. Koplow
Counsel
Date:
----------------------------
<PAGE>
R.J. REYNOLDS TOBACCO COMPANY
By:
------------------------------
Charles A. Blixt
Executive Vice President and
General Counsel
Date:
----------------------------
By:
------------------------------
Arthur F. Golden
Counsel
Date:
----------------------------
<PAGE>
BROWN & WILLIAMSON TOBACCO
CORPORATION
By:
------------------------------
F. Anthony Burke
Vice President and General Counsel
Date:
----------------------------
By:
------------------------------
Stephen R. Patton
Counsel
Date:
----------------------------
<PAGE>
LORILLARD TOBACCO COMPANY
By:
------------------------------
Ronald S. Milstein
General Counsel
Date:
----------------------------
By:
------------------------------
Herbert M. Wachtell
Counsel
Date:
----------------------------
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
APPENDIX A
SCHEDULE OF FEES AND EXPENSES
B-8
<PAGE>
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
<PAGE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
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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
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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
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(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).
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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.
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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.
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(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"):
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<PAGE>
(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,
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<PAGE>
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
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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
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<PAGE>
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.
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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.
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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)
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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
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(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.
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<PAGE>
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").
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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
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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
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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.
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(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
<PAGE>
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
<PAGE>
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:
<PAGE>
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].
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<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
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<PAGE>
(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.
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<PAGE>
(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
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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
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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
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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.
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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
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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.
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(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.
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(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.
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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
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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
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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
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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
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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.
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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.
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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.
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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]
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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.
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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.
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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
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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
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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
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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
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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
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<PAGE>
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
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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
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<PAGE>
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
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<PAGE>
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:
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<PAGE>
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
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<PAGE>
EXHIBIT Q
1997 DATA
---------
[INFORMATION TO BE SUPPLIED AND VERIFIED]
Q-1
<PAGE>
EXHIBIT R
EXCLUSION OF CERTAIN BRAND NAMES
--------------------------------
[INFORMATION TO BE SUPPLIED AND VERIFIED]
R-1
<PAGE>
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
<PAGE>
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.]
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<PAGE>
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
<PAGE>
(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
<PAGE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 181,000
<SECURITIES> 41,056,200
<RECEIVABLES> 15,283,600
<ALLOWANCES> 323,300
<INVENTORY> 266,400
<CURRENT-ASSETS> 0
<PP&E> 3,501,900
<DEPRECIATION> 832,100
<TOTAL-ASSETS> 70,999,400
<CURRENT-LIABILITIES> 0
<BONDS> 5,701,300
0
0
<COMMON> 115,000
<OTHER-SE> 10,396,100
<TOTAL-LIABILITY-AND-EQUITY> 70,999,400
<SALES> 2,126,200
<TOTAL-REVENUES> 16,151,800
<CGS> 769,200
<TOTAL-COSTS> 11,133,500
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 282,300
<INCOME-PRETAX> 1,555,200
<INCOME-TAX> 532,000
<INCOME-CONTINUING> 780,600
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 780,600
<EPS-PRIMARY> 6.79
<EPS-DILUTED> 6.79
</TABLE>
