<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
January 16, 1998
Date of Report (Date of earliest event reported)
- ------------------------------------------------------------------------------
RJR NABISCO HOLDINGS CORP.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 1-10215 13-3490602
(Jurisdiction of (Commission file number) (I.R.S. Employer
Incorporation or Identification No.)
Organization)
- ------------------------------------------------------------------------------
RJR NABISCO, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 1-6388 56-0950247
(Jurisdiction of (Commission file number) (I.R.S. Employer
Incorporation or Identification No.)
Organization)
- ------------------------------------------------------------------------------
1301 Avenue of the Americas
New York, New York 10019
(212) 258-5600
(Address, including zip code, and telephone number,
including area code, of Registrants' principal
executive offices)
- ------------------------------------------------------------------------------
<PAGE>
ITEM 5. OTHER EVENTS.
On January 16, 1998, R.J. Reynolds Tobacco Company ("RJRT") and certain
other major tobacco companies entered into a Settlement Agreement (the
"Agreement") with Dan Morales, Attorney General of the State of Texas, and other
representatives of the State of Texas to settle claims asserted by the State
against RJRT and others in litigation seeking reimbursement for certain State
expenditures for treating smoking related illnesses. Pursuant to the Agreement,
the State has dismissed all of its claims against RJRT and, in addition, has
waived all future claims against RJRT and others (including RJR Nabisco, Inc.
("RJRN") and RJR Nabisco Holdings Corp. ("Holdings")) relating to the use of or
exposure to tobacco products.
The Agreement requires the tobacco companies to discontinue all billboard
advertisements, as well as all advertisements that appear on vehicles and in
certain public transit areas, within several months. The Agreement also imposes
a number of payment obligations on the tobacco companies, requiring them to make
an initial payment to the State of Texas of $725 million, as well as ongoing
annual payments of $290 million for 1998, and, subject to various adjustments,
approximately $326 million for 1999, $363 million for 2000, $471 million for
2001, $471 million for 2002 and $580 million for each year thereafter. In
addition, the Agreement requires the tobacco companies to pay $264 million over
the course of 1998 to fund a two-year State pilot program against youth smoking.
RJRT's shares of the $725 million initial payment and the $264 million
payment for the pilot program will total approximately $114 million, to be paid
over the course of 1998 in payments of approximately $32 million by February 1,
1998; $12 million by July 1, 1998; $23 million by October 1, 1998; and $47
million by November 1, 1998.
The tobacco companies' first annual payment of $290 million for 1998 will
be paid in two installments, with $89 million due on November 1, 1998 and $201
million due on December 31, 1998. These two payments, as well as all subsequent
annual payments, will be allocated among the tobacco companies on the basis of
market share.
As part of the settlement, the tobacco companies have also agreed to pay
the litigation costs of the State and its private counsel. RJRT's estimated
share of such costs is estimated at approximately $11 million, to be paid within
30 days of the Agreement. In addition, the tobacco companies have agreed to pay
the State's private counsel's fees, together with private counsel's fees in
connection with any settlement of similar litigation, in amounts to beawarded
by a panel of arbitrators, subject to a $500 million aggregate annualcap.
Payments on awards
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of attorneys' fees are to be allocated among the companies on the basis of
market share. As an advance on such payments, the tobacco companies will pay
$50 million to the State's private counsel within 45 days of the Agreement, such
payment to be conditioned on the State of Texas's making an equivalent advance.
RJRT's share of the advance on attorneys' fees is approximately $12 million.
RJRN will be charging to expense for the fourth quarter of 1997
approximately $140 million in respect of its share of the above payments other
than the first annual payment.
Settlement agreements previously entered into between the tobacco companies
and the States of Florida and Mississippi, which were described in the Current
Report on Form 8-K filed by RJR Nabisco Holdings Corp. and RJR Nabisco, Inc. on
September 4, 1997, each provide for revisions of their terms to reflect more
favorable terms contained in any later settlement. Neither settlement provides
for payment of any advance on private counsel's fees. Accordingly, as a result
of the advance to be paid to private counsel for Texas, the tobacco companies
may be required to make advances of up to $50 million to private counsel for
each of Florida and Mississippi, provided that both Florida and Mississippi
agree to make equivalent advances. Any such advances by the tobacco companies
would be allocated on the basis of market share.
In the event that federal legislation is passed that substantially
implements the proposed resolution described in the Current Report on Form 8-K
filed by RJR Nabisco Holdings Corp. and RJR Nabisco, Inc. on June 24, 1997, the
Texas settlement would be largely superseded and, accordingly, amounts paid
pursuant to the Agreement (other than the pilot program amounts) would be
adjusted in order to ensure that Texas received the same amount as allocated to
it under the federal legislation. In addition, the settlement provides that, in
the event of such legislation, the tobacco companies will make additional
payments to Texas for its exceptional contribution to the national resolution,
in an amount to be set by a panel of arbitrators. The tobacco companies have
agreed not to oppose requests by Texas for compensation of $329.5 million and
any increase over this amount necessary to offset the difference, if any,
between the amounts to be paid to Texas during 1998 under the Agreement and the
amounts allocated to Texas for that period under the federal legislation.
Payment by the tobacco companies of any amount awarded to Texas by the panel
will be paid over a number of years, subject to an aggregate annual cap of $100
million for all such payments to settling States.
RJRN believes that the settlement of the Texas case has resolved litigation
that could have materially affected the results of operations or cash flows of
RJRN in particular quarterly or annual periods or its financial condition.
Nonetheless, the financial consequences of this settlement for RJRT are hard to
predict, and may depend, among other things, on (i) the amount of the future
annual payments required of RJRT; (ii) the effect of discontinuing most forms of
outdoor advertising in the States of Texas on consumption of tobacco products
within Texas; and (iii) the impact of the advertising restrictions on RJRT's
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competitive position in Texas. In addition, the negotiation and announcement of
the Agreement could also affect (i) federal, state and local regulation of the
tobacco industry, including the federal legislative resolution proposed on June
20, 1997; (ii) public attitudes toward smoking and the tobacco industry; (iii)
the climate for pending litigation against Holdings, RJRN and RJRT and other
tobacco companies; and (iv) the number of new smoking and health claims filed
against the industry.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
Exhibits
(1) Press Release of R.J. Reynolds Tobacco Company, Philip Morris
Incorporated, Brown and Williamson Tobacco Corporation and the
Lorillard Tobacco Company dated January 16, 1998.
(2) Comprehensive Settlement and Release dated January 16, 1998.
<PAGE>
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, hereunto duly authorized.
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
(Registrants)
By: /s/ William L. Rosoff
-------------------------------------------
William L. Rosoff
Senior Vice President and
General Counsel
Date: January 27, 1998
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EXHIBIT 1
FOR IMMEDIATE RELEASE CONTACT: Scott Williams
January 16, 1998 202-739-0225
Steve Duchesne
202-739-0245
Bozell Sawyer Miller Group
WASHINGTON, D.C. -- THE FOLLOWING STATEMENT REGARDING THE SETTLEMENT OF PENDING
LITIGATION IN TEXAS WAS ISSUED TODAY BY PHILIP MORRIS INCORPORATED; R.J.
REYNOLDS TOBACCO COMPANY; BROWN & WILLIAMSON TOBACCO CORPORATION; THE LORILLARD
TOBACCO COMPANY; AND UNITED STATES TOBACCO COMPANY:
Today's settlement with the State of Texas again demonstrates that the industry
is prepared to cooperate with government and the public health authorities to
discourage underage tobacco use.
While today's agreement is important, we continue to believe the best course of
action is adoption of the proposed national resolution now pending before
Congress. Individual state settlements cannot incorporate nor implement the
comprehensive array of public health provisions contained in the proposed
national settlement, which addresses all of the issues involving the regulation
and sale of, and liability for, tobacco.
This settlement represents another step in a process to end the climate of
confrontation and litigation that has marked the national debate on tobacco-
related issues for decades. While this case dealt with specific concerns of the
State of Texas, the national resolution represents the best opportunity to
achieve immediate and meaningful resolution of outstanding issues regarding
tobacco, including what many believe will be a reduction in the use of tobacco
products by minors while preserving the rights of adults to use tobacco.
The settlement provides Texas with an up-front payment of $725 million. The
industry will also provide $264 million to fund state pilot programs, including
research and anti-youth smoking initiatives. Commencing in November 1998, the
companies will pay Texas a 7.25 percent share of the annual ongoing payments
that are contemplated to be paid to the states. Without giving effect to
adjustments for inflation and changes in sales volume, this would result in
payments to Texas of $290 Million in 1999 and $326 million in 1999. These
payments would increase to $580 million by the sixth year and continue at that
level thereafter. Giving effect to other adjustments, Texas will receive $1.27
billion from the settlement in 1998. Over the next 25 years, Texas will receive
$14.5 billion for health care costs, subject to adjustment for inflation and
changes in sales volume.
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- more -
The industry has agreed to pay reasonable attorneys fees to private counsel for
their representation of the state of Texas, and to reimburse the state and
private counsel for reasonable costs and expenses associated with this
litigation. In the event that federal legislation implementing the June 20th
proposed resolution (or a substantially equivalent federal program) is enacted,
these payment obligations will be superseded by those in the federal
legislation, except as expressly stated otherwise in the settlement agreement.
The industry will also be taking down all public billboards, transit and stadium
advertising in Texas as part of this agreement. It is important to note that
only through adoption of a comprehensive national settlement can the full array
of marketing restrictions be achieved.
The Texas agreement, like the Mississippi and Florida settlements, will be
largely superseded by the June 20th, 1997, comprehensive resolution, if enacted
by the Congress and signed by the President.
Today's action highlights the significant provisions of the proposed national
resolution now before Congress. The industry remains committed to the agreement
it reached with the state attorneys general, representatives of the public
health community and the plaintiffs' attorneys.
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EXHIBIT 2
IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF TEXAS,
TEXARKANA DIVISION
- ----------------------------------
)
THE STATE OF TEXAS, )
)
Plaintiff, )
)
vs. ) No. 5-96CV-91
)
THE AMERICAN TOBACCO )
COMPANY, et al., )
)
Defendants. )
- ----------------------------------
COMPREHENSIVE SETTLEMENT AGREEMENT
AND RELEASE
THIS COMPREHENSIVE SETTLEMENT AGREEMENT AND RELEASE ("Settlement
Agreement") is made as of the date hereof, by and among the parties hereto, as
indicated by their signatures below, to settle and resolve with finality all
claims against all parties to this action relating to the subject matter of this
action which have been or could have been asserted by any of the parties to this
action.
WHEREAS, the State of Texas, through its Attorney General, Dan Morales,
commenced this action on March 28, 1996, asserting various claims for monetary
and injunctive relief on behalf of the State of Texas against certain
<PAGE>
tobacco manufacturers and others as Defendants;
WHEREAS, the Defendants have denied each and every one of the State of
Texas's allegations of unlawful conduct or wrongdoing and have asserted a number
of defenses to the State of Texas's claims, which defenses have been contested
by the State of Texas;
WHEREAS, the State of Texas, through its Attorney General, the Honorable
Dan Morales, and Private Counsel, have had a significant leadership role among
the various states in maintaining civil litigation against the tobacco industry
and in seeking to forge an unprecedented national resolution of the principal
issues and controversies associated with the manufacture, marketing and sale of
tobacco products in the United States;
WHEREAS, through the efforts of the State of Texas, Attorney General
Morales, Private Counsel and others, a June 20, 1997 Memorandum of Understanding
and Proposed Resolution (the "Proposed Resolution") (attached as an Appendix
hereto) has been agreed to by members of the tobacco industry, state attorneys
general, private litigants and representatives of public health groups, which
Proposed Resolution would provide for unprecedented and comprehensive regulation
of the tobacco industry while preserving the right of individuals to assert
claims for compensation;
WHEREAS, the Proposed Resolution contemplates action by the United States
Congress and the President to enact and sign a new federal law with respect
2
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to the tobacco industry, which action the tobacco industry has agreed to support
and which will require study and analysis by Congress and the President; and
WHEREAS, trial of this action was scheduled to commence on January 12,
1998 and a continuance of such trial could have prejudiced the State of Texas,
the State of Texas and the undersigned Defendants (the "Settling Defendants")
have agreed to settle independently the litigation commenced by Attorney General
Morales pursuant to financial terms comparable to those contained in the
Proposed Resolution, which terms will achieve for Texas immediately and with
certainty the financial benefits it would receive pursuant to the Proposed
Resolution, should it become law, as well as funding for a pilot program to
reduce the use of Tobacco Products by children under 18 years of age:
NOW, THEREFORE, BE IT KNOWN THAT, in consideration of the payments to be
made by the Settling Defendants, the dismissal and release of claims by the
State of Texas 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. Jurisdiction. Settling Defendants and the State of Texas acknowledge
that this Court has jurisdiction over the subject matter of this action and over
each of the parties hereto, and that this Court shall retain jurisdiction for
the purposes of implementing and enforcing this Settlement Agreement. The
parties hereto agree to present any disputes under this Settlement Agreement,
including without
3
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limitation any claims for breach or enforcement of this Settlement Agreement,
exclusively to this Court.
2. Applicability. This Settlement Agreement shall be binding upon all
Settling Defendants and their successors and assigns in the manner expressly
provided for herein and shall inure to their benefit and to that of their
respective directors, officers, employees, attorneys, representatives, insurers,
suppliers, distributors and agents, and to that of any of their present or
former parents, subsidiaries, affiliates, divisions or other organizational
units of any kind; and the predecessors, successors and assigns of any of the
foregoing. This Settlement Agreement shall be binding on and inure to the
benefit of the State of Texas, its administrators, representatives, employees,
officers, agents, Private Counsel, counsel and legal representatives; all
agencies, departments, commissions and divisions of the State; all subdivisions,
public entities, public corporations, instrumentalities and educational
institutions over which the State has control; and the predecessors, successors
and assigns of any of the foregoing. None of the rights granted or obligations
assumed under this Settlement Agreement by the parties hereto may be assigned or
otherwise conveyed without the express prior written consent of all of the
parties hereto.
3. Voluntary Agreement of Parties. The State of Texas and Settling
Defendants acknowledge and agree that this Settlement Agreement is voluntarily
entered into by all parties hereto as the result of arms length negotiations
during
4
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which all such parties were represented by counsel. Settling Defendants
understand and acknowledge that certain provisions of this Settlement Agreement
impose specific requirements on them that could give rise to challenges under
various federal and State constitutional provisions if the State of Texas
unilaterally imposed such requirements. None of the parties hereto will seek to
challenge this Settlement Agreement based on any such constitutional challenge
to the provisions contained herein.
4. Definitions. For the purposes of this Settlement Agreement, the
following terms shall have the meanings set forth below:
(a) "State" or "State of Texas" means the State of Texas, all of its
officers acting in their official capacities and any department,
subdivision or agency of the State, regardless of whether a named
plaintiff;
(b) "Settling Defendants" means those Defendants in this action that
are signatories hereto;
(c) "Market Share" means, for each year, a Settling Defendant's
respective share of sales of cigarettes by unit for consumption in the
United States;
(d) "Tobacco Products" means cigarettes and smokeless tobacco as
those terms are defined in the Food and Drug Administration Rule;
(e) "Billboards" includes billboards, as well as all signs and
placards in arenas and stadia, whether open-air or enclosed; "Billboards"
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does not include: (1) any advertisements placed on or outside the premises
of retail establishments licensed to sell Tobacco Products or any retail
point-of-sale; and (2) billboards or advertisements in connection with the
sponsorship by Settling Defendants of any transient entertainment,
sporting or similar event, such as NASCAR, that appears in the State of
Texas as part of a national or multi-state tour;
(f) "Private Counsel" means Walter Umphrey, John M. O'Quinn, P.C.,
John Eddie Williams, Jr., Reaud, Morgan & Quinn, and The Nix Law Firm,
each of whom is defined and identified as "counsel" in the Outside Counsel
Agreement executed by Attorney General Dan Morales on March 22, 1996, and
Ness, Motley, Loadholt, Richardson & Poole;
(g) "Transit Advertisements" means advertising on private or public
vehicles and all advertisements placed at, on or within any bus stop, taxi
stand, transit waiting area, train station, airport or any similar
location; "Transit Advertisements" does not include any advertisements
placed on or outside the premises of retail establishments licensed to
sell Tobacco Products or any retail point-of-sale; and
(h) "Final Approval" means the date on which all of the following
shall have occurred:
(1) The Settlement Agreement is approved by the Court;
(2) Entry is made of an order of dismissal of claims or a
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final judgment as provided herein; and
(3) The time for appeal or to seek permission to appeal from
the Court's approval as described in (1) hereof and entry of final
judgment or order of dismissal as described in (2) hereof has
expired or, in the event of an appeal, the appeal has been dismissed
or the approval described in (1) hereof and the judgment or order
described in (2) 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 or review.
5. Settlement Receipts; Use of Funds. The payments to be made by Settling
Defendants under this Settlement Agreement during the year 1998 constitute
reimbursement for public health expenditures of the State of Texas, including
without limitation expenditures made by the State's Employees' Health Insurance
Program and Charity Care programs. All other payments made by Settling
Defendants pursuant to this Settlement Agreement are in satisfaction of all of
the State of Texas's claims for damages incurred by the State in the year of
payment or earlier years, including those for reimbursement of Medicaid
expenditures and punitive damages, except that no part of any payment under this
Settlement Agreement is made in settlement of an actual or potential liability
for a fine, penalty (civil or criminal) or enhanced damages. Accordingly,
subject to the
7
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orders of this Court and the operation of applicable law, the parties hereto
anticipate that funds due to the State of Texas under this Settlement Agreement,
other than funds dedicated for legal expense reimbursement, will be allocated as
follows, or for such other purposes as the State of Texas may determine:
o $151 million dollars to the general revenue fund of the State of Texas, to
be used for the exclusive purpose of providing funding, in conjunction
with the federal government, for the Children's Health Insurance Program,
pursuant to Title XXI of the Social Security Act.
o $200 million dollars to the general revenue fund of the State of Texas to
be used for the exclusive purpose of supporting smoking cessation
programs, enforcement of juvenile smoking laws, counter-marketing
promotional efforts directed toward youth, general anti-tobacco
educational programs and other similar initiatives.
o $200 million to the University of Texas Health Science Center at San
Antonio for the exclusive purpose of establishing, maintaining and
operating the Texas Children's Cancer Institute.
o $428 million to the Texas Foundation for Children and Public Health to be
used in accordance with Texas law for providing grants to organizations
and programs which promote and protect the interest of Texas children and
the public health, including but not limited to the following:
(1) Tobacco counter-marketing promotional efforts directed toward youth;
(2) General anti-tobacco education;
(3) Cigarette smoking and smokeless tobacco use cessation programs;
(4) Children's health screening;
(5) Childhood immunization;
(6) Childhood nutrition;
(7) Children's hospice;
(8) Pre-natal care;
(9) Health education programs;
(10) Rural health care initiatives;
(11) Mammography screening programs;
(12) Physical/sexual child abuse;
8
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(13) Adult domestic violence;
(14) Substance abuse/mental health; and
(15) Physical/mental disabilities.
o $100 million to the M.D. Anderson Cancer Center in Houston for an
endowment for research and for reimbursement of indigent health-care
costs.
o $50 million to the Texas Tech Health Sciences Center for border health
initiatives, including the establishment and operation of the Institute of
Border Health.
o $50 million to the University of Texas Southwestern Medical Center at
Dallas for research, endowments and other programs that benefit the public
health.
All remaining amounts, including any amounts due to be paid by Settling
Defendants after December 31, 1998, are to be allocated to the general revenue
fund of the State of Texas to be used for such purposes as the State of Texas
may determine.
6. Elimination of Billboards and Transit Advertisements. Settling
Defendants agree to discontinue all Billboards and Transit Advertisements of
Tobacco Products in the State of Texas. Settling Defendants agree to exercise
their best efforts in cooperation with the State of Texas to identify all
Billboards that are located within 1000 feet of any public or private school or
playground in the State of Texas. Settling Defendants will remove such Tobacco
Products advertisements (leaving the space unused or used for advertising
unrelated to Tobacco Products) or, at the option of the State of Texas, will
allow the State of Texas, at its expense, to substitute for the remaining term
of the contract
9
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alternative advertising intended to discourage the use of Tobacco Products by
children under the age of 18. Settling Defendants agree to provide the State of
Texas with preliminary lists of the locations of all Billboards and stationary
Transit Advertisements within 30 days from the date of execution of this
Settlement Agreement, such lists to be finalized within an additional 15 days,
and to remove all Billboards and Transit Advertisements for Tobacco Products
within the State of Texas at the earlier of the expiration of applicable
contracts or 4 months from the date the final lists are supplied to the State of
Texas. Settling Defendants also agree to cooperate to secure the expedited
removal of up to 50 Billboards or stationary Transit Advertisements designated
by the State of Texas, within 30 days after their designation.
Each Settling Defendant shall provide the Court and the Attorney General,
or his designee, with the name of a contact person to whom the State of Texas
may direct inquiries during the time such Billboards and Transit Advertisements
are being eliminated, from whom the State of Texas may obtain periodic reports
as to the progress of their elimination and who will be responsible for ensuring
that appropriate action is taken to remove any Billboards or Transit
Advertisements that have not been eliminated in a timely manner.
7. Support of Legislation and Rules. Following Final Approval of this
Settlement Agreement, the Settling Defendants will not challenge existing or
proposed legislative or administrative initiatives insofar as they effectuate
the
10
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following:
(a) The prohibition of the sale of cigarettes in vending machines,
except in adult-only locations and facilities;
(b) The strengthening of civil penalties for sales of Tobacco
Products to children under the age of 18 years, including the suspension
or revocation of retail licenses; and
(c) The strengthening of civil penalties for possession of Tobacco
Products by children under the age of 18 years.
8. Initial Payments. Each Settling Defendant severally shall cause to be
paid into the registry of the Court in accordance with paragraph 11 of this
Settlement Agreement, the respective amounts listed for such Settling Defendant
in Schedule A hereto, such amounts representing its share of the following
payments: $204 million to be paid on or before February 1, 1998; $73 million to
be paid on or before July 1, 1998; $146 million to be paid on or before October
1, 1998; and $302 million to be paid on or before November 1, 1998; the
aggregate amount of such payments ($725 million) being the State of Texas's good
faith estimate of the portion Texas would receive of the $10 billion payment
provided for in Paragraph A on page 34 of the June 20, 1997 Proposed Resolution.
9. Pilot Program Payments. In support of the State of Texas's demonstrated
commitment to the meaningful and immediate reduction of the use of Tobacco
Products by children under the age of 18 years, Settling Defendants
11
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agree to support a pilot program, the elements of which shall be aimed
specifically at the reduction of the use of Tobacco Products by children under
the age of 18 years. Accordingly, each Settling Defendant severally shall cause
to be paid into the registry of the Court in accordance with paragraph 11 of
this Settlement Agreement, the respective amounts listed for such Settling
Defendant in Schedule B hereto, such amounts representing its share of the
following payments: $74 million to be paid on or before February 1, 1998; $27
million to be paid on or before July 1, 1998; $54 million to be paid on or
before October 1, 1998; and $109 million to be paid on or before November 30,
1998.
The pilot program shall commence within a reasonable period after Final
Approval of this Settlement Agreement, and shall last for a period of no less
than 24 months. The amounts paid by Settling Defendants pursuant to this
paragraph 9 in support of the pilot program shall be used for general
enforcement, media, educational and other programs directed to the underage
users or potential underage users of Tobacco Products, but shall not be directed
against any particular tobacco company or companies or any particular brand of
Tobacco Products.
10. Annual Payments. Each of the Settling Defendants agrees that, on the
dates specified in this paragraph 10 with regard to 1998, and annually
thereafter on December 31st of each year after 1998 (subject to final adjustment
within 30 days), it shall severally cause to be paid into the registry of the
Court in
12
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accordance with paragraph 11 of this Settlement Agreement, pro rata in
proportion to its respective Market Share, its share of 7.25% of the following
amounts (in billions):
Year 1998 1999 2000 2001 2002 2003 thereafter
- ---- 1 2 3 4 5 6
Amount $4B $4.5B $5B $6.5B $6.5B $8B $8B
- ------
The above amounts represent the amounts contemplated under the Proposed
Resolution to be paid to the several States, without regard to the possibility
of any claims for reimbursement or credit by any other person or entity
including any federal government agency. The payments made by Settling
Defendants pursuant to this paragraph 10 shall be adjusted upward by the greater
of 3% or the Consumer Price Index applied each year on the previous year,
beginning with the first annual payment. Such payments will also be decreased or
increased, as the case may be, in accordance with decreases or increases in
volume of domestic tobacco product volume sales as provided in Paragraph B.5 on
pages 34-35 of the Proposed Resolution.
Settling Defendants shall make their first annual payment pursuant to this
paragraph 10, without adjustment, and without regard to any first annual payment
date provided for under any legislation implementing the Proposed Resolution (or
a substantially equivalent federal program), as follows. Each Settling Defendant
severally shall cause to be paid into the registry of the Court, in accordance
with
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<PAGE>
paragraph 11 of this Settlement Agreement, its respective share of the following
payments: $89 million to be paid on or before November 1, 1998; and $201 million
to be paid on or before December 31, 1998. The payments to be made by Settling
Defendants in 1998 in the manner described above shall be credited against any
first annual payment due before February 28, 1999 under legislation implementing
the Proposed Resolution (or a substantially equivalent federal program).
11. Payment of Settlement Proceeds. Any payment made pursuant to this
Settlement Agreement shall be made to the registry of the Court; provided, that
any such payments due to be made before Final Approval shall be paid into a
special escrow account (the "Escrow Account"), to be held in escrow pending
Final Approval pursuant to the terms of a mutually acceptable escrow agreement
(the "Escrow Agreement"), and shall be disbursed only as provided by the terms
of the Escrow Agreement. Upon Final Approval and pursuant to the terms of the
Escrow Agreement, the amounts held in escrow pursuant to this paragraph 11 and
the terms of the Escrow Agreement shall be transferred into the registry of the
Court. Any funds held in the registry of the Court shall be disbursed only in
accordance with the orders of the Court.
12. Adjustments in Event of Federal Resolution. In the event that
legislation implementing the Proposed Resolution (or a substantially equivalent
federal program) is enacted into law, the settlement provided herein shall
remain
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in place, but the terms of such legislation shall supersede the Settling
Defendants' obligations under this Settlement Agreement, except such provisions
as relate to the pilot program and except to the extent that the parties hereto
have otherwise expressly agreed. The Settling Defendants agree that they will
advocate the passage of the federal legislation contemplated by the Proposed
Resolution, including the funding to the States contemplated therein. In order
to provide Settling Defendants with a full credit for all payments made
hereunder pursuant to paragraphs 8 and 10 of this Settlement Agreement in the
event of such legislation, and to the extent that the payments made pursuant to
paragraphs 8 and 10 of this Settlement Agreement differ from the amounts to be
received by the State of Texas pursuant to such legislation, the State of Texas
and the Settling Defendants shall take whatever steps are necessary to ensure
that the principal amount of payments received by the State of Texas will be the
same as the amounts it would receive pursuant to such legislation.
13. State of Texas's Dismissal of Claims. Upon approval of this Settlement
Agreement by the Court, the State of Texas shall dismiss, with prejudice as to
Settling Defendants (including their parents and affiliates), and without
prejudice as to Defendant Hill & Knowlton, all claims in this action.
14. State of Texas's Waiver and Release. Upon Final Approval, the State of
Texas shall release and forever discharge all Defendants and their present and
former parents, subsidiaries, divisions, affiliates, officers, directors,
employees,
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<PAGE>
representatives, insurers, suppliers, agents, attorneys and distributors (and
the predecessors, heirs, executors, administrators, successors and assigns of
each of the foregoing), from any and all manner of civil claims, demands,
actions, suits and causes of action, damages whenever incurred, liabilities of
any nature whatsoever, including civil penalties, as well as costs, expenses and
attorneys' fees (except as to Settling Defendants' obligations under paragraph
17 of this Settlement Agreement), known or unknown, suspected or unsuspected,
accrued or unaccrued, whether legal, equitable or statutory ("Claims") that the
State of Texas (including any of its past, present or future agents, officials
acting in their official capacities, legal representatives, agencies,
departments, commissions, divisions, subdivisions (political and otherwise),
public entities, corporations, instrumentalities and educational institutions,
and whether or not any such person or entity participates in the settlement),
whether directly, indirectly, representatively, derivatively or in any other
capacity, ever had, now has or hereafter can, shall or may have, as follows:
(1) for the past, as to any Claims that were or could have been made
in this action or any comparable federal or state action; and
(2) for the future, only as to 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
16
<PAGE>
for health care costs allegedly associated with use of or exposure to
Tobacco Products (such past and future Claims hereinafter referred to as
the "Released Claims").
The State of Texas hereby covenants and agrees that it shall not hereafter
sue or seek to establish civil liability against any person or entity covered by
the release provided under this paragraph 14 based, in whole or in part, upon
any of the Released Claims, and the State of Texas agrees that this covenant and
agreement shall be a complete defense to any such civil action or proceeding;
provided, however, that Defendant Hill & Knowlton shall be entitled to the
foregoing release and covenant not to sue only upon its assent, whenever given,
to comply with the non-economic provisions of this Settlement Agreement,
including waiver of claims, if any.
15. Settling Defendants' Waiver, Dismissal and Release of Claims. Upon
Final Approval of this Settlement Agreement by the Court, Settling Defendants
shall waive any and all claims against the State of Texas and any of its
officers, employees, agents, Private Counsel, counsel, witnesses (fact or
expert), whistle-blowers or contractors, relating to or in connection with this
litigation and shall dismiss, with prejudice, any pending claims or actions
against such persons or entities, including but not limited to Philip Morris,
Inc. v. Morales, Cause No. 95-14807 (120th Judicial Dist., Tex.).
In addition, upon Final Approval Settling Defendants shall release and
17
<PAGE>
forever discharge the State of Texas and any of its employees, Private Counsel,
counsel, witnesses (fact or expert), whistle-blowers or contractors, divisions,
officers, employees, agents, officials acting in their official capacities,
legal representatives, agencies, departments, commissions, divisions,
subdivisions (political and otherwise), public entities, corporations,
instrumentalities and educational institutions and insurers and the
predecessors, heirs, executors, administrators, successors and assigns of each
of the foregoing, from any and all manner of civil claims, demands, actions,
suits and causes of action, damages whenever incurred, liabilities of any nature
whatsoever, including costs, expenses, penalties and attorneys' fees, known or
unknown, suspected or unsuspected, accrued or unaccrued, whether legal,
equitable or statutory, arising out of or in any way related to, in whole or in
part, the litigation of this lawsuit, that Settling Defendants (including any of
their present and former parents, subsidiaries, divisions, affiliates, officers,
directors, employees, witnesses (fact or expert), representatives, insurers,
agents, attorneys and distributors and the predecessors, heirs, executors,
administrators, successors and assigns of each of the foregoing, and whether or
not any such person participates in the settlement), whether directly,
indirectly, representatively, derivatively or in any other capacity, ever had,
now has or hereafter can, shall or may have.
16. Most-Favored Nation. Settling Defendants agree that if they enter into
any future pre-verdict settlement agreement of other litigation brought by a
18
<PAGE>
non-federal governmental plaintiff on terms more favorable to such governmental
plaintiff than the terms of this Settlement Agreement (after due consideration
of relevant differences in population or other appropriate factors), the terms
of this Settlement Agreement will be revised so that the State of Texas will
obtain treatment at least as relatively favorable as any such non-federal
governmental entity. In addition, Settling Defendants agree that, in the event
of any future settlement or final judgment with respect to the claims for
non-economic injunctive relief pending in the lawsuit entitled State of Florida.
v. American Tobacco Co., Civ. Action No. 95-1466 AH (15th Judicial Cir., Palm
Beach County, Fla.), the terms of this Settlement Agreement will be revised so
that the State of Texas will receive benefits comparable to the terms of any
such settlement or final judgment (after due consideration of relevant
differences in population or other appropriate factors).
17. Costs, Expenses and Fees. (a) Reimbursement of Costs and Expenses.
Settling Defendants will reimburse the Office of the Attorney General and other
appropriate State agencies and Private Counsel for reasonable costs and expenses
incurred in connection with this litigation, provided that such costs and
expenses are of the same nature as costs and expenses for which Settling
Defendants would reimburse their own counsel or agents. Within 30 days after the
date of this Settlement Agreement, each Settling Defendant shall severally cause
to be paid to the Attorney General the respective amount listed for such
19
<PAGE>
Settling Defendant in Schedule C hereto. The sum of such payments shall equal $5
million; such amount being the Attorney General's best estimate of such costs
and expenses (with costs for public employees to be fixed at prevailing market
rates). In addition, within 30 days after the date of this Settlement Agreement,
Settling Defendants shall, pursuant to the terms of Exhibit 1 hereto, pay to
Walter Umphrey as representative of Private Counsel an amount equivalent to
Private Counsel's best estimate of their reasonable costs and expenses
consistent with the criteria set forth above. The Attorney General (for his
office and for other appropriate State entities) and Private Counsel shall
provide Settling Defendants with an appropriately documented statement of their
costs and expenses. Settling Defendants shall promptly pay the amount of such
costs and expenses in excess of the amounts already paid, or shall receive a
refund if the total of such costs and expenses is less than amounts already
paid. Any dispute as to the nature or amount of reimbursable costs and expenses
shall be decided with finality by the persons selected to award fees, as
provided below.
(b) Payment of Fees. Pursuant to the terms of Exhibit 1, Settling
Defendants will pay reasonable attorneys' fees to Private Counsel and any other
counsel retained by the State of Texas for their representation of the State of
Texas in connection with this action. The State of Texas has retained Private
Counsel to represent it in connection with this Action, and has advised Settling
Defendants that it has entered into an agreement dated March 22, 1996 regarding
20
<PAGE>
the payment of attorneys' fees to Private Counsel.
(c) Exclusive Obligation of Settling Defendants as to Fees. The provisions
for payment of fees set forth in this Settlement Agreement and Exhibit 1 hereto
constitute the entire obligation of Settling Defendants with respect to
attorneys' fees in connection with this action and the exclusive means by which
Private Counsel or other counsel representing the State of Texas in connection
with this action may seek payment of fees by the Settling Defendants. Settling
Defendants shall have no other obligation to pay fees or otherwise compensate
Private Counsel or any other counsel or representative of the State of Texas.
(d) Additional Compensation for State in Event of National Legislation. If
legislation implementing the Proposed Resolution (or a substantially equivalent
federal program) is enacted, Settling Defendants and the State of Texas
contemplate that the State of Texas and any other similar state which has made
an exceptional contribution to secure the resolution of these matters may apply
to the national panel of independent arbitrators described in section 2(g) of
Exhibit 1 for reasonable compensation for its efforts in securing enactment of
such legislation. Any amount awarded to the State of Texas by such panel shall
be paid in conjunction with awards to other governmental entities and shall be
paid in proportion to the respective unpaid amounts of such awards, subject to a
separate annual cap of $100 million on the total of all such payments to be made
by Settling Defendants.
21
<PAGE>
18. Representations of Parties. The respective parties hereto hereby
represent that this Settlement 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. The
State represents that all of the State's outside counsel that have represented
the State of Texas in connection with this action are, by and through their
authorized representatives, signatories to this Settlement Agreement.
19. Court Approval. If the Court refuses to approve this Settlement
Agreement or any material provision hereof, or if such approval is modified in
any material respect or set aside on appeal, or if the Court does not enter an
order of dismissal of claims or final judgment as provided for in paragraph 13
of this Settlement Agreement, or if the Court enters the order of dismissal of
claims or final judgment and appellate review is sought, and on such review such
order of dismissal or final judgment is not affirmed in its entirety as to all
material aspects of such order or final judgment, then this Settlement Agreement
shall be canceled and terminated and it and all orders issued pursuant hereto
shall become null and void and of no effect.
20. Headings. The headings of the paragraphs of this Settlement Agreement
are not binding and are for reference only and do not limit, expand or otherwise
affect the contents of this Settlement Agreement.
21. No Determination or Admission. This Settlement Agreement having
22
<PAGE>
being executed prior to the taking of any testimony, no final determination of
violation of any provision of law has been made in this action. This Settlement
Agreement and any proceedings taken hereunder are 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 party
hereto or any person covered by the releases provided under paragraphs 14 and 15
hereof. The Settling Defendants specifically disclaim and deny any liability or
wrongdoing whatsoever with respect to the allegations and claims asserted
against them in this action and enter into this Settlement Agreement solely to
avoid the further expense, inconvenience, burden and uncertainty of litigation.
22. Non-Admissibility. The settlement negotiations resulting in this
Settlement Agreement have been undertaken by the parties hereto in good faith
and for settlement purposes only, and neither this Settlement Agreement nor any
evidence of negotiations hereunder shall be offered or received in evidence in
this action, or any other action or proceeding, for any purpose other than in an
action or proceeding arising under this Settlement Agreement. In addition to the
foregoing, notwithstanding the conclusion of the settlement provided for herein,
any restrictions imposed by any protective order in this action governing
treatment of discovery materials during the pendency of this action shall remain
in effect, and existing confidentiality designations shall remain undisturbed
until the earlier of the enactment of legislation implementing the Proposed
Resolution (or a
23
<PAGE>
substantially equivalent federal program) or December 31, 1999. Thereafter, any
party to the action may make any motion with respect to such discovery
materials; provided, however, that nothing in this paragraph 22 shall preclude
undersigned counsel from seeking disclosure of such materials in other actions
or Settling Defendants from agreeing otherwise in any other action.
23. Amendment; Waiver. This Settlement Agreement may be amended only by a
written instrument executed by the Attorney General, Private Counsel and the
Settling Defendants. 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 Settlement Agreement shall not be
deemed to be or construed as a waiver of any other breach, whether prior,
subsequent or contemporaneous, of this Settlement Agreement.
24. Notices. All notices or other communications to any party to this
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.
24
<PAGE>
State of Texas:
Dan Morales
Attorney General
P.O. Box 12548
Capitol Station
Austin, TX 78711
Fax: 512.463.2063
with copies to:
Walter Umphrey
490 Park Street
P.O. Box 4905
Beaumont, TX 77704
Fax: 409.838.8888
John M. O'Quinn
440 Louisiana Street, Suite 2300
Houston, TX 77002
Fax: 713.222.6903
John Eddie Williams, Jr.
8441 Gulf Freeway, Suite 600
Houston, TX 77017
Fax: 713.943.6226
Wayne A. Reaud
Reaud, Morgan & Quinn, Inc.
801 Laurel
Beaumont, TX 77701
Fax: 409.833.8236
Harold W. Nix
Cary Patterson
The Nix Law Firm
205 Linda Drive
P.O. Box 679
Daingerfield, TX 75638
Fax: 903.645.5389
Grant Kaiser
25
<PAGE>
Kaiser & Morrison, P.C.
440 Louisiana, Suite 1440
Houston, TX
Fax: 713.223.0440
Marc D. Murr
Law Offices of Marc D. Murr, P.C.
1001 Texas Avenue, Suite 1250
Houston, TX 77002-3131
Fax: 713.229.8003
Joseph F. Rice
Ness, Motley, Loadholt, Richardson & Poole
151 Meeting Street, Suite 600
Charleston, SC 29402
Fax: 803.720.9290
For Philip Morris Incorporated:
Martin J. Barrington
Philip Morris Incorporated
120 Park Avenue
New York, NY 10017-5592
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
General Counsel
R.J. Reynolds Tobacco Company
401 North Main Street
Winston-Salem, NC 27102
Fax: 910.741.2998
26
<PAGE>
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:
F. Anthony Burke
Brown & Williamson Tobacco Corporation
200 Brown & Williamson Tower
401 South Fourth Avenue
Louisville, KY 40202
Fax: 502.568.7297
With a copy to:
Stephen R. Patton
Kirkland & Ellis
200 East Randolph Dr.
Chicago, IL 60601
Fax: 312.861.2200
For Lorillard Tobacco Company:
Arthur J. Stevens
Lorillard Tobacco Company
714 Green Valley Road
Greensboro, NC 27408
Fax: 910.335.7707
For United States Tobacco Company:
Richard H. Verheij
UST, Inc.
100 West Putnam Avenue
Greenwich, CT 06830
Fax: 203.863.7233
25. Cooperation. The parties hereto agree to use their best efforts and to
27
<PAGE>
cooperate with each other to cause this Settlement Agreement 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 therewith. Consistent with the foregoing, the parties
hereto agree that they will not directly or indirectly assist or encourage any
challenge to this Settlement Agreement by any other person. All parties hereto
agree to support the integrity and enforcement of the terms of this Settlement
Agreement.
26. Governing Law. This Settlement Agreement shall be governed by the laws
of the State of Texas.
27. Construction. None of the parties hereto shall be considered to be the
drafter of this Settlement 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.
28. Severability. In the event that any non-material provision of this
Settlement Agreement is found to be invalid, the remainder of this Settlement
Agreement shall be fully enforceable. The proposed allocations of amounts
received by the State of Texas set forth in paragraph 5 of this Settlement
Agreement shall not be considered material for purposes of this paragraph 28 or
any other provision of this Settlement Agreement.
29. Intended Beneficiaries. This action was brought by the State of Texas,
through its Attorney General, to recover certain monies and to promote the
28
<PAGE>
health and welfare of the people of Texas. No portion of this Settlement
Agreement shall provide any rights to, or be enforceable by, any person or
entity that is not a party hereto, or a person covered by the releases provided
in paragraphs 14 and 15 of this Settlement Agreement, and no portion of this
Settlement Agreement shall bind any non-party or determine, limit or prejudice
the right of any such person or entity.
30. Counterparts. This Settlement Agreement may be executed in
counterparts. Facsimile or photocopied signatures shall be considered as valid
signatures as of the date hereof, although the original signature pages shall
thereafter be appended to this Settlement Agreement.
IN WITNESS WHEREOF, the parties hereto, through their fully authorized
representatives, have agreed to this Comprehensive Settlement Agreement and
Release as of this 16th day of January, 1998.
STATE OF TEXAS, acting by and through
Dan Morales, its duly elected and authorized
Attorney General
By: /s/ Dan Morales
----------------------------------------
Dan Morales,
Attorney General
By: /s/ Jorge Vega
----------------------------------------
Jorge Vega,
First Assistant Attorney General
29
<PAGE>
By: /s/ Harry G. Potter, III
----------------------------------------
Harry G. Potter, III
Special Assistant Attorney General
COUNSEL TO THE STATE OF TEXAS
By: /s/ Walter Umphrey
----------------------------------------
Walter Umphrey
Provost & Umphrey
By: /s/ John M. O'Quinn
----------------------------------------
John M. O'Quinn
By: /s/ John Eddie Williams, Jr.
----------------------------------------
John Eddie Williams, Jr.
By: /s/ Wayne A. Reaud
----------------------------------------
Wayne A. Reaud
Reaud, Morgan & Quinn, Inc
By: /s/ Harold W. Nix
----------------------------------------
Harold W. Nix
The Nix Law Firm
By: /s/ Cary Patterson
----------------------------------------
Cary Patterson
The Nix Law Firm
30
<PAGE>
By:
----------------------------------------
Marc D. Murr
Law Offices of Marc D. Murr, P.C.
By:
----------------------------------------
Grant Kaiser
Kaiser & Morrison
By:
----------------------------------------
Joseph F. Rice
Ness, Motley, Loadholt, Richardson &
Poole
PHILIP MORRIS INCORPORATED
By:
----------------------------------------
Meyer G. Koplow
Counsel
By: /s/ Martin J. Barrington
----------------------------------------
Martin J. Barrington
General Counsel
31
<PAGE>
By: /s/ Marc D. Murr
----------------------------------------
Marc D. Murr
Law Offices of Marc D. Murr, P.C.
By: /s/ Grant Kaiser
----------------------------------------
Grant Kaiser
Kaiser & Morrison
By: /s/ Joseph F. Rice
----------------------------------------
Joseph F. Rice
Ness, Motley, Loadholt, Richardson &
Poole
PHILIP MORRIS INCORPORATED
By:
----------------------------------------
Meyer G. Koplow
Counsel
By:
----------------------------------------
Martin J. Barrington
General Counsel
<PAGE>
By:
----------------------------------------
Marc D. Murr
Law Offices of Marc D. Murr, P.C.
By:
----------------------------------------
Grant Kaiser
Kaiser & Morrison
By:
----------------------------------------
Joseph F. Rice
Ness, Motley, Loadholt, Richardson &
Poole
PHILIP MORRIS INCORPORATED
By: /s/ Meyer G. Koplow
----------------------------------------
Meyer G. Koplow
Counsel
By:
----------------------------------------
Martin J. Barrington
General Counsel
31
<PAGE>
R.J. REYNOLDS TOBACCO COMPANY
By: /s/ Arthur F. Golden
----------------------------------------
Arthur F. Golden
Counsel
By:
----------------------------------------
Charles A. Blixt
General Counsel
BROWN & WILLIAMSON TOBACCO
CORPORATION
By:
----------------------------------------
Stephen R. Patton
Counsel
By:
----------------------------------------
Michael J. McGraw
Senior Vice President
LORILLARD TOBACCO COMPANY
By:
----------------------------------------
Arthur J. Stevens
Senior Vice President & General Counsel
32
<PAGE>
R.J. REYNOLDS TOBACCO COMPANY
By:
----------------------------------------
Arthur F. Golden
Counsel
By: /s/ Charles A. Blixt
----------------------------------------
Charles A. Blixt
General Counsel
BROWN & WILLIAMSON TOBACCO
CORPORATION
By:
----------------------------------------
Stephen R. Patton
Counsel
By:
----------------------------------------
Michael J. McGraw
Senior Vice President
LORILLARD TOBACCO COMPANY
By:
----------------------------------------
Arthur J. Stevens
Senior Vice President & General Counsel
32
<PAGE>
R.J. REYNOLDS TOBACCO COMPANY
By:
----------------------------------------
Arthur F. Golden
Counsel
By:
----------------------------------------
Charles A. Blixt
General Counsel
BROWN & WILLIAMSON TOBACCO
CORPORATION
By: /s/ Stephen R. Patton
----------------------------------------
Stephen R. Patton
Counsel
By:
----------------------------------------
Michael J. McGraw
Senior Vice President
LORILLARD TOBACCO COMPANY
By:
----------------------------------------
Arthur J. Stevens
Senior Vice President & General Counsel
32
<PAGE>
R.J. REYNOLDS TOBACCO COMPANY
By:
----------------------------------------
Arthur F. Golden
Counsel
By:
----------------------------------------
Charles A. Blixt
General Counsel
BROWN & WILLIAMSON TOBACCO
CORPORATION
By:
----------------------------------------
Stephen R. Patton
Counsel
By: /s/ Michael J. McGraw
----------------------------------------
Michael J. McGraw
Senior Vice President
LORILLARD TOBACCO COMPANY
By:
----------------------------------------
Arthur J. Stevens
Senior Vice President & General Counsel
32
<PAGE>
R.J. REYNOLDS TOBACCO COMPANY
By:
----------------------------------------
Arthur F. Golden
Counsel
By:
----------------------------------------
Charles A. Blixt
General Counsel
BROWN & WILLIAMSON TOBACCO
CORPORATION
By:
----------------------------------------
Stephen R. Patton
Counsel
By:
----------------------------------------
Michael J. McGraw
Senior Vice President
LORILLARD TOBACCO COMPANY
By: /s/ Arthur J. Stevens
----------------------------------------
Arthur J. Stevens
Senior Vice President & General Counsel
32
<PAGE>
UNITED STATES TOBACCO COMPANY
By: /s/ Richard H. Verheij
----------------------------------------
Richard H. Verheij
Executive Vice President &
General Counsel
33
<PAGE>
SCHEDULE A
AMOUNTS PAYABLE BY SETTLING DEFENDANTS PURSUANT
TO PARAGRAPH 8 OF THE SETTLEMENT AGREEMENT
<TABLE>
<CAPTION>
Date 2/1/98 7/1/98 10/1/98 11/1/98
- -------------------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Settling Defendants
Philip Morris Incorporated ........... $138,720,000 $ 49,640,000 $ 99,280,000 $205,360,000
R.J. Reynolds Tobacco Company ........ $ 13,872,000 $ 4,964,000 $ 9,928,000 $ 20,536,000
Brown & Williamson Tobacco Corporation $ 36,516,000 $ 13,067,000 $ 26,134,000 $ 54,058,000
Lorillard Tobacco Company ............ $ 14,892,000 $ 5,329,000 $ 10,658,000 $ 22,046,000
United States Tobacco Company ........ $ 0 $ 0 $ 0 $ 0
Total Amount ......................... $204,000,000 $ 73,000,000 $146,000,000 $302,000,000
</TABLE>
<PAGE>
SCHEDULE B
AMOUNTS PAYABLE BY SETTLING DEFENDANTS PURSUANT
TO PARAGRAPH 9 OF THE SETTLEMENT AGREEMENT
<TABLE>
<CAPTION>
Date 2/1/98 7/1/98 10/1/98 11/1/98
- -------------------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Settling Defendants
Philip Morris Incorporated ........... $ 36,452,400 $ 13,300,200 $ 26,600,400 $ 53,693,400
R.J. Reynolds Tobacco Company ........ $ 18,122,600 $ 6,612,300 $ 13,224,600 $ 26,694,100
Brown & Williamson Tobacco Corporation $ 11,988,000 $ 4,374,000 $ 8,748,000 $ 17,658,000
Lorillard Tobacco Company ............ $ 6,489,800 $ 2,367,900 $ 4,735,800 $ 9,559,300
United States Tobacco Company ........ $ 947,200 $ 345,600 $ 691,200 $ 1,395,200
------------ ------------ ------------ ------------
Total Amount ......................... $ 74,000,000 $ 27,000,000 $ 54,000,000 $109,000,000
</TABLE>
<PAGE>
SCHEDULE C
AMOUNTS PAYABLE BY SETTLING DEFENDANTS PURSUANT
TO PARAGRAPH 17 OF THE SETTLEMENT AGREEMENT
Settling Defendants Amount
- ------------------- ------------
Philip Morris Incorporated ................................. $ 2,463,000
R.J. Reynolds Tobacco Company .............................. $ 1,224,500
Brown & Williamson Tobacco Corporation ..................... $ 810,000
Lorillard Tobacco Company .................................. $ 438,500
United States Tobacco Company .............................. $ 64,000
------------
Total Amount ............................................... $ 5,000,000
<PAGE>
EXHIBIT 1
COSTS, EXPENSES AND FEES
SECTION 1. Reimbursement of Costs and Expenses.
Pursuant to paragraph 17(a) of the Comprehensive Settlement Agreement and
Release executed on January 16, 1998 in the case State of Texas v. American
Tobacco Co., No. 5-96CV-91 (E.D. Tex. filed Mar. 26, 1996) (the "Settlement
Agreement"), to which this writing is attached as Exhibit 1, and the terms
hereof, Settling Defendants shall reimburse Private Counsel for reasonable costs
and expenses incurred in connection with this litigation, provided that such
costs and expenses are of the same nature as costs and expenses for which
Settling Defendants would reimburse their own counsel or agents. Within 30 days
after the date of the Settlement Agreement, each Settling Defendant severally
shall pay to Walter Umphrey the respective amount listed for such Settling
Defendant in Rider A hereto. The sum of such payments shall equal $40 million,
such amount being Private Counsel's best estimate of such costs and expenses.
Private Counsel shall provide Settling Defendants with an appropriately
documented statement of their costs and expenses consistent with the criteria
set forth above. Settling Defendants shall promptly pay the amount of such costs
and expenses in excess of the amounts already paid, or shall receive a refund if
the total of such costs and expenses is less than amounts already paid. Any
dispute as to the nature or amount of reimbursable costs and expenses shall be
decided with finality by the persons selected to award fees, as provided below.
SECTION 2. Payment of Fees.
Pursuant to paragraph 17(b) of the Settlement Agreement and the terms
hereof, Settling Defendants will pay reasonable attorneys' fees to Private
Counsel, and any other counsel retained by the State of Texas, for their
representation of the State of Texas in connection with this action. The amount
of such fees will be set by a panel of three independent arbitrators (the
"Panel") whose decisions shall be final and not appealable. The procedures
governing Settling Defendants' obligations to pay such fees, including the
procedures for awarding fees and the timing of payments on such awards, shall be
as provided herein. Payment of such fees shall be subject to an annual aggregate
national cap of $500 million (beginning with payments for calendar year 1998)
for all attorneys' fees and certain other professional fees to be paid by
Settling Defendants in connection with tobacco and health cases settled by the
Settling Defendants or legislatively resolved by operation of law through
enactment of federal legislation implementing the terms of the Proposed
Resolution (or a substantially equivalent
<PAGE>
federal program). The Settling Defendants will pay the amount of unsatisfied fee
awards up to $500 million per year, but in no year shall Settling Defendants be
required to pay more than $500 million dollars with respect to such fees.
(a) Exclusive Obligation of Settling Defendants as to Fees. The provisions
for payment of fees set forth herein constitute the entire obligation of
Settling Defendants with respect to attorneys' fees in connection with this
action and the exclusive means by which Private Counsel and any other counsel
representing the State of Texas in connection with this action may seek payment
of fees by the Settling Defendants in connection with this action. Settling
Defendants shall have no other obligation to pay fees or otherwise compensate
Private Counsel or any other counsel or representative of the State of Texas.
The State of Texas has hired and employed Private Counsel to represent it in
connection with this action, and has advised Settling Defendants that it has
entered into a separate agreement dated March 22, 1996 regarding the payment of
attorneys' fees to Private Counsel. The obligations and rights of the parties to
that agreement are unaffected by the Settlement Agreement and this Exhibit
thereto.
(b) Composition of the Panel.
(i) The members of the Panel shall be selected as follows. The first
member shall be a person selected by the Settling Defendants. The second
member shall be a person selected by agreement of Settling Defendants and
a majority of the members of a committee which shall be 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 Settling Defendants, one additional
representative to serve on behalf of counsel for any one or more States
that, subsequent to the date hereof, enters into a settlement agreement
with Settling Defendants (if such agreement provides for a similar method
for determining fees for such State's private counsel).
(ii) The first and the second Panel members to be selected as
described above shall both be permanent members of the Panel and, as such,
shall participate in the determination of all awards of attorneys' fees in
connection with tobacco and health cases settled by the Settling
Defendants or resolved by operation of law through enactment of
legislation incorporating the terms of the Proposed Resolution (or a
substantially equivalent federal program). The third Panel member shall
not be a permanent Panel member, but instead shall be a state-specific
member selected to determine fees in connection with all fee applications
relating to litigation within a single state. For purposes of determining
the amount of fees to be awarded to Private Counsel (and other outside
2
<PAGE>
counsel for the State of Texas) in connection with their representation of
the State of Texas in this action, the state-specific member of the Panel
shall be selected by Walter Umphrey on behalf of Private Counsel. As a
state-specific member of the Panel, the person so selected shall not
participate in any determination as to the amount of fees to be awarded on
any applications other than those in connection with litigation within the
State of Texas (unless also selected to participate in determinations on
fee applications in connection with litigation in states other than the
State of Texas by such persons as may be authorized to make such
selections under the terms of other settlement agreements).
(c) Commencement of Panel Proceedings. The membership of the Panel shall
have been established, and the Panel shall begin deliberations on any pending
fee applications, either within 30 days after the date of enactment of
legislation implementing the terms of the Proposed Resolution (or a
substantially equivalent federal program) or by November 1, 1998, whichever is
earlier. No fee application may be presented to the Panel until 30 days after
the date of enactment of such legislation or November 1, 1998, whichever is
earlier. Private Counsel shall apply for fees collectively. Any other counsel
for the State of Texas (or any person or entity seeking an award from the Panel
in their stead) shall submit any applications for fees within 10 days of the
submissions by Private Counsel, or shall forfeit the right to any award of fees
by the Panel. The Panel shall render a determination on the amount of fees to be
awarded to Private Counsel, and to other counsel for the State of Texas on whose
behalf applications have been timely submitted, no later than 30 days after the
date on which all completed applications for fees on behalf of Private Counsel
have been submitted.
(d) Procedures Before the Panel.
(i) All interested parties, including persons not parties hereto,
may submit to the Panel any material that they wish. The members of the
Panel will consider all information submitted to them in reaching a
decision that fairly provides for full reasonable compensation for Private
Counsel (and any other outside counsel for the State of Texas) for their
representation of the State of Texas in connection with this action.
Settling Defendants will not take any position adverse to the size of the
fee award requested by Private Counsel, nor will they or their
representatives express any opinion (even upon request) as to the
appropriateness or inappropriateness of any proposed amount. 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 work of
Private Counsel
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and to advise the Panel that they support an award of full reasonable
compensation under the circumstances.
(ii) In considering the amount of fees to be awarded to Private
Counsel in connection with their representation of the State of Texas in
this action, the Panel shall award fees to Texas's counsel without
consideration of any fees that already have been or yet may be awarded by
the Panel.
(e) Operation of the Annual Cap.
(i) General. The annual $500 million cap for each calendar year
shall be allocated equally among each month of the year. A case shall be
eligible to participate in the amount allocated for a given month if it
was settled, or was legislatively resolved by operation of federal
legislation implementing the Proposed Resolution (or a substantially
equivalent federal program), in or before that month ("Eligible Case").
Except as provided in paragraph (iii), the available payment for each
month shall be allocated among all unsatisfied fee awards rendered as of
the applicable payment date with respect to eligible cases in proportion
to their respective unsatisfied amounts.
(ii) Payments with Respect to 1998.
(a) Settling Defendants shall make an initial payment (the
"Initial Fee Payment") on the earlier of December 15, 1998 or 15
days from the date the Panel awards fees for Private Counsel (and
other outside counsel for the State of Texas). The Initial Fee
Payment shall include payment of such counsels' allocable share for
each month preceding the month in which such payment is made; except
that the Initial Fee Payment shall not include payment of a share
for any month for which an Eligible Case exists, but as to which
case no award of fees has been made (either because the fee award is
still under consideration or for any other reason).
(b) Settling Defendants shall make a second payment on January
15, 1999 of private counsel's (and other outside counsel for the
State of Texas's) allocable share for each month of 1998 as to which
no payment was made pursuant to subsection (a).
(iii) Payments with Respect to 1999 and Subsequent Years. Settling
Defendants shall pay Private Counsel's (and other outside counsel
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for the State of Texas's) allocable share for each month in a calendar
quarter within 10 business days after the end of such calendar quarter,
subject to the following:
(a) In the event that federal legislation implementing the
Proposed Resolution (or a substantially equivalent federal program)
is enacted during or before the calendar year in which such calendar
quarter occurs, all unsatisfied fee awards with respect to cases
settled (or legislatively resolved pursuant to such legislation)
before the end of the calendar year in question shall be entitled to
share in the total amount to be paid for that year, in proportion to
their respective unsatisfied amounts. To accomplish this end, with
respect to the second through fourth quarterly payments in any year,
any unsatisfied fee awards that have not received a proportional
share (as described in the preceding sentence) of all prior
quarterly payments in that year shall be the exclusive recipients of
subsequent quarterly payments for the year until each such award has
received the principal amount of its proportional share of all prior
quarterly payments for that year.
(b) In the event that federal legislation implementing the
Proposed Resolution (or a substantially equivalent federal program)
is not enacted during or before the calendar year in which such
calendar quarter occurs, all unsatisfied fee awards with respect to
cases settled before the end of the calendar year in question shall
be entitled to share in the payments for each month of that year
beginning with the month of settlement, in proportion to their
respective unsatisfied amounts. To accomplish this end, with respect
to the second through fourth quarterly payments in any year, any
unsatisfied fee awards that have not received a proportional share
(as described in the preceding sentence) of all prior payments for
months of such year beginning with the month of settlement shall be
the exclusive recipients of subsequent quarterly payments for the
year until each such award has received the principal amount of its
proportional share of all prior payments for months for which the
respective awards were eligible.
(c) Adjustments pursuant to subsections (a) and (b) shall be
made separately for each calendar year. No amounts paid in any
calendar year shall be subject to refund, nor shall any payment made
in any prior calendar year affect the allocation of payments to be
made in any subsequent calendar year.
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(iv) Credits and Limitations.
(a) All payments pursuant to this section are subject to a
credit as provided in section (f)(ii) regarding fees advanced to
Private Counsel.
(b) In no event shall Settling Defendants be required to make
any quarterly payment greater than $125 million unless necessary in
the final quarter to satisfy unsatisfied fee awards up to the
aggregate annual amount of $500 million. Nor shall Settling
Defendants be required to make payments in any calendar year
totaling more than $500 million minus any advances described in
section (f) and any payments described in section (g), with respect
to all attorney's fees and certain professional fees
(f) Advance on Payment of Fees.
(i) Settling Defendants collectively and the State of Texas each
will advance $50 million to Private Counsel toward payment of attorneys'
fees to counsel retained by the State of Texas in this action, such
amounts to be credited to the Settling Defendants and the State of Texas,
in the amounts of their respective advances, against subsequent payments
of attorney's fees. The obligation of Settling Defendants to advance such
amount is expressly conditioned on the continuing agreement of the State
of Texas to advance an equal amount in accordance with the terms of the
Settlement Agreement and this Exhibit. Such advance will be made by
Settling Defendants severally and not jointly in proportion to their
respective market shares, as set forth in Rider B hereto, within 45 days
after the date of the Settlement Agreement and shall be paid to Walter
Umphrey on behalf of Private Counsel. The advance to be made by the State
of Texas shall be made no later than ten days after Final Approval of the
Settlement Agreement or July 10, 1998, whichever is later. If the full
amount of the advance to be made by the State of Texas is not paid by such
date, the Settling Defendants shall be entitled to a refund of the advance
paid by Settling Defendants in an amount equal to the unpaid portion of
the State's advance.
(ii) Any advance made by Settling Defendants pursuant to this
paragraph shall be credited against any amounts payable by Settling
Defendants to Private Counsel on any award of fees pursuant to the
Settlement Agreement. Such credit shall apply to the earliest amounts
payable to Private Counsel by Settling Defendants pursuant to any such
award until the amount of the advance is repaid in full. Notwithstanding
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any other provision of the Settlement Agreement or this Exhibit, any
advances paid by Settling Defendants to Private Counsel (or paid to
private counsel for any other State or governmental entity with which a
settlement has been reached providing for a similar method for determining
fees) shall count against and operate to reduce the $500 million annual
cap described above for the year in which the case is settled or, if the
amount remaining for payment of fees under the annual cap for that year
has already been paid, in the following year.
(iii) In the event that legislation implementing the Proposed
Resolution (or a substantially equivalent federal program) has not been
enacted by December 15, 1998, and, further, that the Settlement Agreement
is canceled and terminated pursuant to paragraph 19 of the Settlement
Agreement, Settling Defendants and the State of Texas shall be entitled to
a full refund of any advances paid pursuant to this paragraph.
(g) Contribution to National Legislation. If legislation implementing the
Proposed Resolution (or a substantially equivalent federal program) is enacted,
a three-member national panel including the two permanent members of the Panel
shall consider any application by Private Counsel for fees for any contributions
made toward the enactment of such legislation, along with all applications by
any other persons who claim to have made similar contributions. No person shall
make more than one application for fees in connection with any such
contributions toward enactment of the legislation. All payments of fees awarded
for such contributions shall be subject to, and shall count against, the same
$500 million aggregate annual cap referenced in this section 2 and shall be paid
in accordance with the provisions of subsection (e).
(h) Application by State in Event of National Legislation. If legislation
implementing the Proposed Resolution (or a substantially equivalent federal
program) is enacted, Settling Defendants and the State of Texas contemplate that
State of Texas and any other similar state which has made an exceptional
contribution to secure the resolution of these matters may apply to the national
panel of independent arbitrators described in subsection (g) for reasonable
compensation for its efforts in securing enactment of such legislation. Any
amount awarded to the State of Texas by such panel shall be paid in conjunction
with awards to other governmental entities and shall be paid in proportion to
the respective unpaid amounts of such awards, subject to a separate annual cap
of $100 million on the total of all such payments to be made by Settling
Defendants.
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RIDER A
AMOUNTS PAYABLE BY SETTLING DEFENDANTS PURSUANT
TO SECTION 1 OF EXHIBIT 1 TO THE SETTLEMENT AGREEMENT
Settling Defendants Amount
- ------------------- ------------
Philip Morris Incorporated ................................. $ 19,704,000
R.J. Reynolds Tobacco Company .............................. $ 9,796,000
Brown & Williamson Tobacco Corporation ..................... $ 6,480,000
Lorillard Tobacco Company .................................. $ 3,508,000
United States Tobacco Company .............................. $ 512,000
------------
Total Amount ............................................... $ 40,000,000
<PAGE>
RIDER B
AMOUNTS PAYABLE BY SETTLING DEFENDANTS PURSUANT
TO SECTION 2(f)(i) EXHIBIT 1 TO THE SETTLEMENT AGREEMENT
Settling Defendants Amount
- ------------------- ------------
Philip Morris Incorporated ................................. $ 24,630,000
R.J. Reynolds Tobacco Company .............................. $ 12,245,000
Brown & Williamson Tobacco Corporation ..................... $ 8,100,000
Lorillard Tobacco Company .................................. $ 4,385,000
United States Tobacco Company .............................. $ 640,000
------------
Total Amount ............................................... $ 50,000,000
