<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
---------------------
RJR NABISCO HOLDINGS CORP.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 1-10215 13-3490602
(State or other jurisdiction of (Commission file number) (I.R.S. Employer Identification No.)
incorporation or organization)
</TABLE>
RJR NABISCO, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 1-6388 56-0950247
(State or other jurisdiction of (Commission file number) (I.R.S. Employer Identification No.)
incorporation or organization)
</TABLE>
1301 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019-6013
(212) 258-5600
(Address, including zip code, and telephone number, including area code,
of the principal executive offices of RJR Nabisco Holdings Corp. and RJR
Nabisco, Inc.)
------------------------------
INDICATE BY CHECK MARK WHETHER THE REGISTRANTS (1) HAVE 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
REGISTRANTS WERE REQUIRED TO FILE SUCH REPORTS), AND (2) HAVE BEEN SUBJECT TO
SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES _X_, NO ___.
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANTS'
CLASSES OF COMMON STOCK AS OF THE LATEST PRACTICABLE DATE: OCTOBER 30, 1998:
RJR NABISCO HOLDINGS CORP.: 324,821,028 SHARES OF COMMON STOCK, PAR VALUE $.01
PER SHARE
RJR NABISCO, INC.: 3,021.86513 SHARES OF COMMON STOCK, PAR VALUE $1,000 PER
SHARE
------------------------
RJR NABISCO, INC. MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(A)
AND (B) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.
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- --------------------------------------------------------------------------------
<PAGE>
INDEX
<TABLE>
<CAPTION>
PAGE
---------
<S> <C> <C>
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Statements of Income--Three Months Ended September 30, 1998 and 1997.... 1
Consolidated Condensed Statements of Income--Nine Months Ended September 30, 1998 and 1997..... 2
Consolidated Condensed Statements of Cash Flows--Nine Months Ended September 30, 1998 and
1997......................................................................................... 3
Consolidated Condensed Balance Sheets--September 30, 1998 and December 31, 1997................ 4
Notes to Consolidated Condensed Financial Statements........................................... 5-14
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................................... 15-24
PART II--OTHER INFORMATION
Item 1. Legal Proceedings.............................................................................. 25
Item 5. Other Information.............................................................................. 26
Item 6. Exhibits and Reports on Form 8-K............................................................... 27
Signatures................................................................................................ 28
</TABLE>
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
---------------------- ----------------------
<S> <C> <C> <C> <C>
RJRN RJRN
HOLDINGS RJRN HOLDINGS RJRN
--------- ----------- --------- -----------
NET SALES*.......................................................... $ 4,328 $ 4,328 $ 4,409 $ 4,409
--------- ----------- --------- -----------
Costs and expenses:
Cost of products sold*............................................ 1,860 1,860 2,212 2,212
Selling, advertising, administrative and general expenses......... 1,729 1,730 1,555 1,561
Amortization of trademarks and goodwill........................... 157 157 158 158
--------- ----------- --------- -----------
OPERATING INCOME................................................ 582 581 484 478
Interest and debt expense........................................... (215) (190) (224) (201)
Other income (expense), net......................................... (24) (24) (16) (16)
--------- ----------- --------- -----------
INCOME BEFORE INCOME TAXES...................................... 343 367 244 261
Provision for income taxes.......................................... 174 186 104 113
--------- ----------- --------- -----------
INCOME BEFORE MINORITY INTEREST IN INCOME OF NABISCO HOLDINGS... 169 181 140 148
Less minority interest in income of Nabisco Holdings................ 11 11 18 18
--------- ----------- --------- -----------
NET INCOME...................................................... $ 158 $ 170 $ 122 $ 130
--------- ----------- --------- -----------
--------- ----------- --------- -----------
BASIC NET INCOME PER SHARE.......................................... $ .45 $ .34
DILUTED NET INCOME PER SHARE........................................ $ .45 $ .34
DIVIDENDS PER SHARE:
Dividends per share of Series C preferred stock................... $ -- $ --
Dividends per share of common stock............................... $ .5125 $ .5125
</TABLE>
- ------------------------
* Excludes excise taxes of $890 million and $946 million for the three months
ended September 30, 1998 and 1997, respectively.
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1
<PAGE>
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
-------------------- --------------------
RJRN RJRN
HOLDINGS RJRN HOLDINGS RJRN
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
NET SALES*............................................................ $ 12,567 $ 12,567 $ 12,474 $ 12,474
--------- --------- --------- ---------
Costs and expenses:
Cost of products sold*.............................................. 5,570 5,570 5,886 5,886
Selling, advertising, administrative and general expenses........... 4,744 4,746 4,259 4,265
Tobacco settlement expense (note 4)................................. 457 457 -- --
Amortization of trademarks and goodwill............................. 473 473 476 476
Restructuring expense (note 1)...................................... 406 406 -- --
--------- --------- --------- ---------
OPERATING INCOME................................................ 917 915 1,853 1,847
Interest and debt expense............................................. (664) (591) (687) (616)
Other income (expense), net........................................... (87) (87) (92) (92)
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES...................................... 166 237 1,074 1,139
Provision for income taxes............................................ 175 206 445 473
--------- --------- --------- ---------
INCOME (LOSS) BEFORE MINORITY INTEREST IN INCOME (LOSS) OF
NABISCO HOLDINGS.............................................. (9) 31 629 666
Less minority interest in income (loss) of Nabisco Holdings........... (17) (17) 51 51
--------- --------- --------- ---------
NET INCOME...................................................... $ 8 $ 48 $ 578 $ 615
--------- --------- --------- ---------
--------- --------- --------- ---------
BASIC NET INCOME (LOSS) PER SHARE..................................... $ (.08) $ 1.68
DILUTED NET INCOME (LOSS) PER SHARE................................... $ (.08) $ 1.67
DIVIDENDS PER SHARE:
Dividends per share of Series C preferred stock....................... -- $ 2.254
Dividends per share of common stock................................... $ 1.5375 $ 1.5375
</TABLE>
- ------------------------
* Excludes excise taxes of $2.561 billion and $2.677 billion for the nine
months ended September 30, 1998 and 1997, respectively.
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
2
<PAGE>
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
-------------------- ----------------------
RJRN RJRN
HOLDINGS RJRN HOLDINGS RJRN
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
Net income.......................................................... $ 8 $ 48 $ 578 $ 615
--------- --------- ----- ---------
Adjustments to reconcile net income to net cash flows from operating
activities:
Depreciation and amortization................................... 852 852 868 868
Deferred income tax expense (benefit)........................... (282) (282) 23 24
Changes in working capital items, net........................... (345) (196) (703) (486)
Tobacco settlement expense, net of cash payments................ 228 228 -- --
Restructuring and restructuring related expense, net of cash
payments...................................................... 241 241 (179) (179)
Other, net...................................................... (4) 8 (8) (5)
--------- --------- ----- ---------
Total adjustments............................................. 690 851 1 222
--------- --------- ----- ---------
Net cash flows from operating activities.......................... 698 899 579 837
--------- --------- ----- ---------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Capital expenditures................................................ (423) (423) (517) (517)
Acquisition of businesses........................................... (9) (9) -- --
Disposition of businesses and certain assets........................ 563 563 112 112
Repurchases of Nabisco Holdings' Class A common stock............... (38) (38) -- --
Proceeds from exercise of Nabisco Holdings' Class A common stock
options........................................................... 24 24 -- --
--------- --------- ----- ---------
Net cash flows from (used in) investing activities................ 117 117 (405) (405)
--------- --------- ----- ---------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Net borrowings of long-term debt.................................... 1,189 1,189 614 614
Decrease in short-term borrowings................................... (1,794) (1,794) (234) (234)
Proceeds from the issuance of trust preferred securities............ 374 -- -- --
Dividends paid on common and preferred stock........................ (564) (27) (574) (26)
Other, net (including intercompany transfers and payments).......... 70 (294) 38 (767)
--------- --------- ----- ---------
Net cash flows used in financing activities....................... (725) (926) (156) (413)
--------- --------- ----- ---------
Effect of exchange rate changes on cash and cash equivalents.......... (4) (4) (19) (19)
--------- --------- ----- ---------
Net change in cash and cash equivalents........................... 86 86 (1) --
Cash and cash equivalents at beginning of period...................... 348 348 252 251
--------- --------- ----- ---------
Cash and cash equivalents at end of period............................ $ 434 $ 434 $ 251 $ 251
--------- --------- ----- ---------
--------- --------- ----- ---------
Income taxes paid, net of refunds..................................... $ 471 $ 471 $ 525 $ 525
Interest paid......................................................... $ 628 $ 557 $ 656 $ 585
Tobacco settlement payments........................................... $ 286 $ 286 $ 133 $ 133
</TABLE>
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
3
<PAGE>
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
-------------------- --------------------
<S> <C> <C> <C> <C>
RJRN RJRN
HOLDINGS RJRN HOLDINGS RJRN
--------- --------- --------- ---------
ASSETS
Current assets:
Cash and cash equivalents........................................... $ 434 $ 434 $ 348 $ 348
Accounts and notes receivable, net.................................. 1,194 1,192 1,122 1,118
Inventories......................................................... 2,537 2,537 2,617 2,617
Prepaid expenses and excise taxes................................... 580 580 538 538
--------- --------- --------- ---------
TOTAL CURRENT ASSETS............................................ 4,745 4,743 4,625 4,621
--------- --------- --------- ---------
Property, plant and equipment, net.................................... 5,608 5,608 5,939 5,939
Trademarks, net....................................................... 7,333 7,333 7,759 7,759
Goodwill, net......................................................... 11,539 11,539 11,885 11,885
Other assets and deferred charges..................................... 489 466 470 453
--------- --------- --------- ---------
$ 29,714 $ 29,689 $ 30,678 $ 30,657
--------- --------- --------- ---------
--------- --------- --------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings............................................... $ 222 $ 222 $ 361 $ 361
Accounts payable and accrued liabilities............................ 3,443 3,267 3,483 3,305
Current maturities of long-term debt................................ 219 219 33 33
Income taxes accrued................................................ 243 366 268 243
--------- --------- --------- ---------
TOTAL CURRENT LIABILITIES....................................... 4,127 4,074 4,145 3,942
--------- --------- --------- ---------
Long-term debt (less current maturities).............................. 8,804 8,804 9,456 9,456
Minority interest in Nabisco Holdings................................. 760 760 812 812
Other noncurrent liabilities.......................................... 2,330 2,063 2,157 1,908
Deferred income taxes................................................. 3,269 3,205 3,524 3,460
Contingencies (note 4)
RJRN Holdings' obligated mandatorily redeemable preferred securities
of subsidiary trusts holding solely junior subordinated
debentures*......................................................... 1,327 -- 953 --
Stockholders' equity:
Other preferred stock............................................... 509 -- 520 --
Common stock (328,204,328 shares issued at September 30)............ 3 -- 3 --
Paid-in capital..................................................... 9,177 11,209 9,668 11,470
Retained earnings................................................... -- -- -- --
Accumulated other comprehensive income.............................. (426) (426) (391) (391)
Treasury stock, at cost............................................. (100) -- (100) --
Other stockholders' equity.......................................... (66) -- (69) --
--------- --------- --------- ---------
TOTAL STOCKHOLDERS' EQUITY.................................... 9,097 10,783 9,631 11,079
--------- --------- --------- ---------
$ 29,714 $ 29,689 $ 30,678 $ 30,657
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
- ------------------------
* The sole assets of the subsidiary trusts are junior subordinated debentures
of RJRN Holdings. The outstanding junior subordinated debentures have
aggregate principal amounts of approximately $978 and $385 million, annual
interest rates of 10% and 9 1/2%, respectively and mature in December, 2044
and September, 2047, respectively. The preferred securities will be
mandatorily redeemed upon redemption of the junior subordinated debentures.
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
4
<PAGE>
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 1 -- INTERIM REPORTING
GENERAL
For interim reporting purposes, certain costs and expenses are charged to
operations in proportion to the estimated total annual amount expected to be
incurred.
Certain prior period amounts have been reclassified to conform to the
current period presentation.
In management's opinion, the accompanying unaudited consolidated condensed
financial statements (the "Consolidated Condensed Financial Statements") of RJR
Nabisco Holdings Corp. ("RJRN Holdings") and RJR Nabisco, Inc. ("RJRN" and
together with RJRN Holdings, the "Registrants") contain all adjustments,
consisting only of normal recurring adjustments, necessary for a fair statement
of the results for the interim periods presented. The Consolidated Condensed
Financial Statements should be read in conjunction with the consolidated
financial statements and footnotes included in the Annual Report on Form 10-K of
RJRN Holdings and RJRN for the year ended December 31, 1997.
FOOD BUSINESSES SOLD AND EXITED
In the third quarter of 1998, cost of products sold was reduced by a $14
million net gain ($1 million after tax, net of minority interest) related to
businesses sold and non-strategic businesses exited. Businesses sold include the
College Inn brand of canned broths, the U.S. and Canadian tablespreads and U.S.
egg substitute businesses, and the Del Monte brand canned vegetable business in
Venezuela for net proceeds of approximately $550 million. Net sales for the full
year 1997 from the businesses sold and exited were $583 million.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
On January 1, 1998, RJRN Holdings and RJRN adopted Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income, which established
standards for reporting and display of comprehensive income and its components.
Comprehensive income is defined as the change in stockholders' equity during a
period from transactions from nonowner sources and primarily includes net income
(loss) and foreign currency translation adjustments. Total comprehensive income
for the three months ended September 30, 1998 and 1997 was $154 million and $81
million, respectively, for RJRN Holdings and $166 million and $89 million,
respectively, for RJRN. Total comprehensive income for the nine months ended
September 30, 1998 and 1997 was ($27) million and $472 million, respectively,
for RJRN Holdings and $13 million and $509 million, respectively, for RJRN.
During 1998, RJRN Holdings and RJRN adopted Statement of Position ("SOP")
No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use, which requires certain costs incurred in connection with
developing or obtaining internal-use software to be capitalized and other costs
to be expensed. The adoption of SOP No. 98-1 had no material effect on RJRN
Holdings' or RJRN's financial position or results of operations.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
During the second quarter of 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities ("SFAS No. 133"), which must be
adopted by January 1, 2000, with early adoption permitted. SFAS No. 133 requires
that all derivative instruments be recorded on the consolidated balance sheet at
their fair value. Changes in the fair value of derivatives will be recorded each
period in earnings or other
5
<PAGE>
NOTE 1 -- INTERIM REPORTING (CONTINUED)
comprehensive income, depending on whether a derivative is designated as part of
a hedge transaction and, if it is, the type of hedge transaction. RJRN Holdings
and RJRN have not yet determined the timing of adoption or the impact that
adoption or subsequent application of SFAS No. 133 will have on their financial
position or results of operations.
In April of 1998, the American Institute of Certified Public Accountants'
Accounting Standards Executive Committee ("AcSEC") issued SOP No. 98-5,
Reporting on the Costs of Start-Up Activities. SOP No. 98-5 establishes
standards on accounting for start-up and organization costs and, in general,
requires such costs to be expensed as incurred. This standard is required to be
adopted on January 1, 1999. The adoption of SOP No. 98-5 is not expected to have
a material effect on RJRN Holdings' or RJRN's financial position or results of
operations.
RESTRUCTURING CHARGES
In the second quarter of 1998, Nabisco recorded a restructuring charge of
$406 million ($216 million after-tax, net of minority interest) related to a
program announced on June 8, 1998. The restructuring program, which was
undertaken to streamline operations and improve profitability, commenced during
the second quarter of 1998 and will be substantially completed during 1999. The
$406 million restructuring expense will require cash expenditures of
approximately $164 million. In addition to the restructuring charge, the program
will require additional cash expenditures of approximately $118 million, of
which $21 million ($10 million after-tax, net of minority interest) was incurred
in the second and third quarters of 1998. These additional expenses are
principally for implementation and integration of the program and include costs
for relocation of employees and equipment and for training. After completion of
the restructuring program, pre-tax savings in the year 2000 and thereafter are
expected to be approximately $100 million annually.
The major components of the $406 million restructuring charge are $162
million for domestic and international severance and related benefits associated
with workforce reductions totaling approximately 4,300 employees, $186 million
for estimated losses from disposals of property related to domestic and
international plant closures, $43 million for estimated losses from disposals of
equipment and packaging materials related to non-strategic product line
rationalizations, and $15 million for estimated costs to terminate distribution
related contracts.
As of September 30, 1998, $27 million of the food restructuring accruals
were utilized as follows: $17 million for severance and related benefits, $8
million for product line rationalizations, $1 million for plant closures and $1
million for contract terminations.
In the fourth quarter of 1997, RJRN Holdings recorded a pre-tax
restructuring expense of $301 million ($235 million after-tax) to reorganize its
worldwide tobacco operations. As of September 30, 1998, $135 million of the
tobacco restructuring accruals were utilized as follows: $60 million for
employee severance and related benefits, $37 million for rationalization of
manufacturing operations, $12 million for disposal of non-strategic investments,
and $26 million for contract terminations and other costs.
TRUST ORIGINATED PREFERRED SECURITIES
In August 1998, a newly formed wholly owned subsidiary trust of RJRN
Holdings issued $374 million principal amount of preferred securities. The
preferred securities will pay preferential cash dividends of 9 1/2% per year per
share. The proceeds from the sale of the preferred securities and the original
capital contribution were invested by the trust in approximately $385 million
principal amount of 9 1/2% junior subordinated debentures of RJRN Holdings. The
junior subordinated debentures are redeemable by RJRN Holdings on or after
September 30, 2003. In October 1998, RJRN Holdings used a portion of the
proceeds from the issuance of the junior subordinated debentures to redeem its
outstanding Series B preferred stock (12,044 shares outstanding at a stated
value of $301 million at September 30, 1998). At
6
<PAGE>
NOTE 1 -- INTERIM REPORTING (CONTINUED)
September 30, 1998, the net proceeds remaining after general corporate spending
but before the redemption of the Series B preferred stock of approximately $245
million is classified in cash and cash equivalents.
NOTE 2 -- INVENTORIES
The major classes of inventory are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- -------------
<S> <C> <C>
Finished products............................................... $ 815 $ 816
Leaf tobacco.................................................... 1,085 1,184
Raw materials................................................... 223 226
Other........................................................... 414 391
------ ------
$ 2,537 $ 2,617
------ ------
------ ------
</TABLE>
NOTE 3 -- EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------ ------------------------------------------
1998 1997 1998 1997
-------------------- -------------------- -------------------- --------------------
BASIC DILUTED BASIC DILUTED BASIC DILUTED BASIC DILUTED
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net income (loss) applicable to common
stock :
Net income............................ $ 158 $ 158 $ 122 $ 122 $ 8 $ 8 $ 578 $ 578
Preferred stock dividends............. (11) (11) (11) (11) (33) (33) (33) (33)
Adjustment for the dilutive effect of
Nabisco Holdings' stock options..... -- -- -- (1) -- -- -- (1)
--------- --------- --------- --------- --------- --------- --------- ---------
$ 147 $ 147 $ 111 $ 110 $ (25) $ (25) $ 545 $ 544
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
Weighted average number of common and
common equivalent shares outstanding
(in thousands):
Common shares......................... 323,858 323,858 323,737 323,737 323,838 323,838 323,793 323,793
Assumed exercise of RJRN Holdings'
stock options....................... -- 2 -- 1,519 -- -- -- 1,450
--------- --------- --------- --------- --------- --------- --------- ---------
323,858 323,860 323,737 325,256 323,838 323,838 323,793 325,243
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
</TABLE>
Shares of ESOP convertible preferred stock of 12,968,683 and 13,912,661 were
not included in computing diluted earnings per share for 1998 and 1997,
respectively, because the effect would have been antidilutive. Common shares
also exclude approximately 969,000 shares of restricted stock as the vesting
provisions have not been met.
NOTE 4--CONTINGENCIES
TOBACCO LITIGATION
OVERVIEW. Various legal actions, proceedings and claims are pending or may
be instituted against R.J. Reynolds Tobacco Company ("RJRT") or its affiliates
(including RJRN and RJRN Holdings) or indemnitees, including actions claiming
that lung cancer and other diseases as well as addiction have resulted from the
use of or exposure to RJRT's tobacco products. During the third quarter of 1998,
81 new actions were served against RJRT and/or its affiliates or indemnitees (as
against 191 in the third quarter of 1997) and 42 such actions were dismissed or
otherwise resolved in favor of RJRT and/or its affiliates or indemnitees without
trial. There have been noteworthy increases in the number of these cases
pending. On September 30, 1998, there were 614 active cases pending, as compared
with 483 on September 30, 1997, and 245 on September 30, 1996. As of October 29,
1998, 673 active cases were pending against RJRT and/or its affiliates or
indemnitees, 667 in the United States, two each in Canada and in Puerto Rico,
and one each in the Marshall Islands, Nigeria and Panama.
7
<PAGE>
NOTE 4--CONTINGENCIES (CONTINUED)
The United States cases are in 48 states and the District of Columbia, and
are distributed as follows: 142 in Florida; 110 in New York; 104 in West
Virginia; 47 in California; 24 in Louisiana; 22 in Massachusetts; 16 in each of
Pennsylvania and Tennessee; 14 in Texas; 13 in Alabama; 11 in each of the
District of Columbia and Illinois; 10 in each New Jersey and Ohio; nine in
Mississippi; seven in each of Georgia, Iowa and Nevada; six in each of Indiana
and Minnesota; five in each of Arkansas and Maryland; four in each of Arizona,
Missouri, New Mexico and Oklahoma; three in each of Colorado, Hawaii, Kansas,
Kentucky, Michigan, Rhode Island, South Carolina, South Dakota, Utah, Washington
and Wisconsin; two in each of Nebraska, New Hampshire, North Dakota and Oregon;
and one in each of Alaska, Connecticut, Idaho, Maine, Montana, North Carolina,
Vermont and Virginia. Of the 667 active cases in the United States, 549 are in
state court, 113 are in federal court, and five are in tribal court. Most of
these cases were brought by individual plaintiffs, but a significant number,
discussed below, seek recovery on behalf of states, union pension funds, or
other large classes of claimants.
THEORIES OF RECOVERY. The plaintiffs in these actions seek recovery on a
variety of legal theories, including, among others, strict liability in tort,
design defect, negligence, special duty, voluntary undertaking, breach of
warranty, failure to warn, fraud, misrepresentation, unfair trade practices,
conspiracy, aiding and abetting, unjust enrichment, antitrust, Racketeer
Influenced and Corrupt Organization Act ("RICO"), indemnity, medical monitoring
and common law public nuisance. Punitive damages, often in amounts ranging into
the hundreds of millions or even billions of dollars, are specifically pleaded
in a number of cases in addition to compensatory and other damages. Fourteen of
the 667 active cases in the United States involve alleged non-smokers claiming
injuries purportedly resulting from exposure to environmental tobacco smoke.
Fifty-four cases purport to be class actions on behalf of thousands of
individuals. Purported classes include individuals claiming to be addicted to
cigarettes, individuals and their estates claiming illness and death from
cigarette smoking, African-American smokers claiming their civil rights have
been violated by the sale of menthol cigarettes, purchasers of cigarettes
claiming to have been defrauded and seeking to recover their costs, and Blue
Cross/Blue Shield subscribers seeking reimbursement for premiums paid. One
hundred thirty-seven of the active cases seek, INTER ALIA, recovery of the cost
of Medicaid payments or other health-related costs paid for treatment of
individuals suffering from diseases or conditions allegedly related to tobacco
use. Eight, brought by entities administering asbestos liability, seek
contribution for the costs of settlements and judgments.
DEFENSES. The defenses raised by RJRT and/or its affiliates, where
applicable, include preemption by the Federal Cigarette Labeling and Advertising
Act of some or all such claims arising after 1969; the lack of any defect in the
product; assumption of the risk; contributory or comparative fault; lack of
proximate cause; and statutes of limitations or repose; and, in the attorney
general cases (discussed below), additional statutory, equitable, constitutional
and other defenses. RJRN and RJRN Holdings have asserted additional defenses,
including jurisdictional defenses, in many of these cases in which they are
named.
INDUSTRY TRIAL RESULTS. Juries have found for plaintiffs in four smoking
and health cases in which RJRT was not a defendant, but in one such case, no
damages were awarded and the judgment was affirmed on appeal. The jury awarded
plaintiffs $400,000 in another such case, CIPOLLONE V. LIGGETT GROUP, INC., but
the award was overturned on appeal and the case was subsequently dismissed. In
the third such case, on August 9, 1996, a Florida jury awarded damages of
$750,000 to an individual plaintiff. That case, CARTER V. BROWN & WILLIAMSON,
was overturned on appeal on June 22, 1998. In another Florida case brought by
the same attorney, WIDDICK VS. BROWN & WILLIAMSON, a state court jury awarded
the plaintiff approximately $1 million in compensatory and punitive damages on
June 10, 1998. A Florida appeals court recently decided that the WIDDICK case
was tried in the wrong venue. The trial court transferred the case, but did not
rule on the motion to overturn the verdict. Brown & Williamson will use the
court's ruling in the CARTER case as a basis for having the verdict overturned.
RJRT has successfully defended itself in all the cases in
8
<PAGE>
NOTE 4--CONTINGENCIES (CONTINUED)
which it was the sole named defendant, including two cases in 1997 brought by
the same attorney who represented plaintiffs in the CARTER AND WIDDICK cases. In
addition, during 1997 and early 1998, RJRT and other tobacco industry defendants
settled six lawsuits. See "Certain Settlements" below.
CERTAIN CLASS ACTION SUITS. In May 1996, in an early class action case,
CASTANO V. AMERICAN TOBACCO COMPANY, the Fifth Circuit Court of Appeals
overturned the certification of a purported nationwide class of persons whose
claims related to alleged addiction to tobacco. Since this ruling by the Fifth
Circuit, most purported class action suits have sought certification of
statewide rather than nationwide classes.
Putative class action suits based on claims similar to those asserted in
CASTANO have been brought in state and, in a few instances, federal courts in
Alabama, Arkansas, California, the District of Columbia (D.C. court), Florida,
Georgia, Hawaii, Illinois, Indiana, Iowa, Kansas, Louisiana, Maryland, Michigan,
Minnesota, New Mexico, Nevada, New Jersey, New York, Ohio, Oklahoma,
Pennsylvania, South Carolina, South Dakota, Tennessee, Texas, Utah, West
Virginia and Wisconsin. A putative class action filed in Tennessee seeks
reimbursement of Blue Cross/Blue Shield premiums paid by subscribers throughout
the United States. On October 19, 1998, a putative class action was filed in
federal court in Philadelphia, Pennsylvania, on behalf of "all living Black
Americans who have purchased or consumed menthol tobacco products since 1954
(including minors through their legal representatives)" seeking redress of
alleged violations of the plaintiffs' civil rights. A purported class action
suit against RJRT in Texas claims that the marketing of "lights" and
"ultralight" cigarettes is deceptive. Similar claims have been made in other
lawsuits. Other types of class action suits have also been filed in additional
jurisdictions and there are also putative class action suits pending in Canada,
Puerto Rico and Nigeria. Most of these suits assert claims on behalf of classes
of individuals who claim to be addicted, injured, or at greater risk of injury
by the use of tobacco or exposure to environmental tobacco smoke, or are the
legal survivors of such persons.
Trial is underway in a class action suit pending in Florida, ENGLE V. R. J.
REYNOLDS TOBACCO COMPANY, in which a class consisting of Florida residents or
their survivors who claim to have diseases or medical conditions caused by their
alleged "addiction" to cigarettes has been certified. The trial is divided into
three phases. The initial phase, which includes common issues related to
liability and general causation, entitlement to punitive damages and possibly
the basis or ratio for assessment of punitive damages, is expected to last
several months, but even if potential liability is confirmed in this phase of
the trial, there would be no actual liability established until the subsequent
phases which could last for some years.
Class certifications, initially granted in two cases pending in New York
state courts, HOSKINS V. R. J. REYNOLDS TOBACCO COMPANY and GEIGER V. AMERICAN
TOBACCO COMPANY, have been reversed on appeal. In the HOSKINS decision, rendered
on July 16, 1998, the appeals court also dismissed the complaint entirely. The
Appellate Division recently granted plaintiffs leave to appeal to the New York
Court of Appeals (the state's highest court). In GEIGER, where class
certification had originally been conditional, a July 6, 1998 decision returned
the case to the trial court for limited class discovery and some form of hearing
on class certification.
On October 22, 1998, a New Jersey Superior Court judge denied motions to
certify classes in five separate cases that were centralized for pre-trial
management. The judge found, among other things, that "the individual facts and
situations of the present plaintiffs nullifies anything common to the class." On
November 5, 1998, however, a Louisiana state appeals court affirmed the
certification of a medical monitoring and/or smoking cessation class of
Louisiana residents who were smokers on or before May 24, 1996 (SCOTT V.
AMERICAN TOBACCO COMPANY).
THE ATTORNEY GENERAL AND RELATED CASES. Forty-five states, through their
attorneys general and/or other state agencies, have sued RJRT and other U.S.
cigarette manufacturers as well as, in some instances, their parent companies,
in actions to recover the costs of medical expenses incurred by the state or its
9
<PAGE>
NOTE 4--CONTINGENCIES (CONTINUED)
agencies in the treatment of diseases allegedly caused by cigarette smoking.
Some of these cases also seek injunctive relief and treble damages for state
and/or federal antitrust law and RICO violations. Certain of the actions also
seek statutory penalties and other forms of relief under state consumer
protection and antitrust statutes. On October 29, 1998, there were 41 such cases
pending in the following states or territories: Alaska, Arizona, Arkansas,
California, Colorado, Connecticut, Georgia, Hawaii, Idaho, Illinois, Indiana,
Iowa, Kansas, Louisiana, Maine, Marshall Islands, Maryland, Massachusetts,
Michigan, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New
Mexico, New York, Ohio, Oklahoma, Oregon, Pennsylvania, Puerto Rico, Republic of
Panama, Rhode Island, South Carolina, South Dakota, Utah, Vermont, Washington,
West Virginia and Wisconsin. Tobacco company defendants have settled attorney
general cases in the states of Mississippi, Florida, Texas and Minnesota. See
"Certain Settlements" below.
On July 24, 1998, an Indiana state court judge dismissed all claims by that
state's attorney general for Medicaid recovery. The judge ruled that the state's
exclusive remedy for recovering such costs is by subrogation on a case-by-case
basis as to each Medicaid recipient. The state has appealed this decision.
However, state courts deciding defendants' motions to dismiss
attorney-general claims in Massachusetts (August 17, 1998) and in Ohio (August
28, 1998) granted in part and denied in part the various motions.
On September 2, 1998, a state court ruling on the Idaho attorney-general
case dismissed almost in its entirety that state's health care cost recovery
action, and granted the state fourteen days to file an amended complaint. The
plaintiff failed to amend its complaint and judgment was entered in favor of the
defendants. Plaintiff has filed an appeal.
On September 21, 1998, trial in the State of Washington health-care
cost-recovery action began. The State is currently presenting its evidence. It
is anticipated that the trial will last four to five months.
The State alleges that it has incurred health care costs resulting from the
defendants engaging in a wrongful conspiracy and violating the state's antitrust
laws by withholding information concerning the health effects of smoking and by
suppressing the development and marketing of a supposed "safer" cigarette. It
further alleges that the defendants violated the State's Consumer Protection Act
by targeting minors and disseminating false information concerning smoking and
health.
Defendants contend that the state knew of the risks of smoking, including
its potential impact on the health of citizens of Washington, long before it
voluntarily chose to participate in the Medicaid program; that it cannot
credibly argue that it was unaware of these risks, or that it was deceived by
the defendants in any fashion that affected the state's decision to participate
in the Medicaid program; and that there is no causal connection between
allegations of wrongdoing contained in the state's complaint and the damages the
state claims to have suffered.
Several additional trials of health care cost recovery actions brought by
states or other governmental entities are currently scheduled through the end of
1999. These include: Oklahoma (January 25, 1999), Massachusetts (February 1,
1999), City of Los Angeles (February 5, 1999), Arizona (March 4, 1999), Oregon
(April 5, 1999), Maryland (April 5, 1999), New York (May 17, 1999), Connecticut
(September 1, 1999), Hawaii (September 6, 1999), Wisconsin (September 13, 1999),
and Puerto Rico (September 13, 1999).
In addition to the 41 pending actions brought by the various attorneys
general, 96 pending actions advancing similar theories have been brought by
private attorneys and/or local officials purportedly on behalf of the citizens
of certain states, counties and/or cities, union health and welfare funds, five
insurance companies, a university, three territories and five native American
tribes. Sixty-three of these cases have
10
<PAGE>
NOTE 4--CONTINGENCIES (CONTINUED)
been brought by health and welfare trust funds and similar entities, and are
pending in the following states: Alabama, Arizona, Arkansas, California,
District of Columbia, Florida, Georgia, Hawaii, Illinois, Indiana, Kentucky,
Louisiana, Maryland, Massachusetts, Michigan, Minnesota, Nebraska, New Jersey,
New Mexico, New York, Ohio, Oregon, Pennsylvania, Rhode Island, Tennessee,
Texas, Washington, West Virginia, and Wisconsin.
On July 13, 1998, a federal district court in Maryland dismissed one such
union case, SEAFARERS WELFARE PLAN V. PHILIP MORRIS, stating that "Plaintiffs'
entire complaint suffers from the fundamental flaw that the funds themselves, as
opposed to their participants or the pertinent employers, have not suffered any
cognizable damages." The court also indicated that, even if the funds have
suffered injury, each of the plaintiffs' claims are subject to dismissal
because, among other reasons, the plaintiffs' alleged injuries are too remotely
caused by the defendants to satisfy the requirements of proximate cause,
plaintiffs' lack "antitrust standing," and plaintiffs failed to state a claim
for unjust enrichment.
During the third quarter of 1998, there have been similar decisions, in
OREGON LABORERS-EMPLOYERS HEALTH & WELFARE TRUST FUND V. PHILIP MORRIS, in
Oregon federal court (August 3, 1998) and in TEXAS CARPENTERS HEALTH BENEFIT
FUND V. PHILIP MORRIS in Texas federal court (August 30, 1998).
On August 26, 1998, a federal district court in New Jersey granted in part
and denied in part defendants' motion to dismiss another union case, NEW JERSEY
CARPENTERS HEALTH FUND V. PHILIP MORRIS. The judge dismissed the antitrust,
special duty and unjust enrichment claims. However, the judge sustained the RICO
and fraud claims "insofar as they allege misconduct directed at and relied upon
by the Funds," as opposed to fund participants.
In a similar decision, a Kentucky federal court, in KENTUCKY LABORERS
DISTRICT COUNCIL HEALTH AND WELFARE TRUST FUND V. HILL & KNOWLTON, INC.
(September 30, 1998) , dismissed claims based on federal antitrust, the Kentucky
Consumer Protection Act, intentional breach of special duty, strict liability,
negligence, breach of express and implied warranties and restitution to prevent
unjust enrichment. The court let stand claims based on federal RICO and
fraudulent misrepresentation and concealment.
On August 12, 1998, in WEST VIRGINIA LABORERS' PENSION TRUST FUND V. PHILIP
MORRIS, however, a federal district court in West Virginia, denied defendants'
motion to dismiss in its entirety. The order set forth no substantive analysis
of the arguments made by the parties, indicating only that the defendants had
not made the showing necessary for dismissal. Discovery in the case is
proceeding.
Finally, in IRON WORKERS LOCAL UNION NO. 17 INSURANCE FUND V. PHILIP MORRIS,
a federal district court in Ohio granted defendants' motion to dismiss
plaintiffs' claims for breach of voluntarily undertaken duty but denied
defendants' motion to dismiss as to claims under federal RICO and the Ohio
Corrupt Activity Act, for antitrust and for civil conspiracy. In a separate
ruling, the court in IRON WORKERS granted class certification status to a class
consisting of approximately 100 jointly administered, multi-employer health and
welfare trust funds in Ohio. Discovery in the case is underway. The case is
currently scheduled for trial starting February 22, 1999.
In addition to the IRON WORKERS case discussed above, two other trials of
health care cost recovery actions brought by union trust funds are currently
scheduled through the end of 1999: NATIONAL ASBESTOS WORKERS MEDICAL FUND V.
PHILIP MORRIS (NY) (May 3, 1999) and NORTHWEST LABORERS EMPLOYERS HEALTH AND
SECURITY TRUST FUND V. PHILIP MORRIS (WA) (September 7, 1999).
PROPOSED MULTI-STATE SETTLEMENT.
Tobacco companies are currently engaged in negotiations with some state
attorneys general seeking to agree on terms for collectively resolving some or
all of the attorneys general lawsuits. Assuming that a
11
<PAGE>
NOTE 4--CONTINGENCIES (CONTINUED)
tentative agreement is reached, if a sufficient number of states (as determined
by the defendant companies) agree to settle their cases against the tobacco
companies on the terms of the tentative agreement, the agreement will be signed
by the industry. The agreement would require substantial payments by the
industry, including certain initial payments and ongoing annual payments of
billions of dollars to the settling states for health care cost reimbursement,
to fund research and to reduce youth smoking. The terms of the agreement would
also limit industry advertising and marketing practices.
There can be no assurance that any such agreement will be approved by the
attorneys general of a sufficient number of states. If the agreement does become
effective, the price increases needed to satisfy Reynolds' payment obligations
under the agreement are likely to reduce volumes and revenues and could have an
adverse effect on Reynolds, RJRN and RJRN Holdings.
In evaluating any proposal to resolve tobacco issues, RJRN and RJRT will
continue to weigh carefully the potential benefits, principally greater
regulatory and litigation certainty and predictability in annual aggregate
contingency risk, against the resulting monetary, regulatory and other costs.
CERTAIN SETTLEMENTS.
Six cases have been settled, including four attorney general cases, since
June 1997: the attorney general cases in Mississippi, Florida, Texas and
Minnesota, a class action in Florida and an unfair trade practices case in
California. These settlements have been described in prior SEC filings on Forms
10-Q and 8-K. (See RJRN's Report on Form 10-Q for the Quarterly Period ended
June 30, 1998, filed August 14, 1998 (the "1998 Second Quarter 10-Q"), RJRN's
Report on Form 10-Q for the Quarterly Period ended March 31, 1998, filed May 15,
1998 (the "1998 First Quarter 10-Q"); RJRN's Report on Form 8-K dated January
16, 1998; RJRN's Report on Form 8-K dated August 25, 1997 and RJRN's Report on
Form 10-Q for the Quarterly Period ended June 30, 1997, filed August 8, 1997.)
As described in the prior filings, the Mississippi, Florida and Texas
settlement agreements provided that, if the defendants entered into subsequent
settlement agreements with any other state or states, these three states would,
under certain circumstances, be entitled to terms at least as favorable to them
as those contained in any such future settlement. In July 1998, in light of
their May settlement with the State of Minnesota, tobacco company defendants,
including RJRT, entered into supplementary agreements with the states of
Mississippi and Texas to make "most favored nation" adjustments to the original
settlement agreements with those states. For a description of these agreements,
see the 1998 Second Quarter 10-Q.
A similar agreement was entered into with the State of Florida on September
11, 1998. The supplemental agreement with Florida provides for additional
"initial payments" by the industry to be paid according to an annual schedule
over five years, commencing in January 1999. The first payment, due in January
1999, is set at $23,470,000; payments for the years 2000 through 2002 are set at
$464,590,000 per year; and the final payment in 2003 is set at $232,760,000.
These industry obligations are to be apportioned among the settling
defendants on the basis of their market share. Except for the 1999 initial
payments, they are to be adjusted upward by the greater of 3% or the change in
the cost of living index and up or down by volume of cigarettes sold in each
year. In addition, the agreement modifies the "most favored nation" terms of
Florida's original settlement agreement so that they apply only to certain
non-economic terms of any future settlement agreements with other settling
states or other non-federal governmental entities.
In separate fee payment agreements, also part of the most favored nation
adjustments, RJRT and the other settling defendants agreed to pay advances
towards the fees of private counsel for Mississippi, Texas and, subsequently,
Florida. These fees are to be awarded by arbitration panels. These panels have
been named and their proceedings, which will also apply to a case settled in
September 1997 (MAGNINI V. R.J.
12
<PAGE>
NOTE 4--CONTINGENCIES (CONTINUED)
REYNOLDS TOBACCO COMPANY) have begun. Pursuant to the fee payment agreements, in
the first 9 months of 1998, RJRT has paid approximately $58 million. These
advances will be credited against future payment obligations.
The Florida fee payment agreement, consistent with those entered with
Mississippi and Texas, includes an annual cap of $500,000,000 for payments of
all attorneys' fees awarded by arbitration panels pursuant to past and future
smoking and health litigation settlements (other than settlements of cases
brought by a single plaintiff). The fee cap was $250,000,000 with respect to
1997. The agreements create a mechanism for allocating these payments among
eligible counsel on a quarterly basis. Although the first payments of
arbitration awards under all the fee payment agreements are to become due on
December 15, 1998, Reynolds obligations are to be deferred to January 1999 to
the extent of $62,000,000 in the aggregate for Mississippi, Texas and two of the
law firms representing the State of Florida.
RJRN Holdings accrued $312 million in the first quarter of 1998 for its
share of all fixed and determinable portions of its obligations related to the
Minnesota settlements and other settlement related costs. In the second quarter
of 1998, RJRT Holdings accrued $145 million related to the additional "initial
payments" expected to be made under the supplementary agreements and advances
toward the fees of private counsel discussed above. RJRT's total estimated cash
payments in 1998 for all attorney general agreements and related fee payment
agreements will be approximately $550 million, $258 million of which has been
paid as of September 30, 1998.
RECENT AND SCHEDULED TRIALS. As of October 31, 1998, trial is underway in
two cases in which RJRT is a party. ENGLE V. R. J. REYNOLDS TOBACCO COMPANY, a
class-action case in Florida state court, began on July 6, 1998. Trial in the
STATE OF WASHINGTON V. AMERICAN TOBACCO COMPANY began September 14, 1998. No
other case in which RJRT is a party is scheduled for trial in 1998 but several,
including attorneys general and other health care-cost-recovery suits referred
to above, are scheduled for 1999. Although trial schedules are subject to change
and many cases are dismissed before trial, it is likely that there will be an
increased number of tobacco cases, involving claims for possibly billions of
dollars, against RJRT and RJRN coming to trial over the next year as compared to
prior years when trials in these cases were infrequent.
RJRT is aware of certain grand jury investigations being conducted in New
York and Washington, D.C. which relate to the cigarette business. For a further
discussion of these investigations see the 1998 First Quarter 10-Q. In addition,
RJRT received a document subpoena date September 17, 1998, from a federal grand
jury convened in the Eastern District of Pennsylvania by the Antitrust Division
of the Department of Justice. RJRT understands that the grand jury is
investigating possible violations of the antitrust laws related to tobacco leaf
buying practices. RJRT is responding to the subpoena but is unable to predict
the outcome of the grand jury's investigation.
Litigation is subject to many uncertainties, and it is possible that some of
the tobacco-related legal actions, proceedings or claims could be decided
against RJRT or its affiliates (including RJRN Holdings and RJRN) or
indemnitees. Determinations of liability or adverse rulings against other
cigarette manufacturers that are defendants in similar actions, even if such
rulings are not final, could adversely affect the litigation against RJRT or its
affiliates or indemnitees and could encourage an increase in the number of such
claims. There have been a number of political, legislative, regulatory, and
other developments relating to the tobacco industry and cigarette smoking that
have received wide media attention, including the various litigation settlements
and the release and wide availability of various industry documents referred to
above. These developments may negatively affect the outcomes of tobacco-related
legal actions and encourage the commencement of additional similar litigation.
Although it is impossible to predict the outcome of such events on pending
litigation and the rate at which new lawsuits may be filed against RJRT, RJRN
and RJRN Holdings, a significant increase in
13
<PAGE>
NOTE 4--CONTINGENCIES (CONTINUED)
litigation and/or in adverse outcomes for tobacco defendants could have an
adverse effect on any one or all of these entities. RJRT, RJRN and RJRN Holdings
each believes that it has a number of valid defenses to any such actions and
intends to defend such actions vigorously.
RJRN Holdings and RJRN believe that, notwithstanding the quality of defenses
available to them and RJRT in litigation matters, it is possible that the
results of operations or cash flows of RJRN Holdings or RJRN in particular
quarterly or annual periods or the financial condition of RJRN Holdings and RJRN
could be materially affected by the ultimate outcome of certain pending
litigation matters (including litigation costs). Management is unable to predict
the outcome of the litigation or to derive a meaningful estimate of the amount
or range of any possible loss in any particular quarterly or annual period or in
the aggregate.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is a discussion and analysis of the consolidated financial
condition and results of operations of RJRN Holdings. The results of operations
discussion and analysis is broken into three sections. The first section
includes reported information for net sales and operating company contribution
as included in the historical consolidated condensed financial statements. The
second section illustrates operating company contribution on a basis consistent
with how management manages the ongoing businesses. It excludes one-time items
that management believes affect the comparability of the results of operations.
This section should not be viewed as a substitute for the historical results of
operations but as a tool to better understand underlying trends in the business.
The last section includes management's discussion and analysis of the ongoing
results. The following discussion and analysis of RJRN Holdings' financial
condition and results of operations should be read in conjunction with the
historical financial information included in the Consolidated Condensed
Financial Statements.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------------------- -----------------------------------
1998 1997 % CHANGE 1998 1997 % CHANGE
--------- --------- ------------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN MILLIONS)
NET SALES:
RJRT............................................ $ 1,495 $ 1,295 15% $ 4,069 $ 3,587 13%
Reynolds International.......................... 735 911 (19) 2,307 2,588 (11)
--------- --------- --------- ---------
Total Tobacco............................... 2,230 2,206 1 6,376 6,175 3
--------- --------- --------- ---------
Nabisco Biscuit................................. 926 920 1 2,640 2,628 --
U.S. Foods Group................................ 538 623 (14) 1,705 1,797 (5)
--------- --------- --------- ---------
Domestic Food Group............................. 1,464 1,543 (5) 4,345 4,425 (2)
International Food Group........................ 634 660 (4) 1,846 1,874 (1)
--------- --------- --------- ---------
Total Food.................................. 2,098 2,203 (5) 6,191 6,299 (2)
--------- --------- --------- ---------
$ 4,328 $ 4,409 (2) $ 12,567 $ 12,474 1
--------- --------- --------- ---------
--------- --------- --------- ---------
OPERATING COMPANY CONTRIBUTION:(1)
RJRT(2)......................................... $ 425 $ 161 164 $ 718 $ 936 (23)
Reynolds International.......................... 95 197 (52) 408 571 (29)
--------- --------- --------- ---------
Total Tobacco............................... 520 358 45 1,126 1,507 (25)
--------- --------- --------- ---------
Nabisco Biscuit(3).............................. 117 172 (32) 385 489 (21)
U.S. Foods Group(3)............................. 64 71 (10) 208 229 (9)
--------- --------- --------- ---------
Domestic Food Group............................. 181 243 (26) 593 718 (17)
International Food Group(3)..................... 57 58 (2) 136 156 (13)
--------- --------- --------- ---------
Total Food.................................. 238 301 (21) 729 874 (17)
--------- --------- --------- ---------
Headquarters.................................... (19) (17) (12) (59) (52) (13)
--------- --------- --------- ---------
$ 739 $ 642 15 $ 1,796 $ 2,329 (23)
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
- --------------------------
(1) Operating company contribution represents operating income before
amortization of trademarks and goodwill and restructuring expense.
Restructuring expense of $406 million related to the food business was
recorded in the second quarter of 1998 ($268 million at Biscuit, $90 million
at U.S. Foods Group and $48 million at International).
(2) The nine month 1998 period includes $457 million related to the settlement
agreement reached with the Minnesota state attorney general ($312 million)
and the additional tobacco settlement charges incurred relating to certain
prior state settlement agreements ($145 million). The three and nine month
1997 periods include a $219 million charge related to the settlement
agreements reached by RJRT with the Florida and Mississippi state attorneys
general and certain class action cases.
15
<PAGE>
(3) The three month 1998 period includes costs of $15 million related to the
implementation of the restructuring of the food business ($10 million at
Biscuit, $1 million at U.S. Foods Group and $4 million at International).
The nine month 1998 period includes $21 million of charges related to the
implementation of the restructuring of the food business ($14 million at
Biscuit, $3 million at U.S. Foods Group and $4 million at International). In
addition, both 1998 periods include a non-recurring net gain of $14 million
from businesses sold and exited ($2 million at U.S. Foods Group and $12
million at International).
The following table represents operating company contribution comparisons
based upon ongoing results. It excludes all one-time items which management
believes affect the comparability of the results of operations. These items are
discussed in footnotes (1) through (3) above.
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
1998 1997 % CHANGE 1998 1997 % CHANGE
--------- --------- ------------- --------- --------- -------------
<CAPTION>
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
OPERATING COMPANY CONTRIBUTION:
RJRT.............................................. $ 425 $ 380 12% $ 1,175 $ 1,155 2%
Reynolds International............................ 95 197 (52) 408 571 (29)
--------- --------- --------- ---------
Total Tobacco................................. 520 577 (10) 1,583 1,726 (8)
--------- --------- --------- ---------
Nabisco Biscuit................................... 127 172 (26) 399 489 (18)
U.S. Foods Group.................................. 63 71 (11) 209 229 (9)
--------- --------- --------- ---------
Domestic Food Group............................... 190 243 (22) 608 718 (15)
International Food Group.......................... 49 58 (16) 128 156 (18)
--------- --------- --------- ---------
Total Food.................................... 239 301 (21) 736 874 (16)
--------- --------- --------- ---------
Headquarters...................................... (19) (17) (12) (59) (52) (13)
--------- --------- --------- ---------
$ 740 $ 861 (14) $ 2,260 $ 2,548 (11)
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
UNLESS OTHERWISE NOTED, DISCUSSIONS OF THE RESULTS OF OPERATIONS ARE BASED ON
ONGOING RESULTS.
TOBACCO
The tobacco line of business is conducted by RJRT and R.J. Reynolds
International ("Reynolds International").
RJRT's net sales for the third quarter were $1.5 billion, $200 million
higher than the comparable period in 1997 and $4.07 billion for the first nine
months of 1998, an increase of $482 million over 1997. The increase for both
periods is primarily attributable to higher pricing ($291 million for the third
quarter and $658 million for the first nine months of 1998), partially offset by
lower volume ($86 million for the third quarter and $148 million for the first
nine months of 1998). The pricing increase is before competitive discounting.
See the operating company contribution discussion below. Volume for the
three-month period and first nine months of 1998 decreased 7% and 4%,
respectively. Industry volume decreased 5% and 4% for the three and nine month
periods ended September 30, 1998, respectively.
RJRT's overall retail share of market for the third quarter of 1998
decreased to 24.96% from 25.30% in the prior year comparable period. For the
third quarter of 1998, RJRT's full-price share of market declined to 16.15% from
16.68%, while its savings share of market increased to 8.80% from 8.62%. Retail
share of market for RJRT for the first nine months of 1998 decreased to 25.24%
compared to 25.40% in 1997. Full price share of market declined to 16.34% for
the first nine months of 1998 versus 16.64% in 1997, while savings increased to
8.89% in 1998 from 8.76% in 1997. Industry wide shipments for the full-price
category increased to 74% of total shipments for the three months ended
September 30, 1998 from 73% in 1997. Shipments industry wide for the full-price
category the first nine months of 1998 were 73% of total shipments compared to
72% in 1997. RJRT's full-price shipments as a percentage of its total shipments
were consistent with 1997 at 64% and 63% for the three and nine months ended
September 30, 1998, respectively.
16
<PAGE>
Camel shipments were up 3% in the third quarter of 1998 compared to 1997
assisted by the introduction of the "Mighty Tasty" advertising campaign in June
of 1998. Shipments were down 2% overall for the first nine months of 1998.
Winston shipments were down 12% for the quarter and 3% for the first nine months
of 1998. The third quarter of 1997 included strong introductory shipments of the
repositioned, "No Bull" Winston. Salem volume declined 14% and 10% for the third
quarter and first nine months of 1998, respectively, versus the 1997 comparable
periods. RJRT is currently testing a new advertising and promotional campaign in
select markets to reverse Salem's declining trend. Volume for Doral, the
industry's leading savings brand, was flat for the third quarter of 1998 but
increased 5% for the first nine months of 1998, versus the comparable 1997
periods. Doral's retail share of market was up 9% for both the third quarter and
first nine months of 1998. New packaging was introduced in the second quarter of
1998 and the "Price Check Jackpot" promotion and Doral's new "Imagine Getting
More" advertising campaign began in September of 1998.
RJRT's operating company contribution increased 12% to $425 million for the
third quarter of 1998 and increased 2% to $1.18 billion for the first nine
months of 1998. The increase for both periods is due primarily to increased
pricing ($291 million for the third quarter and $658 million for the first nine
months of 1998), partially offset by lower volume ($71 million for the third
quarter and $122 million for the first nine months of 1998), ongoing settlement
costs ($38 million for the third quarter and $113 million for the first nine
months of 1998), competitive discounting (marketing) ($91 million for the third
quarter and $286 million for the first nine months of 1998) and other costs
(legal, product costs and merchandising costs) in both periods.
RJRT announced a $3.00 per thousand cigarette price increase effective
August 5, 1998. This followed two other price increases of $2.50 per thousand
cigarettes announced in the second quarter of this year and a $1.25 per thousand
increase in the first quarter of this year. Each $1.00 per thousand increase
equals a $.02 increase per pack. The price per pack of cigarettes has increased
approximately $.19 in 1998. Similar price increases were announced by other
cigarette manufacturers.
Reynolds International's net sales were $735 million for the third quarter
of 1998, a decrease of 19% over the comparable 1997 quarter. Excluding the
impact of unfavorable foreign currency translation, net sales would have
decreased 15% for the quarter versus 1997. Overall volume for the quarter of
46.0 billion units was down 17% versus 1997, primarily due to overall weakness
in Special Markets and deteriorating economic conditions in the CIS and Baltics
region. However, volume performance in the key region of Western Europe was up
5% for the quarter, with gains registered in Spain and France.
Reynolds International's net sales decreased 11% to $2.31 billion for the
first nine months of 1998 over the 1997 comparable period, primarily due to the
weakness in Special Markets and CIS and Baltics region. Excluding the impact of
unfavorable foreign currency translation, year to date net sales would have
decreased 5% compared to 1997. Overall year to date volume of 141.6 billion
units decreased by 4% from 1997, driven by weakness in Special Markets and the
CIS and Baltics region.
Operating company contribution was $95 million for the third quarter of
1998, a decrease of 52% over the third quarter of 1997, and $408 million for the
first nine months of 1998, a 29% decrease over the comparable 1997 period. Only
Western Europe posted gains for the quarter, while on a year to date basis, only
the Americas region posted a small gain. The decrease in the third quarter and
the first nine months of 1998 is mainly attributable to the volume decline and
unfavorable foreign currency translation. Increased marketing costs also
impacted the third quarter of 1998. Excluding the impact of unfavorable foreign
currency translation, operating company contribution for the third quarter and
first nine months of 1998 would have decreased by 44% and 18%, respectively,
versus the comparable 1997 periods.
GOVERNMENTAL ACTIVITY
In August 1996, the U.S. Food and Drug Administration (the "FDA") asserted
jurisdiction over cigarettes and certain other tobacco products by declaring
such products to be medical devices and
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adopting regulations, first proposed in 1995, on the advertising, promotion and
sale of cigarettes. Regulations establishing 18 as the national minimum age for
the sale of cigarettes and requiring age identification from purchasers who
appear to be under age 26 became effective in February 1997. Implementation of
the remaining regulations, which prohibit or impose stringent limits on a broad
range of sales and marketing practices, was stayed by the U.S. District Court
for the Middle District of North Carolina (COYNE BEAHM V. UNITED STATES FOOD &
DRUG ADMINISTRATION) pending appeal of denial of motions for summary judgment by
RJRT and others in the tobacco industry. On August 14, 1998, the U.S. Court of
Appeals for the Fourth Circuit reversed the District Court, finding that the FDA
had exceeded its authority by regulating tobacco products. The government's
request for an EN BANC review of this decision was denied on November 10, 1998.
RJRT is unable to predict the ultimate outcome of this litigation seeking to
find the FDA's regulations to be unlawful. If the ruling by the Fourth Circuit
were reversed, and if the full regulations do go into effect, they could be
expected to have an adverse effect on cigarette sales and RJRT.
On May 28, 1997, the Federal Trade Commission (the "FTC") issued an
unfairness complaint against RJRT, seeking to prohibit the use of Joe Camel
advertising, to require RJRT to undertake certain potentially costly public
education activities and to monitor sales and share of sales of each of RJRT's
brands to smokers under the age of 18. Trial before an administrative law judge
began on November 9, 1998 and is expected to last from four to seven weeks.
In December 1992, the U.S. Environmental Protection Agency (the "EPA")
issued a report entitled, "Respiratory Health Effects of Passive Smoking: Lung
Cancer and Other Disorders," which classified environmental tobacco smoke as a
Group A (known human) carcinogen. On June 22, 1993, RJRT and others filed suit
in the U.S. District Court for the Middle District of North Carolina (FLUE-CURED
STABILIZATION CORP. V. U.S. ENVIRONMENTAL PROTECTION AGENCY) to challenge the
validity of the EPA report. On July 17, 1998, the court's ruling on the
plaintiffs' motion for summary judgment found that the EPA's classification of
environmental tobacco smoke was invalid, and vacated those portions of the EPA
report dealing with lung cancer. The government has announced its intention to
appeal this ruling to the Court of Appeals for the Fourth Circuit.
In July 1996, Massachusetts enacted legislation requiring manufacturers of
tobacco products sold in Massachusetts to report yearly, beginning December 15,
1997, the ingredients of each brand sold. The statute also requires the
reporting of nicotine yield ratings in accordance with procedures established by
the State. The legislation contemplates public disclosure of all ingredients in
descending order, a trade-secret disclosure that RJRT believes could damage the
competitive position of its brands. RJRT, together with other cigarette
manufacturers, filed suit in the U.S. District Court for the District of
Massachusetts seeking to have the statute declared null and void and to restrain
Massachusetts officials from enforcing it. A similar suit was filed by
manufacturers of smokeless tobacco products. The court granted a preliminary
injunction that enjoined Massachusetts officials from enforcing the law relating
to ingredient reporting. Massachusetts appealed that decision. Both the
manufacturers and Massachusetts are now seeking summary judgment from the
district court. Oral argument on the motions for summary judgment took place
during May 1998. Oral argument of Massachusetts' appeal of the preliminary
injunction decision occurred on July 28, 1998.
In 1997, Texas enacted legislation very similar to the Massachusetts law,
except that the Texas statute authorizes confidentiality of trade secrets. After
notice and comment, the Texas Department of Health (TDH) promulgated regulations
denominated "Final" in mid-1998 that would have required both ingredient and
nicotine-yield report to be filed by December 1, 1998. Recently, however, TDH
announced amendments that would extend the initial reporting date to March 1,
1999.
In 1997, the Minnesota legislature enacted a requirement that manufacturers
of tobacco products sold in Minnesota report annually the presence of five
substances in each brand of their products in its "unburned" and "burned"
states. Enforcement of this reporting requirement was to begin when the date
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and form for reporting were announced by the Minnesota Department of Health. The
Department has now prescribed a form and set the reporting date for February 15,
1999.
In August 1998, the Massachusetts Department of Health issued regulations
for public comment that would require (beginning July 1, 2000) annual reporting
on a brand-by-brand basis of 43 smoke constituents in both mainstream smoke and
sidestream smoke. RJRT, together with other cigarette manufacturers, filed
comments with the Department on October 9, 1998. RJRT and the other
manufacturers believe that the Department lacks legal authority to promulgate
these proposed regulations.
The Canadian province of British Columbia has also enacted ingredient
disclosure legislation. RJR-MacDonald is challenging this legislation.
It is not possible to determine what additional federal, state, local or
foreign legislation or regulations relating to smoking or cigarettes will be
enacted or to predict any resulting effect thereof on RJRT, Reynolds
International or the cigarette industry generally, but such legislation or
regulations could have a material effect on RJRT, Reynolds International or the
cigarette industry generally.
For a description of certain litigation affecting RJRT and its affiliates,
including the effects on results of operations of certain attorney general
agreements, see note 4 to the Consolidated Condensed Financial Statements.
FOOD
The food line of business is conducted through the operating subsidiaries of
Nabisco Holdings Corp. ("Nabisco Holdings"). Nabisco Holdings' businesses in the
United States are comprised of the Nabisco Biscuit and the U.S. Foods Group
(collectively, the "Domestic Food Group"). The U.S. Foods Group includes the
Sales & Integrated Logistics Group, the Specialty Products, LifeSavers,
Planters, Tablespreads (through August 14, 1998) and Food Service organizations.
Nabisco Holdings' businesses outside the United States are conducted by Nabisco
Ltd and Nabisco International, Inc. (collectively, the "International Food
Group").
The Domestic Food Group's net sales declined 5% for the third quarter and 2%
for the first nine months. Within the Domestic Food Group, Nabisco Biscuit's net
sales increased 1% in the third quarter and were flat in the first nine months
of 1998 versus the prior year. The increases in the third quarter and the first
nine months of 1998 were primarily due to price increases and volume gains in
core cookie and cracker brands, partially offset by lower volume in Snackwell's
and breakfast snacks. Net sales for the first nine months of 1998 were favorably
impacted by four more selling days. Without these extra days, net sales would
have declined 2%. The U.S. Food Group's net sales decrease of 14% in the third
quarter and 5% for the first nine months of 1998 was primarily due to the
disposal of certain regional brands in 1997, the sale of College Inn broths, the
Tablespreads and egg substitute businesses, and Plush Pippin frozen pies in 1998
and certain non-strategic businesses exited in 1998. Excluding the impact of
these disposals and businesses exited, net sales would have risen 3% in both the
third quarter and nine-month periods. The key contributors to the sales
performance of the continuing U.S. Foods Group business were increased sales for
nuts, pet snacks and hot cereals, and the inclusion of Cornnuts snacks acquired
in December 1997, partially offset by lower sales volume for confections. The
International Food Group's net sales decreased 4% in the third quarter due to
unfavorable foreign currency translation and volume declines in Brazil and
Argentina, partially offset by volume increases in other Latin American markets.
For the first nine months of 1998 net sales decreased by 1% as a result of
unfavorable foreign currency translation and volume declines in Brazil,
Argentina, and Asia, offset in part by improvements in several Latin American
markets.
The Domestic Food Group's operating company contribution was $190 million in
the third quarter of 1998, a decrease of 22% over the third quarter of 1997. For
the first nine months of 1998, the Domestic Food Group generated operating
company contribution of $608 million versus $718 million in the first nine
months of 1997, a decrease of 15%. Within the Domestic Food Group, the operating
company contribution
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for Nabisco Biscuit decreased $45 million or 26% for the third quarter of 1998
and decreased $90 million or 18% for the first nine months of 1998. The decrease
for the third quarter was primarily due to increased marketing spending.
Increased marketing spending and higher manufacturing and selling costs were the
primary reasons for the decrease in the first nine months of 1998. The U.S.
Foods Group operating company contribution decreased 11% and 9% for the third
quarter and first nine months of 1998, respectively. The declines were due
primarily to the absence of profits in 1998 from businesses sold and exited in
both years, partially offset by gains in nuts and the acquisition of Cornnuts
snacks in 1997. The nine month period was also negatively impacted by profit
declines in confections. The International Food Group's operating company
contribution declined 16% to $49 million and 18% to $128 million for the third
quarter and first nine months of 1998, respectively. The decline for the third
quarter was principally due to lower earnings as a result of the economic
downturn in Brazil and Asia and unfavorable foreign currency translation,
partially offset by improved profitability in other Latin American markets. The
decline for the first nine months of 1998 was principally due to lower earnings
in Spain, Asia and Canada, partially offset by small profitability improvements
in several Latin American markets.
In the third quarter of 1998, operating company contribution (on a reported
basis) was increased by a $14 million net gain ($1 million after tax, net of
minority interest) related to the sale of the College Inn brand of canned
broths, the U.S. and Canadian tablespreads and U.S. egg substitute businesses,
and the Del Monte brand canned vegetable business in Venezuela for net proceeds
of approximately $550 million and the costs of exiting certain non-strategic
businesses. Net sales for the full year 1997 from the businesses sold and exited
were $583 million.
RESTRUCTURING CHARGE
In the second quarter of 1998, Nabisco recorded a restructuring charge of
$406 million ($216 million after-tax, net of minority interest) related to a
program announced on June 8, 1998. The restructuring program, which was
undertaken to streamline operations and improve profitability, commenced during
the second quarter of 1998 and will be substantially completed during 1999. The
restructuring charge for the Domestic Food Group amounted to $358 million and
consisted of $268 million for Nabisco Biscuit, $30 million for LifeSavers, $15
million for Specialty Products and the remaining $45 million for corporate
headquarters operations, the Sales & Integrated Logistics Group and other
business units. The restructuring expense for the International Food Group
amounted to $48 million and primarily consisted of $37 million for Latin
American operations, including $15 million for Brazil and $15 million for
Argentina and $7 million for Canada.
The $406 million restructuring charge will require cash expenditures of
approximately $164 million. In addition to the restructuring expense, the
program will require additional expenditures of approximately $118 million, of
which $21 million ($10 million after-tax, net of minority interest) was incurred
in the second and third quarters of 1998. These additional expenses are
principally for implementation and integration of the program and include costs
for relocation of employees and equipment and for training. Key components of
the restructuring program include the disposal of plant and distribution assets
in the United States and Latin America, including facilities in Argentina and
Brazil; the reconfiguring of sales organizations to improve their effectiveness
and drive revenue growth; the downsizing of departmental organizations and
operating company structures; and the discontinuance of certain non-strategic
product lines. After completion of the restructuring program, pre-tax savings in
the year 2000 and thereafter are expected to be approximately $100 million
annually. See note 1 to the Consolidated Condensed Financial Statements for
information regarding the major components of the restructuring program.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENT
On January 1, 1998, RJRN Holdings and RJRN adopted Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income and during 1998
adopted Statement of Position No.
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98-1, Accounting for Costs of Computer Software Developed or Obtained for
Internal Use. See note 1 to the Consolidated Condensed Financial Statements for
further discussion.
See note 1 to the Consolidated Condensed Financial Statements for a
discussion regarding recently issued accounting pronouncements.
LIQUIDITY AND FINANCIAL CONDITION
Net cash flows from operating activities were $698 million in the first nine
months of 1998 compared to $579 million for the first nine months of 1997. The
increase primarily reflects a reduction in inventory resulting from overall
improved inventory management, a reduction in interest payments due to debt
refinancings and repayments at Nabisco and lower income tax payments due to
lower earnings, partially offset by a decrease in net income and an increase in
tobacco settlement payments.
Net cash flows from investing activities for 1998 were $117 million,
compared to a use in 1997 of $405 million. The increase is due to higher
divestiture proceeds from the sale of certain food businesses during 1998 and
lower capital expenditures in 1998 (primarily at Reynolds International),
partially offset by lower proceeds in 1998 versus 1997 resulting from the sale
and closure of certain international tobacco facilities in 1997. Divestiture
proceeds in 1998 were used to reduce debt at Nabisco.
Net cash flows used in financing activities were $725 million for the first
nine months of 1998, compared to $156 million in 1997. The increase was
primarily due to an overall reduction in debt, principally at Nabisco, partially
offset by the proceeds from the issuance of RJRN Holdings' trust orginated
preferred securities.
Free cash flow, another measure used by management to evaluate liquidity and
financial condition, represents cash available for the repayment of debt and
certain other corporate purposes such as common stock dividends, stock
repurchases and acquisitions. It is essentially net cash flow from operating
activities and investing activities per the Consolidated Statements of Cash
Flows, adjusted for acquisitions and divestitures of businesses, less preferred
stock dividends. Free cash flow resulted in an inflow of $374 million and an
inflow of $44 million for the first nine months of 1998 and 1997, respectively.
The increase in free cash flow primarily reflects the reduction in inventory and
the reduction in income tax and interest payments discussed above and a decrease
in capital expenditures and preferred dividend payments, partially offset by a
decline in operating company contribution, and the increase in tobacco
settlement payments in 1998.
Total estimated payments in 1998 for all tobacco ligitation settlement
agreements currently in effect and their associated costs, including all
attorney general agreements and related amendments and fee payment agreements
and the agreement with Blue Cross and Blue Shield of Minnesota, will be
approximately $600 million, $286 million of which has been paid as of September
30, 1998. Payments will be funded primarily by cash flows from operating and
financing activities. These agreements will require similar payments in future
years, but these amounts will be subject to, among other things, the volume of
cigarettes sold by RJRT, RJRT's market share and inflation adjustments. For
further discussion of the potential impact of the proposed resolution of
national, regulatory and litigation issues and various litigation settlements,
including the effects of certain attorney general agreements, see note 4 to the
Consolidated Condensed Financial Statements.
Management of RJRN Holdings and its subsidiaries is continuing to review
various strategic transactions, including but not limited to, acquisitions,
divestitures, mergers and joint ventures. Management is also exploring ways to
increase efficiency and productivity and to reduce the cost structures of its
respective businesses, actions that, if implemented, could affect future
results. Such actions could include a restructuring charge in the fourth quarter
of 1998.
Capital expenditures were $423 million for the first nine months of 1998.
Management expects the current level of capital expenditures planned for 1998 to
be in the range of approximately $600 million to
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$625 million (approximately 56% Food and 44% Tobacco), which will be funded
primarily by cash flows from operating and financing activities. Management
expects its capital expenditures program will continue at a level sufficient to
support the strategic and operating needs of RJRN Holdings' operating
subsidiaries.
RJRN maintains a three-year revolving credit facility, of which no
borrowings were outstanding at September 30, 1998, and a 364-day credit facility
primarily to support commercial paper issuances, of which the entire facility
was substantially available at September 30, 1998. In June 1998, the maturity of
the revolving credit facility was extended to June 2001 and the 364-day credit
facility was renewed to May 31, 1999. The commitment under the 364-day facility
was reduced to $212 million. The commitments under the revolving credit facility
decline to approximately $2.1 billion in year 1, to $2.0 billion in year 2 and
to $1.7 billion in the final year. During 1998, RJRN Holdings and RJRN also
amended certain terms of these credit agreements to accomodate the settlement of
certain litigation.
In October 1998, Nabisco's $1.381 billion 364-day credit facility was
extended to September 1999 and amended to provide $1.108 billion of credit. Also
in October 1998, Nabisco filed a shelf registration with the Securities and
Exchange Commission for $1.0 billion of debt.
In August 1998, RJR Nabisco Holdings, RJR Nabisco Inc. and the RJR Nabisco
Holdings Capital Trusts filed a shelf registration with the Securities and
Exchange Commission for $1.25 billion.
In August 1998, a newly formed wholly owned subsidiary trust of RJRN
Holdings issued $374 million principal amount of preferred securities. The
preferred securities will pay preferential cash dividends of 9 1/2% per year per
share. The proceeds from the sale of the preferred securities and the original
capital contribution were invested by the trust in approximately $385 million
principal amount of 9 1/2% junior subordinated debentures of RJRN Holdings. The
junior subordinated debentures are redeemable by RJRN Holdings on or after
September 30, 2003. In October 1998, RJRN Holdings used a portion of the
proceeds from the issuance of the junior subordinated debentures to redeem its
outstanding Series B preferred stock (12,044 shares outstanding at a stated
value of $301 million at September 30, 1998).
See the Results of Operations within this section regarding the sale of
certain food businesses in the third quarter of 1998.
FOREIGN MARKET RISK
Current volatility of financial markets and political uncertainty in Russia
and the rest of the CIS region have and could continue to adversely impact
RJRN's results of operations. Reynolds International's sales, volume and profits
for the third quarter and first nine months of 1998 suffered from deteriorating
economies in Russia and the rest of the CIS region. In Russia, domestic and
imported volume declined 44% during the third quarter compared to 1997, while
sales declined 53% and operating company contribution declined to a loss of
approximately $8 million from income of approximately $14 million. The ruble's
devaluation and severe limits on trade credit froze important distributor
channels for imported and domestic products. In addition, the poor economy and
uncertain conditions fostered a decline in consumer purchasing power and weak
demand for mid- and premium-priced products. These conditions led Reynolds
International to briefly suspend domestic manufacturing and the import of
higher-priced western brands into Russia toward the end of the third quarter.
Although domestic manufacturing in Russia has resumed, business and economic
conditions during the early weeks of the fourth quarter continue to be unstable.
At this time, RJRN is unable to predict with any certainty the short or
long-term impact of these developments in Russia, but anticipates that these
factors could have an adverse effect on RJRN's results of operations in the
fourth quarter of 1998 and beyond.
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YEAR 2000 ISSUE
RJRN Holdings has developed plans to address the implications of the year
2000 on its computer systems and business operations. The year 2000 issue stems
from computer applications that were written using two digits rather than four
digits to define the applicable year. The issue is whether computer systems will
properly interpret date-sensitive information when the year changes to 2000.
RJRN Holdings is inventorying and assessing its financial, information and
operational systems, including equipment with embedded microprocessors, and is
developing detailed plans for required systems modifications or replacements.
Management estimates that this process is 90% or more complete
and expects this process to be fully complete by year-end 1998.
Software remediation is ongoing and, in the case of information technology
systems ("IT systems"), is approximately 75% complete for the food operations
("Food") and approximately 60% complete for the domestic and international
tobacco operations ("Tobacco"). Management expects this phase of year 2000
readiness to be complete at all operating units by the end of the first quarter
of 1999. In the case of non-information technology systems with embedded
technology ("non-IT systems"), software remediation is in its early stages for
both Food and Tobacco and estimated completion dates are the third quarter of
1999 for Food and the first quarter of 1999 for Tobacco.
Software testing following remediation is approximately 50% complete for IT
systems at both the Food and Tobacco operations. Management expects that testing
at Food will be complete by the second quarter of 1999 and for Tobacco by the
third quarter of 1999. With respect to non-IT systems, testing has recently
begun at both Food and Tobacco, and is expected to be complete by the third
quarter of 1999.
Approximately 50% of IT systems at Food are remediated and in production.
Management expects the remainder to be complete by the second quarter of 1999.
About 45% of IT systems at Tobacco are remediated and in production. Management
anticipates the balance to be complete by the third quarter of 1999. Both
operations anticipate non-IT systems to be fully year 2000 compliant by the
third quarter of 1999.
Incremental costs, which include contractor costs to modify or replace
existing systems, and costs of internal resources dedicated to achieving year
2000 compliance are charged to expense as incurred and are funded by operating
cash flows. Costs are expected to total approximately $90 million, of which $34
million has been spent to date.
RJRN Holdings is also in contact with suppliers, vendors, service providers
and customers to assess the potential impact on operations if key third parties
are not successful in converting their systems in a timely manner. Most
respondents to date have not completed their own compliance programs but have
given assurance that such programs are ongoing.
Progress against year 2000 compliance plans is monitored by management at
each of the operating companies as well as the internal audit department.
Results are reported to the Board of Directors on a regular basis.
RJRN Holdings' systems risk management program includes emergency backup and
recovery procedures to be followed in the event of failure of a
business-critical system. However, these procedures have been expanded to
include additional procedures for potential year 2000 issues. In addition,
contingency plans to protect the business from year 2000-related interruptions
are being developed, which will include development of backup procedures,
identification of alternate suppliers and possible increases in safety inventory
levels. These plans will be complete by the second quarter of 1999 for Food and
by the third quarter of 1999 for Tobacco. The possible consequences of RJRN
Holdings or key third parties not being fully year 2000 compliant include
temporary plant closings, delays in the delivery of products or receipt of
supplies, invoice and collection errors, and inventory obsolescence. However,
RJRN Holdings believes its year 2000 implementation plan, including contingency
measures, should be completed in all material
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respects by the end of 1999, thereby reducing the possible material adverse
effects of the year 2000 issue on its business, results of operations or
financial condition.
EURO CURRENCY CONVERSION
On January 1, 1999, eleven of the fifteen member countries of the European
Union are scheduled to adopt the euro as their common legal currency. The euro
will then trade on currency exchanges and be available for non-cash
transactions. From January 1, 1999 through January 1, 2002, each of the
participating countries are also scheduled to maintain their national ("legacy")
currencies as legal tender for goods and services. Beginning January 1, 2002,
new euro-denominated bills and coins will be issued, and legacy currencies will
be withdrawn from circulation no later than July 1, 2002. RJRN Holdings'
operating subsidiaries that will be affected by the euro conversion have
established plans to address any business issues raised, including the
competitive impact of cross-border price transparency. It is not anticipated
that there will be any near term business ramifications; however, the long-term
implications, including any changes or modifications that will need to be made
to business and financial strategies are still being reviewed. From an
accounting, treasury and computer system standpoint, the impact from the euro
currency conversion is not expected to have a material impact on the financial
position or results of operations of RJRN Holdings and its subsidiaries.
------------------------
The foregoing discussion in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contains forward-looking
statements particularly with respect to the level of restructuring-related
expenses and the amount of savings related to the food restructuring program,
capital expenditures, foreign market risk, the impact of proposed litigation
settlements, including certain attorney general agreements related to the
tobacco business, the impact of the euro currency conversion and the impact of
the year 2000 issue on computer systems and applications, which reflect
management's current views with respect to future events and financial
performance. These forward-looking statements are subject to certain risks and
uncertainties, including, but not limited to, the effect on financial
performance and future events of competitive pricing for products, success of
new product innovations and acquisitions, local economic conditions and the
effects of currency fluctuations in countries in which RJRN Holdings and its
subsidiaries do business, the effects of domestic and foreign government
regulation, ratings of RJRN Holdings' or its subsidiaries' securities and, in
the case of the tobacco business, litigation and related legislative and
regulatory developments. Due to such uncertainties and risks, readers are
cautioned not to place undue reliance on such forward-looking statements, which
speak only as of the date hereof.
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PART II
ITEM 1. LEGAL PROCEEDINGS
TOBACCO-RELATED LITIGATION
OVERVIEW. Various legal actions, proceedings and claims are pending or may
be instituted against R.J. Reynolds Tobacco Company ("RJRT") or its affiliates
(including RJRN and RJRN Holdings) or indemnitees, including actions claiming
that lung cancer and other diseases as well as addiction have resulted from the
use of or exposure to RJRT's tobacco products. During the third quarter of 1998,
81 new actions were served against RJRT and/or its affiliates or indemnitees (as
against 191 in the third quarter of 1997) and 42 such actions were dismissed or
otherwise resolved in favor of RJRT and/or its affiliates or indemnitees without
trial. There have been noteworthy increases in the number of these cases
pending. On September 30, 1998, there were 614 active cases pending, as compared
with 483 on September 30, 1997, and 245 on September 30, 1996. As of October 29,
1998, 673 active cases were pending against RJRT and/or its affiliates or
indemnitees, 667 in the United States, 2 each in Canada and in Puerto Rico, and
1 each in the Marshall Islands, Nigeria and Panama.
The United States cases are in 48 states and the District of Columbia, and
are distributed as follows: 142 in Florida; 110 in New York; 104 in West
Virginia; 47 in California; 24 in Louisiana; 22 in Massachusetts; 16 in each of
Pennsylvania and Tennessee; 14 in Texas; 13 in Alabama; 11 in each of the
District of Columbia and Illinois; 10 in each of New Jersey and Ohio; nine in
Mississippi; seven in each of Georgia, Iowa and Nevada; six in each of Indiana
and Minnesota; five in each of Arkansas and Maryland; four in each of Arizona,
Missouri, New Mexico and Oklahoma; three in each of Colorado, Hawaii, Kansas,
Kentucky, Michigan, Rhode Island, South Carolina, South Dakota, Utah, Washington
and Wisconsin; two in each of Nebraska, New Hampshire, North Dakota and Oregon;
and one in each of Alaska, Connecticut, Idaho, Maine, Montana, North Carolina,
Vermont and Virginia. Of the 667 active cases in the United States, 549 are in
state court, 113 are in federal court, and five are in tribal court. Most of
these cases were brought by individual plaintiffs, but a significant number,
discussed below, seek recovery on behalf of states, union pension funds, or
other large classes of claimants.
Litigation is subject to many uncertainties and it is possible that some of
the tobacco-related legal actions, proceedings or claims could be decided
against RJRT or its affiliates (including RJRN Holdings and RJRN) or
indemnitees. Determinations of liability or adverse rulings against other
cigarette manufacturers that are defendants in similar actions, even if such
rulings are not final, could adversely affect the litigation against RJRT or its
affiliates or indemnitees and could encourage an increase in the number of such
claims. There have been a number of political, legislative, regulatory, and
other developments relating to the tobacco industry and cigarette smoking that
have received wide media attention, the various litigation settlements and the
release and wide availability of various industry documents referred to above.
These developments may negatively affect the outcomes of tobacco-related legal
actions and encourage the commencement of additional similar litigation.
Although it is impossible to predict the outcome of such events on pending
litigation and the rate at which new lawsuits are filed against RJRT, RJRN and
RJRN Holdings, a significant increase in litigation and/or in adverse outcomes
for tobacco defendants could have an adverse effect on any one or all of these
entities. RJRT, RJRN and RJRN Holdings each believe that they have a number of
valid defenses to any such actions and intend to defend such actions vigorously.
RJRN Holdings and RJRN believe, that notwithstanding the quality of defenses
available to them and RJRT in litigation matters, it is possible that the
results of operations or cash flows of RJRN Holdings or RJRN in particular
quarterly or annual periods or the financial condition of RJRN Holdings and RJRN
could be materially affected by the ultimate outcome of certain pending
litigation matters (including litigation costs). Management is unable to predict
the outcome of the litigation or to derive a meaningful
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estimate of the amount or range of any possible loss in any particular quarterly
or annual period or in the aggregate.
For information about other litigation and legal proceedings, see note 4 to
the consolidated condensed financial statements and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Governmental
Activity."
ITEM 5. OTHER INFORMATION
The Board of Directors of RJR Nabisco Holdings, on November 11, 1998,
adopted an amendment to RJRN Holdings' by-laws that shortens the advance notice
requirement for stockholder proposals and director nominations. The amendment
would have the effect, for the coming proxy season, of moving the deadline for
such proposals and nominations from November 27, 1998 to March 12, 1999. With
respect to shareholder proposals submitted pursuant to Section 14a-8 of the
Securities and Exchange Commission rules, this amendment does not alter or
override the November 27, 1998 deadline stated in RJRN Holdings' last proxy
statement.
------------------------
26
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<C> <S>
3.1 By-Laws of RJR Nabisco Holdings Corp. as amended by its Board of Directors on November
11, 1998.
10.1 Seventh Amendment to the 3 Year Credit Agreement and Tenth Amendment to the 364 Day
Credit Agreement, by and among RJR Nabisco Holdings Corp., RJR Nabisco, Inc. and the
lending institutions named therein, dated as of August 14, 1998.
12.1 RJR Nabisco Holdings Corp. Computation of Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends for the nine months ended September 30, 1998.
12.2 RJR Nabisco Holdings Corp. Computation of Ratio of Earnings to Fixed Charges for the
nine months ended September 30, 1998.
12.3 RJR Nabisco, Inc. Computation of Ratio of Earnings to Fixed Charges for the nine
months ended September 30, 1998.
27.1 RJR Nabisco Holdings Corp. Financial Data Schedule for the nine months ended September
30, 1998.
27.2 RJR Nabisco, Inc. Financial Data Schedule for the nine months ended September 30,
1998.
99.1 Stipulation of Amendment to Settlement Agreement and for Entry of Consent Decree,
dated September 11, 1998 by and among the State of Florida and the tobacco companies
named therein.
99.2 Florida Fee Payment Agreement, dated September 11, 1998, by and among the State of
Florida, various Florida counsel and the tobacco companies named therein.
99.3 Form of MFN Escrow Agreement by and among, the State of Florida, the tobacco companies
named therein and a bank acting as escrow agent.
</TABLE>
(b) Reports on Form 8-K
None
27
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, each
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C>
RJR NABISCO HOLDINGS CORP.
RJR NABISCO, INC.
(Registrants)
Date: November 12, 1998 /s/ DAVID B. RICKARD
------------------------------------------------
David B. Rickard
Senior Vice President and Chief Financial
Officer
/s/ RICHARD G. RUSSELL
------------------------------------------------
Richard G. Russell
Senior Vice President and Controller
</TABLE>
28
<PAGE>
Exhibit 3.1
RJR NABISCO HOLDINGS CORP.
BY-LAWS
As Amended Effective November 11, 1998
ARTICLE I
MEETINGS OF STOCKHOLDERS
Section 1. Place of Meetings. Meetings of stockholders of the
Corporation shall be held at such place either within or without the State of
Delaware as the Board of Directors may determine.
Section 2. Annual and Special Meetings. Annual meetings of
stockholders shall be held, at a date, time and place fixed by the Board of
Directors and stated in the notice of meeting, to elect a Board of Directors and
to transact such other business as may properly come before the meeting. Special
meetings of stockholders may be called by the Chairman for any purpose and shall
be called by the Chairman or the Secretary if directed by the Board of Directors
or requested in writing by holders of not less than 25% of the common stock of
the Corporation. Each such stockholder request shall state the purpose of the
proposed meeting.
Section 3. Notice. Except as otherwise provided by law or by the
Certificate of Incorporation, written notice shall be given to each stockholder
entitled to vote at least 10 and not more than 60 days before each meeting of
stockholders, such notice to include the time, date and place of the meeting
and, in the case of a special meeting, the purpose or purposes for which the
meeting is called.
Section 4. Quorum. At any meeting of stockholders, the holders
of record, present in person or by proxy, of a majority of the Corporation's
stock issued and outstanding and entitled to vote shall constitute a quorum for
the transaction of business, except as otherwise provided by law or by the
Certificate of Incorporation. In the absence of a quorum, any officer entitled
to preside at or to act as secretary of the meeting shall have power to adjourn
the meeting from time to time until a quorum is present.
<PAGE>
Section 5. Conduct of Meeting and Order of Business. The
Chairman or, at the Chairman's request, the Chief Executive Officer, shall act
as chairman at all meetings of stockholders. The Secretary of the Corporation
or, in his or her absence, an Assistant Secretary shall act as secretary at all
meetings of stockholders. The chairman of the meeting shall have the right and
authority to determine and maintain the rules, regulations and procedures for
the proper conduct of the meeting, including but not limited to restricting
entry to the meeting after it has commenced, maintaining order and the safety of
those in attendance, opening and closing the polls for voting, dismissing
business not properly submitted, and limiting time allowed for discussion of the
business of the meeting.
Business to be conducted at annual meetings of stockholders
shall be limited to that properly submitted to the meeting either by or at the
direction of the Board of Directors or by any stockholder of the Corporation who
shall be entitled to vote at such meeting and who complies with the notice
requirements set forth in Section 6 of this Article I. If the chairman of the
meeting shall determine that any business was not properly submitted in
accordance with the terms of Section 6 of this Article I, he or she shall
declare to the meeting that such business was not properly submitted and would
not be transacted at that meeting.
Section 6. Advance Notice of Stockholder Proposals. In order to
properly submit any business to an annual meeting of stockholders, a stockholder
must give timely notice in writing to the Secretary of the Corporation. To be
considered timely, a stockholder's notice must be delivered either in person or
by United States certified mail, postage prepaid, and received at the principal
executive offices of the Corporation (a) not less than 60 days nor more than 90
days before the first anniversary of the Corporation's last annual meeting of
stockholders or (b) if no annual meeting was held in the previous year or the
date of the applicable annual meeting has been changed by more than 30 days from
such anniversary date, not less than a reasonable time, as determined by the
Board of Directors, prior to the date of the applicable annual meeting. In no
event shall the public announcement of a postponement or adjournment of an
annual meeting commence a new time period for the giving of a stockholder's
notice as described above.
Nomination of persons for election to the Board of Directors may
be made by the Board of Directors or any committee designated by the Board of
Directors or by any stockholder entitled to vote for the election of directors
at the applicable meeting of stockholders. However, nominations other than those
made by the Board of Directors or its designated committee must comply with the
procedures set forth in this Section 6, and no person shall be eligible for
election as a director unless nominated in accordance with the terms of this
Section 6.
2
<PAGE>
A stockholder may nominate a person or persons for election to
the Board of Directors by giving written notice to the Secretary of the
Corporation in accordance with the procedures set forth above. In addition to
the timeliness requirements set forth above for notice to the Corporation by a
stockholder of business to be submitted at an annual meeting of stockholders,
with respect to any special meeting of stockholders called for the election of
directors, written notice must be delivered in the manner specified above and
not later than the close of business on the seventh day following the date on
which notice of such meeting is first given to stockholders.
The Secretary of the Corporation shall deliver any stockholder
proposals and nominations received in a timely manner for review by the Board of
Directors or a committee designated by the Board of Directors.
A stockholder's notice to submit business to an annual meeting
of stockholders shall set forth (i) the name and address of the stockholder,
(ii) the class and number of shares of stock beneficially owned by such
stockholder, (iii) the name in which such shares are registered on the stock
transfer books of the Corporation, (iv) a representation that the stockholder
intends to appear at the meeting in person or by proxy to submit the business
specified in such notice, (v) any material interest of the stockholder in the
business to be submitted and (vi) a brief description of the business desired to
be submitted to the annual meeting, including the complete text of any
resolutions to be presented at the annual meeting, and the reasons for
conducting such business at the annual meeting. In addition, the stockholder
making such proposal shall promptly provide any other information reasonably
requested by the Corporation.
In addition to the information required above to be given by a
stockholder who intends to submit business to a meeting of stockholders, if the
business to be submitted is the nomination of a person or persons for election
to the Board of Directors then such stockholder's notice must also set forth, as
to each person whom the stockholder proposes to nominate for election as a
director, (a) the name, age, business address and, if known, residence address
of such person, (b) the principal occupation or employment of such person, (c)
the class and number of shares of stock of the Corporation which are
beneficially owned by such person, (d) any other information relating to such
person that is required to be disclosed in solicitations of proxies for election
of directors or is otherwise required by the rules and regulations of the
Securities and Exchange Commission promulgated under the Securities Exchange Act
of 1934, as amended, (e) the written consent of such person to be named in the
proxy statement as a nominee
3
<PAGE>
and to serve as a director if elected and (f) a description of all arrangements
or understandings between such stockholder and each nominee and any other person
or persons (naming such person or persons) pursuant to which the nomination or
nominations are to be made by such stockholder.
Any person nominated for election as director by the Board of
Directors or any committee designated by the Board of Directors shall, upon the
request of the Board of Directors or such committee, furnish to the Secretary of
the Corporation all such information pertaining to such person that is required
to be set forth in a stockholder's notice of nomination.
Notwithstanding the foregoing provisions of this Section 6, a
stockholder who seeks to have any proposal included in the Corporation's proxy
statement shall comply with the requirements of Regulation 14A under the
Securities Exchange Act of 1934, as amended.
Section 7. Voting. Except as otherwise provided by law or by the
Certificate of Incorporation, all matters submitted to a meeting of stockholders
shall be decided by vote of the holders of record, present in person or by
proxy, of a majority of the Corporation's stock issued and outstanding and
entitled to vote.
A proxy shall be executed in writing by the stockholder or by
his or her duly authorized attorney-in-fact and shall be delivered to the
secretary of the meeting at or prior to the time designated by the chairman of
the meeting. No stockholder may designate more than four persons to act on his
or her behalf at a meeting of stockholders.
Section 8. Inspectors of Election. Prior to any meeting of
stockholders, the Board of Directors shall appoint one or more inspectors to act
at the meeting and make a written report thereof in accordance with the Delaware
General Corporation Law. The Board of Directors may designate one or more
persons as alternate inspectors to replace any inspector who fails to act. Each
inspector, before entering upon the discharge of his or her duties, shall take
and sign an oath to execute faithfully the duties of inspector with strict
impartiality and according to the best of his or her ability.
4
<PAGE>
ARTICLE II
DIRECTORS
Section 1. Number, Election and Removal of Directors. The number
of Directors that shall constitute the Board of Directors shall be not less than
one nor more than seventeen. The first Board of Directors shall consist of three
Directors. Thereafter, within the limits specified above, the number of
Directors shall be determined by the Board of Directors or by the stockholders.
The Directors shall be elected by the stockholders at their annual meeting and
shall serve until the next annual meeting of stockholders and until their
successors are elected and shall qualify. Vacancies and newly created
directorships resulting from any increase in the number of Directors may be
filled by a majority of the Directors then in office, although less than a
quorum, or by the sole remaining Director or by the stockholders, and any
Director so chosen shall serve until the next annual meeting of stockholders and
until his or her successor shall be elected and shall qualify. A Director may be
removed with or without cause by the stockholders.
Section 2. Meetings. Regular meetings of the Board of Directors
shall be held at such times and places as may from time to time be fixed by the
Board of Directors or as may be specified in a notice of meeting. Special
meetings of the Board of Directors may be held at any time upon the call of the
Chairman or the Chief Executive Officer and shall be called by the Chairman, the
Chief Executive Officer or the Secretary if directed by the Board of Directors.
A meeting of the Board of Directors may be held without notice immediately after
the annual meeting of stockholders. Notice need not be given of regular or
special meetings of the Board of Directors.
Section 3. Quorum. One-third of the total number of Directors
shall constitute a quorum for the transaction of business. If a quorum is not
present at any meeting of the Board of Directors, the Directors present may
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until such a quorum is present. Except as otherwise provided by
law, the Certificate of Incorporation of the Corporation, these By-Laws or any
contract or agreement to which the Corporation is a party, the act of a majority
of the Directors present at any meeting at which there is a quorum shall be the
act of the Board of Directors.
Section 4. Executive Committee. The Board of Directors, by
resolution adopted by a majority of the entire Board, may appoint from among its
5
<PAGE>
members an Executive Committee consisting of the Chief Executive Officer, if
such officer is a member of the Board of Directors, or the Chairman, if the
Chief Executive Officer is not a member of the Board of Directors, and at least
two other Directors. Meetings of the Executive Committee shall be held without
notice at such dates, times and places as shall be determined by the Executive
Committee. The Executive Committee shall have and may exercise all the powers
and authority of the Board of Directors in the management of the business and
affairs of the Corporation that are permitted by law to be exercised by a
committee of the Board of Directors, including the power to declare dividends,
to authorize the issuance of stock and to adopt a certificate of ownership and
merger of parent corporation and subsidiary or subsidiaries; provided, however,
that the Executive Committee shall not have the power or authority of the Board
of Directors in reference to amending the Certificate of Incorporation, adopting
an agreement of merger or consolidation with respect to the Corporation,
recommending to the stockholders the sale, lease or exchange of all or
substantially all the Corporation's property and assets, recommending to the
stockholders a dissolution of the Corporation or a revocation of a dissolution,
amending the By-Laws of the Corporation or adopting a certificate of ownership
and merger of the Corporation (other than a certificate of ownership and merger
of parent corporation and subsidiary or subsidiaries). The majority of the
members of the Executive Committee shall constitute a quorum. Minutes shall be
kept of the proceedings of the Executive Committee, which shall be reported at
meetings of the Board of Directors. The Executive Committee may, to the extent
authorized in the resolution or resolutions providing for the issuance of shares
of stock adopted by the Board of Directors of the Corporation, fix any of the
preferences or rights of such shares relating to dividends, redemption,
dissolution, any distribution of assets of the Corporation or the conversion
into, or the exchange of such shares for, shares of any other class or classes
or any other series of the same or any other class or classes of stock of the
Corporation or fix the number of shares of any series of stock or authorize the
increase or decrease of the shares of any series.
Section 5. Other Committees of Directors. The Board of Directors
may, by resolution adopted by a majority of the Board of Directors, designate
one or more other committees to have and exercise such power and authority as
the Board of Directors shall specify. In the absence or disqualification of a
member of a committee, the member or members thereof present at any meeting and
not disqualified from voting, whether or not he or she or they constitute a
quorum, may unanimously appoint another Director to act at the meeting in place
of any such absent or disqualified member.
6
<PAGE>
ARTICLE III
OFFICERS
Section 1. Description and Terms. The officers of the
Corporation shall be the Chairman, the Chief Executive Officer, a President, a
Secretary, a Treasurer and such other additional officers with such titles as
the Board of Directors shall determine, all of whom shall be chosen by and serve
at the pleasure of the Board of Directors; provided that the Chief Executive
Officer may appoint Senior Vice Presidents, Vice Presidents or Assistant
Officers at his or her discretion. Subject to such limitations as may be imposed
by the Board of Directors, the Chief Executive Officer shall have full executive
power and authority with respect to the Corporation. The President, if separate
from the Chief Executive Officer, shall have such powers and authority as the
Chief Executive Officer may determine. If the Chief Executive Officer is absent
or incapacitated, the Executive Committee shall determine the person who shall
have all the power and authority of the Chief Executive Officer. Other officers
shall have the usual powers and shall perform all the usual duties incident to
their respective offices. All officers shall be subject to the supervision and
direction of the Board of Directors. The authority, duties or responsibilities
of any officer of the Corporation may be suspended by the Chief Executive
Officer with or without cause. Any officer elected or appointed by the Board of
Directors may be removed by the Board of Directors with or without cause.
Subject to such limitations as the Board of Directors may provide, each officer
may further delegate to any other officer or any employee or agent of the
Corporation such portions of his or her authority as the officer shall deem
appropriate, subject to such limitation as the officer shall specify, and may
revoke such authority at any time.
Section 2. Stockholder Consents and Proxies. The Chairman, the
Chief Executive Officer, each Vice Chairman, the President, the Secretary and
the Treasurer, or any one of them, shall have the power and authority on behalf
of the Corporation to execute any stockholders' consents or proxies and to
attend and act and vote in person or by proxy at any meetings of stockholders of
any corporation in which the Corporation may own stock, and at any such meetings
shall possess and may exercise any and all of the rights and powers incident to
the ownership of such stock which as the owner thereof the Corporation might
have possessed and executed if present. The Board of Directors by resolution
from time to time may confer like powers upon any other officer.
7
<PAGE>
ARTICLE IV
INDEMNIFICATION
To the fullest extent permitted by the Delaware General
Corporation Law, the Corporation shall indemnify any current or former Director
or officer of the Corporation and may, at the discretion of the Board of
Directors, indemnify any current or former employee or agent of the Corporation
against all expenses (including attorneys' fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred by him or her in connection
with any threatened, pending or completed action, suit or proceeding brought by
or in the right of the Corporation or otherwise, to which he or she was or is a
party or is threatened to be made a party by reason of his or her current or
former position with the Corporation or by reason of the fact that he or she is
or was serving, at the request of the Corporation, as a director, officer,
partner, trustee, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise. The right to indemnification conferred in
this Article shall be a contract right and shall include the right to be paid by
the Corporation the expenses incurred in defending any such action, suit or
proceeding in advance of its final disposition unless such action, suit or
proceeding was initiated by the person seeking advances of expenses or was
brought by or in the right of the Corporation with the approval of the Board of
Directors or the Chief Executive Officer; provided however, that if the Delaware
General Corporation Law then so requires, the payment of such expenses incurred
by a Director or officer of the Corporation in advance of the final disposition
of such action, suit or proceeding, shall be made only upon delivery to the
Corporation of an undertaking, by or on behalf of such Director or officer, to
repay all amounts so advanced if it should be determined ultimately that such
Director or officer is not entitled to be indemnified under this Article or
otherwise.
8
<PAGE>
ARTICLE V
GENERAL PROVISIONS
Section 1. Notices. Whenever any statute, the Certificate of
Incorporation or these By-Laws require notice to be given to any Director or
stockholder, such notice is to be given in writing by mail, addressed to such
Director or stockholder at his or her address as it appears on the records of
the Corporation, with postage thereon prepaid. Such notice shall be deemed to
have been given when it is deposited in the United States mail. Notice to
Directors may also be given by telegram or facsimile transmission or be
delivered personally or by telephone.
Section 2. Fiscal Year. The fiscal year of the Corporation
shall be fixed by the Board of Directors.
Section 3. Certificates of Stock. Certificates representing
shares of the Corporation shall be signed by the Chairman or the Chief Executive
Officer and by the Secretary or an Assistant Secretary. Any and all signatures
on such certificates, including signatures of officers, transfer agents and
registrars, may be facsimile.
9
<PAGE>
Exhibit 10.1
SEVENTH AMENDMENT TO THE 3 YEAR CREDIT AGREEMENT
TENTH AMENDMENT TO THE 364 DAY CREDIT AGREEMENT
SEVENTH AMENDMENT, dated as of August 14, 1998, among RJR
NABISCO HOLDINGS CORP., a Delaware corporation ("Holdings"), RJR NABISCO, INC.,
a Delaware corporation (the "Borrower"), and the lending institutions party to
the 3 Year Credit Agreement referred to below and TENTH AMENDMENT, dated as of
August 14, 1998, among Holdings, the Borrower and the lending institutions party
to the 364 Day Credit Agreement referred to below (collectively, the
"Amendment"). All capitalized terms used herein and not otherwise defined herein
shall have the respective meanings provided such terms in the respective Credit
Agreements (as defined below).
W I T N E S S E T H :
WHEREAS, Holdings, the Borrower and various lending
institutions (the "3 Year Banks") are parties to a Credit Agreement, dated as of
April 28, 1995, with respect to initial Commitments aggregating $2,750,000,000
on such date (as in effect on the date hereof, the "3 Year Credit Agreement");
WHEREAS, Holdings, the Borrower and various lending
institutions (the "364 Day Banks" and, together with the 3 Year Banks, the
"Banks") are parties to a Credit Agreement, dated as of April 28, 1995, with
respect to initial Commitments aggregating $750,000,000 on such date (as in
effect on the date hereof, the "364 Day Credit Agreement" and, together with the
3 Year Credit Agreement, the "Credit Agreements");
WHEREAS, Holdings, the Borrower and the 3 Year Banks wish to
enter into the agreements with respect to the 3 Year Credit Agreement as herein
provided; and
WHEREAS, Holdings, the Borrower and the 364 Day Banks wish to
enter into the agreements with respect to the 364 Day Credit Agreement as herein
provided;
NOW, THEREFORE, it is agreed:
I. Amendments to the 3 Year Credit Agreement.
1. Section 8.05(vi) of the 3 Year Credit Agreement is hereby
amended by inserting the text ", the Permitted Series B Redemption and the
Permitted TOPrS Redemption" immediately after the text "Exchange Offer"
appearing in said Section.
2. The definition of "Consolidated Net Worth" appearing in
Section 10 of the 3 Year Credit Agreement is hereby amended by deleting the text
"the minority interests attributable to" appearing in said definition and
inserting the text "the balance sheet valuation of the" in lieu thereof.
<PAGE>
3. The definition of "Cumulative Adjusted Cash Net Income"
appearing in Section 10 of the 3 Year Credit Agreement is hereby amended by
inserting the following text at the end of said definition:
"plus (v) the amount of all charges (determined on an
after-tax basis) taken by Holdings and its Subsidiaries to
account for expenses accrued by Holdings and its Subsidiaries
pursuant to the settlement agreements referred to in clauses
(v), (vi), (viii) and (ix) of the definition of "Adjusted
Operating Income", to the extent (and only to the extent) that
(I) the aggregate amount of such charges taken by Holdings and
its Subsidiaries (as determined on an after-tax basis) does
not exceed $514,000,000 and (ii) such charges are deducted in
any determination of Cumulative Adjusted Cash Net Income".
4. The definition of "Grantor Trust" appearing in Section 10
of the 3 Year Credit Agreement is hereby amended by (i) inserting the text "I"
immediately following the phrase "Grantor Trust" in the first and third place
such phrase appears in said definition and (ii) inserting the text "Exchange
Offer" immediately after the word "Permitted" in the first place such word
appears in said definition.
5. The definition of "Grantor Trust Interest" appearing in
Section 10 of the 3 Year Credit Agreement is hereby amended by deleting the word
"the" appearing immediately prior to the word "Grantor" in said definition and
inserting the word "any" in lieu thereof.
6. The definition of "Permitted Grantor Trust Subordinated
Debt" appearing in Section 10 of the 3 Year Credit Agreement is hereby amended
by (i) inserting the text "Exchange Offer" immediately after the text
`"Permitted' appearing in said definition and (ii) deleting the text "after the
Permitted Series B Exchange Offer issued to the Grantor Trust" and inserting the
text "immediately after giving effect to the Permitted Series B Exchange Offer
and issued to Grantor Trust I".
7. The definition of "Subsidiary" appearing in Section 10 of
the 3 Year Credit Agreement is hereby amended by deleting the word "the"
appearing immediately prior to the word "Grantor" in said definition and
inserting the word "each" in lieu thereof.
8. Section 10 of the 3 Year Credit Agreement is hereby further
amended by inserting the following new definitions in said Section in
appropriate alphabetical order:
"Grantor Trust II" shall mean one or more Persons, each of
which may be a grantor trust or any other trust entity (but shall not be
Holdings or any Subsidiary of Holdings that is a member of the Nabisco Group) to
whom the Permitted Series B Redemption Grantor Trust Subordinated Debt is issued
in connection with the Permitted Series B Redemption, it being understood and
agreed that the organizational documents of Grantor Trust II shall be
satisfactory to the Senior Managing Agents.
"Grantor Trust III" shall mean one or more Persons, each of
which may be a grantor trust or any other trust entity (but shall not be
Holdings or any Subsidiary of Holdings that is a member of the Nabisco Group) to
whom Permitted Refinancing Grantor Trust Subordinated Debt is issued in
connection with the Permitted TOPrS Redemption and/or a
<PAGE>
Permitted Debt Refinancing, it being understood and agreed that the
organizational documents of Grantor Trust III shall be satisfactory to the
Senior Managing Agents.
"Grantor Trusts" shall mean and include Grantor Trust I,
Grantor Trust II and Grantor Trust III.
"Permitted Debt Refinancing" shall mean any refinancing by
Holdings and/or any of its Subsidiaries of outstanding Indebtedness of Holdings
or such Subsidiary with the proceeds of Holdings' incurrence of Permitted
Refinancing Grantor Trust Subordinated Debt, which refinancing shall be effected
within 180 days following the respective incurrence of Permitted Refinancing
Grantor Trust Subordinated Debt and the related issuance of the Grantor Trust
Interests by Grantor Trust III.
"Permitted Grantor Trust Subordinated Debt" shall mean and
include Permitted Exchange Offer Grantor Trust Subordinated Debt, Permitted
Series B Redemption Grantor Trust Subordinated Debt and Permitted Refinancing
Grantor Trust Subordinated Debt.
"Permitted Refinancing Grantor Trust Subordinated Debt" shall
mean, at any time, subordinated debt of Holdings in an aggregate principal
amount not to exceed (x) $950,000,000 less (y) the aggregate liquidation value
of Holdings' 10% Trust Originated Preferred Securities, liquidation amount $25
per share, outstanding immediately after giving effect to the Permitted TOPrS
Redemption less (z) the aggregate principal amount of all Indebtedness repaid
pursuant to all Permitted Debt Refinancings at such time, and issued to Grantor
Trust III in connection with the Permitted TOPrS Redemption and/or a Permitted
Debt Refinancing, all of the terms and conditions of which shall be acceptable
to the Senior Managing Agents and which (i) shall provide, in any event, that
such subordinated debt shall have a maturity of at least thirty years and (ii)
may not be amended or modified without the consent of the Senior Managing
Agents.
"Permitted Series B Redemption" shall mean the redemption by
Holdings of some or all of Holdings' Series B 9.25% Cumulative Preferred Stock,
par value $.01 per share, with the proceeds of Holdings' incurrence of Permitted
Series B Redemption Grantor Trust Subordinated Debt, which redemption shall be
effected within 180 days following the incurrence of the Permitted Series B
Redemption Grantor Trust Subordinated Debt and the issuance of the Grantor Trust
Interests by Grantor Trust II.
"Permitted Series B Redemption Grantor Trust Subordinated
Debt" shall mean, at any time, subordinated debt of Holdings in an aggregate
principal amount not to exceed (x) $300,000,000 less (y) the aggregate
liquidation value of Holdings' Series B 9.25% Cumulative Preferred Stock, par
value $.01 per share, outstanding immediately after giving effect to the
Permitted Series B Redemption and issued to Grantor Trust II in connection with
the Permitted Series B Redemption, all of the terms and conditions of which
shall be acceptable to the Senior Managing Agents and which (i) shall provide,
in any event, that such subordinated debt shall have a maturity of at least
thirty years and (ii) may not be amended or modified without the consent of the
Senior Managing Agents.
2
<PAGE>
"Permitted TOPrS Redemption" shall mean the redemption by
Holdings of some or all of Holdings' 10% Trust Originated Preferred Securities,
liquidation amount $25 per share, with the proceeds of Holdings' incurrence of
Permitted Refinancing Grantor Trust Subordinated Debt, which redemption shall be
effected within 180 days following the respective incurrence of Permitted
Refinancing Grantor Trust Subordinated Debt and the related issuance of the
Grantor Trust Interests by Grantor Trust III.
II. Amendments to the 364 Day Credit Agreement.
1. Section 8.05(vi) of the 364 Day Credit Agreement is hereby
amended by inserting the text ", the Permitted Series B Redemption and the
Permitted TOPrS Redemption" immediately after the text "Exchange Offer"
appearing in said Section.
2. The definition of "Consolidated Net Worth" appearing in
Section 10 of the 364 Day Credit Agreement is hereby amended by deleting the
text "the minority interests attributable to" appearing in said definition and
inserting the text "the balance sheet valuation of the" in lieu thereof.
3. The definition of "Cumulative Adjusted Cash Net Income"
appearing in Section 10 of the 364 Day Credit Agreement is hereby amended by
inserting the following text at the end of said definition:
"plus (v) the amount of all charges (determined on an
after-tax basis) taken by Holdings and its Subsidiaries to
account for expenses accrued by Holdings and its Subsidiaries
pursuant to the settlement agreements referred to in clauses
(v), (vi), (viii) and (ix) of the definition of "Adjusted
Operating Income", to the extent (and only to the extent) that
(I) the aggregate amount of such charges taken by Holdings and
its Subsidiaries (as determined on an after-tax basis) does
not exceed $514,000,000 and (ii) such charges are deducted in
any determination of Cumulative Adjusted Cash Net Income".
4. The definition of "Grantor Trust" appearing in Section 10
of the 364 Day Credit Agreement is hereby amended by (i) inserting the text "I"
immediately following the phrase "Grantor Trust" in the first and third place
such phrase appears in said definition and (ii) inserting the text "Exchange
Offer" immediately after the word "Permitted" in the first place such word
appears in said definition.
5. The definition of "Grantor Trust Interest" appearing in
Section 10 of the 364 Day Credit Agreement is hereby amended by deleting the
word "the" appearing immediately prior to the word "Grantor" in said definition
and inserting the word "any" in lieu thereof.
6. The definition of "Permitted Grantor Trust Subordinated
Debt" appearing in Section 10 of the 364 Day Credit Agreement is hereby amended
by (i) inserting the text "Exchange Offer" immediately after the text
`"Permitted' appearing in said definition and (ii) deleting the text "after the
Permitted Series B Exchange Offer issued to the Grantor Trust" and
3
<PAGE>
inserting the text "immediately after giving effect to the Permitted Series B
Exchange Offer and issued to Grantor Trust I".
7. The definition of "Subsidiary" appearing in Section 10 of
the 364 Day Credit Agreement is hereby amended by deleting the word "the"
appearing immediately prior to the word "Grantor" in said definition and
inserting the word "each" in lieu thereof.
8. Section 10 of the 364 Day Credit Agreement is hereby
further amended by inserting the following new definitions in said Section in
appropriate alphabetical order:
"Grantor Trust II" shall mean one or more Persons, each of
which may be a grantor trust or any other trust entity (but shall not be
Holdings or any Subsidiary of Holdings that is a member of the Nabisco Group) to
whom the Permitted Series B Redemption Grantor Trust Subordinated Debt is issued
in connection with the Permitted Series B Redemption, it being understood and
agreed that the organizational documents of Grantor Trust II shall be
satisfactory to the Senior Managing Agents.
"Grantor Trust III" shall mean one or more Persons, each of
which may be a grantor trust or any other trust entity (but shall not be
Holdings or any Subsidiary of Holdings that is a member of the Nabisco Group) to
whom Permitted Refinancing Grantor Trust Subordinated Debt is issued in
connection with the Permitted TOPrS Redemption and/or a Permitted Debt
Refinancing, it being understood and agreed that the organizational documents of
Grantor Trust III shall be satisfactory to the Senior Managing Agents.
"Grantor Trusts" shall mean and include Grantor Trust I,
Grantor Trust II and Grantor Trust III.
"Permitted Debt Refinancing" shall mean any refinancing by
Holdings and/or any of its Subsidiaries of outstanding Indebtedness of Holdings
or such Subsidiary with the proceeds of Holdings' incurrence of Permitted
Refinancing Grantor Trust Subordinated Debt, which refinancing shall be effected
within 180 days following the respective incurrence of Permitted Refinancing
Grantor Trust Subordinated Debt and the related issuance of the Grantor Trust
Interests by Grantor Trust III.
"Permitted Grantor Trust Subordinated Debt" shall mean and
include Permitted Exchange Offer Grantor Trust Subordinated Debt, Permitted
Series B Redemption Grantor Trust Subordinated Debt and Permitted Refinancing
Grantor Trust Subordinated Debt .
"Permitted Refinancing Grantor Trust Subordinated Debt" shall
mean, at any time, subordinated debt of Holdings in an aggregate principal
amount not to exceed (x) $950,000,000 less (y) the aggregate liquidation value
of Holdings' 10% Trust Originated Preferred Securities, liquidation amount $25
per share, outstanding immediately after giving effect to the Permitted TOPrS
Redemption less (z) the aggregate principal amount of all Indebtedness repaid
pursuant to all Permitted Debt Refinancings at such time, and issued to Grantor
Trust III in connection with the Permitted TOPrS Redemption and/or a Permitted
Debt Refinancing, all of the terms and conditions of which shall be acceptable
to the Senior Managing Agents and which (i) shall provide, in any event, that
such subordinated debt shall have a
4
<PAGE>
maturity of at least thirty years and (ii) may not be amended or modified
without the consent of the Senior Managing Agents.
"Permitted Series B Redemption" shall mean the redemption by
Holdings of some or all of Holdings' Series B 9.25% Cumulative Preferred Stock,
par value $.01 per share, with the proceeds of Holdings' incurrence of Permitted
Series B Redemption Grantor Trust Subordinated Debt, which redemption shall be
effected within 180 days following the incurrence of the Permitted Series B
Redemption Grantor Trust Subordinated Debt and the issuance of the Grantor Trust
Interests by Grantor Trust II.
"Permitted Series B Redemption Grantor Trust Subordinated
Debt" shall mean, at any time, subordinated debt of Holdings in an aggregate
principal amount not to exceed (x) $300,000,000 less (y) the aggregate
liquidation value of Holdings' Series B 9.25% Cumulative Preferred Stock, par
value $.01 per share, outstanding immediately after giving effect to the
Permitted Series B Redemption and issued to Grantor Trust II in connection with
the Permitted Series B Redemption, all of the terms and conditions of which
shall be acceptable to the Senior Managing Agents and which (i) shall provide,
in any event, that such subordinated debt shall have a maturity of at least
thirty years and (ii) may not be amended or modified without the consent of the
Senior Managing Agents.
"Permitted TOPrS Redemption" shall mean the redemption by
Holdings of some or all of Holdings' 10% Trust Originated Preferred Securities,
liquidation amount $25 per share, with the proceeds of Holdings' incurrence of
Permitted Refinancing Grantor Trust Subordinated Debt, which redemption shall be
effected within 180 days following the respective incurrence of Permitted
Refinancing Grantor Trust Subordinated Debt and the related issuance of the
Grantor Trust Interests by Grantor Trust III.
III. Miscellaneous Provisions.
1. In order to induce the Banks to enter into this Amendment,
each Credit Party hereby (i) makes each of the representations, warranties and
agreements contained in Section 6 of each Credit Agreement and (ii) represents
and warrants that there exists no Default or Event of Default, in each case on
the date hereof and on the Amendment Effective Date, both before and after
giving effect to this Amendment.
2. This Amendment is limited as specified and shall not
constitute a modification, acceptance or waiver of any other provision of either
Credit Agreement or any other Credit Document (as defined in each Credit
Agreement).
3. This Amendment may be executed in any number of
counterparts and by the different parties hereto on separate counterparts, each
of which counterparts when executed and delivered shall be an original, but all
of which shall together constitute one and the same instrument. A complete set
of counterparts shall be lodged with Holdings and the Payments Administrator.
4. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE
PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW
OF THE STATE OF NEW YORK.
5
<PAGE>
5. This Amendment shall become effective as of the date first
written above on the date (the "Amendment Effective Date") when (i) each of the
Credit Parties, (ii) 3 Year Banks constituting Required Banks under the 3 Year
Credit Agreement and (iii) 364 Day Banks constituting Required Banks under the
364 Day Credit Agreement, shall have signed a copy hereof (whether the same or
different copies) and shall have delivered (including by way of facsimile
transmission) the same to White & Case, 1155 Avenue of the Americas, New York,
New York 10036, Attention: Jacqueline Lawrence, Esq. (Facsimile No.: (212)
354-8113). After transmitting its executed signature page to White & Case as
provided above, each of the Banks shall deliver executed hard copies of this
Amendment to White & Case, Attention: Jacqueline Lawrence at the address
provided above.
* * *
6
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused a
counterpart of this Amendment to be duly executed and delivered as of the date
first above written.
RJR NABISCO HOLDINGS CORP.
By
---------------------------------
Title:
RJR NABISCO, INC.
By
---------------------------------
Title:
<PAGE>
ABN AMRO BANK N.V.
By
---------------------------------
Title:
By
---------------------------------
Title:
<PAGE>
ARAB BANK PLC - GRAND CAYMAN BRANCH
By
---------------------------------
Title:
<PAGE>
ASAHI BANK, LTD.
The New York Branch
By:
---------------------------------
Name:
------------------------------
Title:
-----------------------------
<PAGE>
BANCA COMMERCIALE ITALIANA
NEW YORK BRANCH
By
---------------------------------
Title:
By
---------------------------------
Title:
<PAGE>
BANCA DI ROMA - NEW YORK BRANCH
By
---------------------------------
Title:
By
---------------------------------
Title:
<PAGE>
BANCO CENTRAL HISPANOAMERICANO,
S.A. -NEW YORK BRANCH
By
---------------------------------
Title:
<PAGE>
BANK OF TOKYO-MITSUBISHI TRUST COMPANY
By:
---------------------------------
Name:
------------------------------
Title:
-----------------------------
<PAGE>
THE BANK OF TOKYO-MITSUBISHI, LTD.,
NEW YORK BRANCH
By:
---------------------------------
Name:
------------------------------
Title:
-----------------------------
<PAGE>
BANKERS TRUST COMPANY
By
---------------------------------
Title:
<PAGE>
THE BANK OF AMERICA NT & SA
By
---------------------------------
Title:
<PAGE>
THE BANK OF NOVA SCOTIA
By
---------------------------------
Title:
<PAGE>
THE BANK OF NEW YORK
By
---------------------------------
Title:
<PAGE>
PARIBAS
By
---------------------------------
Title:
By
---------------------------------
Title:
<PAGE>
BARCLAYS BANK PLC
By:
---------------------------------
Name:
------------------------------
Title:
-----------------------------
<PAGE>
BAYERISCHE LANDESBANK
GIROZENTRALE - CAYMAN ISLANDS BRANCH
By
---------------------------------
Title:
By
---------------------------------
Title:
<PAGE>
BAYERISCHE VEREINSBANK AG
NEW YORK BRANCH
By
---------------------------------
Title:
By
---------------------------------
Title:
<PAGE>
THE CHASE MANHATTAN BANK
By
---------------------------------
Title:
<PAGE>
CANADIAN IMPERIAL BANK OF COMMERCE
By
---------------------------------
Title:
<PAGE>
CITIBANK, N.A.
By
---------------------------------
Title:
<PAGE>
CREDIT LYONNAIS - NEW YORK
BRANCH
By
---------------------------------
Title:
<PAGE>
CREDIT SUISSE FIRST BOSTON
(Formerly known as Credit Suisse)
By
---------------------------------
Title:
By
---------------------------------
Title:
<PAGE>
CREDITO ITALIANO
By
---------------------------------
Title:
By
---------------------------------
Title:
<PAGE>
DEUTSCHE BANK AG, NEW YORK
AND/OR CAYMAN ISLANDS BRANCH
By
---------------------------------
Title:
By
---------------------------------
Title:
<PAGE>
THE DAI-ICHI KANGYO BANK,
LIMITED, NEW YORK BRANCH
By
---------------------------------
Title:
<PAGE>
THE FIRST NATIONAL BANK OF CHICAGO
By
---------------------------------
Title:
<PAGE>
THE FUJI BANK, LIMITED
By
---------------------------------
Title:
<PAGE>
GULF INTERNATIONAL BANK B.S.C.
By
---------------------------------
Title:
By
---------------------------------
Title:
<PAGE>
MARINE MIDLAND BANK
By:
---------------------------------
Name:
------------------------------
Title:
-----------------------------
<PAGE>
MIDLAND BANK PLC- NEW YORK BRANCH
By
---------------------------------
Title:
<PAGE>
KBC Bank N.V.
By:
---------------------------------
Name:
------------------------------
Title:
-----------------------------
<PAGE>
KREDIETBANK N.V.
By
---------------------------------
Title:
By
---------------------------------
Title:
<PAGE>
LTCB TRUST COMPANY
By
---------------------------------
Title:
By
---------------------------------
Title:
<PAGE>
THE MITSUBISHI TRUST & BANKING
CORPORATION, NEW YORK BRANCH
By
---------------------------------
Title:
<PAGE>
THE MITSUI TRUST AND BANKING
COMPANY, LIMITED - NEW YORK BRANCH
By
---------------------------------
Title:
<PAGE>
MORGAN STANLEY
By:
---------------------------------
Name:
------------------------------
Title:
-----------------------------
<PAGE>
NATIONSBANK, N.A.
By
---------------------------------
Title:
<PAGE>
MORGAN GUARANTY TRUST COMPANY
By:
---------------------------------
Name:
------------------------------
Title:
-----------------------------
<PAGE>
NORDDEUTSCHE LANDESBANK
GIROZENTRALE, NEW YORK BRANCH
AND/OR CAYMAN ISLANDS BRANCH
By
---------------------------------
Title:
By
---------------------------------
Title:
<PAGE>
THE SAKURA BANK, LTD.
By
---------------------------------
Title:
<PAGE>
THE SANWA BANK LIMITED- NEW YORK BRANCH
By
---------------------------------
Title:
<PAGE>
STANDARD CHARTERED BANK
By
---------------------------------
Title:
STANDARD CHARTERED BANK
By
---------------------------------
Title:
<PAGE>
THE SUMITOMO BANK, LIMITED
NEW YORK BRANCH
By
---------------------------------
Title:
<PAGE>
SUMITOMO BANK OF CALIFORNIA
By
---------------------------------
Title:
<PAGE>
THE TOKAI BANK, LIMITED
By
---------------------------------
Title:
<PAGE>
THE TOYO TRUST & BANKING CO.,
LTD. - NEW YORK BRANCH
By
---------------------------------
Title:
<PAGE>
UNION BANK OF SWITZERLAND
By
---------------------------------
Title:
By
---------------------------------
Title:
<PAGE>
VIA BANQUE
By
---------------------------------
Title:
By
---------------------------------
Title:
<PAGE>
WACHOVIA BANK OF GEORGIA, N.A.
By
---------------------------------
Title:
<PAGE>
WESTDEUTSCHE LANDESBANK
By
---------------------------------
Title:
By
---------------------------------
Title:
<PAGE>
YASUDA TRUST & BANKING COMPANY, LTD.
By
---------------------------------
Title:
<PAGE>
THE ASAHI BANK, LTD.-NEW YORK BRANCH
By
---------------------------------
Title:
<PAGE>
BANCA CASSA di RISPARMIO di TORINO -
NEW YORK BRANCH
By
---------------------------------
Title:
<PAGE>
BANK OF AMERICA ILLINOIS
By
---------------------------------
Title:
<PAGE>
THE BANK OF TOKYO-MITSUBISHI TRUST
COMPANY - NEW YORK BRANCH
By
---------------------------------
Title:
<PAGE>
THE CHUO TRUST & BANKING CO., LTD -
NEW YORK BRANCH BRANCH
By
---------------------------------
Title:
<PAGE>
FIRST UNION CAPITAL MARKETS GROUP
By
---------------------------------
Title:
<PAGE>
THE HOKKAIDO TAKUSHOKU BANK, LTD.
By
---------------------------------
Title:
<PAGE>
THE INDUSTRIAL BANK OF JAPAN, LTD.
By
---------------------------------
Title:
<PAGE>
ING BANK
By
---------------------------------
Title:
<PAGE>
ISTITUTO BANCARIO SAN PAOLO di TORINO
- NEW YORK BRANCH
By
---------------------------------
Title:
<PAGE>
LEHMAN COMMERCIAL PAPER INC.
By
---------------------------------
Title:
<PAGE>
THE LONG-TERM CREDIT BANK OF JAPAN,
LTD. - NEW YORK BRANCH
By
---------------------------------
Title:
<PAGE>
MORGAN GUARANTY TRUST COMPANY
By
---------------------------------
Title:
<PAGE>
THE NORINCHUKIN BANK - NEW YORK BRANCH
By
---------------------------------
Title:
<PAGE>
THE NORTHERN TRUST COMPANY
By
---------------------------------
Title:
<PAGE>
ROBOBANK NEDERLAND - NEW YORK BRANCH
By
---------------------------------
Title:
<PAGE>
THE ROYAL BANK OF CANADA - NEW YORK BRANCH
By
---------------------------------
Title:
<PAGE>
ROYAL BANK OF SCOTLAND - NEW YORK BRANCH
By
---------------------------------
Title:
<PAGE>
SBC WARBURG
By
---------------------------------
Title:
<PAGE>
SOCIETE GENERALE - NEW YORK BRANCH
By
---------------------------------
Title:
<PAGE>
THE TORONTO-DOMINION BANK
By
---------------------------------
Title:
<PAGE>
U.S. BANK OF OREGON
By
---------------------------------
Title:
<PAGE>
THE ROYAL BANK OF SCOTLAND- NEW
YORK BRANCH
By
---------------------------------
Title:
<PAGE>
FIRST BANK, N.A.
By
---------------------------------
Title:
<PAGE>
HSBC CORPORATE BANKING
By
---------------------------------
Title:
<PAGE>
FIRST CHICAGO CAPITAL MARKETS
By
---------------------------------
Title:
<PAGE>
BZW
By
---------------------------------
Title:
<PAGE>
J.P. MORGAN & COMPANY, INC.
By:
---------------------------------
Name:
------------------------------
Title:
-----------------------------
<PAGE>
THE FIRST NATIONAL BANK OF CHICAGO
By
---------------------------------
Title:
By
---------------------------------
Title:
<PAGE>
UBS AG
By:
---------------------------------
Name:
------------------------------
Title:
-----------------------------
<PAGE>
EXHIBIT 12.1
RJR NABISCO HOLDINGS CORP.
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1998
---------------------
<S> <C>
Earnings before fixed charges:
Income before income taxes.................................................................. $ 166
Add minority interest in pre-tax loss of Nabisco Holdings................................... 19
-----
Adjusted income before income taxes......................................................... 185
Interest and debt expense................................................................... 664
Interest portion of rental expense.......................................................... 45
-----
Earnings before fixed charges................................................................. $ 894
-----
-----
Combined fixed charges and preferred stock dividends:
Interest and debt expense................................................................... $ 664
Interest portion of rental expense.......................................................... 45
Capitalized interest........................................................................ 3
Preferred stock dividends (1)............................................................... 44
-----
Total fixed charges and preferred stock dividends............................................. $ 756
-----
-----
Ratio of earnings to fixed charges............................................................ 1.2
-----
-----
</TABLE>
- ------------------------
(1) Series B preferred stock dividends have been increased to present their
equivalent pre-tax amounts.
<PAGE>
EXHIBIT 12.2
RJR NABISCO HOLDINGS CORP.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1998
-------------------
<S> <C>
Earnings before fixed charges:
Income before income taxes.................................................................. $ 166
Add minority interest in pre-tax loss of Nabisco Holdings................................... 19
-----
Adjusted income before income taxes......................................................... 185
Interest and debt expense................................................................... 664
Interest portion of rental expense.......................................................... 45
-----
Earnings before fixed charges................................................................. $ 894
-----
-----
Fixed charges:
Interest and debt expense................................................................... $ 664
Interest portion of rental expense.......................................................... 45
Capitalized interest........................................................................ 3
-----
Total fixed charges....................................................................... $ 712
-----
-----
Ratio of earnings to fixed charges............................................................ 1.3
-----
-----
</TABLE>
<PAGE>
EXHIBIT 12.3
RJR NABISCO, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, 1998
-------------------
<S> <C>
Earnings before fixed charges:
Income before income taxes.................................................................. $ 237
Add minority interest in pre-tax loss of Nabisco Holdings................................... 19
-----
Adjusted income before income taxes......................................................... 256
Interest and debt expense................................................................... 591
Interest portion of rental expense.......................................................... 45
-----
Earnings before fixed charges................................................................. $ 892
-----
-----
Fixed charges:
Interest and debt expense................................................................... $ 591
Interest portion of rental expense.......................................................... 45
Capitalized interest........................................................................ 3
-----
Total fixed charges....................................................................... $ 639
-----
-----
Ratio of earnings to fixed charges............................................................ 1.4
-----
-----
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM RJRN HOLDINGS'
CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000847903
<NAME> RJR NABISCO HOLDINGS CORP.
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 434
<SECURITIES> 0
<RECEIVABLES> 1,194
<ALLOWANCES> 0
<INVENTORY> 2,537
<CURRENT-ASSETS> 4,745
<PP&E> 9,036
<DEPRECIATION> (3,428)
<TOTAL-ASSETS> 29,714
<CURRENT-LIABILITIES> 4,127
<BONDS> 8,804
1,327
509
<COMMON> 3
<OTHER-SE> 8,585
<TOTAL-LIABILITY-AND-EQUITY> 29,714
<SALES> 12,567
<TOTAL-REVENUES> 12,567
<CGS> 6,027
<TOTAL-COSTS> 6,027
<OTHER-EXPENSES> 879
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 664
<INCOME-PRETAX> 166
<INCOME-TAX> 175
<INCOME-CONTINUING> 8
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8
<EPS-PRIMARY> (.08)
<EPS-DILUTED> (.08)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM RJRN'S
CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<CIK> 0000083612
<NAME> RJR NABISCO, INC.
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 434
<SECURITIES> 0
<RECEIVABLES> 1,192
<ALLOWANCES> 0
<INVENTORY> 2,537
<CURRENT-ASSETS> 4,743
<PP&E> 9,036
<DEPRECIATION> (3,428)
<TOTAL-ASSETS> 29,689
<CURRENT-LIABILITIES> 4,074
<BONDS> 8,804
0
0
<COMMON> 0
<OTHER-SE> 10,783
<TOTAL-LIABILITY-AND-EQUITY> 29,689
<SALES> 12,567
<TOTAL-REVENUES> 12,567
<CGS> 6,027
<TOTAL-COSTS> 6,027
<OTHER-EXPENSES> 879
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 591
<INCOME-PRETAX> 237
<INCOME-TAX> 206
<INCOME-CONTINUING> 48
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 48
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE>
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
<PAGE>
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);
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;
2
<PAGE>
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,
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
3
<PAGE>
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:
(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
4
<PAGE>
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 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
5
<PAGE>
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;
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
6
<PAGE>
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 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
7
<PAGE>
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 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,
8
<PAGE>
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 (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
9
<PAGE>
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 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):
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Year 1999 2000 2001 2002 2003 thereafter
- ----
Amount $4.5B $5B $6.5B $6.5B $8B $8B
- ------
</TABLE>
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
10
<PAGE>
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
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
11
<PAGE>
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 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
12
<PAGE>
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
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.
13
<PAGE>
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
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-
14
<PAGE>
federal governmental plaintiff than the terms of the Settlement Agreement
(including this Stipulation of Amendment and the Consent Decree) (after due
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.
15
<PAGE>
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 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).
16
<PAGE>
Except as specifically provided in the foregoing sentence, nothing in
the 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, ss.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. ss.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
17
<PAGE>
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
18
<PAGE>
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.
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
19
<PAGE>
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 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
20
<PAGE>
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 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
21
<PAGE>
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 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,
22
<PAGE>
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 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
23
<PAGE>
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
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
24
<PAGE>
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 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
25
<PAGE>
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 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"),
26
<PAGE>
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
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
27
<PAGE>
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
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:
----------------------------
Lawton M. Chiles, Jr.
Governor
28
<PAGE>
By:
----------------------------
Robert A. Butterworth
Attorney General
PHILIP MORRIS INCORPORATED
By:
----------------------------
Meyer G. Koplow
Counsel
By:
----------------------------
Martin J. Barrington
General Counsel
R.J. REYNOLDS TOBACCO
COMPANY
By:
----------------------------
Arthur F. Golden
Counsel
By:
----------------------------
Charles A. Blixt
Executive Vice President &
General Counsel
29
<PAGE>
BROWN & WILLIAMSON TOBACCO
CORPORATION
By:
Stephen R. Patton
Counsel
By:
----------------------------
F. Anthony Burke
Vice President & General
Counsel
LORILLARD TOBACCO COMPANY
By:
----------------------------
Arthur J. Stevens
Senior Vice President &
General Counsel
UNITED STATES TOBACCO
COMPANY
By:
----------------------------
Richard H. Verheij
Executive Vice President &
General Counsel
30
<PAGE>
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
<PAGE>
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
<PAGE>
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;
WHEREAS, the Settlement Agreement contains a "Most Favored Nation"
clause which provides that, in the event that Settling Defendants enter into a
<PAGE>
EXHIBIT 1
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 Amendment to Settlement Agreement and for Entry of Consent Decree executed on
September 11, 1998 (the "Stipulation of Amendment");
2
<PAGE>
EXHIBIT 1
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' 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
3
<PAGE>
EXHIBIT 1
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.
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
4
<PAGE>
EXHIBIT 1
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 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
<PAGE>
EXHIBIT 1
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, 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
6
<PAGE>
EXHIBIT 1
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.
(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
7
<PAGE>
EXHIBIT 1
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 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
8
<PAGE>
EXHIBIT 1
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
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
9
<PAGE>
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
<PAGE>
Exhibit 99.2
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;
<PAGE>
WHEREAS, section IV of the Settlement Agreement contains a "Most
Favored Nation" clause which provides that, in the event that Settling
Defendants
<PAGE>
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
<PAGE>
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
(c) all payments of attorneys' fees and certain other professional
fees (other than fees for attorneys or agents of Participating Defendants)
pursuant to a
3
<PAGE>
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.
(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
4
<PAGE>
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.
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
5
<PAGE>
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
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
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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 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
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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 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
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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 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
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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
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.
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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 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
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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
NonParticipating 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 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).
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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
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
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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.
(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.
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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. 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
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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
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:
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(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 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,
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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.
(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
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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 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
19
<PAGE>
(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.
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
20
<PAGE>
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.
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.
21
<PAGE>
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.
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
22
<PAGE>
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.
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.
23
<PAGE>
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 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.
24
<PAGE>
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
<PAGE>
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:
-----------------------------------
Lawton M. Chiles, Jr.
Governor
By:
-----------------------------------
Robert A. Butterworth
Attorney General
26
<PAGE>
Florida Fee Payment Agreement,
dated September 11, 1998
PHILIP MORRIS INCORPORATED
By:
-----------------------------------
Meyer G. Koplow
Counsel
By:
-----------------------------------
Martin J. Barrington
General Counsel
R.J. REYNOLDS TOBACCO COMPANY
By:
-----------------------------------
Arthur F. Golden
Counsel
By:
-----------------------------------
Charles A. Blixt
Executive Vice President & General Counsel
27
<PAGE>
Florida Fee Payment Agreement,
dated September 11, 1998
BROWN & WILLIAMSON TOBACCO
CORPORATION
By:
-----------------------------------
Stephen R. Patton
Counsel
By:
-----------------------------------
F. Anthony Burke
Vice President & General Counsel
LORILLARD TOBACCO COMPANY
By:
-----------------------------------
Arthur J. Stevens
Senior Vice President & General Counsel
28
<PAGE>
Florida Fee Payment Agreement,
dated September 11, 1998
UNITED STATES TOBACCO COMPANY
By:
-----------------------------------
Richard H. Verheij
Executive Vice President & General Counsel
29
<PAGE>
Florida Fee Payment Agreement,
dated September 11, 1998
PARTICIPATING CONTRACT COUNSEL
<TABLE>
<S> <C>
By: By:
-------------------------------------- -------------------------------------------
C. David Fonvielle William C. Gentry
for Fonvielle, Hinkle & Lewis, P.A. for Gentry, Phillips & Hodak, P.A.
By: By:
-------------------------------------- -------------------------------------------
Wayne Hogan Robert G. Kerrigan
for Brown, Terrell, Hogan, Ellis, for Kerrigan, Estess, Rankin & McLeod
McClamma & Yegelwel, P.A.
By: By:
-------------------------------------- -------------------------------------------
Michael Maher Robert Montgomery
for Maher, Gibson & Guiley, P.A. for Montgomery & Larmoyeux
By: By:
-------------------------------------- -------------------------------------------
James H. Nance Joseph F. Rice
for Nance, Cacciatore, Sisserson, for Ness, Motley, Loadholt, Richardson &
Duryea & Hamilton, P.A. Poole
By: By:
-------------------------------------- -------------------------------------------
Sheldon J. Schlesinger Richard F. Scruggs
for Sheldon J. Schlesinger, P.A. for Scruggs, Millette, Bozeman & Dent, P.A.
By:
--------------------------------------
C. Steven Yerrid
for Yerrid, Knopik & Krieger, P.A.
</TABLE>
30
<PAGE>
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.
<PAGE>
SCHEDULE A
MARKET SHARE PERCENTAGES
<TABLE>
<CAPTION>
Settling Defendant Percentage
- ------------------ ----------
<S> <C>
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
</TABLE>
<PAGE>
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
<PAGE>
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.
-----------------------------
Lawton M. Chiles, Jr.
Governor
2
<PAGE>
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)
<PAGE>
Settling Defendants
---------------------
<TABLE>
<S> <C>
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
</TABLE>
(continued)
2
<PAGE>
Contract Counsel
----------------
<TABLE>
<S> <C>
Joseph F. Rice Richard F. Scruggs
Ness, Motley, Loadholt, Richardson & Scruggs, Millette, Bozeman & Dent, P.A.
Poole 743 Delmas Avenue
151 Meeting Street, Suite 600 Pascagoula, MS 39568-1425
Charleston, SC 29402 Fax: (228) 762-1207
Fax: (843) 720-9290
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, Duryea &
3375 Capital Circle Northeast 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
</TABLE>
(continued)
3
<PAGE>
<TABLE>
<S> <C>
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
</TABLE>
4
<PAGE>
Exhibit 99.3
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
<PAGE>
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
<PAGE>
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.
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(b) Upon receipt of (i) written notice signed by counsel for
the MFN Settling Defendants and counsel for the State of Florida
stating that the Availability Date has occurred and (ii) an order of
the Court pursuant to applicable Florida law so directing, the MFN
Escrow Agent shall proceed to distribute the MFN Escrow Amount in
accordance with such Court order.
(c) For its services, the MFN Escrow Agent shall receive fees
in accordance with the MFN Escrow Agent's customary fees in similar
matters. All such fees shall constitute a direct charge against the MFN
Escrow Amount, but the MFN Escrow Agent shall not debit the MFN Escrow
Amount for any such charge until it shall have presented its statement
to and received approval by counsel for the MFN Settling Defendants and
counsel for the State of Florida, which approval shall not be
unreasonably withheld. Such approval shall be deemed given if the MFN
Escrow Agent has not received written objections from either counsel
for MFN Settling Defendants or counsel for the State of Florida within
30 days after presentment of its statement. Such fees and all expenses
charged against the MFN Escrow Amount shall, to the extent possible, be
paid out of interest earned. In the event that counsel for MFN Settling
Defendants or counsel for the State of Florida objects in writing to
such fees, the MFN Escrow Agent shall not debit the MFN Escrow Amount
except upon a court order approving such fees.
SECTION 5. Substitute Form W-9; Qualified Settlement Fund.
Each of the signatories to this MFN Escrow Agreement shall provide the
MFN Escrow Agent with a correct taxpayer identification number on a substitute
Form W-9 within 90 days of the date hereof and indicate thereon that it is not
subject to backup withholding. It is anticipated that the MFN Escrow Account
established pursuant to this MFN Escrow Agreement shall be treated as a
Qualified Settlement Fund for federal tax purposes pursuant to Treas. Reg.
Section 1.468B-1.
SECTION 6. Termination of MFN Escrow Account.
This MFN Escrow Agreement (other than the MFN Escrow Agent's right to
indemnification set forth in Section 7) shall terminate when the MFN Escrow
Agent shall have released from the MFN Escrow Account all amounts pursuant to
Section 4 hereof.
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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.
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(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
Fax: (212) 907-5399
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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
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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.
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(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.
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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
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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:
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