ESCROW AGREEMENT This Escrow Agreement (Agreement) is entered into as of, 2001, by the undersigned tobacco product manufacturer ( Manufacturer ) and, as Escrow Agent (the Escrow Agent ). WITNESSETH: WHEREAS, many States, including California, have enacted laws which require tobacco product manufacturers, which have not entered into the Master Settlement Agreement resolving the States tobacco litigation, to establish a reserve fund to guarantee a source of compensation to the State if the Manufacturer has acted culpably, and to prevent such Manufacturer from deriving large short-term profits and then becoming judgment-proof before liability may arise, WHEREAS,, a tobacco product manufacturer intends to comply with such laws requiring reserve funds in States where the Manufacturer s products are sold and hereby enters into this Escrow Agreement which establishes a qualified escrow fund for the benefit of each State which has enacted such a law, NOW THEREFORE, in consideration of the mutual promises contained herein and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: SECTION I APPOINTMENT OF ESCROW AGENT The manufacturer hereby appoints to serve as Escrow Agent under this Escrow Agreement on the terms and conditions set forth herein. The Escrow Agent represents that it is a federal or state chartered financial institution, having assets of at least one billion dollars ($1,000,000,000), and has no affiliation with any tobacco product manufacturer. The Escrow Agent, by its execution hereof, hereby accepts such appointment and agrees to perform its duties and obligations set forth herein. SECTION II DEFINITIONS A. Capitalized terms used in this Escrow Agreement and not otherwise defined herein shall have the meaning given to such terms in the Agreement. -1- (form TOB.ea-1)
B. Master Settlement Agreement means the settlement agreement (and related documents) entered into on November 23, 1998 by the States and leading United States tobacco product manufacturers, a copy of which has been supplied to the Escrow Agent. C. Affiliate means a person who directly or indirectly owns or controls, is owned or controlled by, or is under common ownership or control with, another person. Solely for purposes of this definition, the terms owns, is owned and ownership mean ownership of an equity interest, or the equivalent thereof, of ten percent (10%) or more, and the term person means an individual, partnership, committee, association, corporation or any other organization or group of persons. D. Manufacturer as used in this Escrow Agreement is (1) a tobacco product manufacturer which manufacturers cigarettes intended to be sold in the United States, and has not become a participating manufacturer as that term is defined in section 2(jj) of the Master Settlement Agreement; or (2) is the first purchaser anywhere for resale in the United States of cigarettes manufactured anywhere that the manufacturer does not intend to be sold in the United States; or (3) a successor of an entity described in (1) or (2) as defined in Health and Safety Code section 104556(i). E. Qualifying Statute is a state law which requires a non-participating manufacturer to establish a qualified escrow fund. F. Qualified Escrow Fund means an escrow arrangement with a federal or State chartered financial institution having no affiliation with any tobacco product manufacturer and having assets of at least one billion dollars ($1,000,000,000) where such arrangement requires that the financial institution hold the escrowed funds principal for the benefit of Releasing parties and prohibits the tobacco product manufacturer placing the funds into escrow from using, accessing or directing the use of the funds principal except as consistent with California Health and Safety Code section 104557(b). G. Units Sold means the number of individual cigarettes sold in California, including the amount of roll-your-own tobacco (.09 ounces of roll-your-own constitutes one cigarette) and little cigars (which weigh three (3) pounds or less per 1,000), by the tobacco product manufacturer (whether directly or indirectly through a distributor, retailer or similar intermediary or intermediaries) during the year in question. H. Released Claims means released claims as that term is defined in the -2- (form TOB.ea-1)
Master Settlement Agreement. I. Releasing Parties means releasing parties as that term is defined in the Master Settlement Agreement. SECTION III ESCROW FUND AND RELEASE OF FUNDS THEREFR0M A. From time to time the Manufacturer shall deliver to the Escrow Agent for deposit in the Escrow Account funds required to be placed in escrow pursuant to the NPM Statute of the Beneficiary State. In California, the NPM statute is Health and Safety Code sections 104555-104557. B. All funds received by the Escrow Agent pursuant to the terms of the Agreement shall be held and disbursed in accordance with the terms of this Escrow Agreement. Such funds and any earnings thereon shall constitute the Escrow and shall be held by the Escrow Agent separate and apart from all other funds and accounts of the Escrow Agent, and the Manufacturer. C. In each State where the Manufacturer s products are is sold and where there is a Qualifying Statute, by April 15 of the year following the year in which the Qualifying Statute was enacted, the Manufacturer shall deliver to the Escrow Agent for deposit pursuant to this section the following amounts by April 15 (as such amounts are adjusted for inflation in accordance with the formula set forth in Exhibit C to the Master Settlement Agreement) 2000: $.0104712 per Unit Sold; for each of 2001 and 2002: $.0136125 per Unit Sold; for each of 2003 through 2006: $.0167539 per Unit Sold; for each of 2007 and each year thereafter: $.0188482 per Unit Sold. D. Manufacturer shall designate the amount placed in the Escrow Fund for each State based on the Units sold in the applicable sales year, and the Escrow Agent shall place and hold such funds in a sub-account for the benefit of each State. E. The Manufacturer shall receive the interest or other appreciation on the funds deposited, pursuant to subsection C, as earned. F. Funds deposited pursuant to subsection C, including accrued interest or other appreciation, shall be released from escrow only under the following circumstances: (i) To pay a judgment or settlement on any released claim brought against the Manufacturer by the State of California or any Releasing Party located or residing in -3- (form TOB.ea-1)
the California. Such judgment or settlement must specify that the payment is to be made from the Qualified Escrow Account. Promptly after receiving a request for a release of funds under this subsection, and prior to release of funds, the Escrow Agent shall provide thirty (30) days written notice to the Manufacturer and the State Attorney General s Office and the State Board of Equalization. Should the manufacturer or the State timely object to a requested release of the funds the Escrow Agent shall not authorize the requested release of funds until such objection has been finally resolved under applicable California law, procedures and remedies. Funds shall be released from escrow under this subparagraph (a) in the order in which they were placed into escrow and (b) only to the extent and at the time necessary to make payments required under such judgment or settlement; or (ii) If a Manufacturer establishes that the amount it was required to place into escrow in a particular year was greater than the State of California s allocable share of the total payments that such Manufacturer would have been required to make in that year (had it been a Participating Manufacturer) under the Master Settlement Agreement (as determined pursuant to section IX(i)(2) of the Master Settlement Agreement, and before any of the adjustments or offsets described in section IX(i)(3) of that Agreement other than the Inflation Adjustment), the excess shall be released from escrow and revert back to the Manufacturer, or (iii) To the extent not released from escrow under subparagraph (i) or (ii), funds shall be released from escrow and revert back to such Manufacturer twenty-five years after the date on which they were placed into escrow. (iv) With regard to the release from escrow provided for in subsection F(ii) of Section III of this Escrow Agreement, the Manufacturer shall submit in writing to the State Attorney General the Company s calculation establishing the Excess Amount. If the State Attorney General disputes the Manufacturer s calculation, the dispute shall be submitted to the Independent Auditor appointed under the Master Settlement Agreement, with each party bearing their respective share of the costs. Resolution of disputes pertaining to the Independent Auditor s determination shall be as provided in Article XI(c) of the Master Settlement Agreement. G. When the Manufacturer has made the first deposit into a Qualified Escrow Fund for the benefit of a State, the Escrow Agent shall notify the State Board of Equalization and the Attorney General s Office that the Qualified Escrow Fund has been established, provide to the State Board of Equalization and the State Attorney General s Office a copy of the Escrow -4- (form TOB.ea-1)
Agreement along with all relevant instructions from the Manufacturer, and the amount of the deposit made. Thereafter, each year the Escrow Agent shall provide information to each State, including the Attorney General for the State of California and the California Board of Equalization, on the amount of deposit made by the Manufacturer for the benefit of the State under the Escrow Agreement. In California, these reports shall be filed with the Attorney General by April 30 of each year following the sales year. H. All amounts credited to an account or sub-account shall be retained in such account or sub-account until disbursed therefrom in accordance with the provisions of this Escrow Agreement pursuant to paragraph F of Section III. SECTION IV FAILURE OF ESCROW AGENT TO RECEIVE INSTRUCTIONS In the event that the Escrow Agent fails to receive any written instructions contemplated by this Escrow Agreement, the Escrow Agent shall refrain from taking any action required under any section of this Escrow Agreement until such written instructions are received by the Escrow Agent. In so refraining, the Escrow Agent shall be fully protected from any liability arising out of its inaction. SECTION V INVESTMENT OF FUNDS BY ESCROW AGENT The Escrow Agent shall invest and reinvest all amounts from time to time, credited to the sub-accounts in either (1) direct obligations of, or obligations the principal and interest on which are unconditionally guaranteed by the Unites States of America; (2) repurchase agreements fully collateralized by securities described in clause (1) above; (3) 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 any of the 50 States thereof ( a United States Bank ) and having combined capital, surplus and undistributed profits in excess of $500,000,000; or (4) demand deposits with any United States Bank having combined capital, surplus and undistributed profits in excess of $500,000,000. To the extent practicable, monies credited to any sub-account shall be invested in such a manner so as to be available for use at the times when monies are expected to be disbursed by the Escrow Agent and charged to such account. Obligations purchased as an investment of monies credited to any sub-account shall be deemed at all times to be a part of such sub-accounts and the income or -5- (form TOB.ea-1)
interest earned, profits realized or losses suffered with respect to such investments (including, without limitation, any penalty for any liquidation of an investment required to fund a disbursement to be charged to such sub-account), shall be credited or charged, as the case may be, to such sub-account and shall be for the benefit of, or be borne by, the person or entity entitled to payment from such sub-account. In choosing among the investment options described in clauses (1) through (4) above, the Escrow Agent shall comply with any instructions received from time to time from all of the Escrow Parties which consists of the Manufacturer or the State for whose benefit an account or sub-account has been established. For California, the Escrow Parties are the Attorney General for the State of California and the California Board of Equalization and the Manufacturer. In the absence of such instructions, the Escrow Agent shall invest such sums in accordance with clause (1) above. SECTION VI SUBSTITUTE FORM W-9; QUALIFIED SETTLEMENT FUND The Manufacturer shall provide the Escrow Agent with a correct taxpayer identification number on a substitute Form W-9 or if it does not have such a number, a statement evidencing its status as an entity exempt from back-up withholding, within 30 days of the date hereof (and, if it supplies a Form W-9, indicate thereon that it is not subject to be treated as a Qualified Settlement Fund for federal or tax purposes pursuant to Treasury Regulations section 11.468B-1). The Escrow Agent shall comply with all applicable tax filing, payment and reporting requirements, including, without limitation, those imposed under Treasury Regulations section11.468b, and if requested to do so shall join in the making of the relation-back election under such regulation. SECTION VII DUTIES AND LIABILITIES OF ESCROW AGENT The Escrow Agent shall have no duty or obligation hereunder other than to take such specific actions as are required of it from time to time under the provisions of this Escrow Agreement and it shall incur no liability hereunder or in connection herewith for anything whatsoever other than any liability resulting from its own gross negligence or willful misconduct. The only duties and responsibilities of the Escrow Agent shall be the duties and obligations specifically set forth in this Escrow Agreement. -6- (form TOB.ea-1)
SECTION VIII INDEMNIFICATION OF ESCROW AGENT The Manufacturer shall indemnify, hold harmless and defend the Escrow Agent from and against any and all losses, claims, liabilities, and reasonable expenses, including the reasonable fees of its counsel, which it may suffer or incur in connection with the performance of its duties and obligations under this Escrow Agreement, except for those losses, claims, liabilities and expenses resulting solely and directly from its own gross negligence or willful misconduct. SECTION IX RESIGNATION OF ESCROW AGENT The Escrow Agent may resign by giving 45 days written notice thereof to the Manufacturer and to the Attorney General of each State for which there is a sub-account. Such resignation shall not become effective until a successor Escrow Agent, selected by the Manufacturer, shall have been appointed and shall have accepted such appointment in writing. SECTION X ESCROW AGENT FEES AND EXPENSES The Manufacturer shall pay the Escrow Agent its reasonable fees and expenses, including all reasonable expenses, charges, counsel fees, and other disbursements incurred by it or by its attorneys, agents and employees in the performance of its duties and obligations under this Escrow Agreement. Fees, costs and expenses may be paid from interest earned on funds held in escrow. SECTION XI INTENDED BENEFICIARIES; SUCCESSORS No persons or entities other than the States which have enacted a Qualifying Statute, including specifically the State of California, and Releasing Parties are intended beneficiaries of this Escrow Agreement, and only the States, the Releasing Parties and the Manufacturer and the Escrow Agent shall be entitled to enforce the terms of this Escrow Agreement. The provisions of this Escrow Agreement shall be binding upon and inure to the benefit of the parties hereto and, in the case of the Escrow Agent and Manufacturer, their respective successors. -7- (form TOB.ea-1)
SECTION XII GOVERNING LAW This Escrow Agreement shall be construed in accordance with and governed by the laws of the State of California. SECTION XIII JURISDICTION AND VENUE Any suit, action or proceeding seeking to interpret or enforce any provision of, or based on any right arising out of this Escrow Agreement must be brought in a court of original jurisdiction for matters involving contract, equity and damage claims in the State where the Escrow Agent is domiciled. SECTION XIV NOTICES All notices required by the Escrow Agreement shall be in writing and shall be deemed to have been received (a) immediately if sent by facsimile transmission (with a confirming copy sent the same Business Day by registered or certified mail), or by hand delivery (with signed return receipt), or (b) the next Business Day if sent by nationally recognized overnight courier, in any case to the respective addresses as follows: If to the Company: If to the Escrow Agent: -8- (form TOB.ea-1)
If to the California Attorney General (two copies to each of the following): Attorney General of the State of California Attorney General of the State of California c/o National Association of Attorneys General 1300 I Street 750 First Street, N.E., Suite 1100 POB 944255 Washington, D.C. 20002 Sacramento, CA 94244-2550 Attn: Peter J. Levin Attn: William F. Soo Hoo (202) 326-6041 telephone (916) 323-3853 telephone (202) 408-8064 fax (916) 323-0813 fax If to the California Board of Equalization: California Board of Equalization Excise Taxes Division 450 N Street P.O. Box 942879 Sacramento, CA 95814 Attn: William Kimsey (916) 322-1960 telephone (916) 323-9297 fax SECTION XV SEVERABILITY The parties agree that if any provision of this Escrow Agreement shall under any circumstances be deemed invalid or inoperative this Escrow Agreement shall be construed with the invalid or inoperative provisions deleted and the rights and obligations of the parties shall be construed and enforced accordingly. SECTION XVI AMENDMENTS This Escrow Agreement may be amended by written instrument executed by the Manufacturer and Escrow Agent. Each State for which there is a sub-account shall be notified of amendments to this Agreement. For California, the State Attorney General and the State Board of Equalization shall be notified. The waiver by any party of any breach of this Agreement shall not be deemed to be or construed as a waiver of any other breach, whether prior, subsequent or contemporaneous, of this Escrow Agreement, nor shall such waiver be deemed to be or construed as a waiver by any other party. -9- (form TOB.ea-1)
SECTION XVII COUNTERPARTS This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. Delivery by facsimile of a signed counterpart shall be deemed delivery for purposes of acknowledging acceptance hereof; however, an original executed Escrow Agreement must promptly thereafter be delivered. SECTION XVIII CAPTIONS The captions herein are included for convenience of reference only and shall be ignored in the construction and interpretation hereof. and Escrow Agent. SECTION XIX CONDITIONS TO EFFECTIVENESS This Escrow Agreement shall become effective when signed by the Manufacturer (DATE AND SIGNATURE BLOCKS) -10- (form TOB.ea-1)