IN THE CHANCERY COURT OF JACKSON COUNTY, MISSISSIPPI

IN RE MIKE MOORE, ATTORNEY GENERAL ex rel,
STATE OF MISSISSIPPI TOBACCO LITIGATION CAUSE NO. 94-1429

MEMORANDUM OF UNDERSTANDING

This Memorandum of Understanding ("MOU") is made as of July 2,1997, by and among the undersigned counsel, on behalf of their respective clients, to setforth the principal terms and conditions of an agreement in principle among the partieshereto to settle and resolve with finality all present and future claims against allparties relating to the subject matter of this litigation which have been or could havebeen asserted by any of the parties hereto, including all claims on behalf of the State ofMississippi and all of its governmental agencies, departments, political subdivisions andany other state-controlled public entities (collectively "Mississippi" or"the State of Mississippi"). The parties contemplate the prompt drafting andexecution of a comprehensive Settlement Agreement that will incorporate the terms of thisMOU, as well as other customary terms and conditions, including releases, acceptable tothe parties.

WHEREAS, the State of Mississippi, through its Attorney General MichaelC. Moore, has instituted this action asserting various claims on behalf of the State ofMississippi against tobacco manufacturers and other defendants;

WHEREAS, the defendants have contested the claims in Mississippi'scomplaint;

WHEREAS, Attorney General Moore has had a leadership role amongAttorneys General from various states in maintaining civil litigation against the tobaccoindustry and in seeking to forge an unprecedented national resolution of the principalissues and controversies associated with the manufacture, marketing and sale of tobaccoproducts in the United States;

WHEREAS, through the efforts of Attorney General Moore and others a June20, 1997 Memorandum of Understanding and attached Proposed Resolution ("ProposedResolution") has been agreed to by members of the tobacco industry, state attorneysgeneral, private litigants and representatives of public health groups which would providefor unprecedented and comprehensive regulation of the tobacco industry while preservingthe right of individuals to assert claims for compensation;

WHEREAS, the Proposed Resolution contemplates action by the UnitedStates Congress and the President to enact and sign a new federal law with respect to thetobacco industry, which action the tobacco industry has agreed to support and which willrequire study and analysis by Congress and the President;

WHEREAS, trial is scheduled to commence on July 7, 1997 and acontinuance of such trial could prejudice the State of Mississippi, the State ofMississippi and the undersigned defendants have agreed to settle independently thelitigation commenced by Attorney General Moore pursuant to financial terms comparable tothe Proposed Resolution, which terms will achieve for Mississippi immediately thefinancial benefits it would receive pursuant to the national Proposed Resolution, shouldit become law;

NOW THEREFORE, it is hereby agreed as follows:

This MOU will be presented to the Chancery Court of Jackson County (the"Court") promptly upon its execution, and the parties agree jointly to petitionthe Court to adjourn all further proceedings in contemplation of their final resolutionand termination pursuant to this MOU and the Settlement Agreement contemplated hereby.

The Settlement Agreement shall contain among other things, the followingterms to which the parties hereby agree:

1. On or before July 15, 1997 the undersigned defendants (the"Settling Defendants") shall cause to be paid into a special account (the"Account"), for the benefit of the State of Mississippi, to be held in escrowpending effectuation of the Settlement Agreement, the sum of $170 million; that

being plaintiff's good faith estimate of the portion Mississippi wouldreceive of the $10 billion payment provided for in Paragraph A on page 34 of the June 20,1997 Memorandum of Understanding and attached Proposed Resolution.

2. On or before July 30, 1997, the Settling Defendants shall cause to bepaid to the Attorney General $2.5 million for the best estimate of costs and expensesattributable to his office and other appropriate state agencies in connection with thislitigation; and on or before July 30, 1997, the Settling Defendants shall further cause tobe paid $12.5 million to the plaintiffs' private counsel for their best estimate of theircosts and expenses. The combined costs to be paid on July 30, 1997, may not exceed 15million dollars. Thereafter the Attorney General's office, the appropriate state agenciesand the plaintiffs' private counsel shall provide the Settling Defendants with anappropriately documented statement of their costs and expenses. The Settling Defendantsshall promptly pay the amount of such costs and expenses in excess of the above $15million, or shall receive a refund or a credit against other payments due hereunder if thetotal of such costs and expenses shall be less than $15 million. Any dispute as to thenature or amount of reimbursable costs and expenses shall be decided with finality by thepersons selected to award fees pursuant to paragraph 8 below.

3. Commencing within ten (10) business days after December 31, 1998, andannually thereafter, the Settling Defendants shall cause to be paid to the Account 1.7% ofthe following amounts (in billions):

Year 1 2 3 4 5 6 thereafter
Amount $4B $4.5B $5B $6.5B $6.5B $8B $8B

The above payments shall be adjusted upward by the greater of 3% or theConsumer Price Index applied each year on the previous year, beginning with the firstannual payment. The above payments will also be decreased or increased, as the case maybe, in accordance with decreases or increases in volume of domestic tobacco product volumesales as provided in Paragraph B.5 on pages 34-35 of the June 20, 1997 ProposedResolution.

4. In recognition of the ongoing payments called for in paragraph 3above, the Settlement Agreement will provide for the resolution of all past and futureclaims of the type described above against all defendants. The defendants will be releasedfrom all such claims by the State of Mississippi.

5. In the event that the Proposed Resolution is enacted as federallegislation, or if any substantially equivalent federal program is enacted, the settlementprovided herein and in the Settlement Agreement shall remain in place, but the terms ofsuch Proposed Resolution or federal program shall supersede the provisions of this MOU andSettlement Agreement. In order to provide the Settling Defendants with a full credit forall payments made hereunder pursuant to paragraphs I and 3 of this MOU in the event of theenactment of the Proposed Resolution or substantially equivalent federal program, and tothe extent that the payments made to the Account pursuant to paragraphs 1 and 3 of thisMOU shall differ from the amounts to be received by Mississippi pursuant to such ProposedResolution or substantially equivalent federal program, adjustments shall be made in theform of a credit to the future payments by the Settling Defendants, a refund by the Stateof Mississippi, or other means that will ensure that the principal amount of paymentsreceived by Mississippi will be the same as the amounts they would receive pursuant to theProposed Resolution or substantially equivalent federal program.

6. In the absence of the enactment of the Proposed Resolution or anysubstantially equivalent federal program, and in the event of multiple settlements by theSettling Defendants with various non-federal governmental plaintiffs in other similarlitigation, it is agreed that the aggregate percentage applicable to the variousnon-federal governmental plaintiffs will not exceed 100%, and the sum of the initialpayments will not exceed $10 billion. In order to ensure this result it is agreed that allsuch percentages (including the 1.7% applied in paragraph 1 and specified in paragraph 3)will be adjusted downward (by the same relative percentage) to achieve a total aggregatepercentage of 100%.

7. The Settling Defendants agree that if they enter into any settlementagreement of other similar non-federal governmental litigation on terms more favorable tosuch governmental plaintiff then the terms of this MOU and the Settlement Agreement (afterdue consideration of relevant differences in population or other appropriate factors), theterms of this Settlement will be revised so that Mississippi will enjoy treatment at leastas relatively favorable as any such other non-federal governmental entity.

8. The Settling Defendants agree to pay, separately and apart from theabove, reasonable attorneys' fees. If the Proposed Resolution or substantially equivalentfederal program is enacted, the amount of such fees will be set by a panel of independentarbitrators with finality, subject to an appropriate annual cap on all such payments andother conditions. In the absence of any such Proposed Resolution or substantiallyequivalent federal program, attorneys' fees in connection with this litigation will beawarded in the same manner (subject to an appropriate annual cap and other conditions) bythree independent arbitrators selected by the parties hereto. In the event of theenactment of the Proposed Resolution or other substantially equivalent federal program,the parties contemplate that the State of Mississippi and any other similar state whichhas made an exceptional contribution to secure the resolution of these matters may applyto the panel of independent arbitrators for reasonable compensation for its efforts insecuring the Proposed Resolution, subject to an appropriate separate annual cap on allsuch payments.

July 2, 1997

Washington, D.C.

STATE OF MISSISSIPPI
/s/Michael C. Moore, Attorney General
 
PHILIP MORRIS INCORPORATED
/s/By: Meyer G. Koplow
 
R.J. REYNOLDS TOBACCO COMPANY
/s/By: D. Scott Wise
 
BROWN & WILLIAMSON TOBACCO CORPORATION
/s/By: D. Scott Wise
 
LORILLARD TOBACCO COMPANY
/s/By: Meyer G. Koplow

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