Exhibit 10.1

November 14, 2012

TERM SHEET

 

I. ACCRUED CLAIMS FOR 2003 TO 2011 AND 2012 NPM ADJUSTMENT

Accrued claims relating to the NPM Adjustment disputes for 2003 to 2011 and the
2012 NPM Adjustment would be handled as follows:

 

  A. The basic methodology from the August 2010 MOU would be retained, with the
following adjustments:

 

  1. All amounts related to the 2010, 2011 and 2012 NPM Adjustments would be
added to the terms of the settlement.

 

  2. The settlement value would be increased from 29.5% to a percentage ranging
from 37.5% to 46%. The applicable percentage within that range depends on the
aggregate Allocable Share of the signatory Settling States as follows:

 

Aggregate Allocable Share

   Settlement Value Percentage  

80% or more

     37.5 % 

75-79.9%

     38.5 % 

70-74.9%

     39.5 % 

65-69.9%

     40.5 % 

60-64.9%

     42.5 % 

55-59.9%

     44.5 % 

50-54.9%

     46 % 

Appendix A sets forth the reference date for determining the aggregate Allocable
Share and the increased settlement value applicable to States that sign this
Term Sheet after December 14, 2012 (or, in the case of States with December
hearing dates, after the start of their hearing).

 

  3. The amount contributed to fund the Data Clearinghouse would be reduced from
$20,000,000 to $10,000,000.

 

  B. The signatory Settling States would allocate the settlement amounts (either
the application of the credits to the PMs or the receipt of amounts released
from the DPA, or both) among themselves so as to fully compensate those
signatory Settling States whose diligent enforcement for 2003 was uncontested
for their share of the 2003 NPM Adjustment, plus interest.

 

  C. These provisions would be implemented as provided in Appendix A.

 

II. TRANSITION

 

  A. There will be a two-year transition period covering sales years 2013-2014
during which the revised NPM Adjustment will operate as follows.

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  B. The revised adjustment for non-SET-paid sales under Section III.C will not
apply for those years. The revised adjustment for SET-paid sales under Section
III.B will apply for those years, except for the final sentence of Section
III.B.2.c and the tribal tax clause of footnote 1.

 

  C. In addition, for each of those years, the signatory PMs will receive the
amounts detailed in Section II.A.3 of the MOU, except that the percentage in
(a) of that Section will be 25% and the Market Share Loss referred to in
(a)-(d) of that Section will be the 2011 Market Share Loss.

 

III. NPM ADJUSTMENT FOR SUBSEQUENT YEARS

 

  A. The terms of the MOU would be abandoned and replaced with the adjustments
outlined herein.

 

  B.

SET-Paid NPM Sales1

 

  1. Adjustment. Each year, an adjustment will be applied to a signatory
Settling State’s share of the OPMs’ MSA Payment equal to the adjustment amount
for each non-compliant NPM cigarette on which SET is paid in the state. The
adjustment amount will be three times the per-cigarette escrow deposit rate in
the Model Escrow Statute for the year of the sale, including the inflation
adjustment in the statute. There will be a proportional adjustment for each
signatory SPM in proportion to the size of its MSA payment for that year.

 

  2. Meaning of non-compliant NPM cigarettes. Non-compliant NPM cigarettes are
SET-paid NPM cigarettes as to which escrow was (i) not deposited at the Escrow
Statute rate or (ii) released or refunded except as provided in the Escrow
Statute as amended by Allocable Share Repeal. The term non-compliant NPM
cigarettes does not include:

 

  a. cigarettes on which the escrow was deposited at the statutory rate by
either: (i) the NPM or any other entity liable for such payments under the laws
of the individual signatory Settling State, or (ii) a person or entity in the
distribution chain on behalf of such NPM or other entity liable for such
payments under such laws, so long as such state did not release or refund any
part of the deposit, unless released pursuant to the terms of the Escrow
Statute, as amended by Allocable Share Repeal;

 

  b. cigarettes on which a signatory Settling State recovered at the statutory
rate on an escrow bond posted pursuant to the laws of that

 

 

1 

SET includes state cigarette excise tax or other state tax on the distribution
or sale of cigarettes (other than a state or local sales tax that is applicable
to consumer products generally and is not in lieu of an excise tax), and, for
NPM cigarettes sold after 2014, an excise or other tax imposed by a state- or
federally-recognized tribe on the distribution or sale of cigarettes. Except if
otherwise indicated, references to “NPM sales,” “NPM cigarettes” and “NPM
volume” in this Term Sheet refer to NPM Cigarettes, with the term “Cigarette”
having the meaning given in the MSA.

 

2

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  state, so long as such state did not release or refund any part of the deposit
so recovered, unless released pursuant to the terms of the Escrow Statute, as
amended by Allocable Share Repeal;

 

  c.

cigarettes as to which the state is barred from requiring escrow deposits from
all entities liable for such payments under its individual state law, and from
recovery on a remaining escrow bond, by an automatic stay or subsequent order in
a federal bankruptcy proceeding or by order of a court of competent jurisdiction
that requiring escrow deposits is barred by federal or state constitutional law
(other than state constitutional provisions added or amended after the signature
date of this document or state constitutional law as it may impact or be applied
in relation to sovereign immunity or other Native American issues) or federal
statutory or common law, so long as: (i) the state opposes and appeals the stay
or order,2 and (ii) the NPM and brand at issue were properly on the state’s
approved-for-sale directory, either in accordance with the terms of
Complementary Legislation or pursuant to the order of a court of competent
jurisdiction barring removal of the NPM or brand from that directory, within 30
days prior to the time of sale. This paragraph only applies to signatory
Settling States that have requirements in effect that the NPM in question post a
bond in at least the amount described in section 17(b) of the Appendix to the
MOU and that importers are jointly and severally liable for escrow deposits due
from an NPM with respect to NPM cigarettes that they import; or

 

  d. SET-paid NPM cigarettes sold after 2014 in a signatory Settling State on
which escrow was timely deposited in an amount equal to or greater than the
Escrow Statute rate, but as to which the State releases a portion of such amount
not to exceed 50% of the Escrow Statute rate pursuant to a tribal compact to a
federally recognized tribe (or tribe that was recognized by that State as of
January 1, 2012) with a reservation in that State where each of the following is
true: (i) the release occurs no earlier than one year after the deposit is made,
(ii) the cigarettes on which the escrow is released were sold in retail
transactions to consumers on that tribe’s reservation, (iii) the money released
is provided to the tribe itself and used solely for public safety on such
tribe’s reservation and/or social services for tribal members (e.g., health
care, education) and not for any function that could directly or indirectly
promote or reduce the costs of cigarette production, marketing or sales,
(iv) the money released is not used in any way for the benefit of an NPM or to
facilitate NPM sales, (v) the compact makes the requirements of Section IV.L
applicable to the tribe, and the tribe is in conformity with such

 

 

2 

Subject to any limitation arising from Rule 11 or similar state ethical rules.

 

3

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  requirements, and (vi) the State has amended its Escrow Statute to remove the
NPM’s right to reversion and interest as to (but only as to) the escrow to be
released in conformity with the above requirements.3 Provided, however, that
(i) a signatory Settling State may not release more than $1 million in escrow as
described in this paragraph in any year to all tribes collectively; and (ii) in
the event a court strikes down a signatory Settling State’s removal of the NPMs’
right to reversion and interest described in (vi) above, such State may pay to
tribes the amounts authorized under the remainder of this paragraph out of its
general fund (subject to all other conditions and limits set forth above). A
State that releases escrow as described in this paragraph has the responsibility
of ensuring that (i)-(vi) and the terms of the preceding sentence are met.

 

  3. Safe Harbor. No adjustments under this section will be applied to a
signatory Settling State for any year in which the state demonstrated (a) that
escrow was deposited on at least 96% of all NPM cigarettes sold in the state
during that year on which SET was paid in the state, or (b) that the number of
SET-paid NPM cigarettes sold in the state during that year on which escrow was
not deposited did not exceed 2 million cigarettes.

 

  4. Timing. The adjustment amount with respect to a signatory Settling State
will be applied to that state’s share of the signatory PMs’ next annual MSA
Payment. If a stay or order, as referenced supra, is reversed or otherwise
becomes no longer operative and escrow is not then deposited on the cigarettes
at issue, the adjustment on those cigarettes will be applied to that state’s
share of the signatory PMs’ next annual MSA Payment unless a further stay or
order is entered. Adjustment amounts applied to a state’s share will be subject
to appropriate repayments by the signatory PMs if escrow is deposited on the
cigarettes at issue after application of the adjustment.

 

  5. Process. The process will be as specified in Sections II.B.5 and IV.B of
the MOU. The final settlement agreement will include provisions as to
communication of information to the Data Clearinghouse.

 

  C. Non-SET-Paid NPM Sales

 

  1. Non-SET-Paid NPM Sales would be handled as to the signatory Settling States
per the terms of the MSA, with the following adjustments:

 

 

3 

This paragraph applies only with respect to cigarettes of NPMs that existed in
the U.S. market as of June 1, 2012 and does not apply with respect to cigarettes
of NPMs that entered the U.S. market after that date. In addition, this
paragraph does not apply where any NPM involved in the production, distribution
or sale of the cigarettes at issue is one (or an affiliate or successor of one)
affiliated with the tribe (or any members of the tribe) to which the escrow
would be released. For purposes of this paragraph, a tribe with reservation land
located in more than one State is considered to have a reservation in, and to be
eligible for release of escrow from, only the State in which the largest portion
of its reservation land is located.

 

4

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  a.

The total NPM Adjustment liability (if any) of each signatory Settling State
under the original formula for a year would be reduced by a percentage. The
percentage would equal the sum of (i) the percentage represented by the fraction
of the total SET-paid NPM volume in the MSA States divided by nationwide
FET-paid NPM volume for that year;4 plus (ii) in the case of a signatory
Settling State that has, as of January 1 of the year at issue, executed
documentation approving the PSS amendment, the percentage represented by the
fraction of (x) the total equity-fee-paid NPM sales in those PSS that had in
effect for the entire year at issue an NPM equity fee law that, by its terms,
imposed a per-pack fee equal to or greater than 90% of the escrow rate for sales
made that year under the Escrow Statute on all cigarette sales in such state
that it has the authority under federal law to tax, divided by (y) nationwide
FET-paid NPM volume.5

 

  b. The liability reduction under paragraph (a) would be effectuated by each
signatory Settling State that is found non-diligent and allocated a share of the
NPM Adjustment amount receiving a reimbursement by the signatory PMs through the
methodology detailed in Paragraph 3(a) of the Agreement Regarding Arbitration.

 

  2.

The Diligent Enforcement standard applies to all FET-paid NPM sales that the
State reasonably could have known about and on which such State has the
authority under federal law to tax or collect escrow, including (i) all such
sales made via the Internet, (ii) all such tribal sales or sales on tribal
lands, and (iii) all such sales that may otherwise constitute contraband.6

 

 

4 

The total SET-paid NPM volume in the MSA States will be calculated as follows.
SET-paid NPM volume in a signatory Settling State will be the number of SET-paid
NPM sales in that State in that year as determined through the process described
in Section III.B.5. SET-paid NPM volume in a non-signatory Settling State will
be NPM sales in that State in that year on which the State’s cigarette excise
tax was paid (or on which another state tax on the distribution or sale of
cigarettes or an excise or other tax imposed by a tribe was paid if that State
in that year treated NPM sales on which such tax was paid as fully subject to
the escrow requirement under that State’s Escrow Statute). For a non-signatory
Settling State, such volume will be as reported by that State under the
Significant Factor procedures agreement (or other agreement among the parties as
to the Significant Factor issue for that year), provided that any signatory PM
or signatory Settling State may challenge that reported volume in the
arbitration referenced in Sections III.C.4 and IV.J.1 as an inaccurate measure
of the volume described in the preceding sentence. In the event of such a
challenge, the arbitration panel’s determination of the volume will be final and
binding on all signatory PMs and signatory Settling States. References to “FET”
include arbitrios de cigarillos in Puerto Rico.

5 

The final settlement agreement will include provisions addressing how the
information for calculating the total equity-fee-paid NPM sales in each such PSS
will be obtained. The current fee laws in MS and MN will be deemed to meet the
requirements of clause (x) even though they otherwise would not so long as the
per pack amount in effect under them remains at least as large as it is now. The
signatory PMs further agree to the following: (i) the signatory OPMs agree to
support the enactment in FL and TX of legislation meeting the requirements of
clause (x) provided that such legislation is not in conjunction with any other
legislative proposal and does not contain any provision that applies to the OPMs
or their products or businesses; (ii) if the PSS amendment has become effective,
the signatory SPMs agree not to oppose the enactment in FL and TX of legislation
meeting the requirements of clause (x) provided that such legislation is not in
conjunction with any other legislative proposal; and (iii) if a signatory PM
supports the enactment in FL or TX of an equity fee law that does not meet the
requirements of clause (x) and such law is enacted, the law will be deemed to
meet the requirements of clause (x) as to that signatory PM (and, if enactment
of the law was supported by signatory PMs with more than 60% Market Share, the
law will be deemed to meet the requirements of clause (x) as to all signatory
PMs).

6

The following are exempt from the Diligent Enforcement standard: (i) NPM
cigarette sales on a federal installation in a transaction that is exempt from
state taxation under federal law, and (ii) NPM cigarette sales on a tribe’s
reservation by an entity owned and operated by that tribe or member of that
tribe to a consumer who is an adult member of that tribe in a transaction that
is exempt from state taxation under federal law.

 

5

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  3.

Factors relevant to the Diligent Enforcement determination include, but are not
limited to: (i) whether the number of NPM sales in the State that were SET-paid
and addressed under Section III.B was reduced by virtue of a policy or agreement
not to require/collect SET or enforce an SET stamping requirement, or an
indifference to SET collection or to enforcement of an SET stamping requirement;
and/or (ii) whether the actual number of SET-paid NPM sales in the State during
that year was significantly greater than the number of such sales addressed
under Section III.B.7

 

  4. The signatory Settling States agree that diligent enforcement will be
determined as to them in a single arbitration each year. Future arbitrations
under this Term Sheet would be governed by the arbitration terms outlined within
the MOU, except to the extent necessary for a future merged arbitration to
proceed as described in Section IV.J.1 below.

 

  5. The signatory Settling States and the PMs will continue to discuss in good
faith on an ongoing basis whether there are other actions that they can
reasonably take to prevent non-SET-paid NPM sales.

 

IV. OTHER TERMS

 

  A. Withholding/Disputed Payment Accounts. Except as provided in Section J
below, the PMs will not withhold or pay into the DPA based on a dispute arising
out of the revised NPM Adjustment, except if the dispute was noticed for
arbitration by the PM over one year prior to the payment date and the
arbitration has not begun despite good faith efforts by the PM.

 

  B. Most Favored Nations. The MFN clause provided within the MOU would be
retained.

 

  C. RYO. Those terms relating to RYO in the MOU as to applying the SET-paid
sales provision to RYO would be retained (i.e., it applies if tax other than SET
is paid, and whether or not the state law requires that the containers be
stamped). The signatory Settling States and the signatory PMs will continue to
discuss in good faith on an ongoing basis the issues of pipe tobacco being sold
for use as RYO and of cigarette rolling machines being located at retail
establishments and clubs.

 

  D. Office. Those terms of the MOU designating an office within each signatory
Settling State as a point-of-contact on tobacco-related matters would be
retained.

 

 

7 

A finding referenced in (ii) will not increase the adjustment applicable to the
State under Section III.B or the reduction under Section III.C.1(a)(i).

 

6

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  E. Conditions of Settlement. The terms of this Term Sheet are conditioned
upon: (1) joinder by a critical mass of PMs and a critical mass of Settling
States by December 14, 2012; and (2) approval of this Term Sheet’s terms by the
Arbitration Panel. On December 17, 2012, each party that has signed this Term
Sheet will determine, in each party’s sole discretion, whether a critical mass
of PMs and Settling States have joined such that it will proceed with the
settlement, provided that the signatory PMs agree that a critical mass of
Settling States will have joined if the aggregate Allocable Share of the
Settling States that sign this Term Sheet by December 14, 2012 and determine to
proceed with the settlement on December 17, 2012 is 50% or more and such States
include the States that participated directly in the drafting of this Term Sheet
(AZ, AR, CA, MI, NE, NV, TN). If the settlement proceeds, additional Settling
States and PMs may join the settlement following December 14, 2012 by signing
this Term Sheet or the final settlement agreement up to the end date of the last
individual State diligent enforcement hearing in the 2003 Arbitration, although
they will have different payment obligations or payment rights as detailed in
Appendix A. Settling States may join the settlement after the end date of the
last individual State diligent enforcement hearing in the 2003 Arbitration if
the signatory PMs, in their sole discretion, agree. PMs may join the settlement
after the end date of the last individual State diligent enforcement hearing in
the 2003 Arbitration if the signatory Settling States, in their sole discretion,
agree.

 

  F. Settlement Agreement. The parties will cooperate in the drafting and
execution of a comprehensive final settlement agreement incorporating the terms
of this Term Sheet, as well as all other customary terms and conditions
acceptable to the parties. The documentation process will be subject to the
oversight of the Arbitration Panel. Pending the execution of the final
settlement agreement, this Term Sheet is binding on all signatories provided the
conditions of Section IV.E are met.

 

  G. Necessary legislation. All signatory Settling States must have the Escrow
Statute, Complementary Legislation and Allocable Share Repeal in full force and
effect. A signatory Settling State that does not currently have Allocable Share
Repeal in full force and effect will have until the end of 2013 to put it into
full force and effect. If it does not do so, starting with NPM cigarettes sold
in 2014, NPM cigarettes on which that State releases escrow that would not be
released under Allocable Share Repeal will be treated as non-compliant NPM
cigarettes under Section II.B.

 

  H.

Significant Factor. The signatory Settling States agree that the significant
factor condition to the NPM Adjustment is no longer operative as to them.
Beginning for 2022, no NPM Adjustment will be applicable to the signatory
Settling States for any year in which NPM Market Share is 3% or less.8

 

  I. Profit Adjustment. The final settlement agreement will include appropriate
provisions ensuring that the OPMs will not be subject to a profit adjustment
under Section B(ii) of Exhibit E arising from payments under Sections I-II being
concentrated or recognized in less than 10 years.

 

 

8 

This Section does not affect the calculation of the amount of the NPM Adjustment
under the MSA or this Term Sheet applicable to the signatory Settling States for
any year in which NPM Market Share is greater than 3%.

 

7

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  J. Relation with non-joining States. If there are Settling States that are not
signatory Settling States and the parties agree to proceed with the settlement:

 

  1. The parties will cooperate in merging the arbitration under Section III.C.4
for a year with the diligent enforcement arbitration under Section XI(c) of the
MSA as to non-joining States for that year.

 

  2. The 2015 arbitration under Section III.C will not commence until the 2015
diligent enforcement arbitration begins as to non-joining States. The provisions
of Section III.B will continue to apply on the schedule described in that
Section.

 

  3. In the interim, the signatory Settling States and the PMs will split the
amounts at issue under III.C for 2015 and each subsequent year on a 50-50 basis,
subject to repayment without interest by the PMs or credit without interest by
the signatory Settling States after the arbitration for that year concludes. No
more than 1 year would be subject to repayment or credit in any one year.

 

  4. Notwithstanding the above, the PMs would have the right to commence the
2015 arbitration under Section III.C as to the signatory Settling States in
advance of the above schedule if the volume of non-SET-paid NPM sales exceeds 9
billion cigarettes in each of any two years. After the first such year, the PMs
and signatory Settling States would discuss measures that could be taken to
avoid such sales. Notwithstanding the above, the signatory Settling States would
have the right to commence the 2015 arbitration under Section III.C. as to the
PMs in advance of the above schedule if the volume of non-SET-paid NPM sales is
less than 2 billion cigarettes in each of any two years. Any early commencement
under this paragraph requires the unanimous approval of the signatory members of
the side seeking early commencement.

 

  K. Cap of MSA payment. A signatory Settling State may not be subject to a
total NPM Adjustment under this Term Sheet for a year in excess of its total MSA
payment for that year.

 

  L.

Taxes. If a signatory Settling State has a law, regulation, systematic policy,
compact or agreement with respect to taxes (applicability, amount, collection or
refund) or stamping that is different for any NPM cigarettes than any PM
cigarettes or a law, regulation, systematic policy, compact or agreement with
respect to stamping that does not set forth specific requirements regarding when
and what stamps are required, the law, regulation, systematic policy, compact or
agreement

 

8

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  will be relevant to the Diligent Enforcement determination.9 In addition, if
the difference between NPM and PM cigarettes with respect to taxes or stamping
is material, the reduction in liability described in Section III.C.1(a)(i) will
not be applied with respect to that State (if found non-exempt from the NPM
Adjustment) for a year in which the difference is in effect.

 

  M. Additional Legislation. If requested by a signatory Settling State, the PMs
will support the enactment of legislation, provided that such legislation is not
in conjunction with any other legislative proposal and contains no deviation of
substance from the model language referred to below, which: (i) permits the
release of taxpayer-confidential information to the Data Clearinghouse for the
purpose of fulfilling its responsibilities under the settlement; (ii) imposes
the bonding requirement described in Section III.B.2.c above, (iii) imposes the
joint-and-several liability requirement described in Section III.B.2.c above,
(iv) modifies the Escrow Statute in a manner consistent with Section III.C.2-3
above with respect to the subjects described in those Sections, and/or
(v) permits a compact meeting the conditions described in Section III.B.2.d
above and modifies the Escrow Statute in the manner described in Section
III.B.2.d(vi) above. The final settlement agreement will include model language
for the above modifications (including appropriate severability language) that
signatory Settling States may choose, at their option, to use, and the PMs agree
that the model language (or language containing no material deviation of
substance from it) will not affect the status of a signatory Settling State’s
Escrow Statute as a Qualifying or Model Statute or any prior agreement to that
effect. In addition, if requested by a signatory Settling State, the PMs will
not oppose the Model Legislation set forth in Appendix A to the MOU. The
signatory Settling States and the signatory PMs will continue to discuss in good
faith on an ongoing basis support for other appropriate legislative enactments
that would enhance enforcement of and/or improve compliance with the escrow
requirement and for legislation prohibiting or limiting the sale of cigarettes
to any consumer who is not in the physical presence of the seller at the time of
sale.

 

  N. Potential New Participating Manufacturers. Subject to the condition
specified in the last sentence of this section, the PMs agree to waive rights
under Section XVIII(b) of the MSA as to NPMs signing the MSA and becoming a
Participating Manufacturer without making back-payments for sales in prior years
that would otherwise be required under Section II(jj) of the MSA and/or without
making full escrow deposits on such prior sales, provided that the following
conditions are met: (i) the NPM signs the MSA within 120 days of the execution
of the final settlement agreement; (ii) the NPM turns over the full amount on
deposit in its existing escrow accounts to the Settling States; (iii) all other
MSA terms are applicable to the NPM and the NPM waives any claim of immunity
from enforcement of its MSA obligations; (iv) the NPM agrees to the other
customary terms and conditions, apart from back-payments and escrow deposits,
that the States have required for new

 

 

9

This does not include (i) taxes or stamping requirements that differ for
reservation sales and non-reservation sales provided that the taxes and stamping
requirements applicable to reservation and non-reservation sales respectively
are the same for both PM and NPM sales, or (ii) requirements that NPM cigarettes
bear a stamp of a different color solely for purposes of identification.

 

9

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  Participating Manufacturers (including quarterly payments and de-listing); and
(v) the NPM agrees that substantial non-compliance with its MSA obligations
during the first five years after joining the MSA in the absence of a good-faith
dispute would trigger the back-payment obligations that would otherwise have
been required of it. The PMs do not waive rights under Section XVIII(b) of the
MSA as to a new Participating Manufacturer’s performance of its MSA obligations
going forward. This section is conditioned upon the delivery to the PMs within
60 days of the execution of the final settlement agreement a binding agreement
executed by all Settling States and the Foundation that NPMs that sign the MSA
pursuant to this provision without making full back-payments will not be
considered Participating Manufacturers for purposes of Section IX(e) of the
MSA.10

 

  O. Release of Escrow. Except pursuant to the unanimous consent of the
signatory PMs, signatory Settling States will not release or refund escrow
deposited for the resolved years 1999-2012 or transition years 2013-2014 except
to a State or as provided in the Escrow Statute as amended by Allocable Share
Repeal. Any release or refund of escrow deposited for subsequent years will be
addressed as provided in Section III.B for SET-paid NPM sales and as provided in
Section III.C and the Diligent Enforcement standard for non-SET-paid NPM sales.

 

 

10 

This provision does not apply to any entity that had previously agreed to sign
the MSA and to make any back-payments. The PMs retain their rights under Section
XVIII(b) of the MSA as to any such entity.

 

10

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APPENDIX A:

 

  1.

The OPMs receive a total amount equal to (a) the aggregate Allocated Settlement
Percentage of the signatory Settling States multiplied by $6.52 billion; and
(b) the aggregate Allocated Settlement Percentage of the signatory Settling
States multiplied by the OPMs’ full 2010-12 NPM Adjustments. Each signatory
Settling State’s Allocated Settlement Percentage equals the product of its
Allocable Share percentage and the applicable settlement value percentage under
Paragraph 2.11

 

  2. (A) For Settling States that sign this Term Sheet by 6:00 P.M. PST on the
initial sign-on date and determine to proceed with the settlement on
December 17, 2012, the applicable settlement value percentage is that reflected
in the grid below, with the aggregate Allocable Share being the aggregate
Allocable Share of the Settling States that sign this Term Sheet by the
Reference Date and proceed with the settlement:

 

Aggregate Allocable Share

   Settlement Value Percentage  

80% or more

     37.5 % 

75-79.9%

     38.5 % 

70-74.9%

     39.5 % 

65-69.9%

     40.5 % 

60-64.9%

     42.5 % 

55-59.9%

     44.5 % 

50-54.9%

     46 % 

Except as provided below, the initial sign-on date is December 14, 2012. For
Settling States whose individual State diligent enforcement hearing in the 2003
Arbitration is scheduled to begin in December 2012 (WA, AZ and CO), the initial
sign-on date is the day preceding the beginning of its hearing unless the
beginning of its hearing is deferred until after December 14, 2012. At the
present time, WA and AZ have agreed to such deferral, and their initial sign-on
date will be December 14, 2012 so long as the Panel approves the deferral.

(B) For Settling States that sign this Term Sheet (or, in the case of Settling
States that do not sign this Term Sheet, the final settlement agreement) after
the initial sign-on date, the applicable settlement value percentage is 59%. The
signatory PMs, in their sole discretion, may waive all or part of the increase
above the applicable settlement value percentage under subparagraph (A) as to
such a State without triggering the MFN clause in this Term Sheet and without
any obligation to provide a similar waiver to any other State.12

(C) The Reference Date is December 21, 2012. A Settling State that signs this

 

 

11 

References to a State’s “Allocable Share” percentage in this Term Sheet are to
the percentage set forth for that State as listed in Exhibit A of the MSA.

12 

Approval by signatory PMs representing at least 85% Market Share in 2011 will be
sufficient for this waiver and will bind the remaining signatory PMs.

 

11

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Term Sheet after the initial sign-on date but by the Reference Date will be
counted as part of the aggregate Allocable Share under subparagraph (A) whether
or not the signatory PMs waived the increased percentage applicable to such
State under subparagraph (B).

 

  3.

(A) The amount under Paragraph 1 will be provided by the OPMs receiving credits
reflecting the total amount specified in Paragraph 1 (the “Total OPM Amount”).
Subject to Section IV.I, the credits will be applied as follows: (i) 50% of the
Total OPM Amount as a credit against the OPMs’ MSA annual payment due in April
2013; and (ii) a [    ]% reduction in the OPMs’ MSA annual payment under Section
IX(c)(1) of the MSA due in each of April 2014-2017, plus interest on the amount
of each reduction (except as provided in the accompanying footnote) at the Prime
Rate calculated from April 15, 2013.13

(B) The amount of the percentage in subparagraph (A)(ii) will be the percentage
that, when applied to the OPMs’ estimated MSA annual payments due in April
2014-2017 (the estimate being after the Inflation Adjustment, Volume Adjustment
and Previously Settled States Reduction, but before the remaining adjustments,
reductions and offsets under the MSA), yields a total reduction equal to 50% of
the Total OPM Amount. (For example, if 50% of the Total OPM Amount were $1
billion and the OPMs’ estimated MSA annual payments for 2014-2017 (as adjusted
as specified above) were $5 billion per year, the percentage in subparagraph
(A)(ii) would be 5%.) The percentage will be filled in with respect to the MSA
annual payment due in April 2014 pursuant to these specifications as of the
Reference Date (once the Total OPM Amount is known), subject to change in the
event additional Settling States sign this Term Sheet or the final settlement
agreement after the Reference Date. With respect to each of the reductions to
the MSA annual payments due in April 2015-2017, the percentage will be
recalculated annually on October 15 of the year prior to the year the payment is
due (for example, on October 15, 2014 for the MSA annual payment due in April
2015) to reflect the percentage that, when applied to an estimate of the OPMs’
next annual payment based upon inflation and volume in the first 9 months of the
year prior to the year the payment is due, yields a reduction equal to 12.5% of
the Total OPM Amount.14

(C) The final settlement agreement will include provisions that will apply in
the event the Total OPM Amount increases after the Auditor’s Final Calculation
of the MSA annual payment due on April 15, 2013 as a result of increased State

 

 

 

13 

Interest will only be paid on the portion of each reduction that exceeds 20% of
the signatory Settling States’ aggregate Allocable Share of amounts previously
withheld by an OPM and paid into the DPA pursuant to Paragraph 5.

14 

The reductions to be applied in 2014-2017 do not count in calculating the NPM
Adjustment or toward the cap in Section IV.K (the final settlement agreement
will include provisions addressing how the OPMs will receive the funds at issue
if such a State does not have a sufficient MSA payment remaining in any such
year to apply the reductions due that year). In addition, the final settlement
agreement will include provisions regarding the accrual of the reductions.

 

12

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participation after that date and that specify how the increased part of that
Amount will be provided to the OPMs. Unless the parties agree otherwise, those
provisions will be consistent with the principles of this Appendix, including
providing for payment of 50% of the increased part of that Amount by
first-available credit and of the remaining 50% by reduction.

(D) Each credit and reduction will be allocated among the OPMs as directed by
the OPMs.

 

  4.

The credit and reductions under Paragraph 3 will be allocated solely among the
signatory Settling States and will not be allocated to the Allocated Payment of
any non-signatory Settling State. Except as provided in Section I.B or as may be
agreed upon by the parties in the final settlement agreement, the credit and
each of the reductions will be allocated among the signatory Settling States in
proportion to their respective Shares. A signatory Settling State’s “Share”
means the percentage yielded by dividing its Allocated Settlement Percentage by
the aggregate Allocated Settlement Percentages of all signatory Settling
States.15

 

  5. Any OPM that withheld amounts with respect to an NPM Adjustment will pay
that amount into the DPA by seven days after approval of this Term Sheet’s terms
by the Arbitration Panel. Each OPM that paid amounts attributed to the 2003,
2004, 2006, 2007, 2008 or 2009 NPM Adjustments into the DPA (including
previously withheld amounts paid into the DPA pursuant to the preceding
sentence) will, as of the date it receives confirmation from the Independent
Auditor that it will apply all of the credits and reductions described in
Paragraphs 1-3 and allocate them as described in Paragraphs 4 and 6, instruct
the Escrow Agent and the Independent Auditor to release to the signatory
Settling States from the DPA an amount equal to the total amounts attributed to
such NPM Adjustments (plus the accumulated earnings thereon) multiplied by the
aggregate Allocable Share percentage of the signatory Settling States, less
amounts allocated to the Data Clearinghouse per Section I.A.3 above. Individual
signatory Settling States may choose to have their DPA releases spread over
2013-2017. This would not affect any credits, adjustments or other calculations.

 

  6. The signatory Settling States and OPMs will jointly instruct the Escrow
Agent and Independent Auditor: (i) to apply all of the credits and reductions
described in Paragraphs 1-3, and to allocate them among the OPMs as described in
Paragraph 3

 

 

15 

Subject to the limits specified below, a signatory Settling State that signs
this Term Sheet by the Reference Date may elect, by notice to the parties no
later than the Reference Date, for its Share of the Total OPM Amount to be
applied entirely as a credit against the OPMs’ MSA annual payment due in April
2013. In that event, the overall amounts of the respective credit and reductions
under Paragraph 3 will not change, but the credit and reductions will be
allocated among the signatory Settling States differently so that (i) each
electing State is allocated a portion of the April 2013 credit equal to its
Share of the Total OPM Amount and is allocated none of the 2014-2017 reductions,
and (ii) each other signatory Settling State is allocated a lower portion of the
April 2013 credit and a corresponding higher portion of each of the 2014-2017
reductions as necessary to fulfill the provisions of Paragraph 4. Unless the
OPMs agree otherwise, the election right will not be available if it would
result in a profit adjustment under Section B(ii) of Exhibit E of the MSA or if
it is not possible to apply the preceding sentence because too many signatory
Settling States have already sought to make that election.

 

13

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  and solely among the signatory Settling States as described in Paragraph 4;
and (ii) to allocate the amount released from the DPA under Paragraph 5 solely
among the signatory Settling States in proportion to their respective Allocable
Shares, except for those amounts allocated to the Data Clearinghouse.

 

  7. There will be parallel provisions for SPMs so that each signatory SPM
receives the same (i.e., no greater) relative payment amounts on the same
general timetable and makes the same relative releases (including amounts paid
into the DPA attributed to the 2010-11 NPM Adjustments) through an equivalent
process.

 

  8. The remaining methodology in the August 2010 MOU would be retained,
including as to SPMs that withheld funds (including in excess of their total
payment amounts under this Term Sheet), SPMs that are not current on their
undisputed or adjudicated MSA payment amounts or that expressly waived or
assigned Adjustment claims, and late-joining Settling States or PMs.
Late-joining Settling States would be eligible to join subject to the provisions
of Section IV.E, but their payment amount would be as provided in Paragraph 2.
Any late-joining OPM will be treated in the same manner as a late-joining SPM
was to have been treated under the August 2010 MOU. A PM or Settling State that
signs this Term Sheet after the initial sign-on date (for PMs, 6:00 P.M. PST on
December 14, 2012; for States, as provided in Paragraph 2) will be considered
late-joining, provided that, in the case of a late-joining Settling State, the
signatory PMs may waive all or part of the increased payment from that State as
provided in Paragraph 2.

 

14

--------------------------------------------------------------------------------

SPM ADDENDUM

The following reflects the parties’ agreement as to the parallel provisions
under Paragraph 7 of Appendix A with respect to the individual SPMs listed in
Exhibit A hereto.1

1.     Each listed SPM will receive a total amount equal to (a) the aggregate
Allocated Settlement Percentage of the signatory Settling States multiplied by
the amount listed for that SPM in the attached Exhibit A; and (b) the aggregate
Allocated Settlement Percentage of the signatory Settling States multiplied by
that SPM’s full 2010-12 NPM Adjustments.

2.     Each listed SPM that paid amounts attributed to any of the 2003, 2004 or
2006-2011 NPM Adjustments into the DPA, will, as of the date it receives
confirmation from the Independent Auditor that it will apply all of the credits,
payments, and reductions described in Paragraph 4 below (or in the case of
Liggett and Vector, Paragraph 5 below) and allocate them consistent with
Paragraphs 4 and 6 of Appendix A and Paragraph 3 below, instruct the Escrow
Agent and the Independent Auditor to release to the signatory Settling States
from the DPA an amount equal to the total amounts attributed to such NPM
Adjustments (plus the accumulated earnings thereon) multiplied by the aggregate
Allocable Share percentage of the signatory Settling States.

3.     The parallel provisions to Paragraphs 4 and 6 of Appendix A will include
provisions for instructions to the Escrow Agent and Independent Auditor (i) to
apply all of the credits, payments, and reductions described in Paragraphs 4 and
5 below and to allocate them solely among the signatory Settling States; (ii) to
allocate amounts paid or released by each SPM solely among the signatory
Settling States; and (iii) to recognize and apply the provisions regarding
carryforward and transfer of credits described in footnote 2 below.

4.     The amount under Paragraph 1 will be provided by each listed SPM (except
for Liggett and Vector) receiving credits reflecting the total amount specified
for that SPM in Paragraph 1 in one of the following three ways:

(i)     the SPM receiving its full amount under Paragraph 1 as a credit against
its MSA annual payment under Section IX(c)(1) of the MSA due in April 2013;

(ii)     the SPM receiving (a) 50% of its amount under Paragraph 1 as a credit
against its MSA annual payment under Section IX(c)(1) of the MSA due in April
2013; and (b) a [__]% reduction in its MSA annual payment under Section IX(c)(1)
of the MSA due in each of April 2014-2017, plus interest on the amount of each
reduction at the Prime Rate calculated from April 15, 2013; or

 

 

1  The definitions in the Term Sheet and Appendix A apply to this Addendum.
References to Appendix A are to Appendix A to the Term Sheet.

--------------------------------------------------------------------------------

(iii)     the SPM receiving (a) 30% of its amount under Paragraph 1 as a credit
against its MSA annual payment under Section IX(c)(1) of the MSA due in April
2013, and (b) a [__]% reduction in the SPM’s MSA annual payment under Section
IX(c)(1) of the MSA due in each of April 2014-2016, plus interest on the amount
of each reduction for the years 2014, 2015, and 2016 at the Prime Rate
calculated from April 15, 2013.

(iv) The option in subparagraph (iii) is available only if enough listed SPMs
have selected options (i) or (ii) above such that, in combination with the
amounts that would be credited in 2013 under subparagraph (iii)(a), at least 50%
of the aggregate amounts due to all listed SPMs under Paragraph 1 are credited
in 2013. For purposes of this calculation, the amounts for Liggett and Vector
under Paragraph 1 will be deemed credited in 2013, although those amounts will
be conferred as provided in Paragraph 5 below.

(v)     The percentages in subparagraphs (ii) and (iii) will be the percentage
that, when applied to the listed SPM’s estimated MSA annual payments due in
April 2014-2017 (in the case of subparagraph (ii)) or April 2014-2016 (in the
case of subparagraph (iii)), in each case with the estimate being after the
Inflation Adjustment and Volume Adjustment but before the remaining adjustments,
reductions and offsets under the MSA, yields a total reduction equal to 50% of
the amount due the listed SPM under Paragraph 1 (in the case of subparagraph
(ii)) or 70% of the amount due the listed SPM under Paragraph 1 (in the case of
subparagraph (iii)). The percentages will be filled in with respect to the MSA
annual payment due in April 2014 pursuant to these specifications as of the
Reference Date (once the amount due the listed SPM under Paragraph 1 is known),
subject to change in the event additional Settling States sign this Term Sheet
or the final settlement agreement after the Reference Date. With respect to each
of the reductions to the MSA annual payments due after April 2014, the
percentage will be recalculated annually on October 15 of the year prior to the
year the payment is due (for example, on October 15, 2014 for the MSA annual
payment due in April 2015) to reflect the percentage that, when applied to an
estimate of the listed SPM’s next annual payment based upon inflation and volume
in the first 9 months of the year prior to the year the payment is due, yields a
reduction equal to 12.5% of the amount due the listed SPM under Paragraph 1 (in
the case of subparagraph (ii)) or 23.3333333% of the amount due the listed SPM
under Paragraph 1 (in the case of subparagraph (iii)).2

 

 

2  The reductions to be applied in 2014-2017 do not count in calculating the NPM
Adjustment or toward the cap in Section IV.K (the final settlement agreement
will include provisions addressing how the SPMs will receive the funds at issue
if such a State does not have a sufficient MSA payment remaining in any such
year to apply the reductions due that year). In addition, the final settlement
agreement will include provisions regarding the accrual of the reductions. A
listed SPM that has no MSA payment obligation in 2013 against which the credit
under Paragraph 4 due in 2013 may be applied, or whose MSA payment obligation
for 2013 is less than the amount of the credit to which it is entitled that year
under Paragraph 4 may, if it chooses, carry the unused portion of the credit
forward and apply it in future years or may transfer the unused portion of the
credit to another PM that may apply such credit against its own payment. An

 

2

--------------------------------------------------------------------------------

5.     With respect to Liggett and Vector, which withheld certain funds, the
amount under Paragraph 1 will be handled pursuant to this Paragraph. Liggett and
Vector will receive no credit against their MSA payments and instead will
receive the benefit of the settlement and address previously withheld amounts
for the 2004-2010 adjustments as follows. No later than April 15, 2013, each of
those companies will pay to the signatory Settling States the excess of
(a) $44,098,572 (for Liggett) or $2,624,625 (for Vector) multiplied by the
aggregate Allocable Share percentage of the signatory Settling States; over
(b) the amount to which that company is entitled under Paragraph 1; plus
(c) 12.8090288% of $27,185,288 (for Liggett) or $1,834,639 (for Vector)
multiplied by the aggregate Allocable Share percentage of the signatory Settling
States. Following these payments, the amount Liggett and Vector have withheld
with respect to NPM Adjustments shall be reduced by $44,098,572 (for Liggett)
and $2,624,625 (for Vector) multiplied by the aggregate Allocable Share
percentage of the signatory Settling States, plus the amount of all accrued
interest on those amounts, reflecting the settlement between Liggett and Vector
and the Signatory States with respect to those States’ Allocable Share of the
NPM Adjustment claims. With respect to the 2003, 2007 (for Vector), 2011, and
2012 NPM Adjustments, Liggett and Vector will be governed by Paragraph 2.

6.     With respect to Farmers Tobacco Company of Cynthiana, Inc., which
withheld certain funds, the amount under Paragraph 1 will be handled pursuant to
this Paragraph. Farmers Tobacco will receive no credit against its MSA payments
and instead will receive the benefit of the settlement and address previously
withheld amounts for the 2003-2009 adjustments as follows. No later than
April 15, 2013, Farmers Tobacco will pay to the signatory Settling States the
excess of (a) $20,028,552 multiplied by the aggregate Allocable Share percentage
of the signatory Settling States; over (b) the amount to which Farmers Tobacco
is entitled under Paragraph 1. Following these payments, the amount Farmers
Tobacco has withheld with respect to NPM Adjustments shall be reduced by
$20,028,552 multiplied by the aggregate Allocable Share percentage of the
signatory Settling States, plus the amount of all accrued interest on those
amounts, reflecting the settlement between Farmers Tobacco and the Signatory
States with respect to those States’ Allocable Share of the NPM Adjustment
claims. (The amount for Farmers Tobacco in Exhibit A referenced in Paragraph
1(a) is not multiplied by 112.8090288%.)1

 

 

SPM that is not current on its undisputed or adjudicated payment obligations
under the MSA or any amendment to the MSA, or that has been delisted by any
State as of August 31, 2012 for failure to generally perform its MSA financial
obligations when due, shall (in addition to treatment specified under the term
sheet and Appendix A) not be entitled to carry the unused portion of the credit
forward or transfer it to another PM, and any amounts to be received by such an
SPM under the Term Sheet, and any amounts transferred to it under this footnote,
will be applied to its unpaid obligations and will not otherwise be credited to
that SPM except to the extent such amounts exceed the signatory Settling States’
aggregate Allocable Share of such unpaid obligations.

1 

The numbers in Exhibit A and Paragraphs 5 and 6 remain subject to verification.

--------------------------------------------------------------------------------

7.     The final settlement agreement will include provisions that will apply in
the event the amounts due the SPMs under Paragraph 1 increase after the
Auditor’s Final Calculation of the MSA annual payment due on April 15, 2013 as a
result of increased State participation after that date and that specify how the
increased part of that Amount will be provided to each SPM. Unless the parties
agree otherwise, those provisions will be consistent with the principles of this
Addendum. Also, this Addendum may be supplemented to address additional SPMs
joining the Term Sheet.

 

4

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EXHIBIT A

 

Formula derivation:

     

OPM NPM Adjustments 2003-2009

   $ 5,779,679,225      

OPM Amount Specified in App. A, ¶ 1

   $ 6,520,000,000       Percent by which OPM Amount Specified
in App. A, ¶ 1 exceeds 2003-2009
Adjustments      12.8090288%      

SPM (to be verified)

    
  NPM Adj.
2003-2009   
       
 
 

 

112.8090288%
of NPM Adj
2003-09

(¶ 1 amount)

  
  
  

  

Commonwealth Brands, Inc.

   $ 201,218,098       $ 226,992,182    Compania Industrial de Tabacos Monte
Paz, S.A.    $ 468,522       $ 528,536   

Daughters & Ryan, Inc.

   $ 269,022       $ 303,481   

Farmers Tobacco of Cynthiana

   $ 20,028,552       $ 20,028,552   

House of Prince A/S

   $ 4,495,813       $ 5,071,683   

Japan Tobacco International U.S.A., Inc.

   $ 3,888,474       $ 4,386,550   

King Maker Marketing, Inc.

   $ 7,257,720       $ 8,187,364   

Kretek International

   $ 1,158,476       $ 1,306,866   

Lane Limited

   $ 803,048       $ 905,911   

Liggett Group LLC

   $ 37,006,861       $ 41,747,081   

Lignum-2, Inc.

   $ 1,138,201       $ 1,283,994   

Peter Stokkebye Tobaksfabrik A/S

   $ 1,229,041       $ 1,386,469   

Premier Manufacturing, Inc.

   $ 4,945,073       $ 5,578,489   

P.T. Djarum

   $ 4,143,605       $ 4,674,360    Reemtsma Cigarettenfabriken GmbH (Reemtsma)
   $ 275       $ 311   

Santa Fe Natural Tobacco Company, Inc.

   $ 19,446,985       $ 21,937,955   

Sherman 1400 Broadway N.Y.C., Inc.

   $ 885,232       $ 998,621   

Top Tobacco, L.P.

   $ 12,941,925       $ 14,599,660   

Vector Tobacco Inc.

   $ 2,141,354       $ 2,415,641   

Von Eicken Group

   $ 118,127       $ 133,257   

U.S. Flue Cured Tobacco Growers, Inc.

   $ 1,751,910       $ 1,976,312   

Total

   $ 325,336,312       $ 364,443,024