

 

                                                                    EXHIBIT 10.6



                             STATE ESCROW AGREEMENT
                             ----------------------

         This escrow agreement (the "State Escrow Agreement") is entered into as
of May 8, 1998, by and among Philip Morris Incorporated, R.J. Reynolds Tobacco
Company, Brown & Williamson Tobacco Corporation and Lorillard Tobacco Company
(collectively, the "Settling Defendants" and each individually a "Settling
Defendant"), the State of Minnesota and [NAME OF ESCROW AGENT], as Escrow Agent
(the "State Escrow Agent").

                                   WITNESSETH:

         WHEREAS, counsel for the State of Minnesota and Settling Defendants
entered into a settlement agreement and release as of May 8, 1998 (the
"Settlement Agreement"), which settlement agreement set 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
Minnesota v. Philip Morris Incorporated, No. C1-94-8565, (filed August 17, 1994)
(the "Action"), in the District Court of the State of Minnesota, County of
Ramsey, Second Judicial District (the "Court");

         WHEREAS, paragraph II.B. of the Settlement Agreement and Schedule A
thereto provide that, on the dates specified therein, each Settling Defendant
shall pay, severally and not jointly, its respective share of the aggregate
amounts payable by the Settling Defendants pursuant to the terms of that
paragraph, with each Settling Defendant's respective share to be determined
according to the terms thereof;

         WHEREAS, paragraph II.D. of the Settlement Agreement provides that, on
December 31, 1998, and on December 31 of each year annually thereafter, each
Settling Defendant shall pay, severally and not jointly, its respective share of
the aggregate annual amount payable by the Settling Defendants pursuant to the
terms of that paragraph, with each Settling Defendant's respective share to be
determined according to the terms thereof;

         WHEREAS, paragraph V.B. of the Settlement Agreement further provides
that, in the event of a challenge to the Court's Final Approval of the
Settlement Agreement, any payments due to be paid by Settling Defendants
pursuant to paragraph II.D. of the Settlement Agreement shall be paid into a
special escrow account (the "State Escrow Account"), to be held in escrow
pending resolution of such challenge as set forth in paragraph V.B. and of the
Settlement Agreement;

         WHEREAS, paragraph V.B. of the Settlement Agreement further provides
that, in the event of a challenge to the Court's Final Approval of the
Settlement Agreement prior to December 31, 1998, any payments due to be paid by
Settling Defendants pursuant to paragraph II.B. of the Settlement Agreement
shall be paid into the State Escrow Account, to be held in escrow pending
resolution of such challenge as set forth in paragraph V.B. of the Settlement
Agreement;

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         NOW, THEREFORE, the parties hereto agree as follows:

SECTION 1.  Appointment of State Escrow Agent.

         Settling Defendants and the State of Minnesota hereby appoint the State
Escrow Agent to act as escrow agent on the terms and conditions set forth
herein, and the State Escrow Agent hereby accepts such appointment on such terms
and conditions.

SECTION 2.  Deposit.

         Any payment pursuant to paragraph II.D. of the Settlement Agreement
that is due to be paid by Settling Defendants before resolution of any challenge
to Final Approval as set forth in paragraph V.B. of the Settlement Agreement,
and any payment pursuant to paragraph II.B. of the Settlement Agreement that is
due to be paid by Settling Defendants before resolution of any challenge to
Final Approval initiated prior to December 31, 1998 as set forth in paragraph
V.B. of the Settlement Agreement shall be delivered to the State Escrow Agent
and shall be deposited into the State Escrow Account (all payments deposited
into the State Escrow Account, together with any interest or other income on
investment with respect to such payments, being herein called the "State Escrow
Amount") and shall be governed by the terms of this State Escrow Agreement. All
such deliveries of funds are subject to the right of the Settling Defendants to
obtain, pursuant to section 4(a) of this State Escrow Agreement, prompt return
of the entire State Escrow Amount (less appropriate deductions for
administrative fees and expenses, including taxes and other related costs) in
the event that the Settlement Agreement is canceled and terminated pursuant to a
court order. The State Escrow Amount shall be maintained, invested and disbursed
by the State Escrow Agent strictly in accordance with this State Escrow
Agreement.

SECTION 3.  Investment of State Escrow Amount.

         The State Escrow Agent shall invest and reinvest the State 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 Minnesota;
(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 State Escrow Amount.
The State 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 State Escrow Agent shall pay all or any part of the State Escrow
Amount to any party as provided herein, the State Escrow Agent shall also pay

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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 State Escrow Amount.

         After receipt, the State Escrow Agent shall deliver the State Escrow
Amount as set forth below:

                a. In the event that the Settlement Agreement is canceled and
         terminated pursuant to paragraph V.B. of the Settlement Agreement, and
         upon receipt of a court order so directing, the State Escrow Agent
         shall disburse the entire State Escrow Amount (including any interest
         thereon, as provided in Section 3) to the Settling Defendants on the
         same pro rata basis as the Settling Defendants' contributions to the
         State Escrow Account.

                b. Upon receipt of written notice signed by counsel for the
         Settling Defendants and counsel for the State of Minnesota notifying
         the State Escrow Agent that all challenges to Final Approval have been
         resolved as provided in paragraph V.B. of the Settlement Agreement and
         that all escrow funds may be released, the State Escrow Agent shall
         proceed to distribute the State Escrow Amount to an account designated
         in writing by the State of Minnesota.

                c. For its services, the State Escrow Agent shall receive fees
         in accordance with the State Escrow Agent's customary fees in similar
         matters. All such fees shall constitute a direct charge against the
         State Escrow Amount, but the State Escrow Agent shall not debit the
         State Escrow Amount for any such charge until it shall have presented
         its statement to and received approval by counsel for the Settling
         Defendants and counsel for the State of Minnesota, which approval shall
         not be unreasonably withheld. Such approval shall be deemed given if
         the State Escrow Agent has not received written objections from either
         counsel for Settling Defendants or counsel for the State of Minnesota
         within 30 days after presentment of its statement. Such fees and all
         expenses charged against the State Escrow Amount shall, to the extent
         possible, be paid out of interest earned. In the event that counsel for
         the Settling Defendants or counsel for the State of Minnesota objects
         in writing to such fees, the State Escrow Agent shall not debit the
         State 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 State Escrow Agreement shall provide
the State 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 State Escrow
Account established pursuant to this State Escrow Agreement shall be treated as
a Qualified Settlement Fund for federal tax purposes pursuant to Treas. Reg. ss.
1.468B-l.

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SECTION 6.  Termination of State Escrow Account.

         This State Escrow Agreement (other than the State Escrow Agent's right
to indemnification set forth in Section 7) shall terminate when the State Escrow
Agent shall have released from the State Escrow Account all amounts pursuant to
Section 4 hereof.

SECTION 7.  State Escrow Agent.

                a. The State 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 State Escrow Agent fails to receive the instructions
         contemplated by Section 4 hereof or receives conflicting instructions,
         the State 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. Settling Defendants, on the same pro rata basis as the funds
         constituting the State Escrow Amount were contributed to the State
         Escrow Account, agree to indemnify, hold harmless and defend the State
         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 date of the termination of this Escrow Agreement as provided in
         Section 6 hereof, except such as shall result solely and directly from
         its own negligence or willful misconduct. The State Escrow Agent shall
         not be bound in any way by any agreement or contract between Settling
         Defendants and the State of Minnesota (whether or not the State Escrow
         Agent has knowledge thereof) other than this State Escrow Agreement,
         and the only duties and responsibilities of the State Escrow Agent
         shall be to hold and invest the State Escrow Amount received hereunder
         and to release such State Escrow Amount in accordance with the terms of
         this State Escrow Agreement.

                c. The State 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 escrow agent,
         selected by the Settling Defendants and agreeable to the State of
         Minnesota, shall have been appointed and shall have accepted such
         appointment in writing. If an instrument of acceptance by a successor
         escrow agent shall not have been delivered to the State Escrow Agent
         within 30 days after the giving of such notice of resignation, the
         resigning State Escrow Agent may, at the expense of the Settling
         Defendants and the State of Minnesota (to be shared equally between the
         Settling Defendants and the State of Minnesota), petition the Court for
         the appointment of a successor escrow agent.

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                d. Upon resolution of any challenge to Final Approval as
         provided in paragraph V.B. of the Settlement Agreement, provided that
         Settling Defendants have performed all of their obligations required to
         be performed hereunder prior to such date, all duties and obligations
         of Settling Defendants hereunder shall cease, with the exception of any
         indemnification obligation of Settling Defendants incurred prior to the
         date of the termination of this Escrow Agreement.

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 Minnesota:
         ------------------

                  Hubert H. Humphrey, III
                  Attorney General
                  102 State Capitol
                  St. Paul, MN 55155
                  Fax: 612.297.4193

                  Michael V. Ciresi
                  Robins, Kaplan, Miller & Ciresi L.L.P.
                  2800 LaSalle Plaza
                  800 LaSalle Avenue
                  Minneapolis, MN 55402-2015
                  Fax: 612.339.4181

                  Chief Deputy Attorney General
                  State of Minnesota
                  102 State Capitol
                  St. Paul, MN 55155
                  Fax: 612.297-4193

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         Settling Defendants:
         -------------------

                  For Philip Morris Incorporated:
                  ------------------------------
                  Martin J. Barrington
                  Philip Morris Incorporated
                  120 Park Avenue
                  New York, NY 10017-5592
                  Fax: 212.907.5399

                  With a copy to:
                  --------------
                  Meyer G. Koplow
                  Wachtell, Lipton, Rosen & Katz
                  51 West 52nd Street
                  New York, NY 10019
                  Fax: 212.403.2000

                  For R.J. Reynolds Tobacco Company:
                  ----------------------------------
                  Charles A. Blixt
                  General Counsel
                  R.J. Reynolds Tobacco Company
                  401 North Main Street
                  Winston-Salem, NC 27102
                  Fax: 910.741.2998

                  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

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                  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

                  For Lorillard Tobacco Company:
                  -----------------------------
                  Arthur J. Stevens
                  Lorillard Tobacco Company
                  714 Green Valley Road
                  Greensboro, NC 27408
                  Fax: 910.335.7707

         State Escrow Agent:
         ------------------

                  [NAME OF BANK]
                  [ADDRESS]
                  Phone:   [PHONE NUMBER]
                  Fax:   [FAX NUMBER]

                  Wire Transfer Instructions
                  ABA:   [NUMBER]
                  Account:   [NUMBER]

                b. Successors and Assigns. The provisions of this State 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 State Escrow Agreement shall be construed
         in accordance with and governed by the laws of the State of Minnesota,
         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 Court for purposes of
         any suit, action or proceeding seeking to enforce any provision of, or
         based on any right arising out of, this State Escrow Agreement, and the
         parties hereto agree not to commence any such suit, action or
         proceeding except in the Court. The parties hereto hereby irrevocably
         and unconditionally waive any objection to the laying of venue of any
         such suit, action or proceeding in the Court and hereby further
         irrevocably waive and agree not to plead or claim in the 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 State
         Settlement Agreement are, unless otherwise defined herein, used in this
         State Escrow Agreement as defined in the State Settlement Agreement.

                f. Amendments. This State 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 State Escrow Agreement shall not be deemed to be or
         construed as a waiver of any other breach, whether prior, subsequent or
         contemporaneous, of this State Escrow Agreement.

                g. Counterparts; Effectiveness. This State 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 State 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 Agreement must promptly thereafter be delivered to
         each party.

                h. Captions. The captions herein are included for convenience of
         reference only and shall be ignored in the construction and
         interpretation hereof.

         IN WITNESS WHEREOF, the parties have executed this State Escrow
Agreement as of the day and year first hereinabove written.

                                       STATE OF MINNESOTA


                                       By: 
                                            ------------------------------------
                                            Name:  Hubert H. Humphrey III
                                            Title: Attorney General

                                       PHILIP MORRIS INCORPORATED


                                       By:
                                            ------------------------------------
                                            Name:  Meyer G. Koplow
                                            Title: Counsel

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                                       R.J.  REYNOLDS TOBACCO COMPANY


                                       By:
                                            ------------------------------------
                                            Name:  D. Scott Wise
                                            Title: Counsel

                                       BROWN & WILLIAMSON TOBACCO CORPORATION


                                       By:
                                            ------------------------------------
                                            Name: Stephen R. Patton
                                            Title: Counsel

                                       LORILLARD TOBACCO COMPANY


                                       By:
                                            ------------------------------------
                                            Name: Arthur J. Stevens
                                            Title: Senior Vice President &
                                            General Counsel


                                       [NAME OF BANK],
                                            as Escrow Agent


                                       By:
                                            ------------------------------------
                                            Name:  [NAME]
                                            Title: [TITLE]

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