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EXHIBIT 10.1
November 20, 1998
Brooke Group Ltd.
Xxxxxxx & Xxxxx, Inc.
Xxxxxxx Group Inc.
000 XX 0xx Xxxxxx
Xxxxx, Xxxxxxx 00000
Attention: Xxxxxxx X. XxXxx
Re: Acquisition of Certain Brands and Entry INTO MASTER SETTLEMENT AGREEMENT
This letter agreement and the term sheet (the "Term Sheet") attached hereto
(collectively, the "Agreement") constitute the agreement of Brooke Group Ltd.
("Brooke"), Xxxxxxx & Xxxxx Inc. (L&M") and Xxxxxxx Group Inc. ("Xxxxxxx" and
together with Brooke and L&M, the "Xxxxxxx Parties") and Xxxxxx Xxxxxx
Incorporated ("PM," and together with the Xxxxxxx Parties the "Parties") with
respect to trademarks and certain related intellectual property related to the
"Lark," "L&M," and "Chesterfield" brands of cigarettes, and to the execution by
the Xxxxxxx Parties of the Master Settlement Agreement made by the Settling
States and the Participating Manufacturers (the "MSA"). Each Party, intending to
be legally bound by this Agreement, agrees to take the actions set forth in the
Term Sheet to be taken by it, and to cause its subsidiaries to take the actions
set forth in the Term Sheet to be taken by such subsidiaries.
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Please indicate your agreement with the foregoing by executing this letter in
the space below.
Sincerely,
XXXXXX XXXXXX INCORPORATED
By: /s/ Xxxxxx X. Xxxxxxxxxx
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Accepted and Agreed:
BROOKE GROUP LTD.
By: /s/ Xxxxxxx X. XxXxx
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XXXXXXX & XXXXX INC.
By: /s/ Xxxxxxx X. XxXxx
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XXXXXXX GROUP INC.
By: /s/ Xxxxxxx X. XxXxx
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Attachment
Sworn to before me this
20th day of November, 1998
/s/ Xxxx X. Xxxxx
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Xxxx X. Xxxxx
Notary Public, State of New York
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DEFINITIVE TERM SHEET
1. THE INITIAL PAYMENT. Immediately upon the satisfaction of the following
four conditions:
(a) The MSA is executed by the Settling States (as defined in the MSA)
and PM elects in its sole discretion to execute the MSA;
(b) PM completes, without discovery of any adverse condition (other than
liens in respect of Xxxxxxx'x senior notes that will be eliminated
in connection with the Initial Payment as described below) that has
not been cured by the Xxxxxxx Parties, preliminary due diligence
with respect to liens, trademark search, etc. as described on Annex
A hereto, such preliminary due diligence to be completed by the
close of business on November 30, 1998;
(c) The Xxxxxxx Parties sign the MSA and they receive and deliver to PM
evidence in a form heretofore agreed to by the Parties that there
are and will be no encumbrances, restrictions or conditions on or
affecting the Marks (as defined herein) arising from the Xxxxxxx
Parties' previous settlements with the states of Massachusetts,
Louisiana, West Virginia, Florida and Mississippi; and
(d) PM receives evidence satisfactory to it that the Xxxxxxx Parties
have deposited with the trustee under Xxxxxxx'x senior secured notes
sufficient funds, and have otherwise taken all action, so that upon
deposit of the Initial Payment (as described below) with the trustee
under such notes, any lien on the Marks in respect of such notes
shall be eliminated, with no further action by any Xxxxxxx Party,
upon the passage of not more than 75 days after such deposit,
PM will pay (the "Initial Payment") to Eve Holdings Inc. ("Eve") or such other
entity designated by the Xxxxxxx Parties (the date of such payment being the
"Initial Payment Date") by irrevocable deposit (in a manner satisfactory to PM
and the Xxxxxxx Parties) with the trustee under the senior notes:
(1) $5 million in consideration for the grant of an option (the "Class A
Option") to purchase 100% of the Class A Interest described in
paragraph 4(a) for $10.1 million, such option to be exercisable
until the expiration of the Class B Option, subject to obtaining HSR
approval for both the purchase of the Class A Interest and entry
into the License Agreement (as defined below); and
(2) $145 million in consideration for the grant of an option (the "Class
B Option") to purchase 100% of the Class B Interest described in
paragraph 4(a) for $139.9 million (the "Class B Exercise Price"),
subject to adjustment as provided below, such option to be
exercisable during the ninety day period beginning on the 10th
anniversary of the Initial Payment Date, provided, however, that
such ninety-day period may be extended by PM for up to an additional
six months if for any reason (including any legal or financial
impediment) PM is unable to exercise the Class B Option (or to cause
the LLC to redeem the Class B Interest) during such ninety-day
period.
Upon purchase of the Class A Interest and/or the Class B Interest,
the Class A Interest and the Class B Interest must be delivered free and clear
of all encumbrances and restrictions (other than, with respect to the Class B
Interest, any encumbrance resulting from the pledge securing the Loan, which
encumbrance is eliminated when the Guarantor (as defined in paragraph 4(c)
below) is released from its obligations under the Loan).
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2. PUT/REDEMPTION OF CLASS B INTEREST. Provided that either the Class A
Option has been exercised or is required to have been exercised pursuant
to this Agreement, the Xxxxxxx Parties will have a put option that gives
them the right to put the Class B Interest to PM (or PM's designee) at a
put price that is $5 million less than the redemption amount described
below, which put option is exercisable at any time during the ninety-day
period beginning on the 90th day following the 11th anniversary of the
Initial Payment Date, and which is otherwise on the same terms applicable
to the Class B Option. When the put or the Class B Option is exercised, PM
will be required to cause each Guarantor to be released from its
obligations as guarantor of the Loan. At the expiration of the put period,
if the Class B Option has not been exercised, and the Class B Interest has
not been redeemed in accordance with terms as described below, the holder
of the Class B Interest shall be entitled to convert the Class B Interest,
at its election, into a Class A Interest having the same rights to share
in future profits and losses, including the same aggregate voting power,
as the Class A Interest initially created as described in paragraph 4(a),
which newly converted Class A Interest shall represent 50% of the
aggregate capital of the LLC to be created pursuant to paragraph 4(a).
The Class B Interest will also be redeemable (during the same period as
the Class B Option may be exercised) by the LLC for $139.9 million, less
the net outstanding principal of the Loan (as defined below). Upon such
redemption, PM will be required to cause each Guarantor to be released
from its obligation as guarantor of the Loan.
3. FURTHER DUE DILIGENCE. Following the Initial Payment Date, PM will conduct
further due diligence with respect to the Marks. PM will not have to
exercise the Class A Option if, as a result of matters learned through
such due diligence, PM reasonably determines that (i) there exists
substantial doubt as to the validity or enforceability of the Marks, or
(ii) there exists substantial and previously unknown to PM (x) litigation
liability affecting or relating to the Marks material in relation to the
transaction, or (y) regulatory risk, affecting or relating to the Marks.
PM will be entitled to continue its due diligence and make any such
reasonable determination until the close of business on the 10th day
following HSR clearance, subject to extension as provided in paragraph 4.
4. THE PURCHASE TRANSACTIONS. Upon expiration or termination of the HSR
waiting period ("HSR Clearance") (whether HSR Clearance for PM or HSR
Clearance for a transferee of PM) and satisfactory (as described above)
completion of PM's due diligence, PM will exercise the Class A Option no
later than the 10th day following HSR clearance; provided however that in
the event that any information requested by PM in the course of its due
diligence is withheld due to competitive consideration, such information
will be provided to PM by the Xxxxxxx Parties no later than the 10th day
following HSR Clearance and PM may continue its due diligence until the
30th day following HSR Clearance. On or before the close of business on
such 30th day, PM shall either (i) notify the Xxxxxxx Parties that its due
diligence has not been completed satisfactorily or (ii) exercise the Class
A Option. The date of closing of the purchase of the Class A Interest will
be selected by PM and will be no later than 90 days after the notice of
exercise is given. In connection with such closing:
(a) The Xxxxxxx Parties will organize a new LLC, to which the Xxxxxxx
Parties will contribute the Marks, free and clear of all
encumbrances and restrictions, in exchange for 100% of the Class A
Voting Interest and 100% of the Class B Redeemable Nonvoting
Interest in the LLC (which Class B Interest will be allocated income
and receive a distribution of $500,000 per year) and which LLC will
have no other interests, or rights to acquire such interests,
outstanding;
(b) PM will enter into an exclusive (including with respect to the LLC)
license of the trademarks from the LLC for an 11-year term at an
annual
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royalty at least equal to an amount, that alone or when combined
with other funds made available to the LLC by PM, will equal the
annual debt service obligation on the Loan and the obligation to
make the $500,000 per annum distribution described in paragraph (a)
immediately above;
(c) the LLC will borrow not more than $5 million less than the Class B
Exercise Price (the "Loan") from an independent third party, with
such borrowing to be guaranteed by Eve and any other holder of the
Class B Interest (the "Guarantors"); and
(d) the LLC will distribute the proceeds of the Loan to the Xxxxxxx
Parties as distributions on the Class B Interests and the Class B
Exercise Price will be reduced by the net amount so distributed.
With respect to the Loan, it is agreed that (a) the inability of the
LLC to obtain the Loan will not interfere with the obligation of the Xxxxxxx
Parties to sell the Class A Interest upon exercise of the Class A Option or the
obligation of PM, as set forth above, to exercise the Class A Option; (b) PM
will cooperate with the Xxxxxxx Parties and the LLC and use its reasonable best
efforts to assist the LLC to obtain the Loan; provided, however, that PM is not
required to directly or indirectly subsidize such Loan (except to the extent of
complying with its explicit obligations under paragraph 4(b)); (c) the Xxxxxxx
Parties will cooperate with PM and the LLC and use their reasonable best efforts
to assist the LLC to obtain the Loan; and (d) in connection with such
cooperation, PM will consent to the pledge by the LLC of the Marks and the LLC's
interest in the License Agreement to the lenders of the Loan, and the Xxxxxxx
Parties will (or will cause the holder thereof to) pledge the Class B Interests
and the put right to such lenders.
5. FAILURE OF THE PURCHASE TRANSACTIONS TO CLOSE. In the event that HSR
approval is not obtained or PM is not satisfied (as described above) with
the results of its due diligence, the Class A Option and the Class B
Option shall remain in effect, and PM will be entitled to assign its
rights under both options in accordance with paragraph 15. In addition, in
the event that HSR Clearance is not obtained, PM shall, upon the request
of the Xxxxxxx Parties, attempt periodically to obtain such approval,
provided, that PM shall not be required to attempt to obtain any such
approval more than once in any two-year period or more than four times
over the period of the Options. The Xxxxxxx Parties shall cooperate with
PM (pursuant to the terms of Paragraph 10 hereof) in obtaining such
approval each time that PM seeks such approval. Notwithstanding the
foregoing, PM shall not be required to attempt to obtain any such approval
(other than the initial approval) at any time at which it reasonably
believes that attempting to obtain such approval is likely to interfere
with any pending transaction so long as PM does not defer any request for
more than six months or more than once in any two-year period.
6. REPAYMENT OF INITIAL PAYMENT. Each of (a) the material failure of the
Xxxxxxx Parties or any of their affiliates to comply with its obligations
under paragraph 9 (prior to the MSA being approved by all relevant courts)
or 10 (prior to the purchase of the Class A Interest) hereof and (b) the
material failure of the Xxxxxxx Parties to deliver to the LLC (at the time
of formation of the LLC) the Marks free and clear of all encumbrances,
restrictions or conditions arising as a result of settlement agreements
("Settlement Liens") and to keep such Marks free of any such Settlement
Liens through the closing of the sale of the Class A Interest shall be a
"Material Breach by the Xxxxxxx Parties" of this Agreement. In the event
that a Material Breach by the Xxxxxxx Parties of this Agreement occurs and
is not cured to PM's reasonable satisfaction within 120 days after PM
gives written notice of such breach to the Xxxxxxx Parties, (i) the
Xxxxxxx Parties shall promptly repay to PM the full amount of the Initial
Payment and (ii) PM shall have the right, at its sole discretion, to
terminate all remaining obligations under this Agreement (and if the
Xxxxxxx Parties have repaid the Initial Payment and PM does not terminate,
the aggregate option exercise price shall be increased to $300
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million). Notwithstanding the foregoing, a failure to comply with the
provisions of paragraph 10 shall not be deemed to be a Material Breach by
the Xxxxxxx Parties unless, nine months following the initial HSR filings,
as a direct or indirect result of such failure, either (i) HSR Clearance
has not been obtained or the government has commenced litigation to enjoin
the transaction or (ii) PM has had to make a material concession to the
government to obtain HSR Clearance or avoid such litigation. The foregoing
remedies are not liquidated damages, and the parties shall be entitled to
pursue all remedies available at law or equity in addition to such
remedies.
7. PAYMENT OF SUBSEQUENT PAYMENT WITHOUT EXERCISE OF OPTION. The failure of
PM to comply (prior to the purchase of the Class A Interest) with
paragraph 10 hereof shall be a "Material Breach by PM" of this Agreement.
In the event that a Material Breach by PM of this Agreement occurs, PM
shall promptly prepay to the Xxxxxxx Parties the full amount of the
exercise price of each of the Class A Option and the Class B Option (in
each case, minus one dollar), and the exercise price of each of the Class
A Option and the Class B Option shall become one dollar and such options
shall thereafter become immediately exercisable. Notwithstanding the
foregoing, a failure to comply with the provisions of paragraph 10 shall
not be deemed to be a Material Breach by PM unless, nine months following
the initial HSR filings, as a direct or indirect result of such failure,
HSR Clearance has not been obtained or the government has commenced
litigation to enjoin the transaction. The foregoing remedies are not
liquidated damages, and the parties shall be entitled to pursue all
remedies available at law or equity in addition to such remedies.
8. MSA EXECUTION. The Xxxxxxx Parties shall execute the MSA in the form
distributed to the states, with such changes and/or corrections as are
consented to by PM and are incorporated into an MSA to which PM has become
a signatory, provided any such changes do not increase (either by an
increase in amount or acceleration of the date of payment) the payment
obligations of the Xxxxxxx Parties thereunder and do not significantly
adversely change the rights or obligation of the Xxxxxxx Parties. Each
Xxxxxxx Party hereby irrevocably appoints PM as the attorney-in-fact for
such Xxxxxxx Party for the limited purpose of executing the MSA as
provided in the previous sentence in the name of such Xxxxxxx Party if
such Xxxxxxx Party has not executed the MSA within one business day of PM
requesting the Xxxxxxx Parties to do so. PM agrees that it will not agree
to any changes in the MSA which would have the result in any Settling
State (as defined in the MSA) leaving Xxxxxxx with neither the MSA nor its
prior settlement agreement, if any, with such Settling State.
9. ACTIONS TAKEN WITH RESPECT TO THE MSA. Neither any Xxxxxxx Party nor any
controlled affiliate of any Xxxxxxx Party will take (or support any other
person in taking) any material action to (i) discourage any party or
potential party to the MSA from signing the MSA, (ii) oppose the final
approval of the MSA by any court or other governmental body, (iii) assert
any claim of invalidity or illegality with respect to the MSA or with
respect to Xxxxxxx'x execution thereof, (iv) otherwise materially and
willfully interfere with the execution or effectiveness of the MSA. It is
understood that Xxxxxxx X. XxXxx and all officers and directors of any of
the Xxxxxxx Parties, and all agents and attorneys for any of the Xxxxxxx
Parties (in their capacity as such) are deemed to be controlled affiliates
of the Xxxxxxx Parties for purposes of this Agreement.
10. XXXX-XXXXX-XXXXXX. Promptly after execution of this Agreement, each party
shall promptly prepare and file all filings required to be made by it in
connection with the exercise of the Class A Option and enter into the
License Agreement under the HSR Act, as well as any other filings required
to be made with any other governmental entity in connectiOn with this
Agreement, the entry into or exercise of either option or the entry into
the License Agreement (collectively, "Governmental Filings"). Each party
shall provide any information required by the HSR Act and any other
Governmental Filing, and
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shall cooperate with the other parties hereto in connection with obtaining
any approval required from any governmental entity in order to consummate
the transactions contemplated hereby. Each party hereto shall use its
reasonable best efforts to obtain promptly any consent, order or approval
of, or any exemption by, any governmental entity in connection with the
consummation of the transactions contemplated hereby (including without
limitation to cause the prompt expiration of the waiting period under the
HSR Act applicable to the exercise of the Class A Option and the entering
into the License Agreement); provided, however, that notwithstanding
anything to the contrary in this Agreement, PM shall not be required to
agree to divest or hold separate any brand, product, business or assets or
to take or agree to take any action that limits its freedom of action with
respect to, or its ability to retain, any of the Marks or the Brands or
any brand, product, business or other asset of PM or its affiliates.
11. THE MARKS. The "Marks" shall mean all of the interest of the Xxxxxxx
Parties and any affiliate of any Xxxxxxx Party in all trademarks, trade
names, trade dress, service marks, registrations and applications for
registrations therefor, in each case relating to "Lark," "Chesterfield"
and "L&M" brands, including any variation or product line extension
thereof and any derivative pertaining thereto. "Lark," "Chesterfield" and
"L&M" are referred to herein as the "Brands."
12. NO LIABILITIES. Neither the LLC nor PM shall assume any liabilities of any
nature, express or implied, whether or not contingent, relating to the
Marks or the Brands and arising from production, sales, marketing,
consumption, use or exposure or any activity or omission prior to the
closing of the purchase of the Class A Interest, and the Xxxxxxx Parties
shall indemnify each of the LLC and PM from and against any and all such
liabilities.
13. OTHER ASSETS. The LLC shall acquire from the Xxxxxxx Parties only the
Marks, and shall not acquire any assets other than the Marks. From and
after the closing of the purchase of the Class A Interest, the Xxxxxxx
Parties shall destroy any inventory of finished goods related to the
Brands, as well as all POS, advertising and marketing materials related to
the Brands. Prior to such date, the Xxxxxxx Parties shall sell products
bearing the Marks only in the normal course and shall not engage in "trade
loading."
14. FURTHER AGREEMENTS. The Parties will promptly negotiate and finalize the
additional agreements required to effectuate this Agreement. Unless and
until all of such agreements have been finalized in a mutually
satisfactory manner, executed and delivered, this Agreement shall govern
and be binding and enforceable. This Agreement shall be superseded by such
agreements, when such agreements are executed and delivered. For further
clarification, the Initial Payment shall be due, payable and paid upon
satisfaction of the conditions set forth in paragraph 1, regardless of
whether such additional agreements shall have theretofore been executed
and delivered.
15. ASSIGNABILITY OF AGREEMENTS. The options, the Class A Interests and the
license shall be assignable (and may be sublicensed, with respect to the
License Agreement) by PM, provided that PM is not relieved of any
obligations and the assignee assumes all obligations of PM under this
Agreement and any such assigned (or sublicensed) agreement.
16. THE LLC. The Class A Interests shall have all of the voting power of the
LLC, and the Class B Interests shall have no voting or veto rights of any
kind. The owner of a majority of the Class A Interests shall be the sole
Managing Member of the LLC. Except for the income and distribution
referred to in paragraph 2 above, the Managing Member shall not be
required to declare or pay any distribution to any person or entity or in
respect of any interest. The
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Managing Member may declare a distribution in respect of Class A Interests
without declaring a distribution in respect of Class B Interests, and vice
versa.
17. GOVERNING LAW. The Agreement (and the additional agreements referred to
above) will be governed by the internal laws of the State of New York.
Each of the Parties (i) consents to submit itself to the personal
jurisdiction of any Federal or state court located in the State of New
York in the event that any dispute arises out of this Agreement or any of
the transactions contemplated hereby, (ii) agrees that it will not attempt
to deny or defeat such personal jurisdiction by motion or other request
for leave from any such court and (iii) agrees that it will not bring any
action relating to this Agreement or any of the transactions contemplated
by this Agreement in any court other than a Federal or state court sitting
in the State of New York.
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ANNEX A
1. Trademark search to obtain registration particulars and confirm that there
are no pending conflicts or cancellation actions or other challenges or
claims.
2. Search for registrations in the names of third parties related to
non-tobacco goods and services, to determine that no such registration
exists currently followed by the trademark department of PM and which in
PM's reasonable opinion would materially and adversely affect the
currently anticipated value of the Marks to PM.
3. Lien search in all states.
