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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) July 2, 1997
Philip Morris Companies Inc.
(Exact name of registrant as specified in its charter)
Virginia 1-8940 13-3260245
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
120 Park Avenue, New York, New York 10017-5592
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 880-5000
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(Former name or former address, if changed since last report)
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Item 5. Other Events.
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Philip Morris Companies Inc. is filing today a Prospectus dated July
10, 1997 and a Prospectus Supplement dated July 10, 1997 (Registration Statement
No. 333-16955) in connection with the offering of $1,000,000,000 aggregate
principal amount of its 7% Notes Due 2005. Such Prospectus Supplement includes
the information set forth below.
RECENT DEVELOPMENTS
PROPOSED RESOLUTION OF CERTAIN REGULATORY AND LITIGATION ISSUES
On June 20, 1997, together with other companies in the United States tobacco
industry, Philip Morris Incorporated ("PM Inc."), the Company's domestic
tobacco subsidiary, entered into a Memorandum of Understanding to support the
adoption of federal legislation and any necessary ancillary undertakings,
incorporating the features described in the proposed resolution attached to
the Memorandum of Understanding.
The Memorandum of Understanding and the proposed resolution (together, the
"Resolution") resulted from negotiations with state attorneys general,
representatives of the public health community and attorneys representing
plaintiffs in certain smoking and health litigation. The Resolution contains
certain regulatory and legislative provisions with which the industry does not
necessarily agree, but which the industry has agreed to accept in the interest
of achieving the Resolution. The Resolution can be implemented only by federal
legislation and is subject to approval of the boards of directors of the
participating companies. (The Company's Board of Directors approved the
Resolution on June 25, 1997.) If enacted into law, the legislation would
resolve many of the regulatory and litigation issues affecting the United
States tobacco industry and, thereby, reduce uncertainties facing the industry
and increase stability in business and capital markets.
The Resolution is currently under review by the White House, Congress, the
public health community and other interested parties. The White House and
certain members of the public health community have expressed concern with
certain aspects of the Resolution and certain members of Congress have
indicated that they may offer alternative legislation. There can be no
assurance that federal legislation in the form of the Resolution will be
enacted or that it will be enacted without modification that is materially
adverse to the Company or that any modification would be acceptable to the
Company or that, if enacted, the legislation would not face legal challenges.
In any event, implementation of the Resolution would materially adversely
affect the financial position of the Company in the year of implementation and
would likely materially adversely affect the volume, operating revenues, cash
flows and/or operating income of the Company in future years. Moreover, the
negotiation and signing of the Resolution could affect other federal, state
and local regulation of the United States tobacco industry and regulation of
the international tobacco industry.
The following summary of the Resolution is qualified by reference to the
complete text, which has been filed with the Securities and Exchange
Commission as Exhibit 10 to the Company's Current Report on Form 8-K dated
June 20, 1997, and which is incorporated herein by reference. Certain terms of
the Resolution would apply to all tobacco products sold in the United States;
certain terms would apply only to tobacco manufacturers that consent to
participate in the Resolution; other terms would apply only to non-consenting
manufacturers.
Advertising and Marketing Restrictions
The Resolution would incorporate certain regulations previously promulgated
by the Food and Drug Administration (the "FDA") and add additional
restrictions to curtail tobacco product advertising and marketing. Among other
things, it would:
Prohibit the use of human images and cartoon characters, such as Joe
Camel and the Marlboro man, in all tobacco-product advertising.
Ban all outdoor tobacco-product advertising, including advertising in
enclosed stadia and advertising inside a retail establishment that is
directed outside.
Except for advertising in adult-only facilities or adult publications,
limit tobacco-product advertising to black text on a white background.
Ban sponsorships (including concerts and sporting events) in the name,
logo or selling message of a tobacco brand.
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Ban all non-tobacco merchandise (such as caps, jackets and bags) bearing
the name, logo or selling message of a tobacco brand.
Ban offers of non-tobacco items or gifts based on proof of purchase of
tobacco products.
Ban direct or indirect payments for tobacco product placement in movies,
television programs and video games.
Prohibit direct and indirect payments to "glamorize" tobacco use in media
appealing to minors, including live and recorded music performances.
Prohibit tobacco-product advertising on the Internet unless designed to
be inaccessible in or from the United States.
In addition, the Resolution would require that use of currently employed
product descriptors such as "low tar" and "light" be accompanied by a
mandatory health disclaimer in advertisements, and would prohibit the use of
any new descriptors embodying express or implied health claims unless approved
by the FDA. The FDA would also have the corresponding power, but not the
obligation, to modify advertising restrictions with respect to tobacco
products that it concludes present sufficiently reduced health risks.
Exemplars of all new advertising and tobacco product labeling would be
submitted to the FDA for its ongoing review.
Warnings and Labeling
The Resolution would mandate a new set of rotating warnings to be placed on
packages of tobacco products with greater prominence than previous warnings
(25% of the front of cigarette packs at the top of the pack). The new rotating
warnings would also appear in all advertisements and would occupy 20% of press
advertisements. Cigarette packs would also carry the FDA mandated statement of
intended use ("Nicotine Delivery Device").
Access Restrictions
The Resolution would restrict access to tobacco products by minors. Without
preventing state and local governments from imposing stricter measures, the
Resolution would incorporate regulations previously promulgated by the FDA
that restrict access to tobacco products and would also add additional
restrictions. Taken together, these access restrictions would include the
following:
Setting a minimum age of 18 to purchase tobacco products.
Requiring retailers to check photo identification of anyone under 27
years of age.
Establishing a requirement of face-to-face transactions for all sales of
tobacco products.
Banning the sale of tobacco products from opened packages, requiring a
minimum package size of 20 cigarettes, and banning the sampling of tobacco
products.
Banning the distribution of tobacco products through the mail except for
sales subject to proof of age (with subsequent FDA review to determine if
minors are obtaining tobacco products through the mail).
Imposing retailer compliance obligations to ensure that all displays,
advertising, labeling, and other items conform with all applicable
requirements.
Banning all sales of tobacco products through vending machines.
Banning self-service displays of tobacco products except in adult-only
facilities.
Licensing of Tobacco Retailers
The Resolution would require that any entity that sells tobacco products
directly to consumers obtain a license. Sellers would be subject to monetary
penalties and suspension or loss of their licenses if they do not comply with
the access restrictions. The federal government and state and local
authorities would enforce these
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access and licensing provisions through funding provided by Industry Payments,
as defined below under the heading "Industry Payments".
State Enforcement
The Resolution would require states to adopt "no sales to minors" laws and
would contain economic incentives for the states to enforce such laws. If a
state does not meet "no sales to minors" performance targets, the FDA may
refuse to pay that state certain funds otherwise payable under the Resolution.
To comply with the "no sales to minors" law, the state must achieve compliance
rate results of 75% by the fifth year after enactment of federal legislation,
85% by the seventh year and 90% by the tenth year and each year thereafter.
Compliance would be measured as a percentage of random, unannounced compliance
checks in which the retailer refused to sell tobacco products to minors. Funds
withheld from states for failure to achieve the performance targets would, in
turn, be reallocated to those states that demonstrated superior "no sales to
minors" enforcement records.
Surcharge for Failure to Achieve Underage Smoking Reduction Goals
The Resolution would impose surcharges on the industry if required
reductions in underage smoking are not achieved. A "look back" provision would
require the following reductions in the incidence of underage smoking from
estimated levels over the past decade: 30% in the fifth and sixth years after
enactment of implementing federal legislation, 50% in the seventh, eighth and
ninth years, and 60% in the tenth year, with incidence remaining at such
reduced levels thereafter.
For any year in which these required reductions are not met, the FDA must
impose a mandatory surcharge on the participating members of the cigarette
industry based upon an approximation of the present value of the profit the
companies would earn over the lives of the number of underage consumers in
excess of the required reduction. The annual surcharge would be $80 million
(as adjusted for changes in population and cigarette profitability) for each
percentage point by which the reduction in underage smoking falls short of the
required reductions (as adjusted to prevent double counting of persons whose
smoking has already resulted in the imposition of a surcharge in previous
years). The annual surcharge would be subject to a $2 billion annual cap (as
adjusted for inflation). The surcharge would be the joint and several
obligation of participating manufacturers allocated among participating
manufacturers based on their market share of the United States cigarette
industry and would be payable on or before July 1 of the year in which it is
assessed. Manufacturers could receive a partial refund of this surcharge (up
to 75%) only after paying the assessed amount and only if they could
thereafter prove to the FDA that they had fully complied with the Resolution,
had taken all reasonably available measures to reduce youth tobacco usage and
had not acted to undermine the achievement of the reduction goals. The FDA
would use the surcharges to fund its administrative costs and to fund grants
to states for additional efforts to reduce underage smoking.
Regulation
Under the Resolution, the FDA would oversee the development, manufacturing,
marketing and sale of tobacco products in the United States, including FDA
approval of ingredients and imposition of standards for reducing or
eliminating the level of certain constituents, including nicotine.
Under the Resolution, tobacco would continue to be categorized as a "drug"
and a "device" under the Food, Drug and Cosmetic Act. The FDA's authority to
regulate tobacco products as "restricted medical devices" would be explicitly
recognized and tobacco products would be classified as a new subcategory of
Class II devices.
For a period of at least twelve years after implementing legislation is
effective, the FDA would be permitted, subject to certain procedures and
judicial review, to adopt performance standards that require the modification
of existing tobacco products, including the gradual reduction, but not the
elimination, of nicotine yields, and the possible elimination of other
constituents or components of the tobacco product, based upon a finding that
the
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modification: (i) will result in a significant reduction of the health risks
associated with such products to consumers thereof; (ii) is technologically
feasible; and (iii) will not result in the creation of a significant demand
for contraband or other tobacco products that do not meet the performance
standards.
The Resolution would also require, effective three years after implementing
legislation is effective, that no cigarette sold in the United States can
exceed a 12 mg. "tar" yield, using the Federal Trade Commission's presently
existing methodology to determine "tar" yields.
Beginning twelve years after implementing legislation becomes effective, the
FDA would be permitted to set performance standards that exceed those
discussed above, including the elimination of nicotine and the elimination of
other constituents or other demonstrated harmful components of tobacco
products, based upon a finding that: (i) the safety standard will result in a
significant overall reduction of the health risks to tobacco consumers as a
group; (ii) the modification is technologically feasible; and (iii) the
modification will not result in the creation of a significant demand for
contraband or other tobacco products that do not meet the performance
standards. An FDA determination to eliminate nicotine would have to be based
upon a preponderance of the evidence and be subject to judicial review and a
two-year phase-in to permit Congressional review.
The Resolution would require disclosure of non-tobacco ingredients to the
FDA, require manufacturers to submit within five years a safety assessment for
non-tobacco ingredients currently used, and require manufacturers to obtain
the FDA's preapproval for any new non-tobacco ingredients. The FDA would have
authority to disapprove an ingredient's safety. The Resolution also outlines
legislation that would require companies to notify the FDA of technology they
develop or acquire that reduces the risk from tobacco products and that would
mandate cross-licensing of technology that the FDA determines reduces the risk
from tobacco products and that would authorize the FDA to mandate the
introduction of "less hazardous tobacco products" that are technologically
feasible.
The Resolution would subject the tobacco industry to "good manufacturing
practice" standards, including requirements regarding quality control systems,
FDA inspections and record-keeping and reporting.
Public Disclosure
The Resolution would require the tobacco industry to disclose to the public
previously confidential internal laboratory research as well as certain other
documents relating to smoking and health, "addiction" or nicotine dependency,
"safer or less hazardous" cigarettes and underage tobacco use and marketing.
The Resolution would also require the industry to disclose all such internal
laboratory research generated in the future. The Resolution would provide
protection for proprietary information and applicable privileges, and would
establish a streamlined process by which interested persons could contest
claims of privilege.
Cessation Programs
The Resolution would authorize the Secretary of Health and Human Services to
accredit smoking cessation programs and techniques that the agency determines
to be potentially effective.
Compliance Programs
Participating tobacco manufacturers would be required to create, and to
update each year, plans to ensure compliance with all applicable laws and
regulations, to identify ways to reduce underage use of tobacco products, and
to provide internal incentives for reducing underage use and for developing
products with "reduced risk".
Participating manufacturers would also be required to implement compliance
programs setting compliance standards and procedures for employees and agents
that are reasonably capable of reducing violations. These programs must assign
to specific high-level personnel the overall responsibility for overseeing
compliance, forbid delegation of substantial discretionary authority to
individuals who have shown a propensity to disregard
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corporate policies, establish training or equivalent means of educating
employees and agents, and institute appropriate disciplinary measures and
steps to respond to violations and prevent similar ones from recurring.
Participating manufacturers would be required to promulgate corporate
principles that express and explain the company's commitment to compliance,
reduction of underage tobacco use, and development of "reduced risk" tobacco
products. They would be required to work with retail organizations on
compliance, including retailer compliance checks and financial incentives for
compliance, and disband certain industry associations and only form new ones
subject to regulatory oversight.
Participating manufacturers would be subject to fines and penalties for
breaching any of these obligations. Companies would be required to direct
their employees to report known or alleged violations to the company
compliance officer, who in turn would be required to provide reports to the
FDA. Finally, companies would be prohibited from taking adverse action against
"whistleblowers" who report violations to the government.
Public Smoking
The Resolution would mandate minimum federal standards governing smoking in
public places or at work (with states and localities retaining power to impose
stricter requirements). These restrictions, which would be enforced by the
Occupational Safety and Health Administration, would:
Restrict indoor smoking in "public facilities" to ventilated areas with
systems that exhaust the air directly to the outside, maintain the smoking
area at "negative pressure" compared with adjoining areas and do not
recirculate the air inside the public facility.
Ensure that no employee may be required to enter a designated smoking
area while smoking is occurring.
Exempt restaurants (other than fast food restaurants) and bars, private
clubs, hotel guest rooms, casinos, bingo parlors, tobacco merchants and
prisons.
Enforcement
Violations of the Resolution's terms would carry civil and criminal
penalties based upon the penalty provisions of the Food, Drug and Cosmetic Act
and, where applicable, the provisions of the United States criminal code.
Special enhanced civil penalties of up to ten times the penalties applicable
to similar violations by drug companies would attach to violations of the
obligations to disclose research about health effects and information about
the toxicity of non-tobacco ingredients.
Terms of the Resolution would be embodied in state consent decrees, giving
the states concurrent enforcement powers. State enforcement could not impose
obligations or requirements beyond those imposed by the Resolution (except
where the Resolution specifically does not preempt additional state-law
obligations) and would be limited to the penalties specified in the Resolution
and by prohibition of duplicative penalties.
Industry Payments
The Resolution would require participating manufacturers to make substantial
payments in the year of implementation and thereafter ("Industry Payments").
Participating manufacturers would be required to make an aggregate $10 billion
initial Industry Payment on the date federal legislation implementing the
terms of the Resolution is signed. This Industry Payment would be based on
relative market capitalizations and the Company currently estimates that its
share of the initial Industry Payment would be approximately $6.5 billion.
Thereafter, the companies would be required to make specified annual Industry
Payments determined and allocated among the companies based on volume of
domestic sales as long as the companies continue to sell tobacco products in
the United States. These Industry Payments, which would begin on December 31
of the first full year after
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implementing federal legislation is signed, would be in the following amounts
(at 1996 volume levels): year 1: $8.5 billion; year 2: $9.5 billion; year 3:
$11.5 billion; year 4: $14 billion; and each year thereafter: $15 billion.
These Industry Payments would be increased by the greater of 3% or the
previous year's inflation rate determined with reference to the Consumer Price
Index. The Industry Payments would increase or decrease in proportion to
changes from 1996 domestic sales volume levels. Volume declines would be
measured based on adult sales volume figures; volume increases would be
measured by total sales volume. If sales volume declines but the industry's
domestic net operating profit exceeds base year inflation-adjusted levels, the
reduction in the annual Industry Payment due to volume decline, if any, would
be offset to the extent of 25% of the increased profit. At current levels of
sales and prior to any adjustment for inflation, the Resolution would require
total Industry Payments of $368.5 billion over the first 25 years (subject to
credits described below in connection with potential civil tort liability).
The Industry Payments would be separate from any surcharges required under
the "look back" provision discussed above under the heading "Surcharge for
Failure to Achieve Underage Smoking Goals". The Industry Payments would
receive priority and would not be dischargeable in any bankruptcy or
reorganization proceeding and would be the obligation only of entities selling
tobacco products in the United States (and not their affiliated companies).
The Resolution provides that all payments by the industry would be ordinary
and necessary business expenses in the year of payment, and no part thereof
would be either in settlement of an actual or potential liability for a fine
or penalty (civil or criminal) or the cost of a tangible or intangible asset.
The Resolution would provide for the pass-through to consumers of the annual
Industry Payments in order to promote the maximum reduction in underage use.
The Industry Payments would be made to a central federal authority and then
allocated among various programs and entities to provide funds for federal and
state enforcement efforts; federal, state and local governments' health
benefit programs; public benefits to resolve past punitive damages claims that
might be asserted in private litigation; and the expenses related to the
administration of federal legislation enacted pursuant to the Resolution. A
priority for these expenditures would be to fund a variety of public and
private non-profit efforts to discourage minors from beginning to use tobacco
products and to assist current tobacco consumers to quit. Those programs
include research, public education campaigns, individual cessation programs,
and impact grants.
Effects on Litigation
If enacted, the federal legislation provided for in the Resolution would
settle present attorney general health care cost recovery actions (or similar
actions brought by or on behalf of any governmental entity), parens patriae
and smoking and health class actions and all "addiction"/dependence claims and
would bar similar actions from being maintained in the future. However, the
Resolution provides that no stay applications will be made in pending
governmental actions without the mutual consent of the parties. On July 2,
1997, together with other companies in the United States tobacco industry, PM
Inc. entered into a Memorandum of Understanding with the State of Mississippi
with respect to that state's health care cost recovery action. See
"Mississippi Settlement". The Company may enter into discussions with certain
other states with health care cost recovery actions scheduled to be tried this
year with regard to the postponement or settlement of such actions pending the
enactment of the legislation contemplated by the Resolution. No assurance can
be given whether a postponement or settlement will be achieved, or, if
achieved, as to the terms thereof. The Resolution would not affect any smoking
and health class action or any health care cost recovery action that is
reduced to final judgment before implementing federal legislation is
effective.
Under the Resolution, the rights of individuals to sue the tobacco industry
would be preserved, as would existing legal doctrine regarding the types of
tort claims that can be brought under applicable statutory and case law except
as expressly changed by implementing federal legislation. Claims, however,
could not be maintained on a class or other aggregated basis and could be
maintained only against tobacco manufacturing companies (and not their
retailers, distributors or affiliated companies). In addition, all punitive
damage claims based on past conduct would be resolved as part of the
Resolution and future claimants could seek punitive damages only with
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respect to claims predicated upon conduct taking place after the effective
date of implementing federal legislation. Finally, except with respect to
actions pending as of June 9, 1997, third-party payor (and similar) claims
could be maintained only based on subrogation of individual claims. Under
subrogation principles, a payor of medical costs can seek recovery from a
third party only by "standing in the shoes" of the injured party and being
subject to all defenses available against the injured party.
The Resolution contemplates that participating tobacco manufacturers would
enter into a joint sharing agreement for civil liabilities relating to past
conduct. Judgments and settlements arising from tort actions would be paid as
follows. The Resolution would set an annual aggregate cap equal to 33% of the
annual base Industry Payment (including any reductions for volume declines).
Any judgments or settlements exceeding the cap in a year would roll over into
the next year. While judgments and settlements would run against the
defendant, they would give rise to an 80-cents-on-the-dollar credit against
the annual Industry Payment. Finally, any individual judgments in excess of $1
million would be paid at the rate of $1 million per year unless every other
judgment and settlement could first be satisfied within the annual aggregate
cap. In all circumstances, however, the companies would remain fully
responsible for costs of defense and certain costs associated with the fees of
attorneys representing certain plaintiffs in the litigation that would be
settled by the Resolution.
Non-participating Manufacturers
The Resolution would contain certain measures to ensure that non-
participating manufacturers are not free to undercut the Resolution by selling
tobacco products at lower prices because they were not making the Industry
Payments.
Financial Effects
The Company anticipates that its share of the industry's $10 billion initial
payment, which it currently estimates would be approximately $6.5 billion,
would be funded from a combination of available cash, commercial paper
issuances, bank borrowings and long-term debt issuances in the global markets.
This payment would have a material adverse effect on the Company's financial
position.
The Company currently anticipates that implementation of the Resolution
would require a charge to comply with the advertising and marketing
restrictions of the Resolution.
The Company believes that implementation of the Resolution would likely
materially adversely affect the volume, operating revenues, cash flows and/or
operating income of the Company in future years. The degree of the adverse
impact would depend, among other things, on the rates of decline in United
States cigarette sales in the premium and discount segments, PM Inc.'s share
of the domestic premium and discount cigarette segments, interest rates and
the timing of principal payments on debt incurred to finance the initial
payment due under the Resolution, and the effect of the Resolution on
cigarette consumption and the regulatory and litigation environment outside
the United States. In view of the foregoing, the Company may reevaluate its
share repurchase and dividend policies.
Developments in Pending Tobacco Litigation
The following summarizes certain recent developments with respect to pending
tobacco related litigation discussed in Note 3 ("Note 3") to the Company's
condensed consolidated financial statements, incorporated herein by reference
to the Company's Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 1997. Tobacco related litigation generally falls within three
categories: (i) smoking and health cases alleging personal injury brought on
behalf of individual smokers, (ii) smoking and health cases alleging personal
injury and purporting to be brought on behalf of a class of plaintiffs, and
(iii) health care cost recovery actions brought primarily by states and local
governments seeking reimbursement for Medicaid and other health care
expenditures allegedly caused by cigarette smoking.
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In the individual and class action smoking and health cases pending against
PM Inc. and, in some cases, the Company and/or certain of its other
subsidiaries, plaintiffs allege "addiction" to cigarette smoking and personal
injury resulting from cigarette smoking and/or exposure to environmental
tobacco smoke ("ETS") and seek various forms of relief, including compensatory
damages, creation of a medical monitoring fund, disgorgement of profits,
various injunctive and equitable relief, and, in some cases, punitive damages
in amounts ranging into the billions of dollars. During the past two years,
there has been a substantial increase in the number of such smoking and health
cases in the United States, with a majority of the new cases having been filed
in Florida on behalf of individual plaintiffs. As of July 1, 1997, there were
approximately 230 smoking and health cases filed and served on behalf of
individual plaintiffs in the United States against PM Inc. and, in some cases,
the Company (excluding approximately 25 cases in Texas that were recently
voluntarily dismissed but which may be refiled under certain conditions),
compared to approximately 190 such cases as of March 31, 1997, and
approximately 150 such cases as of March 31, 1996. Approximately 100 of the
cases filed and served as of July 1, 1997, were filed on behalf of individual
plaintiffs in the State of Florida. Fourteen of the individual cases involve
allegations of various personal injuries allegedly related to exposure to ETS.
In addition to the foregoing individual smoking and health cases, as of July
1, 1997, there were approximately 40 purported smoking and health class
actions pending in the United States against PM Inc. and, in some cases, the
Company (as compared to 25 on March 31, 1997), including two that involve
allegations of various personal injuries related to exposure to ETS. Most of
these actions purport to constitute statewide class actions and were filed
after the Fifth Circuit Court of Appeals, in the Castano case (discussed in
Note 3), reversed a federal district court's certification of a purported
nationwide class action on behalf of persons who were allegedly "addicted" to
tobacco products. One purported smoking and health class action is pending in
Canada and another in Brazil against affiliates of the Company.
As of July 1, 1997, approximately 70 health care cost recovery actions were
pending compared to approximately 30 on March 31, 1997. These cases, which
seek reimbursement for Medicaid and other health care expenditures allegedly
caused by cigarette smoking, have been brought primarily by states and local
governments, but also by unions and others. In addition, in California,
individuals and local governments and other organizations purportedly acting
as "private attorneys general" have filed suits seeking, among other things,
injunctive relief, restitution and disgorgement of profits for alleged
violations of California's consumer protection statutes.
In August 1996, a Florida jury awarded a former smoker and his spouse
$750,000 in a smoking and health case against another United States cigarette
manufacturer (Carter v. American Tobacco Co., et al.), and that manufacturer
was subsequently ordered to pay approximately $1.8 million in attorneys fees
and costs. Neither PM Inc. nor the Company was a party to that litigation.
Defendant in that action has appealed the verdict. Later that month, a jury
returned a verdict for defendants in a smoking and health case in Indiana
against United States cigarette manufacturers, including PM Inc. (Rogers v.
R.J. Reynolds Tobacco Company, et al.). Plaintiff has appealed the verdict. In
May 1997, a Florida jury returned a verdict for defendants in a smoking and
health case involving another United States cigarette manufacturer (Connor v.
R.J. Reynolds Tobacco Company).
In May 1997, the court in the Broin case denied defendants' motion for class
decertification, denied a motion for summary judgment as to plaintiffs' fraud
and conspiracy claims and denied defendants' challenge to plaintiffs' punitive
damages claim. Defendants have petitioned the Florida Supreme Court to review
the trial court's punitive damages ruling. The trial in this case started on
June 2, 1997 and is continuing.
Since the date of Note 3, a number of new smoking and health class actions
have been filed against United States cigarette manufacturers and others and,
in some cases, the Company, including actions in California, Georgia, Illinois
(two actions), Iowa, Michigan, New Jersey (four actions), South Dakota, and
Tennessee.
In May 1997, the court in the Florida health care cost recovery action
denied defendants' motion to limit the initial trial to the medical
expenditures made to treat the twenty-five Medicaid recipients deposed by
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defendants. In June 1997, the court issued a number of rulings, including (i)
that plaintiffs could not recover for future damages under Florida's Medicaid
recovery statute (the "FMR"), (ii) that plaintiffs could not proceed under the
FMR on a design defect claim based on the inherent risks associated with
tobacco, (iii) that plaintiffs' claim under the FMR are limited to allegations
of misrepresentation, failure to warn and failure to design cigarettes in a
safer manner, (iv) that plaintiffs could not seek punitive damages under the
FMR, and (v) that the statute of repose barred claims under Florida's false
advertising statute based on conduct before July 1, 1982, but that the statute
of repose did not bar claims under the FMR. The court also (i) granted
defendants' motion for partial summary judgment for lack of proximate cause
with respect to plaintiffs' claim of "regulatory fraud" but denied the motion
with respect to plaintiffs' other claims, (ii) denied defendants' motion for
partial summary judgment with respect to plaintiffs' claim for compensatory
damages under Florida's false advertising and racketeering statutes for the
federal government's share of Medicaid expenses in Florida, and (iii) denied
defendants' motion for partial summary judgment challenging plaintiffs'
statistical models to be used in establishing their damages claims. Plaintiffs
filed motions to prevent defendants from asserting defenses of "unclean
hands", laches and due process. Plaintiffs also filed a motion to preclude
evidence at trial of the State's benefits from the sale of cigarettes,
including excise taxes and reduction in benefit payments.
On July 2, 1997, the parties signed a Memorandum of Understanding to settle
the Mississippi health care cost recovery action. See "Mississippi
Settlement".
In May 1997, the court in the Maryland health care cost recovery action
dismissed all of plaintiff's claims other than those based on anti-trust and
consumer protection theories.
In June 1997, the court in the Washington health care cost recovery action
dismissed all of plaintiff's claims except for anti-trust, conspiracy and
consumer protection act claims.
In May 1997, the court in the Michigan health care cost recovery action
granted plaintiff's motion, which contended that statutory subrogation is not
the exclusive remedy to be pursued by the State (although the court appeared
to hold that statutory and common law subrogation were the only theories
available to the State to recover damages). In addition, the court dismissed
certain of defendants' affirmative defenses under Michigan's consumer
protection statute, dismissed plaintiff's anti-trust claim, dismissed, with
leave to amend, plaintiff's claims of breach of special duty and injunctive
relief, and dismissed plaintiff's claims for punitive damages.
In May 1997, the court in the Arizona health care cost recovery action
granted in part, and denied in part, defendants' motion to dismiss various of
plaintiff's claims, and did not rule on defendants' motion to dismiss
plaintiff's racketeering act claims.
Since the date of Note 3, a number of health care cost recovery actions have
been filed, including actions brought by the Marshall Islands, the
Commonwealth of Puerto Rico, the City of Birmingham, Alabama and the Greene
County Racing Commission, the States of California, Colorado, Idaho, Maine,
Nevada, New Hampshire, New Mexico, Oregon, Rhode Island and Vermont, taxpayers
in the Territory of Guam, the University of South Alabama, various labor
unions and/or their benefits funds in Connecticut, Hawaii, Illinois, Iowa,
Kentucky, Louisiana, Massachusetts, New York, Ohio, Oregon and Washington, the
Lower Brule Sioux Tribe in South Dakota, the Crow Tribe in Montana and the
Muscogee Creek Nation in Oklahoma.
In addition to these actions, other foreign, state and local government
entities and others, including labor unions, have announced that they are
considering filing health care cost recovery actions.
It is not possible to predict the outcome of the litigation pending against
the Company and its subsidiaries. Litigation is subject to many uncertainties,
and it is possible that some of these actions could be decided unfavorably. An
unfavorable outcome of a pending smoking and health case, such as the Carter
case discussed above, could encourage the commencement of additional similar
litigation. There have also been a number of adverse legislative, regulatory,
political and other developments concerning cigarette smoking and the tobacco
industry that have received widespread media attention, including the recent
Liggett settlements of certain health
10
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care cost recovery actions and a purported nationwide smoking and health class
action, and a decision by a federal district court on a motion for summary
judgment to uphold the FDA's regulation of cigarettes as "drugs" or "medical
devices". These developments, as well as the widespread media attention given
to the Resolution, may have negatively affected the perception of potential
triers of fact with respect to the tobacco industry, possibly to the detriment
of certain pending litigation, and have prompted the commencement of
additional similar litigation.
Management is unable to make a meaningful estimate of the amount or range of
loss that could result from an unfavorable outcome of all pending litigation.
It is possible that the Company's results of operations or cash flows in a
particular quarterly or annual period or its financial position could be
materially affected by an unfavorable outcome of certain pending litigation or
by the Resolution or by settlement, if any, of certain state health care cost
recovery actions. However, implementation of the Resolution would resolve the
most significant tobacco litigation against the Company and its subsidiaries.
Furthermore, the Company and each of its subsidiaries named as a defendant
believe, and each has been so advised by counsel handling the respective
cases, that it has a number of valid defenses to all litigation pending
against it. Except as described in the first paragraph under "Effects on
Litigation", all such cases are, and will continue to be, vigorously defended.
OTHER DEVELOPMENTS
Mississippi Settlement
On July 2, 1997, together with other companies in the United States tobacco
industry, PM Inc. entered into a Memorandum of Understanding (the "MOU") with
the State of Mississippi setting forth the principal terms and conditions of
an agreement in principle to settle and resolve with finality all present and
future claims relating to the subject matter of Mississippi's health care cost
recovery action pending against PM Inc. and others. The MOU is attached as
Exhibit 10 to the Company's Current Report on Form 8-K, dated July 2, 1997,
and the following summary of the MOU is qualified by reference thereto.
Under the MOU, the parties agree to petition the Chancery Court of Jackson
County, Mississippi to adjourn all further proceedings in contemplation of
their final resolution and termination pursuant to the MOU and the Settlement
Agreement contemplated thereby. Under the MOU the parties agree that the
Settlement Agreement will include the terms summarized below.
The settling defendants will deposit $170 million, representing the State's
estimate of its share of the $10 billion initial payment under the Resolution,
in an escrow account ("the Escrow"). This amount would be allocated among the
settling defendants in accordance with their relative market capitalization,
which would result in a payment by PM Inc. of approximately $115 million.
Beginning December 31, 1998, the settling defendants will pay into the
Escrow 1.7% of that portion of the annual Industry Payments under the
Resolution which is contemplated to be paid to the states. These payments,
which are not offset by potential credits for civil tort liability and which
would be adjusted as provided in the Resolution, could result in payments to
the State of Mississippi of $68 million with respect to 1998 and $76.6 million
with respect to 1999. These amounts would increase to $136 million with
respect to 2003 and would continue at that level thereafter. The settling
defendants will also reimburse the State's expenses and those of its
attorneys, currently estimated to be $15 million, and will be responsible for
the attorneys' fees of counsel for Mississippi (which will be set by a panel
of arbitrators). Each of these payments would be allocated among the settling
defendants in accordance with their relative volume of domestic cigarette
sales.
If legislation implementing the Resolution or its substantial equivalent is
enacted, the Settlement Agreement will remain in place, but the terms of the
federal legislation will supersede the Settlement Agreement and the foregoing
payment amounts will be adjusted so that the State would receive the same
payment as it would receive under the Resolution. Similar provision is made in
the event of multiple settlements of non-federal governmental health care cost
recovery actions, provided that Mississippi is entitled to treatment at least
as relatively favorable as such other non-federal governmental entities.
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Italian Tax Assessment
During 1996 and the first four months of 1997, tax assessments alleging the
underpayment of Italian value added taxes for the years 1988 to 1995 and
income taxes for the years 1987 to 1995 were asserted against certain
affiliates of the Company. The aggregate amount of taxes claimed to be
assessed to date is the Italian lire equivalent of $2.7 billion. In addition
there have been claimed assessments of the Italian lire equivalent of $6.3
billion in interest and penalties. The Company anticipates that additional
value added and income tax assessments may be claimed for 1996. With respect
to these assessments, the Company and its affiliates believe they have
complied with applicable Italian tax laws and are vigorously contesting the
assessments. A hearing concerning one of the assessments for value added taxes
was held in the Italian tax court on July 1, 1997.
Proposed Federal Excise Tax Increase
The United States federal excise tax on cigarettes currently is $12 per
1,000 cigarettes ($0.24 per pack of 20 cigarettes). In June 1997, the United
States Senate approved an increase in the federal excise tax on cigarettes of
$10 per 1,000 cigarettes ($0.20 per pack of 20 cigarettes). If approved by the
House of Representatives and signed by the President, such action may
adversely affect PM Inc.'s volume, operating revenues and operating income.
Recent Acquisitions and Divestitures
In June 1997, Philip Morris International Inc., the Company's international
tobacco subsidiary, reached agreement, subject to regulatory approval, to
increase its equity interest in its Mexican cigarette joint venture from 28.8%
to 50% in exchange for a payment of approximately $400 million.
On July 2, 1997, Kraft Foods, Inc., the Company's domestic food subsidiary,
completed its sale of its Log Cabin syrup retail and food service businesses.
The sale included manufacturing equipment but no manufacturing facilities.
Recent Debt Issuance
On April 7, 1997, the Company issued $500 million aggregate principal amount
of its 7 1/2% Notes due April 1, 2004.
See Exhibits 10 and 23 attached.
Item 7. Exhibits.
- ------ --------
10. Memorandum of Understanding dated July 2, 1997
re: Mississippi Settlement.
23. Consent of Sutherland, Asbill & Brennan, L.L.P.
12
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHILIP MORRIS COMPANIES INC.
By: /s/ G. Penn Holsenbeck
--------------------------------------
G. Penn Holsenbeck, Vice President,
Associate General Counsel and
Corporate Secretary
Date: July 10, 1997
13
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Exhibit 10
IN THE CHANCERY COURT OF JACKSON COUNTY, MISSISSIPPI
)
IN RE MIKE MOORE, ATTORNEY GENERAL ex rel, )
STATE OF MISSISSIPPI TOBACCO LITIGATION ) CAUSE NO. 94-1429
)
MEMORANDUM OF UNDERSTANDING
---------------------------
This Memorandum of Understanding ("MOU") is made as of July 2, 1997,
by and among the undersigned counsel, on behalf of their respective clients, to
set forth the principal terms and conditions of an agreement in principle among
the parties hereto to settle and resolve with finality all present and future
claims against all parties relating to the subject matter of this litigation
which have been or could have been asserted by any of the parties hereto,
including all claims on behalf of the State of Mississippi and all of its
governmental agencies, departments, political subdivisions and any other state-
controlled public entities (collectively "Mississippi" or "the State of
Mississippi"). The parties contemplate the prompt drafting and execution of a
comprehensive Settlement Agreement that will incorporate the terms of this MOU,
as well as other customary terms and conditions, including releases, acceptable
to the parties.
WHEREAS, the State of Mississippi, through its Attorney General
Michael C. Moore, has instituted this action asserting various claims on behalf
of the State of Mississippi against tobacco manufacturers and other defendants;
WHEREAS, the defendants have contested the claims in Mississippi's
complaint;
<PAGE>
WHEREAS, Attorney General Moore has had a leadership role among
Attorneys General from various states in maintaining civil litigation against
the tobacco industry and in seeking to forge an unprecedented national
resolution of the principal issues and controversies associated with the
manufacture, marketing and sale of tobacco products in the United States;
WHEREAS, through the efforts of Attorney General Moore and others a
June 20, 1997 Memorandum of Understanding and attached Proposed Resolution
("Proposed Resolution") has been agreed to by members of the tobacco industry,
state attorneys general, private litigants and representatives of public health
groups which would provide for unprecedented and comprehensive regulation of the
tobacco industry while preserving the right of individuals to assert claims for
compensation;
WHEREAS, the Proposed Resolution contemplates action by the United
States Congress and the President to enact and sign a new federal law with
respect to the tobacco industry, which action the tobacco industry has agreed to
support and which will require study and analysis by Congress and the President;
WHEREAS, trial is scheduled to commence on July 7, 1997 and a
continuance of such trial could prejudice the State of Mississippi, the State of
Mississippi and the undersigned defendants have agreed to settle independently
the litigation commenced by Attorney General Moore pursuant to financial terms
comparable to the Proposed Resolution, which terms will achieve for Mississippi
immediately the financial benefits it would receive pursuant to the national
Proposed Resolution, should it become law;
2
<PAGE>
NOW THEREFORE, it is hereby agreed as follows:
This MOU will be presented to the Chancery Court of Jackson County
(the "Court") promptly upon its execution, and the parties agree jointly to
petition the Court to adjourn all further proceedings in contemplation of their
final resolution and termination pursuant to this MOU and the Settlement
Agreement contemplated hereby.
The Settlement Agreement shall contain among other things, the
following terms to which the parties hereby agree:
1. On or before July 15, 1997 the undersigned defendants (the
"Settling Defendants") shall cause to be paid into a special account (the
"Account"), for the benefit of the State of Mississippi, to be held in escrow
pending effectuation of the Settlement Agreement, the sum of $170 million; that
being plaintiff's good faith estimate of the portion Mississippi would receive
of the $10 billion payment provided for in Paragraph A on page 34 of the June
20, 1997 Memorandum of Understanding and attached Proposed Resolution.
2. On or before July 30, 1997, the Settling Defendants shall cause to
be paid to the Attorney General $2.5 million for the best estimate of costs and
expenses attributable to his office and other appropriate state agencies in
connection with this litigation; and on or before July 30, 1997, the Settling
Defendants shall further cause to be paid $12.5 million to the plaintiffs'
private counsel for their best estimate of their costs and expenses. The
combined costs to be paid in July 30, 1997, may not exceed 15 million dollars.
Thereafter the Attorney General's office, the appropriate state agencies and the
plaintiffs' private counsel shall provide the Settling Defendants with an
appropriately documented statement of their costs and expenses. The Settling
Defendants shall promptly
3
<PAGE>
pay the amount of such costs and expenses in excess of the above $15 million, or
shall receive a refund or a credit against other payments due hereunder if the
total of such costs and expenses shall be less than $15 million. Any dispute as
to the nature or amount of reimbursable costs and expenses shall be decided with
finality by the persons selected to award fees pursuant to paragraph 8 below.
3. Commencing within ten (10) business days after December 31, 1998,
and annually thereafter, the Settling Defendants shall cause to be paid to the
Account 1.7% of the following amounts (in billions):
Year 1 2 3 4 5 6 thereafter
- ----
Amount $4B $4.5B $5B $6.5B $6.5B $8B $8B
- ------
The above payments shall be adjusted upward by the greater of 3% or the Consumer
Price Index applied each year on the previous year, beginning with the first
annual payment. The above payments will also be decreased or increased, as the
case may be, in accordance with decreases or increases in volume of domestic
tobacco product volume sales as provided in Paragraph B.5 on pages 34-35 of the
June 20, 1997 Proposed Resolution.
4. In recognition of the ongoing payments called for in paragraph 3
above, the Settlement Agreement will provide for the resolution of all past and
future claims of the type described above against all defendants. The
defendants will be released from all such claims by the State of Mississippi.
5. In the event that the Proposed Resolution is enacted as federal
legislation, or if any substantially equivalent federal program is enacted, the
settlement provided herein and in the Settlement Agreement shall remain in
place, but the terms of such
4
<PAGE>
Proposed Resolution or federal program shall supersede the provisions of this
MOU and Settlement Agreement. In order to provide the Settling Defendants with
a full credit for all payments made hereunder pursuant to paragraphs 1 and 3 of
this MOU in the event of the enactment of the Proposed Resolution or
substantially equivalent federal program, and to the extent that the payments
made to the Account pursuant to paragraphs 1 and 3 of this MOU shall differ from
the amounts to be received by Mississippi pursuant to such Proposed Resolution
or substantially equivalent federal program, adjustments shall be made in the
form of a credit to the future payments by the Settling Defendants, a refund by
the State of Mississippi, or other means that will ensure that the principal
amount of payments received by Mississippi will be the same as the amounts they
would receive pursuant to the Proposed Resolution or substantially equivalent
federal program.
6. In the absence of the enactment of the Proposed Resolution or any
substantially equivalent federal program, and in the event of multiple
settlements by the Settling Defendants with various non-federal governmental
plaintiffs in other similar litigation, it is agreed that the aggregate
percentage applicable to the various non-federal governmental plaintiffs will
not exceed 100%, and the sum of the initial payments will not exceed $10
billion. In order to ensure this result it is agreed that all such percentages
(including the 1.7% applied in paragraph 1 and specified in paragraph 3) will be
adjusted downward (by the same relative percentage) to achieve a total aggregate
percentage of 100%.
7. The Settling Defendants agree that if they enter into any
settlement agreement of other similar non-federal governmental litigation on
terms more favorable to such governmental plaintiff than the terms of this MOU
and the Settlement Agreement (after
5
<PAGE>
due consideration of relevant differences in population or other appropriate
factors), the terms of this Settlement will be revised so that Mississippi will
enjoy treatment at least as relatively favorable as any such other non-federal
governmental entity.
8. The Settling Defendants agree to pay, separately and apart from
the above, reasonable attorneys' fees. If the Proposed Resolution or
substantially equivalent federal program is enacted, the amount of such fees
will be set by a panel of independent arbitrators with finality, subject to an
appropriate annual cap on all such payments and other conditions. In the
absence of any such Proposed Resolution or substantially equivalent federal
program, attorneys' fees in connection with this litigation will be awarded in
the same manner (subject to an appropriate annual cap and other conditions) by
three independent arbitrators selected by the parties hereto. In the event of
the enactment of the Proposed Resolution or other substantially equivalent
federal program, the parties contemplate that the State of Mississippi and any
other similar state which has made an exceptional contribution to secure the
resolution of these matters may apply to the panel of independent arbitrators
for reasonable compensation for its efforts in securing the Proposed Resolution,
subject to an appropriate separate annual cap on all such payments.
July 2, 1997
Washington, D.C.
PHILIP MORRIS INCORPORATED STATE OF MISSISSIPPI
By: /s/ Meyer G. Koplow By: /s/ Michael C. Moore
------------------------- ---------------------------
Meyer G. Koplow Michael C. Moore,
Attorney General
6
<PAGE>
R.J. REYNOLDS TOBACCO COMPANY
BY: /s/ D. Scott Wise
--------------------------
D. Scott Wise
BROWN & WILLIAMSON TOBACCO
CORPORATION
By: /s/ D. Scott Wise
--------------------------
D. Scott Wise
LORILLARD TOBACCO COMPANY
By: /s/ Meyer G. Koplow
--------------------------
Meyer G. Koplow
7
<PAGE>
Exhibit 23
(LETTERHEAD OF SUTHERLAND, ASBILL & BRENNAN, L.L.P.)
July 10, 1997
Philip Morris Companies Inc.
120 Park Avenue
New York, New York 10017
Ladies and Gentlemen:
In connection with the U.S. $1,000,000,000 principal amount of Notes Due
July 15, 2005 (the "Notes"), of Philip Morris Companies Inc. (the "Company") to
be issued under an indenture dated as of December 2, 1996 (the "Indenture"),
between the Company and The Chase Manhattan Bank, as trustee, we have acted as
special tax counsel to the Company, and in that capacity have furnished certain
opinions to it for use in the Prospectus Supplement dated July 10, 1997 (the
"Supplement") to a Prospectus dated July 10, 1997 (the "Prospectus"), both of
which have been prepared in connection with the issuance of the Notes. We have
examined the Indenture, the Prospectus, the Supplement, and such other documents
and legal authorities as we have deemed relevant for purposes of expressing the
opinion contained herein. Our opinion is conditioned upon representations
contained in such documents, and assumes and is conditioned upon the accuracy of
the information contained therein.
Based on the foregoing, we hereby confirm that the statements contained in
the Supplement under the caption "CERTAIN UNITED STATES FEDERAL INCOME TAX
CONSEQUENCES" are correct as of this date. We consent to the reference to our
firm and to the use of our opinion in the Supplement.
Sincerely yours,
SUTHERLAND, ASBILL & BRENNAN, L.L.P.
By: /s/ David A. Golden
-----------------------
David A. Golden
